denis beau : opportunities and risks of evolving sources of financing for the economy speech by mr denis beau, first deputy governor of the bank of france, at " les rencontres du financement de l ’ economie ", organized by option finance, paris, 26 march 2019. * * * accompanying slides. ladies and gentlemen, i am very happy to introduce the 6th edition of the rencontres du financement de l ’ economie. as a backdrop to your discussions, i would like to focus on the ongoing changes in the financing of the french and european economies and the related opportunities and risks, both from the point of view of a central bank, the banque de france, and of a supervisor, the acpr, which are responsible for ensuring the stability of our financial system and for contributing to a financing of economic growth that is resilient to shocks and sound. this concern for strong and effective financing of growth is highly topical for three reasons : - the downside risks to the euro area ’ s outlook for expansion have increased in recent months, – the digital revolution has started to spread widely across our economies, offering opportunities and gains but also raising threats for those who are unable to adjust, – the predominance of bank lending, which accounts for 60 % of corporate debt in france [ slide 1 ]. the remaining 40 % stems from market financing, which is the exclusive preserve of large enterprises. this situation is not unique to france. it is quite widespread in europe, in contrast with what prevails in the united states. already, several factors, such as the search for yield driven by a low interest rate environment, new regulatory constraints on the banking system, and digitalisation, are changing the way in which financing is designed, produced, distributed and managed. this transformation is leading to a more diversified financing structure for our economies. is this diversification desirable? is this diversification sufficient? 1. a desirable diversification of financing modes to spur growth and innovation, which must be further supported my answer to the first question is yes because too strong a reliance on bank financing may constitute a source of vulnerability for business development in the event of a shock affecting the banking system. however, the relatively slow pace of development of this diversification shows that it is not so simple to achieve, and that it should be further encouraged. a. in the short term, the efforts made to adapt the regulatory framework and standardise the alternative sources of financing to bank lending should

quickly. buying in the secondary market also helps enhance the goc bond market ’ s functioning and liquidity. it gives participants more regular opportunities to trade and see pricing points for off - the - run securities that are less liquid than on - therun bonds. when we do become a regular buyer in these markets again, a couple of key principles will guide us to help ensure that our presence leans toward enhancing market functioning. first and foremost, we want to limit the market impact of our purchase operations. our bond purchase operations, for example, will be pricesensitive, and we won ’ t necessarily buy everything that dealers offer to us. and second, we will always aim to be as transparent and predictable as possible. for example, we will publish calls for tender ahead of our operations, as well as quarterly purchase schedules. so now you know what comes next once we ’ ve finished qt. where do recent repo market pressures fit? before i conclude, let me also take this opportunity to say a few words about the recent pressures in repo markets and how they fit into all this. i want to be clear that we will not be ending qt out of any concern about the functioning of repo markets. our assessment is that, for the most part, other factors are causing these pressures. i also want to be very clear that the pressures in repo markets are not a reflection or indication of broader financial system stress. last year, our analysis determined that upward pressure in repo markets was being caused primarily by positioning in bond and futures markets, largely by - 9hedge funds. 5 through our more recent monitoring and discussions, we can see that hedge fund activity and positioning continue to contribute to higher funding requirements sourced in the repo market. these have led to upward pressure on repo market rates — along with other factors, such as the transition to a one - day settlement period for trades, also known as t + 1 settlement. 6 we ’ ve also seen greater upward pressure on rates in overnight repo markets around regulatory reporting dates, such as at year - end or quarter - end for banks. this happens in many other major jurisdictions as well. 7 repo trading increases the size of a bank ’ s balance sheet and, in turn, its regulatory capital requirements. so as reporting dates approach, banks try to reduce their balance sheet to satisfy regulatory requirements. this tends to make them less willing to conduct repo transactions with clients and cash desks, due to the