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The 1.00 percentage point cut in 2009 relaxed the financial burden of the banking system’s intermediation activity. The Bank of Albania has consistently supported the banking system with the required liquidity. In addition to cutting the key interest rate, the Bank of Albania has helped Albania’s banking system activity through: the change of the refinancing auction form from fixed-amount auction to unlimited-amount auction; up to 3-month extension of the maturity term of injected liquidity; expansion of the range of collateral in our refinancing operations; BIS Review 78/2010 5 increase of the use of required reserve; and the reduction of the overnight loan interest rate. We have employed almost all of our range of instruments for implementing monetary policy. The amount of liquidity injected by the Bank of Albania peaked in summer with ALL 40 billion. As a result of the deposits entering the banking system, this amount reduced gradually to about ALL 28 billion at the end of 2009. 2. Banking supervision and financial stability The banking system performance was significantly conditioned by the economic slowdown and wavering of confidence, aspects that were elaborated at length in my speech. Consequently, there was higher uncertainty, higher bank sensitivity to liquidity, a more cautious lending behaviour, and an increase in non-performing loans. These are the main highlights of the banking system performance during 2009. Despite the downward profitability, capitalization indicators remain at satisfactory levels. | Mervyn King: Rebalancing the United Kingdom’s economy Speech by Mr Mervyn King, Deputy Governor of the Bank of England, to the British Chambers of Commerce National Conference, London, 23 April 2002. * * * For a decade now, the British economy has grown at an average rate of close to 3% a year, just above its long-run trend rate. The spare capacity created by the recession of the early 1990s has gradually been used up. Unemployment has more than halved from over 10% in early 1993 to around 5% now, on the internationally standardised measure. And growth has been more stable than for decades. But overall this stability has concealed the contrasting fortunes of different sectors in the economy. Since 1997 household spending on consumption has risen, on average, by 4% a year in volume terms. It is most unlikely that consumer spending can continue to rise at this rate. The trade deficit has widened sharply in recent years, reaching some 3% of GDP at the end of last year. And the increase in the trade deficit would have been even larger had it not been for an improvement in the terms of trade, the ratio of export to import prices, which rose by 8% over the past five years. The result of the widening trade deficit, and the improvement in the terms of trade, is that domestic demand has been able to grow faster than output. | 0 |
We understand that some banks may have concerns about reporting ongoing investigations, for fear of litigation risks. But we don’t want to create a potential loophole such that “bad apples” could just get around the Scheme by leaving one firm to join another firm once an investigation commences. To strike a balance, the industry guidelines set out factors that banks should take into account when exercising judgement on whether or not to share information about ongoing internal investigations. To ensure transparent and fair treatment to the job applicants, they will be provided with an opportunity to be heard in case of any negative information. 14. I would like to emphasise that the MRC Scheme is a very important milestone of our efforts to enhance bank culture. And this is one of the earlier efforts among major international banking centres to tackle the “rolling bad apples” problem. We certainly look forward to collaborating with the industry to ensure smooth implementation of the Scheme. Phase 1 of the Scheme covering senior positions will formally start in May 2023. But I would strongly encourage banks to start sharing and reporting any misconduct information as soon as they are ready to do so. Talent pool for the financial sector 15. So that’s the part on conduct and risk culture, or what I normally referred to as the efforts on the “mindset” of bank employees. | We value highly human and civil rights ranging from gender equality, data protection, to the condemnation of torture, including the rejection of capital punishment. The protection of these values and rights relies on the vigilance of the legal professionals here in this room and elsewhere. This is even more important vis-à-vis a reality of extreme and obsessive forms of nationalism. The EU has also increased personal choices. The ability to travel, work and live across borders has been enhanced. The European Health Insurance Card permits European citizens to obtain healthcare wherever they are. 1.5 million people, perhaps including some of you here today, BIS central bankers’ speeches 1 have completed part of their studies in another member state as part of the Erasmus programme. More than 15 million EU citizens have moved to other EU countries to work or to enjoy their retirement. This wider range of options increases people’s wellbeing. These reasons, and the other positive aspects of membership, have been drowned out in debate by concerns over migration and the large wave of refugees from troubles in the Middle East and elsewhere, the impact of the crisis, disaffection with high levels of unemployment – especially youth unemployment, and a perceived lack of accountability and legitimacy of the EU institutions. I fully recognise that Europe in its current state is not perfect. The crisis has shown that Economic and Monetary Union is incomplete, and further work is required, particularly in the areas of banking and credit markets. | 0 |
Rating system design The first area concerns the design of a risk rating system, which is, of course, central to ensuring the effectiveness of the IRB approach. The Basel Committee believes that banks’ internal rating systems should accurately and consistently differentiate between degrees of risk. The minimum IRB standards in this area build on the strongest risk management practices observed in the industry. To illustrate the point, many organizations either already have, or are in the process of developing a ratings system that captures both the risk of borrower default, as well as transaction-specific factors that shed light on the amount of loss that would arise if default occurs. In other words, these banks’ systems are now oriented to capturing the several essential components in estimating credit risk under the IRB approach. Credit risk rating systems are clearly improving in various dimensions, including how finely they seek to distinguish differing degrees of borrower risk. To do so, banks typically look to expand the number of ratings categories into which they slot their exposures. However, just establishing more rating categories is not enough. The challenge is for banks to define clearly and objectively the criteria for these ratings categories in order to provide more meaningful assessments of both individual credit exposures and, ultimately, their overall risk profile. The clarity and transparency of the ratings criteria will be critical to ensuring that ratings are assigned in a disciplined and reliable manner. b. | Our analysis includes banks’ assessments of their economic capital requirements for operational risk, and how this capital is allocated to business lines to reinforce efforts to improve internal controls. With respect to those specific business lines, we are increasingly looking to drill down to test key controls. The aim is to ensure that the internal processes in place are in fact working and are effective in mitigating relevant risks. Without question, it will be important to devote the necessary supervisory resources - in terms of skilled personnel, technical training, and a targeted strategy - to these new supervisory efforts. In this regard, the Basel Committee anticipates providing much assistance, both formally and informally, to supervisory agencies around the world that are preparing for the added responsibilities we will all assume as the New Accord comes into force. Moreover, I am pleased to note that the Financial Stability Institute (or FSI) will continue its collaboration with the Basel Committee, especially in assisting supervisors globally in understanding and implementing all aspects of the revised Accord. The FSI anticipates that more than half of its 50 seminars and programs this year will concentrate on components of Basel II. In fact, shortly after the release of the final consultative package later this spring, the FSI intends to offer three special seminars around the world to introduce other supervisors to the most important features of the new framework. | 1 |
Price stability is not sufficient for financial stability The two decades leading up to the financial crisis had been characterized, across the developed world, by low and stable inflation, and, by historical standards, by exceptionally stable output growth. It is not by chance, indeed, that macroeconomists labeled those years as the “Great Moderation” era. At the same time, however, as extensively documented in particular by the BIS in several perceptive, early papers, 1 those years had been also characterized, compared with the previous portion of the post-WWII era, by a significantly more frequent occurrence of asset price bubbles and subsequent crashes. A longer-term perspective clearly shows that the occurrence of asset prices booms and busts under conditions of price stability, far from being a “fluke” of the Great Moderation era, had been, in fact, quite common. Until the outbreak of World War I, indeed, metallic standards had dominated for centuries, guaranteeing an extent of price stability which is, by today’s standards, virtually unimaginable. Just to mention a single example, the price level in England in 1661, five years before the Great Fire of London, had been virtually the same as that prevailing in 1913, one year before the collapse of the international Gold Standard. In spite of such remarkable price stability, however, metallic standards had been recurrently plagued by financial crises and asset prices booms and busts, from the South Sea bubble of 1 See in particular Claudio Borio and William White (2003), “Wither Monetary and Financial Stability? | 3 A more recent example of this phenomenon is provided by Japan, where the persistent deflation which has gripped the country since the early 1990s has consistently led, ceteris paribus, to a heavier debt burden for households that had contracted mortgages in the boom phase of the late 1980s and deterioration of banks’ balance sheets. In a symmetric fashion, high inflation – which, historically has also consistently meant volatile inflation – threatens the very foundations of the financial system because of the resulting capricious and unpredictable redistribution of wealth between debtor and creditor institutions. The most glaring example of such a phenomenon is provided by episodes of very high, or hyper-inflation, such as those plaguing a significant fraction of belligerent nations in the aftermath of World War I. Evidence from the Great Inflation episode of the 1970s is, although less dramatic, equally telling. Altogether, historical evidence therefore leads us to conclude that, although not sufficient, price stability is indeed a necessary precondition for financial stability. I now turn to a final point concerning the relationship between financial and price stability, namely the need to preserve the stability of the financial system in order to prevent the emergence of “tail risks” to price stability. I will start by discussing risks on the downside – that is, the possibility that the economy falls into a deflationary spiral – and I will then turn to those on the upside. | 1 |
