in their own right. second : stiffer competition between markets the development of information technology and telecommunications has allowed economic agents to move their capital at will. as a result, their investment and borrowing decisions are based on the opportunities available on all markets. • domestic exchanges have become mere compartments of the global market and find themselves competing with each other. • exchanges must also compete with the extraordinary expansion of over - the - counter markets. the largest financial institutions are big players on these markets, which operate according to private and decentralised mechanisms. total notional liabilities on otc derivative markets rose from usd 72, 000 billion in june 1998 to usd 88, 000 billion at end 1999. the average daily turnover on these markets increased by 50 % between april 1995 and april 1998. • users ’ desire to improve efficiency has also driven the evolution in market structures. planned links between stock markets, particularly in europe, and the consolidation of delivery - vs - payment systems testify to these concerns. domestic trading floors with regular working hours are gradually giving way to electronic international markets open around the clock. and the official trading systems of the various financial centres are in turn being challenged by private trading systems such as electronic communication networks. third : new demands for transparency and profitability in the financial industry spurred on by this competitive pressure, the principles of corporate governance and value - adding have taken root, in particular under the impetus of fund managers. these principles force players to meet new requirements in terms of transparency and profitability. such requirements encourage participants in the global market to adopt new investment behaviour, in particular with the spread of index - linked management or massive recourse to leveraging. these objectives also result in the use of fairly homogeneous risk management techniques, such as the definition and use of limits, risk management with value - at - risk models and the development of stress testing. in addition, these objectives have established the importance of rating agencies for financial institutions, both in determining the conditions of their funding and in defining the structure of their portfolios. fourth : restructuring to cope with this increased competitive pressure if they are to survive, traditional financial intermediaries must expand and / or innovate. • the current consolidation of the financial industry is driven by the search for market power and / or economies of scale. mega - institutions emerge, more and more internationalised and diversified. these developments give rise to financial conglomerates aiming at economies of scale. • product or process innovation is an alternative - or complement - to the search

whereby prudential standards are adapted to the individual situations of financial institutions. this is the purpose of the revision of the solvency ratio currently underway in basel, in particular via the second and third pillars. • in addition, the mechanisms for safeguarding the soundness of financial systems should be adapted to the changing features of these systems. some of the aspects we feel should be given priority are : • – how to deal with financial institutions that are not yet regulated, such as financial conglomerates and highly - leveraged institutions, or certain types of financial holding ; – how to deal with remote financial services. finally, regulators must ensure that the new regulatory mechanisms they have devised fit in with the other objectives of economic policy. the impact of these regulations on the real economy must be carefully assessed in order to avoid privileging stability to the detriment of efficiency by creating new competitive distortions. in general, prudential concerns about financial stability, monetary concerns about price stability and social concerns, that is, protecting consumers, must be reconciled. in conclusion, allow me to mention the key role played by central banks in reinforcing financial stability first of all, i would like to stress what i feel is the highly complementary nature of the price stability and financial stability objectives. i believe that price stability is the bedrock on which financial stability is built. it is of course a prerequisite. secondly, i consider central banks to bear a special responsibility arising on their central position at the heart of financial systems : • they contribute directly to supplying liquidity to the economy. • their close and constant contacts with credit institutions give them a thorough understanding of banking systems. • they are responsible for ensuring that payment systems operate smoothly. central banks thus find themselves at the intersection of the various aspects of financial systems, and accordingly appear particularly well - suited to maintaining financial stability. thirdly, in my opinion, the correct answer to the changes underway in financial systems is not to set up vast centralized supervisory bodies at a global or a european level. in this domaine to be close to the credit and financial institutions concerned is decisive for efficiency. i am convinced that establishing a new generation of prudential standards and reinforcing active and close cooperation between decentralised supervisors will be for us the best means to reconcile efficiency with financial stability. to deal with these challenges, given their specific features, central banks are obviously at the heart of the process.