At the Annual General Meeting of the Bank for International Settlements (BIS), which serves as a bank for central banks, Christian Noyer, BIS Chairman and Governor of the Bank of France, praised policymakers everywhere for taking exceptional measures to prevent a financial system meltdown, but warned that the financial system remains vulnerable. He emphasized the need for countries to (1) make fiscal adjustments to reduce budget deficits, (2) scale back the public sector’s involvement in the banking system and (3) put in place a global financial stability framework to ensure a safer, more resilient financial system. He also urged against delay in making these changes because “delaying fiscal policy adjustment would only risk renewed financial volatility, market disruptions and funding stress.” Instead, “[a] much better strategy is to set out credible front-loaded actions for meaningful fiscal adjustment and for restructuring the financial system.”

Following the Annual General Meeting, BIS published its 80th Annual Report, covering the year ended March 31, 2010, which includes a comprehensive review of the state of the global economy, challenges facing the financial sector, and significant financial regulatory reforms. The report echoes Mr. Noyer’s speech in urging governments to slash their fiscal deficits sooner rather than later and suggesting that stimulus packages need to be phased out. In addition, among other things, the report argues against keeping interest rates too low to avoid distortion of investment decisions, noting that “An extended period of such low policy rates can encourage borrowers to shorten the duration of their debts, facilitate the increased leverage of risky positions and delay necessary balance sheet adjustments.” Waiting too long to return to normal monetary policy could result in further damage to the global economy. The report further observes that “the level of public debt in many industrial countries is on an unsustainable path,” and that “high levels of public debt may lower long-term economic growth and ultimately endanger monetary stability.”

The report cautions that “banks still remain vulnerable to further loan losses.” Noting “recent disruptions in funding markets,” the bank observes that “banks can face significant refinancing pressures when sentiment turns adverse” and that “[e]fforts to restructure and strengthen the financial system should continue.” Emphasizing the importance of a global financial regulatory framework, the report urges policymakers “to incorporate in the regulatory framework the stronger standards being imposed by the marketplace,” with an emphasis on “[h]igher-quality capital, lower leverage and more stable funding.”