countries in central europe, the baltic states and three balkan countries : bulgaria, rumania and slovenia. these countries must all pass what is known as the copenhagen test. this test was drawn up by the european council in copenhagen in 1993, and consists of three criteria : • to begin with accession countries must have political and democratic institutions along western lines before they can even enter into negotiations. that is why turkey, the thirteenth accession country, finds itself in an exceptional position. • secondly, the potential member states must subscribe to the objectives of european integration. this means, among other things, that they must adopt and implement all european legislation and rules, in other words the acquis communautaire. exceptions, such as those made in the past for the british and the danes with regard to participation in emu, will not be allowed. • finally, the copenhagen criteria also encompass an economic test : the accession countries must have a functioning market economy and be capable of coping with market forces within the eu. in my opinion, this means they must be able to create a stable macro - economic climate, where market operators and consumers can take decisions and develop initiatives in a predictable and reliable environment. this presupposes powerful institutions and supervisory authorities, a full - fledged physical and human infrastructure and a developed financial sector. it also means that economic sectors must be sufficiently competitive to be able to operate within the single market. an indicator of such competitiveness is provided by trade relations with the european union. over the past ten years, these relations have tightened considerably. the geographical reorientation and the abolition of trade barriers since 1990 have contributed to an increase in the trade volume between the accession countries and the eu. today about 67 % of these countries ’ exports go to eu member states. it is worth noting that trade between the same sectors has also grown materially. there can be no doubt that this is largely the result of vast foreign investment in these countries. the adoption of european rules may, however, impair the competitiveness of, for instance, the agricultural and industrial industries. in its latest evaluation, of november 2001, the commission concluded that all accession countries except rumania and bulgaria have a functioning market economy. of these countries, the baltic states, hungary, poland, slovakia, slovenia and the czech republic are considered capable of holding their own within the single market, provided they continue to reform. malta and cyprus already fully meet the economic criterion. subsequent to this commission report, the european

are not captured through traditional measures. in particular, i would highlight the following : • first, a rapid growth of trading book assets relative to traditional banking book assets and a fundamental shift in the types of risks retained in the trading book, in particular those arising from structured credit products. this is a natural consequence of the improvement in financial technology we are seeing, which enables more and more assets to be priced and traded. • second, the growth of the trading book is, in turn, producing a rapid growth in counterparty credit exposures relative to traditional credit exposures. as with market risk exposures, these counterparty exposures are becoming increasingly complex and difficult to measure. • third, the valuation of increasingly complex products presents yet another challenge. many of these products have not been tested under periods of stressed liquidity, which could have a significant impact on valuations. • fourth, the use of traditional approaches by many firms to assess their vulnerability to funding liquidity risk. these approaches may not take into account the growing reliance on active markets to manage the firm ’ s liquidity in an environment that is increasingly capital - markets driven. both the basel committee and the industry are currently exploring issues relating to the management and supervision of funding liquidity. • finally, the degree of risk transfer that is actually achieved through credit risk mitigation and securitisation techniques requires greater scrutiny. in particular, how well do these risk transfers hold up under stress? to what extent will risk be put back to firms if counterparties were to default, if investors were to demand compensation for losses, or if investor risk appetites were to shift abruptly? practical areas of focus for risk managers and supervisors trying to predict how all these risks will play out in practice can be demanding since we have little historical experience to guide us. growth in credit markets, synthetic securitisations, new market players and new risk management techniques have largely taken place over the past five years, that is, after the last credit downturn. i expect we will only experience a true period of stress when we have the combined impact of a credit downturn, a major shift in risk appetites and a withdrawal of market liquidity. firms have been challenged to develop more comprehensive stress tests that cut across risk types and business lines in a true downturn environment. stress tests that are produced on a regular basis are most evolved in the market risk area. regular credit risk stress tests tend to be conducted primarily at the level of business lines. more