jean - pierre landau : bubbles and macro prudential supervision remarks by mr jean - pierre landau, deputy governor of the bank of france 1, at the joint conference on “ the future of financial regulation ”, organised by the bank of france and the toulouse school of economics ( tse ), paris, 28 january 2009. * * * looking at the future of financial regulation is specially challenging in the current juncture. right in the midst of the crisis, we cannot be sure that we fully understand its ultimate causes, its roots, and its dynamics. furthermore, we do not want to be fighting the last war. we need a vision on how the financial system will evolve in the future, something very difficult to figure out right now. and yet, there is a strong political demand for orientations and measures to fix the problems and make sure they never happen again. this demand is fully legitimate, considering the social costs that the crisis is imposing on our societies, and more specifically, the financial burden taken on by tax payers. i have chosen to present some remarks on bubbles and macro prudential supervision. they should be seen more as a work program than a full - fledged answer to the many questions raised for the future. i will deal with three issues : what are we trying to achieve? what are the main challenges? which are the proper instruments? what are we trying to achieve? here, we have two certainties, and many questions. first, we know for sure that macro prudential supervision is preemptive by nature. it aims to avoid crises because crises are costly. second, a macro approach to financial supervision must encompass the whole financial system as opposed to any specific or individual institution. beyond that, things become more complicated. macrosupervision is often assimilated to preventing systemic risk. these are closely related, but not identical concepts. systemic risk refers to the internal dynamics of the financial system ; whereas, macroprudential supervision is mainly concerned with its interaction with the real economy. occurrence of systemic risk can harm the financial system ; but not always, and not necessarily, the real economy. on the other hand, there are cases where a ( temporarily ) healthy system, with no obvious systemic problems, may behave in a way which in the long run, is very detrimental to the real economy : a typical example being the expansion of balance sheets and credit which, by itself, does not threaten the short term resilience of the system but is potentially

measures would do better than nothing at all. i will stop here, knowing, once again, that i have raised more questions than i have provided answers. but looking at what is happening in this very moment, in our economies, it is necessary to think " out of the box " and look at all possibilities. those in charge of macroeconomic policies are doing just that. those responsible for financial regulation should not hesitate to emulate them, at least partially. thank you for your attention. references aglietta m. at b. mojon ( 2008 ), central banking, in a. berger, ph. molyneux and j. wilson ( eds ), the handbook of banking, oxford university press. alessi l. and c. detken ( 2009 ), “ real time ” early warning indicators for costly boom - bust cycles : a role for global liquidity, european central bank mimeo. allen, f. and d. gale ( 2000 ), bubbles and crises, the economic journal 110, 236 - 55. bernanke b., m. gertler and s. gilchrist ( 1999 ), the financial accelerator in a quantitative business cycle framework, in. j. taylor and m. woodford ( eds ), the handbook of macroeconomics, north holland. blanchard, o. ( 2008 ), the crisis : basic mechanisms, and appropriate policies, mit working paper 09 - 01. borio c. and p. lowe ( 2002 ), asset prices, financial and monetary stability : exploring the nexus, bis working paper 114. borio, claudio ( 2008 ), the macroprudential approach to regulation and supervision : where do we stand? mimeo. holmstrom, b. and j. tirole ( 1997 ), financial intermediation, loanable funds and the real sector. the quarterly journal of economics 110 - 3, 663 - 691. kiyotaki n. and j. moore ( 1997 ), credit cycles, the journal of political economy 105, 21148. meltzer a. ( 2003 ), rational and non rational bubbles, in hunter, kaufman, pomerleano ( eds ), " asset price bubbles ". mit press.