rescued by the government may weaken market discipline. the result may be increased risk - taking. international organisations have developed international codes and standards for the financial infrastructure and for the regulation and supervision of the financial sector, which are in line with good practices. these codes and standards should contribute to improving policy and creating more robust financial systems. they should make it easier for investors and others to keep abreast of developments, which in turn will increase their ability to assess risks in a country. this will reduce the risk of herd behaviour and the build - up of substantial imbalances. the international monetary fund plays an important role in international surveillance and crisis management. they have substantially strengthened their oversight of the financial systems in member countries. other international organisations are also intensifying their efforts in the area of financial stability. in the nordic countries, both the supervisory authorities and the central banks have expanded their cooperation as a result of the integration of the nordic banking industry. one question that will arise is bordo, m. d., dueker, m. j. and d. c. wheelock ( 2000 ). aggregate price shocks and financial instability : an historical analysis. nber working paper 7652 see bis, financial stability forum ( 2001 ). international standards and codes to strengthen financial systems. whether guarantee funds and other rules and regulations can differ when markets are so closely integrated. next year, an important international milestone will be reached when the basel committee on banking supervision presents the new capital adequacy rules. according to plan, the rules will apply from 2005. basel ii has a three - pillar architecture. first, the rules relating to minimum capital requirements will be further developed. second, the supervisory authorities will monitor banks more actively. third, information disclosure requirements will enhance market discipline. combined, this will constitute a coherent system for protecting the financial strength of banks. the regulations will improve the balance between capital requirements and banks ’ financial risk. this will also increase the focus on the development of risk management systems. finally, i would like to place particular emphasis on the need for market discipline, which is the third pillar in the proposed basel capital accord. financial stability is dependent on the identification, management and control of risk. this also means that we must factor in risk. this applies to banks in their internal credit routines, and others with interests in banks – shareholders, lenders, bondholders and depositors. market participants must understand that equity, subordinated loan capital and other claims on banks not covered

jean - claude trichet : the successful entry of cyprus into the euro area speech by mr jean - claude trichet, president of the european central bank, at the conference “ welcoming cyprus to the euro area ”, nicosia, 18 january 2008. * * * ladies and gentlemen, it is a great pleasure for me to attend this conference celebrating your adoption of the euro. let me first congratulate all parties involved in the successful cash changeover that took place at the beginning of the year. it has been going smoothly. none of this would have been possible without the excellent performance of the cypriot economy during the convergence process. 1. cyprus ’ s economic achievements on the way to the euro 1 today ’ s euro celebrations are the result of the successful macroeconomic policies that the cypriot authorities have pursued in recent years. cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well - managed monetary and exchange rate policies combined with a range of structural reforms. in the last decade, hicp inflation in cyprus has been contained, averaging 2. 2 % in 2007, with the only exceptions being in 2000 and 2003, when inflation rose mainly because of increases in energy prices as well as vat harmonisation. short - term as well as long - term interest rates have followed a declining trend in recent years to levels in line with those of the euro area as a whole. this suggests that market participants have confidence in cyprus ’ s macroeconomic and fiscal developments as well as in its monetary and exchange rate policies. the process of nominal convergence has been accompanied by robust economic growth. real gdp growth in cyprus has been well above that in the euro area in recent years. real output growth has been underpinned by domestic demand, and in particular by strong private consumption and, importantly, by strong fixed capital formation. cyprus ’ s gdp per capita ( in ppp terms ) progressed from around 74 % of the 1996 average of the 12 countries which initially joined the euro area to around 84 % in 2006 : this is a significant improvement, and may it continue that way. in spite of its remarkable progress towards nominal and real convergence, cyprus has not experienced major imbalances : price and cost competitiveness developments have been favourable since 2004. the fiscal balance ( the deficit - to - gdp ratio ) has been improving since 2004 and stood at - 1. 2 % of gdp in 2006. looking at the financial side, cyprus is experiencing substantial financial deepening, which has been