banks are able to raise sufficient capital in line with their increasing volume of business. another crucial issue, especially in the present context, relates to banks ’ special role in the credit delivery system. there is no inherent conflict between the canons of sound banking and banks ’ proactive role in credit disbursements to promote growth. these two objectives are complementary to each other. high growth leads to high credit off - take and credit availability conditions influence growth prospects of an economy. ultimately, it is the credit business which is central to the profitability of the banking system. to the extent that excessive risk aversion – 6 – among bankers restricts credit growth in the economy, it has adverse effects on the profitability of the banking system as well as on economic growth. credit disbursement to the rural sector and small - scale industries require special attention from banks. the gupta committee recommendations involving greater flexibility and discretion to the lending banks in the agricultural sector in matters of collateral, margin, security, no dues certificate, composite cash credit limits etc., have to be implemented by the banks expeditiously. similarly, special treatment has to be accorded to small - sector units in improving their accessibility to institutional finance with a view to enabling them to emerge as profit centres for the banking system. given its critical importance in the manufacturing and export activities in the economy, it is unlikely that the banking system ’ s profitability and efficiency can grow without exploiting the opportunity provided by the small - scale industrial sector. the kapur committee has recently made a comprehensive set of recommendations for improving the credit delivery system for small - scale industries, which are being implemented in phases. the international context an important effect of the asian economic crisis, and of the recent developments in japan, has been that there is now a much greater international focus on the soundness of the domestic banking system in all countries – developed and developing. unlike previous financial crises, the persistent crisis in the real economy in east asia and also japan is generally believed to have been accentuated by the weakness in the financial sector rather than the other way round. the health of the banking sector and the prudential and regulatory framework are thus no longer a matter of domestic concern only. a country ’ s ability to access capital markets as well as investments abroad is likely to depend on whether the domestic financial system is perceived to broadly conform to international prudential and supervisory norms. in fact, the world standards themselves are being put to a severe test

##al supervisory authorities, which remain individually responsible for deciding when they should be activated. in particular, the banco de espana is now empowered to require banking institutions to establish countercyclical capital buffers by credit segment, limits on concentration in relation to economic activity sectors, and limits and conditions when underwriting new loans ( in terms of loan - to - value, loan - to - income and debt service - to - income, and also the maturity, the currency in which the operation is denominated and whether the interest rate is fixed or variable, among others ). 3 / 11 some of these new macroprudential tools, in particular those based on the borrowers ’ ability to pay, have already been introduced into the national legislation of other eu member states to prevent excessive easing of credit underwriting standards by banks and to contribute to the sustainability of household and corporate debt. these new instruments complement those already available to the banco de espana included in the european legislation : the countercyclical capital buffer, the systemic risk buffer and the buffer for systemic banks, among others. all in all, this new institutional setting is a significant step forward in reinforcing financial stability in spain. the importance of a macroprudential policy framework in my view, the introduction of macroprudential policy instruments to complement monetary and fiscal policy is probably one of the most significant policy developments following the global financial crisis. for countries in a monetary union, like spain, the introduction of these tools is particularly important. indeed, it is one of the few domestically managed levers available to guarantee the stability of the domestic financial system. however, the design of macroprudential policy poses significant challenges. this is mainly because there is little experience in the use of these tools and scant empirical evidence on their effectiveness, at least when compared with fiscal and monetary policy tools. in this setting, one of the main priorities for those responsible for ensuring the stability of the financial system with powers over macroprudential policy is, in my view, to develop a complete and coherent policy framework for the application and communication of that policy. and, in this task, the contribution of academia is of vital importance. in what follows, i would like to share some preliminary thoughts on some of the elements that, in my opinion, should be included in this framework. in particular, i would like to focus on two specific issues : first, the macroprudential policy objectives, which of course should be the basis for the