Frankfurt, Germany, April 9, 2008 — A report embracing the critical issues in today's financial markets has been published by the Institute of International Finance, the global association of financial institutions. "The leadership of our industry recognizes its own responsibility to restore confidence in the financial markets, solve the problems that have arisen and prevent those problems from recurring in the future. We are fully committed to raising standards and improving best practices in the financial services industry," stated Dr. Josef Ackermann, Chairman of the Board of Directors of the Institute of International Finance (IIF) and Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG, speaking on behalf of the IIF's Board of Directors.

The IIF's Committee on Market Best Practices (CMBP) noted that its Interim Report reviews the fundamental issues posed by the recent market stress and provides clear indications of the direction of the CMBP's thinking for best-practice recommendations. Mr. Rick Waugh, President and CEO, Scotiabank, who served as co-Chairman of the Committee stated at a press conference, "Our work has involved many senior executives - CEOs, CROs and CFOs - representing most of the major global firms. There has been a huge commitment of talent to this exercise. Our goal is to develop recommendations, which, when adopted, can contribute not only to orderly management of the market stress, but more importantly to improved business practices going forward which can help to prevent recurrences of crises in the future."

The IIF, which has more than 375 member financial services firms across the world, said that the Interim Report's publication is particularly timely as finance ministers and central bank governors of the leading industrial countries will be meeting in Washington DC on Friday, April 11, to consider actions that the international community needs to take to reestablish stability and confidence in the markets.

Mr. Cees Maas, co-Chairman of the IIF Committee and Former Vice-Chairman, CFO and CRO, ING, stated, "We have been engaged in an informal and productive dialogue with the regulatory community. This has informed our views and the report that we are presenting today. We look forward to further discussions with the regulators as we move towards finalizing our work."

Dr. Ackermann pointed out that the report, which reflects the views of leaders of private finance, states that, "Our industry needs to increase transparency in many aspects of its work - this is of central importance. Many firms need to improve their risk management, liquidity management and conduit underwriting approaches significantly. Firms should also reconsider incentives and compensation structures. In addition, we are recommending improvements in the ratings process, and we are developing ways to deal with the valuation problems faced in a mark-to-market world in circumstances of low liquidity."

The IIF Board Chairman said that, "In recent months outside observers - and occasionally even market participants - often struggled to understand why banks apparently had difficulties in providing hard figures as to losses sustained as a result of the market turmoil. In particular, there has been criticism that banks seemed to disclose additional losses quarter after quarter, rather than coming up with one definitive figure. Indeed, some commentators have argued that banks did so deliberately in order to hide losses. While, unfortunately, the repeated disclosure of additional losses has indeed led to continued uncertainty in the markets, it is in fact easy to explain in principle: In a mark-to-market accounting framework, banks have to value the exposures and assets they hold at the prices prevailing on the respective balance sheet date, quarter after quarter. Banks are required to use the value recorded on that day; they are not allowed to anticipate future price movements in their valuations."

Dr. Ackermann added on this issue: "In an environment that continued to deteriorate from quarter to quarter, this rule inevitably entailed the announcement of further losses. In addition, over the past quarters market turmoil spread from one asset class to another - from subprime mortgages, to alt-A mortgages, to CDOs, to leveraged loans, etc. - so that write-downs which had not been necessary at earlier reporting dates were recognized progressively."

Transparency & Compensation

IIF Managing Director Charles Dallara emphasized at the press conference that, "Cutting across each of the areas of focus in today's report are proposals aimed at strengthening transparency and disclosure, both for structured products and at the level of institutions. Adoption of measures along these lines by the industry should help prevent a recurrence of the turmoil of the kind experienced since last summer."

Dr. Ackermann said, "Another area where improved transparency is needed is compensation. Compensation policies should remain the responsibility of senior management, based on transparent principles and subject to the approval of the Board of Directors. We recommend that incentive compensation models should be better aligned with shareholders' interests and long-term, firm-wide profitability. The same principles should apply to severance packages."

