This requires that governments are credibly committed to achieving sound fiscal positions as soon as possible and to fully applying the provisions of the Stability and Growth Pact, which provides sufficient flexibility to deal with adverse economic circumstances. Financial stability and supervision Let me now focus on the financial sector and issues related to its regulation and supervision. The synchronised deceleration in activity in all economies has added to the stresses on the financial system in Europe and the euro area. The weakening of economic activity has impaired the quality of bank loans, which has adversely affected banks’ capital positions. As financial institutions continue to deleverage their balance sheets, they reduce their securities holdings and tighten the credit standards applied to new loans. This feeds back to the real economy and in turn constrains the ability of the private sector to service its debts. Therefore, there are emerging signs of a negative feedback loop between the real economy and the banking sector. Initially, the banking system in Europe faced the financial turmoil with solvency positions generally well above regulatory minimum requirements, following several years of strong profitability. However, as the financial market tensions intensified in the autumn of 2008, banks’ balance sheets came under significant pressure, as the values of structured finance products declined further, securitisation activity came to a virtual standstill, credit losses started to rise and income from fees and commissions as well as trading dropped. As a result, the banking sector has been facing significant challenges.

François Villeroy de Galhau: External imbalances - challenges and policy responses Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the "Financial Globalisation" conference, Central Bank of Ireland Symposium, Dublin, 2 February 2018. * * * Accompanying slides Speech elaborated with the contributions of Antoine Berthou, Matthieu Bussière, Laurent Ferrara, Sophie Haincourt, Francesco Pappadà and Julia Schmidt Ladies and Gentlemen, First and foremost, I would like to congratulate the Central Bank of Ireland on the 75th anniversary of its creation, and especially my colleague and friend Governor Philip Lane. I am delighted to be part of this conference dedicated to “Financial Globalisation”, with such distinguished speakers and panellists. I would like to share with you a few thoughts on global current account imbalances and in doing so I will take mostly a policy perspective. The stylised facts are well known so I will be brief [Slide2]. Starting from the late 1990s, the world economy was characterised by very substantial growth in global current account imbalances. Despite a process of rebalancing and short-term movements mainly related to commodity prices that started with the Great Recession in 2008– 09, these imbalances have remained large and persistent. Consequently, net international positions have continued to increase [Slide 3]. The euro area is one of the regions where developments have been particularly striking [Slide 4]. Although countries such as Spain or Italy have rebalanced their current accounts, imbalances still persist, mostly due to the large surpluses of Germany and the Netherlands.