The increase in leverage has appeared everywhere: in the expansion of banks’ balance sheets; in the proliferation of off-balance sheet vehicles that for the most part operate without own funds, i.e. with infinite leverage; lastly, as I have said, in the use of the limited capital of monoline insurers to guarantee a large volume of structured products. One well-known feature of leverage is that it amplifies both gains and losses. For many years, the US property boom provided substantial returns on investment. But with the turnaround in the market, very considerable depreciations have been recorded on structured products, which, for many banks, have exceeded their level of capital. Their inability to recapitalise has led to the failure of some of them. How, in this environment, can we assess the state and performance of our banks? They are, of course, not immune to the crisis. They have direct or indirect exposures (notably via US monolines) to structured products. They have had to make write-downs, sometimes substantial ones. They are also suffering the impact of the drying up of liquidity, the seizing up of some markets and, more generally, the rise in their refinancing costs. That said, our banks are sound and profitable. It is worth recalling four facts that, in the current turmoil, are sometimes overlooked: First, the solvency ratios of French banks are high, well above the minimum requirements set by prudential regulation and the levels of their European competitors; Second, overall our banks remain profitable: over EUR 7 billion in the first half of 2008.
Article 9 of the new NBL defines a wider scope of possible transactions. This allows the National Bank to further optimise the structure of its investments with a view to specific central bank needs. As part of this process, we are also evaluating the possibility of enlarging the investment universe. However, such an extension would raise a number of fundamental questions that will first need to be examined. Before the new law enters into force, we will establish and publish investment policy directives setting out how the Governing Board plans to make use of the extended investment policy scope. While our assets have already been managed largely in conformity with the principles of modern asset management, improvements were nevertheless called for. It was essential to bring our internal investment and risk control processes into line with the new legal framework. The opportunities for diversification brought about by additional investment instruments would, in principle, reduce the market risk of the investments. At the same time, though, the SNB would incur new risks, e.g. additional credit risks. In addition, corporate governance is to be enhanced. The primary goal is to segregate powers as far as possible: firstly between monetary policy and investment policy operations, secondly between investment strategy and its implementation through asset management, and thirdly between risk taking and risk controlling. There are limits to the principle of segregation of powers insofar as the Governing Board is responsible both for monetary policy and investment policy.