christian noyer : france ’ s banking industry in 2006 – key trends speech by mr christian noyer, governor of the bank of france and chairman of the french banking commission, at the presentation of the 2006 annual report of the french banking commission, paris, 29 june 2007. * * * welcome to this press breakfast, organised for the release today of the 2006 annual report of the commission bancaire. i would like to discuss the key trends that characterised france's banking industry in 2006, not just in terms of structure and performance but also the regulatory environment in which it operates. it is clear that the framework for financial activity and banking risk management has changed in recent months, confirming the ever more urgent need for new methods of risk assessment and for appropriate supervision that can react swiftly to these changes. in my view, several factors are important in this respect. first, in a highly international context, banks'performances are increasingly being judged from the outside, especially by shareholders. those judgements are sometimes so harsh that they can have a direct structural impact. consequently, banks can no longer afford simply to post excellent results – as again was the case in 2006 for most major international banks, especially french banks. they must also make sure that the underlying quality of those results is sound. to do this, they must pay special attention to the way they manage risks internally and plan their strategic expansion, and to their capital adequacy policy. second, the economic and financial context in which french banks are operating is also a source of risks. indeed, lessons must be learned from the slowdown in the usa, amply illustrated by the housing downturn, which resulted in higher risk in the sub - prime segments of the retail banking market. it should also be acknowledged that financial markets could become more unsettled. if higher risk aversion were to encourage greater use of risk transfer products, this could drain liquidity from some markets and undermine the efficiency of banks'management. from a supervisory perspective, the problem is all the more acute since the growing reliance on credit risk transfer instruments tends to make it harder to assess the type and degree of risk that banks actually bear when, for example, they arrange complex transactions. third, the regulatory environment for french banks is changing radically as a result of the basel ii accords. banks that have adopted the advanced approaches to risk management must put models in place – usually as early as january 2008 – for the internal rating and assessment of credit risk, market risk

decisions are state - dependent rather than time - dependent and as a consequence, both the frequency and the amplitude of the policy changes are mainly driven by the underlying state of the economy. as far as the eurosystem is concerned, the more gradualist approach is nothing but the reflection that the economy of the euro area has been less affected by cyclical fluctuations than the us economy. moreover, recent research carried out by the eurosystem on inflation persistence tends to show that the degree of inflation persistence in the euro area is quite moderate while the degree of price stickiness is considerable and higher than in the united states. this finding may provide another justification for a gradualist monetary response to cost - push shocks as : first, the impact of an inflation shock will be small as agents anticipate a low persistence of this shock and therefore will maintain their expectations of future inflation at low levels ; in turn, the negative response of the output gap will be limited implying a less persistent response of the real rate. 5. as a result, the eurosystem monetary policy has won european citizens ’ confidence in and acceptance of the new currency finally, the euro has been readily accepted by economic agents and is now part of european consumers ’ daily lives. surveys confirm that the general public has confidence in the euro, as a solid currency, and in the eurosystem as their central bank. however, there remain two causes for concern : - one is the natural difficulty in moving to an entirely new set of price references – and it may take a number of years before this switch is fully made by the public at large. - and the second, probably related to the first one, is the feeling in the public that there have been excessive price increases linked to the cash changeover. indeed, the public ’ s attention has focused on a small number of goods and services in which abnormal increases occurred at the time of this event, leading to a misperception of the real rate of inflation. this gap between perceived inflation and real inflation has however been narrowing progressively and should hopefully disappear in the near future. concluding remarks to conclude, let me emphasise that eight years after its adoption, the euro has lived up to all of our expectations. after the unprecedented challenge of a continent - wide cash changeover, the euro almost instantly replaced the legacy currencies without any disruptions. it has fostered both price and macroeconomic stability through its credibility and has shielded many euro area countries from significant exchange rate volatility and