Nevertheless, the profitability of EU banks at mid-2002 was not much below the average between1995 and 1999 and the level of provisioning is still in line with what tends to be normal provisioning levels in an economic downturn. EU banks’ solvency levels have remained unaffected in all size groups of EU banks, allowing them to withstand the shocks in their operating environment.
One, international best practices and our own empirical evidence suggest that the transmission of policy signals to the operating target and other short-term market interest rates is most effective under deficit liquidity conditions. The challenge is to keep the systemic liquidity in a deficit mode consistently. This needs an accurate forecasting of liquidity.