The other polar view is that a more stringent regulation will not have any negative impact on growth because it would essentially reduce the frequency of crisis, hence improving the long term performance of the economy. Both views are well-informed and of interest. They come from fairly different constituencies and have very different underpinnings. Having studied carefully all the arguments made during the last months, let me give you my personal sense, at this stage, on the good regulatory equilibrium. First, some consequences of the new regulations are difficult to predict and should be carefully observed. Quantifying precisely the effect of the reforms on the economy is not an easy task. The phasing-in period of Basel 3 has been specifically designed to be consistent with the economic recovery and, more generally, to minimize potential adverse consequences on banks and the macro-economy. Second, we all know also that any regulation may have unintended consequences. One of those, of course, is to create incentives for regulatory arbitrage. It is therefore crucial that the reforms be applied fully and consistently across jurisdictions. It is also important to make sure that a significant part of financial intermediation does not shift to the unregulated (shadow) financing sector, as this would not help reduce the likelihood of disruptive financial crises. Finally, increasing robustness is a necessary but not sufficient condition to get safer financial systems. Another important element is to ensure that risk remains at acceptable levels and carefully managed.
Christian Noyer: The G20’s current challenges – combining new regulations and economic growth Introductory remarks by Mr Christian Noyer, Governor of the Bank of France, at the Paris EUROPLACE Conference “The G20’s current challenges: combining new regulations and economic growth”, Paris, 5–6 July 2011. *  *  *  Ladies and Gentlemen, It is my great pleasure to take part in this Paris-Europlace conference and I warmly thank the organizers for their kind invitation. I am very glad to introduce this roundtable dedicated to a major challenge, regulators and policy makers are facing at the current juncture, that is ensuring a smooth combination between new regulations and economic growth. The crisis has taught us that market economies may be intrinsically unstable. And the costs of this instability are considerable. Whether we look at unemployment, or public debts, it will take many years to deal with the legacy of those few months where the global financial system was on the verge of collapse. Long term consequences still need to be assessed, and, as you know, there are questions about whether the crisis has – or not – permanently affected the growth potential of advanced economies. Therefore, curbing the tendency of our economies to alternate phases of booms and busts and reducing the procyclicality of our financial systems, are legitimate public policy priorities.