In modern times, most societies would demand proper protection of consumers when they purchase a wide variety of goods and services, such as food, electrical appliances, drugs, health care and financial services. Consumers, as compared to suppliers and their intermediaries, are normally in a disadvantaged position in terms of product knowledge and bargaining power. Therefore, they need to be protected from unscrupulous sales practices or misrepresentations. Regardless of what kinds of goods or services are involved, the basic principle in consumer protection is that consumers should be treated fairly. In essence, what it means is that consumers should be able to know what they are buying, the costs involved and all other relevant terms and features of the transactions and should not be subject to high handed sales tactics. In Hong Kong, when a customer walks into a typical retail bank, he or she can undertake a wide variety of financial transactions, ranging from conventional banking services, such as deposits, currency conversion, credit cards, remittances and loans, to the purchase of wealth management or insurance products. This is what we call “universal banking”, a regime in which banks operate like financial supermarkets. Naturally, banks like the universal banking regime as it offers non-interest income such as fees and commission as well as diversification of businesses. At the same time, customers also like universal banking as it offers great convenience in the form of a one-stop service instead of having to go through different firms for different types of financial transactions or products. | The bank should also ensure that the key terms and conditions are clearly spelt out and understood by the customer. For example, when a customer wants to take out a loan, the bank should highlight the key features about interest rates and any applicable fees, charges or penalty for late or early repayments. When it comes to the selling of investment products, the situation becomes more complicated. The complication arises not only from the risk inherent in the investment products, some of which can be rather complex, but also from the special relationship between banks and their customers. Banks serve a special function in modern times. They are different from other financial firms in that they are the institutions with which most of our citizens entrust their life savings. There is a special trust between banks and their customers. However, over the years and for a number of reasons including strong competition, narrowing interest margins and pressure for revenue growth, banks have sought to increase the share of fee- or commission-based income by expanding their businesses to the sale of financial products to customers. As a result, bank depositors have become the main sales targets for different kinds of investment or wealth management products. Very often the special customer trust that banks enjoy has made it easier for bank staff, as compared to their counterparts in other financial firms, such as securities firms, brokers, investment advisers and insurance agents, to market and sell investment products to their customers. | 1 |
…and here at home Sweden has also been affected by the turbulence in the financial markets, albeit to a much lesser extent than, for instance, the United Kingdom, Germany and the United States. The fact that Sweden has been affected despite not being, as it were, involved in the problems that started the unrest is not so remarkable. We are a part of the global financial system and not an isolated northern outpost. The Riksbank governs the short-term rate that applies for one day, the so-called overnight rate, and this has remained stable around the repo rate. In brief, the Riksbank’s method of steering interest rates has worked well. But the interbank rates with slightly longer durations have risen, although not as much as in some parts of the world. This is primarily a question of different effects from the uncertainty in the financial markets, such as rising risk premiums. On the whole, the Swedish financial system and the interbank market have nevertheless functioned well. 6 BIS Review 106/2007 What is the role of the Riksbank? What does the Riksbank do when there is unrest in the money market? One of the most important tasks is to continue to ensure that the economy develops in a stable manner. We have to conduct our monetary policy so that we attain the inflation target of 2 per cent. Where possible, when the price stability objective allows scope for this, we should also ensure that production and employment develop in a balanced manner. | In comparison with other countries, this is particularly the case for banks and other service sectors, reducing their production costs. The business sector has been quick to adapt and change, and to make use of new technology that is available in an international market. This is probably due to the 1980s and 1990s’ modernisation of the way the economy functions, which resulted in more efficient markets. In addition, growth in labour productivity reflected a marked fall in sickness absence in 2004. The latest figures nonetheless indicate that productivity growth is falling back. Although we do not have satisfactory current statistics for central government and local government productivity, government agencies have probably also become more efficient. New technology and new organisational structures have certainly provided opportunities to increase efficiency. Wage-earners and enterprises have both fared well. Low import prices have resulted in a slow rise in consumer prices and a solid increase in wage-earners’ real wages. High export prices have contributed to holding down the rise in real wages. Combined with high productivity growth, this has resulted in high corporate earnings and solid growth in employment. It remains to be seen whether the combination of low unemployment and a low wage share is sustainable. This partly depends on whether positive supply-side conditions persist. There is probably symmetry here. First, should Norway’s terms of trade deteriorate, productivity growth slacken and foreign workers return to their home country, the wage share will increase, profits fall and 4 BIS Review 139/2007 unemployment will rise. | 0 |
The time is also right for pushing through projects that contribute to the transition to a more sustainable economy. The size of this European fund should be proportionate to the public spending financing needs generated by the pandemic; indeed, the fund’s approval and launch should be expedited. 4. The design of an ambitious structural reform agenda Beyond these short-term measures, we need to define an ambitious structural reform agenda, aimed at increasing the economy’s potential growth. Let me briefly outline what, in my view, the content of this agenda should be. 4.1. Improving productivity dynamics Firstly, the main determinant of the Spanish economy’s low potential growth is lacklustre productivity growth. In the past 20 years, Spanish total factor productivity has grown at an average annual rate of 0.2%, far below Germany and the United States. It is therefore a priority to improve the dynamics of this variable. I shall focus on three aspects which, across the spectrum, determine these productivity gains. Promoting business dynamism and growth, and raising the degree of sectoral competition The Spanish economy is characterised by the small size of its firms. And it is precisely in Spanish SMEs that we see a high, negative productivity gap with their European counterparts. Boosting their growth would not only help increase productivity; it would also enhance the financial soundness of the business sector. | While we have expanded the regulatory scope to address emerging risks in payment developments, regulations are also right-sized to the risks posed. 11. First: As individual e-wallets, how do we keep them safe to use ? When we look at ewallets, we find that they face very similar risks as digital banking products. Firstly, as online services, both are dependent on technology and face cyber risk – so MAS expects them to manage these technology and cyber risks well. Second, they both hold retail customer monies, so they need to safeguard these monies. The differences however, are that an e-wallet is used for day-to-day payments, and so needs to be very liquid to meet customer demands, and ewallet issuers don’t give loans with the float. So it’s important to right-size our regulations to their business model, and not to stifle innovation by loading them with bank-like requirements. Taking these into account, MAS sets out proportionately simple options for e-wallets to safeguard customer monies, for example, holding it as a deposit with a bank. MAS may also prescribe further safeguarding measures in liquid and low-risk assets. Second: Collectively, how do we manage risks that e-wallets pose to the financial system? Our role as central banks is to protect the stability of, and confidence in, the financial 12. system. To achieve this, we need to develop regulations that, while addressing key risks, do not obstruct the industry developments. | 0 |
If you wish to operate in our markets, or make use of our market infrastructures, including effecting any payment or settlement arising from relevant transactions, as participants or as intermediaries, you have to follow these disclosure rules and ensure that you deal only with those who follow these rules. The regulation of international finance is even more difficult, but I think the same cooperative spirit can be applied, if indeed regulation in whatever form is considered necessary. But then, looking at the situation facing the key players in a position to influence the direction of this important reform, I doubt whether the political will is there to make changes of this nature. Views of strong domestic lobbies may prevail and urgent domestic issues may divert attention. As you may know, it is not the desirability of reform, nor the technical feasibility of the details, that dictates action or inaction, it is, regrettably, more often than not, the political reality. Meanwhile, international discussions on this subject are moving into a critical stage when we will either see results or see much recent effort jettisoned as momentum is lost. Regional initiatives What recourses, then, are left to small open markets such as our own to enable us to pursue the legitimate goal of ensuring monetary and financial stability? Not a lot, I am afraid. | So perhaps we played a part in turning around the sentiment of international finance last year. BIS Review 120/1999 2 And let me say this also: knowing well my close colleagues who fought this battle together with me, it would, I think, be difficult to find stronger believers in the free market than those of us in the Hong Kong Administration. A few names will, of course, spring to your mind immediately, but my response is that we work in the real world and not in ivory towers. The fact of the matter is that free markets can sometimes fail. Free markets can sometimes behave in a manner very much against the long-term interests of society. When this occurs, if those of us in the Administration hide conveniently behind the banner of free markets and do nothing, we are failing in our duties. And to those who accuse us of betraying the philosophy of positive non-interventionism, let me ask this question: why do you think Sir Philip Haddon-Cave used the word “positive” when he coined the phrase? International finance But perhaps enough has already been said on that subject. Let me now move to the longer-term structural issues of concern to our monetary and financial systems. As I said earlier, we need to ensure that we come out of the crisis stronger rather than weaker. We need to identify structural defects, if any, and address ways of correcting them, not necessarily limiting ourselves to our own systems, given the globalisation of financial markets. | 1 |
• Over the past months good progress has been made in the various areas and the momentum needs to be maintained to establish a sound regulatory framework. Work has been completed on a number of issues (e.g. enhancements of Basel II, as mentioned below) while other areas still need more consideration before they will be finalised by the end of 2009 or at the beginning of 2010. • The Basel Committee on Banking Supervision (BCBS), which is the driving force regarding initiatives in the area of micro-prudential regulation, issued in July 2009 a final package with measures to improve the Basel II framework. • On accounting the IASB (International Accounting Standards Board) is taking various initiatives and shows openness to collaboration with regulatory authorities. A couple of important projects are under way. • But significant challenges remain. Again: International bodies and governments must not lose momentum in their efforts to strengthen financial regulation and supervision. All the aforementioned issues equally deserve due consideration and should be addressed as a matter of urgency. BIS Review 102/2009 The world economy after the crisis The crisis is not over yet. However, it is worthwhile discussing some preliminary reflections about the world after the crisis. • First, beyond these regulatory and supervisory challenges, a successful crisis resolution will also impinge on economic structures world wide. The global growth model of the last 15 years has failed. | The monetary pillar provides for discipline not to ignore risks to price stability stemming from imbalances in money and credit developments. • Initiatives are now being taken to close the gap in the area of cross-border supervision and between micro- and macro prudential supervision. The envisaged establishment of the European Systemic Risk Board (ESRB) which the ECB will support analytically and logistically marks an important step in this direction. The ESRB will monitor systemic risk and provide risk warnings and recommendations. Effective cooperation and leadership at the European level will be crucial to make the ESRB successful in the pursuit of its mandate. • Is the current improvement in some financial market segments genuine or driven by governments and central banks? When the crisis took hold and risk aversion spread, leading to de-leveraging and a sharp decline in securitisation public attention focused on executive pay as an area for regulation. In fact improving corporate governance remains a key area for regulation. Bonus systems need to be changed so as to make managers liable for their decisions and provide them with the right incentives to focus on longer-term sustainability of their business models rather than short-term profit. • But corporate governance is just one area where regulation needs to be improved. | 1 |
