Sylvie Matherat Director, Financial Stability Bank of France

1. Sylvie MatheratDirector, Financial StabilityBank of France Macro-prudential and regulatory reforms : what is needed to make the global financial system less crisis prone? LSE and Deutsche Bank Conference on « Reforming the Global Architecture of Financial Regulation » 19/03/2009

2. Introduction • These reforms are needed as there is no way out for the economy if the financial system is not back on track: • On a short term basis: an urgent need to fix financial situation of credit institutions • On a medium /long term basis: a new regulatory/prudential oversight for a new financial system;

3. Outline The new framework is twofold 1/ a need to revisit individual regulation and prudential oversight 2/ a need to « invent » a macro prudential framework

4. Individual regulation/prudential oversight • This new micro prudential framework needs to look at: • incentives • risks • institutions

5. Individual regulation/prudential oversight • Improvement of incentives: • Accounting rules: reforms needed to prevent short termism (day one profit, fair value gains) • Prudential rules: • Avoid regulatory arbitrage by increasing the capital coverage of trading activities • Limit procyclicality: VAR through the cycle… • Corporate governance: better implication of board of directors, remuneration policy

6. Individual regulation/prudential oversight • Better risk coverage: • Tail risk can happen • Off balance sheet risks do not disappear (no clean break/reputation risk) • Funding/liquidity/mismatch risks: they do exist and have a price

7. Individual regulation/prudential oversight • Increase regulatory oversight: • Banks, non banks • Hedge funds, private equity • Rating agencies • Not only deposit-taking institutions but all intervention in the financial system need to be subject to some form of oversight: leads to the necessity of adopting a macro prudential approach.

8. A new macro prudential framework • A new macro prudential framework: • Its rationale • Its objectives • Its actors • Its tools

9. A new macro prudential framework • A new macro prudential framework, why? • Good regulation and incentives at micro prudential level does always not make a good macro economic policy • Harmonization of rules leads to mimetic behaviour

10. A new macro prudential framework • General objectives: • Limit risks of distress for the financial system as a whole • Reduce procyclicality of financial regulation • Prevent excessive risk taking/leverage in order to avoid disconnection between financial sector and the real economy • Enhance crisis resolution

11. A new macro prudential framework • The Actors: Need for an international financial architecture ensuring level playing field • International Financial Institutions: IMF and FSF • expected to collaborate for the regular conduct of Early Warning Exercises • Central banks • having a double role in financial stability: crisis management (liquidity provision, swap agreements) and macro prudential surveillance • Colleges of supervisors

12. A new macro prudential framework • The tools • Possible use of microprudential tools: • Countercyclical capital buffers, • Dynamic provisioning and valuation reserve, • Leverage ratio including off-balance sheet items • Need to enhance institutional capabilities for systemic risk detection: • So far, limited efficiency of early warning indicators, • Need to improve information on cross-border banks’ exposures and systemic institutions • Need to have a better grasp of interbank markets developments, and on price determination

13. Conclusion • Impossibility of preventing financial crises • But need to limit procyclicality of financial regulation and regulatory arbitrage • Key role of central banks in financial stability and macroprudential surveillance • Works in progress on effective tools for the monitoring of systemic risks