in this forecast. the cumulative impact of the rise in energy prices on inflation and activity - - a topic to which i will return shortly - - was clearly one concern. so too was the ongoing rise in home prices and the possibility that this phenomenon is unsustainable. house prices have risen to levels that, in some areas of the country, seem high relative to the economic fundamentals. the market for second homes seems especially strong, raising the fear that some homeowners are speculating on further increases in home prices. the greater use of innovative forms of mortgage finance adds to the concern that the residential real estate market may well be vulnerable to a flattening of home prices, and in certain markets, perhaps a decline. i do not think that a significant and widespread drop in home prices is the most likely outcome, but the situation will require careful monitoring in the months ahead. a further risk is the apparent deceleration in business spending on new equipment and software ( e & s ). real e & s outlays grew almost 14 percent last year, but the rate of increase thus far in 2005 has slipped into the single digits. are businesses becoming more reluctant to invest? one answer to this question may be that the slowdown only reflects the usual noise in the investment data. another possibility is that higher energy prices are discouraging investment by increasing the uncertainty surrounding the outlook for aggregate demand. higher energy prices ought to boost investment as firms seek to replace their machines with new, more energy - efficient models, but this effect easily could be swamped by concerns about future weakness in the demand for their products. given the importance of capital deepening for the growth of structural productivity and for increases in our long - run standard of living, this slowdown in the growth of equipment investment also bears watching. the economic effects of hurricanes katrina and rita i'd now like to turn to the economic effects of hurricanes katrina and rita. on the one hand, it is important to recognize that, besides causing enormous human tragedy, the hurricanes made the nation economically worse off. not only did output fall as the result of the storms, but households lost their homes and possessions, businesses were damaged or destroyed, and key infrastructure was wiped out. initial estimates of losses range anywhere from $ 50 billion to $ 150 billion. on the other hand, although these are very large losses in absolute terms, they represent only a tiny fraction of national net worth. past natural disasters can serve as a rudimentary

dividend income from equity participations has generally become much more important, indicating an increase in the importance of the profit generated by non - bank subsidiaries. beside the establishment of non - bank subsidiaries, there have been other strategic and organisational changes that have resulted in banks strengthening their securities - related activities. in particular, significant motives behind the recent merger trend seem to include the desire to increase bank size and hence to be able to operate efficiently in wholesale securities markets as well as to be able to cater for the needs of large international corporations for investment banking services. the trend towards securitisation can be regarded as one of the reasons for the structural changes in the banking system that appears to have accelerated recently. there have naturally also been other reasons why banks have sought to merge, predominantly the need to cut capacity and to reduce costs. these cost - driven mergers have taken place primarily among smaller banks. 6. conclusion in my remarks today, i have referred to a number of changes and market initiatives in the euro area financial landscape. these developments point to the increasing importance of the fixed income and equity markets that many expected in stage three of economic and monetary union ( emu ), providing new opportunities for borrowers and investors and causing pressure to adjust for financial institutions. in this respect, i should like to mention the importance of removing the remaining regulatory barriers to the further development of the securities markets. to this end, the european commission has recently published an action plan of regulatory changes to improve the single market for financial services that would certainly – when implemented – boost the integration and market - driven development of the european securities markets. finally, i should like to conclude with some remarks about the role of the eurosystem ( the term that we use to mean the ecb and the 11 national central banks of the member states participating in stage three of emu ) in the developments in the financial sector in europe. first of all, the eurosystem contributes to developments in the financial sector by providing it with a stable and credible monetary policy. with a strong and credible commitment to its primary objective, price stability, the eurosystem has created a situation in which the financial sector can concentrate on those issues that are of the greatest relevance to its activities. the eurosystem does not play a direct role in structural developments in the financial sector. with its single monetary policy framework and target in particular, the eurosystem has created an infrastructure that has proved to be useful for the establishment of an integrated money market in