jaime caruana : words of welcome - ecb governing council dinner speech by mr jaime caruana, governor of the bank of spain and chairman of the basel committee on banking supervision, at the governing council dinner on the occasion of the meeting of the european central bank governing council, madrid, 7 june 2006. * * * it is a source of great satisfaction for me to welcome you to this dinner on the occasion of the meeting of the ecb governing council in madrid. we are particularly honoured by the presence of the president of the government and by that of the other authorities and personalities accompanying us today. as many of you are aware, this is the second time the governing council of the european central bank has met here. the first was in march 2000, a little more than one year after the start of monetary union, unquestionably the most visible feature of european construction. on that occasion, the euro area economy appeared set on a notably dynamic path with year - on - year growth exceeding 3 % and the spanish economy, in turn, was maintaining a sustained pace of expansion, benefiting from the favourable monetary and financial conditions and strong job creation. against this backdrop, spanish citizens could already perceive the favourable effects of our participation in the euro area and, therefore, the success of the economic policies applied during the convergence process. it is thus no exaggeration to say that those present at a similar dinner six years ago felt quite optimistic about the prospects for the european economy, within monetary union, although the union had only just taken its very first steps and euro banknotes and coins had not even begun to circulate. we now have the benefit of the experience built up in the intervening period. the euro has meant tangible benefits in terms of savings on transaction costs for citizens, eliminating exchange rate risks within the area, facilitating market integration and it has provided an environment of economic and monetary stability. the ecb has attained high credibility in a short period of time which is undoubtedly a result of the clarity of its objectives, the effectiveness of its strategy and the soundness of its decisions. nevertheless, it is a fact that the european economy has not managed to repeat growth figures close to those seen in 2000. it has been prone to bouts of notable sluggishness, highlighting - in addition to the effect of an unusual series of adverse shocks - the structural shortcomings holding back activity and employment. we have therefore seen that, despite the favourable effects a monetary policy unequivocal

norway and the eurozone. it should also be said that there is a general consensus that the inflation target in sweden has been a successful one. financial stability as i mentioned earlier, many central banks today also have an objective to promote financial stability. while there is close to universal agreement on what price stability means, there has yet to emerge, some attempts none withstanding, a consensus on a working definition of financial stability. 1 given the problems in defining and measuring financial stability, why should we pay any attention to it? one answer is that we simply cannot afford not to do so, as financial crises carry with them huge costs to society. this was shown by events in japan and the nordic countries during the early 1990s, and in much of south east asia in 1997. in fact, one could even claim, that financial stability takes precedence over price stability, in the sense that the latter is quite irrelevant if the financial system is on the brink of collapse. an important difference between price stability and financial stability is that while responsibility for price stability rests squarely on the central bank, financial stability necessitates the cooperation of the central bank, supervisors and the government. however, the exact roles played by different authorities differ from country to country. another difference is the number of instruments available to policy makers. in the case of price stability, there basically exist one instrument ( either the short - term interest rate or the nominal exchange rate ). maintaining financial stability, on the other hand, requires a wide spectrum of policy measures, such as professional supervision, a legal framework that does not encourage “ moral hazard ” - type behaviour and crisis management plans. a recent complication is the surge in cross border banking activities, which means that the national authorities engaged in financial stability work, increasingly must work with their foreign colleagues. while the internationalisation of the banking industry holds the potential for efficiency gains, and increased household welfare, it has also added a score of new challenges. perhaps the most serious of these challenges is what has been termed the home - host problem. this can, in all its essence, be described as follows : suppose a bank, which is of marginal importance in its home country, sets up a branch in another country, which turns out to be systemically important for that country. given that the bank is not important in its home country, the home supervisors, who have responsibility for the supervision, might not think that the bank merits close supervision. however, for the host country, which will foot the