##ned securitization. conduits, especially sivs, were not built to absorb shocks. their relationships with sponsor banks are sometimes very ambiguous. there may be a gap between the legal commitments taken by the banks through liquidity support and credit enhancements, and the “ true ” level of responsibility they felt obliged to take to protect their reputation. potential consequences for the economy financial turbulences may affect the real economy through several channels. • there is, obviously, a potential effect on confidence. we are currently seeing deterioration in business and consumer surveys in the euro area, although from very high levels. this may put a question mark over our hopes that europe could " decouple " its cyclical evolution from the evolution of financial markets and uncertainties in the us outlook. • most of the impact, however, will depend on how credit markets will evolve in the period to come. while some sectors – such as hedge funds – seem to have held up well, the increased turbulence of recent weeks has partly reversed the improvements in market dynamics seen in late september and in october. funding uncertainties around year - end maintain inter - bank markets under pressure. • some tightening of financing conditions has already occurred through stricter lending standards and decreased credit availability for the weakest segments of the market. the sectors more concerned have been household's non - conforming mortgage loans ( jumbo loans, subprime loans … ). • for the future, there will be pressures on banks balance sheets and we must watch carefully for signs of quantitative restraint on credit distribution. there are talks, in some countries, of " capital shortages " in big financial institutions. we have absolutely no signs of this in france. but, in all countries, banks have been ( or will be ) exposed to a triple shock : unwanted expansion of their balance sheets through reintermediation ; higher cost of capital as a consequence of the decrease in share prices ; and, finally, a deterioration in the quality of their assets if the credit cycle turns downward or valuation problems appear for some securities ( all this, according to basel ii, would mobilize additional capital ). tighter credit conditions might be desirable. repricing of risky assets, better risk compensation and more attractive yields may ease some of the restrictions and bring in new investors into the markets. however, quantitative constraints on credit distribution could be very damaging – especially if corporate bond issuances were to stay, as they are now, extremely low. challenges for central banks the

christian noyer : some thoughts on current financial turbulences speech by mr christian noyer, governor of the bank of france, at the euro fixed income forum, paris, 4 december 2007. * * * these are difficult times for policy makers. financial turmoil has created macro economic uncertainties. events are still unfolding. in those circumstances, i thought best to have a look at the dynamics driving recent turbulences ; then describe potential consequences for the economy ; finally make remarks on challenges for central banks and best ways to preserve and restore international financial stability. the dynamics of the crisis • i will start with a paradox. by any measure, we are facing a huge shock in financial markets. spreads in some segments of credit markets have widened with unprecedented speed and volatility. even more significantly, interbank markets in large industrial countries have been severely disrupted, for the first time in fifty years, more disrupted in fact, and for a longer period, than after september 11, 2001. • and yet, the losses themselves, while significant and spectacular for some institutions, would not seem to pose a major risk to the health of the financial system. current median estimates put the direct cost of subprime defaults around 250 billions usd. this is a little less than one year of profits for the 40 major financial institutions in the world. most notably, the turbulences occurred in a very favorable macro economic environment. why is there such a disproportion between the cause and the effect? at the aggregate level, most observers – including the banque de france – would point to a prolonged period of excessive risk taking in credit markets fueled by liquidity expansion at the world level. this was most apparent in the strong developments of lbos, mostly financed through leveraged ( i. e. with weak covenants ) loans. according to this interpretation, we may be witnessing the burst of a credit bubble. but there is also a deeper, more structural, element to the current turmoil. this crisis is the first in a disintermediated credit world. while, previously, loans were originated by banks, kept on their balance - sheet and monitored for the entire life of the loan, the process is to a large extent dissociated today : the loan is originated by a first entity, then bundled together with other loans as a structured product by another entity, then sold to final investors. these developments were expected to bring important benefits to the financial system and the broader economy : o as part