christian noyer : global stability, the future of capital markets and islamic finance in france speech by mr christian noyer, governor of the bank of france, at the euromoney seminars, islamic paris conference, paris, 29 september 2009. * * * ladies and gentlemen, it ’ s a great pleasure for me to address such a distinguished audience today. while conventional economies are still suffering from a deep crisis and some of our traditional economic thought is being challenged, this meeting is a great opportunity to discuss how alternative finance, and especially islamic finance, can contribute to the economic recovery. in the past two years, the french authorities, in active cooperation with the industry, in particular via paris - europlace, have introduced substantial reforms to make it possible to allow shariah ’ compliant finance into france. as governor of the banque de france, which is in charge of the licensing of french banks, i would like to specifically highlight ongoing work aimed at licensing islamic banks in a secure framework. i will come back to this point later … to focus on the matter i was invited to speak about, i would like to address several issues : • first, the links between the current overhaul of financial regulation and islamic finance ; • second, the role islamic finance could play in france ; • the third, the relationship between islamic finance and financial stability ; • finally, i would like to mention the conditions islamic banks need to meet to ensure that their establishment in france is consistent with the smooth functioning of the banking system. ♦♦♦ the current crisis has illustrated the rapid contagion effect fostered by financial globalisation. however, it is important to emphasise that financial globalisation is not in itself the cause of the crisis, which has rather revealed failures in financial regulation. indeed, the crisis has highlighted the need to better assess and prevent risks in the financial system as a whole, in addition to simply monitoring the risks of each individual institution. it has also shown that some features of the regulatory regime have had an amplifying effect on the economic cycle instead of mitigating it. that is why the g20 has launched an ambitious agenda to reform financial regulation, covering four main areas : the strengthening of prudential standards, the redefinition of the scope of regulation, the revision of accounting standards and the strengthening of risk management. we will see later that these areas find a strong echo in islamic finance, which has also to deal with issues linked to lack of transparency, of a level

small commercial banks, - ( ii ) large commercial banks tend to be financially stronger than large islamic banks, - ( iii ) small islamic banks tend to be financially stronger than large islamic banks. “ islamic banks and financial stability : an empirical analysis ” prepared by martin cihak and heiko hesse ( january 2008 ). the analysis is based on evidence covering 77 islamic and 397 comparable commercial banks in 18 banking systems with a substantial presence of islamic banking, over the 1993 - 2004 period. one of the plausible explanations given by the paper is that it is significantly more complex for islamic banks to adjust their credit risk monitoring system as they become bigger. given their limitations in standardisation in credit risk management, monitoring the various profitloss - arrangements rapidly becomes much more complex as the scale of the banking operation grows. these findings are based on evidence drawn from banking systems with a substantial presence of islamic banking. therefore, they are not strictly transposable to france. nevertheless, precisely because france is a conventional environment, i would like now to conclude my speech with some remarks on conditions islamic banks need to meet to ensure that their establishment in france offers sufficient safety for their customers and is compatible with the smooth functioning of the french banking system. this is primarily in islamic banks ’ own interest and is also in the interest of the banking system! regarding licensing, the credit institutions and investment firms committee ( comite des etablissements de credit et des entreprises d ’ investissement – cecei ) will assess the same criteria as for any conventional bank : financial resources and suitability of the shareholders ; integrity, qualifications and suitable experience of managers ; level of own funds ; business plan ; capacity of the bank to achieve its development objectives and so on. indeed, there is no specific criteria or requirement for islamic banks in the french licensing framework. but beyond these standard licensing criteria, banking authorities need to ensure that islamic banks will interact with their conventional environment in france as soundly as possible. therefore, some key issues need to be tackled before licensing an islamic bank, regarding especially : - their governance, with for example the role of the shariah ’ board, - the legal classification of profit - sharing investment accounts and its consequences in terms of coverage by the french deposit guarantee scheme, - and liquidity management and access to the eurosystem funding, especially the issue of assets eligible as collateral. let me stop here. i would like to thank you very much, ladies and gentlemen, for your