jean - paul redouin : liquidity and transformation speech by mr jean - paul redouin, deputy governor of the bank of france, at the general meeting of the french association of bank treasurers ( aftb ), paris, 30 may 2011. * * * ladies and gentlemen, it is a great pleasure for me to speak at this general meeting of the aftb. i would like to take this opportunity to welcome the successful cooperation that has been established between your association and the banque de france. it is extremely beneficial for us and i believe that you and your institutions also find it valuable. in many respects, bank and market liquidity is a fascinating area because few phenomena have been perceived in such different ways over such a short period of time. indeed, market liquidity became abundant and cheap in the 1980s : financial markets deepened and transaction costs fell. in the 1990s, the growth of derivatives products facilitated the management and transfer of risk. in the following decade and up to 2006, many studies had already focused on excess liquidity. then, during the financial crisis of 2007 – 2008, sources of bank funding suddenly dried up. i would like to highlight some conclusions that can be drawn from this crisis : – first, the crisis reminded us that not only does liquidity have a price and that this price could fluctuate greatly, but above all that liquidity cannot be taken for granted, irrespective of the price that some market participants are willing to pay ; – second, central banks rapidly and efficiently adjusted their operational frameworks to provide liquidity to the financial system, re - establish the normal functioning of the money market and restore confidence. but such measures must naturally remain exceptional, and central banks must be vigilant about the signals and incentives they give to the financial system. – third, due to its magnitude, the crisis has highlighted the risks associated with excessive maturity transformation when long - term assets are funded by short - term liabilities, or even funded overnight. this raises questions regarding both interest rate risk management and liquidity risk management. while these are distinct areas, they have close linkages. it is important not to have a short memory and relegate all this to ancient history. indeed, at present, in an environment of ongoing extremely low interest rates, it is still possible to fund long - term assets at very low cost, with the risk of creating further asset price bubbles. in this respect, the example of the real estate sector seems telling. housing loans

##slocation when all their peers were receiving like assistance – and much more. moreover the banks have neither had, nor needed, access to this for some time now and the stock of guaranteed liabilities outstanding has fallen by about half from its peak level, as issues mature or are repurchased so our banking system, while not entirely free from blemishes, was nonetheless in pretty good shape overall. banks were able to raise capital privately in the depths of the crisis. the lowest rate of return among any of the major banks over a year during the crisis period was about 10 per cent. the australian government has not needed to take an ownership stake in a financial institution. second, australia had scope for macroeconomic policy stimulus, which was used promptly and decisively. interest rates were lowered aggressively, from a high starting point, lowering bis central bankers ’ speeches debt servicing burdens at a rapid rate. the fiscal stimulus was one of the larger ones, as a percentage of gdp, among the various countries with which we can make comparisons. the evidence suggests that these macroeconomic measures were effective in sustaining growth. thirdly, the rapid return to growth of the chinese economy saw demand for energy and resources strengthen again after a brief downturn in late 2008 and the first couple of months of 2009. this reversed the fall in australia ’ s terms of trade, and in fact pushed them to new highs, which led to a resumption of the historic investment build - up that had already begun. it benefited the whole of asia, which staged a very pronounced v - shaped recovery on the back both of the chinese measures and things other countries did themselves. a fourth element that many people add is that the exchange rate fell sharply, which was an expansionary impetus for the economy. but of course the exchange rate was responding endogenously to the various shocks and policy responses, and has since reversed the fall. it was doing what it was supposed to do. perhaps the real point is that the right exchange rate system was implemented nearly 30 years ago, and that it was allowed to work. so australia had these things going for it. was this all just luck? we could not deny that our geography – thought for much of our history to be a handicap because of the distance from european and american markets – combined with our natural resource endowment has provided a basis for the country to ride the boom in asian resource demand. we did not create that, though we still have to muster the capability to take sustained