limited only by the amount of collateral that they have at their disposal. the list of eligible collateral has been expanded to bbb - rated instruments. lower quality assets can be used for emergency lending assistance operations with national central banks. european governments have committed not to let any bank fail. such a commitment, to be credible, must be followed by a programme of bank recapitalisation. such a programme should be implemented rapidly and in a broad way, to convince market participants that indeed no bank will fail and that it is again safe to buy bank shares and bonds. this will create a virtuous circle of confidence in the markets that will spread to the rest of the economy. given the current market stress, the capital injection of the banking system must be abundant and generalised. the private sector alone cannot do the job properly. previous capital increases have been insufficient and entailed losses, which discourages new potential investors. to achieve a higher capital ratio banks would most probably cut their loans to the private sector, therefore creating a credit crunch. this is why state intervention is needed. care must be taken, however, and i mention this in particular for those european authorities that are in charge of assessing state aid : such state intervention is not aimed at saving one or a few ailing banks ; it is aimed at preserving systemic and macroeconomic stability. to achieve its goal, recapitalisation should meet the following requirements : • first, it has to be abundant, going far beyond prudential requirements which are designed for normal times and which should not be modified in the current conjuncture, to avoid being pro - cyclical. i would not dare to give a number but it should create a sufficient buffer to instantaneously restore confidence in the banking system, for instance pushing the tier 1 capital ratio to a two - digit number. it should be sufficient to further push down balance sheets so that no doubt remains as to where the losses are. • second, recapitalisation has to be across the board, and align all banks ’ capital ratio to the same high level. the functioning of the interbank market requires that participants have no doubt of each other ’ s solvency position. any fear of a rotten apple can spoil the bunch. • third, recapitalisation has to have conditions that make it temporary and sustainable. this requires that the remuneration of the capital injection should be sufficient to compensate the taxpayer and to induce an early repayment, but not punitive so

jean - claude trichet : testimony before the committee on economic and monetary affairs of the european parliament introductory statement by mr jean - claude trichet, president of the european central bank, before the committee on economic and monetary affairs of the european parliament, brussels, 1 december 2003. * * * it is my pleasure to appear before your committee for the first time in my capacity as president of the ecb. i would like to tell you that i was very impressed by our last encounter here and i thank your committee and parliament for the confidence expressed by giving your approval to my appointment. i look forward to continuing our regular dialogue in the same fruitful and constructive spirit that was dear to my predecessor wim duisenberg, to whose achievements i wish to again pay tribute on this occasion. i shall begin my first report to you with our assessment of economic and monetary developments, before turning to another issue of topical importance, namely the draft eu constitution. i should like to conclude my statement by briefly addressing the international role of the euro. 1. economic and monetary developments at the time of mr duisenberg ’ s last testimony in september, we noted that economic activity had been very weak in the first half of 2003. at the same time, early signs of a recovery were emerging. since then, data have confirmed our main scenario, which is one of a gradual improvement in economic activity starting in the second half of this year. eurostat has provisionally estimated that quarterly real gdp growth was 0. 4 % in the third quarter of the year. there are, increasingly, reasons to expect the gradual economic recovery in the euro area to broaden and strengthen in the course of 2004. recent data show that the recovery of the world economy is clearly making progress. the expansion of global trade and economic activity should support euro area exports. on the domestic side, recent survey data continue to point towards a further improvement in confidence. the conditions for investment are also improving as a result of firms ’ continued adjustment efforts to enhance productivity and profitability. financing conditions are generally favourable, not least due to the low level of interest rates. finally, terms - of - trade effects stemming from the past appreciation of the euro should also positively affect real disposable income and thus facilitate a pick - up in consumption growth. developments in financial markets are broadly consistent with the overall picture of a gradual resumption of economic growth. as compared with a few months ago, downside risks to the main scenario of a gradual recovery