in the financial markets attempt to retain a large amount of funds at hand. if they fail to obtain sufficient funds, financial markets could destabilize due to heightened uncertainty, which could eventually adversely affect economic activity. 3 to prevent such a situation, the bank has been providing ample liquidity since immediately after the earthquake, striving to ensure financial market stability by maintaining a sense of security on the funding front, and trying to avoid adverse effects on corporate activity and people ’ s daily lives from the financial side. more specifically, on monday, march 14, the first business day after the disaster, financial institutions ’ precautionary demand for funds surged and tensions intensified in the money markets. to address the situation, the bank provided a total of 21. 8 trillion yen in funds, almost three times as much as the largest daily funds provision during the financial crisis after the failure of lehman brothers. thereafter, the bank continued to provide ample funds to sufficiently meet market demand. as a result, the outstanding current account balance of the bank significantly exceeded the high of 36 trillion yen recorded during the period of japan ’ s “ quantitative easing ” policy. the bank went beyond simply providing a large quantity of funds. it also carefully devised types and timings of market operations according to market conditions. for instance, based on the fact that a slight weakness was seen in financial intermediation functions in the cp market due to uncertainties about the future following the earthquake, the bank purchased cp under repurchase agreements on march 22 for the first time in a year. the bank also conducted outright purchases of cp on march 25. as a result, issuance spreads on cp declined to just slightly above their levels prior to the earthquake4 and funding through cp continued without major problems. in coordination with the u. s. federal reserve system, on march 29, the bank started to offer market participants in japan one - week u. s. dollar funds, in addition to the existing threemonth funds, in its u. s. dollar - funds supplying operation. this measure was taken not because domestic financial institutions were having difficulties securing u. s. dollar funding at the time. rather, it is taken because the establishment of convenient measures for providing u. s. dollar funding in advance is expected to contribute to preventing economic activity from being adversely affected by a widespread deterioration in business sentiment or an increase in investors ’ risk aversion. therefore, although there were no bids for the operation, its very existence

just for the sake of context, why corporate governance is important in general. at its most basic level, corporate governance sets up the “ rules of the game ” to deal with issues arising from separation of ownership and management so that the interests of all stakeholders are protected. empirical evidence shows that businesses with superior governance practices generate bigger profits, higher returns on equity and larger dividend yields. importantly, good corporate governance also shows up in such soft areas as employee motivation, work culture, corporate value system and corporate image. conversely, the failure of high profile companies such as bcci, enron, worldcom and parmalat was a clear lesson of the damage bad corporate governance can inflict. here at home we had a corporate scandal of unprecedented dimensions in satyam computers where the company ’ s ceo admitted to having falsified accounts to the tune of over 7000 crore, and that too spread over several years. even as the judicial process relating bis central bankers ’ speeches to this alleged fraud is still under way, the big question is in what ways was this a failure of corporate governance and how are we fixing those lacunae? we had instances of poor governance in the banking sector as well – erosion of standards in forex derivative transactions and fraud in wealth management schemes – reminding us that we need to work hard to get to best practice in every area of corporate governance. how is corporate governance of banks different? banks are different from other corporates in important respects, and that makes corporate governance of banks not only different but also more critical. banks lubricate the wheels of the real economy, are the conduits of monetary policy transmission and constitute the economy ’ s payment and settlement system. by the very nature of their business, banks are highly leveraged. they accept large amounts of uncollateralized public funds as deposits in a fiduciary capacity and further leverage those funds through credit creation. the presence of a large and dispersed base of depositors in the stakeholders group sets banks apart from other corporates. banks are interconnected in diverse, complex and oftentimes opaque ways underscoring their “ contagion ” potential. if a corporate fails, the fallout can be restricted to the stakeholders. if a bank fails, the impact can spread rapidly through to other banks with potentially serious consequences for the entire financial system and the macroeconomy. all economic agents tend to behave in a procyclical manner, and banks are no exception, as aptly summed