Christian Noyer: Central banks in the financial crisis Speech by Mr Christian Noyer, Governor of the Bank of France, at Paris Europlace, Paris, 3 July 2009. *  *  *  Introduction Ladies and gentlemen, It’s a great pleasure for me to address such a distinguished audience. From the outset, central banks have been major actors in fighting the financial crisis. Overall, their actions have been broadly applauded. In the period to come, however, steering the economy in an environment of high uncertainty will prove particularly challenging. It is therefore timely to reflect upon the past, present and future course of central banks' actions. Today, I would like to address three questions: Is monetary policy responsible for the crisis? How to assess the policy response from the central banks up to now? And, finally, to which extent does the crisis change our vision of their role in the future? Is monetary policy responsible for the crisis? To those who think it is the case, the standard argument goes as follows: in the aftermath of the equity bubble that burst in 2000, interest rates have been kept too low for too long. This created, for investors, both an incentive and a possibility to take excessive risk. The incentive came from the low level of interest rate where the "search for yield" could only be satisfied by moving to riskier assets and increasing leverage. The possibility was created by ample liquidity and the availability of cheap financing.
As the US is the primary supplier of liquid and safe assets, it attracts inflows of capital, a process which accentuates global imbalances. Excess demand for those assets pushes their prices up, which triggers financial bubbles. Financial development in surplus countries would go a long way to solve that problem by reducing the asset shortage, thus the probability of future bubbles. BIS Review 85/2009  1  •  Third, there is no denying that weaknesses and failures in financial markets played a major role in the build up to the crisis. Over the last decade, financial innovation has been organized to "transform" illiquid and risky instruments into (apparently) safe and liquid assets. That unsustainable process has abruptly come to an end with the burst of the credit bubble. During that period, rating agencies, accounting rules, unregulated and off balance sheet entities as well as very poor risk management all contributed, willingly or unwillingly, to fragilize our financial systems. Those weaknesses are at the origin of the crisis. Had they been addressed in due time, most of the problems we are now dealing with could have been avoided. Creating a new regulatory regime and strengthening our supervisory arrangements are at the forefront of efforts conducted at the national and, for the EU, at the European level. Those efforts are closely coordinated worldwide through the G20 process and the newly created Financial Stability Board.