French Central Bank Head Calls for Macro Prudential Regulation and Securitization Reform

Echoing the call of the US Treasury blueprint and other policy makers, French central bank governor Christian Noyer said that macro prudential must be an essential component of reforming financial regulation. In remarks at the National Federation of the Credit Agricole, he called for a review of the very foundations of current financial system regulations. France has been in the forefront of a move towards the creation of a brand new international financial order. No stone should be left unturned, he said, in efforts to improve regulation in many areas, from rating agencies to risk management, executive compensation, and the entire organization of the financial markets.

The general principle behind macro prudential regulation is straightforward, he noted, consisting of ensuring that regulation manages to limit risks for the stability of, not only a particular institution but also of the entire financial system. Its implementation, however, is complex.

On a more micro level, he observed that very significant reforms of accounting rules are in the process of being finalized. The first reform aims to bring the current framework in line with what is best practice in the world today, It will allow banks to transfer instruments hitherto booked at market value to portfolios where that will no longer be the case. The second reform will introduce greater flexibility in marked-to-market accounting rules, allowing assets whose market is no longer active to be valued at amortized historical cost. This will ensure that the valuation of these products is better suited to current market conditions.

Finally, he noted that this crisis is at root a crisis of securitization. Thus, complex structured securitization must be reformed. While traditional securitization was a successful tool for bundling loans into asset-backed securities, he said, in the last decade it morphed into the short-term financing of complex illiquid securities whose value had to be determined by theoretical models. The inherent fragility of this new securitization model was masked by the actions of market intermediaries, particularly credit rating agencies. The collapse of structured securitization revealed the ugly reality that, far from managing and dispersing risk, it had increased leverage and concentrated risk in the hands of specific financial institutions.