francois villeroy de galhau : between " shadow " banking and an angelic vision of the market – towards a balanced development of non - bank finance speech by mr francois villeroy de galhau, governor of the bank of france, at the presentation of the 22nd financial stability review, paris, 25 april 2018. * * * ladies and gentlemen, i am very pleased to welcome you this morning to this presentation of the 2018 financial stability review ( rsf ), dedicated to non - ban k finance. intended as a forum for dialogue and exchange, the fsr offers leading personalities from diverse backgrounds the chanceto have an open debate. i am delighted to see many of this year ’ s contributors here among us this morning, and i would like to extend my warm thanks to all the speakers : klaas knot, president of the dutch central bank ; philip lane, governor of the central bank of ireland ; robert ophele, president of the autorite des marches financiers ; paul hamill, global headof ficc at citadel securities ; yves perrier, ceo of amundi ; and richard portes, professor of economics at the london business school. the topic we have chosen to address is far from anodyne : [ slide 2 ] according to the financial stability board ( fsb ), non - bank financing totalled usd 160 trillion in 2016 [ monitoring universe of non - bank financial intermediation, munfi ], up 50 % relative to 2008 and accounting for close to half of all financial assets held by financial institutions worldwide, compared with 40 % in 2008. and yet – or maybe precisely because of this – there is still much heated debate over its scope and over what exactly it should be called. in order to better understand it, we need to rid ourselves of two mindsets : first, one of irrational fear, as non - bank finance also enables the financing of growth and innovation ; and, in contrast, an over - idealised or “ angelic ” vision of the sector, as shadow banking does indeed carry risks and regulators have a role to play in mitigating them. 1. overcoming our irrational fears : the benefits of market - based financing to overcome our irrational fears of non - bank finance, the words we use to describe it matter. is it “ shadow banking ", with all the negative connotations this implies, or rather, as some regard it, “ market - based finance ” or “ non - bank

at the national level, i am pleased to see that the “ pacte ” law drafted by the minister for the economy and finance seeks to foster long - term an d equity - based life insurance contracts – by overhauling eurocroissance – and encourage and simplify retirement savings, including the annuity component which has the longest investment horizon. moreover, one approach supported by the banque de france is the implementation of an ambitious european framework : [ slide 4 ] a “ financing union for investment and innovation ” to better channel the euro area ’ s eur 400 billion savings surplus into equity financing and innovation. this financing union needsto unite and build on existing initiatives, first and foremost the capital markets union, but also the banking union and the juncker investment plan. it also means making concrete progress in several areas : the revision of accounting rules, taxation and insolvency lawsin order to facilitate cross - border investment, notably in equity ; the european - wide development of long - term savings products and investment vehicles such as venture capital funds ; the completion of the banking union. 2. avoiding an angelic vision : monitoring, testing, regulating so no irrational fears in the face of the shadows ; but no angelic vision either. [ slide 5 ] a portion of shadow banking is still overly exposed to credit, liquidity, leverage and maturity risk, and there is significant potential for these to spread to the rest of the financial system and cause financial instability. we discussed this issue at the imf and g20 meetings in washington just last week. in my view, therefore, there are three priorities for regulators [ slide 6 ] : monitoring, testing and regulating. monitoring first, thanks to the compilation of detailed data on shadow banking. the fsb already contributes to this with its annual report on shadow banking, as does the esrb with its european union shadow banking monitor. but we need to go further : we need an even more precise picture of the sector as participants and business models can vary considerably from one country to another, and are sometimes extremely complex. it is particularly crucial to put together a mapping of the interconnections within the shadow banking sector and with traditional banks and insurers. the second priority is to be able to test for systemic risks, using appropriate tools. in order to measure the global impact of shocks, we have a particular need for liquidity macro stress - tests that take into account investment funds : the latter are especially vulnerable to runs, in the event