11 Boz, Gopinath and Plagborg-Moller (2017) show that a 1% appreciation of the dollar leads, all else equal, to a 0.6% contraction in trade volumes in the rest of the world. 6  All speeches are available online at www.bankofengland.co.uk/news/speeches  6  Third, a growing asymmetry at the heart of the IMFS is putting the global economy under increasing strain. Huge network effects mean the dollar has remained dominant in the IMFS despite the transformation of the global economy. At the time of the Latin American debt crisis, EMEs made up a little more than one third of global GDP. Since the last Fed tightening cycle, their share of global activity had risen from around 45% to 60%. By 2030, it is projected to rise to around three quarters. As well as being the dominant currency for the invoicing and settling of international trade, the US dollar is the currency of choice for securities issuance and holdings, and reserves of the official sector. Two-thirds of both global securities issuance and official foreign-exchange reserves are denominated in dollars.12 The same proportion of EME foreign currency external debt is denominated in dollars13 and the dollar serves as the monetary anchor in countries accounting for two thirds of global GDP.14 The US dollar’s widespread use in trade invoicing and its increasing prominence in global banking and finance are mutually reinforcing. With large volumes of trade being invoiced and paid for in dollars, it makes sense to hold dollar-denominated assets.
1.3 The necessary constraints on model risk that the package contains should not be gold plated in the European transposition 1/3  BIS central bankers' speeches  The Basel 3 Final Agreement constrains overly aggressive internal models thanks to the introduction of the output floor at the highest level of consolidation. The EU should beware of not adding unnecessary constraints that would increase the impact of the output floor in a superequivalent way. In addition, in Europe, Pillar 2 requirements also cover model risks – whereas it is not the case for US banks, which do not have a specific Pillar 2 add on in their capital requirements. We therefore have to find a way in Europe, in some form or another, to eliminate any overlapping capital charges. 1.4 The need for a stabilization of the regulatory framework after the implementation of Basel 3 finalization We are now coming to an end of this regulatory cycle with the implementation of the Basel 3 finalization. Back in November 2020, the GHoS clearly committed the BCBS to abstain from major regulatory changes in the Basel framework in the near future. We need that banks focus now on other challenges in particular those related to the sustainability of their business models and those related to the new risks such as climate related risks or cyber-risks. 2. The stress testing framework in Europe: past, present and future Now, let me turn to the topic of the stress test in this second part of my remarks.