French banks were affected through several channels: •  First, through their direct exposures to American households in the subprime category or through indirect exposures in portfolios of structured financial instruments, such as residential mortgage backed securities (RMBS) and collateralised debt obligations (CDOs) that are in turn exposed to subprime risks. As was the case for the rest of the banking system in Europe, indirect exposures accounted for much greater amounts than direct exposures and therefore for the  BIS Review 82/2008  1  bulk of the losses; the lessons that this situation holds for more refined risk management need to be learned quickly. •  Secondly, through exposures to securitisation vehicles (conduits or structured investment vehicles) and particularly through liquidity lines, which need to be managed more rigorously going forward. •  Thirdly, through exposures to assets taken back from securitisation vehicles, or even collective investment schemes, that ran into liquidity problems; this type of reintermediation needs to be given more consideration in terms of capital requirements. •  Fourthly, through their exposures to monoline insurers, which insured some products and were themselves hard-hit by the crisis and thus epitomise “wrong-way” counterparty risks, which need to be assessed more carefully. •  Finally, though exposures to leveraged buy-outs, or more generally by credit-riskrelated costs on the most vulnerable companies, which are starting to rise. Consequently, French banks have not escaped the overall slowdown in net banking income growth affecting major international banking groups.
A review of how refinancing risk could arise across all of a bank’s business lines is a priority; as is an analysis of how refinancing risk interacts with market risk, credit risk and concentration risk. The Committee of European Banking Supervisors and the Basel Committee, at the global level, are currently reviewing the principles governing liquidity risk management. On a final note, I would like to add that the crisis has highlighted the need to enhance internal control systems and to improve the circulation of information about risks, especially for senior managers. The exceptional case of fraud affecting Société Générale has strengthened our resolve in this matter. In France, this should lead to the amendment of Regulation 97.02 on internal control, with provisions on managing operating risk, along with specific efforts to fight fraud. This reform is connected to moves to ensure greater involvement of banks’ highest governance bodies in monitoring their internal control systems. All these initiatives draw on the lessons learned from the past, but they are also forward-looking. Their purpose is to establish the principles of risk management. These principles do not eliminate all risks, but they enhance the resilience of the system when tensions do emerge. This is the objective of the reforms, which I am sure will contribute to greater financial stability in the long run.