. during the remaining part of my speech, i shall elaborate on this subject. in doing so, i would first like to shed some light on the rationale behind macroeconomic projections and the method used before talking about the importance and use of projections in monetary policy. the rationale behind macroeconomic projections and the method used forecasting and utilising projections of the likely development of key economic variables is key to effective central banking. why is this so? the main reason for this is that monetary policy measures affect the economy only after a long, variable und uncertain time lag. a stability - oriented monetary policy should therefore not merely respond to actual data on inflation and the real economy. rather, it should act in a pre - emptive manner and, in turn, should not wait for risks to price stability to materialise. metaphorically speaking, obviously, a stability - oriented monetary policy cannot be conducted by looking through the rear - view mirror – in other words, by focusing on past inflation and real economic data. moreover, looking through the side window – that is relying primarily on current observations of growth and inflation – is not sufficient either, since the long and variable lags of monetary policy transmission mean that today ’ s inflation can no longer be influenced by current monetary policy decisions. thus, the only viable option for monetary policy is to act in a forward - looking manner in order to ensure price stability over the medium term. therefore, ( at least implicit ) forecasts for inflation and real gdp growth are tools used by most central banks nowadays for assessing the appropriateness of the current monetary policy stance. in this context, three particular questions arise : “ what are the specific characteristics of economic forecasts? ”, “ how can these characteristics be conveyed to the general public? ”, and “ how can monetary policy make use of macroeconomic projections? ” 3. 1 central forecast and uncertainty especially with respect to the first two questions, i do not want to go into too many mathematical details regarding forecasting techniques, as this would make my remarks a highly technical presentation. i would prefer to concentrate instead on the fundamental and most important elements of forecasting. so, where to start if one wants to generate a forecast? as we are living in an ever - changing economic environment, the starting point of every forecast is a set of forward - looking assumptions, at least with respect to main economic variables such as future market interest rates, exchange rates, crude oil prices and both world trade and growth. the

and up to the present day : first, to strengthen the stability of the international banking system, and, second, to eliminate or mitigate distortions in international competition among banks due to differences in national regulation. undoubtedly, the main achievements of the first basel capital accord were that it represented a significant step towards international harmonisation of banking regulation – it was later applied by more than 100 countries – and that, for the first time, it put the focus on the relationship between the capital that banks hold and the weighted risks that banks take. after its implementation, it was not long before basel i came in for increasing criticism. first, it did not adequately cover all the risks to which banks were exposed. second, the risk weightings were presented in a very crude form that was an inadequate reflection of the actual underlying risks. despite such early warning signs, it was a long road that led to the implementation of basel ii. in the interim, financial turbulence, namely the mexican crisis ( 1994 - 95 ) and the asian crisis ( 1997 - 98 ) had further heightened the awareness among the g10 countries of the need for greater international cooperation in financial market oversight. as a consequence, the financial stability forum was founded in 1999 and the first working groups were entrusted with drawing up appropriate measures for financial regulation. out of this process the basel ii framework with its three pillars that you are all aware of was born and finally published in june 2004. basel ii was scheduled for implementation by end of 2006. however, owing to its complexity – especially with regard to the different approaches to assessing the minimum capital requirements – the timetable allowed fairly long transition periods for the change of supervisory regime. as a result, basel ii had not yet been fully implemented by most credit institutions when the subprime crisis emerged in the summer of 2007. in particular, many banks – including the eu ones – applied the new basel ii capital rules for the first time in 2008. consequently, we still have only a restricted knowledge, based on real data, of how basel ii works in practice. and, most notably, we cannot blame basel ii for the recent financial crisis. nevertheless, the financial crisis has highlighted deficiencies in financial regulation within and beyond the supervisory framework of basel ii that have to be addressed based on a thorough analysis. challenges in strengthening financial stability 3. 1 banking regulation the search for the underlying causes of the financial crisis has been intense. although a definitive assessment is still outstanding, it is widely agreed that the seeds of the crisis were