will take remedial action in case the limits are breached by any financial institution. the canadian framework consists of five stages viz., a “ normal ” stage, an “ early warning ” stage, a “ risk to financial viability or solvency ” stage, a “ future financial stability in serious doubt ” stage and a “ non - viability / insolvency imminent ” stage. each stage is identified by a set of conditions and a number of options for supervisory measures. in india, an early intervention system in the form of a prompt corrective action based on three indicators – capital to risk weighted assets, non performing advances and return on assets, has existed since 2002. threshold values for each of the indicators have been defined along with associated structured and discretionary actions. interconnectedness as a potential source of crisis was recognized in india much before the onset of the crisis and, as a result, in march 2007, rbi limited a bank ’ s inter bank liabilities to twice its net worth. a higher ibl limit of 300 per cent of net worth is allowed for banks whose crar is 11. 25 per cent. further, crisis prevention has been an integral part of regulatory framework in india. more recently, we set up the financial stability unit ( fsu ) within the reserve bank to interalia carry out macroprudential surveillance. since its formation in 2009, the fsu has published four financial stability reports ( fsrs ) on a biannual basis. in the most recent report published in december 2011, we introduced the financial stability indicator based on a combination of financial market stability, macroeconomic stability and banking stability indicators. we also introduced new tools for risk assessment such as the systemic risk survey and the systemic liquidity indicator in addition to improving the coverage of the network model analysis introduced in the previous fsr. most people are aware of rbi ’ s counter cyclical policies that won us accolades in our management of the crisis. however, we have also taken several measures to address systemic risk arising out of interconnectedness amongst financial institutions such as placing prudential limits on call borrowing and lending, limits on banks cross holdings of bank ’ s ownership, limits on exposure to single and group borrowers, etc. the further use and development of a macro - prudential policy toolkit to manage systemic risk is actively being pursued within the bank. bis central bankers ’ speeches concluding remarks recent experiences have clearly demonstrated that resolving a financial crisis is complex and costly. this

losses. the fund ’ s fixed income portfolio is well diversified across different types of bonds and different regions and the active strategies had low correlation in normal markets. however, the financial crisis revealed that these strategies were exposed to more underlying, systematic risk. correlation was not expected to be high between investments in, for example, japanese inflation - indexed government bonds, bonds issued by international organisations such as the european investment bank, european covered bonds and us mortgage - backed bonds. these experiences and the abrupt turnaround in market liquidity suggest that active management of the fixed income portfolio should be limited and measured on the basis of a number of criteria, as laid down by norges bank ’ s executive board. the fund currently has extensive holdings of bonds that are difficult to trade in today ’ s market. realised losses related to these investments have, as mentioned above, been limited. the flipside of large book losses is that this portfolio has a high return, reflecting not only the increase in credit risk but also high liquidity premiums and fears and uncertainty in the market. the return, measured as the difference in the effective interest rate between the actual portfolio and the benchmark portfolio, is now close to two percentage points. history has seen a number of deep financial crises, and market conditions will return to normal in time. the final results of the management of the fund ’ s fixed income portfolio since the beginning of the financial crisis cannot be deduced from the quarterly results while the crisis is at its most intensive. values are not lost as long as borrowers fulfil their obligations. the fund is prepared to retain ownership of a large volume of bond holdings until they mature in a few years. moreover, unless the economic outlook goes from bad to considerably worse, the fund will record a substantial excess return in the years ahead. the ministry of finance has set risk limits for norges bank ’ s management of the fund. this limit is defined using a statistical concept – expected tracking error ( relative volatility ) – which puts a ceiling on how far the fund ’ s actual investment portfolio can deviate from the benchmark portfolio. expected tracking error must not exceed 1. 5 percentage points or 150 basis points. this limit entails an expectation that the gap between the return on the fund and the benchmark portfolio will be less than 1. 5 percentage points in two out of every three years. at the beginning of 2008, the fund ’ s expected tracking error was 43 basis points, which is slightly higher than the