eurofi – santiago de compostela, 15 september 2023 monetary and fiscal policy - mix addressing the disease of inflation speech by francois villeroy de galhau, governor of the banque de france press contact : mark deen ( mark. deen @ banque - france. fr ), deborah guedj ( deborah. guedj @ banquefrance. fr ) page 1 sur 4 ladies and gentlemen, it is a great pleasure to be here for this final day of the traditional september eurofi meeting, and i extend my warmest thanks to didier cahen and david wright for organising this event, this time in the holy city of santiago de compostela. let me start with good news about a favourite eurofi topic : banking regulation and basel 3. i say it as bis chair and former chair of ghos : we had in monday an important ghos meeting in basel, and we unanimously welcomed the decisive progress made this year in the implementation of basel 3. by 2025, all jurisdictions – including europe and – yes – the us – should have implemented it in a broad compliance with the standards. i know each banking industry, on both sides of the atlantic, tends to consider that the other side has undue advantages. it ’ s simply not right, and our motto is now straightforward : let us now close this page, and implement the european compromise, no less and no more. no less as some banks would perhaps still dream of, and no more as some theoreticians of regulation would perhaps imagine. and we should now turn to the priority learned from the banking turmoil : “ strengthening supervisory effectiveness ” i rather than focusing on further regulation. let me now turn to my theme which is the policy mix to fight our main economic disease : inflation. well, santiago has not yet produced a miracle for inflation, but there is indeed some encouraging news : headline inflation has passed its peak since the beginning of 2023, and it seems that core inflation is following suit. indeed, the latter started to recede, to stand at 5. 3 % in august ( down from 5. 5 % in july and 5. 7 % in march ) in the euro area. obviously, these inflation rates remain too high : we must and we will bring inflation back towards our 2 % target by 2025. i reiterate this morning this clear commitment which is fully consistent with our latest ecb forecasts. monetary policy is the first line of defence,

reaching structural changes have taken place in credit and capital markets, with hedge funds playing a major role in the process. it's fair to say, for instance, that credit derivatives would not have expanded at the same pace and with so high innovation without strong hedge funds involvement. what do those evolutions mean for the future? financial innovation is good and healthy for our economies. changes that have occurred in the last years strongly contribute to market efficiency and overall increase the resilience of our financial system. by allowing wider spreading of risk through credit derivatives, in particular, hedge funds bring an important contribution to market efficiency and liquidity. at the same time, the implications of those changes for financial market dynamics might be more complex and far reaching than before. new instruments have been developed in a very benign environment. liquidity in many market segments has not been tested in period of stress. how these instruments would behave in periods of stress is a major question for market participants and authorities alike. in such an uncertain environment, securing the full benefits of the structural shifts in the financial system does put a premium on risk management. everybody would agree, i think, that the first mitigant against the risks associated with hedge funds is robust internal risk management systems, both in hedge funds themselves and at their prime brokers. these are the basis for an efficient market discipline and a condition for financial stability. strong and rigorous implementation of sound principles for risk management seem essential. you have noticed the reference, in yesterday's g7 communique, to the paulson's task force ( presidents working group ). beyond that, there may be some additional questions to consider which, for the sake of argument and in order to launch the debate, i will put on the table rather in a provocative mode, but are dealt with in more detail and balance in my own ( and some other ) contributions to the review. first question : what are the conditions to ensure an appropriate level of investor protection, and in particular, what are the consequences of the increased " retailization " of hedge funds? a second question is the future of the hedge fund industry. it is the nature of technological progress to spread in a way that the profits it creates to be competed away. replicating hedge funds strategies – at lower costs – seems to be expanding. m. hsieh will tell you more about it during the panel discussion. a third and important issue relates to the evolving relationship between banks and hedge funds. this relation is complex