Dr. Josef Ackermann

Chairman of the IIF Board of Directors
Chairman of the Management Board and of the Group Executive Committee of Deutsche Bank AG.

Washington, DC, October 21, 2007 — Good morning and welcome to this press conference, which takes place as the IIF celebrates its 25th anniversary. Today, we have more than 370 member institutions, including virtually all of the world's leading financial institutions and more than 100 headquartered in emerging markets. The important work that the Institute does has established it as the leading global organization of financial services firms and I hope you have an opportunity to attend our special anniversary meetings this week-end.

There are many uncertainties in the global economic outlook today and yet we continue to see resilience on the part of emerging markets' countries, many of whom have significantly improved their economic fundamentals. Today, the IIF releases its new capital flows report that shows net private flows into emerging markets set to exceed $600 billion for the first time. My colleague Bill Rhodes will say more about the outlook.
I want to spend the next few minutes talking about the issues that arise from the most recent extraordinary events in global financial markets that were triggered by U.S. subprime market developments. In part these were due to activities by unregulated institutions in the U.S. mortgage market. We welcome the discussions underway to address this particular area that lacks regulatory oversight.

There have of course, been serious dislocations in some segments of financial markets. It is important to recognize, however, that most financial markets have continued to function well. This has been a necessary, albeit painful adjustment in certain of our credit markets. Placed in perspective it should be recognized at the outset that financial institutions and the financial system itself remains strong, notwithstanding the strains we have experienced. Yet, there is significant scope for improvement.

It is now clear that a number of complex structural problems have raised issues that need to be addressed not only, but primarily by the financial industry to follow on the immediate corrective measures that many institutions have already started to implement.

I am announcing today that the IIF's Board of Directors is launching a major initiative to refine best practices for market participants. Our Board brings together leaders of some of the largest financial institutions from across the globe who are committed to this initiative.

The Board is establishing a committee to produce recommendations by the Spring of 2008 that reflect the views of leaders of our industry and that can enjoy strong support from financial services firms across the world and that complement efforts underway by the official community.

The committee's agenda will concern a variety of key aspects of important issues, including those relating to structured products, comprising:

• Risk management, credit underwriting practices, and pricing of risks;
• Conduits and the contingent liquidity risks that firms have been exposed to by using off-balance sheet instruments;
• Valuation questions, especially where markets are thin or absent;
• Ratings - interpreting and evaluating them; and,
• Transparency, disclosure and communications to define appropriate standards.

At the IIF's Spring Membership Meeting at the end of May, we called for lenders to follow best practices and not allow deal pressures to water down standards. Although there were some efforts to resist these tendencies they were not sufficient to forestall the stress that has arisen in the market.

As our committee starts its work it will be able to build on the IIF's report "Principles of Liquidity Risk Management", published last March, which made recommendations for good industry standards. Events have underscored the importance of these recommendations. For example, the report urged that executives responsible for liquidity risk should have a detailed understanding of the contingent liquidity risk to which their firms are exposed by off-balance sheet vehicles - so as to ensure that effective contingency measures are in place in the event that liquidity problems arise that could cause a draw on back-up commitments.

Against this background, and taking note of the recent actions that we have seen, many of which have had beneficial effects, it is obvious that there are issues of the longer-term structure and stability of financial markets that demand attention. It is these that our new Committee will address.
As we move forward we will also collaborate closely with other professional associations. For instance, it will be important to draw on the experience of the accounting profession.