On this front, a study conducted by the Hong Kong Government in conjunction with TMA earlier concluded that there are no major legal or regulatory obstacles to transactions involving wholesale Islamic financial instruments in Hong Kong. 13. However, there is a need to refine the tax regime in Hong Kong in order to provide a level playing field between sukuk and conventional bonds. Owing to Shariah requirements, structuring sukuk often involves the originator setting up a special purpose vehicle for the purposes of issuing sukuk to sukuk holders, and multiple transfers of underlying assets between the originator and the sukuk issuer in order to generate profits. These complex structures, which are not required for conventional bonds, may incur additional tax and stamp duty expenses for the sukuk issuers. 14. I am pleased to see that an amendment bill to address this issue has been introduced into Hong Kong’s Legislative Council and is now in the final stages of enactment. 3 2 Source: Institute for International Finance. BIS central bankers’ speeches The bill, once passed, will enable sukuk to enjoy tax treatments similar to those currently afforded to conventional bonds. This would be a significant milestone in the development of a sukuk market in Hong Kong. 15. Apart from providing a level playing field, equally important is the active participation of market players, including non-Islamic arrangers, issuers and investors in the Islamic capital markets, as they will be the ones who lead market development in the future. | If Singapore did not have political stability, good infrastructure, and a conducive business environment, MAS’ strategies to grow the financial centre also would not have worked as well. In a world where central banks typically keep a distance from the rest of government, it is amazing how closely MAS works with other government agencies in Singapore – macroeconomic surveillance and national economic policies and strategies combating money laundering risks and investigating financial crimes promoting jobs, skills development, and labour market policies advancing technology initiatives ranging from e-payments to digital identity These partnerships have made a decisive difference to the outcomes for MAS, the financial industry and the Singapore economy. MAS has achieved what it has also because of the close partnership it has enjoyed with the financial industry. In a world, where many regulators are aloof at best and hostile at worst when dealing with the industry, the relationship MAS has with the industry is special. To be sure, we are a no-nonsense supervisor, not averse to setting high prudential standards, imposing tough remedial measures, and occasionally shutting down a bank or two. But MAS has always believed that working with the industry, rather than against it, is the best way to achieve our shared objectives: keeping the system safe and growing the business. In this, MAS has been fortunate to have an industry – banking, insurance, asset management, and capital markets – that has actively supported us through thick and thin. | 0 |
Other measures such as so-called moral suasion, whereby the problems are pointed out to the banks and the financial sector, could then also come into question. It is also reasonable for central banks to take some responsibility for real economic developments in addition to those that are judged to affect inflation in the medium term, even if financial stability is not under immediate threat. As I mentioned, the Riksbank has decided to take account of this by disregarding temporary effects on inflation. We also discuss developments beyond the target horizon that normally governs monetary policy. A successful, flexible policy of inflation targeting leads to lower fluctuations in output without giving rise for that reason to higher average inflation. And that is the essential aim of the price stability target. The second question, however, is considerably more difficult to answer. Forecasts of resource utilisation and inflation can be systematically inaccurate because the models and assessments used do not take account of the independent role that asset prices and debt can play. Also, as a result of structural changes, historical relationships may have changed, thus causing the central bank, for example, to come to incorrect conclusions about the output gap and potential growth. This could, for instance, result in a monetary policy that pushes up asset prices and debt too high. For example, the traditional models, which are grounded in an analysis of the real economy, are based on assumptions of rationally behaving households and firms, efficient capital markets and linear relationships. | As a result, at the beginning of the 1990s Sweden and other Scandinavian countries were hit by both a banking and currency crisis. As before the depression in 1930, the crises were preceded by steep rises in asset prices and a very sharp expansion in credit. Reform of a tax system that had fuelled debt and that was changed in such a way that caused a rise in post-tax interest costs, contributed to deepening the crisis. The lack of experience at banks and supervisory authorities of acting in a deregulated environment, in combination with excessively expansionary fiscal policy, were other significant causes of the negative developments. But large financial imbalances had already accumulated before the crisis was triggered. This occurred without the anchor for inflation, that is the nominal exchange rate, giving sufficient indications in time. In spite of the fact that the overheating resulted in a real appreciation of the krona against other currencies due to inflation, confidence in the fixed exchange rate regime appeared to be fairly stable for a long period. This led to substantial, partly short-term, capital inflows increasing demand for the krona at the same time as a growing current account deficit reduced krona demand. The demand for the krona was partly due to Swedish firms demanding loans in foreign currency. Consequently, monetary policy, which targeted the exchange rate, was not tight enough to prevent the build-up of the imbalances. | 1 |
As in the past, we shall present our June and December inflation forecasts at our media conferences. In March and September, the inflation forecast will be published within the context of the press release on the quarterly assessment of the situation. Gold sales On 22 September this year, the Swiss people and the cantons rejected both the gold initiative and the counter-proposal. The National Bank, however, continues to implement its programme for the sale of half of its gold reserves. For the time being, the surplus gold reserves will still figure in our balance sheet. To date, approximately 660 tonnes of a total of 1,300 tonnes of gold have been sold. We see no reason to change our strategy: these assets are surplus reserves which are no longer needed for monetary policy and which may be put to another use. In order to use the reserves for other purposes, the gold is sold and the proceeds are invested in securities. We invest the proceeds from the gold sales in Swiss and foreign securities. The portfolio from the surplus reserves is thus less exposed to exchange rate fluctuations than the foreign exchange reserves. The earnings deriving from invested gold proceeds flow into the SNB's income statement and thus become available for profit distribution in favour of the Confederation and the cantons. As from 2003, annual profit distribution will amount to Sfr 2.5 billion. The profit distribution agreement concluded with the Confederation last April need not be revised. | Inflation forecast I shall now turn to the course of inflation and our new inflation forecast. Our inflation forecast of June 2002 (the green dash-dotted curve in the graph) shows that at that time we assumed, based on a stable three-month Libor rate of 1.25%, that inflation would gradually rise to 1.9% in the first quarter 2005. Year-on-year inflation, as measured by the national consumer price index, dropped to 0.3% in the third quarter 2002 from 0.7% in the second quarter. In October and November it rose to approximately 1%. These fluctuations are due mainly to changes in the exact points in time when data on clearance sales prices are collected. This is also the main reason why our forecast of June 2002 over-estimated the development of inflation in the third quarter 2002. Our new inflation forecast (red dashed curve) is based on the assumption that growth in the US will pick up again from the second quarter 2003 onward. The US economy is likely to achieve its growth potential stepwise until the beginning of 2004. In the EU, the upswing will take a little longer. We are not expecting a significant acceleration of growth before the end of 2003. We assume that the BIS Review 73/2002 1 dollar/euro rate will remain at about the current level and that the oil price will be around $ per barrel. | 1 |
I therefore really appreciate the opportunity to participate in today's discussion on assessing monetary policy. I have today chosen to highlight a very fundamental question with regard to assessing monetary policy; is it really necessary to interpret inflation that deviates from target as a failure for monetary policy? It is clear that short-term deviations do not necessarily imply failure. But how should we regard a deviation from target that persists for a longer period of time, perhaps several years? Here I take as a point of departure the changes in the supply side of the economy that have occurred in recent years in a number of countries, including Sweden and Norway, where inflation has for a period of time been below target. I will, however, begin with a more general description of my views on the assessment of monetary policy and how we in Sweden work to create the conditions for a good and fair assessment of monetary policy. Assessing monetary policy When discussing and assessing central banks’ target fulfilment, it is important to base the assessment on a realistic picture of what monetary policy actually can and should achieve. To make the most correct assessment possible, it is therefore necessary for central banks to have a clear analytical framework to produce the material on which decisions are made. Similarly, it must be quite clear which principles have been used as a basis for monetary policy decisions and on what information the conclusions were based. | The strained economic situation among a number of municipalities and county councils meant that we assessed it to be difficult for the Swedish Municipal Workers' Union to achieve any further far-reaching wage increases for its members. It was estimated that, all in all, the demand situation would have a subduing effect on wage demands and we thus did not expect to see any major contagion effects in the 2004 wage bargaining rounds from the early termination of the Municipal Workers' Union's wage agreement. We did not find reason to make any fundamental changes to these assessments at the beginning of February, when we had our most recent monetary policy meeting. Wages comprise only part of the total costs for labour among companies; on top of these come costs for negotiated and legislated employer contributions, various types of fringe benefits and shorter working hours. As it is the total wage cost that is important to inflationary pressure, it is also necessary to make an estimate of all of these factors. The assessment in the Inflation Report was that the wage costs for the economy as a whole would increase by just under 5 per cent this year and just over 4 per cent next year. It was also assumed in the forecast that productivity growth would recover after a decline in 2001 and approach the more normal, trend level. | 0 |
