Christian Noyer: International financial stability Keynote address by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the International ParisEuroplace Financial Forum, Tokyo, 29 November 2010. *  *  *  Although the financial crisis originated in one country, it quickly became apparent that it was truly global in nature. It brought home a simple message: capital markets are closely interlinked around the world and, thus, domestic and international financial stability cannot be dissociated. They really are two sides of the same coin. Today, I would like to reflect upon international financial stability. The views expressed are my own but, as you know, France now holds the Presidency of the G20 and I will try to put my own thoughts in that perspective. International financial instability has increased over the last period. Whether we look at exchange rates, international capital flows or commodity prices, signs abound of more intense volatility. Volatility may not necessarily be a bad thing. To some extent, it is a sign of well functioning financial markets. Movements in asset prices help the financial system to serve as a cushion, an “absorber” for exogenous economic shocks. This is welfare improving since it avoids, or mitigates, adjustment in more rigid goods or labor markets. Volatility may also be driven by fundamentals. For instance, capital inflows to emerging economies partly reflect very favorable long term growth prospects and high potential returns on capital.

Market participants, however, are exposed to greater financial risks than before due to the appearance of more complex and dynamic transactions that have substantially increased uncertainties in the marketplace. Furthermore, there exists more universal banking today than in the past. Advances in IT technology, capital movements and geographical extension of banking business have become the new engines of global integration. The increased awareness of risk concept, together with the higher living standards and rapid technological development, has led to substantial change in the hedging strategies. It certainly appears to be the case that the emergence of new markets, such as highly liquid foreign exchange and derivative markets, has provided essential financial transactions and contributed to the rapid expansion of global finance. However, the speculative uses of the new financial instruments in these markets have increased the diversity of risks. Consequently, the availability of a wider range of financial instruments and deeper financial markets has enabled banks, non-bank financial institutions, institutional investors and companies to better manage their risks by using complex hedging strategies. II. Globalization  In this part of my speech, I will concentrate on the opportunities and challenges brought by globalization. (A)  Opportunities and challenges  We define globalization as more integrated financial markets, economies and trade, higher factor mobility, and spectacular change in information technology leading to the spread of knowledge  1  BIS Review 79/2000  throughout the world.