christian noyer : central banks in the financial crisis – a european perspective speech by mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, at the bank of korea international conference, seoul, 1 june 2010. * * * introduction ladies and gentlemen, it ’ s a great pleasure for me to address such a distinguished audience. first, let me thank the organizers of the conference for giving me the opportunity to open this second day of the conference. yesterday ’ s contributions have been outstanding and, in view of our program i have very high expectations for our discussions of today. from the outset, central banks have been major actors in fighting the financial crisis. overall their actions have been broadly successful. in the period to come, however, steering the economy may prove more challenging and new risks can weigh negatively on the recovery underway. a case in point is the brutal reassessment of sovereign risks by market participants. the euro - area has been at the epicentre of this phenomenon. some market segments have become dysfunctional to a point that jeopardized the transmission of monetary policy. the eurosystem has therefore resorted to new steps to contain those tensions and prevent their spill over to the real economy. the sovereign debt turmoil is the most recent episode of a crisis that started already more than two years ago. it reminds us if need be that crisis management is a difficult and potentially long lasting task and that we should always keep in mind that our policies have effects not only the current course of events but also through the expectation of the private sector that they may be repeated in the future. it is therefore timely to reflect upon the past, present and future course of central banks ’ actions. i – the seeds of financial instability it is paradoxical that the crisis took place after a protracted period of nominal and real stability. in particular, inflation had remained low and remarkably stable for nearly two decades. this unprecedented degree of price stability mostly reflects a combination of central banks ’ credibility and the effects of a benign economic environment. this macroeconomic stability has however not prevented deep imbalances – macroeconomic and financial – to grow in parallel, reinforcing one another. the abundance of savings in the world, specifically in emerging economies, prevented real long term interest rates from rising and stimulated the pace of credit expansion, especially in the us. indeed, when policy rates were raised in 2004 in the us and late 2005 in the euro area

rates and the associated tightening of financial conditions are still being transmitted to broader credit conditions through the banking channel. bank funding costs, including deposits from households and nfcs, as well as wholesale funding costs and securities – other than shares – are increasing. it is true that the pass - through of rate hikes to the remuneration of households ’ sight deposit remains limited, but the transmission to the remuneration of term deposits and deposits redeemable at notice is much stronger, although incomplete. page 4 sur 14 as a result households have started shifting towards term deposits, and so further increasing the average cost of funding for banks. turning now to bank loans to households and firms, let me stress that this credit channel is of primary importance in the euro area - much more so than in the united states - as bank loans remain the dominant source of financing for firms, in particular for smaller firms. 1 overall, the growth rate of loans has slowed due to a combination of higher borrowing rates, lower demand, and - for firms tighter credit standards. ( 1 ) the cost of credit has risen significantly from exceptionally accommodative levels. households in the euro area willing to buy a house at the end of 2021 could borrow at 1. 3 % in average whereas they have to pay almost 3. 5 % in march 2023, although significantly less in france ( 2. 6 % ). lending rates for firms the average share of bonds in debt financing has increased over time but only makes up 30 % of debt financing for firms. see holm - hadulla, f., musso, a., nicoletti g. and tujula m. ( 2022 ) “ firm debt financing structures and the transmission of shocks in the euro area ”, economic bulletin, issue 4, ecb. page 5 sur 14 have been rising still faster, from 1. 3 % at end - 2021 to 4. 2 % today. compared to 2005 - 2007, the increase in policy rates is much faster today. page 6 sur 14 the plain lines correspond to the cycle started in 2022, whereas the dashed lines show the previous tightening cycle in 2005. the dfr is growing more rapidly than the mro did in 2005. but the pace of the pass - through is relatively similar today compared to the previous cycle. lending rates to nfcs ( in red ) are increasing today in line with policy rates, just as in 2005. they increased by almost 300 bp from january 2022 to march 202