it must capitalise on the progress made in future risk analysis, based on statistical databases and stress testing, to adopt a more forward - looking provisioning policy. this has already been accomplished in several areas of sectoral or geographical risk. that being said, we firmly believe that international accounting standards should move in this direction, fostering the widespread use of forward - looking provisions and thereby contributing immensely to financial stability. in a context of economic crisis, the constant strengthening of french credit institutions ’ financial structure gives them an appreciable safety margin, which could also allow them to play a part in the consolidation of europe ’ s financial industry. 2. 2 priority has rightly been placed on controlling risks and ordinary profitability the other fundamental elements that contribute to the resilience of french banks ’ earnings are risk management and control over operating conditions. as you know, the commission bancaire places a premium on ensuring that french banks, and credit institutions in general, generate satisfactory profits at operating level. gross operating income is the first fall - back - before regulatory capital - for satisfying provisioning requirements, which naturally become more acute when economic conditions turn down. accordingly, final operating margins must be sufficiently wide. this is also essential so that banks can tap the markets, at optimal cost and with sufficient independence, for the financing they need to develop and to secure their future. to that end, the commission bancaire makes sure that cost - to - income ratios, which measure operating expenses as a percentage of overall operating profit, are not excessive. spontaneous action by banks themselves has naturally been crucial in this respect. this trend must continue. the same applies to efforts to improve the selection, monitoring and control of risk. thanks partly to those efforts, it has been possible to confine loss - risk and provisioning requirements to securities portfolios and capital market business in general, as well as to some large corporate loans, particularly in the usa. further improvements in internal controls, at the instigation of the commission bancaire, are naturally of major importance. when the economic and financial environment is dominated by uncertainty, the only cogent strategy is to reduce the factors that produce risk. apparently there is room for further improvement in areas such as the spreading of credit risk. furthermore, stricter internal controls could be applied to capital market intermediation and to the management of specific factors such as operating risk. 3. with tighter control over processes, information systems, operations and risk, french credit institutions should

be able to cope with future developments aside from the cyclical aspects i have just mentioned, the short - term outlook is characterised by both the increasing interplay between the financial and non - financial spheres, owing to the development of new risk - transfer instruments, and by closer harmonisation of the rules applicable to different economic agents. 3. 1 careful attention must be paid to the characteristics and consequences of risk transfer transactions credit derivatives, and products and techniques like securitisation that produce similar results, are a means of reducing the loan - loss exposure of credit institutions, which are net risk - sellers. these instruments can be useful for mitigating risk exposure, provided naturally that banks act as protection buyers. however, the characteristics and consequences of the development of these products must be closely scrutinised, both by credit institutions operating in these markets and by the authorities responsible for maintaining financial stability. institutions must pay particular attention to the real impact of risk transfer. they must also keep close watch on the resulting counterparty risk that attaches to the protection seller. the question of risk transfer is also under scrutiny because of the treatment of the special purpose vehicles to which assets are sold. on this point, the accounting rules currently under review at the international level seem to focus quite rightly on the reality of risk transfer. credit institutions must therefore analyse this criterion in greater detail. the issue is also of interest to the authorities responsible for financial stability. as standardised risk - transfer instruments develop, they are likely to come into wider use. so far, market participants have not properly identified or analysed the likely knock - on effects, whether direct or indirect. for this reason, there is a vital need for improvements in the prudential reporting and market transparency of these transactions ; there is also a need for greater harmonisation of the rules and regulations applicable to institutions in different countries and to different types of company. the aim should be to record the risk where it is actually borne, both economically and financially. in addition, the authorities responsible for different financial sectors must coordinate their efforts to jointly identify where risks lie and to measure their extent. the banque de france and the commission bancaire are working to that end with their counterparts in the insurance industry and the securities markets. 3. 2 the future solvency ratio will better reflect the economic realities of banking risk the finishing touches are being put to the solvency ratio, due to come into force in 2006. the new ratio will cover a broad