On the fiscal front, investment in effective water management systems is urgently needed on top of reconstruction and assistance for flood victims and affected firms. This will not only restore foreign investors’ confidence, but will also enhance the economy’s productivity and its potential growth by avoiding future disruptions and making more efficient use of the country’s abundant water resources. BIS central bankers’ speeches 3 Nevertheless, the expected massive spending for such purposes will unavoidably stretch the government’s fiscal resources. At the same time, the government will have to spare some fiscal policy “bullets” in the event that the situations in the U.S. and the Eurozone worsen more than expected and lead to another global recession. Against this backdrop, mediumterm fiscal discipline is needed to ensure long-term sustainability of the country’s public finance. This means the government will have to rethink or reprioritize certain policies that may not contribute to productivity enhancement. Meanwhile, the Monetary Policy Committee (MPC) had been raising the policy interest rate over the past year, until the last meeting in October where the MPC hold the policy rate unchanged. Personally, I view the current level of our policy rate to be accommodative enough to support domestic recovery, with some room available for further easing if needed. While upside risks to inflation are not very serious at the moment, we still need to keep our eyes on inflation pressures that are likely to build up with the pick-up in public and private spending after the flood is over. | And at this point, I would like to stress more on why we cannot afford to be complacent with the situation. Most importantly, there always seems to be an unbridgeable gap between what market anticipates and what governments and central banks can really offer at the end of the day. And if history is any guide, it is precisely this gap that creates ripples of disappointment and risk aversion that propagate throughout the global financial market almost instantly. When we look back, not so far in the past, all of us have just witnessed a panic sell-off in global stock markets starting from late July to September. In addition to stocks, almost every type of risky assets was also under tremendous selling pressure across the board, and some 2 BIS central bankers’ speeches market commentators even went so far as comparing this event with the onset of the 2008 global financial crisis. And when we look forward, the future is not very promising either due to two major reasons. First is the fact that so-called “milestone” developments toward the resolution of the crises in the U.S. and the Eurozone so far do not seem to address problems at their root causes; rather, issues have been dealt with merely temporarily, one after another. A recent example of this would be the eleventh-hour negotiation in the U.S. in raising debt ceiling limits only to meet the August-second deadline, which did nothing but leave the big elephant standing in the room. | 1 |
The Bank’s approach has therefore been to seek to reduce these risks to financial stability by engaging with initiatives which support an orderly market transition and facilitate a shift in financing to support climate goals. I want to talk about three specific areas: disclosure, green finance initiatives and the need for coordination. Disclosure The Bank has been supportive of the FSB’s Task-force for Climate Related Financial Disclosures (TCFD). The TCFD recommendations provide an excellent basis for firms to disclose their exposure to climate-related risks and opportunities and their related strategies, governance and risk management practices. Disclosure helps investors identify which businesses are best equipped to deal with the risks and opportunities that climate change presents. And that in turn creates the pressure for change that ensures the risks are managed better than they would otherwise be. For me what was ground breaking about the TCFD recommendations was the introduction of scenario analysis - where firms set out the resilience of their strategy in different climate related scenarios, including a two degree or lower scenario. To be clear these scenarios are not forecasts or predictions. Rather they are data driven stories that are designed to enable the market to drive better decisions today. They are thus hugely more informative than spot observations of current exposures. And they are absolutely what is required to help investors price medium and long term risks like these. The TCFD recommendations are voluntary. In my view that is important. | I am informed that one of the objectives of the Association is to utilise the acquired scholarly knowledge and experience to add value to society through leadership in various projects and initiatives. I know that alumni associations world over have existed for centuries and most of them have one basic principle, that of benefiting members wherever they may be and for free. However I am told that your association other than just carryout activities for the benefit of members will go a step further to do benevolent activities for the benefit of society at large. This is commendable and I am looking forward to see what initiatives you have outlined to advance welfare in our society. Mr President, the theme for this launch this evening “Innovation for Leadership Excellency” is indeed very timely and appropriate to the norms and beliefs that I am told your association espouses. It is innovations such as yours that gives us the comfort that you are indeed giving back to society following the huge resources that were invested in making it possible for you to acquire this very important qualification the Masters in Business Administration from ESAMI. You have been schooled as business managers and therefore it is inevitable that what is expected of you is nothing short of leadership excellence. We shall all be looking up to you to offer solutions to the business and economic challenges that your institutions and the economy as a whole are faced with. | 0 |
As importantly, they have typically involved fiscal and monetary policies acting in tandem to cushion the effects of the crisis on jobs and incomes. The first line of defence against the crisis has come from fiscal policy. Fiscal tools act directly on the source of the problems caused by the Covid crisis – cash-flow shortfalls for companies and jobs risks for workers. 18 For example, Barro, Ursúa and Weng (2020). 17 All speeches are available online at www.bankofengland.co.uk/speeches 17 To those ends, a wide variety of fiscal measures have been put in place over recent months, including job support schemes, tax rebates and holidays, grants to certain sectors and loan guarantee programmes.19 For the major economies, these programmes has been as large as any since the Great Depression, often double-digit percentages of GDP (Chart 15). Additional support will come from the automatic stabilisers built into tax and spending rules. All in, the IMF estimate that announced fiscal stimulus measures from the Covid crisis are near $ trillion globally, equivalent to around 8% of world GDP in 2019. | Since then, positive demand news has lifted the starting level of UK output. If this level was maintained along the same growth trajectory, the average output gap over the next three years would be 3 percentage points smaller than in May. With a Phillips curve slope of a third, inflation at years 2 and 3 would be around 1 percentage point higher than expected in May. Another significant piece of news since May has been in asset prices. Since then, shorter-term interest rates have fallen by around 25 basis points, risky asset prices such as equities have risen by almost 7% and the sterling exchange rate has fallen by around 2¼%. Taken together, these asset prices movements represent a material loosening in UK monetary conditions. On standard ready-reckoners, they would boost output by around ½%, and inflation by around 0.2 percentage points, at the policy horizon relative to the May scenario. Finally, imagine we plugged this news about the expected output gap and inflation into a standard Taylor Rule, in which interest rates are mechanically set in line with these two factors. Assuming weights on the 22 All speeches are available online at www.bankofengland.co.uk/speeches 22 two terms of 0.5 and 1.5 respectively, the Taylor Rule implied path of interest rates would, on average, be around 1 percentage point higher over the policy horizon as a result of the news about asset prices and demand, relative to the May-implied scenario path. | 1 |
The forecasts were made under each participant’s unspecified views of appropriate policy, which is defined in true Fedspeak as: “the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s dual objectives of maximum sustainable employment and stable prices.” BIS central bankers’ speeches 5 Being more explicit about appropriate policy can clear up a lot of uncertainty. For example, suppose inflation were running higher than we would like, and the economic projections in the SEP showed it coming down over the next couple of years. In the absence of information on participants’ policy projections, the public would not know whether the FOMC thought inflation would simply come down on its own or whether it thought that a monetary tightening would be required to reduce inflationary pressures. Including policy projections will help clarify such judgments. In my opinion, this is a substantial, first-order improvement in policy communications, and this greater clarity may have significant additional value for improving how the economy operates. Expectations of the future path for policy and the degree of uncertainty surrounding those expectations are key determinants of private borrowing rates and other asset prices. These play an important role in the spending and saving decisions of households and businesses. | 11 In this 10 See Rachel, L and Smith, T (2015), ‘Secular drivers of the global real interest rate’, Bank of England Working Paper No. 571 and ‘Resolving the climate paradox’, speech by Mark Carney at the Arthur Burns Memorial Lecture, Berlin, 22 September 2016, available at http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech923.pdf. 11 Among companies responding to the Bank’s Decision Maker Panel survey between February and April 2017, Brexit was the largest current source of uncertainty for 10%, one of the top two or three sources of uncertainty for 30%, one of many drivers of uncertainty four 40% and not important for the remaining 20%. 4 All speeches are available online at www.bankofengland.co.uk/speeches 4 context, the best contribution the Bank of England can make is maintaining financial and monetary stability by pursuing the right policies within consistent frameworks. In recent years, the Bank has been determined to remove any lingering uncertainties that companies may have about access to finance in good times and bad. The Bank is building the resilience of the financial system through much higher capital levels, more prudent underwriting standards, rigorous stress testing and appropriate contingency planning. The core tier 1 capital ratios for major UK banks are now almost 14% (Chart 12). Yesterday, the FPC increased the countercyclical capital buffer rate to 0.5% from 0%, announced higher expectations of lenders’ underwriting standards for consumer credit, and recalibrated the leverage ratio. | 0 |
Undoubtedly, the most significant effect of the global crisis on our banks was the fact that the path of gradual adjustment of imbalances that Spain had undertaken and which until then was the scenario shared by all analysts and national and international organisations, suddenly turned into a collapse of all macroeconomic indicators. That obliged banks and savings banks to accelerate the clean-up of their balance sheets and to set in train what has ultimately become a full-fledged industrial restructuring of the Spanish banking system. 2 BIS central bankers’ speeches The toolkit at hand, which had been successfully used in the past, was not up to facing a crisis of this nature. The legislation on bank resolution had not been adapted to the demands of the Monetary Union, in particular to the prohibition of monetary financing, and nor did it envisage that it was savings banks that would essentially need to be repaired. Moreover, the singularity of a systemic crisis, on a global scale and with absolutely unrestricted capital movements, made it impossible to make creditors take haircuts without running the very serious risk that market alarm would ultimately lead healthy institutions to sink. Our main strength – one by no means insubstantial – was that the large credit institutions were reasonably sound and that the problems were concentrated in a clearly defined group of small and medium-sized institution. | While the merit of what has been achieved should be accorded to many, allow me briefly to acknowledge the work of the staff of the Banco de España, and most specifically the body of bank examiners, economists, lawyers and the senior managers of the supervisory, regulatory and legal arms of the Bank, on whom the greatest burden has fallen in terms of implementing the strategy approved in legislation. The fact is, the task discharged by them has perforce been complex and time-consuming. The decision by the authorities – previous and present alike – to use limited public funds in the reconstruction of the banking system was warranted because the big Spanish banks did not and do not need help and because, given the delicate situation of our country’s public finances then and now, the impact on the markets of a sharp and sudden increase in the budget deficit might have led to the collapse or intervention of the entire Spanish economy, as indeed occurred in some other countries. But with this strategy of minimising the use of public resources, the restructuring work increases exponentially and extends over time. The Spanish supervisor has had no “bad bank” with which to restructure the sector. Here we have not seen a State which, armed with taxpayers’ money, has bought bad assets from banks, thereby resolving all supervised banks’ problems at a stroke. Our Bank’s supervisory team has had to apply a strategy which has obliged it to seek predominantly private solutions. | 1 |
