Jean-Pierre Landau: Extreme events in finance – some reflexions Remarks by Mr Jean-Pierre Landau, Deputy Governor of the Bank of France, at the conference on extreme events jointly organised by the Bank of France and the Toulouse School of Economics (TSE), Paris, 3 September 2008. Updated on 23 November 2008. I want to thank Benoit Coeuré and my colleagues Laurent Clerc, Sylvie Mathérat, Imène Rahmouni, Anne-Marie Rieu and Pierre-François Weber for their comments and suggestions on earlier versions. *  *  *  The current crisis is a strong reminder, if needed, that extreme events can occur inside the financial system. Over the last year, we have witnessed many episodes (1) whose outcome can reasonably be defined as "catastrophic" and, (2) which could not have been predicted according to probability based on past experience. Here, I would like to develop four points: are financial systems prone to extreme events? Is this propensity aggravated by modern finance, as it evolved during the last decade? Does this problematic help us understand the current crisis? And, finally, what are the possible policy responses? Are financial systems prone to extreme events ? I can see at least two reasons why this may be the case. 1. Financial systems are complex systems. They are based on interdependence between multiple actors and counterparties. Transmissions occur through networks whose structure and architecture is constantly transformed by financial innovation and regulatory arbitrage. This potentially creates numerous feedback loops.
In late November, the annual growth of budget revenues was only 2 percent, almost entirely reflecting the low pace of generating the tax revenues. On the other hand, public expenditures have maintained high growth rates, accounting for 16.4 percent in November. The budget deficit reached ALL 65 billion in November. The deficit has been mostly financed through foreign borrowing and privatization receipts, dampening the pressures in the domestic financial market Rapid growth of expenditure and budget deficit during 2009 has further increased the public debt level, accounting for 58 per cent of GDP at the end of November. The Bank of Albania deems that the future budget policy orientation towards fiscal consolidation, aiming at reducing the public debt, is now a prerequisite for the macroeconomic stability in the country. As we have constantly stated, the public debt reduction will mitigate the pressure of the public sector on the financial markets, creating more room for the private sector. Consolidation of public finances will also lower the risk premiums in the economy and will raise the monetary policy effectiveness. Monetary supply slowed down further in the second half, reflecting to a great extent, the ever lower credit growth. Annual growth of private sector loan portfolio slowed down to 10 percent in November. Unlike the first six months of 2009, when credit growth curbing was more  BIS Review 11/2010  3  affected by the tightened supply, in the second half of the year the credit performance was dictated by decreased demand for loans.