if the pfandbrief today can boast of a reputation of reliability, it is to a great part because it rests on a solid german state and a sound economy. and it has been resting there for quite some time now. originally, the german pfandbrief was introduced over 200 years ago by the prussian king frederick ii. frederick ’ s intention was to ease a credit crunch after the seven years ’ war, and with the pfandbrief he created a financial product of extremely long standing. after more than 200 years of trading experience on the german bond market, the pfandbrief has gained the trust of investors and a reputation as a secure and crisis - proof investment. in 2012, the size of the pfandbrief market was some euro525 billion, which amounts to almost 19 % of outstanding global covered bonds. the trust in the pfandbrief also stems from the fact that since 1901, no german pfandbrief bank has had to declare bankruptcy. but as frederick ii remarked : “ what is the good of experience if you do not reflect on it? ” more than 100 years without a single default is certainly an impressive feat. however, we have to reflect on the question of how to continue this accomplishment in the future. bis central bankers ’ speeches we have to acknowledge that during the crisis some pfandbrief banks encountered difficulties. hypo real estate, for instance, had to be saved with public money. and in the first half of 2009, the pfandbrief market as a whole was affected to a certain degree when the broader covered bond market experienced significant stress. the intervention of the eurosystem in the covered bond market certainly helped to ease that stress. in the wake of the financial crisis, though, many sovereigns and banks lost their top ratings. the consequence was widespread downgrades, also in the covered bond market. many pfandbriefe were affected and lost their aaa - rating. nonetheless, their spreads versus riskfree securities did not significantly change, displaying unbroken investor interest and trust. meanwhile banks have adjusted to the changing conditions. regarding mortgage pfandbriefe cover pools, for instance, overcollateralisation more than doubled. in 2007, assets in these cover pools on average had a value of 116 % of issued pfandbriefe. in the third quarter of 2013, the value of cover pools rose to 133 %. indeed, over

credit risk – either by securitisation or credit derivatives – started to grow rapidly. the chance to sell or buy credit risk, instead of holding loans until maturity, placed banks under increased pressure to know the present values of their assets well before maturity. this posed a challenge to risk modeling as present values depend in a complex way on market factors like interest rates or exchange rates. therefore, it is not surprising that the growth of credit trade was accompanied by rapid technological progress, for instance, by the development of new credit portfolio models. it is difficult to say which came first or – in other words – whether these new risk measurement techniques were the egg and the increased credit trade the hen or vice versa. technological progress has continued up to the present day. the interaction of market and credit risk is being taken into account by more and more sophisticated models. the increased trade of credit on the one hand offers an opportunity to further diversification of credit risk over the whole financial system and to contribute to financial stability. on the other hand, it can also be seen as a development incurring new risks, be it by an inadequate recognition of risks inside a single bank, be it by new adverse risk - taking incentives or by the imperfection of hedges, be it, finally, by new effects that no one had discovered before. these developments are a first reason for bank managers, regulators and central bankers to improve their understanding of the interaction of market and credit risk. in addition to these developments, some industry representatives were concerned that diversification effects between market risk and credit risk were being ignored by regulators, which could lead to too high minimum capital requirements. a deeper understanding of diversification effects and their relevance for risk aggregation in banks is a second reason to have a conference on the interaction of market and credit risk. at the end of 2005, the research task force project group on the interaction of market and credit risk received the mandate, first, to collect and summarise information on the state of the art of measuring the interaction of market and credit risk, and second, to set up and to conduct its own research projects in a rather broad field. as this was a vastly unexplored research area, the new working group has become one of the most research - oriented groups of the research task force. ladies and gentlemen, this conference contributes to bringing together three groups involved with the interaction of market and credit risk : bank practitioners, regulators, and researchers. the need to make them exchange their ideas and