Lessons of the financial market turmoil An economic recovery must not however be a reason for returning to “business as usual”. Lessons must be learnt from the financial market turbulence. This work is still under way. Many national, European and international institutions and bodies are discussing the conclusions to be drawn for the financial system. The global financial system must become  BIS Review 16/2009  5  more resilient in order to avoid such episodes in the future. I would like to name three key words, which point to the need for change: •  short-termism in the financial sector. A far too short time horizon for many actors in the financial system has contributed, among other things, to an excessive risk appetite. That’s why, for instance, the compensation systems and risk management of the banks need to be profoundly improved. •  The transparency of the financial markets. Full information on all institutions, instruments and markets of relevance to financial stability is of the essence. •  The pro-cyclicality of the financial system. In the financial system there is a tendency to accept excessive risks in good times. In a downturn, sharp movements occur in the opposite direction. Here, among other things, banks face the question of adequate capital requirements. Current developments and the euro’s role Against the background of the current developments, let me say a few words about the role of the euro.
Current account imbalances are no more than the arithmetic difference between gross capital inflows and outflows. As these gross flows increase as a result of financial liberalisation, it is natural to expect the difference between them to become more volatile (Obstfeld (2010)). As Chart 4 shows, the growth of gross capital flows in the  2  BIS Review 174/2010  years preceding the crisis was dramatic. At the start of the 1980s, gross capital flows were around 5% of world GDP. By 2007, they had risen to 7 times that. This growth in capital flows and imbalances has been mirrored in the path of the external balance sheets of the major economies. These, too, have adjusted rapidly. In 1985, the US was a net external creditor. By 2009, it had become a net external debtor to the tune of around 20% of GDP. In 1999, China was a net external debtor. By 2008, it had become a net external creditor of around one third of GDP. An interesting perspective on the drivers of imbalances is provided by looking at the gross saving and investment behaviour of surplus and deficit countries over this period. Chart 5 looks at these patterns. It suggests a couple of striking patterns. First, the correlation between saving and investment rates appears to have weakened significantly over the past two decades, for both surplus and deficit countries. This is consistent with increasing capital mobility. Historically, there has been a high correlation between national saving and investment rates – the Feldstein-Horioka (1980) puzzle.