This traditional cost / benefit analysis seems less and less able, however, to account for the true behavior of reserve holders. During the crisis, foreign exchange reserves were used as a tool for internal – as well as external – financial stability. National Central Banks, especially in Latin America, acted as dollar lenders of last resort to their domestic banks. (Obstfeld et al. 2009). This function will develop in the future. Financial openness and integration means that domestic banks will engage more and more into foreign currency operations. In turn, the expansion of their international balance sheets will increase the potential demand for liquidity support in case of shocks. This trend should be accepted as a normal consequence of open  4  BIS Review 120/2010  capital markets and international banking, together with the predominance of a very limited number of currencies in international finance. It is bound to impact the demand for reserves and increase the need for self insurance. One characteristic of liquidity shocks is that the net demand for liquidity may become almost infinite. Ex ante, no buffer is ever big enough. No amount of reserves will fully protect a financially open economy against a systemic shock. It is noticeable that countries, such as Korea, which possessed very important amounts of reserves prior to the crisis and has a flexible exchange rate regime, nevertheless felt the need to enter into currency swaps with the Federal Reserve. In a sense, countries face the same dilemma as private institutions.

Jean-Pierre Landau: International monetary arrangements Speech by Mr Jean-Pierre Landau, Second Deputy Governor of the Bank of France, before the Reinventing Bretton Woods Committee, Beijing, 6 September 2010. *  *  *  Opinions expressed are solely mine and do not represent the views of Banque de France or the Eurosystem. International financial and monetary arrangements are currently extensively debated. For many countries, both advanced and emerging, the crisis has shown that there is a close link between internal and international financial stability. In addition, rebalancing of the world economy stands at the forefront of the G20 policy agenda and there is a perception it may be difficult to achieve under current arrangements. According to an apt definition, an international monetary system consists of (i) exchange rate arrangements; (ii) capital flows; and (iii) a collection of institutions, rules, and conventions that govern its operation (Carney, 2009). Explicit or implicit “rules of the games” form the backbone of such a system. This is an ambitious approach and it may seem too normative to some. But it has a long history, starting with the gold standard, from which the phrase “rules of the games” originated. The Bretton Woods system itself was built around an elaborate framework of rules, disciplines and support mechanisms aimed at ensuring convertibility for the current account – but, crucially, not the capital account –, together with fixed but adjustable exchange rates. With the generalisation of flexible exchange rate regimes, the normative approach to the international monetary system was somehow weakened.