Risk Management

Speaking at the press conference via videoconference from Toronto, Canada, Mr. Waugh noted that the market turmoil has underscored the central importance of sound risk management. He said management has key responsibilities in this area, which include building a robust risk management culture across the firm and ensuring sound implementation. He said, "Risk management is much more than just a monitoring function. It is a core responsibility of the CEO and all executive management. We emphasize that firms need to build risk management into their overall business strategies. The Chief Risk Officer needs to be both a risk manager and a risk strategist, with an independent voice and as part of the highest levels of management."

Mr. Waugh added, "It is essential that firms introduce processes, if they do not already have them, to ensure that senior managements adopt and periodically affirm their firm's risk appetite. Risk appetite is the degree of risk relative to reward the institution wishes to accept. The firm's risk appetite should be understood and communicated at all levels of the organization. This obviously also includes the board of directors in their oversight role."

Mr. Waugh stressed that today's report provides detailed suggestions for an array of improvements in risk management processes. On noting the values of technical stress testing and of metrics and models in risk management, he said that, "A core message of this report is that expert judgment and critical analysis are always needed."

Rating Agencies

With regard to rating agencies, he stated that they play key roles as not all investors are in a position to make fully independent evaluations. He noted that the IIF's Committee has been engaged in a continuous dialogue with the rating agencies at the most senior levels, and this will continue.

He said the IIF Committee is "Recommending that ratings models should be consistent with industry-developed standards and subject to independent review and external validation, not unlike the review and validation that exist for the internal ratings and risk methodologies at banks. We are proposing that a means be established that would enable the independent, industry-based, external review of the methodologies, models and internal governance processes of rating agencies. This is not intended to change rating outcomes or proprietary models, but trust has to be restored in the ratings process as well as in the credit markets and its financial institutions."

Valuation

Mr. Maas stated at the press conference that, "In the context of the issues that we are discussing today few are more complicated or important than those relating to the valuation of complex structured products. We have analyzed the issues here at two levels: first, practical problems of how to effect valuations in a difficult environment and whether there are ways to correct specific difficulties with fair value that have been encountered in recent markets; and second, the need for broad dialogue on the long-term implications of fair-value accounting."

Mr. Maas pointed out that over the past decade, fair-value/mark-to-market accounting has proven valuable in promoting sound risk management, transparency and market discipline, and it continues to be an effective approach for securities in liquid markets. "Our challenge is to apply this approach in circumstances when liquidity dries up in secondary markets. Banks alone can not resolve the issues here. We are proposing as an urgent priority that a top level technical dialogue be initiated among firms with auditors, rating agencies, investors, analysts and supervisors to address many of the limitations in the current mark-to-market system. We believe such a dialogue together with improved disclosure can result in more reliable valuation approaches.

Mr. Maas stressed, "Let me be very clear, we are not suggesting in any form that firms should avoid taking losses that the current system requires. The key as we look ahead is to find credible approaches that align with underlying fundamentals in a world characterized by illiquid markets for a number of structured products."

Turning to liquidity risk management, he noted that the IIF had published a report on this subject a year ago which remains valid. He said today's interim report notes that each firm needs to ensure that it has approaches in place that enable it to determine its own risk tolerance and the best way to combine the prudent management of risks within its business strategy. Supervision and regulation should recognize the practicality of tailored approaches and focus on their overall effectiveness. Mr. Maas said, "We underscore the need for firms to strengthen effective risk management to ensure that exposure to conduits and other vehicles is captured in liquidity planning and management and that there is sufficient transparency, capital and proper disclosure by sponsoring banks and firms."

Preventing Future Crises

Dr. Ackermann noted that the views expressed in today's report seek not only to address current weaknesses but to strengthen best practices so that the financial system is better equipped to deal with future challenges that may arise. He noted that, "We are considering the establishment of a Capital Markets Monitoring Group. This is important in a world where the pace of innovation and the dynamic of the financial markets are likely to continue to accelerate and where being alert to potential systemic difficulties will remain critical. We are considering a group of approximately 10 to 20 highly respected experts and eminent leaders of finance who can combine their experience and knowledge to alert the industry to actual and potential vulnerabilities and market developments that pose systemic risks."

