. as regards instruments, we have used both : • the “ standard ” instrument par excellence : interest rates. the ecb ’ s monetary policy has been very accommodative for several years, with key interest rates currently at historically low levels and negative real interest rates in large parts of the euro area. • a broad range of “ non - standard ” instruments that can be grouped into two categories : i ) liquidity - providing instruments ( with the fixed rate full allotment policy, the expansion of eligible collateral, and the extension of maturities up to three years with the vltros ) and ii ) instruments making it possible to intervene directly on the most dysfunctional market segments ( the cbpp and smp ). this diversification and broadening of the eurosystem ’ s interventions has naturally raised questions about the ultimate goals pursued, the methods used and the possible risks incurred. in this critical period, we were convinced of the need to build a solid, robust and clearly defined foundation for our actions. in particular : • we have always acted and will continue to act within the framework of the mandate assigned to us by the treaty : our priority objective is to maintain price stability, defined as an inflation rate below, but close to 2 % over the medium term. fears concerning the possible inflationary effects of our policies are therefore completely unfounded. • moreover, we have always acted, and will continue to act, totally independently from the political authorities. it has always been perfectly clear that the responses to the real roots of the crisis can only be provided by the governments themselves and that monetary policy can never durably mitigate political shortcomings. thus fears regarding the financing of euro area states are also groundless. focus on omts i would like to conclude by presenting in greater detail the most recent ecb measure, known as outright monetary transactions ( omts ). to understand the logic and power of this instrument, we need to make a brief excursion into monetary policy theory ( before lunch … sorry! but it ’ s not that complicated ). as you know, central bank monetary policy impulses are transmitted to the real economy via several different channels. in the euro area, with bank loans accounting for three quarters of the economy ’ s total financing, the “ credit channel ” is by far the most significant vector. in normal times, if the ecb lowers its key rates, the banks ’ financing costs decrease, allowing them to pass these lower costs on to the

various valuation adjustments while valuing their derivatives portfolios like – ( i ) incurred cva losses, ( ii ) closeout costs, ( iii ) operational risks, ( iv ) early termination, investing and funding costs, and ( v ) future administrative costs and where appropriate, model risk. 7 ) rbi has indicated that the capital requirement under ima would be a function of three components : ( i ) normal var measure ( for general market risk and specific risk ) ( ii ) stressed var measure ( for general market risk and specific risk ) ( iii ) incremental risk charge ( irc ) ( for positions subject to interest rate specific - risk capital charge ). general market risk and specific risk can be modelled together or separately for normal var measure and stressed var measure. in other words, a bank could calculate either a combined var measure for the bis central bankers ’ speeches two risk categories ( general market risk and specific risk ) or separate var measures for each of them. for example, the most extensive approach to model equity risk would be having risk factors corresponding to the volatility of individual equity issues. in such a case, bank would have modelled both general market risk and specific risk together. however, in cases where a bank calculates a combined var measure, it should be able to isolate the var for each component so as to enable its backtesting and use in the day - to - day risk management. in addition, in the case of interest rate - sensitive positions, which have credit risk, the banks will also have to compute incremental risk charge for default and migration risks, which are generally not captured by the var model. to start with, banks in india are required to model general market risk and use the present standardised measurement method for specific risk. 8 ) on measurement of market risks, var methodology has proved to be the main method of assessing the overall market risk of trading positions over a short horizon, such as a 10 day period, and under “ normal ” market conditions. the mechanics of var has been variously described at one end of spectrum as “ a benchmark for managing financial risk ” and at the other end of the spectrum as an “ intellectual fraud ” along with various shades of opinions in between the two extremes. in effect, the methodology allows us to capture in a single number the multiple components of market risk such as curve risk, basis risk and volatility risk. however, each time there is a turmoil in the worlds markets, the limitations of