yves mersch : shaping a new regulatory framework – international banking at the crossroads speech by mr yves mersch, governor of the central bank of luxembourg, at the conference “ the emerging framework to strengthen banking regulation and financial stability ”, organised by the financial stability institute, bis, and hosted by the arab monetary fund, abu dhabi, 8 november 2010. * * * let me start by thanking the arab monetary fund and the fsi of the bis for providing the opportunity to present my views on financial sector reform in the post crisis era from the perspective of international banking. the topic is vast, and i shall not attempt to deal exhaustively with its numerous dimensions, but rather concentrate myself on one key component, namely cross - border banking flows. i will describe their main drivers, explore their impact on financial stability, and review major reforms currently discussed and aimed at maximizing the benefits of international banking. international banking : drivers, effects and impact on financial stability cross - border flows have expanded enormously in the last three decades. since the second half of the 19th century, the internationalization of banking has proceeded in several waves. the most recent waves followed the liberalization of the early 1980s and the expansion of subsidiaries and branches in emerging and developing economies since the second half of the 1990s. measured by the expansion of cross - border lending and the local claims of foreign banks, the scale of international banking increased dramatically since the beginning of 1980s, also in the gulf states ( figure 1 ). while international claims vis - a - vis developing countries are less than 20 percent of claims to developed countries, there has been a recent acceleration of the former. in the last half of this decade, the increase in the share of loans to non - banks in the gulf states is noticeable, and it reflects the internationalization strategy of banks which have favored extending credit by local affiliates to cross - border lending. until the beginning of this decade, international banking growth tracked well the increasing world integration as measured by international trade growth. more recently, however, cross - border flows have grown faster than international trade reflecting the emergence of risk transfer and securitization thus making international banking an important component of a broader process of globalization and integration. capital flows have not been uniformly distributed across countries, and a crosscountry analysis of net international positions show large imbalances and persistent net creditor and debtor positions ( figure 2 ). the most important ultimate macroeconomic drivers of international banking are the regulatory environment and technological developments. while

regulators concerned but it would be adequate and cost less. economic and financial evolution during the debt crisis in latin america in the late 1980's, most of the actors involved had to accept the fact that they had been surprised by the crisis. in the aftermath of the crisis, the imf decided to introduce a new data standard, the special data dissemination standard, in order to collect additional information on the situation of its member countries and to publish this information much faster than it had been done in the past. this new data requirement was felt necessary since it is supposed to better inform economic actors and therefore create an early warning system for financial crises. the “ new economy ” and its important productivity gains due to information technologies generated the need for more detailed data concerning prices – for instance hedonic prices to capture ever faster changes. the present crisis in the american mortgage market will also call for additional information. indeed financial innovation supposed to spread risk and thus liberate capital and increase liquidity was found not to be stress resistant. credit risk transfer with increased complexity and dissemination in parallel decreased both access to information and the exercise of due diligence. the lack of transparency triggered a wave of mistrust impairing the proper functioning of whole segments of financial markets. it had been expected that the generalized phenomenon of the mispricing of assets had its origin in some institutional developments such as hedge funds or private equity and increased disclosure was requested in this direction. however, the unfolding of the turbulence identifies a lack of transparency associated with the “ originate and distribute ” model, the role of rating agencies and the limits to the supervisory boundaries. the foreseeable response will be more disclosure, better information and increased statistical coverage. in all, greater transparency. exogenous factors the terrorist attacks on 11 september 2001 were also at the beginning of additional information needs. in the recent past, the us customs have requested more private information from people travelling into the usa and most countries are now introducing new biometric passports. in the same vein, the united - states, in the war against terror, requested as much information as possible about financial transactions in order to reduce the financing of terrorists. hence, they obtained access to additional and mainly very confidential information on financial transactions worldwide through swift. where is the end? will we continuously increase data needs or are there limits? there are at least two limits. • data production generates costs the increasing data requests on the part of regulators generate increased production costs and therefore decreases competitiveness.