particular figure - say, 3½ per cent. we would regard it as excessive if it is pushing up wages and prices in a way which would cause our medium - term target to be exceeded. obviously, the faster is growth in any particular period, all other things equal, the higher the risk of that problem becomes. but we do not have, and it is not sensible to have, a doctrinaire view of particular growth thresholds which, if breached, are assumed to generate problems. the policy process is rather more pragmatic than that, and proceeds by the rather simple technique of examining the evidence for what it says about inflation pressures in the period ahead. that, to repeat, is the test : not whether a growth rate matches or exceeds a particular pre - determined figure, but whether low inflation performance is being maintained over time. at any point in time we are constantly monitoring wages and prices and making an assessment of the outlook over the next year or so. if we get good news and our assessment is for lower growth in wages and prices, we can, other things equal, let the economy run faster. this may be done by reducing interest rates or, depending on the circumstances, refraining from raising them. if on the other hand we are getting bad news, we may have to tighten or forego an easing. this idea is not all that novel. it is very similar to the way the monetary policy process is described in the united states. our newspapers are full of the latest speculation about what alan greenspan - the chairman of the federal reserve board - is going to do this month, next month and thereafter. the big story of 1996 in the united states was that nearly everyone expected monetary policy to be tightened. the us economy was already at full capacity and still growing strongly, people expected that inflationary pressures would soon emerge, and the fed would have to tighten. on three occasions - july, september and december - the markets were convinced it was going to happen, but on each occasion the fed was able to sit on its hands. why was it possible to delay the tightening for nearly a year? it was not because the economy weakened ; in fact, it grew faster than initially anyone had forecast, expanding by over 3 per cent in 1996, well above previous forecasts and economists ’ estimates of its long - run potential growth rate. it was because the fed continued to receive constant feedback from the economy indicating that rises in prices and wages remained moderate. none of this means

and market risks have diminished with their progressive transfer away from banks ’ balance sheets, but other types of risks have emerged. the reputation of a bank is inevitably and increasingly affected by the quality of the products it supplies to its customers. there has also been an increase in both legal and operational risks. the banks ’ increasing role in the distribution of third parties ’ products makes it crucial to monitor for conflicts of interest. it is extremely important that conduct should be ethical. the integrity and completeness of the information provided to the public must be guaranteed and internal controls must be reinforced. staff incentives must be designed to prevent the risk of improper conduct. 3. supervision international cooperation between banking, insurance and financial market supervisory authorities is strengthening. in view of the close links between the systems of the major areas - in the first place those of central and western europe and the united states, but also to an increasing extent those of eastern europe and asia - supervisory cooperation has spread to the global level. in europe, the nationally based organization of banking supervision is in conformity with the cardinal principle of the single european market, founded on minimum harmonization and mutual recognition. supervision on a national basis permits the authorities to operate near the entities subject to control. it favours a constant exchange of information and direct contact with intermediaries. this is particularly effective if it is also realized by means of a widespread presence in the territory and through on - site inspections. banking supervision is rooted in the legal and administrative systems of each country, not least owing to the possible involvement of public money in crises. europe has equipped itself with a well - structured system of multilateral cooperation and bilateral agreements between the national authorities responsible for supervising the banking and financial markets. spurred by the guidelines set by the ecofin council meeting of oviedo in 2002, in 2004 the application of the lamfalussy reform was completed, extending to the banking and insurance sectors bodies and legislative procedures that had already been introduced in the securities field. the reform process sees national authorities and european institutions engaged in speeding up the approval of harmonized european regulation, ensuring its uniform application in national law and further strengthening cooperation among the supervisory authorities. 4. derivatives in the last four years the cyclical slowdown of the global economy, stock market turbulence, the failure of large companies operating at international level and the default of sovereign states have subjected financial systems to strong pressures in both advanced and emerging economies. banks have demonstrated a great capacity to absorb the destabilizing impulses.