european central bank has hiked its policy rate from minus 0. 5 per cent to 4 per cent since last summer. experience shows that it takes some time before higher interest rates are fully reflected in activity in society. and then some more time before the dampened demand affects inflation. therefore, the interest rate increases haven't yet been fully passed through to activity in denmark. but the banks and those who borrow money are affected by the higher interest rates. the interest rate policy pursued by the ecb – and which we implement in denmark under our fixed exchange rate policy – has suited the danish economy well. developments in recent years have illustrated how the fixed exchange rate policy contributes to stability in denmark : even when the economic waters around us are slightly rougher to navigate in. although the interest rate increases have been significant, most of us in this room remember when interest rates were even higher. this gives rise to the question : when are interest rates high? and when are they high enough? this is a very good question with which scholars in many countries are grappling at the moment. i don't have the answer. but our opinion is that higher interest rates will – sooner or later – get in - flation under control. at the same time, it's important that fiscal policy doesn't counteract the effect of higher interest rates. 2 / 6 bis - central bankers'speeches monetary policy works through, among other measures, the interest rates that customers encounter in the banks. and our analyses show that interest rate changes in the banks have occurred faster in denmark than in the euro area. the difference between the lending rate and the money market interest rate – that is the lending margin – has decreased during the past years. this reflects competition between the institutions to lend money. at the same time, we're seeing remarkably low impairment charges and losses. conversely, banks have had less need to attract deposits because depos - its have been growing over several years. the large customer funding surplus reduces the banks'incentive to raise their deposit rates. we can see that households – including those with large deposits – have so far only sought alternatives such as time deposits and bonds to a lim - ited extent. i believe it's important to remember that deposit rates are set in the mar - ket and that transparency and competition between the financial institu - tions are key elements in keeping prices in check. and that leads me to your advisory task. you are well experienced in

and banking industry landscape. in several important respects, we are now far removed from the environment of the late eighties. for one thing, the complexity of risks now faced by credit institutions operating in an increasingly globalised environment has increased significantly and, as a result, both risk - management and supervision have become much more difficult tasks. for another, some recent developments have also increased the opportunities to manage risks. the impressive advances in technology that have enhanced the industry ’ s ability to collect and process large amounts of information in real time could hardly have been suspected 20 years ago. collecting risk data across many business lines has catalysed further efforts to aggregate those measures of risk by quantifying them in a more rigorous and more consistent fashion. the “ ultimate expression ” of risk aggregation is the summation of many types of risk into a single measure based on the concept of economic capital, which estimates the amount of capital a firm requires to protect itself against these risks with a certain degree of confidence. using the concept of economic capital, banks can develop sound policies for monitoring exposure limits, risk - adjusted pricing policies and sound provisioning practices based on the inherent risks of the portfolios. they can also measure returns and assign capital on a risk - adjusted basis. likewise, the progressive widening and deepening of financial markets and the continuous creation of new assets has enlarged the menu of choices available for banks to manage, share and transfer risks. the basel ii process started, more than 6 years ago, against this background of increasingly sophisticated risk management practices, heightened complexity in the financial markets and stronger interaction between the real and the financial economy. rather than simply resetting the quantitative standards, we sought to develop a new forward - looking approach that would be more sensitive to the actual risks that banks take on. the new framework is a significant step towards achieving a more comprehensive and risk - sensitive supervisory approach. it seeks to provide banks with stronger incentives to employ the most advanced techniques to calculate risk exposures and, hence, to push risk - management towards the best available practices. specifically, basel ii makes these general principles operative by building on three complementary pillars. the first pillar is intended to achieve a more precise and sensitive mapping between banks ’ actual risks and the minimum regulatory capital requirements. under the new framework, banks are allowed and, indeed, encouraged to rely on their own measures of certain risk parameters, thus fostering a wider usage of the best available techniques and tools for that purpose. the committee firmly believes that a better alignment between