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

Good afternoon and welcome to this press conference to present the "Interim Report" of the IIF's Committee on Market Best Practices. The Institute of International Finance is a global association of more than 375 financial services firms around the world. The IIF Committee has been co-chaired by my colleagues Rick Waugh and Cees Maas, who are with us today, and has drawn on the excellent support of Charles Dallara and the staff at the IIF.

To begin with, the interim report we are presenting here today underlines the fact that the leadership of our industry recognizes its own responsibility to restore confidence in the financial markets, solve the problems that have arisen and prevent those problems from recurring in the future. We are fully committed to raising standards and improving best practices in the financial services industry.

Today's Interim Report reflects a major effort by the industry to develop recommendations that firms can adopt and implement, while continuing to pursue an informal dialogue with the main regulatory authorities. Although this report was produced solely by the private financial industry, it has benefited from our close dialogue with regulatory authorities.

The report reflects the intense efforts of our Committee and its five sub-committees. It highlights the direction of our thinking on the most critical issues, notably the weaknesses in business practices and market dynamics that are largely related to the growth of complex structured products. It is a preliminary response to a crisis that started in mid-2007 and that continues to overshadow the global financial markets.

Today's report is most timely, not only because of the broad public interest in the perspectives of our industry on these subjects, but also because we are mindful of the important official sector deliberations that are taking place, such as discussions between G7 Finance Ministers and Central Bank Governors scheduled for this Friday in Washington. Our Committee's objective is to publish a final report this summer that includes best-practice recommendations and possible codes of conduct.

As the report emphasizes, the financial service industry needs to increase transparency in several aspects of its work; many firms need to improve their risk management, liquidity management and conduit underwriting approaches significantly. Firms should also reconsider incentives and compensation structures. In addition, we recommend improvements in the work of ratings agencies and we propose initiatives to deal with the valuation problems faced in a mark-to-market world in times of low liquidity. We will briefly highlight some of these issues in our opening statements this afternoon.

I shall comment on the issues of transparency, incentives and future crisis monitoring, and then turn to Rick, who will discuss risk management and ratings, and to Cees, who will outline our recommendations with regard to valuation, liquidity and regulation.

We all agree that public confidence can be rebuilt only if the industry is seen to be directly addressing key weaknesses and seeking to provide more comprehensive information on its activities. Improving transparency is of central importance.

For example, with regard to structured products, we anticipate that in our final report we will be able to make recommendations for standardized market definitions and structures, clarification of the roles of agents, and more reader-friendly issue documentation. We are looking at ways to make valuation processes and methodologies more understandable to investors and the public and to enhance underwriting practices so that clearer information is provided.

In this context, let me emphasize that in recent months outside observers - and occasionally even market participants - have often struggled to understand why banks apparently had difficulties in providing you with hard figures for losses sustained as a result of the market turmoil.

In particular, there has been criticism that banks seemed to disclose additional losses quarter after quarter, rather than coming up with one definitive figure. Indeed, some commentators have argued that banks did so deliberately in order to hide losses.

While, unfortunately, the repeated disclosure of additional losses has indeed led to continued uncertainty in the markets, it is in fact easy to explain in principle: In a mark-to-market accounting framework, banks have to value the exposures and assets they hold at the prices prevailing on the respective balance sheet date, quarter after quarter. Banks are required to use the value recorded on that day; they are not allowed to anticipate future price movements in their valuations.

In an environment that continued to deteriorate from quarter to quarter, this rule inevitably entailed the announcement of further losses. In addition, over the past quarters market turmoil spread from one asset class to another - from subprime mortgages, to alt-A mortgages, to CDOs, to leveraged loans, etc. - so that write-downs which had not been necessary at earlier reporting dates were recognized progressively.

We have also considered the issue of incentives and compensation, which is another area where improved transparency is needed. Shareholders and other stakeholders should be given a clearer understanding of the principles and the processes that determine pay in our organizations as we compete for the best people we can find.

Although in some countries disclosure of this and other information is already mandatory, it is evident that more can be done to respond to legitimate questions. We have recognized that there are perceptions that risk and reward have not been aligned sufficiently in parts of our industry and that incentive systems may in some cases have encouraged excessive risk-taking.

Compensation policies should remain the responsibility of senior management, based on transparent principles and subject to the approval of the Board of Directors. When decisions are taken in this respect, we recommend that incentive compensation models be closely aligned to shareholders' interests and long-term, firm-wide profitability. The same principles should apply to severance packages.

