erkki liikanen : southern engines of global growth – china, india, brazil and south africa opening remarks by mr erkki liikanen, governor of the bank of finland, at the unu - wider conference, helsinki, 7 september 2007. * * * introduction thank you for your kind introduction professor shorrocks, and good morning, ladies and gentlemen, it is a great pleasure for me to be here to open this conference on southern engines of global growth. china, india, brazil and south africa – together with many other emerging market countries – are playing an increasingly important role in the global economy. their growing importance is being felt in many areas, including growth, trade, international finance, global governance, and geopolitics. as a backdrop, let me say first just a few words about the global economy. the ongoing global economic expansion is exceptionally broad in terms of geography. the strong growth in emerging market and developing countries is reducing the number of people living in extreme poverty, and the gap between average incomes of developing and developed countries is narrowing. these positive developments are clearly visible even for a casual observer, as i had the chance to witness earlier this year when i was traveling in subsaharan africa and latin america. however, despite these very favorable developments, there is no room for complacency. the extended period of rapid global growth has resulted in a build up of some tensions which, if left unaddressed, pose a threat to continued global growth in the longer term. one source of concern is global current account imbalances and the risk of their abrupt and disorderly unwinding. another source of concern is the uneven distribution of benefits of globalization within countries, which risks eroding support for globalization. these two concerns are closely linked to the rapid rise of emerging market countries. growth and trade as a small northern country with high per capita income, finland is quite different from the cibs - countries that are all large, southern, and still relatively poor. nevertheless, some of the factors behind finland's transformation from a poor agrarian economy to a modern advanced economy bear relevance to the current challenges of the cibs, or any other country that seeks to put in place conditions for sustained economic growth. first is a proactive attitude toward the internationalization of the economy, importantly through foreign trade. second is the importance of sound macroeconomic policies. that is, sound money, sustainable government finances and sustainable external position. third is a stable institutional environment

new risks are emerging, ranging from cyber - risks and risks related to crypto - assets to misconduct and legal risks, physical and transition risks associated with climate change, and risks related to regulatory arbitrage. both regulators and market players are just starting to learn how to deal with and address all these new threats. let me now share some thoughts on some of the risks i have mentioned and then suggest some policy actions that policy makers could consider implementing in an effort to mitigate them. - low bank profitability starting with low bank profitability, i would like to highlight three messages. first, this is more a regional than a global issue. in fact, the profitability ratios of banks across countries show marked heterogeneity. for example, the return on equity of canadian, swedish and us banks is relatively high. in contrast, banks in japan and the euro area find themselves in the lower part of the distribution. moreover, in the case of european banks, their return on equity is not only well below that seen prior to the crisis ; their roe is also lower than their cost of equity. needless to say, this may have negative implications for financial stability. put simply, low profitability limits banks ’ capacity to generate capital buffers internally and therefore their ability to absorb negative shocks. at the same time, low returns may push entities towards risky search - for - yield strategies. my second message is that caution is required when drawing a simplistic and causal relationship between low profitability and monetary policy. take for instance the case of sweden, where the riksbank has pursued a negative interest rate policy from 2015 until very recently ; yet, banks ’ profitability ratios in that country are relatively high. more broadly, low or even ( mildly ) negative interest rates tend to have counteracting effects on bank profitability : while they may exert downward pressure on unit intermediation margins, they also promote loan demand, improve credit quality and produce capital gains in banks ’ securities portfolios. we may well appreciate the different channels through which low ( and even negative ) interest rates help boost economic growth and repair banks ’ balance sheets. but we cannot ignore the possibility that, if persistent enough, such a scenario may ultimately impair bank profitability and the bank - based transmission of monetary policy. precisely for this reason, the ecb introduced last september a two - tier system for the remuneration of bank reserves. looking forward, we should remain vigilant ahead of any