yves mersch : the recent sub - prime turbulences and their consequences for luxembourg speech by mr yves mersch, governor of the central bank of luxembourg, at the association of the luxembourg fund industry ( alfi ) spring conference, luxembourg, 19 march 2008. * * * ladies and gentlemen, i want to thank the alfi organisers ’ for inviting me to this conference and share with you some thoughts on the challenging question regarding the recent sub - prime turbulences and their consequences for luxembourg. in fact, several months after the beginning of the financial turbulences as we experience yet another wave shock of a propagating crisis, this conference is now timely appropriate for such an exchange of views in order to assess, in an environment still characterized by vast uncertainties, the impact of the turmoil and identify areas for action to minimize risks and safeguard our financial system. factors underlying contemporaneous financial turbulences diffusion process let me begin by recalling that until recently, the valuation of the impact of the sub - prime turbulences was focused on asset - backed securities, and particularly those backed by us sub - prime mortgages and to some extent leveraged loans. given that the origin of the turbulences is mainly linked to the us mortgage market, some experts were suggesting that the developments linked to this negative shock would remain to a large extent confined to the us economy. however, there are several reasons to wander from this optimistic view. first, the process of globalization in the financial system has advanced more rapidly than in other economic sectors. this is particularly relevant for the money market, bonds and equities markets, otc and derivatives markets. unfortunately, as usual, one aspect of this process is : “ there are no free lunches in the economy ” which means that globalization has also negative effects on financial stability. the outcome of globalization might certainly spread risks but in the same time pave the way for shocks to propagate rapidly among markets and participants. contagion becomes a realistic scenario. secondly, large banking or financial institutions now operate internationally either through branches and subsidiaries or through several segments of the financial system, thereby easing co - movements and exposure to common shocks. a simple measure of the intensity of the geographical scope of foreign activities is the total assets held by banks outside their home country and / or world - wide assets held by intermediaries in their balance sheets. in this respect, the foreign assets held in non – eu countries by the eu key cross - border banking groups ’ account on

. this isn ’ t an argument against title ii resolution. dodd - frank ’ s addition of title ii to the resolution toolkit was an important advance to regulators ’ ability to mitigate financial instability. but we must recognize that title ii by itself it is not sufficient to eliminate the advantages of being perceived as too big to undergo ordinary bankruptcy at the holding company level. moreover, even with a viable title ii resolution regime in place, we must recognize that there still will be disruption to the financial system when a large firm fails. this suggests to me that while a title ii single point of entry resolution is a very useful tool that we should continue to develop, we should view it as more preferable to prevent the failure of the sifi in the first place. in this regard, i think we have made considerable progress by raising capital and liquidity requirements for large, complex firms. in addition to the role of these requirements in reducing the probability of failure, higher capital and liquidity requirements for large, complex firms also have the ancillary benefit of offsetting any residual competitive advantage that might remain for sifis because of how they are likely to be treated under title ii resolution. the comprehensive capital analysis and review ( ccar ) stress tests are important in this regard because they make the capital requirements for large, complex institutions forward looking. what matters is not just the current capital ratio, but also what the capital ratio could be if a stress environment were to materialize. the ccar process is also useful because it focuses on the quality of the bank ’ s capital planning processes. it is not sufficient just to have enough capital ; the bank ’ s management and directors need to be able to evaluate the bank ’ s ongoing capital needs in a thoughtful and thorough manner. bis central bankers ’ speeches the responsibility of the management of a large, complex firm does not end with capital planning. firms ’ managers need to ensure that they can respond to financial or operational weakness of any type by having robust recovery plans that get triggered long before resolution becomes necessary. firms should develop and track metrics that not only identify when they are on the verge of insolvency or default, but also trigger appropriate remediation actions whenever the firm begins to become stressed. these plans should identify actionable options that the firm can take in response to financial weakness that will restore the confidence of the firm ’ s counterparties in the firm without the need for extraordinary official sector support. firms must also have disciplined processes that analyze the