4  BIS Review 9/2001  Credits The monetary projection for 2001 envisages continuation of the intensified credit activity of banks registered in 2000. It is consistent with the expected growth in the banks deposit potential and the growth in the government deposits with the Central Bank. In 2001, total banks’ credits in favor of the non-government sector should increase by Denar 5,420 million or by 13.1%. Observed by structure, the Denar credits are projected to increase by 10.9%, or by Denar 3,610 million, while the foreign currency credits are projected to increase by 21.5% or by Denar 1,810 million. The monetary policy will be aimed at achieving the projected dynamics of the economic growth in the Republic of Macedonia, creating room for growth of banks’ credits to the non-government sector. Simultaneously, the downward trend in lowering the share of the non-performing credits in total banks’ credit exposure is expected to continue. This should derive from the initiated improvements in the commercial banks’ credit policy, stimulated by the strengthened banks' corporate governance, on one hand, as well as by the continuous strict supervision examination on the banks operations by the Central Bank, on the other hand.
Many of the originators were forced into bankruptcy at the start of the year and in the last few weeks we have seen Bear Stearns’ announcement that two of its funds have lost all or nearly all of their investors’ money. I suspect the speed and scale of the changes were outside most stress test simulations. And while the most dramatic changes may have happened there will now be a long period as the implications work through the ratings of other derivatives and the full range of instruments are marked to market. A related lesson is about liquidity in new markets. The worry has been that at times of stress, liquidity would dry up and it would be impossible to trade out of positions. That would not just lock firms into losses but would disrupt strategies which require continuous dynamic hedging – for example, strategies such as constant proportion portfolio insurance (CPPI). Again that has been a feature of recent weeks. It has been widely reported that a couple of the lenders to the BSAM funds put their collateral on the market but were not able to sell as much as they wanted. That is connected to the fourth lesson, the vulnerability of valuations in sophisticated derivatives. These are not widely traded so valuations are usually based not on market prices but on models which draw in turn on correlations established over the recent past. This is a fundamental and unavoidable feature of new products and markets.