The more complex and interconnected it gets, the more vulnerable it is when exposed to small, and localized, shocks. These may worsen and compromise the stability and integrity of the whole. This is what is now happening in Europe, as it happened before with subprime mortgages in the US. In both cases, problems of limited size – the Greek public debt in the case of Europe – have had a disproportionate impact because amplification mechanisms have occurred inside the financial system. In Europe, three separate dynamics have been at work. BIS central bankers’ speeches  1  First, between solvency and liquidity of sovereign debtors. In times of turmoil, sovereigns, like financial institutions, can be either illiquid or insolvent, or both. In many cases, the distinction is blurred. When uncertainty is high, sovereigns face liquidity shortages, and they can only issue new debt at ever higher interest rates. This, in turn, creates doubts about their ultimate solvency, triggering a negative spiral. Good fundamentals are an absolute necessity, but not always a sufficient condition. Liquidity spirals, when allowed to develop, can lock a country, just like a financial institution, into a bad equilibrium. This process has clearly been at work in peripheral Europe, especially Spain and Italy, since the beginning of August. A second interaction occurs between sovereigns and banks. Both are perceived as closely linked by the market. Indeed, sovereign CDSs act as floors to bank CDSs. And, conversely, banks’ creditworthiness depends on their exposure to sovereign risk.
Mugur Isărescu: Meeting the challenges of volatility Opening speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the "Meeting the Challenges of Volatility" Conference, organised by the Romanian Financial Analysts' Association (AAFBR) and Chartered Financial Analysts (CFA) Romania , Bucharest, 27 March 2018. * * * Distinguished guests, Ladies and gentlemen, Good morning and welcome to the National Bank of Romania. Let me extend a warm welcome to our keynote speaker, Ms. Rachel Lomax, a trusted, longstanding friend of Romania. I am pleased to open today’s conference – Meeting the Challenges of Volatility, organized by two prestigious professional associations, the Romanian Financial Analysts’ Association (AAFBR) and Chartered Financial Analysts (CFA) Romania, with the support of the National Bank of Romania. Here, at the central bank, we always offer a friendly framework for debate and interesting topics. I will not go into detail about today’s topic, as I am sure that the panelists of the three panels will bring to discussion important inputs regarding: Global markets volatility and potential risks for Romania (Panel I), Lending, regulations and capital flows volatility (Panel II), and How the fiscal volatility endangers economic growth (Panel III). Before introducing our keynote speaker, allow me to address a subject which is not part of today’s agenda, but is dear to our hearts. A hundred years ago, on the 27 th of March 1918, the union of the old province of Basarabia (Bessarabia) with Romania was created.