results were largely attributable to retail banking business in france. consumer credit and home loans continued to grow, along with specialised financial services. in addition, falling interest rates had a positive effect on interbank business - which in france has always been significant - and drove down the net expense on these transactions. by contrast, capital market activities and asset management were hit by financial market turbulence, giving rise to substantial provisions in some cases. furthermore, for the second year running, fees and commissions contracted as a percentage of net banking income, falling to 26 per cent compared with nearly 30 per cent in 2000. 1. 3 diversification has helped french credit institutions to offset negative cyclical trends as in previous years, conventional retail banking activities cushioned the negative impact of trends in investment banking and asset management in 2002. on the international front, too, retail banking was a major avenue of development for leading french banks. it must be stressed, however, that the consolidated accounts of france ’ s largest banks were slightly less positive in 2002, even though the overall situation was satisfactory. in this regard, the dollar - euro exchange rate had an impact on the foreign activities of these banks, denominated in euros, which were also exposed to the negative earnings momentum of subsidiaries specialising in equity - related businesses. 2. french banks must buttress the elements that have allowed them to withstand cyclical contingencies for the past few years in addition to diversifying their business lines - and i am pleased to note that securities analysts are now taking this factor into account when assessing different banking industries - french banks have improved their capacity to withstand cyclical contingencies. that ability must naturally be maintained and strengthened. 2. 1 french banks used the healthy profits of the late 1990s to strengthen their capital base french credit institutions have entered the cyclical downswing on a sounder financial footing. to illustrate that point, a review of the french banking system since the late 1960s is included in the appendixes to this annual report. book capital is now equivalent to 5. 2 per cent of total assets, compared with 4. 2 per cent in the mid - 1990s. the commission bancaire is at pains to ensure that all french banks - small and large - build up their capital gradually but steadily until it well exceeds the regulatory minimum. furthermore, provision cover for doubtful loans now stands at 60. 4 per cent. the industry must pursue this prudential policy. in particular, as we have been urging for several years,

. but guesses about the future must be correct on average if individuals are to remain satisfied with the mechanism by which their anticipations are formulated. when agents diagnose systematic errors, they have an incentive to amend the basis of their forecasts. expectations are thus the outcome of a decision process and this process responds and adapts to changing circumstances, in particular to possible changes in the behaviour of monetary authorities. understanding expectations formation as a process underscores the strategic interdependence that exists between expectations formation and economic institutions. recognition of this interdependence by central bankers and legislators profoundly changed the way in which macroeconomic authorities view the nature of policymaking. central bankers came to hold the view that monetary policy is not a sequence of isolated policy actions. if agents, when forming their expectations, seek to capture the general pattern of monetary policy, then the relevant problem to solve for central banks centres not only on the size and the timing of a given interest rate move in response to a particular state of the robert lucas ( 1972 ), “ expectations and the neutrality of money, ” journal of economic theory, 4, pp. 103 - 124 and robert lucas ( 1973 ), “ some international evidence on output - inflation trade - off ”, american economic review, vol. 63 ( 3 ), pp. 326 - 334. thomas sargent and neil wallace ( 1975 ), “ rational expectations, the optimal monetary instrument and the optimal money supply rule, ” journal of political economy, vol. 83 ( 2 ), pp. 241 - 254. economy, but also and overall it relates to the strategy for repeatedly adjusting the policy instrument in response to the state of the economy, whatever this might be. so, monetary policymakers and, gradually, legislators came to recognise that the meaningful set of choices that societies face relates to alternative monetary policy regimes, that is a clear specification of the central bank objective and of its strategy in managing economic events. the notion that monetary regimes are very powerful in shaping public expectations had received dramatic evidence when the old monetary policy order, the bretton woods arrangements, foundered. in those circumstances, private sectors in a large portion of the industrial world were left for years in the dark about the “ true ” objectives of monetary policy, and about the determination with which central banks were prepared to pursue it. a new monetary order could not be established unless it tackled the problem of the mandate and of the strategy squarely. building on a time - tested tradition of pr