up of financial imbalances which proved unsustainable. in those conditions, a minor change may suffice to trigger a financial market collapse. it is difficult to rationalise such an outcome unless it is the result of some kind of coordination between economic agents on a bad equilibrium. some contributions presented here mentioned strategic complementarities, an explanation which cannot be completely ruled out. indeed, it seems that the driving force behind the massive securitisation era was, for most participants, regulatory arbitrage. therefore, it comes as no surprise that the main policy response has focused on regulation. indeed, there is a widespread consensus that the cause of the current financial meltdown stems from the failure or even the absence of regulation in important segments of the financial system. but it may also have implications for monetary policy, to which i turn now. some implications for monetary policy central banks have been on the frontline since the crisis unfolded in the summer of 2007. a dramatic change occurred however after the collapse of lehman brothers where we had the sentiment that we were moving into uncharted territories : spreads reached unprecedented levels both on the money and credit markets, leading to a worsening of financing conditions across industrialised countries. without action some important parts of the transmission mechanisms would have been significantly impaired. in such a context, major central banks embarked on unconventional policies by : • increasing central bank liquidity ; • influencing risk premia on private financial and credit instruments. such policies are referred to as credit easing policies ; • pre - committing to conducting very low interest rate policies for as long as necessary in countries where the interest rate has already reached its lower bound. all these policies are set out as temporary policies and deemed to be used in times of stress only. it is obviously too early to gauge their overall impact. so far, they have been effective with regard to market confidence, and have contributed to a significant reduction in various credit risk premia. one channel relies on portfolio composition effects. i know that some contributions presented here made that point in a very sophisticated framework, i. e. positive feedback effects may be generated through the greater liquidity of investing entrepreneurs. obviously, the soundness of the financial system is critical to the success of these unconventional policies. these policies must be viewed as state contingent policies : they are conditional on the state of the economy. a significant part of the intervention is short - term oriented, as the acquisitions focus on short - maturity assets. furthermore, the assets purchased are

christian noyer : the macroeconomy and financial systems in normal times and in times of stress speech by mr christian noyer, governor of the bank of france, at a conference, jointly organised by the bank of france and the deutsche bundesbank, chantilly, 9 june 2009. * * * introduction ladies and gentlemen, dear colleagues it is my great pleasure to address such a distinguish audience to day. as you may know, this is the second time the banque de france and the deutsche bundesbank have jointly organised such a conference. it is held every two years, alternating between germany and france. the fact that an event of this nature is co - sponsored by the two institutions sends a strong signal to the research community. it also clearly illustrates the importance of research in today ’ s monetary policy making, given the interplay, which is not always fully understood, between financial markets and the real economy. the top quality work that has been done in this conference will be of great help for policy making. normal times and times of stress over the recent months, thanks to the joint actions of governments and central banks, markets have shown gradual signs of improvement. yet, the functioning of the markets has not been fully restored. at the current juncture, one key challenge is to restore confidence in a context where players are still confronted with numerous sources of uncertainty : uncertain exposure vis - a - vis counterparties, uncertain valuation regarding financial assets or financial risks. in such a context, what should we do to return to normality? economic theory provides a set of conditions to be fulfilled for a market to function efficiently : full information, enforceable property rights and contracts, absence of externalities just to mention the most important ones. in times of stress, these conditions are not fulfilled. but they are hardly met in normal times either. moving from one situation, to the other, does not necessarily involve a huge economic shock. small changes in economic sentiment or “ animal spirit ” may bring financial markets to a point of near collapse. the past ten years are a striking case in point. the development of securitisation was initially perceived as improving welfare through better risk management and allocation. overall, it was seen as a move towards more complete and efficient markets. the crisis has shown that this was not necessarily the case : the process was plagued by information asymmetries and moral hazard, and created high risk concentration on a limited number of counterparties, it also lead to the build -