Christian Noyer: Some thoughts on the financial crisis Speech by Mr Christian Noyer, Governor of the Bank of France, at Paris-Europlace, Tokyo, 18 November 2008. *  *  *  Ladies and Gentlemen, It is a great pleasure for me to be here and share some thoughts on the financial crisis. It is too early to draw all the lessons from recent events in financial markets. It is however vital to start reflecting on the experience of the last few months. Even more in periods of tension than in normal times, action and reflection should reinforce one another. It is at the very moment of managing the current crisis that we lay the foundations for the future financial system. Having said that, I propose to reflect with you on four topics: •  The nature of the financial crisis  •  The policies implemented to address it  •  The macroeconomic outlook  •  The outlook for financial regulation  The nature of the crisis The crisis first emerged as a liquidity crisis. The first symptoms appeared at the beginning of August 2007 when serious disruptions surfaced on the inter-bank market. More than a year later, tensions on money markets are still with us. Recent weeks have witnessed abnormal levels of spreads, a shortening of maturities, and the contraction, or even closure, of some market segments. Through spill-over, these tensions are also affecting non-financial corporations and, more broadly the financing of the economy.
Banks’ balance sheets became overstretched. Off-balance sheet vehicles without any equity proliferated. Monoline insurers  BIS Review 143/2008  1  guaranteed volumes of structured products way beyond what their equity position could bear. As you know, leverage works both ways. It amplifies gains as well as losses. Amplified gains took the form of the US property boom. Amplified losses are with us now. The whole deleveraging process still underway has meant, since its start, that financial institutions unable to raise capital had to suffer very considerable depreciations on some products, which in some instance wiped out their net worth, bringing them to failure. Against this background, what about French banks? Of course, they are not immune to the crisis. Direct or indirect exposures to toxic assets implied that they too had to record writedowns; sometimes substantial ones. The liquidity shortage is also hurting and the prolonged market disruptions have raised their refinancing costs. That said, our banks are sound and robust. Indeed bearing in mind the following. First, French banks exhibit high solvency ratios. Indeed well above minimum prudential requirements and above ratios of many competitors. Second, overall, they remain profitable. It is so not least because they benefit from regular sources of income. They are universal banks; and as such much less susceptible to funding market conditions. Sound and revolving sources of profits are a vital asset at the current juncture. Fourth, French banks can “manoeuvre” and play an active role in the ongoing restructuring of the international financial sector.