##ries. the strong competitiveness of the financial sector is furthermore supported by high business and regulatory standards as well as effective and stringent banking secrecy rules. however, the imf critically mentioned the low domestic profitability and efficiency of austrian banks. for one thing, these factors are traceable to strong competitive pressures given the high banking and branch office density. for another, banks still retain a rather unfavorable cost - income ratio, with some banks still absorbing the costs of recent domestic consolidation, of expansion into central and eastern europe as well as of major investments into upgrading information technology platforms and risk management systems. furthermore, the imf expressed concerns regarding the high level of foreign currency loans taken out especially for house mortgages. the oesterreichische nationalbank had already raised the same concerns earlier on. in the first quarter of 2005, foreign currency loans accounted for 19. 3 % of all loans issued to domestic nonbanks and for about 30 % of all loans to households. from the european perspective, loans granted by austrian banks accounted for approximately 3 % of all euro area loans to nonbanks while foreign currency loans accounted for 18 % of all euro area foreign currency loans granted to nonbanks at end - 20043. nearly 90 % of all foreign currency loans issued to nonbanks in austria are denominated in swiss francs while the importance of the japanese yen currently stagnates at a low level, equaling the volume of loans denominated in u. s. dollars. this high amount of foreign currency loans is tightly monitored by the austrian authorities and has already entailed a number of supervisory actions, including the introduction of a set of recommendations called “ minimum standards of granting and managing foreign currency loans. ” fsaps are designed to assess the stability of a financial system as well as to identify and remedy weaknesses in a country ’ s financial sector structure. swiss francs 42 %, japanese yen 19 %, u. s. dollars 2 %. 3. economic and financial sector performance in 2004 and in the first months of 2005 turning to my third issue, i would now like to give you a brief glance on the development of the austrian economy and financial sector in 2004 and the first months of 2005. austria encounters the current challenges and reform requirements with a forward - looking economic policy. the pension reform contributes to a sustainable retirement system that is financially secure in the long term. the corporate and income tax reform add to making austria an attractive business location and supports the

financial stability is more complex. deeper financial integration may increase diversification and reduce certain vulnerabilities, while possibly raising contagion risk. close cooperation between supervisors and central banks especially in the euro area therefore seems warranted. faster and more efficient legislative procedures on the european level are important in order to keep pace with rapid technological changes and financial innovations. in this respect, the so - called lamfalussy regime, which was developed in the securities business, was extended to comprise the entire financial services sector in 2004. the committee of european banking supervisors ( cebs ), which consists of high - level representatives of national supervisory authorities and central banks, has become the most important advisory body supporting the european commission in supervisory matters. the cebs not only aims to ensure a consistent implementation of eu directives across member countries, but develops standards and guidelines to harmonize supervisory practices in the eu. in order to achieve further financial integration in the eu and a single market in financial services, the european commission launched the financial services action plan ( fsap ) in 1999. one of the last and most prominent open issues on the agenda of the fsap is the proposal of a new capital adequacy directive to implement the new basel capital accord ( basel ii ) in the banking sector. basel ii is regarded a necessary instrument to meet the fundamental changes in the banking industry, which includes the emergence of new financial products and advances in risk management practices. basel ii aims to enhance the stability of the financial system via more risk - sensitive capital requirements. austrian banks are considered to be well informed of, and prepared for, the changes induced by basel ii. the oesterreichische nationalbank is closely involved in the basel ii process and currently conducts a road show on this topic to improve the level of know - how especially among small and medium - sized enterprises ( smes ) in austria. while completing the eu initiatives especially with a view to the new capital requirements, solvency ii, and the legal framework for payments, the european commission has announced that in the postfsap era, its activities will rather focus on the effective implementation and enforcement of regulations issued in recent years. any new initiatives will be subject to rigorous impact assessments, and the european commission will continue its consultation activities with the industry. one of the priorities in this respect will be the further integration of the retail financial market. ladies and gentlemen, given the limited time frame i was only able to touch upon some cornerstones of the financial