The policy mix must be well-balanced at the international as well as the domestic levels. Placing too heavy a burden on monetary policy in terms of achieving the main economic and financial balances is detrimental to its effectiveness. In particular, it diminishes its ability to maintain and consolidate financial market stability. This concern underlies the implementation of the Growth and Stability Pact in Economic and Monetary Union. By obliging fiscal policies to commit to stability, the pact allows the fiscal buffers to fulfil their role as stabilisers. Indeed, by their information and expectations, investors can penalise  4  BIS Review 41/2001  imbalances affecting the main world economies or diverging developments in different countries. To reduce this constraint, economic and monetary policies must be harmonised at the international level in order to achieve more balanced international financial relations. B. Financial authorities have to soften as much as possible some of the side-effects of the new financial market features. Let us first consider a few possible improvements as regards credit cycles: •  Provisioning standards should allow banks’ lending to be less pro-cyclical. As a general rule, provisioning standards require improvements so that provisions better reflect the actual inherent credit risk of loan portfolios. They should also be improved for macroeconomic purposes, so that banks’ lending behaviour becomes less pro-cyclical. These objectives could be achieved through a more forward-looking provisioning, whereby provisions are set up earlier – that is to say, in a perfect world, as soon as a loan is granted.

Jean-Claude Trichet: Preserving monetary and financial stability in an increasingly globalised world Keynote address by Mr Jean-Claude Trichet, Governor of the Banque de France, at the OECD Forum 2001 on Sustainable Development and the New Economy, Paris, 16 May 2001. *  *  *  Ladies and Gentlemen, It is a great pleasure for me to be invited today to this OECD Forum to talk about preserving monetary and financial stability in an increasingly globalised world. One should keep in mind that financial globalisation has brought about improved macroeconomic efficiency. As you know, the globalisation of the world economy and the development of financial markets were driven by two key factors: •  firstly, financial deregulation – reinforced in Europe by the setting up of the single market and subsequently of the Economic and Monetary Union – which liberalised capital flows and enhanced competition among financial sectors;  •  and secondly, technical and financial innovation, which simultaneously paved the way for the creation of financial markets that are deep, liquid and interconnected. What is interesting to stress is that the interaction of free capital movements within interconnected markets, increasing integration of market segments and hedging opportunities provided by new financial instruments have allowed a better fit between the financing capacities and borrowing requirements of both governments, households and companies. The use of market interest rates, which represent the markets’ consensus on the risk incurred at a moment, as a driving force is fully beneficial to an efficient allocation of capital.