, the deterioration in the economic cycle and in borrowers ’ credit quality has led to increasing provisions against loan losses. second, the plunge in global and, in particular, european stock markets has given rise to greater risk aversion and uncertainty in other financial markets. this has reduced banks ’ noninterest income from investment banking and trading activities. we also find that, for many large banks, diversification has not generated the desired benefits, as several businesses have deteriorated at the same time. in particular, internationally operating banks have been affected by the adverse capital market behaviour owing to the high proportion of their investment banking and asset management business. banks that focus on retail banking and have a strong franchise in domestic markets have fared best under the prevailing circumstances. in our analysis we have focused, in particular, on banks ’ heightened credit risks. banks ’ loan loss provisioning has already accelerated and banks have generally anticipated the increase in loan losses by improving provisioning reserves. the strain on banks ’ profitability could therefore continue over the short term. nevertheless, the profitability of eu banks at mid - 2002 was not much below the average between1995 and 1999 and the level of provisioning is still in line with what tends to be normal provisioning levels in an economic downturn. eu banks ’ solvency levels have remained unaffected in all size groups of eu banks, allowing them to withstand the shocks in their operating environment. the aggregated total regulatory capital ratio for the eu banking system as a whole in 2001 stood at 12 %, i. e. well above the required minimum level of 8 %. eu banks have made efforts not only to maintain but also build up capital levels. their resilience in the face of adverse developments owes much to the satisfactory capital buffers that are in place as well as to improved risk management, active cost - cutting efforts and continuous access to wholesale market liquidity. however, attention should be paid to the preservation of adequate capital levels, since a deterioration in profitability reduces banks ’ ability to withstand further shocks. given the present circumstances, eu banks ’ lending policies are an issue of particular current relevance. the quantitative and qualitative information collected at the committee level does not provide strong evidence of supply - side constraints in any member state. eu banks seem to have appropriately tightened credit standards - pricing as well as collateral requirements - in line with increased risks, rather than becoming restrictive in lending because of capital shortages. finally, let me try to give an outlook for risks

process will begin. the fed has said that it will depend on economic conditions, as obviously it must. moreover it will only be a step on what is likely to be a fairly long path back towards “ normal ” monetary policy. we can be fairly sure, though, that there is ample potential for this shift in direction to reverberate around global markets. that ’ s what usually occurs when the fed changes course. the anticipation of this has already been a factor affecting markets, including in particular those in some important “ emerging market economies ”, at various points this year. it is sensible to assume that this will be the case over the period ahead, as “ tapering ” begins and as market participants try to ascertain its extent and pace. turning to the australian economy, in february we felt that growth had moderated somewhat and would be below trend for a while, within a range of 2 – 3 per cent for 2013. broadly speaking that is what has occurred. our most recent statement on monetary policy, released bis central bankers ’ speeches in november, put likely gdp growth within that range. the recently released september quarter data don ’ t cause any material change to that view. this result reflects quite subdued growth in private domestic demand, partly offset by quite strong growth in exports. the very large run - up in mining investment has reached its peak, while non - mining investment remains at a low ebb, and dwelling investment spending is only in the early stages of an upturn. consumer spending has been rising, but at a below average pace, as people adjust to slower growth in income and look to contain or reduce debt. inflation has remained consistent with the 2 – 3 per cent target. for the year to december, it looks as though the consumer price index will have risen by about 2½ per cent, with underlying inflation perhaps a little below that. our assessment is that inflation will remain consistent with the target over the next one to two years. looking ahead, resource sector investment will decline – gradually at first but more quickly thereafter. it will most likely fall considerably over the next few years. there is therefore scope for other forms of private demand to grow more quickly, the more so as government spending is scheduled to be subdued. investment in dwellings shows clear signs of a significant increase, and exports of resources will continue to rise strongly. it is likely that capital spending by firms in some sectors outside the resources sector will eventually pick up, but this will take some time yet and it