Scenarios where these variables denote higher or lower inflationary persistence could lead the MPR reduction process to take longer or conclude sooner than projected. Another relevant factor will be the economy’s adjustment speed. The external scenario has been deteriorating steadily and the expectations of households and firms are in pessimistic territory. In this context, a faster adjustment of the economy leading to an earlier reduction of the MPR cannot be ruled out. In any case, the opposite scenario cannot be ruled out either, considering that just recently demand, particularly investment, has behaved more dynamically than we expected. The Board believes that the lower and upper bounds of the MPR corridor capture the alternative MPR trajectories associated to said events (figure 15). Turning to risks, the external scenario has morphed into an important source of concern and events that could significantly disrupt financial conditions and sharply damage the external impulse are very possible. In such case, the short-term inflationary effects could be substantial (due to the global appreciation of the dollar) although mitigated in the medium term by their impact on growth. Meanwhile, measures impeding the projected adjustment of spending and give a new push to inflation, would yield the way to MPR increases to ensure the convergence of inflation to the target. Let me conclude with some reflections. Final thoughts Dear senators, it is important to note that this is the first Report in several quarters in which our projection scenario presents no significant changes with respect to the previous Report.

Let me also say that we now comply fully with the recommendations set out in the Financial Stability Forum report commissioned by the G8 and published on the 19th May 2007. Getting back to the banking system, I believe that, in light of these developments, banks should adopt an appropriate scale of charges and, more importantly, stricter oversight procedures, in line with the rationale at the heart of Basel II approach. French banks are currently in the final straight as regards the implementation of the new regulation Basel II is playing a key role in moves to buttress risk management at credit institutions. The European Council and the Parliament adopted the Capital Requirements Directive on 14 June 2006, a crucial milestone in implementing the Basel II mechanism, established by the Basel Committee for Banking Supervision, within the European Union. The mechanism's three pillars – minimum capital requirements, supervisory review, and market discipline – form a prudential framework that is both more extensive and more sensitive to the risks actually incurred by credit institutions. Above all, Basel II should encourage institutions to improve their internal management and carefully calibrate their capital requirements. At present, we are concentrating on assessing the implementation of internal ratings-based approaches for credit risk and advanced measurement approaches for operational risk. The Commission Bancaire therefore undertook a series of on-site inspection missions in 2006 and 2007 to  2  BIS Review 75/2007  evaluate the systems and models developed by French institutions.