Focusing on the longer term implies that compensation programs ought to give greater consideration to the cost of capital, not just revenues. Thought should be given to ways through which the financial targets against which compensation is assessed can be measured on a risk-adjusted basis.

Now, before I hand over to Rick and Cees, I would like to underline that our deliberations have also sought to reach beyond today's crisis to the challenge of preventing crises in the future. We are considering that a Market Monitoring Group be established. This is important in a world where the pace of innovation and the dynamics of the financial markets are likely to continue to accelerate and where being aware of potential difficulties will remain critical. We envisage a group of approximately 10 to 20 highly respected experts and eminent financial leaders who can combine their experience and knowledge to alert the industry to actual and potential vulnerabilities and market developments that pose systemic risks.

Risk management practices are a critical issue in all of our discussions and Rick Waugh will now introduce this subject.

Mr. Richard E. Waugh
President and CEO
Scotiabank
(via videoconference link from Toronto)

Good afternoon. It has been a privilege to co-chair this IIF Committee. The level and the scale of participation in the Committee and its sub-committees has been impressive. It has involved many very senior executives - CEO's, CRO's, and CFO's - representing most of the major global firms. A huge commitment of talent to this exercise.

A central issue has been risk management, which has to be a core competency for our firms.

Therefore, management has the key responsibility for risk management. Its responsibilities include building a robust risk management culture across the firm, involved both strategically and tactically ensuring sound implementation. Our interim report explains each of these concepts and the final report will make specific recommendations for each.

Risk management is much more than just a monitoring function. It is a core responsibility of the CEO and all executive management. We emphasize that firms need to build risk management into their overall business strategies. The Chief Risk Officer needs to be both a risk manager and a risk strategist, with an independent voice and part of the highest levels of management.

It is essential that firms introduce processes, if they do not already have them, to ensure that senior managements adopt and periodically affirm their firm's risk appetite. Risk appetite is the degree of risk relative to reward the institution wishes to accept. The firm's risk appetite should be understood and communicated at all levels of the organization. This obviously also includes the board of directors in their oversight role.

Consideration might be given by boards to having distinct board audit and risk management committees with individuals who have substantial risk management experience.

We agreed when looking at specific risk management issues that many firms, actually all of us, need to strengthen the managing and monitoring process that involves all the risk and control functions as well as strategic planning. For example, in new product or new business initiatives.

Our report considers how firms use metrics and models in their risk management. Metrics, much less internal or external ratings, should never be the end of risk-management thinking. Models are powerful tools but must remain a tool and not the driver of the business decision. A core message of this report is that expert judgment and critical analysis are always needed.

You will also find sections of the report dealing with stress testing. In addition to technical questions, we want to emphasize that firms need to ensure that their approaches and the results of stress testing are part of the senior management dialogue and in making informed judgments about forward-looking risks.

We have also been reviewing credit underwriting standards, which alone could be the subject for a full press conference. Let me just say now that prime causes of the turmoil that we have seen relates to mispricing of liquidity, the mismatching of cash flows, and deficiencies in the originate and distribute models. There are many benefits of the originate and distribute models but consistent standards of due diligence should be employed regardless of whether assets such as structured securities are held or distributed to third parties.

Lastly, our report contains important comments on the work of rating agencies. I have emphasized that expert judgment is crucial to every facet of risk management and so is investor accountability. That means, of course, that there should not be sole reliance on ratings. Having said this we recognize that not all investors are in a position to make fully independent evaluations and that credible ratings are vital.

We have been engaged in a continuous dialogue with the rating agencies, at the most senior levels, and this will continue. Our report does note that there are some outstanding differences among us and the agencies. We are recommending that ratings models should be consistent with industry-developed standards and subject to independent review and external validation, not unlike the review and validation that exist for the internal ratings and risk methodologies at banks. We are proposing that a means be established that would enable the independent, industry-based, external review of the methodologies, models and internal governance processes of rating agencies. This is not intended to change rating outcomes or proprietary models, but trust has to be restored in the ratings process, as well as the credit markets and its financial institutions.

