This is an effective instrument for increasing the prosperity of European citizens and one suited to playing a leading role in the international monetary system. It is also a magnet for other European countries whose integration into the area will give it greater worldwide influence. A dynamic process is now under way in the area in which those economies that are most flexible and best equipped with physical, technological and human capital will be those that most benefit from participation in the common European venture. To date, the Spanish economy has been able to draw on its progressive economic and monetary integration in Europe to move towards correcting some of its structural imbalances, to further real convergence with the core European countries and to pursue increasing external openness. In parallel, Spain has re-geared its economic policies towards stability and has pushed through the liberalisation of its financial, factor and product markets. This modernisation and openness drive has led to a substantial change in Spain's position in the world economy, which includes strategic ownership interests in certain regions in which it has invested strongly. Undoubtedly, the main challenge now facing the Spanish economy is to consolidate this position against a background of heightened competition, rapid technological change and future European Union enlargement. The Annual Report presented today illustrates the benefits that the Spanish economy has obtained from participation in Economic and Monetary Union, even under the particular circumstances of a generalised slowdown in the world economy, as was the case in 2001.

We are not there yet. Banks’ equity capital accounts for 6 per cent of total assets. This is low from a historical perspective, but not compared with banks in other countries. Banks are procyclical. They amplify business fluctuations. During an expansion, loan losses are low and bank earnings increase due to higher turnover. Capital is readily available. During a downturn, bank losses increase, and earnings and access to equity capital may deteriorate, forcing banks to tighten lending. Norwegian banks need more capital in the period ahead to enable them to absorb expected and any unexpected losses and to satisfy tighter counterparty capital requirements. The government’s offer to supply core capital through the Government Finance Fund will now allow banks to improve their financial strength without rationing credit. There must be no doubt that the banks have the capital they need. The measures I have discussed have been implemented to lessen the effects of the financial crisis. Another question is which lessons we can draw. The authorities in many countries are now working towards increasing the robustness of financial markets. Four points stand out. First, for a given risk assessment, banks must be subject to higher equity capital requirements. Banks calculate their capital requirements based on internal risk models. The models capture historical loan performance. The capital requirements are determined by the degree of credit risk exposure as derived from this historical performance. One drawback is that the historical basis for the models, and hence for the risk assessments, is too limited.