to a new net creation of specific risk provisions, some individual banks have released previously created so called general provisions, thus allowing for an improvement in their end - of - year results. general provisions have here played the role of reserve buffer. recent discussions on the implementation of new rules and regulations in the banking sector will certainly pose challenges and call for new risk mitigation techniques. i will only mention as examples the discussion in relation to the introduction of the ias accounting standards for the banking sector, including full fair value accounting for the banking book, as well as the information disclosure of the quarterly results, which will most likely increase the short term volatility of the banking results ; the future introduction of the new capital adequacy rules which risks having a negative pro - cyclical impact of the loan - loss provisions on the financial sector. the concept of dynamic provisioning could be a step in the right direction in this context. if we disregard in the banks ’ accounts from the results the miscellaneous income, including capital gains, the picture of the banking sector appears even more alarming. banks ’ income before provisions and taxes would show a decrease of 7 % in 2002 instead of an increase of 6 % ; their net results would be almost 30 % lower than the year before, instead of a modest decline of 6 %. amid these adverse developments, banks have succeeded in containing their costs. administrative costs have been reduced by 6 % over the year under review, while staff costs have only slightly increased by 3 %. possible further cost reductions into the year 2003 are however not unlimited. the cost / income ratio of luxembourg banks stands at 40 % at the end of 2002, down from 41 % in 2001, and is already more efficient than for most other european banks. it compares indeed to an average ratio of 66 % eu - wide in 2001. an important part of potential further cost cuts on the european level is most probably already incorporated in the luxembourg results. other gauges of banking activity are not encouraging either. a look at the banks ’ aggregated balance sheet shows a decrease of 58, 4 billion euros, a decrease of 8 % compared to 2001 and contrasting with a continuous growth over the past twenty years. even employment, typically a lagged indicator, decreased by close to 600 units in 2002, or 2 % in relative terms, and the total number of employees stands at 23 300 at the end of december 2002. this reduction is however attenuated by an increase of about 200 staff members within

outlook hinges on developments in the economic and financial markets environment. we are facing a quite unusual synchronized slowdown in the world ’ s three major economies, europe, the united states and japan. today, the words that can appropriately characterize the future outlook are uncertainty, fragility and volatility in relation to the timing and pace of economic recovery overshadowed by geopolitical tensions. we should remain vigilant. 2. issues of financial stability the combination of the central banks ’ role in issuing money and the participation of commercial banks in the money creation process results in the involvement of central banks in financial stability. commercial banks ’ money represents a large share of the total money stock, and its value is dependent on the creditworthiness of commercial banks. the concern of central banks for the orderly functioning and stability of the banking system arises hence from the need to maintain the public good of a stable means of payment. banking is plagued by inherent instability. the banking sector functions as a closely inter - linked system, which is prone to contagion risks through the payment system and the interbank markets. central banks, as issuer of money, need, like any other sound managed financial institution, to monitor the quality of their counterparts. this is an addition to their role as ultimate provider of a safe settlement medium and of liquidity to ensure the orderly functioning of the financial system. price stability supports sound investment and sustainable growth, which in turn is conducive to financial stability. since the fragility of banks and their counterparts tend to be more frequent when prices are unstable, the pursuit of price stability can be seen as a crucial contribution to financial stability. day - to - day monetary policy tools are to a significant extend associated with financial stability considerations. lending - and deposit facilities at the central bank and fine tuning money market operations are primarily aimed at providing sufficient liquidity to the money market and facilitating an orderly liquidity management by individual banks. a specific question relates to the relationship between asset prices, financial stability and monetary policy. how should a central bank position itself with regard to price changes in assets? asset price targeting beyond the pursuit of price stability could set conflicting signals. one could certainly question central banks ’ superior ability for asset price targeting ; different asset classes could require conflicting action. based on an indicator for maintaining price stability over the medium term, the present ecb strategy takes note of movements of exchange rates, stock prices and properties prices. the mission attributed to the escb in the field