, rising global interest rates, political tremors and credit rating downgrades, we ended 2005 on a clearly upbeat note among others : • our economy continued to grow ; • we contained inflation at single - digit levels even with runaway oil prices ; • the cost of doing business remained benign with a steady downtrend in interest rates, based on 90 - day t - bill rates ; • the peso emerged as best performing currency in asia ; • capital adequacy ratio of banks remained well above the international benchmark ; • the asset base of the banking sector sustained its growth ; • asset quality of banks continued to improve with single - digit non - performing loan ratio ; • our poverty alleviation program through microfinance was recognized as excellent by the united nations, making us one of only three asian nations given that distinction ; • ofw remittances hit their highest level ; • foreign investment inflows continued to rise ; • a higher - than - expected bop surplus was registered ; • international reserves hit record - high levels ; and • the revised value added tax and sin taxes, accompanied by stronger tax administration efforts are showing positive results. if both fiscal discipline and higher revenues can be sustained, there is good reason to expect a balanced budget by 2008 in other words, ladies and gentlemen, we are off to a good start in 2006 for this, we must also acknowledge the significant contributions of my predecessor …. former bangko sentral governor rafael buenaventura …. as well as the other members of the monetary board during his term friends, governor paeng could not be with us tonight but let us applaud him and his mb members as a way of saying thank you for their unwavering commitment to initiate necessary reforms in our financial sector. what ’ s in store in 2006 the new year gives us a fresh opportunity to do things better, not only for our respective institutions but also for our country of course, you and i know we have a long way to go before we can truly say everything is … a - ok more than anyone, you know. our economic fundamentals : our strong points …. as well as other areas requiring more attention in our case, it is critical for the bangko sentral ng pilipinas to keep an eye on the risks to inflation and to make such risks clear to the markets and the general public our main focus is to ensure that we achieve our inflation target, keep the public ’ s inflation expectations anchored and manage the

originate - to - distribute model ” pushed forward risky and opaque products, which were at the epicentre of the subprime crisis. only those european banks got into trouble that embarked into investment banking activities or had bought toxic assets on a large scale. but the crisis also revealed weaknesses of business models based on public sector support or public financing. the additional ratio for systemically important financial institutions ( sifis ) can be questioned in so far as it sanctions the traditionally larger banks of continental europe. such large banks are unpopular in the us – without being necessarily more risky. the negative consequences of basel iii, that sanctions bank loans as relatively risky and illiquid, imposing higher capital requirements and haircuts, are threefold : – the formerly stable universal banks of continental europe would be pushed into riskier activities when the margins of lending to smaller and medium sized firms were diminishing due to regulatory requirements. – the new rules lead to comparative disadvantages to the european banking system. the us banks rely more on fees than on deposits. the global playing field will be tilt. – as the real economy is mainly financed by the banking system, financing conditions for companies without access to the capital markets would tighten and trigger a negative impact on economic growth. as the former imf head and governor of the french central bank, jacques de larosiere, put it recently : “ the cruel irony is that the banking system model that most favours financial stability and economic growth could be the chief victim of the new framework. ” a remaining challenge is to regulate and supervise the shadow banking system. moreover, it has to be made sure, that basel iii will be implemented at the time in all jurisdictions to guarantee a level playing field. as we know, this was not the case for the basel ii rules. institutional reform also, on the institutional level reform is necessary. here again, a one - fits - all - answer will not be appropriate. the us did consolidate its highly fragmented regulation regime. banking there is regulated at both the federal and state level. depending on a banking organization ’ s charter - type and organizational structure, it may be subject to numerous federal and state banking regulators. europe also has to overcome national fragmentation in this respect. despite some initial temptations for re - segmentation of prudential competences, the response will be at the european and at the eu27 level. it will consist of the implementation of new concepts and institutions aiming at de - risking the financial industry. liquid