The reason that the HKMC can offer rather high annuity rates is because it will place the entire annuity premium received from policyholders with the HKMA. The HKMA will then invest the money alongside with the Exchange Fund portfolios, half in the public markets (bonds and listed equities) and half in private markets (private equity and real estate). As the HKMA already has the investment capability and infrastructure for managing a portfolio as large as around $ trillion, it would be easy to take on the additional investment generated by the HKMC’s annuity premium. The HKMC has now received around 10,000 applications amounting to $ billion in subscription. We are processing the applications and the exercise is expected to be completed soon. By end-October or early November this year, the first annuitants will be receiving their first monthly annuity payments. 8. Let me do some quick maths here by using a married couple at the age of 65 who has joined both the Reverse Mortgage Programme and the Life Annuity Scheme. If the property they own is worth $ million, (which is the average value of the properties under the Programme), then they would get a monthly payment of $ plus the right of lifelong occupancy under the Reverse Mortgage Programme. If they each subscribe for $ million Life Annuity, then they will get another $ $ + $ per month. So they will receive $ per month. | As for the elderly, the Government provides a non-contributory means tested Old Age Living Allowance for those aged 65 or above; and people that do not fall within either of the first two groups. Typically this group of citizens are those who have worked hard for their whole life, used up the bulk of their earnings in raising their children, and may be owning a small apartment. Most (iii) of them, by the time they retire, do not enjoy any pension or other forms of voluntary retirement benefits. They do have some accumulated savings in their Mandatory Provident Fund accounts, but it is unlikely that, for various reasons, the amount, on its own, would be large enough to support a decent retirement life. 3. It is the retirement protection of this third group of citizens that I wish to address today. In Hong Kong, about 70% of the 1.7 million privately owned residential housing units, including subsidized home ownership flats, are owner-occupied. Around 65% of the owner-occupiers have fully paid down the mortgage loans, if any, of their properties. For those owner occupiers who have already paid off their mortgages, many of them don’t have a lot of other savings or assets at their disposal. Even for those with some savings, they are having a tough time in managing their money if they don’t have the expertise or the appetite in active investment. | 1 |
11 While the positive unconditional correlation between average firm-level mark-ups and concentration at the sector level shown in Chart 4 is not statistically significant, a regression of individual firm-level mark-ups on market concentration in their sector (at the two-digit SIC level) shows a statistically significant positive relationship when we include firm and time fixed effects. 12 For example, Díez et al (2018) find that the majority of industries in the US have seen mark-ups rise since 1980. 13 Díez et al (2018) find that the increase in US mark-ups since 1980 is also relatively broad-based across sectors. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 This fattening of the upper tail of the mark-up distribution is not uniform across sectors. Chart 10 plots a measure of the skew of the mark-up distribution across different sectors over time. The fattening of the upper tail of the distribution is most pronounced in the ICT, transport and storage and manufacturing sectors, each of which is associated with higher average levels of mark-up. In understanding the characteristics of these firms, one revealing cut comes from taking into the account the extent to which UK-based firms’ sales are domestic or foreign-focussed (Chart 11). While both categories have seen their mark-ups rise somewhat, this has been far larger among firms selling predominantly into foreign markets (almost 60 percentage points) than domestic markets (around 15 percentage points). | 28 All speeches are available online at www.bankofengland.co.uk/speeches 28 Chart 9: Mean and median UK-listed firms’ mark-ups Mark-up (e.g. | 1 |
While life insurance premiums and family takaful contributions have grown by 48% since 2010, the penetration rate has only increased by 5 percentage points. This indicates that the industry is increasingly concentrated on a narrow insurance segment. If we eliminate double-counting, only 35% of adults have some form of cover. For the rest, products are too complex and remain unaffordable. Existing distribution channels also fail to provide adequate access, especially outside urban centres. Technological advancements are not being used to the fullest. Even for the population segments that are being served, making a purchase or a claim is a process fraught with anxiety and headache. Increasing medical insurance premiums have also placed insurers under heightened public scrutiny, with questions raised on the suitability of product designs that offer little protection against escalating costs of healthcare. Insurers’ contracting arrangements with healthcare service providers have also been called into question. While insurers might not be the guilty party here, the response to the criticism has been slow and wanting. As a group, the insurance community is meek in safeguarding the sector’s image and reputation. Underinvestment in domestic talent and capacity is another key concern. Among a large number of foreign insurers, significant reliance on group level support has limited the investments in core functions needed to develop strong domestic capabilities. In addition, large amounts of payments are being made for management fees and outsourcing arrangements. Between 2014 and 2016, it is estimated that insurers in Malaysia made no less than RM1.3 billion of such payments to foreign affiliates. | In terms of the migration to e-payments, the insurance and takaful sector is a key sector where the usage of cheques is still prevalent. In 2016, 2.3 million cheques were issued by insurance and takaful companies while 9.8 million cheques were collected by such companies from their customers. While good progress has been made this year with the decline in cheque collection accelerating from -0.5% in 2016 to -22.1% in the first 7 months of 2017, more effective and creative measures are needed to drive cheque usage to negligible levels. To this end, Bank Negara Malaysia has recently concluded a consultation exercise with the industry on the implementation of an ePayment Incentive Fund Framework (ePIF). Under the framework, insurance companies shall set aside RM3 for every cheque issued and RM1 for every cheque collected to be used as incentives to encourage their customers, agents, service providers and government agencies to migrate to e-payments. The current practice where agents collect premiums from customers in cash and make payment to insurance and takaful companies using the agencies’ own cheques or credit cards should stop. The industry should promote greater prudence and transparency in the collection of customer premiums by facilitating customers to make direct payments to the insurance and takaful companies. To this end, the industry equipping agents with mobile point-of-sale (mPOS) or mobile apps to collect payment directly from customers should be the norm. Thirdly, the industry needs to collaborate and invest in key market infrastructure and arrangements. | 1 |
The Banco de España was one of the first to join (in April 2018); it is a Plenary member and plays an active role in all of the workstreams. From my personal experience I can confirm that it is a forum for global 6 Banco de México, Bank of England, Banque de France and Autorité de Contrôle Prudentiel et de Résolution, De Nederlandsche Bank, Deutsche Bundesbank, Finansinspektionen (Sweden), the Monetary Authority of Singapore and the People’s Bank of China. cooperation characterised by continuous learning, drawing on both the experience of the members themselves and the analytical work performed by the different workstreams. Meanwhile, the Eurosystem, the European Central Bank (ECB) and the Banco de España have also been devoting considerably more resources to better understanding the implications of climate change. Notably, this includes: i) ii) iii) the incorporation of climate-related issues within the ECB’s monetary policy framework. the integration of sustainable and responsible investment practices into own portfolio management. the assessment of climate risks in microprudential supervision. Monetary policy First, with respect to our monetary policy mandate, in 2021 the ECB’s Governing Council presented an action plan to include climate change considerations in its monetary policy strategy. The measures aim to reduce financial risk related to climate change on the Eurosystem’s balance sheet. Moreover, they are designed in accordance with the Eurosystem’s primary objective of maintaining price stability, and the secondary objective of supporting the green transition of the economy in line with the European Union’s climate neutrality objectives. | In this regard, the main challenges facing us all (including the financial sector) when it comes to managing these risks are plain to see. Among others, I would single out a lack of harmonised definitions, ESG data gaps and the ability to measure impacts. With this in mind, I will now address certain key aspects that concern all sectors, and not just the financial sector. Main regulatory initiatives We authorities, regulators and supervisors have been shaping the regulatory framework for appropriate management of this risk. This is still an ongoing task, but important progress has been made. At the European level, I would highlight the following: first, the EU Taxonomy Regulation,13 which establishes the bases for determining when an investment or economic activity may be considered environmentally sustainable, and lays the groundwork for other European sustainable finance regulations; and second, Directive (EU) 2022/2464 (CSRD)14 on corporate sustainability reporting, published on 14 December 2022, which updates and reinforces the rules on environmental and social reporting by the companies concerned, which are large undertakings (defined as those that meet at least two of the following requisites: balance sheet total over € million, net turnover over € million or average number of employees over 250), along with listed small and mediumsized undertakings.15 13 Regulation (EU) 2020/852 14 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464 15 Article 19 bis of Directive 2013/34/EU amended by the CSRD. | 1 |
Of course, greater economic integration in Europe has been accompanied by greater institutional cooperation. Although now supplemented by the (still untested) Chiang Mai Initiative, the framework for economic policy cooperation in Asia involves less deep and intense collaboration than in the European Union. The single monetary policy in the euro area is the acme of Europe’s economic integration. And the situation in the 1990s in Asia was much less developed than now. Several Asian countries (notably Malaysia at an early stage) introduced capital controls in the face of the financial crisis, something which cannot be done in Europe given the depth of financial integration and the commitments made to the free movement of capital within the Single Market in the EU Treaties. 4. Policy responses to the crises The much deeper set of economic and institutional linkages within the EU and euro area today compared with those that existed in Asia in the mid-1990s has important implications for the policy responses. In particular, the lack of a regional framework in Asia placed the responsibility for addressing the financial crisis in the 1990s immediately and squarely on the international financial institutions, notably the IMF. By contrast, the close cooperation between EU countries has meant that the IMF has played a less prominent role in the recent crisis, even though it makes a significant contribution to the design and implementation of the adjustment programmes implemented in Greece and Ireland. | The Fed and the Bank of England have introduced a new “collateral swap facility”, under which the banks can temporarily swap their unsaleable securities against liquid government paper. The pressure on banks to refinance their balance sheets is thus reduced without additional central bank money having to be injected into the market. The Fed went even further in providing support during the sale of investment bank Bear Stearns. It took illiquid and risky securities directly onto its own balance sheet. Thus, in the third phase, some countries administered new remedies in addition to the existing ones, and even performed a few emergency operations. In the SNB’s case, the range of counterparties admitted to repo auctions has already been very broad for some time. Indeed, shortly before the turmoil began, we decided to expand the range of eligible securities for money market operations, whilst still retaining stringent quality standards. Measures such as those used in the US and UK have not proved necessary in Switzerland to date. Monetary policy steering during the crisis The measures taken by the SNB, as described above, were primarily aimed at ensuring the smooth functioning of the Swiss franc money market during the turbulence. However, it is also important to look at the actual implementation of monetary policy strategy during the crisis. Of particular interest in this regard are two aspects which have occasionally been misinterpreted by the general public. | 0 |
