The risk of financial imbalances being built up as a result of over-optimism still remains, but is now assessed to comprise less of a threat to the recovery of the economy than was previously thought. Monetary policy considerations Developments over the past months also indicate that the risks of a profound and prolonged international economic slowdown have declined considerably. There are a number of signs that the lowest point has now been reached. One condition for an upturn in international economic activity is that growth in the US economy picks up. Productivity has continued to develop very positively relative to the economic situation, which is a good sign. The fact that American households' demand for consumption has improved since the autumn also indicates that the lowest point has been reached and a turnaround is on the way. The unease that has existed, and which was accentuated after the terrorist attack on 11 September, over the possibility that rapid and perhaps exaggerated adjustments of financial imbalances in the American households' and companies' balance sheets might cause a deeper decline appears, at least  4  BIS Review 18/2002  so far, to have been quite unfounded. Better functioning financial markets as a result of the changes in economic policy and the improvements in regulatory frameworks and supervision that I mentioned earlier may have contributed to this.
The difficult times of past years, during which most institutions showed notable resilience, led many of them to undertake reforms designed to reduce costs, such as the sale of non-strategic assets, and these decisions should now be bearing fruit. The improved situation of financial institutions at the international level seems to be borne out by the favourable outlook for their future performance that agents operating in the markets have. In 2003 this perception was reflected in rising stock market prices, reduced implied volatilities and narrowing risk premia. Spanish deposit institutions, thanks to their sound initial position and the fact that the Spanish economy outperformed the EU average, were less severely hit by the difficulties of past years. They were thus in a position in 2003 to benefit from the favourable international financial situation, from the rebound of the securities markets, and from the continued strong relative performance of the Spanish economy. In particular, Spanish deposit institutions enjoyed higher growth of earnings and profitability in 2003. This allowed the effects of a more competitive environment and low interest rates to be offset by larger business volumes and tighter control of operating expenses. Also, lower doubtful assets allowed bad debt provisioning to be reduced thanks to the smaller need for provisions to the specific fund (partly counteracted by changes in the statistical and general funds), thereby boosting the institutions’ profit and loss accounts. Solvency ratios held steady and default ratios stood at historical lows.