Now, let me turn to Cees and a discussion of some of the central issues of valuation and liquidity and regulation.

Thank you.

Mr. Cees Maas
Former Vice Chairman and Former Chief Financial Officer
ING Group NV

Thank you Rick. In the context of the issues that we are discussing today few are more complicated and important than those relating to the valuation of complex structured products. We have analyzed the issues here at three levels: first, practical problems of how to effect valuations in a difficult environment; second, whether there are ways to correct specific difficulties with fair value accounting that have been widely encountered in recent markets; and, third, the perceived need for broad dialogue on the long-term implications of fair-value accounting.

We emphasize in the report the need for firms to have effective governance frameworks around valuation processes that incorporate risk, finance and accounting policy inputs to ensure proper product and risk controls. Procedures need to be in place for times of market stress that better enable managements to act when changes in market liquidity, or volatility, require changes in valuation approaches for individual assets.

Our Committee will be doing a considerable amount of work in coming weeks in this area. We agree that over the past decade, fair-value/mark-to-market accounting has proven valuable in promoting sound risk management, transparency and market discipline and it continues to be an effective approach for securities in liquid markets. Our challenge is to apply this approach in times when liquidity dries up in secondary markets.

Banks alone can not resolve the issues here. We are proposing as an urgent priority that a top level technical dialogue be initiated among firms with international and national accounting standard setters, auditors, supervisors, and market participants to address many of the limitations in the current mark-to-market system. We believe such a dialogue together with improved disclosure can result in greater convergence in valuation approaches. Let me be very clear, we are not suggesting in any form that firms should avoid taking losses that the current system requires. The key as we look ahead is to find credible approaches that align with underlying fundamentals in a world where we cannot rule out the possibility of illiquid markets.

Tight liquidity conditions have brought the valuation issues to the forefront, while making the need for sound practices in liquidity risk management a central concern for our industry. One year ago the IIF published a report on Principles of Liquidity Risk Management that called for raising the bar in the industry in this area. The recommendations of that report remain valid.

Each firm needs to ensure that it has approaches in place that enable it to determine its own risk tolerance and the best way to combine the prudent management of risks within its business strategy. Principles-led supervision and regulation should recognize the practicality of tailored approaches and focus on their overall effectiveness. We underscore the need for firms to strengthen effective risk management to ensure that exposure to conduits and other vehicles is captured in liquidity planning and management and that there is sufficient transparency, capital and proper disclosure by sponsoring firms.

Against this background permit me to comment on issues that arise from our recommendations with regard to the implementation of the Basel II Accord on capital requirements. As we have stated in the past, we want to again underscore that we see Basel II as contributing to a more robust system. Had Basel II been fully implemented, at least some of the problems we have seen would have been avoided.

Basel II has been an important catalyst to the implementation of modern risk management in the industry. In addition, Pillar 2 will have the effect of institutionalizing internal capital adequacy assessments and offering the basis for sound supervision. The full impact of Pillar 3 is not known but, subject to developing good market understanding of its disclosures, it should be beneficial.

Significant Basel II issues remain that requires continued dialogue. Resolution of home-host issues will be even more important in the new environment, and the dialogue with the supervisors about the cross-border application of Pillars 2 and 3 is far from complete. It is important to recognize that a risk-based Accord will have procyclical effects, especially as banks reduce internal ratings and adjust models for current events. Some technical details of the Accord will be subject to review by the Basel Committee and we look forward to discussions with the authorities.

The key point, however, is that it is necessary to avoid adding more conservatism to an already-conservative Accord. Imposing across the board add-on capital requirements, as has been suggested by some, would be a drag on recovery from present conditions.

In conclusion, and for speaking for all of us here, let me stress that we look forward to working with the regulatory authorities on the issues in our report. Many of the problems that have arisen lend themselves to market-led solutions with the implementation of significant improvements in management areas by many individual firms.

However, we recognize that there are areas where there may be benefits from further regulatory action. In addition to Basel II issues, our report notes the need for regulation of essentially unregulated financial institutions that were directly involved in the origination of U.S. loan mortgages that triggered the crisis. We believe these firms should be held to the same standards as fully regulated banks.

Thank you.