to a substantial accumulation of ofr, well in excess of what was required for mas ’ central banking operations. so, in 1981, the gic was set up – in today ’ s parlance, a sovereign wealth fund – to manage part of the reserves for higher returns without the central bank constraints of liquidity. part of the ofr was transferred from mas to gic, which was tasked to invest the reserves in a globally diversified portfolio of asset classes with a higher risk profile to deliver good long - term returns. the third pot of reserves is managed by temasek holdings, an investment company wholly owned by the government. 3 / 7 bis central bankers'speeches temasek ’ s history also dates back to the early years of singapore ’ s development. there was little private capital in those days but a rapidly industrialising economy needed key infrastructure – in aviation, in shipping, in telecommunications, in banking, and so on. the government therefore set up enterprises in these areas. temasek was formed as a holding company in 1974 for these enterprises so that the government could focus on its roles of policy making and regulation without conflict, while temasek would own and manage these investments on a commercial basis. today, temasek is an active, equity investor that aims to deliver sustainable long - term shareholder value. more than a quarter of temasek ’ s portfolio is invested in singapore, with the rest invested in asia and global markets. the initial portfolio was provided by the government, but since then, temasek ’ s funds have come mainly from the investment growth of its own portfolio. compared to mas and gic, temasek is further out on the risk - return spectrum. how are the ofr managed? let me now move to the third question : how are the ofr managed? this is the portion of the reserves that mas is responsible for. there are three prongs to mas ’ approach to managing the ofr robust risk management ; balanced asset allocation ; and efficient investment process robust risk management the starting point to mas ’ approach to managing the ofr is its risk management framework, which sets out the liquidity and risk tolerance levels of the ofr. these relate to : the ability of the portfolio to meet liquidity needs under stress conditions ; and the maximum loss of the portfolio under tail risk scenarios. these liquidity and risk tolerance levels are determined on the basis of what is minimally required to meet the objectives of the ofr in supporting

financial stability could increase further. as we saw in 2015, even a lower momentum on the swiss mortgage and residential real estate markets can cause imbalances on these markets to increase. this can happen, for instance, when combined with comparatively weaker developments in fundamentals such as gdp growth. moreover, in a sustained period of low interest rates, real estate prices will remain subject to upward pressure. another rise in prices or decline in yields could occur particularly in the residential investment property segment. this would increase the risk of a substantial correction in the event of an interest rate rise, which would put pressure both on leveraged investors and on the banks who finance their investments. at the same time, in an environment of persistently low interest rates, the pressure on interest rate margins would continue. such pressure creates powerful incentives for banks to take on more risks. the focus here is on maturity transformation and affordability risk in mortgage lending. in the short term, this may allow banks to increase their profitability, but the flip side is that this also makes them more vulnerable to interest rate shocks and corrections on the mortgage and residential real estate markets. domestically focused banks would be particularly exposed to a major interest rate shock. as we explain in our financial stability report, in the event of a normalisation of interest rates, banks would initially benefit from the restoration of the liability margin. however, a major interest rate shock would cause net interest income to fall significantly at many banks, potentially resulting in losses. the greater a bank ’ s maturity transformation is, the higher these losses will be. even if the current low interest rate period were to continue and interest rates were only to rise very gradually, the possibility of a major interest rate shock should not be ruled out. experience has shown that interest rate corrections can sometimes be sudden and sharp. it should also be borne in mind that interest rates on the money and capital markets are currently more than 300 basis points lower than at the beginning of 2008. in other words, bis central bankers ’ speeches even if interest rates were to return to levels previously considered normal, this would still constitute a major correction. in view of the fact that risks to financial stability could increase further over the short to medium term, the capital surpluses of domestically focused banks are of particular significance. when defining their appetite for risk and their capital plans, the banks should continue to ensure that they are also able to absorb the losses associated with highly unfavourable but possible scenarios in the future. even under scenarios of