Without exceeding the terms of this legal mandate, proper compliance requires, as I stated earlier, that banking supervision should be able to adapt to changes in its environment. One group of these changes covers aspects such as financial innovation, concentration and internationalisation, i.e. all developments present in the system and the attendant trends. Banking supervision must know how to capture and interpret the latter, as part of a threefold aim: to encourage their positive aspects; to eliminate, or at least minimise, processes which may prove harmful; and to adapt its own procedures to new circumstances. Only in this way will banking supervision, observing to the full the system's underlying rationale and the initiative of its agents, be able to avoid or correct, at the lowest possible cost, the imperfections of the markets, especially the externalities that may harm third parties. The second no less important group of changes to which banking supervision must adapt is in relation to the demands posed by society. I consider two such demands to be particularly significant. The first is the growing social demand that supervision should promote not only sound, stable and efficient financial systems but systems, moreover, which are governed by increasingly stricter codes of conduct giving rise to practices and conduct subject to ever-higher standards. Among the practical consequences of this demand are, among others, improvements in transparency, in corporate governance and in banks’ knowledge of their clients, as I mentioned earlier.

The firm, concerted response by the monetary authorities in the main economic areas softened the initial impact on financial markets and meant that the effects on the world economy were relatively short-lived, though sharp, and confined to specific sectors. Broadly, the design of the euro area members' fiscal policies in 2001 prevented expansionary discretionary measures being adopted. Such measures would have jeopardised the sustainability of recent fiscal consolidation achievements and, given the lag with which such measures operate, they could have had a counter-productive effect on the cyclical stability of the economies in the area. However, the available estimates of the structural budget balance show that, at the aggregate level, there was a slight deterioration last year as a result of the tax cuts applied in certain countries before the cyclical weakening had become apparent. Further, fiscal results have shown that, in certain countries, not enough room for manoeuvre was available to absorb the budgetary effects of the slowdown without drawing too close to the limits set in the Stability and Growth Pact. Clearly, in such cases the consolidation drive made has not been sufficient to attain a balanced budgetary position. In this respect, it is of paramount importance that EMU members maintain the commitments entered into under the Pact and do so symmetrically, as reflected in the conclusions of the Barcelona Summit. The appropriate response by economic policies to the slowdown in 2001 has therefore contributed to the recovery of the European economy apparently under way since the beginning of the current year.