shamshad akhtar : pakistan – framework for consolidated supervision keynote address by dr shamshad akhtar, governor of the state bank of pakistan, at the annual general meeting of the institute of bankers, pakistan, karachi, 31 october 2008. * * * financial markets have not only been growing at a rapid pace, but have also been marked by continuous change. key structural transformation has been the evolution of large and complex global financial institutions and structures that, given their inherent size and strengths, have promoted financial engineering and innovation, exploited new avenues of financial leveraging accompanied by greater risk appetite, and infusion of information technology. together these developments have changed the financial landscape. over the period, various market developments along with few key legislative changes, such as repealing of the glass steagall act, 1933 ( which rolled back the restrictions imposed on banks for mixing their business with securities and investment banks ) in the late nineties, fostered new financial structures and strategic alliances that removed the distinction between activities specific to various types of financial institutions. though the recent global financial market turmoil has triggered questions regarding the risks associated with the emerging types of financial structures, however a more relevant debate is regarding the gaps and weaknesses in the regulatory and supervisory structures that allowed over - leveraging and the operations of several financial industry segments to operate without appropriate oversight. recognizing the need to evolve an appropriate oversight policy mechanism for its evolving financial structure, sbp, as a part of its overall financial sector reforms launched in july 2008, has advocated the need for legislature to empower the central bank to augment its oversight of the financial sector. in my remarks this morning i propose to outline the economic and financial benefits of financial conglomeration and the risk and supervisory challenges arising out of these complex financial structures. i propose to then share with you the legislative reforms launched by sbp in this area which have recently been approved, in principle, by the cabinet and are to be tabled for parliament consideration. rationale for consolidated supervision worldwide, the process of change has allowed many financial organizations, which used to engage in the primary business of banking, asset management or insurance activities on a standalone basis, to adopt more flexible structures whereby banks opened up a wide range of subsidiaries and affiliates that primarily engage in businesses other than their core business. the main economic and financial benefit which encourages the formation of such groups is the enhanced ability to achieve economies of scale and to capture synergies across complementary financial services business lines. these synergies

liquidity leads also to further expansion of the balance sheet of the federal reserve. to avoid inflation in the long run and to allow short - term interest rates ultimately to return to normal levels, the fed's balance sheet will eventually have to be brought back to a more sustainable level. the fomc will ensure that that is done in a timely way. however, that is an issue for the future ; for now, the goal of policy must be to support financial markets and the economy. finally, working together with the treasury, the fdic, and other agencies, we must take all steps necessary to minimize systemic risk. the capital injections into the banking system under the eesa, the fdic's guarantee program, and the provision of liquidity by the federal reserve have already served to greatly reduce the risk that a systemically important financial institution will fail. we at the federal reserve and our colleagues at other federal agencies will carefully monitor the conditions of all key financial institutions and stand ready to act as needed to preserve their viability in this difficult financial environment. banks have an incentive to borrow from the gses and then redeposit the funds at the federal reserve ; as a result, banks earn a sure profit equal to the difference between the rate they pay the gses and the rate they receive on excess reserves. however, thus far, this type of arbitrage has not been occurring on a sufficient scale, perhaps because banks have not yet fully adjusted their reserve - management practices to take advantage of this opportunity. i have not discussed the international response to the crisis today, but policymakers abroad as well as those in the united states have taken a series of extraordinary steps to address an extraordinary situation. these steps include strong fiscal and monetary actions as well as measures to stabilize key financial institutions and markets and to strengthen the financial infrastructure. i am not suggesting the way forward will be easy. but i believe that the policy responses taken here and by our international partners, together with the underlying vitality and resilience of the american economy, will help to restore confidence to our financial system and place our economy back on the path to vigorous growth.