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30 March 2010

Christian Noyer: French perspective of financial stability in Europe and the world


The universal model adopted by French banks has weathered the storm relatively well. There needs to be scope for different countries to tailor solutions to their circumstances within a globally agreed framework.

He focused his remarks on the emerging new financial order and addressed the following three important policy questions:
 
1.    How can we make our financial systems more resilient?
 
The challenge, now, is to calibrate and phase in the new Basel framework in a way that does not impede the recovery and does not contradict our macro-economic objectives. In the long run, we want stronger balance sheets in the banking system. In the immediate future, disorderly deleveraging is one of the main downside risks to the recovery process. Striking the right balance, in our actions and in our communication, is important, but difficult. The top-down assessment underway in the context of the Basel committee and the FSB is trying to reach that balance. The broader point here is that the proposed reforms can have significant macroeconomic consequences and these should be factored in when designing and implementing them. France experience is that our banks’ universal model has weathered the storm relatively well. It would be a major paradox to put in place rules which would challenge such universal models. There needs to be scope for different countries to tailor solutions to their circumstances, while at the same time doing so within a globally agreed framework.
 
 
2.    How can we reduce the procyclicality of financial systems?
 
The Basel Committee is working on a very comprehensive approach, which is casted in its “Principles for revision of IAS 39”. Accounting standard setters have also been working hard.
 
I firmly believe that two steps are required going forward. One is that the IASB should follow the principles by the Basel Committee. Another is that the IASB and the FASB should adopt a common methodology regarding provisioning based on expected credit losses. This is a precondition to ensure that the G20 countries have convergent accounting systems.
 
 
3.    How can we best address systemic risk?
 
Various initiatives are currently discussed, including stronger cooperation between supervisors and, more controversially, additional capital charges. They certainly require further thorough analysis It is essential to avoid threshold effects and never forget that risks are continuous in nature, time-varying and state-contingent.
 
He concluded by saying that: “Looking into the future, a macro-prudential policy framework could provide further rooms for manoeuvre. In a nutshell, macro-prudential policy could alleviate some of the constraints associated with the conduct of monetary policy when faced with asset price instability. It might also alleviate the burden on fiscal policy by limiting systemic risks and thus lowering the need for state financial rescue packages. That said, in practice, developing a well-articulated macro-prudential policy framework raises some challenges. I trust the benefits of addressing them are worth the impressive hard work currently underway.”
 




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