There may be a gap between the legal commitments taken by the banks through liquidity support and credit enhancements, and the “true” level of responsibility they felt obliged to take to protect their reputation. Potential consequences for the economy Financial turbulences may affect the real economy through several channels. •  There is, obviously, a potential effect on confidence. We are currently seeing deterioration in business and consumer surveys in the Euro area, although from very high levels. This may put a question mark over our hopes that Europe could "decouple" its cyclical evolution from the evolution of financial markets and uncertainties in the US outlook. •  Most of the impact, however, will depend on how credit markets will evolve in the period to come. While some sectors – such as hedge funds – seem to have held up well, the increased turbulence of recent weeks has partly reversed the improvements in market dynamics seen in late September and in October. Funding uncertainties around year-end maintain inter-bank markets under pressure. •  Some tightening of financing conditions has already occurred through stricter lending standards and decreased credit availability for the weakest segments of the market. The sectors more concerned have been household's non-conforming mortgage loans (jumbo loans, subprime loans…). 2  BIS Review 144/2007  •  For the future, there will be pressures on Banks balance sheets and we must watch carefully for signs of quantitative restraint on credit distribution. There are talks, in some countries, of "capital shortages" in big financial institutions.

We have absolutely no signs of this in France. But, in all countries, banks have been (or will be) exposed to a triple shock: unwanted expansion of their balance sheets through reintermediation; higher cost of capital as a consequence of the decrease in share prices; and, finally, a deterioration in the quality of their assets if the credit cycle turns downward or valuation problems appear for some securities (all this, according to Basel II, would mobilize additional capital). Tighter credit conditions might be desirable. Repricing of risky assets, better risk compensation and more attractive yields may ease some of the restrictions and bring in new investors into the markets. However, quantitative constraints on credit distribution could be very damaging – especially if corporate bond issuances were to stay, as they are now, extremely low. Challenges for central banks The most immediate was to restore the orderly functioning of the interbank market. This has been done by providing liquidity to the market. Actions by Central banks have raised some concerns about so called "moral hazard": would liquidity provision lead to "bailing out speculators"? In fact, we have responded to an exogenous and general increase in demand for Central Bank money and ensured smooth management of liquidity conditions. No more, no less. This is the job of Central Banks. Clearly, as experience in some countries has shown, it is not an easy one and we may have to think, in the future, about our modalities of intervention. I am personally very satisfied with the way we have operated.