Weaknesses in business practices and market dynamics

There has been considerable analysis of the causes of the recent events. The weaknesses in business practices and market dynamics that have been revealed have highlighted the areas where industry practices need to improve:

1. Risk Management --- Many financial institutions have strengthened risk management in recent years. But, to be frank, this most recent experience calls on all of us to hone our practices in certain areas of risk management. For example, evaluation and pricing of risk in structured products and leveraged loans is critical. Some transactions included loans with high default risks that may not have been adequately priced. In a liquid market with narrow spreads, some risks were, in hindsight, mispriced. Our review will also include the relationship of regulated institutions to unregulated entities. We will consider the issues that arise from the strains on banks' balance sheets from LBO-related bridge loans that could not be sold into the market as originally structured, and on CDO warehousing loans.
2. Conduits --- We will review risk management issues arising from the funding difficulties faced by conduits and Special Investment Vehicles as the asset-backed commercial paper market dried up. Support of sponsoring banks and forced draws on backstop bank credit lines created an urgent need for bank liquidity. The committee will also address the need for greater transparency on the links between firms and their off balance sheet vehicles.
3. Aspects of valuation --- Our committee will focus on best market practices for valuations, which is very difficult for complex products without reference-market prices. We saw how the sharp spike in subprime mortgage delinquencies dried up the market for subprime-linked and then other structured products. Sharply eroding prices made them difficult to value given thin or non-existent quotations.
4. Ratings --- We need to look at the credit ratings process, particularly with respect to structured products, to restore investor confidence. While ratings are essential to structuring risk-transfer products, there may have been over-reliance on credit ratings by many purchasers. We will also examine the migration of ratings and the underlying rationale and timing of ratings adjustments. Such work should be done in close cooperation with the rating agencies.
5. Transparency --- Our committee will look for ways to improve transparency. A challenge is how best to define "transparency" for structured products so the market is better equipped to assess the dispersion of specific risks avoiding the problem of apparent contamination of whole portfolios, most of which will often consist of perfectly sound assets. The market turbulence showed that wide dispersion of credit risks made the identification of specific risk very difficult, both in terms of what products were most likely to default, and which firms hold those products.

Conclusion

As our Committee pursues its work on the market vulnerabilities uncovered by recent events, we shall seek to find ways to contribute to the restoration of market confidence and enhance it going forward. As we do so we also aim to advance the restoration of trust among financial institutions and between the financial community and our customers. At the same time, permit me to reiterate a comment that I made at the outset that, while we are dealing with serious strains in segments of credit markets, we do have fundamentally strong financial firms operating in a fundamentally sound financial system.

As we move ahead, we will also consider how the IIF can work with member firms in jointly monitoring global financial markets and detecting at an early stage imbalances or excesses that might have potential systemic influences. If successful, such an effort could also be the basis for a more structured dialogue with the official sector on this issue.

Increasingly we are learning that stability requires ever closer public and private sector cooperation and dialogue. To this end, we applaud the decision of the Financial Stability Forum to create a special working group, chaired by Mario Draghi, to formulate an appropriate and coordinated international response to issues arising from recent volatility. In addition, we want to emphasize the importance of full and timely implementation of Basel II. We look forward to continuing our close cooperation on this with the Basel Committee.

Finance ministers and central bank governors have also been discussing these issues here in Washington. We share the views of leading officials who have cautioned against overly prescriptive regulatory responses - we all recognize the costs of possible over-reaction. There is broad understanding that innovation is vital for the further healthy development of financial markets and that strengthening internal risk management in financial institutions has to be a critical feature of the process of innovation.

We look forward to discussing these issues with the official community and to building on our tradition of dialogue with the public sector. Let me emphasize that we fully recognize that while our industry has the prime responsibility for promoting best practices to strengthen global finance, we also need to work with the public sector to improve cross-border regulation to respond to global events.

Thank you.

Mr. William Rhodes

First Vice Chairman of the IIF Board of Directors
Chairman, President & CEO, Citibank N.A., Senior Vice Chairman, Citigroup Inc.

Good morning. First, let me echo Joe's comments by emphasizing the importance of the IIF's new initiative. The hallmarks of the IIF over its 25 years - and I have been involved with the Institute for most of this period - have been its focus on sound economic analysis of fundamentals, its emphasis on risk management best practices, and its leadership on behalf of the global financial services industry in policy dialogues with the official community. Our new initiative reflects these pillars of the IIF's work.

As you will recall, on several occasions at past IIF press conferences, most notably at last year's meeting in Singapore, I have stressed the high probability of dislocations in financial markets. We at the IIF have repeatedly argued that the reach for yield by investors, inadequate spreads, the lack of attention to fundamentals and the need for differentiation in the marketplace, posed serious risks.

