christian noyer : it was vital to break the adverse feedback loop between bank and sovereign risk interview with mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, in les echos, 17 september 2012. * * * do the ecb ’ s announcement to purchase sovereign debt and the german constitutional court ’ s approval of the european stability mechanism mark a turning point in the crisis? these announcements were welcomed by the markets and the outlook now appears much clearer. the european stability mechanism is a key factor for strengthening the cohesion of the euro area and demonstrates that the euro is here to stay and irreversible. it will help ailing economies return to competitiveness and growth. the governing council ’ s decision to purchase, subject to appropriate conditions, government debt is reassuring for at least three reasons : purchases are potentially unlimited, which should end speculation about the possible collapse of the euro area ; the strict conditionality will oblige countries to pursue their fiscal consolidation efforts ; lastly, these purchases fall squarely within the ecb ’ s mandate as they are conducted in the secondary market and aim to ensure the proper transmission of the policy stance to the real economy. the ecb has played its role. what must governments now do? euro area member states need to restore their credibility and they are already making efforts to do so. some have had to implement austerity plans and others, less drastically, are undertaking structural reforms and continuing to reduce their government deficits. this is the case of france. even if these efforts appear moderate compared to those of other countries, they are necessary for our market credibility. brussels has presented its proposals for a european bank supervisory mechanism ; are they in line with your expectations? yes, they are. the developments of the financial crisis have brought to light one of the euro area ’ s fragilities : the link between bank and sovereign risk. following the collapse of lehman brothers, governments bailed out their banking systems and, in doing so, established a nexus between sovereign debt and local banking systems, which interferes with monetary policy transmission. when the euro area sovereign debt crisis erupted, bank refinancing conditions became correlated with sovereign risk, with the consequences that we have witnessed for ailing countries. the large amount of liquidity provided by the eurosystem has reduced this impact, but funding costs have remained very high in some countries. it was therefore essential to decouple sovereign risk from bank

these balance sheets to work ”. and, as a result, in the formulation of monetary policy, “ quantities ” – the amounts of assets and liabilities – have come to play an increasing role as compared to “ prices ” – the level of interest rates. this, of course, is a component and a consequence of unconventional monetary policies. traditional channels, – through interest rates - have become ineffective : first of all because economies have hit the zero lower bound ; and in some case, like in the euro area, because transmission – through credit – has been clogged. the expansion of balance sheets results from attempts to overcome those limits and allow monetary policies to fulfill their mandates via large scale of assets purchases. 2. is it the size of the balance sheet or the means of its increase that matter? the causes and consequences of changes in balance sheets size are rather diverse. broadly speaking, both liabilities and assets of central banks matter. an expansion of liabilities occurs when, as the eurosystem did in many instances, the central bank increases liquidity provision to the banking sector, with the explicit objective of easing pressures on funding, reducing its costs, and ultimately, influence lending behavior. expansion of liabilities may be bis central bankers ’ speeches more passive though when setting an exchange rate floor such as in the case of the snb. looking, now, at the asset side, asset purchases bring down risk premia, they trigger portfolio rebalancing, flatten the yield curve, increase risk taking in the private sector and shift expectations in a more positive territory. as you all know, the eurosytem has now embarked into a major purchase program, the pspp, that follows other programs of smaller sizes for asset - backed securities ( abspp ) and covered bonds ( cbpp3 ). there are many technical discussions. some people would argue that the stocks of assets held by central banks matter more than the flows of purchases. others would contend that the composition and size of purchases are the real levers. the issue boils down to whether an expansion in the monetary basis is enough to trigger credit expansion or whether the latter is correlated to banks willingness to expand credit and more importantly to the appetite of economic agents to borrow. based on how monetary policies have been conducted for the past several decades, banks have always had the ability to expand credit at a given level of interest rate irrespective of the size of the central bank ’ s balance sheet. being at the zlb