Christian Noyer: The G20's current challenges - combining new
regulations and economic growth
Introductory remarks by Mr Christian Noyer, Governor of the Bank of France, at the Paris
EUROPLACE Conference "The G20's current challenges: combining new regulations and
economic growth", Paris, 5-6 July 2011.
* * *
Ladies and Gentlemen,
It is my great pleasure to take part in this Paris-Europlace conference and I warmly thank the
organizers for their kind invitation. I am very glad to introduce this roundtable dedicated to a
major challenge, regulators and policy makers are facing at the current juncture, that is
ensuring a smooth combination between new regulations and economic growth.
The crisis has taught us that market economies may be intrinsically unstable. And the costs
of this instability are considerable. Whether we look at unemployment, or public debts, it will
take many years to deal with the legacy of those few months where the global financial
system was on the verge of collapse. Long term consequences still need to be assessed,
and, as you know, there are questions about whether the crisis has - or not - permanently
affected the growth potential of advanced economies.
Therefore, curbing the tendency of our economies to alternate phases of booms and busts
and reducing the procyclicality of our financial systems, are legitimate public policy priorities.
Indeed, with a strong impulse from the G20 and the French Presidency, we have embarked
into an ambitious financial reform agenda whose explicit objective is to prevent any
recurrence of such intense episodes of financial turbulence and instability.
On the other hand, growth cannot occur without efficient and developed financial systems to
allocate savings, redistribute risks, and provide liquidity to the economy. There is ample
evidence that financially repressed economies are penalized in terms of investment and
economic growth.
The challenge, therefore, is to find the right balance, as suggested by the title of our session.
Looking at our achievements to date, my sense is that we are definitely moving in the right
direction. But, of course, this is still work in progress: regulators and policymakers are
constantly looking for additional evidence and insights on how to best reconcile stability and
efficiency in the developments of our financial systems.
The thrust of our efforts has been to increase the robustness of financial institutions and
infrastructures. It is not in our power to eliminate financial shocks and volatility. It is our duty
to make sure that they can be absorbed without undue consequences for the institutions
themselves and the whole economy. Building up appropriate cushions was therefore a
priority and a necessity to protect tax payers from the consequences of future turbulences.
First and foremost, a robust system needs strongly capitalized banks. Basel 3 will make
essential contributions in this regard, by increasing both the quantity and quality of banks'
capital.
Second, progress is being made to reduce the vulnerabilities intrinsic to the derivatives
markets. We, regulators, tend to think that clearing and settling those derivatives through
CCCPs will considerably reduce aggregate counterparty risk, limit the contagion channels,
hence strengthening the whole financial system's robustness. I am fully aware that there are
doubts, in some parts of the financial community, on the opportunity of such an evolution.
There are fears it will lead to greater standardization of derivative products and less flexible
markets overall. This is clearly a case, where the optimum trade-off between efficiency and
stability is different according to the market and regulator's point of view. But, of course,
regulators' views are naturally finding their way into legislation, especially on this issue, as
you know, in the United States.
More generally, when any new financial regulations are designed, two polar views were
expressed.
One view is that regulatory reforms will take a significant toll on the economy. The argument
is because they would raise, in this case, the cost of funding for the economy. It is feared that
financial institutions will then pass this cost on to the private sector through an increase in
lending rates or worse abandon certain financing segments. This would in turn have a
negative effect on output growth.
The other polar view is that a more stringent regulation will not have any negative impact on
growth because it would essentially reduce the frequency of crisis, hence improving the long
term performance of the economy.
Both views are well-informed and of interest. They come from fairly different constituencies
and have very different underpinnings. Having studied carefully all the arguments made
during the last months, let me give you my personal sense, at this stage, on the good
regulatory equilibrium.
First, some consequences of the new regulations are difficult to predict and should be
carefully observed. Quantifying precisely the effect of the reforms on the economy is not an
easy task. The phasing-in period of Basel 3 has been specifically designed to be consistent
with the economic recovery and, more generally, to minimize potential adverse
consequences on banks and the macro-economy.
Second, we all know also that any regulation may have unintended consequences. One of
those, of course, is to create incentives for regulatory arbitrage. It is therefore crucial that the
reforms be applied fully and consistently across jurisdictions. It is also important to make
sure that a significant part of financial intermediation does not shift to the unregulated
(shadow) financing sector, as this would not help reduce the likelihood of disruptive financial
crises.
Finally, increasing robustness is a necessary but not sufficient condition to get safer financial
systems. Another important element is to ensure that risk remains at acceptable levels and
carefully managed. This is, so to speak, one specificity of our approach in this country. We
believe in strong and efficient supervision. We don't think that bigger cushions are a
substitute for competent supervisors. We are strong supporters, in our jargon, of the "Pillar 2"
approach, whereby the supervisor is in charge, at any single moment, to check the adequacy
of capital buffers with the effective level of risk in the system. Needless to say, we also
strongly support the development of macro prudential tools allowing authorities to detect and
prevent systemic risks. Given that all economic cycles are not simultaneous, to be fully
efficient, those tools should be set and implemented at each jurisdiction's level and not a
regional one, in order to take into account national cycles and the level of risks of individual
economies.
Overall, I can assure you we are very keen to monitor in real time the economic impact of
financial regulation. For the first time, economic and systemic assessments have been made
of the new projected Basel 3 framework. We will continue to update them permanently. A
good example of our constant vigilance relates to projected liquidity ratios, where the
systemic impact and implications for monetary policies are being thoroughly reviewed at this
time.
***
To conclude, let me emphasize that policy makers are fully aware of possible macro
consequences of regulatory reforms and will be eager to limit the economic costs. Beyond
broad effects on growth, it is also clear that the new regulations should neither derail financial
systems nor favor some particular business models over others.
Yet, there was, and still is, a need to move from a financial world of excessive risk taking and
heavy regulatory arbitrage to a new system of better quality capital and increased risk
capture. An implementation of the Basel III package endorsed by the G20 will provide the
appropriate foundations for such a system, provided that phase-in arrangements are
respected and implementation is coordinated globally.
Thank you for your attention.