This document summarizes a speech given by William White about the search for efficiency in the financial world and its potential consequences. The speech discusses how deregulation and new technologies aimed at increasing efficiency in real economies, financial markets, and monetary policy have helped lower inflation and volatility but may have also contributed to growing financial imbalances. These imbalances, as seen in issues like high credit growth, rising asset prices, and sectoral debt levels, have historically led to economic "headwinds." The current financial market turmoil stemming from the subprime crisis reflects some of these underlying issues and has significant implications for financial participants, the broader financial system, and the global economy.

1. Has the search for efficiency made the financial world
less safe?
William R White
Head, Monetary and Economic Department
Bank for International Settlements, Basel
Istanbul, 13 March 2008
Money does not perform. People do.

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Overview
The search for efficiency
As good as it gets?
Could financial imbalances lead to “headwinds”?
Current financial turbulence
Conclusion
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3. The search for efficiency
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In the real economy
In financial markets
In the conduct of monetary policy
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4. Efficiency in the real economy
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Deregulation in industrial economies
Productivity and IT
Transition economies and globalisation
A disinflationary bias?
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5. Efficiency in financial markets
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Deregulation and technology
Risk decomposition and risk management
New products and new players
Cheaper and better services
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6. Efficiency in financial markets subtitle
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7. Efficiency in the conduct of monetary policy
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More focus on near-term price stability
More reliance on market processes
More attention to communication
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8. As good as it gets?
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Lower and less volatile inflation
Higher and less volatile growth
More resilience to shocks
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9. Could financial imbalances lead to “headwinds”?
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1, 2, 3, …?
Efficiencies on the real side keep inflation down
More efficient central banks conclude all is well
More efficient financial markets overreach and imbalances build up
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10. Could financial imbalances lead to “headwinds”?
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Credit growth
Asset prices
Sectoral imbalances
Headwinds in history
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11. Credit growth
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Low real interest rates and the Wicksellian natural rate
Rapid credit growth globally
The particular case of China
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15. Asset prices: bond rates and corporate spreads subtitle
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16. Asset prices: sovereign spreads subtitle
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17. Asset prices: equity subtitle
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18. Asset prices: real estate
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19. Asset prices: implied volatility subtitle
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20. Sectoral imbalances
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Over extended consumer and household balance sheets
Large external imbalances
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23. Headwinds in history
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Net private savings
Credit cycles and financial stress
“Boom-bust” cycles in historical perspective
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26. Boom-bust cycles in historical perspective
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Why history still matters
Historical examples
And all without inflation
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27. Current financial turbulence: subprime as “catalyst”
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Implications of the securitisation revolution for participants
Implications for the financial system as a whole
Implications for the broader economy
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28. Implications for participants; households
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Easier and cheaper access to mortgage credit
More options, especially variable rates
Intertemporal smoothing BUT
Choice requires more judgement
More exposure to market swings
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29. Implications for participants; originators and banks
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Greater risk diversification
Normally more sources of liquidity BUT
Less need for “due diligence”
Difficulties in valuing complex products
Failure to price liquidity adequately
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30. Implications for participants; originators and banks subtitle
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31. Implications for the financial system as a whole
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Risk transferred to those who can manage it OR
To the most gullible and the most greedy?
Everyone becomes suspect
And the demand for liquidity soars
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32. Implications for the financial system as a whole subtitle
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33. Implications for the financial system as a whole subtitle
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34. Implications for the broader economy
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Will current turmoil result in credit rationing?
How vulnerable is the global economy?
Is the global housing sector of particular concern?
And what about the dollar?
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35. Conclusion
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Current financial turbulence has deep roots
The boy who cried wolf!
How a “better” financial system can still be improved
Implications for monetary and regulatory policy
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