Benoît Coeuré: Unexpected events and the global safety net
Remarks by Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, at the IMF-SNB High-Level Conference on the International Monetary System, Zurich,
8 May 2012.
* * *
I wish to thank Isabel Vansteenkiste, Roswitha Hutter and Andreas Schönenberger for their contributions to these
remarks. I remain solely responsible for the opinions contained herein.
Madam Managing Director, Mr Chairman of the Governing Board, ladies and gentlemen,
I am honoured to speak at this third IMF-SNB high-level conference on the International
Monetary System.
The recent global financial crisis, including the ongoing euro area sovereign debt crisis, has
reemphasised the need for global and coordinated safety nets. Following a decade that was
largely free of crises, in the aftermath of Lehman Brothers collapse, liquidity has dried up
globally and the crisis has spread to, and within, the euro area.
The view that crisis resolution mechanisms were inadequate also prevailed during the Asian
crisis of the 1990s. This is one of the reasons why many emerging market economies have
built up national foreign exchange reserves.
1. Recent innovations to global financial safety nets
The recent crisis has led to substantial progress in the global safety net, including the
following improvements.

The strengthening of the IMF's crisis prevention toolkit through a combination of
increased firepower and more flexible and effective instruments: an increase in IMF
resources through bilateral loans in 2009; an expanded New Arrangements to
Borrow in 2011; an increase in IMF resources in 2012 (during the last Spring
Meetings firm commitments were made to increase the resources made available to
the IMF by over USD 430 billion, in addition to the quota increase under the 2010
reform); the introduction of the Flexible Credit Line and Precautionary Credit Line
(the latter has more recently been replaced by the Precautionary and Liquidity Line,
as recommended by G-20 Leaders in Cannes); and an agreement to double the
amount of IMF quotas, thereby in effect doubling the Fund's permanent resource
base.

The creation and strengthening of the European financial safety nets: the European
Financial Stability Facility and, more recently, the European Stability Mechanism.
The overall European firewall, including the amounts already committed under the
Greek Loan Facility and the European Financial Stability Mechanism amounts to
approximately EUR 800 billion, more than USD 1 trillion, which is being mobilised to
ensure the financial stability of the euro area.

Also, at a regional level outside Europe, progress is ongoing in Asia towards
strengthening the Asian financial safety net, known as the Chiang Mai Initiative
Multilateralisation (CMIM), with the doubling of the CMIM fund to USD 240 billion.
In parallel, important steps have been taken to mitigate the spreading of risks within a highly
interconnected global financial system, making it more resilient to unexpected events:

Systemically important financial institutions, which contribute to the spreading of
risks given their high level of interconnectedness, will be subject to stricter capital
requirements under the Basel III agreement;

