Christian Noyer: A review of the financial crisis Speech by Mr Christian Noyer, Governor of the Bank of France, at the Hearing before the Finance Commission of the Assemblée nationale, Paris, 7 October 2008 (updated 15 October 2008). * 1. *  *  A number of comments on the developments of the past month  The bankruptcy of the investment bank Lehman Brothers on 15 September 2008 marked a crucial turning point in the crisis. The direct consequences of this failure, involving over USD 600 billion in assets, appear to have been correctly contained and managed up to now. Nevertheless, it exacerbated the crisis of confidence, with the following major repercussions: •  first, interbank markets increasingly seized up, because banks perceived there to be a rise in counterparty risk. Overnight dollar interbank rates rose to particularly high levels of close to 7%;  •  second, significant pressure on other money market segments, in particular the US commercial paper market, where yields on 30-day paper have been climbing since mid-September to reach levels close to those observed at the end of last year;  •  lastly, the deterioration in the financial position of AIG, the largest US insurer, followed by its exceptional bailout. A two-pronged rescue plan was implemented: on the one hand, the Fed made an USD 85 billion loan at a penalty rate of three-month Libor plus 850 basis points and, on the other, the US government took a 79.9% stake in the company.
So the Bank won’t hesitate to withhold approval of inadequate or opaque models”. There are many things I could say about Solvency II, but I want to concentrate on what it means for the future. One particular aspect is that it sensibly allows for a smooth transition, over a period of 16 years in some cases. It is recognised that for insurers (particularly life insurers), Solvency II with the introduction of a “going concern” regime, is a considerable shift. In particular, firms will have to hold a risk margin to ensure that the insurance liabilities reflect the value for which they could be transferred to a third party. To allow for the gradual introduction of the risk margin, firms will be able to make a transitional deduction from their  BIS central bankers’ speeches  5  technical provisions. Together, the various transitional measures within Solvency II should ensure a smooth progression, avoiding the market dislocation, volatility and increased costs that could result should a number of firms have to augment their capital base at the same time. They rightly recognise that the underlying risks have not changed overnight, even if the regime has. Firms making use of transitional measures will be afforded time to reach the level of financial resources required by the full Solvency II regime. In the meantime we can be sure that the transitional deduction from technical provisions will not result in a firm’s resources falling below those required under the existing UK regime.