holding a substantial portfolio. as argued by freddie's ceo at that time, by financing mortgages with mortgage - backed securities sold to investors, freddie avoided interest rate risks and thus could keep mortgages flowing when depository institutions were suffering an interest rate squeeze. 7 freddie's message changed after 1989 when it became owned by private shareholders and it began to exploit the risk - adjusted profit - making potential of a larger portfolio. * * * the creation of mortgage - backed securities for public markets is the appropriate and effective domain of the gses. deep and liquid markets for mortgages are made using mortgage - backed securities that are held solely by investors rather than the gses. fannie's and freddie's purchases of their own or each other's mortgage - backed securities with their market - subsidized debt do not contribute usefully spreads averaged 148 basis points in 1997 and 280 basis points in 2003. see andreas lehnert, wayne passmore, and shane sherlund ( 2005 ), " gses, mortgage rates, and secondary market activities, " board of governors of the federal reserve, finance and economic discussion series 2005 - 7, january. press reports indicate that during a recent open conference call, freddie mac said it is poised to start growing its portfolio again. for example, see " freddie earnings fell sharply in 2004 ; but gse sees growth potential and rising market share in 2005, " inside mbs & abs, april 1, 2005, page 4. leland c. brendsel, government - sponsored enterprises, hearing before the subcommittee on oversight of the committee on ways and means, house of representatives, the 101st congress, september 28, 1989. to mortgage - market liquidity, to the enhancement of capital markets in the united states, or to the lowering of mortgages rates for homeowners. the bulk of the gses'portfolio growth over the past decade has occurred mainly through the acquisition of their own mortgage - backed securities - which reflect the aaa - rating of pools of home mortgages. as i indicated earlier, holding their own securities in portfolio often yielded fannie and freddie subsidized annual returns on equity of more than 25 percent, far in excess of the returns to purely private financial institutions from holding such securities. * * * limiting the systemic risks associated with gses would require that their portfolio holdings be significantly smaller. at the same time, reducing portfolios would have only a modest effect on financial markets. currently, these portfolio

5 march 2018 the new challenges facing central banks colegio de ingenieros de caminos luis m. linde governor let me begin by thanking the school of civil engineering for inviting me to inaugurate this cycle of meetings with regulatory agencies. many thanks to the president of the school, its management board and all of you for being here today. the international financial crisis that began in 2007 has given rise to various changes and to the emergence of new challenges. central banks are, today, in a rather different and novel situation compared with where we were before the crisis some 10 years back, and we are affected by a debate about our functions in the economy and the thrust of our policies. in the past decade central banks have increased monetary stimuli manifold and there have been deep - seated changes in the monetary and regulatory policy objectives and instruments implemented. we are now emerging from the crisis and this is raising even more the profile of the debate on the role central banks should play and whether the policies pursued in recent years should be maintained, or progressively abandoned, and at what speed and to what extent either alternative should be taken. the challenges facing central banks can be grouped in three areas : first, what is being labelled as the “ new normal ” in the macroeconomy and its implications for monetary policy ; second, the challenge for financial regulation policies ; and third, the new challenges posed by financial innovation and the new technologies. the impact of the crisis on monetary policy but before addressing these challenges, i think it might be useful to take a short step back to remember where we have come from. we can only understand today ’ s challenges if we bear in mind the changes, often far - reaching, that have come about in central banks in response to the crisis. the global financial crisis came about following a build - up of bubbles in the advanced economies, mainly in the financial and real estate sectors, a process to which easy financing conditions proved conducive in a setting in which risks were not appropriately priced. in any event, what was surprising was the intensity and global nature of the crisis that broke in 2008. given highly integrated financial markets and complex interconnections, instability spread rapidly, leading to the most serious financial crisis since the second world war. in the european union the crisis was, moreover, exacerbated by a double - dip recession, which has prolonged the recovery period and has also revealed the weakness of the euro area ’ s institutional framework. the crisis also left