christian noyer : international financial stability speech by mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, at the lloyd ’ s city dinner, london, 29 september 2010. * * * although the financial crisis originated in one country, it quickly became apparent that it was truly global in nature, both in terms of its mechanisms and its consequences. it brought home a simple message : capital markets are closely interlinked around the world and, thus, domestic and international financial stability cannot be dissociated. today, i would like to reflect upon international financial stability : what it means, whether or not it should be pursued as a major policy objective ; and finally, what actions should be taken and which instruments should be employed. the views expressed are my own and do not represent an official position. however, as you know, next year france will hold the presidency of the g20 and, bearing this in mind, i will try and offer my own thoughts. international financial stability : what does it mean? over the last decades increased financial integration has led to greater reallocation of savings across countries. the expansion of gross and net capital flows has been spectacular. as a result current account imbalances have increased both in amplitude and durability. in fact, they have become a permanent feature of our economic environment. many analysts would argue that these imbalances are the ultimate cause of the crisis. i would not go that far. but it seems reasonable to assume that some common causes lay behind both the crisis and the imbalances themselves. international capital flows have made countries increasingly interconnected and interdependent. at the same time, major transformations have occurred over the past decade in our international environment. the monetary and financial system has become truly “ multipolar ”. an increasing number of countries, both developed and emerging, have become active participants in the global capital market. while there are currently three main currency blocs, at least one ( the chinese rmb ) and maybe other additional systemic currencies will emerge in the future. participants in the international financial system are increasingly diverse from the point of view of their economic structure, their demography, their level of development, and, more importantly, their social choices and preferences. for instance, different saving rates may be seen as resulting from divergent time preferences. likewise, diversity in capital account regimes may, to some extent, reflect different choices and tradeoffs

between efficiency and stability in the financial infrastructure. these characteristics will most likely persist over time. a large number of different countries, with different preferences, will permanently be linked and interdependent through growing and active international capital markets. it is not clear, at this stage, how the coexistence and interaction between national financial systems worldwide will finally play out. looking beyond short ‐ term volatility, the real question is whether this architecture will be conducive to the efficient and stable allocation of capital over the long run ; or whether, on the contrary, it will lead to an accumulation of imbalances and recurrent bouts of instability. an optimistic view can be found in the “ bretton woods ii ” theory, which posits that the pattern of international capital flows results from a mutually beneficial equilibrium between two groups of countries. on the one hand, emerging economies follow an export ‐ led development strategy and seek to prevent appreciation of their real exchange rates by constant foreign exchange intervention ( together with capital controls ). as a consequence, they accept to accumulate increasing stocks of liquid assets denominated in dollars. on the other hand, the united states is happy to receive both reserve inflows to finance its deficits and cheap imports to fuel their demand for consumption goods. such equilibrium is stable by virtue of the mutual benefits it brings to both groups. moreover, the longer it lasts, the more impossible it is to change since both groups become mutually dependant through the stock of claims and debts they have reciprocally accumulated. this “ financial balance of terror ” is supposed to keep the system in place for a long period of time. a more recent, and pessimistic, explanation is provided by the “ asset shortage ” theory according to which the world has a shortage of liquid and riskless assets. moreover, the supply of these assets is asymmetrically distributed between regions, with the us providing a large chunk of the total. hence, there is a structural excess demand for dollar ‐ denominated securities, which sustains permanent capital inflows from emerging economies into the united states. this approach has deep implications. it shows why, for more than a decade now, capital has been continuously flowing “ uphill ”, i. e. from poor to rich countries, with current account surpluses in emerging economies reflected in growing deficits in the united states. it also helps to explain why asymmetries in financial development between countries generate both payment imbalance