The Walker Report recommends a set of guidelines for disclosure and transparency by private equity funds, including the publication of regular information on their financing, ownership and prospects. 4  BIS Review 31/2008  Sovereign wealth funds and global imbalances However, the emphasis on transparency and the politics of SWFs risks missing a bigger policy issue: the recent rapid growth in SWFs reflects large and persistent global imbalances which are a continuing threat to the stability of the world financial system and the global economy. Global imbalances and financial crises While there are many examples of countries which have run deficits for many years such as Australia and New Zealand, history also shows how painful the eventual adjustment can be. There are many examples in which capital flight has resulted in a huge fall in GDP growth and broader financial crises – for example in Latin America in the early 1980s, in the Nordic countries in the early 1990s and the east Asian economies a decade ago – which, in turn, weakened global GDP growth or global financial institutions. Countries with large deficits are vulnerable to a rapid reversal of capital flows. If investors are no longer willing to finance the deficit, domestic spending will need to be cut relative to output through a combination of reducing spending and switching production to the tradable sector. A recent IMF study reviewed 42 episodes of large reductions in current account deficits in developed countries over the past 40 years.
The second remark is that removing anticipations of state support/bailouts is a process that may take time and which must be handled with extreme care. The unexpected imposition of losses on some type of creditors to resolve problems in some banks can lead to shifts in expectations of public guarantee for other institutions, and create contagion and funding stress at other banks. The case of Cyprus was a perfect illustration of this. The difficulty is to guide the evolution in expectations over time, and avoid abrupt shifts that would increase financial instability and ultimately undermine the objective of the reforms. This ‘transition problem’ is in my view critical, and has been overlooked in many discussions. This conference is organized so as to facilitate exchanges with the audience. Therefore, I encourage you to be fully involved in the discussions and wish you fruitful debates. I now leave the floor to Augustin Landier from Toulouse School of Economics, one of the organizers of this conference with Regis Breton and Laurent Clerc from the Banque de France Financial stability directorate, who will chair the first session of the conference. BIS central bankers’ speeches  3