Andrew G Haldane: Global imbalances in retrospect and prospect Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Global Financial Forum, Chatham House Conference on “The New Global Economic Order”, London, 3 November 2010. *  *  *  I am grateful to Charlie Bean, Martin Brooke, Oliver Bush, Richard Davies, Katie Farrant, Samuel Knott, William Speller, Gregory Thwaites, Iain de Weymarn, Tomasz Wieladek, Michelle Wright and Gabriele Zinna for comments and contributions. Global imbalances are colossal. At their high-water mark in 2006, imbalances of the G7 economies totalled around 5% of GDP. Like Colossus, global imbalances straddle many of today’s most important global public policy issues. These include the architecture of the international monetary system, the future of the international trading system and the design of the international financial system. These are high stakes. This paper assembles some facts from the past on global imbalances. More speculatively, it also assesses some of the factors shaping the course of imbalances in the future. Those medium-term forces suggest that imbalances may get worse before they get better. If so, this global financial fault-line could cause further tremors to the international monetary, trading and financial system in the period ahead, the like of which we are currently experiencing. Global imbalances – past Global imbalances are a natural by-product of free trade in goods, services and capital. In others words, capital flows are a necessary ingredient of trade and capital liberalisation. In that sense, they are good cholesterol.

As stewards of financial institutions, boards and senior management bear the responsibility of ensuring that regulatory policies translate into operational practices. Rules must be embedded into the day-to-day business and operations that suit an institution’s business environment. Good corporate governance will not emerge from mere compliance with regulatory checklists as each financial institution is different and unique. With careful introspection, each individual institution needs to continuously reflect on whether its governance arrangements, practices and business models are effective and still relevant. In doing so, each institution must continuously assess and take into consideration the nature, scope and scale of its business. In some instances, conventional and proven governance approaches might not work anymore and therefore new thinking and methodologies are required. Real change cannot be dictated by regulation alone. This is neither sustainable nor possible. Instead, principles of good governance need to be deeply woven into the fabric – or DNA – of an organisation. Directors and senior management, as leaders of financial institutions, are in  BIS central bankers’ speeches  3  the position to foster a positive organisational culture. The board and senior management should work in harmony to cultivate an environment which appropriately balances between performance and stability. For instance, the structuring of remuneration schemes should reward long-term performance and encourage sound risk-taking. There should always be a balance between financial innovation and excessive risk-taking. While an equilibrium is not easy to attain, it cannot be achieved accidentally.