increased substantially. following the september fomc meeting it rose above 150 basis points. a spike in the spread following a decision to ease monetary policy is not surprising because the primary market may be slower to react. the spread has since retraced to its pre - september fomc meeting level of about 120 basis points. however, the spread remains elevated by historic standards. an important objective of this workshop is to gain a deeper and clearer understanding of the determinants of the primary - secondary spread and its dynamics over time. this spread is influenced by a number of elements, such as the valuation attached to the right to service the mortgages underlying the security, and the annual guarantee fee that is paid to cover the credit guarantee provided by the government - sponsored enterprises ( gses ). the observed widening of the primary - secondary spread likely reflects many factors. part of this widening is due to higher annual agency guarantee fees which are a necessary and overdue re - pricing of the credit guarantee provided to investors. while these guarantee fees differ by mortgage and by seller, the average effective guarantee fee has increased from 20 to 25 basis points to around 50 basis points today. but this still leaves a significant part of the spread left to be explained by other factors such as changes in originators ’ costs and profits. as you all know, the primary - secondary spread is a technically imperfect measure of the pass - through from primary rates to secondary rates. a new study1, by authors including new york fed staff, adjusts for these factors to come up with a measure of originator2 profits and unmeasured costs, or opucs. the basic picture remains the same, with opucs at historically elevated levels. the paper evaluates a number of potential factors that could help explain this increase. these include the decline in the value of mortgage servicing rights, credit losses and other costs associated with put - back risk, possible changes in pipeline hedging costs and other loan production expenses. it finds a potentially material role for the decline in the value of mortgage servicing rights in particular, but concludes that the increase in the aggregate measure of profits and unmeasured costs is “ not likely to be driven exclusively or even mostly by increase in costs ”. this suggests that originator profits may have increased. the study examines a number of potential explanations. these include capacity constraints, market concentration, pricing the rising gap between primary and secondary mortgage rates. we interpret originator to include all actors involved in

the national payment systems act ; the prohibition and prevention of money laundering act ; the bank of zambia anti - money laundering directives ; and the bank of zambia corporate governance guidelines. the speed at which changes to these regulatory frameworks can be made is a crucial element of the reform process in regulatory and supervisory arrangements as it improves policy responsiveness. a number of challenges exist in this area including the need to update some of the statutory instruments ( sis ) in order to reflect the dynamics presently characterizing the financial markets. in some cases, new guidelines are altogether needed for regulating new products and innovations such as mobile banking, internet banking and islamic banking. the need for quick and appropriate responses to market developments and innovations while important also need to be balanced by a well designed regulatory framework that ensures the maintenance of a stable and sound financial system. chairperson, the stability and soundness of the financial system is in turn, heavily dependent on the adequacy of capital. it is essential for the right balance to be struck between the need for banks to hold adequate capital to absorb losses and the need to ensure that capital requirements do not unduly constrain from lending to the real economy. it is also important that banks are not so highly leveraged relative to common equity as to create incentives for excessive risk taking. the required capital ratios should therefore be viewed in the context of the high quality capital – core tier 1 and tier ii definitions and should exclude subordinated debt as providing relevant support. distinguished delegates, basel ii provides a pragmatic approach to determining overall capital levels. it introduced a new approach to the definition of relative capital requirements to be held against specific asset categories. the challenge in this approach is in deciding what an optimal level of capital is especially in light of massive scale of economic losses now being suffered as a result of the banking system collapse. however, any theory of optimal capital level will have to strike a balance between the increased cost of financial intermediation which result from higher capital requirements and the benefits of the decreased probability of bank failure and economic harm which will be achieved. recent developments have established a prima facie case for higher minimum capital requirements. the challenge will be for supervisors to manage the transition to higher capital requirements in a phased approach and take into account the need to avoid procyclical pressure on bank capital adequacy under conditions of economic downturn. zambia has adopted basel ii for implementation although work is still on - going in this area. the enhanced approaches to capital that