box - ticking ” attitude. therefore, rather than focusing on establishing ethics offices as a “ second line of defense ”, we should focus on the ethics of the “ first line of defense ” : the bankers themselves. another option would be to impose more rules on the financial sector. of course, some of the extra regulation that has been introduced was necessary. for instance, the basel iii rules which provide that capital ratios have to be raised. yet, in my opinion, extra rules cannot solve all of our problems. for every new rule will lead to creative solutions to evade that rule. by making new rules, we won ’ t make bankers less greedy, nor will we make them more ethical. instead of overregulating every detail, we should focus on the decisions bankers make. this point – how decisions are to be made – deserves to be discussed in greater detail. a bank is governed by a board of directors and by senior management. these officers decide on the bank ’ s strategy and key targets. their decisions have far - reaching consequences for the bank ’ s operations, as the example of “ managing for value ” demonstrates : a misguided decision may have undesirable effects. this considered, i would like to focus on the way bankers should make their decisions. the classical virtue “ prudentia ” – in modern english, “ prudence ” – can help us here. prudentia is the virtue that stands for “ making careful decisions ”. it requires a capacity for reflection, careful analysis, and balanced judgment. this sounds like a goal worth striving for, but what does it mean in banking practice? in banking practice, it means that, instead of focusing on one interest in particular, bankers have to balance all of their stakeholders ’ interests. they should neither focus on their shareholders alone, nor on a specific category of their clients. bankers practicing prudence take their societal responsibility to heart, which is : to be a trustworthy intermediary. bis central bankers ’ speeches therefore, to be “ prudent ” decision - makers, bankers should : • scan which interests are at stake, • balance the different interests involved, • reflect on the consequences of their actions, • and show themselves “ moderately risk - prone ”. by making careful and balanced decisions, and reflecting on their societal responsibility, bankers will regain the trust they need to function optimally. what does dnb do as prudential supervisor to improve the “ prudence ” of

forms of co - ordination, there is only one single policy, that is the exchange rate policy of the euro area as a whole. but different institutions are responsible for making it work. before discussing these different forms of policy co - ordination, however, i will provide an intellectual framework for the discussion by briefly outlining the limitations of economic policy - making as such. in other words, one cannot discuss how to play a symphony before knowing how to play the instruments. how to play an instrument? traditionally, economists distinguish between - at least - two instruments of economic policy - making : fiscal and monetary policy - making. as far as fiscal policy is concerned, three main functions can be distinguished. first, the allocation function or the provision of public goods. second, the redistribution function, or the adjustment of income and wealth to what society considers a ‘ fair ’ distribution. third, the stabilisation function, or the use of fiscal policies to stabilise the business cycle. when discussing policy co - ordination in the context of emu, the focus is on the latter function of fiscal policy, which does not imply that there is no role for the other functions. in the literature, the restrictions of the stabilisation function have come to the fore. as we have learnt from the experiences in the 1970s, fine - tuning has its difficulties, because of the time lag between the decision of measures and its effects, and - even more important - because of the lack of detailed information necessary for this kind of policy. apart from the fine - tuning problem, there is the potential problem of time inconsistency, since a government may be tempted to pursue an inconsistent policy for the sake of short - term gains, for example in the run - up to elections. under these circumstances, it is tempting to increase expenditure or reduce taxes. in other words, playing - 2the fiscal violin is not a piece of cake. indeed, it takes good musicians years to learn to master the vibrato of this instrument. pursuing monetary policy for the sake of short - term stabilisation is even more complicated than in the case of fiscal policies. although monetary policy - making is not so much hampered by the lack of detailed and recent information, the time lag problem is even severe than in the field of fiscal policies, especially because in monetary policies time lags may differ substantially from case to case. the time lag problem is linked with the fact that the transmission process of monetary policy in the real