years before the great fire of london, had been virtually the same as that prevailing in 1913, one year before the collapse of the international gold standard. in spite of such remarkable price stability, however, metallic standards had been recurrently plagued by financial crises and asset prices booms and busts, from the south sea bubble of see in particular claudio borio and william white ( 2003 ), “ wither monetary and financial stability? the implications of evolving policy regimes ”, presented at : monetary policy and uncertainty : adapting to a changing economy, a symposium sponsored by the federal reserve bank of kansas city, jackson hole, wyoming, august 28 – 30, 2003. 1720 2 to the “ panic of 1907 ”, which was only solved by the forceful intervention of john pierpont morgan, and which ultimately convinced u. s. policymakers of the necessity to establish a central bank. but why should monetary regimes delivering strong price stability be vulnerable to asset price bubbles and financial crashes? a long term perspective suggests that banking systems tend to periodically generate asset price bubbles even under radically different monetary regimes. having an outburst of several years of excessive credit growth, or for the old days financial crisis, the rising exposure of some financial institutions to asset price volatility has repeatedly led to financial crises. historical experience before world war i, where price stability has been unmatched ever since, should have reminded all of us, financial market participants and policy makers alike, that price stability is no blanket insurance against financial instability. b. price stability is necessary for financial stability the most obvious case in which price instability automatically leads to financial instability is that of deflation, via the “ debt deflation ” mechanism originally identified by irving fisher with reference to the great depression. 3 a more recent example of this phenomenon is provided by japan, where the persistent deflation which has gripped the country since the early 1990s has consistently led, ceteris paribus, to a heavier debt burden for households that had contracted mortgages in the boom phase of the late 1980s and deterioration of banks ’ balance sheets. in a symmetric fashion, high inflation – which, historically has also consistently meant volatile inflation – threatens the very foundations of the financial system because of the resulting capricious and unpredictable redistribution of wealth between debtor and creditor institutions. the most glaring example of such a phenomenon is provided by episodes of very high, or hyper - inflation, such as those plaguing a significant fraction of belligerent nations in the aftermath of

francois villeroy de galhau : banking turmoil - three blessings and a funeral speech by mr francois villeroy de galhau, governor of the bank of france, at the eurofi high - level seminar 2023, stockholm, 28 april 2023. * * * ladies and gentlemen, i am delighted to address you at this eurofi seminar in stockholm, and i would like to extend my warmest thanks to david wright and didier cahen. this speech, as the two previous ones, seems like a perfect opportunity to take a first look at the lessons to be learnt from the banking turmoil of 2023. as i have the privilege to speak after my friends pablo hernandez de cos and klaas knot, my task is made simpler : they have already covered a lot of ground, and hence i will be able to speak still more freely, and to call my speech " three blessings and a funeral ". let me start with the funeral, at least the one that we can welcome, but which, unfortunately, is not final. it should be the condemnation and the funeral of mismanagement. indeed, blatant mismanagement of the risks and of the business model in some banks explains first and foremost the recent turmoil. as pablo said in washington, " jumping straight to discussions about the regulatory and supervisory implications of recent events is akin to forgiving banks for not fulfilling their primary responsibilities ". 1 to put it even more bluntly, when some people act like reckless drivers on the road, they are the ones who are guilty, not the police. after the ( temporary, alas ) funeral, let me return to the three blessings. this word is a bit selfcentered, i confess, since i am referring to public policies, and each of them today raises questions : ( i ) regulation, ( ii ) supervision, ( iii ) resolution. therefore, how could we revisit each of them? i. regulation : a plea for an effective implementation allegedly, if regulation had been more effective, it could have prevented the banking turmoil. for its critics, basel iii was too focused on liquidity and counterparty risks, and not enough on interest rate risk. well - let me call into question those ideas. such criticism is ironic : didn't anyone notice that the first blast of turbulence came from a bank not subject to the full set of basel standards? while the basel framework applies in its entirety to every single european bank – several thousands of them