however, we should not forego the opportunity to learn from the events and possibly strengthen systems even further. future directions looking to the future, the lessons of asia provide sign posts for the areas of risk management in which work by both market participants and supervisors is likely to be concentrated. volatility, after all, usually leads to innovations to help deal with it. credit risk management emerged as one theme in assessments of the asian volatility. a reassessment of liquidity risk was another. an emphasis on the infrastructure of the market no doubt will continue as well. firms already were working upon ways to apply techniques developed for the management of market risk in the context of credit risk. supervisors also were evaluating the potential for applying such an internal models approach to the determination of regulatory capital requirements for credit risk. events in asia highlight not only the promise of such approaches but also the hurdles that must be overcome if their potential is to be realized. once one recognizes the correlation between market risk and credit risk, the next step is a consideration of a global approach to risk management and the possibility of extending an internal models approach beyond market risk. the application of that approach implies, however, that prices can be obtained from thin markets and used effectively in risk measurement. as we continue to pursue new approaches to credit risk management, the basic questions arise again and again : are data and techniques for revaluing positions available? can acceptable risk measurement models be developed? are hedging vehicles available? these questions represent hurdles that must be jumped. they will not necessarily be easy, but neither were other hurdles that this industry has overcome. another theme that emerges is liquidity risk. a fundamental assumption of many risk management procedures is the ability to get out of a position or to hedge it. events in asia demonstrated once again that assumptions about liquidity in normal markets rarely hold in more volatile ones. this argues both for a reassessment of the assumptions themselves and for more careful and fundamental thinking about liquidity risk in risk management procedures. at the outset of my remarks, i noted my appreciation for infrastructure developments as a foundation for the growth of the market. certainly, their importance is unlikely to diminish in the near term. market participants generally have an appreciation for potential legal risk but continuing reassessment is valuable. episodes of volatility give some counterparties strong incentives to try to walk away from losing contracts. such events indicate areas where further legal work may be necessary to ensure that the market

were continued in 1997. in 1996, the central bank decided to withdraw from the long - term market and reached custodian agreements with three securities firms following a bidding process. the bank handed over to the firms a part of its securities portfolio and at the same time ceased to be a market maker in government bonds, government notes and housing bonds. the experience from these agreements is positive and they were renewed in march 1997. the new agreements were more extensive than the earlier ones, and in their wake two banks announced that they would engage in market making for certain classes of government securities in the same manner as the custodial firms. it is not unlikely that such custodial agreements will become unnecessary and that the central bank will no longer need to be involved in ensuring adequate market making in the long - term market. both the treasury and the state housing authority began to reorganize the classes of bonds they issue, with the effect of improving the price determination of government guaranteed bonds and raising turnover in the secondary market. the central bank ’ s monetary policy instruments in 1997, the central bank began preparing changes to its monetary policy instruments. the purpose was twofold : first, to level the playing field for domestic credit institutions with respect to their access to facilities at the central bank, and, second, to adjust the operating environment of domestic credit institutions to the environment prevailing in the european economic area. these changes have been modelled on the instruments designed for the prospective european central bank, which will be established on july 1 and formally commence operations on january 1, 1999. under the auspices of the european monetary institute, the precursor to the european central bank, work has proceeded on designing the monetary instruments of the bank. the central bank has followed this work to the extent possible. some issues, such as concerning reserve requirements, will not be resolved until after the european central bank has been established. the central bank may therefore adjust its rules when the situation in europe becomes clearer. the first step in changing the central bank ’ s instruments was taken on march 1 and covered the following. the liquidity requirement of deposit banks was abolished. weekly auctions of 14 - day repurchase agreements replaced the tap - sale of these agreements. all government guaranteed securities and the central bank ’ s certificates of deposit qualify as collateral for repurchase agreements rather than only treasury bills and certificates of deposit. the central bank will auction 14 - day certificates of deposit when it feels the need to withdraw liquidity. the direct sale of 45