The monetary and financial world is becoming increasingly “multipolar”. While the current system comprises three currency blocs, at least one (the Chinese RMB) and may be other additional systemic currencies will emerge in the future.   Second, those participants are more diverse from the point of view of their economic structure, their demography, their level of development, and, more importantly, their social choices and preferences. For instance, different saving rates may be seen as resulting from divergent time preferences. Likewise, asymmetries in financial  BIS Review 120/2010  1  development may, to some extent, reflect different choices and tradeoffs between efficiency and stability in the organisation of capital markets and the architecture of financial systems.   Finally, linkages between economies, whether through trade, capital or more intangible “confidence” channels are continuously getting stronger as witnessed by the speed and amplitude of contagion of economic and financial shocks during the last eighteen months, which took everybody by surprise. Pending some economic catastrophe, these characteristics will persist over time. A large number of different countries, with different preferences, will permanently be linked and interdependent through active, but imperfect capital markets. Any future international architecture must be compatible with those basic features of today’s world which, prima facie, create the potential for more complexity and, maybe, instability. Therefore, when discussing international monetary arrangements, one must try and take a different view, encompassing all aspects of the financial interrelationships between nations.

Governor Zhu suggested that the role and status of the SDR be enhanced, with the long term objective of creating a “super reserve” currency. However, the Triffin dilemma goes back to a period when international capital markets were poorly developed. By then, international liquidity was limited to instruments used to settle payments between official monetary authorities. It was represented by claims on such official  BIS Review 120/2010  3  entities. By contrast, in today’s world, most international liquidity is privately provided and represented by claims on private institutions. Interbank markets play a crucial role in this process. The more capital markets become integrated at the short end, the more international liquidity is provided by the private sector. As a consequence, there is a strong continuity and complementarities between domestic and international liquidity. Both depend on the willingness of counterparties to extend credit to each other. Both are subject to aggregate supply and demand shocks with sudden shifts in risk aversion or liquidity preference. Both result from leveraging and deleveraging by private institutions (Adrian and Shin, 2008). When markets seize, counterparty risk is perceived as excessive, uncertainty settles in, financial institutions deleverage their positions towards non residents, and then international liquidity dries up and disappears. When a shock occurs, public provision of liquidity has to substitute to private provision. In a domestic context, this is the function of the lender of last resort. But when the shortage is about foreign currency liquidity, this role has to be played by foreign exchange reserves.