Christian Noyer: No moral hazard – the banks are doing their job Comment by Mr Christian Noyer, Governor of the Bank of France, in the Financial Times, 18 September 2007. *  *  *  In recent weeks, Central Banks in Europe and the US have acted repeatedly to provide liquidity to interbank money markets. These interventions have raised some questions. Concerns were expressed that monetary authorities were bailing out speculators, thus creating the same kind of moral hazard that may have led to excesses in the past. There were also concerns as to whether the integrity of monetary policy would be compromised. These are valid questions. On numerous occasions, in the past, we pointed out the potential dangers that mispricing of credit risk posed for financial stability. We may be now seeing some of the consequences. Excessive risks were taken, and losses will have to be accepted. It is important that monetary and financial authorities take no action that would prevent this process from running its course, let alone be seeing to be condoning past or future excesses. However, the logic behind recent interventions is different. Put very simply, financial turbulence and uncertainty have suddenly triggered an upward shift in the demand for Central Bank money. Faced with such a shift, whose direction is apparent but amplitude uncertain, the choice, for monetary authorities, is clear: either accommodate, and provide temporary liquidity; or not, in which case, interest rates would have to rise to restore balance in the interbank market.
By the same token, such benefits could be gained in the domestic setting from having a lead supervisor under the separate authorities model. Of course, in the case of the integrated model, the notion becomes a lead department in the same agency, rather than an outside lead supervisor. The next question is: who should be the lead supervisor? The obvious answer is it should be the one that supervises the core financial institutions of the country. And following my previous argument that a central bank should supervise the core financial sector, the central bank should be the lead supervisor. The financial landscape, role, and systemic importance of financial institutions evolve overtime, so must the scope of oversight and focus of lead supervisor. The lead supervisor must closely monitor this evolution and ensure no regulatory gap emerges. It can do so by expanding its scope of supervision either directly or indirectly through the relevant agencies and build coordination to ensure it can perform its lead role properly. BIS Review 32/2009  3