stephen grenville : globalisation and the international financial architecture : writing ( and righting ) the rules speech by mr stephen grenville, deputy governor of the reserve bank of australia, to ceda gold series dinner, held in sydney, on 29 june 2000. * * * it is a self - evident truism that globalisation has changed australia, and the world. we see it in the array of goods available, in our travel habits, in media and entertainment, and in the intellectual debate. while it has its opponents, their arguments are often partial - criticising aspects of globalisation, rather than the overall impact. my central theme is that globalisation brings with it huge benefits, but at the same time, creates a need for a much more comprehensive set of rules to govern the way it will be carried out, analogous to the complex and ubiquitous rules which govern interactions in the domestic economy. these generalisations have application in an area relevant to the central bank role : the development of an appropriate international financial architecture. are better international rules needed and feasible? some will argue that this search for more comprehensive rules is either unnecessary or futile. some would say that, to the extent that globalisation involves economic interchange, we can simply rely on the invisible hand of the free market, and that therefore rules will not be necessary. the vision, for those who hold this view, is of an adam smith world in which everyone pursues their own individual self - interest but at the same time achieves society ’ s goals, with no more than a walrasian auctioneer to organise the process. this is, i suspect, the sort of world envisaged by thomas friedman ( 1999 ) when he talks about the “ golden straitjacket ” - the set of rules which globalisation imposes on participants. but what we know from experience with domestic markets is that every transaction and every market is governed by a complex set of rules. sometimes these are set down by governments, but where they are not, the participants themselves find it advantageous to define a set of rules ( in this, the example that springs to mind is futures markets, where the government has left these largely unregulated but the participants need to define their relationships with each other by quite comprehensive rules ). sport, too, provides analogies - there are no games that are a total free - for - all, but each game tries to find a sensible mix of rules which will allow individual talents to come

at financial institutions is surely also necessary in a number of cases, and this must start at the top. the culture around risk management and risk tolerance clearly is an important element of this. the practices that became pervasive throughout the first part of this century that contributed to the excesses need to change. what was considered an acceptable way of doing business will no longer suffice. given the role that the financial sector plays in the economy, there is a form of social contract between it and the general public. as i have mentioned earlier, the financial sector enjoys a level of support that is not present for other sectors of the economy, because of the crucial role it plays. but leverage implies financial institutions are more vulnerable. we need to consider what the safe degree of leverage is. that is a debate that is being had currently. the rate of profitability in the financial sector is also a debate society needs to be having. if financial institutions are perceived to be earning too high a rate of profitability, particularly if the institution is enjoying a degree of support from the public sector, that too will impede the restoration of trust. it will be a long road back to restore trust. without trust, the process of intermediation and credit provision will be greatly curtailed. in turn, this will impede the path to global economic recovery with costs to all. we have to lay out the road ahead, put down the road rules in the form of regulations and other curbs on the financial sector. but then the journey still needs to be taken. there are no short cuts. bis central bankers ’ speeches