General Manager's statement

Statement by Mr Jaime Caruana, General Manager of the BIS, at the BIS press conference on the occasion of the Bank's Annual General Meeting, Basel, 29 June 2009.

A warm welcome to you all. It is a pleasure for me to represent the BIS as General Manager at this Annual General Meeting press conference for the first time. I am accompanied by Stephen Cecchetti, who joined the BIS as Economic Adviser and Head of the Monetary and Economic Department just after last year’s Annual Meeting. Before Steve and I take your questions, I would like to make a short statement.

As you might have expected, this year’s BIS Annual Report focuses on the financial crisis –the unfolding of the events, their causes, their effects on the real economy and the policy responses. The financial crisis greatly intensified in September and October of last year. This in turn forced monetary, fiscal and regulatory authorities both to expand their fight to restore the health of the financial system and to counter the threats to the real economy. The scale and scope of the monetary and fiscal policy responses are unprecedented. One of the key messages of this Annual Report is the need to focus clearly on the medium term and on sustainability when designing such policy responses.

The financial crisis might be beginning to ease its grip. Nevertheless, the balance sheets of many financial institutions have still not been repaired and markets are not yet working normally. Further efforts are urgently needed to address this; after all, a healthy financial system is a precondition for the effectiveness of expansionary policies and for stable long-run real growth. It is essential that authorities persevere in repairing the financial system until the job is done, because as long as financial institutions are hesitant to finance economic activity, the prospects for growth are at risk.

The path to a self-sustaining recovery is narrow and risky. Once the recovery becomes evident, there must be a timely exit, both from the unprecedented macroeconomic stimulus and from the intermediation role of central banks. Otherwise there is a risk of generating inflationary pressures and perpetuating competitive distortions in financial markets. The timing of such exit is, however, not easy.

More generally, policies need to aid, not hinder, orderly adjustment. Policies need to ensure that short-run responses are consistent with long-term sustainability. Policies need to allow the financial sector to shrink as leverage is reduced. And policies need to promote a shift in production patterns away from export- and leverage-led growth models towards more balanced ones.

The failures that caused the crisis were broad-based. They included macroeconomic factors, such as large and persistent global current account imbalances and low real interest rates over a protracted period. And they also included microeconomic factors, such as flawed systems for measuring and managing risk, misaligned incentives and inadequate corporate governance at financial institutions. The result was a build-up of excessive leverage in the financial sector and in the household sector in a number of countries. Neither market discipline nor regulation and supervision were able to prevent these developments.

Repairing the financial system and building a more resilient one for the future also requires broad-based efforts involving cooperation between governments and the private sector. To be successful, these efforts have to result in a new financial stability framework with clear practical objectives embedded in a macroprudential perspective.

The BIS Annual Report argues that financial instruments, markets and institutions all require reform if a truly robust system is to emerge. For instruments, it means putting in place better mechanisms for assessing their suitability and risks. For markets, it means encouraging greater centralisation in clearing and settlement. For institutions, it means making them sounder through tighter consolidation of off-balance sheet exposures, better accounting and improved capital and liquidity standards. Above all, it calls for strengthening the macroprudential orientation of financial regulation and supervision, which has been a central theme of the BIS’s work for many years now. It implies focusing firmly on system-wide risk and addressing the procyclicality of the financial system.

But better regulation is not enough. Macroeconomic policies can and must play a role in promoting financial stability. For monetary policy, this means taking better account of asset prices and credit booms. For fiscal policy, this means at least focusing on long-term sustainability and seeing beyond the distortions of fiscal balances created by credit and asset price booms.

Pursuing this agenda of rescue, recovery and reform calls for great perseverance, patience and determination. At the same time, we need to resist the move towards protectionism; mounting that resistance puts a premium on international cooperation and a heightened sense of shared responsibility.