However, with debt maturity profiles spread out over time and much of the borrowing at fixed rates, these vulnerabilities remain contained. A third necessary differentiation is that each country stands in a different place. If I may take the example of the French financial sector, both banks and insurers have proven quite resilient, with strong capital and liquidity positions, suffering no contagion from the financial turmoil caused by the political crisis in the UK. In terms of profitability, orderly rising interest rates should also have a progressive and positive effect on banks net interest margin. All of these factors explain that CDS premiums of French banks, for example, have remained lower so far on average than that of the US, the UK, and the rest of Europe, which underlines market confidence in the solidity of the French financial system. We happen not to have pensions funds – which in this regard at least is an advantage –, and French insurance companies don’t make significant use of the same kind of derivatives that would imply margin calls. Page 7 sur 11  These thoughts about financial stability bring me to a general remark about macroprudential policy in the present and new context of tightening monetary policy. When rates were low, macroprudential policy was essential to contain financial risks, allowing monetary policy to focus on the inflation and to remain loose as long as necessary. But now, how to revise our stance in a high interest rates environment with inflation above target?
Ultimately, leverage combined with inept asset management strategies will lead to hedge fund failures. These are likely to occur in the future as they have in the past. It is not inconceivable that expansionary monetary policy and the resulting global liquidity boost provide fertile grounds for the rise and fall of hedge funds. In the event of hedge fund failures, investors – for the most part wealthy individuals – will lose money. In some cases, these amounts could be vast. Nonetheless, such losses have no bearing on the stability of the financial system and should be of no concern to policy makers. What financial and economic policy makers must be concerned with are hedge fund failures or hedge fund activities that undermine the stability of the global financial system. Prudent and disciplined risk management methods, operations and processes in the global investment banks provide the most reliable defense against an erosion of lending standards and the potentially hazardous consequences of the use of excessive leverage in the hedge fund industry. BIS Review 8/2005  5  Graph 1  12000  1200  10000  1000  8000  800  6000  600  4000  400  2000  200  0  AuM in USD bn  Number of funds  Number of Hedge Funds and Assets under Management  0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 No.