The reports issued by the Counterparty Risk Management Policy Groups I and II both make the important observation that the financial system is likely to be more resilient under conditions of stress when counterparties set initial margins at levels that are likely to be sustainable in less benign conditions. When margin levels are set more conservatively, firms are likely to have more flexibility in responding to stress and are less likely to take action that might amplify the market shock and exacerbate the reduction in liquidity. When competitive pressure drives margins down, markets may be less resilient. Third, we believe the major financial institutions need to continue to improve their capacity to measure their exposure to risk in a less benign market and economic environment than we have experienced in recent years. The discipline of stress testing and scenario analysis that is designed to measure tail risk is at the frontier of this challenge. Senior management and the boards of directors need to understand the limitations of the tools we use to assess these risks, to try to better understand the potential scale of losses the firm may face, and to carefully examine how well risk exposures reflect the overall risk appetite of the firm, and the size of the capital and liquidity cushion maintained in relation to those exposures. BIS Review 54/2006  3  I want to conclude with the observation that the requirements of effective risk management and control regimes are likely to become more rather than less demanding over time.
All three layers – national, regional and global – must complement and reinforce one another. Well-designed, they can operate as a package, offering a comprehensive suite of financial options to countries in need. AMRO – The focal point of regional surveillance 20. Let me now turn to AMRO, the emerging focal point for regional surveillance underpinning the CMIM. AMRO was set up to perform three important functions:   to conduct surveillance and contribute to the early detection of risks in the region;    to facilitate the implementation of remedial action; and    to inform the decision making of the CMIM. 21. These functions help to ensure that any activation of the CMIM mechanisms will be predicated on informed and independent judgement. 22. AMRO will give ASEAN+3 authorities a new and vital perspective as it considers the impact of global developments on ASEAN+3 as a region. AMRO’s surveillance toolkit will be based on its own in-house capabilities, access to policymakers in ASEAN+3, and regular dialogue and exchange of information with the IMF and other international financial institutions. We envision AMRO emerging over time as an authoritative interpreter of economic and financial developments in the Asian region. 23. AMRO’s progress since its establishment in May 2010 has been remarkable. It commenced operations just a year later, in May 2011. It has since conducted a number of surveillance visits in the region.