The level of mistrust among US investors towards new instruments with collateral in property in small, distant countries should not be underestimated. BIS central bankers’ speeches  7  So, in terms of risks for an acute liquidity crisis, it is important how the banks borrow, in particular which proportion of the borrowing is short-term. And this brings the problem back to just how to get hold of dollars. However, the problem is also related to that of how the borrowed dollars are used. In principle, there are three options. One way is to purchase US government bonds to use as a liquidity reserve. Borrowing for this purpose (and this has been significant for a couple of banks, at least) does not form a problem. Government bonds can always be sold on the market when the loans fall due, as they are highly liquid and remained so throughout the entire crisis. Another way of using the borrowed money is to exchange it immediately into Swedish kronor, but at the same time to enter into a forward contract where these kronor are exchanged back to dollars on the same date as the loan falls due. This entire process – borrowing in dollars, the immediate exchange into kronor and the exchange of these back again into dollars when the transaction falls due – is generally combined into a single transaction known as a currency swap.
Zeti Akhtar Aziz: The nature of risks involved in dealing with OTC financial derivatives Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 4th Banking and Financial Law School Seminar, Kuala Lumpur, 19 February 2004. *  *  *  It is my great pleasure to be here at this 4th Banking and Financial Law School in light of developments in the global and domestic financial markets. We are in a period of great change. As the pace of globalisation intensifies the global environment has been marked by greater volatility and uncertainty. As a consequence we are often dealing with probabilities. The process of globalisation has resulted in international capital movements and developments in the global financial, and regulatory arena that have had significant implications on domestic financial institutions. There is therefore a need for a global perspective in effectively managing these risks. The universal application of ISDA Master Agreements is a demonstration of the need for globally oriented solutions. This morning my remarks will focus on the need to appreciate the nature of risks involved in dealing with OTC financial derivatives, both by the market and the regulators. I will also touch briefly on the opportunities emerging in terms of developing derivatives within Islamic banking and finance. Financial institutions, as the linchpin for the process of financial intermediation, have a crucial role in facilitating the flow of capital to areas where it can be most productively used.