tightly integrated regulatory and supervisory structure in the euro area. second, given the crisis of confidence in the financial markets, backstops have to be identified to ensure the stability of the financial system, in particular banks. this means that markets – not only supervisors – have to be convinced that banks can withstand a worsening of the situation, both in terms of access to liquidity and in terms of absorbing potential losses through capital. the provision of liquidity is the responsibility of the central bank. ten days ago we decided to conduct two longer - term refinancing operations with a maturity of about one year, at fixed rate with full allotment. we also decided to continue conducting our main refinancing operations at fixed rates with full allotment against collateral at least until mid - 2012. we also launched a new covered bonds purchase programme. however, national treasuries are responsible for ensuring that the banking system is adequately capitalised. higher capital is required in particular as a precautionary measure, with a view to reassuring the markets. however, given that the markets are now quite nervous, we should avoid promoting solutions which end up producing the opposite result, in particular having a permanent excess of capital and entrenching the idea that euro area public bonds are unsafe assets. there is also a risk that if banks are given too much time to secure the desired capital ratio, they will achieve it through a de - leveraging and a reduction of their assets, thus bis central bankers ’ speeches triggering a credit crunch. what is needed is a credible backstop for the banking system which can be used quickly to absorb potential losses, if they materialise. at the current juncture, higher capital in the banking sector could help to reduce the negative feedback loop between the sovereigns and the banks, through several channels. with higher capital buffers banks would be able to withstand larger external shocks, including those stemming from the difficulties of the domestic or a foreign sovereign. in addition, wellcapitalised banks would have less of a need to de - leverage and to liquidate their exposure to sovereign debt. finally, being less vulnerable to systemic risks would mitigate the perceived credit risk of the sovereign itself, and in this way contribute to lowering its financing cost. the third element of the comprehensive solution is the backstop to the sovereign risk to convince markets that liquidity problems affecting the euro area members will not translate into solvency problems. the european financial stability facility has been put in place

##ilient. the downward trend in annual m3 growth from mid - 2003 appears to have halted over the summer months, and the shorter - term dynamics of m3 have strengthened. this reflects the fact that the historically low level of interest rates in the euro area continues to support monetary expansion, especially of the most liquid assets included in the narrow aggregate m1. the low level of interest rates also fuels the growth of mfi credit. the annual growth rate of loans to the private sector remains robust, largely driven by the dynamism of mortgage loans. these are also supported by strong house price increases in several euro area countries. there remains substantially more liquidity in the euro area than is needed to finance non - inflationary growth. at present, it is not clear how this excess liquidity, which is mainly the result of past portfolio shifts, will be used in the future. if significant parts of these liquid holdings were to be transformed into transaction balances, particularly at a time when confidence and economic activity were strengthening, inflationary risks would rise. in addition, high excess liquidity and strong credit growth could become a source of substantial asset price increases. to sum up, annual inflation rates should fall below 2 % in 2005, but a number of medium - term upside risks to price stability need to be carefully monitored. cross - checking with the monetary analysis also supports the case for strong vigilance with regard to the materialisation of risks to price stability. let me also address the current evidence on fiscal developments, where the latest budgetary notifications are a source of concern. while some countries will maintain a sound budgetary position, a significant number of euro area countries are expected to record deficits near to or above 3 %. the aggregate euro area fiscal deficit - to - gdp ratio is expected to increase somewhat, as is the debt - togdp ratio. in the coming years, important challenges for the consolidation of public finances will have to be faced. member states need to renew their consolidation efforts and should not rely on one - off measures, so as to comply with their commitments under the stability and growth pact and to foster confidence. they must also set the right priorities in public finances, towards structural reform, innovation and competitiveness. this would very much support the lisbon agenda and thereby promote economic growth, foster job creation and reduce unemployment. concerning the european fiscal framework, the governing council is convinced that substantial improvements in the implementation of the stability and growth pact are possible and would be beneficial, while we