It is, of course, conceivable that these imbalances will prove to be relatively short lived. They might be driven by underlying influences that prove to be largely temporary – for example an investment overhang in East Asia, which is eventually worked off, or a purely cyclical divergence in growth rates between major regions, or a short lived spike in world oil prices. But at the moment there is little sign of this – rather the reverse. It is therefore worth reflecting whether today’s international monetary system (IMS) is sufficiently robust to ensure that global imbalances can be financed, contained or corrected through the normal mechanism of market forces, without crisis; or failing that, whether institutional arrangements exist to resolve collective action problems and conflicting priorities without damage to the wider world economy. There are three key features of today’s IMS which are particularly relevant in thinking about this question. The first is financial globalisation which has totally transformed the landscape over the past two decades. Total financial wealth has risen sharply relative to GDP; and investors are now able and willing to hold a higher proportion of their portfolios in external assets. The trend to larger external asset and liabilities has been particularly significant in industrial countries, whose external assets and liabilities relative to output roughly tripled between 1990 and 2003, reaching average levels of more than 200 per cent of GDP. This has two effects. First, the expansion in external balance sheets has relaxed the constraints on the financing of countries’ savings and investment imbalances.

Churchill apparently uttered in 1925 that he “would rather see finance less proud and industry more content.”  4  Currently no exact definition of the “shadow banking system” exists. According to the FSB, it can broadly be described as “credit intermediation involving entities and activities outside the regular banking system” (See Shadow Banking: Strengthening Oversight and Regulation, Recommendations of the Financial Stability Board, 27 October 2011). 5  Financial Stability Board: Key Attributes of Effective Resolution Regimes, 4 November 2011. 6  See Frankfurter Allgemeine Sonntagszeitung, 30 October 2011. 4  BIS central bankers’ speeches  The negative perception of the financial industry often focuses on compensation practices. In fact, commentators have frequently expressed their scepticism on whether the activities of bankers and market players deserve those high wages and bonuses compared to the economic rewards earned in other industries. Already Keynes wondered “… how long will it be necessary to pay City men so entirely out of proportion to what other servants of society commonly receive for performing social services not less useful or difficult?” It is by now well understood that excessive wage and bonus packages in some segments of financial markets have encouraged irresponsible risk-taking. Thus, incentives were set inappropriately. Against this backdrop, it comes as no surprise that the overhaul of compensation practices in the financial sector appears to have dragged the most broadbased public attention among all the components of the financial sector reforms.