yandraduth googoolye : credit risk and market risk – the journey ahead opening and closing remarks by mr yandraduth googoolye, first deputy governor of the bank of mauritius, at the working session on “ credit risk and market risk – the journey ahead ” at the federation of indian chambers of commerce and industry and indian bank ’ s association conference on “ global banking : paradigm shift ” theme : “ navigating successfully in an uncertain world ” mumbai, 7 november 2008. * * * ladies and gentlemen it is a pleasure for me to chair this afternoon session on credit risk and market risk, a subject whose importance is gaining momentum among policymakers these days. economic theory tells us that credit risk and market risk are intrinsically related to each other and are not separable ( jarrow and turnbull : 2008 ). with financial innovation, the interaction between credit risk and market risk has itself become even more complex today. the recent financial crisis has indeed showed us how a credit risk event can trigger other market related and liquidity related risk events. the sub - prime crisis in the united states, which has its origin in protracted low interest rate policy, has shown us how our interest rates setting decisions impact on credit risk – a linkage that has been somehow neglected over recent times. as we coordinate our efforts to ease monetary conditions to curb the growing risk that our economies would dip into recession ; we need to be vigilant on the long term consequence of our decisions today, to avoid another financial turmoil in future. financial innovation has spurred the development of risk management tools but it has also brought together various other forms of risk into financial products, making the art of risk management even more sophisticated. the rapid growth of derivative instruments blurs the dividing line between the established concepts of credit risk and market risk. the trading of credit derivatives and other exotic securities has transformed credit risk into market risk. when the credit conflagration morphed into a fully - fledged panic in financial markets over the last few weeks, the major stock markets plunged. a decade or so ago, technological innovation produced securitized and other credit derivatives to help financial institutions to manage risks ( credit or liquidity ). those instruments quickly gained popularity among practitioners as they promised to transfer credit risk to those who were supposedly in a better position to bear those risks while contributing to financial stability. as these instruments grew in complexity, existing risks were transformed into other risks and new risks emerged. those risks were typically

driver of the increased capitalisation has been the post - crisis strengthening of the regulatory framework. but it is also important to note that the shocks that have hit european economies in recent years have largely been buffered by fiscal and monetary policy, thus shielding the banks from their full impact. the third factor at play is robust liquidity. banks'liquidity coverage ratio increased from 138 % in 2015 to 158 % in 2023. effective liquidity risk management is becoming even more important in the current environment. the monetary tightening that began in july 2022 followed years of highly accommodative monetary policy and ample liquidity provision. moreover, heightened geopolitical risks are not fully priced in by markets, which may lead to abrupt market reactions following negative news. 2 / 7 bis - central bankers'speeches however, even if banks may meet capital and liquidity requirements, this will not shield them from the impact of adverse shocks if risk management systems and governance are ineffective. this is one of the key lessons from the turmoil on international banking markets in march 2023. the fourth factor is thus improving governance and risk management, which has been a priority for european banking supervision in recent years. while progress has been made here, more needs to be done. strong internal governance and effective strategic steering remains one of our top supervisory priorities. we will soon publish a guide on governance and risk culture, including examples of good practice in this field. overall, there is no room for complacency. risk management in banks needs to continue focusing on forward - looking risk assessments and sustained resilience, including capital, liquidity and operational resilience. european banking supervision needs to foster this sound risk management in banks and ensure sufficient resilience. the risk environment in which banks operate has evolved substantially in recent years. it and cyber risks, for example, are on the rise : the number of reported cyber incidents at european banks doubled from 2022 to 2023. 5 and these attacks have become more sophisticated. they can heavily disrupt the functioning of banks, with potentially significant financial, reputational and legal implications. this is why european banking supervision has flagged this topic as a key priority. the results of this year's cyber resilience stress test will be published later this summer. it is important to note that many changes are not merely cyclical ; they are in fact structural. becoming climate neutral requires changes in relative prices for co2intensive activities and in the patterns of production and consumption