Today it remains an important task of central banks, but is reserved for very special situations where financial stability may be threatened. In this address, I will focus on preventive measures. As a general measure, the authorities use surveillance and regulation in order to enforce financial stability.6 Surveillance of markets, institutions and infrastructure may in itself contribute to sound financial risk management. Effective and appropriate prudential regulation will reduce risks and promote sound financial institutions. For instance, an important motivation behind the Basel II agreement is to increase the efficiency of financial institutions by revising existing standards of capital requirements for banks. Prudential regulation can also be used by the authorities as a special measure to curb undesirable developments. Countercyclical variations in capital requirements (or collateral requirements) can respond to potential imbalances. However, there are several arguments against using this instrument. First, it is very difficult to decide the appropriate timing and size of a policy response. Also, while authorities may regulate financial institutions, market outcomes are difficult to control. Risks may be transferred through the market, away from the regulated institutions, only to show up somewhere else. Financial agents need to operate on a level playing field. In many countries, branches and subsidiaries of foreign banks have large market shares. If one country decides to increase the domestic capital requirements for banks, this creates competitive distortions in the national markets between domestic banks and branches of foreign banks, the latter complying with the regulation of their home country authorities.

Given the prevailing wage moderation, this acceleration in activity has been particularly propitious for job creation: the euro-area unemployment rate has declined by one percentage point since October 1999 and stood at 8.9% in October 2000. Surging oil prices and the depreciation in the euro’s effective exchange rate have fuelled a marked rise in inflationary pressure since the autumn of 1999. Inflation as measured by the Harmonised Index of Consumer Prices (HICP) thus rose above the 2% threshold in the twelve months to February 2000. In November 2000, the year-on-year increase amounted to 2.9%. There have also been increasing signs of pressure on the productive system, with the appearance of production bottlenecks and rising capacity utilisation rates throughout the euro area. The latter work out to 84.7% for the fourth quarter of 2000, i.e. almost three points above their long-term average of 81.8%. In addition, the value of imports rose substantially under the combined impact of buoyant economic activity, an almost two-fold increase in oil prices and the euro’s depreciation. As a result, the current account, which had shown a surplus, shrank to a slight deficit. Robust growth for the French economy Following the trend initiated in 1999, the French economy enjoyed robust growth. Although the growth rate levelled off somewhat in the third quarter, it should remain sustained given the renewed confidence expressed by households and the business prospects of the industrial sector, where our surveys indicate that order books are well-filled.