Joseph Yam: Establishment of the Treasury Markets Association Welcoming remarks by Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the inaugural ceremony of the Treasury Market Association, Hong Kong, 23 January 2006. * * * Good afternoon, Ladies and Gentlemen, 1. First of all, let me, as President of the Council of the Treasury Markets Association, welcome you all to this inauguration ceremony to celebrate the establishment of the Treasury Markets Association. The establishment of the TMA has the strong support of market participants. I am glad to learn that the Association has already successfully registered about 2,000 market practitioners and over 50 institutions as members. This strong membership provides a solid base for the Association to take forward its strategy and plans. 2. To maintain the status of Hong Kong as an international financial centre, a requirement specified in Article 109 of the Basic Law, I believe that it is important for us to have, among other things, treasury markets that are active, professional and efficient, and that operate in accordance with international standards. The volume of financial business in Hong Kong is enormous. | National balance sheets and the crisis Recently, when events have centred on the euro area, the focus has been on the risk of sovereign default. The underlying issue is the cumulative loss of competitiveness of some economies, and the consequent strains in government balance sheets resulting from their attempts over the years to use fiscal policy to sustain growth. A look at Spain’s external balance sheet reveals (net) liabilities of around 100% of GDP (Chart 1). Italy’s net external liabilities are, perhaps, rather smaller than that (Chart 2). But in terms of total government debt, Italy’s new administration inherited the greater burden. Put those two facts together and it becomes clear that Italy’s fiscal problem is partly about the distribution of debt and resources within the country. Japan is, perhaps, not dissimilar. Go back four-five years, to the beginning of the crisis, and the problem was the mortgage obligations of US households – subprime households in particular were hugely over borrowed. The commercial real estate sector too. Defaults there triggered the crisis. Every set of defaults and problems around the world has reverberated through the UK, due to London’s role in intermediating international capital flows. We have one of the largest gross external balance sheets (Chart 3). Although much of it is accounted for by foreign banking activity, the City is not an entrepôt. UK banking is linked to the wider City’s fortunes via complex counterparty-credit exposures and investments. | 0 |
For example, by identifying the common characteristics and residual risks underlying various types of credit risk mitigation techniques - collateral, guarantees, netting, and credit derivatives - it is hoped that a more uniform and consistent treatment can be applied to these instruments in place of the various, somewhat ad hoc, treatments that have grown up to date. There is perhaps one caveat that should be attached to the aim of introducing greater risk sensitivity. This is that it often entails much greater reliance on the judgement and competence of the supervisors. This can be seen in the evolution of the Basel Accord to encompass banks’ internal market risk models, if approved by supervisors, and in the new proposals to allow some banks’ internal ratings to be used for credit risk capital. It is also evident in the emphasis on individual supervisory judgement in Pillar 2 of the consultative paper. We believe this is the right direction to follow in the case of G10 banks and supervisors. It is, however, more questionable whether such a system is easily exportable outside the G10, in particular to some emerging markets. Indeed, even amongst the G10, some supervisors (such as the US) are actively contemplating drawing a two or more tier distinction in the capital rules applied to banks, depending on the level of complexity of the organisation. | However, we are at least talking about a reasonably well-defined type of risk and one which is quantifiable in statistical terms. We are in much more difficult territory when it comes to operational risk. The term operational risk covers a wide range of types and sources of risk, and banks’ data bases of loss are generally patchy. There are numerous questions not only about the appropriate design of the charge, but also about the appropriate level. It is clear that some types of operational risk, such as fraud, can result in huge spikes of loss, as we saw in the case of Barings and Morgan Grenfell. Even though we are concerned with protecting the system, I feel it would be inappropriate to expect most banks to hold an additional cushion of capital to cover these sorts of very rare events: it would either be grossly excessive for most of the time, or alternatively seriously inadequate if a major problem arose. So the focus here must be on systems and controls, and on using variable target capital ratios under Pillar 2 to encourage improvements in these. Moreover, the appropriate level of capital will depend in part on how far we think operational losses are correlated with other types of loss which are already covered by capital. Probably there are some types of operational loss - processing errors, settlement delays - which do not exhibit a high correlation with either credit or market risk. | 1 |
Mr Duisenberg focuses on the possible future impact of the unique monetary unification in the European Union and shares some observations on the challenges facing the ECB and the EU Speech given by Mr Willem Duisenberg, President of the European Central Bank, at the Villa d’Este Workshop in Cernobbio on 4 September 1999. * * * Ladies and Gentlemen, A great number of you are clearly familiar with the political and economic developments which led to the introduction of our new currency, the euro. I should therefore like to look ahead and focus my remarks on the possible future impact of this unique monetary unification and share with you some observations on the challenges facing the European Central Bank and the European Union as a whole. Since 1 January 1999, the euro has been the common currency for eleven Member States of the European Union. This was rightly described as a historic event, since the completion of Economic and Monetary Union indeed marks an unprecedented degree of economic and political integration among the European countries participating in this endeavour. I am sure that the introduction of the single currency will help to further realise the efficiency and welfare gains of the Single Market, although this will probably be a gradual process, and will become apparent only over time. However, with the establishment of Economic and Monetary Union, the integration process has certainly gained a new quality. | Figure 1 Unemployment calculated according to Okun’s law7 Per cent of labour force 14 14 Outcome 13 13 Okun 1 (differences, 1980-) Okun 2 (differences, 2001-) 12 12 11 11 10 10 9 9 8 8 7 7 6 6 5 5 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2007 2008 2009 2010 2011 2012 2013 2014 Note: The difference version of Okun’s law captures the relationship between GDP growth and the change in unemployment. The figure shows unemployment forecasts based on estimates of this relationship in two different time periods. Source: The Riksbank According to the historical relationship between changes in GDP and changes in unemployment, the change in GDP between the first quarter of 2009 and the third quarter of 2011 should have led unemployment to increase by 1.5–2.5 percentage points above the actual increase. The functioning of the labour market is decisive. Actual unemployment is not only influenced by economic activity, but also by structural factors that shape the functioning of the labour market. These structural factors influence both the decision to enter the labour market and companies’ decisions to hire and fire. | 0 |
The new international division of labour thus affects every stage of the production process; it influences the localisation of added value and raises the question of the financing of the external imbalances of economies that focus on the design and marketing of products rather than their manufacture. The second session will deal with the impact of trends in productivity and competitiveness on international capital allocation and global imbalances. These trends may have contributed to the increase in global imbalances reflected in current account balances, and highlight several paradoxes. The first paradox is that of the US economy, which combines the structural surge in its productivity with a possible loss in competitiveness illustrated by the increase in its external deficit. This paradox is perhaps only apparent if we consider that the improvement in the US’ relative productivity performance is mainly in the non-tradable sector and as compared to the industrialised rather than the emerging economies. In addition, while this pick-up in productivity does boost the profitability of investments, logically, it goes hand in hand with an excess of investment over national savings that calls for increasing foreign capital inflows. However, the predominant nature of capital inflows to the United States changed at the start of the 2000s, switching from mainly purchases of equities and foreign direct investment by the private sector to purchases of government securities by central banks, which are not motivated by the search for increased profitability. This leads us to the second paradox, a twin to the first, i.e. | Furthermore, economic agents should not be given any cause to act on the basis of expectations that central banks would insure financial markets against considerable losses. Otherwise, there would be serious moral hazard problems and the public would hold the central banks accountable for specific developments in financial markets such as the performance of the stock market. This might seriously impair the central banks' goal of pursuing price stability, and thus their credibility. Central banks also face considerable problems in terms of identifying financial bubbles. After all, a bubble can only be confidently identified as such once it has burst. 5 J.E. Core, W.R. Guay and D.F. Larcker, “Executive Equity Compensation and Incentives: A Survey”, Federal Reserve Bank of New York, Economic Policy Review, April 2003, pp.27-45. 6 A. Greenspan in his Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 16 July 2002; see also A. Greenspan, “Stock Options and Related Matters”, remarks at the 2002 Financial Markets Conference of the Federal Reserve Bank of Atlanta, 3 May 2002. 7 P. Maidment, “In Nothing We Trust”, Forbes Magazine, 7 January 2001; F. Fukuyama, “Trust: The Social Virtues and the Creation of Prosperity”, Free Press, 1995. 8 F. Fukuyama, “Social Capital and Civil Society”, 1 October 1999, paper presented at the IMF Conference on Second Generation Reforms; J. Sobel, “Can We Trust Social Capital?”, Journal of Economic Literature, Vol. XL, March 2002, pp.139-154. | 0 |
