At the HKMA, we have just introduced an initiative called “Balanced and Responsive Supervision”. It involves a mechanism to regularly review with banks possible execution issues arising from the supervisory processes, as well as to collect ideas for streamlining supervisory practices and requirements. Through better and ongoing communication with the industry, we should be able to achieve a more optimal and sustainable supervisory outcome in the longer run. 14. I would also argue that banking supervision is not the only, and should not become the most important, means in protecting the interests of bank customers. It is my strong belief that regulation and supervision are most effective in prescribing what constitutes unacceptable behaviours or outcomes, e.g. minimum standards for capital and liquidity ratios, prohibition of unacceptable market behaviours such as insider dealing and rigging of interest rate or FX benchmarks, no mis-selling of financial products, etc. However, supervision is much less effective or appropriate in setting good corporate culture, values and ethical standards of a financial firm. No amount of external supervision or policing can instill and sustain the right culture and ethics of a bank. Culture and ethical standards must be from top-down, owned by the Board and filter down to the senior management and then to all levels of the firm. A bank and its staff must internalise good culture and values in such a way that they behave properly not because they are afraid of being caught and punished by the supervisors but because they think it is unethical to do otherwise. 15.

In these circumstances the gradual withdrawal of the Eurosystem’s expansionary monetary policy stance, begun in late 2005, has only partly reduced the looseness of financial conditions. Immigration flows, which remained very high in 2005 according to the information available, were a further factor behind the dynamism of economic activity and employment. They also added some flexibility to production and working arrangements. On one hand, the increase in the immigrant population has sustained the thrust of domestic spending, while on the other, the resulting greater supply of labour has increased the Spanish economy's productive capacity, enabling increases in output more closely tailored to the buoyancy of demand to be attained. Furthermore, the presence of this additional labour – which has a comparatively higher degree of mobility – has contributed to restricting potential sectoral bottlenecks and the wage pressures that usually characterise situations of notably vigorous expenditure, such as that seen in recent years. The composition of growth in 2005 evidenced few changes in relation to previous years, in step with the continuity of the impulses received by the economy. Indeed, the growth pattern became slightly more unbalanced, as national demand grew by 5.1%, outpacing the related increase in 2004, while foreign trade gave rise once again to a substantial negative contribution to GDP growth. Household consumption and housing-related spending continued to be the main underpinning of the increase in demand, supported in turn by the sound growth of disposable income and of employment, and by the generosity of financial conditions in the economy.