Precautionary reserve accumulation, however legitimate, unavoidably creates side effects for domestic macro policies as well as spillover effects on other countries. Stabilizing the demand for international reserves would therefore bring huge benefits in terms of world welfare. The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis. Hence the current search for international financial safety nets which has taken first stage in the G20. Finally, I would like to say a few words about financial development. Differences between countries, are striking, whether one looks at capital account regimes, the broadness and debt of domestic financial markets or, more generally, their ability to generate locally a sufficient supply of safe and liquid assets. Some of those differences reflect true social choices and preferences that must be respected and accommodated. Others result from deliberate or inadvertent policy‐induced distortions, which should be reduced or eliminated. Domestic financial imperfections and frictions in international capital flows interact with each other to create and amplify imbalances. Ultimately, financial instability is a product of this interaction. Part of this instability shows up in exchange rates movements. It is very unlikely that a global capital market driven by constant frictions between highly different domestic financial systems would lead to a stable – and fundamentals based – equilibrium in foreign exchange markets. Ensuring that our different financial systems interact harmoniously should be a policy priority. Greater compatibility in approaches to financial regulation between advanced and emerging economies is within reach.

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.