up of the ministers of finance from the eight countries. as council members, they provide directives and guidelines to the bank on monetary and credit policy issues. as elected representatives, accountable to the people and with cabinet and legislative responsibilities in their respective countries, the ministers spearhead implementation of the requisite legislative arrangements and fiscal policies to ensure that the financial system remains safe and the ec dollar remains stable. it is within this framework that the operations of the bank are conducted, with due consideration being given to various factors in the economies of the member states, as well as in the wider external environment. the external environment major considerations during the course of the year were : • first, the sharp upturn in the prices of fuel and petroleum products, with accompanying hikes in the costs of transportation, electricity, imported building materials as well as domestically produced goods and services. this resulted in an increase in the inflation rate in eccu countries to 4 per cent in 2005, up from 2. 6 per cent in 2004. • second, growth in the currency union of approximately 5 per cent, compared with 3. 9 per cent in 2004, driven largely by increased construction activity, in preparation for the cricket world cup 2007. • third, a weakening in the tourism sector in 2005, and • fourth, the rising interest rate environment existing in the united states. against this backdrop, let us now look at the performance of the bank during the 2005 / 2006 financial year. the bank ’ s performance i am happy to report that the bank achieved its main objectives of monetary and financial sector stability. the exchange rate peg of the ec dollar was maintained, and the foreign reserve backing of the currency stood at 96 per cent at 31 march 2006, well above the statutory requirement of 60 per cent. in the area of financial sector stability among the initiatives undertaken were : • the drafting of new prudential guidelines and regulations, aimed at strengthening its regulatory capacity and financial sector risk management in the eastern caribbean currency union ; • refinement of the risk assessment model used as the basis for an early warning system. the model is used to stress - test institutions and the financial system, and • reducing the vulnerability of banks to credit risk by mandating the reduction in the tolerable limit for non - performing loans from 10 percent to the international benchmark of 5 per cent. recognising, however, the existence of gaps within the regulatory infrastructure, the bank continues to collaborate with member governments to establish single regulatory units in each member

we cannot afford to ignore the downside risks embodied in the nature of credit derivatives and we need to take the necessary steps to appropriately weigh the advantages against such risks. 2 ) financial stability perspective from the investors ’ point of view, credit derivatives represent an asset class that allows investors to assume risks in exchange for a corresponding remuneration that suits their investment profile. at the same time, banks use credit risk transfer instruments, including securitisation, to distribute lending - related credit risk exposures to such investors. however, the development of the market for credit derivatives also embodies features affecting the balance of risks of the different actors in the financial landscape. to begin with, the following features related to market structure should be taken into account : 1. concentration in cds trading is very high and has probably further increased since july 2007 with the exit of several major players. such a high degree of concentration increases liquidity risk in the market. a recent report by the ecb 1 focusing on a sample of leading european banks active in the cds market found that the top ten counterparts for each large surveyed bank accounted for between 62 - 72 % of its cds gross market value exposure. 2. the cds market is highly interconnected, making it susceptible to contagion. one of the central lessons of the past two years is that – despite the appearance of netting positions falling outside the banking sector – credit risk has not been effectively transferred outside of the financial sector, with a number of contractual arrangements preventing a true separation of credit risks from the lending institutions. furthermore, counterparty risk has taken as a result a prominent role, as indicated at least since 2005 by the counterparty risk management policy group in the so - called “ corrigan report ”. 3. cds have increasingly become an important tool in the pricing of credit in other markets. while this pricing mechanism has been shown to function well in normal times, during episodes of financial turbulence the transmission of information may be impaired, with spillovers for the access to credit, the cost of funding and, due to the increasing interlinkages between markets, the functioning of other market segments, notably equities. these risks related to market structures are not the only concerns from the point of view of financial stability. the opacity of the credit derivatives market, and especially of structured synthetic instruments, has been a potential source of concern long before the start of the crisis, as underlined by the corrigan report. the complex interaction between cash instruments and credit derivatives