The sources of risks related to the crisis are being closely monitored, but the French banking system, like any other, cannot be fully protected against new negative developments stemming from the crisis. In today’s globalised financial markets, the contagion of financial turmoil can spread through many channels. Therefore, extreme vigilance is called for. For example, let me say a few words about hedge fund risks, since an increase in counterparty risk exposure to these unregulated entities may still occur, and it could be combined with “commodities” risk. In this respect, I would like to stress that it is critical for banks to ensure that their hedge fund exposures are adequately collateralised at all times. I am aware that hedge funds are attractive customers that no credit institution can afford to ignore today, and that prime brokerage activities are a path to growth for many of our institutions. Similarly, no bank can afford to ignore the growth of the financial markets linked to commodities and energy. However, it must not be forgotten that hedge funds are also very active in these highly volatile markets. It is therefore critical to avoid risk concentration and a combination of vulnerabilities stemming from these two rapidly growing sectors. Even though we have not taken a second-round shock to the real economy stemming from the financial crisis as our central scenario for the euro area, a high degree of uncertainty is still the distinguishing characteristic of the banking business in 2008.
The first one, which we may call the pan-European approach, has tended to produce a lot of numbers on aggregates and averages in the financial stability analysis. No country wants to stick out in the assessment; they hide behind these broad numbers. But you cannot identify weaknesses and vulnerabilities through averages. “On average”, banks’ credit portfolios and capital ratios may be robust but an FSAP should look for the outliers – the ones which will break first. Whichever approach you select, you would need to include a detailed analysis of those major financial groups which cross the borders between the European countries and sometimes also operate outside the region. These groups are in many cases so large that they could influence countries both positively and negatively depending on developments. Let me give you a recent example from my own country: Icelandic investors have bought large stakes in Swedish financial firms. The investments are rather small from the Swedish point-of-view but significant for their parents in Iceland. Recently, there has been volatility in the Icelandic financial and currency markets. Luckily, the investments in Sweden are doing very well and have rather contributed to strengthening the Icelandic financial system. But in another situation the reverse could have been true – had the Icelanders made these investments during the Swedish banking crisis in the 1990s the Swedish holdings would have contributed to weakening the Icelandic economy.