as you know, we have taken a very neutral stance on this issue and neither encouraged or discouraged the use of the euro as a reserve currency. in fact, the euro is increasingly used in international transactions and accepted for payments ( including retail ones ) in many countries – as european tourists can experience every day. recently, the eurozone seems to exert a stronger influence on global monetary conditions. for the first time in many decades, long - term rates in europe have significantly decoupled from those of the us. also, there is some evidence of “ reverse causality ” with euro long term rates increasingly impacting us rates, creating new channels for monetary spillovers and feedbacks. however, the euro is not yet widely used as a unit of account : most global transactions – especially in commodities – are denominated in dollar. a majority of new securities issuances are also denominated in dollars. new global currencies? as the geography of the world economy changes, so will the shape of the international monetary system. over the last two decades, china has grown into one of the two largest economies in the world. at the same time, authorities are constantly announcing new steps to increase the renminbi ( rmb ) convertibility and develop its use in international transactions. it is therefore natural to wonder whether the rmb will emerge as a major international currency in the foreseeable future. in line with my introductory remarks, i will refrain from any geopolitical speculation on this question and present a few technical – and personal – remarks on the nature of a global currency. what does it take to become a reserve currency? it is generally assumed that this status brings important privileges, some of them “ exorbitant ”. it is also forgotten that it comes with significant obligations. first, being a reserve asset means that the currency enjoys full and unconditional capital account convertibility towards both residents and non - residents. the economy is therefore fully integrated with global capital markets and fully exposed to external financial shocks. this creates a very demanding environment. convertibility essentially means that you accept the judgment of “ foreigners ” as to the true value and purchasing power of your domestic currency. although it is not often perceived as such, it entails some abandonment of sovereignty, through the loss of some independence in monetary policy. this is the famous “ mundell trilemma ” : no country can simultaneously have a fixed exchange rate, full capital bis central bankers ’ speeches convertibility

##s are really mortgages extended to those who are, to put it bluntly and simply, not credit worthy. and as mortgages are assets on the books of the lenders, subprime mortgages are really sub - standard financial assets. second, when property prices were rising and there was a clear expectation that they would continue to rise, those who were responsible for lending took comfort from the possibility of second mortgages providing borrowers with funding for servicing the first, sub - prime mortgages, in the event that the borrowers encounter difficulties in their mortgage payments. indeed, when property prices were on a rising trend, the delinquency rate of sub - prime mortgages was quite low and sub - standard financial assets were considered as good quality assets. third, through securitisation the lender was able to off - load the sub - standard financial assets to third parties quickly. this eroded the incentive of the lender to carefully assess the ability of the borrower to service the sub - prime mortgage. instead, the lender was more interested in accelerating the production line in this “ originate and distribute ” model, earning a fee and providing other customer services. ironically, therefore, financial innovation in the form of securitisation and credit risk transfer to those in a better position to assume risks, while it should theoretically enhance financial efficiency and promote financial stability, has led to distortions in the incentives of financial intermediaries, eroded credit standards and undermined financial stability. fourth, the powers of financial innovation continued to work after the sub - standard financial assets got into the hands of the third parties. slicing, mixing and re - packaging came in and the sub - prime mortgages were buried in very complex financial arrangements to become what are nicely described as collateralised debt obligations ( cdo ), or generally as structured products. fifth, the complexity of many of these structured products and the risks involved were simply beyond the comprehension of the ordinary investors and perhaps even the professional investors who did not have the time to look into the fine details of the financial arrangements. and so the rating agencies were relied upon, for a fee, to provide an objective view, or rather a rating that was as objective as it could be under the circumstances. but we all noticed the instability of these ratings, some falling from aaa to junk within a short time span, which threw doubt not so much on the integrity of the rating agencies – they are respectable organisations essential to the functioning of the financial system