On the contrary, new barriers could be erected either in the form of capital controls or through national regulations forcing financial  BIS Review 76/2010  11  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 and in percentage of world GDP. This scenario may be seen as the only realistic response to increased diversity in a multipolar world. Such an evolution could also be defended on the ground that the assumed benefits of financial harmonization and integration have not really materialized (Rodrik et al. 2008). Furthermore, the crisis has shown that no financial system can claim to be intrinsically superior and countries could feel justified in adopting and promoting their own models. The systemic consequences, however, are not clear. In such a world, current account imbalances would be heavily influenced by public actions and policies. Regulatory competition would dominate the localization of financial activities and the allocation of savings. In the absence of some “rules of the game”, tensions would naturally arise between countries, most likely through conflicts about exchange rate regimes and policies. An opposite scenario would see 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.

  the Bretton Woods, system 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. All these conventions were enforced through IMF surveillance and were supported by IMF facilities  BIS Review 76/2010  1  With the generalisation of flexible exchange rate regimes, and the ensuing changes in the IMF articles, the normative approach to the international monetary system was somehow weakened. Capital account liberalisation led to entrust international financial markets with the “disciplining” function. When it became apparent that the discipline would not be gradual and progressive, but, instead, often lead to abrupt capital flows reversal and crisis, the international community attempted to strengthen the IMF surveillance and develop its facilities so as to pre-empt such shocks and make them more manageable. That is, basically, where we are today. Everything must be done to ensure that IMF surveillance works. But, like any “disciplinary” approach, it meets with three essential difficulties:   first, diverging interests between countries. At any single point in time, conflicts may arise as to how much adjustment is needed and by whom. Situations when all national policies naturally point in the same direction – such as in the first quarter of 2009 – are very exceptional.   second, enforcement problems : the IMF has naturally more leverage on countries that need its help than on others.