Today, Jose Manuel Gonzalez-Paramo, a member of the Executive Board of the ECB Institute of International and European Affairs, gave a speech entitled, “Globalisation, international financial integration and the financial crisis: The future of European and international financial market regulation and supervision.” In his speech, Mr. Gonzalez-Paramo focused on the positive and negative aspects of international financial integration and urged the implementation of recent “reforms of the European and international supervisory and regulatory framework.”

With respect to the positive aspects of financial integration, Mr. Gonzalez-Paramo noted the importance of “risk sharing” and stated that “[i]n general, improved risk-sharing opportunities allow economic agents to smooth their consumption and investment patterns better over time” and that “improved risk-sharing enhances in turn the ability of countries to specialize in their most productive sectors, leading to increased economic efficiency.” In addition to risk sharing, he noted that “financial integration improves macroeconomic stability [through] allocative efficiency and economic diversification.”

He also acknowledged the potentially negative consequences of financial integration, stating that “it is not integration per se that is to blame for financial instability and its impact on the real economy, but lack of transparency, wrong incentives, sub-optimal regulation, and certain flawed banking business models - all of which may, but certainly must not necessarily accompany financial integration.” According to Gonzalez-Paramo, “the challenge of the day is how to strengthen financial stability without reducing long-term growth.”

He expressed his support for the recent reform efforts by the G-20 and the European Union. He discussed the work of the Financial Stability Board, a newly formed group under the G-20 and the Basel Committee of Banking Supervisions. He noted the importance of a “prudential framework,” as well as “(1) the development of a framework for macro-prudential supervision, (2) devising effective mechanisms to address the moral hazard problem and the risks posed by “too big to fail” institutions, and (3) legal regimes to allow an ordered resolution of complex financial institutions.”

With respect to European financial reform, he supported the “adoption of the ECOFIN roadmap … on financial supervision, stability and regulation” and the “revision of the EU supervisory framework.” Within these initiatives, he specifically focused on “macro-prudential supervision,” noting that “[m]acro-prudential oversight focuses on the financial system as a whole and involves the monitoring, assessment and mitigation of systemic risk” and that “[m]acro-prudential policies aim to mitigate the build up of financial imbalances and ensure that the financial system is able to withstand their unwinding and be resilient to shocks.” He identified central banks as “especially well suited to take up the main responsibility for macro-prudential supervision.”

In conclusion, Mr. Gonzalez-Paramo stressed the need to “fully and quickly implement the reforms of the European and international supervisory and regulatory framework which are needed to enhance the robustness of our financial systems.”