anne le lorier : bailouts, bail - in and financial stability welcome address by ms anne le lorier, first deputy governor of the bank of france, at the conference “ bailouts, bail - in and financial stability ”, jointly organized by the bank of france and the toulouse school of economics, paris 28 november 2014. * * * it is a great pleasure to welcome you here today at the banque de france for this joint conference organized with the toulouse school of economics. it is the seventh conference jointly organized with tse since the beginning of our partnership on financial stability issues. in the previous events, we tackled “ extreme events ” in 2008, and then “ liquidity ” in 2009, “ the future of financial regulation ” in 2010, “ debt crisis in the euro area ” in 2011, “ banking models and banking structures ” in 2012, and “ bank liquidity, transparency and regulation ” last year. today ’ s topic is “ bailouts, bail - in and financial stability. ” in the follow up to the last financial crisis, almost all regulatory initiatives have been motivated by the objective of ensuring no future public bailouts of banks or, in the language of economists and banking regulators, ending the too - big - too - fail problem. this objective is to be reached for all systemically important financial institutions, be they banks, insurance companies, market infrastructures or entities belonging to the so called “ shadow banking system ” ( asset managers, hedge funds and so on ). due to their unique role and concentration of positions, non - banks such as global insurers, global central counterparties and large asset managing entities undoubtedly entail systemic risks that have to be carefully monitored and mitigated. this is already acknowledged by standard setters ( cpmi - iosco ) and by the financial stability board and would probably deserve a specific conference. what makes banks specific among systemic institutions is the presence of implicit subsidies and this feature is the main focus of today ’ s conference. allow me to elaborate a bit on the tbtf problem and the implicit subsidy to prevent the collapse of the global financial system, governments in major jurisdictions stepped in by bailing out some financial institutions or by providing public guarantee to unsecured bank - debt holders. this use of tax - payers money for preventing private losses entailed sizeable direct costs for governments, in terms of both political support and fiscal implications. a more indirect, but equally important concern is that these interventions – aimed at stab

when one considers each reform separately, since the objective is to eliminate / compensate the competitive advantage that these institutions derive from expectations of public support. however, the result of adding up all measures may be to turn a gross competitive advantage into a net competitive disadvantage. although one might see this as a welcomed outcome, i see at least two reasons that could mitigate this view : • first, this cumulative regulatory cost could lead banks to operate below the economically optimal scale and scope, and withdraw from the provision of activities important for international firms and globalized financial markets. i have no preference for big systemic banks. but i simply do not believe that these large financial institutions became large and complex simply to benefit from the implicit subsidy. • alternatively, this could lead to even more concentration among systemic institutions themselves, as some attempt to secure higher public support probabilities to compensate for the higher regulatory burden. unless public authorities suddenly find a way to credibly commit to no bailouts whatsoever, we may well end up at some point with a world with fewer but more systemically important systemic players. and i am not convinced that a world with five g - sibs instead of the current list of thirty would necessarily be more stable. the second remark is that removing anticipations of state support / bailouts is a process that may take time and which must be handled with extreme care. the unexpected imposition of losses on some type of creditors to resolve problems in some banks can lead to shifts in expectations of public guarantee for other institutions, and create contagion and funding stress at other banks. the case of cyprus was a perfect illustration of this. the difficulty is to guide the evolution in expectations over time, and avoid abrupt shifts that would increase financial instability and ultimately undermine the objective of the reforms. this ‘ transition problem ’ is in my view critical, and has been overlooked in many discussions. this conference is organized so as to facilitate exchanges with the audience. therefore, i encourage you to be fully involved in the discussions and wish you fruitful debates. i now leave the floor to augustin landier from toulouse school of economics, one of the organizers of this conference with regis breton and laurent clerc from the banque de france financial stability directorate, who will chair the first session of the conference. bis central bankers ’ speeches