As we launch our new initiative, I would like to underscore that the period immediately ahead is fraught with risks for the global economy - risks that could spillover into emerging markets' finance, even though we have been witnessing remarkable resilience in these markets in the face of the turmoil in European and U.S. financial markets in recent months.

The resilience reflects some fundamental developments that have been building gradually, but which should be highlighted. The IIF was conceived 25 years ago at the time of the Mexican debt crisis. Today, looking back over that quarter of a century, I can say that most emerging market economies are now better positioned to withstand external capital market shocks than in the past.

To their credit, they have improved policies and financial positions. From Brazil to India they have opened their markets and become more integrated into the mainstream of the global economy, as today's capital market report shows. Many emerging market economies are sustaining significant growth, holding down inflation and building foreign exchange reserves. These are levels of performance that few people expected just a few years ago.

The IIF's economists are forecasting record net private capital flows to emerging markets of $620 billion this year and further high level of close to $600 billion next year. While these are record amounts, it is useful to note that they represent 4.7 percent and 3.8 percent of the GDP of the emerging market economies, which is considerably below the peak years in the 1990s.

The robust level of capital flows being reported today is taking place despite the fact that many economists, including those at the IIF, are prudently scaling-back growth forecasts for the leading industrial economies. Meanwhile, growth in the Eurozone is slowing to a pace below that of last year.

Moreover, we can not preclude the risk of an even more substantial slow-down in the leading industrial economies given the uncertainties, for example, surrounding U.S. housing and its possible spillover effects on the U.S. consumer and the real economy, or the global high level of petroleum prices.

Aside from risks associated with slowing growth, there are three additional sets of vulnerabilities to world economic prospects that need to be evaluated and which are not, at this time, receiving the full attention in the official and the investment communities that they deserve. This lack of attention is itself a concern.

• First, the serious dislocations in global financial markets did not have much of an impact on emerging market debt pricing if we take the period since early August as whole, or on the bullish sentiment in emerging market equities. I am concerned that investor faith in emerging markets, which may strengthen because of the resilience that has been displayed, could push asset prices up to unsustainable levels. Emerging market currencies have generally strengthened. Markets could overshoot, and when a correction comes, then there could be a hard landing.
  
  It is important that national authorities in these countries are vigilant in monitoring external borrowing by banks and corporations and emphasize responsible liability management to guard against an excessive build-up of short-term debt. In addition, long postponed structural reforms need to be tackled. Delay here could have serious consequences down the road.
• Second, there are concerns about the prospects for rising inflation, here in the U.S. and elsewhere. A notable factor in this connection is the strong demand that is being seen for many commodities. Let me just add that in Athens, at our last IIF press conference, I noted the over-heating of China's economy. Since then the problem has increased. The authorities in Beijing are aware of the dangers here and the hope is that after the 17th Party Congress has concluded, additional steps will be taken to tackle the problem.
• Third, while not overstating the risks, we need to be mindful of the possibility of a disorderly unwinding of the global imbalances. Some positive developments, together with matters of concern are highlighted in a section of today's IIF capital flows report that is appropriately labeled" a disorderly environment for the dollar."
  
  Clearly, all the major economies need to work together to formulate a concerted strategy to resolve the issue o0f imbalances. We look to the G7 and the IMFC for leadership in the period ahead. It is striking, for example, to note in the capital flows report that China is forecast to have a $450 billion current account surplus in 2008, which is over 10 percent of its GDP.
  
  By the way, China, as well as India, Brazil and Russia, should join the regular G7 finance ministers to form a G11 as the IIF has long proposed - they need to be at the table to enhance prospects for successful multilateral efforts to unwind the imbalances.

Given these varied and serious uncertainties it would be a mistake for the national authorities of emerging market economies to be complacent just because their markets have performed better than the developed countries in the recent turbulent times. And it would be a profound error for investors to become over-confident about profit prospects in the emerging markets.

Thank you.