jean - paul redouin : risks may be transferred, but they do not disappear! address by mr jean - paul redouin, deputy governor of the bank of france, at the paris europlace, financial forum, stockholm, 29 march 2007. * * * the international financial system is going through an extraordinarily benign phase. the world is enjoying stable inflation and strong and broad - based gdp growth. at the macrofinancial level, corporate profits have been sustained, risk premia have been very thin for a broad set of asset classes, and volatilities remain unusually low. based on these market signals, risks appear very low. do risk premia correctly reflect the risks currently facing the financial system? or is their low level the result of excessive risk appetite on financial markets? indeed, some recent warning signals have reminded us how fragile the current pricing of risk is, and how much it relies on the expectation that an “ ideal scenario ” of strong growth and contained inflation will prevail. in this context, i would like to focus my remarks on a very important structural development : credit risk transfer. basically, the transfer of risks helps to spread them, according to a process i shall call the “ atomisation of risk " ( namely risk being split into elementary particles and then re - packaged ). but do these techniques mean that risks disappear? the breakthrough of crt has gone hand in hand with constant innovation and the emergence of powerful non - bank players. the financial markets are therefore in a state of permanent revolution in which globalisation and disintermediation have made the channels risk can take more complex and affected its traceability. this evolution can bring stability and resilience to the system only under certain conditions. the role of a central banker and supervisor is to list them, to inform the financial community of the systemic aspects of their development and to implement certain key policy measures. 1. crt can improve distribution of risk and stronger resilience to shocks. how? the first benefit is linked to a process of “ atomisation ” of risk. greater risk dispersion among investors may increase the resilience of the financial system in the event of shocks. financial engineering has enabled credit risk to be extracted from banks ’ balance sheets and broken down into portions of risk that are repackaged into portfolio products. this is the essence of securitisation mechanisms : the default of a large issuer has less chance of resulting in the default of its

esigelec - rouen 25 may 2023 digital transformations and financial system turbulence : what lessons for regulators and supervisors? speech by denis beau, first deputy governor introduction [ go to slide 2 ] dear professors, dear students. i am very pleased to have the opportunity of sharing with you some of the lessons that we at the banque de france and the acpr, under our financial stability mandate, have learned from the recent turbulence that has affected the international financial system. this turbulence, which has impacted both traditional financial players in the wake of the svb bankruptcy and players in the " new digital finance " ecosystem in the wake of the ftx bankruptcy, results from the realisation of risks, whose impact has been amplified or whose spread throughout the financial system has been sped up, by digital innovations that are transforming at high speed, or even shaking up, the way in which finance works. while the effect of this turbulence on the financial system as a whole and the real economy seems to be contained for the time being, the impact of digital innovations raises questions as to the regulation and supervision practices of both traditional finance and the emerging digital finance. i propose presenting these questions to you one after the other, together with the answers that i believe to be appropriate. 1. traditional finance put to the test by the digital world : what lessons can be learned from recent bank failures? [ go to slide 3 ] silicon valley bank ( svb ), which was virtually unknown to the general public before its collapse last march, was a - if not the - tech bank and as such had a specific business model, based on two pillars : - its sources of funding were heavily dependent on uninsured deposits, stemming from a highly concentrated customer base of entrepreneurs and venture capitalists in the tech and digital world. - a very high share of these deposits was invested in long - term government bonds, issued by the us federal government or federal agencies, at fixed rates, since these securities are intended to be held for the long term. in 2022, the change in the us economic and financial environment transformed svb's business model into a source of vulnerability to liquidity and interest rate risk. this vulnerability, combined with major failures in the bank's management and governance system, proved fatal. indeed, in this new environment marked by rising interest rates and slowing growth, the cash flow needs of tech companies led them to withdraw a portion of their deposits, causing a liquidity problem for svb, which forced it