As we have heard this morning, the Eurosystem is making a significant contribution by developing a wholesale payment system, known as TARGET2, which will provide for safer and more efficient large-value payment flows within the euro area. I would agree that more has to be done by the competent authorities to achieve higher integration for retail payments and securities transactions. However, the Eurosystem, together with the European Commission, is actively supporting the Single Euro Payments Area initiative and has devoted much effort to promoting more efficient and safer securities settlement systems and to facilitating the cross-border use of collateral. In any event, I have the impression that in years to come the Eurosystem will have to strengthen further both aspects of its policy approach. As EMU is not likely to become a much more homogenous area in the foreseeable future, the need might be felt to pay more attention to key national economic developments on the basis of the contribution by the National Central Banks, therefore making more intensive use of the federal organisation of the European monetary authority. My feeling is that country-specific analysis is proving increasingly informative for fully understanding the situation, prospects and policy needs of the euro area as a whole. Similarly, I would not be surprised if the ECB were to find it appropriate in the future to raise its profile somewhat in defending a more integrated and liberalised market for financial services in Europe.
Hence, there is much to be gained in terms of greater resilience and efficiency of the financial system through the design of regulatory and supervisory frameworks aimed at combating the factors that underlie a poor assessment of risks at their root. In this sense, a sound prudential framework should provide financial institutions with the right incentives to properly assess and monitor the risks of their investment and lending policies, incorporating them accordingly into their pricing decisions. Increased awareness of risks, and how these evolve along the business cycle, favours earlier reactions to changing conditions and smoother adjustments in the flow of credit, thus reducing the likelihood of episodes of abrupt liquidity and credit contraction. The New Capital Accord, known as Basel II, is an example of a prudential framework that makes the foregoing principles I have outlined its centrepiece, since it seeks to strengthen the stability of the international banking system by promoting the implementation of more robust and comprehensive risk management practices. It does so mainly by establishing a more precise and sensitive system to link banks’ real risks and the minimum regulatory capital requirements, and by imposing higher levels of transparency in banks’ financial reporting, hence fostering closer scrutiny by market participants. A more risk-sensitive capital framework tends to make banks more watchful of the actual risks of lending policies focused on short-run targets, such as market share or portfolio size, which presumably are important ingredients in periods of credit booms sustaining speculative activities.