Financial infrastructures have been made more resilient. First, the Financial Stability
Board is working on safeguards aimed at promoting global clearing in order to
facilitate access to, and the use of, global clearing houses. Second, regulators and
overseers have just finalised a new set of regulatory principles for financial market
infrastructures aimed at ensuring that any such infrastructures, whether domestic or
global, will be better able to withstand shocks and unforeseen events. Moreover,
regulators and overseers are required to adopt regimes for effective cooperation
with each other.
2. Further improvements to global financial stability nets
While all these measures have undoubtedly made an important contribution to stabilising the
global economy, many observers have argued that gaps remain in the current global
financial safety nets. Existing mechanisms for dealing with crises have been seen as being
deficient in three respects: (i) insufficient amount of financial fire-power; (ii) insufficiently
flexible or fast decision-making and (iii) insufficient coordination with respect to both financing
and surveillance.
These deficiencies have been seen as leading countries to increase their foreign exchange
reserve holdings. For the holders, the great attraction of reserves is that they provide
instantaneous and unconditional liquidity. However, the accumulation of a large stock of
reserves is not only based on precautionary motives. Moreover, even at the level of the
individual holder, there are downsides as reserves come with a quasi-fiscal cost.1
How can we go forward and what can be done differently? Overall, there is widespread
agreement about what a global mechanism should do: (i) reduce the demand for
selfinsurance through reserves accumulation; (ii) provide fast-disbursing financial assistance in
large amounts to the "innocent bystanders"; and (iii) reduce global imbalances.2
However, it is clear that any further improvement will need to strike the right balance
between, on the one hand, efficiently addressing global liquidity shocks and, on the other,
avoiding moral hazard and respecting the mandate of individual institutions.
During the financial crisis, swap lines among major central banks played a pivotal role in
easing the funding pressure of banks. Empirical evidence and anecdotal feedback suggest
that market participants see them as a useful safety net, also in times of limited usage.
While swap agreements have so far been set up with a high level of urgency, it is worth
considering a framework of permanent stand-by swap lines. There are important limitations,
however. Such a framework should not constrain the monetary policy and operational
frameworks of participating central banks.
Even more importantly, the establishment of global financial safety nets should not lead
countries, or financial institutions, to engage in overly risky strategies.
3. Reaping the full benefits of international financial integration
At a deeper level, global financial safety nets cannot be a substitute for a more resilient and
better functioning global financial system. Let me mention a few avenues for reflection.
First, the global financial system should adapt to an increasingly multi-polar international
monetary system. Various initiatives have been taken by Chinese authorities to promote the
renminbi's international role. Its use by market participants has already increased,
particularly as a currency for international trade invoicing and, more recently, as a currency
for international issuance, deposit and selected official investments. Such initiatives should
be increasingly reflected in market infrastructures.
Second, global financial safety nets are temporary instruments - and as we all know,
temporary measures often risk becoming permanent. Measures aimed at addressing liquidity
crises should not weaken policymakers and market participants' incentives to address
financial market malfunctioning in a more durable manner. Let me give an example: in the
euro area, the ECB has extended liquidity to banks faced with temporary funding difficulties,
provided they are financially sound and can post adequate collateral, but the ECB should not
act as a substitute to euro area capital markets on a durable basis. This is all the more
important as shocks to cross-border capital flows, such as sudden stops in capital
movements, have proven to be persistent rather than short-lived. More analytical reflection
on what has made such shocks persistent, and how this can be addressed at a deeper
structural level would therefore be welcome. Today, there are many signs that political
support for international financial integration has weakened in domestic constituencies, and
we are witnessing an increased fragmentation of capital markets at a global and at a regional
level3. This should not be accepted, because we would then lose the benefits of financial
integration. Financial markets, if properly regulated, should regain a key role in allocating
resources and sending price signals to individual players and policymakers.
Third, an interconnected financial system requires a very high level of harmonisation of
financial regulation and cooperation among financial markets and banking supervisors, both
at the international and at the regional level. In the euro area, the ECB has argued in favour
of a single regime for bank resolution and, down the road, in favour of a single European
institution in charge of insuring deposits and winding down failed banks. If one wishes to reap
the benefits of financial integration while delivering financial stability, one must be willing to
give up at least partially national autonomy in financial regulation.
Fourth, one should take into account what Maurice Obstfeld has named the fiscal dimension
of international liquidity4: expanded international lending facilities, including an expanded IMF
or a stronger European framework, cannot remain unconditionally solvent in the absence of
an expanded level of fiscal backup. Global financial safety nets should be backed by sounder
fiscal fundamentals in all major economic areas.
I will now conclude. Global financial safety nets have been successfully strengthened under
the Korean and French G-20 presidencies, and there is room for further improvement. But
measures aimed at addressing liquidity crises should remain temporary, and they should not
weaken the incentives to address financial market malfunctioning in a more durable manner.
Even more importantly, safety nets are there only to address unexpected events. It is the
duty of policymakers to take preventive action against expected disorderly outcomes, such
as those resulting from current account and fiscal imbalances.
Thank you for your attention.