When money was abundant, even debt of poor quality or uncertain value could be refinanced easily. This was especially the case since the quality of this debt was artificially boosted by a favourable rating and an insurance guarantee. With the first defaults on subprime loans, all of  BIS Review 130/2008  1  these protections quickly fell apart. Liquidity – and this is one of its characteristics – dried up much more quickly than it had appeared. There was a flood of rating downgrades by agencies, which occurred at a speed and above all suddenness that nothing, in the metrics or methodology used, could have suggested. Lastly, it quickly emerged that the capital of monoline insurers was highly insufficient to enable them to honour the commitments they had entered into. It then became apparent that, far from being spread across the whole system, credit risk was implicitly or explicitly concentrated in the hands of specific institutions, foremost among which were the major investment banks. Hence the successive waves of depreciations of structured products, imposed by the accounting rules in force, with these depreciations in turn fuelling doubts about banks’ solvency, liquidity constraints and further falls in asset prices. This negative spiral is still continuing today. The collapse of structured securitisation has highlighted a fundamental reality. To a great extent, the financial innovation of the past few years has served not to manage and spread risk better, but to increase the volume of credit per unit of capital, referred to as leverage.
The latest forecasts by the IMF envisage for the euro zone, and even more for France, a rebound in growth in the second half of 2009 [respectively +0.6% and +0.8% in 2009Q4 / 2008Q4]. As regards inflation in 2009, the IMF is forecasting 1.9% and 1.6% for the euro area and France respectively. This is not the dark scenario that some people are predicting. Moreover, the IMF forecasts are based on the rather pessimistic hypothesis of oil prices 30% higher than at present and do not factor in the action plans announced over the last ten days. The outlook for financial regulation The crisis has highlighted the need to take a fresh look at the foundations of financial system regulations and has rekindled concerns about the structure of their supervision. At the French President’s instigation, Europeans are calling for the creation of a new “Bretton Woods”, to establish a new international financial order. I believe it would be useful to revisit the foundations of our financial regulation. This must be done without haste, but no stone should be left unturned. Improved regulation appears to be necessary in several domains, from rating agencies to risk management, the organisation of financial markets and even the question of remuneration. As a contribution to this ambitious debate, I would like to make two sets of remarks. One involves the fluctuations of financial systems, the other concerns financial supervision. Financial systems that operate in the framework of a developed market economy are, by nature, subject to cyclical forces.