Capital markets could go through a process of progressive and partial fragmentation: no significant capital account opening would occur in many parts of the world. Conversely, new barriers could be erected either in the form of “soft” capital controls or through national regulations forcing financial institutions to ring‐fence local pools of capital and liquidity. There would be little convergence in domestic financial systems and regulations. Foreign exchange reserves would keep growing, both in absolute terms and as a percentage of world GDP. This scenario may be seen as the only realistic response to increased diversity in a multipolar world. The systemic consequences, however, are not clear. In such a world,  BIS Review 127/2010  3  current account imbalances would be heavily influenced by public actions and policies. Regulatory competition would determine the location of financial activities and the allocation of savings. In the absence of some “rules of the game”, tensions would naturally arise between countries regarding many aspects of their domestic and international macroeconomic policies. The opposite scenario would involve the progressive opening of all capital accounts, together with some (more or less intensive) convergence in financial systems and regulations. This would allow for the emergence of a unified world capital market, an efficient allocation of savings across countries and a smooth financing of current account imbalances. Experience shows, however, that an open international financial system is not inherently stable and, therefore, very dependent on strong infrastructure. Two elements of such an infrastructure seem especially important.

Christian Noyer: International financial stability Speech 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 Lloyd’s City Dinner, London, 29 September 2010. *  *  *  Although the financial crisis originated in one country, it quickly became apparent that it was truly global in nature, both in terms of its mechanisms and its consequences. It brought home a simple message: capital markets are closely interlinked around the world and, thus, domestic and international financial stability cannot be dissociated. Today, I would like to reflect upon international financial stability: what it means, whether or not it should be pursued as a major policy objective; and finally, what actions should be taken and which instruments should be employed. The views expressed are my own and do not represent an official position. However, as you know, next year France will hold the Presidency of the G20 and, bearing this in mind, I will try and offer my own thoughts. International financial stability: what does it mean? Over the last decades increased financial integration has led to greater reallocation of savings across countries. The expansion of gross and net capital flows has been spectacular. As a result current account imbalances have increased both in amplitude and durability. In fact, they have become a permanent feature of our economic environment. Many analysts would argue that these imbalances are the ultimate cause of the crisis. I would not go that far.