Measures of broad (commercial bank) money globally rose by only around 85% in the decade following the global financial crisis and by even less 11 Global figures are based on data on OECD M1, while UK figures based on central bank reserves plus notes and coins in circulation. 9 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 9 in the UK. Put differently, the money multiplier in the UK – the ratio of broad money to central bank money – fell by around two-thirds following the global financial crisis (Chart 9). Chart 9: Ratio of Broad Money to Narrow M4ex/(Reserves+ Notes and Coins) 35 30 25 20 15 10 5 0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Bank of England and Bank calculations. This should come as no surprise. The global financial crisis impaired financial intermediation, slowed the growth in bank credit and money and thus contributed to the sluggish growth in money spending. Interestingly, the relationship between broad money growth and money spending growth – the velocity of circulation of broad money – remained relatively stable following the global financial crisis (Chart 10). The velocity of circulation of narrow money, by contrast, fell dramatically. The Covid crisis has added to these long-standing disinflationary pressures. | 9 8 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 8 official interest rates to close to zero and expanded their balances sheets progressively by around $ trillion or 13% of global GDP (Chart 8). Chart 8: Central Bank Balance Sheets 20000 USD (billions) 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2006 2007 2008 2009 Fed 2010 2011 2012 ECB 2013 BoJ 2014 2015 BoE 2016 2017 2018 SNB 2019 2020 Total Source: Respective central banks and Bank calculations. Interestingly, this rapid growth in central bank money creation was not mirrored in money spending growth in the economy. In the ten years prior to the Covid crisis, narrow money globally rose by over 150%, while money spending globally rose by less than 50%. In the UK this contrast was starker still, with central bank money rising by around 200%, while money spending rose by less than 50%. 11 One way of reconciling these diffuse trends in the monetary and real sides of the economy comes from looking at a different measure of money - commercial bank money. | 1 |
Indeed, in the case of those prepared by the Banco de España, the impact of the crisis on Spanish public finances is estimated to be somewhat more severe than what was envisaged in the scenarios published on 20 April, given that they were made on the assumption that the duration of some of the measures was more time-limited than what certain subsequent economic policy decisions infer. The Banco de España will publish an update of its macroeconomic and fiscal projections in early June. 13 The impact of the crisis on the financial system The severe impact of the pandemic on economic activity has significant consequences on many fronts. One such front is financial stability. In this connection, as highlighted in the Banco de España’s latest Financial Stability Report,5 published on 4 May, the economic impact of the crisis has substantially increased the risks to financial stability. That said, the national, European and international economic policy measures adopted should help mitigate these risks. In the specific case of banks, the disruption of activity is increasing credit, market and operational risks. 5 See Banco de España (2020), Financial Stability Report, Spring 2020. 14 Indeed, the pandemic has meant that credit risk has increased substantially. This is particularly the case of credit exposures to non-financial corporations, which have seen how their revenue has fallen, initially as a result of the shutdown in productive activities and subsequently further to the lower demand for their products. | The effectiveness of monetary policy in the euro area has unfortunately been hindered during the crisis by financial fragmentation – and in the countries where low interest rates are most needed. But we are now seeing signs that monetary policy is once more gaining traction across the euro area, in particular via the bank lending channel. On the funding side, bank funding conditions have eased considerably since mid-2012. Interbank counterparty risk has fallen, as evidenced in the sharp decline in the spread between secured and unsecured money market lending. And benchmark interest rates, notably sovereign yields, have been responding much more homogenously to our rate reductions. On the lending side, the transmission of our interest rate decisions to bank lending rates is still uneven across euro area countries, but the dispersion has narrowed considerably. Our latest Bank Lending Survey also confirmed a stabilisation in lending conditions, with improvements highly concentrated in stressed countries. In short, we have reason to be optimistic that our accommodative monetary policy is feeding through to the real economy and, as such, can help prevent damage to potential growth caused by a prolonged period of economic weakness. Yet it is also clear that low interest rates cannot raise growth on a structural basis. What is crucial to actually lift productivity is credit being allocated where it is most productive. Let me therefore turn to the issue of financial sector repair. | 0 |
In this we write that monetary policy should normally be aimed at attaining the inflation target within two years. But the current situation is not normal. In the present situation it is more reasonable to aim for CPIF inflation being close to 2 per cent towards the end of the forecast period. And it will be, according to our forecasts. CPI inflation varies substantially over time, partly as a result of our own repo rate decisions. The substantial fall in inflation this year is primarily due to our own repo rate cuts and falling energy prices. Inflation measured in terms of the CPIF, on the other hand, is more stable and provides a better picture of the underlying inflation trend. During the period 1995-2008, in which we have hade an inflation target, inflation measured as the CPIF has on average been close to 2 per cent and rarely outside of the tolerance interval of 1-3 per cent. The target for monetary policy is still that CPI inflation should be 2 per cent, but we must accept that it fluctuates around 2 per cent as a result of repo rate changes. BIS Review 25/2009 7 At the most recent monetary policy meeting my colleague Lars E.O. Svensson took up the question of temporarily replacing the inflation target with a price level target. Lars has put forward this idea earlier in his research into monetary policy with a zero interest rate and experiences from Japan's deflation problems in the 1990s. | None of us at that time could have foreseen that a virus would change the picture completely and lead the Norwegian and the global economy into a deep decline. Chart: A historically deep decline The economic outlook has changed dramatically in a short period of time. Activity in the Norwegian economy has fallen abruptly owing to the coronavirus pandemic. The virus outbreak and the extensive measures taken to contain it have led to production halts and lower activity across a range of businesses. Unemployment has risen to very high levels. Mainland GDP is projected to fall by around 5 percent in 2020. We have not seen a contraction like this since the war years. Chart: An abrupt and deep decline in the global economy The countries around us have also been severely affected. Measures taken to contain the spread of the virus, combined with changes in behaviour and uncertainty about developments ahead, have resulted in substantial declines in output across economies. In early March, we expected moderate economic growth among trading partners. Now a deep decline appears likely this year followed by a gradual rebound. The subsequent path of developments is, however, highly uncertain. The authorities in many countries have implemented powerful fiscal policy measures to alleviate the situation. Central banks have cut policy rates and taken extensive measures to stabilise financial markets. The sharp global downturn amplifies the challenges for a small open economy like Norway. | 0 |
In view of the high success penetration rate of bancassurance service providers and the fact that bank backed insurance companies have ready pool of the banking customers within the group to tap, they should seriously explore the bancassurance route to exploit the effectiveness of bancassurance to gain new market share. Ladies and Gentlemen, I am confident that the commitment of Axa Affin's foreign partner to introduce its best practices in Malaysia and its strategy to "Think Global Act Local" in terms of product innovation, operational and distribution strategy will go a long way towards ensuring the success of this new business venture, founded on the sound relationship they have nurtured via the general insurance entity, i.e. Axa Affin Assurance Berhad. This would also contribute to the development of the industry through the transfer of expertise, providing leadership in innovation and expanding the range of quality products and services available to Malaysian consumers. Having such strategic partnerships which allows equity participation from international players of up to 49% under BNM new liberalized operating environment would enable insurers to leverage on the experience and financial capabilities of the foreign partner and this would allow them to grow in size. They would also have the capacity to improve their competitiveness and enter into foreign markets, taking more complex risks and expand their product portfolio more significantly. | Florin Georgescu: Challenging the status quo in management and economics Opening remarks by Mr Florin Georgescu, First Deputy Governor of the National Bank of Romania, at the Strategica International Academic Conference "Challenging the Status Quo in Management and Economics", Bucharest, 11 October 2018. * * * Distinguished guests, Ladies and Gentlemen, I am glad to welcome you at the National Bank of Romania, as we host today the 6th edition of this prestigious international conference, together with the National University of Political Studies and Public Administration, and the Romanian Academic Society of Management. The debates today will be held under a generous and timely topic: “Challenging the Status Quo in Management and Economics”. We couldn’t have a better moment to discuss challenges to the status quo than today, as we witness a whole range of economic, social and political forces pushing for change all over the world. If this change is in the sense of progress or not, that remains to be seen. I trust that your presentations and insights will shed more light on these trends. I confess that I had a look at the titles of the presentations in both days of the conference, and the word that appears most frequently in these titles is knowledge. And I realize that not less than 50 years ago, Peter Drucker, the philosopher and management guru, launched the concept of knowledge economy. Since then, economists and management specialists of all doctrines, put knowledge at the forefront of their views of the world. | 0 |
It was only such an infusion that would allow us to maintain stability, as well as be able to have the much needed funds to keep the infrastructure development effort going. Some financially savvy members of the Opposition too, realized the significance of such a fund infusion into the economy, and tried their utmost to scuttle that effort. But, fortunately, we were able to defeat those endeavours, and raise the all important bond, and tide over the risky period. The infusion of the new funds immediately brought stability to the economy and also acted as an important stimulus for growth, with the new additional resources quickly filtering down into the economy. Hence, as a result of the move, the Fiscal framework was supported with the moderation of interest rates; the monetary framework was facilitated with the stabilization of prices; and exchange rate was supported by the buttressing of international reserves. Mr. Chairman, I believe that, some day when Sri Lanka’s economic history is being written, this 2007 infusion of $ 500 million through the international sovereign bond, would be marked as a major “turning point” in our economic landscape. I also believe that the benefits of this land mark move has been of an enduring and permanent nature, as evidenced by the fact that, over the next 5 ½ years, the Government has been able to raise a further $ ½ billion from international bonds, with the coupon rates tightening considerably each year. | This probably reflects the strong competition that Norwegian producers of consumer goods encounter from international operators. At the same time, domestic demand is being stimulated by low interest rates, and in some industries capacity utilisation is providing a basis for higher margins. Service prices, which showed little rise last year, have increased again this year. In many industries, including the airline industry, where price competition is strong, low profitability has led to an increase in prices. High oil prices have also resulted in increased prices, for example for transport services. On the basis of the pay increases agreed upon in this year’s wage settlement, combined with the estimates for wage drift and wage carry-over, annual wage growth is projected at around 3½ per cent this year. This is somewhat lower than the average for the past ten years. The relatively low level of inflation implies, however, that real wage growth is in line with the average for the past ten years. Prices for imported consumer goods are still falling from the level prevailing one year earlier. Sharply rising production capacity in the world economy as a result of high investment levels in many low-cost countries has led to subdued price increases for many internationally traded goods. The dismantling of trade barriers has also boosted imports of consumer goods from countries with low cost levels. For example, clothing imports from these areas have increased markedly in the past few years. This has contributed to a significant fall in clothing prices. | 0 |
