christian noyer : some thoughts on the financial crisis speech by mr christian noyer, governor of the bank of france, at paris - europlace, tokyo, 18 november 2008. * * * ladies and gentlemen, it is a great pleasure for me to be here and share some thoughts on the financial crisis. it is too early to draw all the lessons from recent events in financial markets. it is however vital to start reflecting on the experience of the last few months. even more in periods of tension than in normal times, action and reflection should reinforce one another. it is at the very moment of managing the current crisis that we lay the foundations for the future financial system. having said that, i propose to reflect with you on four topics : • the nature of the financial crisis • the policies implemented to address it • the macroeconomic outlook • the outlook for financial regulation the nature of the crisis the crisis first emerged as a liquidity crisis. the first symptoms appeared at the beginning of august 2007 when serious disruptions surfaced on the inter - bank market. more than a year later, tensions on money markets are still with us. recent weeks have witnessed abnormal levels of spreads, a shortening of maturities, and the contraction, or even closure, of some market segments. through spill - over, these tensions are also affecting non - financial corporations and, more broadly the financing of the economy. the crisis also emerged as a crisis of securitisation. securitisation is an old and successful technique used to refinance a range of loans. what was new about it is that it got used extensively in highly unstable financial structures, which were financing short - term assets that were illiquid, complex, and whose value proved to be uncertain and contingent upon models. the instability of such structures was largely masked. indeed, cheap money allowed easy refinancing of poor quality debt and of assets with uncertain value. also, favourable ratings and credit enhancements artificially boosted the quality of loans underlying structured products. the rise in defaults on such loans, first on subprime mortgages, triggered a chain of reactions whose consequences are still unfolding now. credit protections proved illusory. liquidity dried up much more quickly than it had appeared. rating agencies massively, suddenly and sharply downgraded products which until then were deemed of the highest quality. the demise of the “ new ” securitisation chain highlights two fundamental realities. the first one is that far

equity can have harmful effects. to meet the financial challenge, savings have a central role to play. i will focus on two avenues for steering them into productive investment. first, savings should be reoriented towards the long - term, more easily than towards direct risk - taking. french and, more generally, european savers are more risk - averse than american ones – and this is probably not going to change. the first savings motive in the euro area is indeed insurance against unexpected events ( mentioned by more than 50 % of households ). viii but at the same time, savers are more and more concerned by the increase in life expectancies and the need to prepare for retirement : old age provision ranks as the second most important savings motive ( nearly 40 % ). ix therefore it makes sense to offer savers new, complementary forms of savings products, that are less liquid during the first years, but that include some form of longterm capital guarantee. these new products would provide financial intermediaries – in particular life insurers – with liabilities long enough to take pooled risks – in the form of equity investments essentially – and savers with the higher returns offered by equity over the long run. to promote these new products, we also need, at the very least, to avoid any tax distortions that might penalise them more than liquid and risk - free investments. second, savings should better circulate across europe, to where investment needs are. a large part of the solution lies at the european level, with the building of what i call a “ financing and investment union ” ( fiu ), rather than just a “ capital markets union ” ( cmu ). this fiu would merge together the initiatives already in place – the cmu of course, but also the juncker plan and the banking union – in order to magnify their impact through synergies and more ambitious measures. let me mention two measures for tackling obstacles to cross - border investment. firstly, the fiu would encourage the development of a pan - european venture capital ecosystem. one of europe ’ s most obvious limitations is indeed the size of its funds compared with us ones : the size scale varies from at least 1 to 10 given the national borders and the domestic bias in europe. this unfortunately limits european funds ’ ability to take on big enough equity stakes, especially in “ scale up ” companies – successful start - ups at a later stage. the second example concerns the regulatory