In applying this caveat to Spanish institutions, we shall focus on the three lines of defence used by institutions to protect themselves from possible difficulties: risk management, which enables ex ante minimisation of difficulties, and profitability and solvency, which make it easier to absorb risks once they materialise. As regards risks, the low levels of default unquestionably reflect not only the favourable financial and macroeconomic trends, but also improvements in the procedures for identifying, measuring and controlling those risks. The sharp increase in activity, however, poses certain questions to which some thought should be given. First, although the fastest growing instruments are secured loans, their concentration in the real-estate market, together with growing household indebtedness, should be taken into account by managers, since both factors (sectoral concentration and growing indebtedness) entail under alternative scenarios a greater risk, which should be analysed within the framework of an institution’s medium- and long-term financial strategy, taking account of its financial equilibrium conditions. Second, there is a need for the management systems used to incorporate the regular performance of stress tests under adverse scenarios, considering variations in real estate prices, changes in interest rates and other possible modifications in macroeconomic data. This analysis will be of use in regularly reviewing each institution’s strategy and will determine the advisability of establishing internal control measures and how to ameliorate the residual risk incurred. Particular attention is required by those market segments, such as the financing of real-estate development activities, which have shown higher risk in the past.

It thus appears that the euro area has yet to harness fully the benefits arising from economic integration and the introduction of the single currency. The emergence of difficulties in furthering European economic integration has recently been discerned. Cases in point are the problems affecting the fiscal discipline framework, the delays in meeting the targets of the Lisbon Agenda and the obstacles still blocking, in certain industries, the development of the single European market. At the March 2005 European Council, the authorities attempted to correct the lack of ambition behind the structural reforms and the scant consistency of budgetary policies with the disciplinary rules set by adjusting some of the policy co-ordination mechanisms. However, only clear resolve on the part of the authorities to fulfil their commitments would dispel the scepticism some of these proposals evoke. In the fiscal policy realm, the European Council approved a reform of the Stability and Growth Pact. Among other changes, provisions were made to pay greater attention to the particular situation of each country when evaluating its budgetary position and to make the application of the corrective measures  BIS Review 45/2005  3  envisaged in the Treaty more flexible. As a result of these changes, the economic rationality of certain components of the Pact has perhaps been enhanced, though its complexity and the margin available for discretion in its application have also undoubtedly increased.