Our Asset Purchase Program, especially the PSPP, its largest component, is a case in point: the Eurosystem applies strict eligibility requirements. Purchases are subject to issuer and issue limits. We closely monitor the risks of the programme in place and any possible deviations from the benchmarks, e.g. in the CBPP3. Our due diligence can, under very strict conditions, lead to purchases of covered bonds that credit rating agencies rate below our regular eligibility threshold. On the other hand, our due diligence can also lead to additional risk control measures for particularly risky covered bonds. Given that we have not suffered any impairment since we started the expanded asset purchase programmes, I feel justified in saying that the financial risks have been successfully contained so far. Maintaining the risk management principles while returning to a more conventional monetary policy It is clear that, once we have seen a sufficiently sustained adjustment in the path of inflation, we will continue to prudently adjust our tool-box of monetary policy instruments, as we have been doing since December last year. This will also be the moment when we have to carefully review how our operational and risk management framework has deviated from its pre-crisis state. Where necessary, some temporary measures will be rolled back. But we will also consider whether there are areas where we have taken new risks onto our balance sheet – and consequently where certain elements should be kept. | Second, the “storm broke out”: after the default of Lehman Brothers, it became evident that such standard measures were no longer sufficient to achieve price stability in the euro area. We therefore provided enhanced credit support and, later on, non-standard credit operations in the light of the increased liquidity demands from the banking system. To avoid potential collateral shortages when satisfying this increased demand, we expanded the range of assets against 2/4 BIS central bankers' speeches which banks can draw liquidity from the Eurosystem. But at the same time, we followed the principle of risk equivalence with the assets accepted under the pre-crisis rules. Let me give you a concrete example: since 2012, several national central banks of the euro area, including the one hosting this conference, have accepted additional bank loans as collateral. To ensure risk equivalence, haircuts on these assets were higher than those used in regular operations. This brings me to the third phase of the crisis, the “crosswinds”: in recent years the continued decline in inflation rates in the euro area called for additional non-standard measures – I am referring, of course, to the asset purchase programmes. This type of liquidity provision was a novelty for the Eurosystem, although the instrument of outright purchases has been envisaged as one of the legal and operational tools of the Eurosystem since its inception. Accordingly, additional risk control frameworks needed to be developed to keep the financial risks in check given the significant rise in exposures. | 1 |
Davíð Oddsson: Recent economic and financial developments in Iceland Speech by Mr Davíð Oddsson, Chairman of the Board of Governors of the Central Bank of Iceland, at a seminar organised by the Iceland Chamber of Commerce, Reykjavik, 7 November 2006. * * * I would like to thank the Iceland Chamber of Commerce for giving me the opportunity to say a few words here as has become customary at this time of year, following the Central Bank of Iceland’s interest rate decision and the publication of Monetary Bulletin. That publication provides indications of the position and outlook at the end of this year and what is to be expected over the forecast horizon of the next two years. Of course the Bank’s long-term forecasts are presented with due humility and respect towards the uncertainties that time may bring. Something of a milestone was reached on November 2 when the Board of Governors of the Central Bank decided to leave the policy interest rate unchanged at least until the next interest rate decision day, which was in fact brought forward to December 21. The last decision marked an end to 17 successive hikes on interest rate decision days. At this juncture it is uncertain whether a real turning point has been reached, because the decision was presented more as a deferral of a rise in the policy rate than as an end to the hike process. In other words, the data available to the Central Bank supported raising the policy rate still further. | People may well question and in fact some already have the Bank’s grounds for its concerns and its strongly worded message, bearing in mind the short-term and long-term downturn in inflation, slower credit growth, lower oil prices and substantially less wage drift than was feared. The answers are obvious from the Bank’s core writings on these issues. They show that a tight monetary stance must be maintained for longer than would seem to be generally expected. Inflation has certainly slowed down but it is still running high and will continue to do so, and for quite a while will remain incompatible with the target and main tasks assigned to the Bank. Almost everywhere we look, strong pressures persist in the economy. The labour market is greatly overstretched and labour demand is enormous. This has been met with heavy imports of labour and it is questionable whether such a swift influx is necessarily beneficial or healthy for Iceland in the long run, despite making the battle with inflation easier for the moment. In the banking sector, credit growth remains robust even though it is now slower than at the peak, and is still unsustainable in the long term. Now that the banks have fortunately managed to secure medium-term funding, the risk is that they will become more complacent and ease their restraint. Such signs seem to be emerging. The housing market appears to be picking up again and household and business sentiment is still very upbeat. | 1 |
But the analysis of the euro area will be undertaken centrally to a large extent and the level of interest rates will be decided by the ECB Governing Council, which consists of the members of the ECB’s Executive Board and the NCB Governors of the, initially eleven, participating countries. The European System of Central Banks (ESCB) has been given a highly independent status so as to be in a position to conduct a monetary policy for price stability without short-run political considerations. But its independence does not relieve the ECB of the duty to inform and communicate. On the contrary, it accentuates the need for a dialogue and exchange of information. The European Parliament has displayed a high profile in these matters and worked to establish a basis for discussing and monitoring monetary policy continuously. The ECB will be obliged to make difficult decisions in various matters. One problem may arise from cyclical disparities between euro area countries. While these disparities may diminish over time, they are unlikely to disappear completely. Meanwhile, the ECB has to set a single instrumental rate for the whole monetary union. The common interest rate will normally not be ideal in relation to the economic situation in every country. The national financial structures also differ considerably, which means that, for instance, interest rate sensitivity varies. | Structural questions have been brought to the fore during the British Presidency and there have been somewhat more concrete discussions in various committees about how to get Member States in step here as well. One approach involves finding good examples in different fields, just as in the case of employment, and analysing the structural problems of each country. This process generates what the British call peer pressure, which can also contribute to the desired national changes coming about. Once again, however, the decisions in this field largely have to be made at national level. But to perhaps an even greater extent than with fiscal policy, the major benefits of a successful national policy will accrue to the country in question. By itself, this seems hopeful and should facilitate changes. At the same time, the political resistance in most EU countries is strong. Some believe that the very fact of monetary union will generate desired reforms in labour markets. Possibly but not necessarily - when high unemployment rates in recent decades in many EU countries have failed to produce changes, why, it may be asked, would monetary union be more successful? In conclusion, I consider that much work at EU level will be invested in political education and a search for methods to gain support for changes in this field. But I do not foresee the same pressure in the joint processes as in the case of fiscal policy; there is less need of a common approach. | 1 |
Monetary policy needs to take this onboard, even before considering other issues such as risk-management at the zero bound. I have argued today that the central bank needs to have a major role in ensuring that the financial system is sound. Without this, the central bank cannot ensure that monetary policy will be effective in achieving its objectives. This is the important linkage of monetary policy to banking. Now some express concern that involvement in banking regulation and supervision may lead a central bank to bias the setting of monetary policy to try to help troubled banks or other institutions. This fear is misplaced. Problems in the financial sector are taken into account for monetary policy purposes only to the extent that they affect the transmission of policy to the real economy. There is a separate tool kit to address problems at the level of the banks themselves. Others will argue that having the central bank involved in the oversight and regulation of the financial system puts too much power in the hands of one authority. Another concern is that such a consolidation of responsibilities is dangerous for the central bank because it could threaten the central bank’s independence with respect to monetary policy. I think these are legitimate issues. But the bigger risks, in my view, are a monetary policy that fails to accomplish its economic objectives because of financial instability, and difficulties that stem from the inevitably imperfect coordination that takes place between multiple agencies with divided responsibilities during a crisis. | The problem we face is that unemployment’s critical level cannot be identified for certain and we do not know when shortages and rapid wage increases will actually arise. Estimating these matters is difficult and the results cannot be taken for granted. It is therefore hard to tell how much scope there is for a temporary phase of economic growth above the long-term trend. The ability to look ahead and formulate monetary policy cautiously is particularly important when an economy is moving further and further along an upward phase. Otherwise there is a risk of price and wage increases accelerating so that the brakes have to be applied more abruptly later on, leading to a situation that is worse than would otherwise have been the case. Thus it is in this phase of rising activity that we can be said to influence the depth of the next slowdown. It was the overheating in the late-1960s, the mid-1970s and the end of the 1980s that set the stage for the subsequent deep troughs. And each recession was worse than its predecessor. Looking back, it is easy to see that economic policy ought to have been tightened much earlier than was the case on those occasions. At the same time, it has tended to be difficult, not least in fiscal policy, to take such measures sufficiently early, particularly as that needs to be done before the problems are clear to everyone. | 0 |
It is not even self-evident that inflation will return to the target level in the long run if monetary policy is too tight. If we are worried that a long period with a low repo rate will give rise to an unjustified upturn in housing prices and indebtedness, we should perhaps ensure we conduct a monetary policy that means we quickly move towards the inflation target, and that still works even if 8 BIS central bankers’ speeches economic developments are less favourable than forecast in our main scenario. Such a monetary policy could entail cutting the repo rate now to increase inflation and then raising the repo rate slightly faster in the coming period when inflation accelerates (see Figure 7). Admittedly, preliminary assessments within the Riksbank, based on model calculations combined with empirical relationships, indicate that a large repo-rate cut now, followed by faster increases in the future would entail slightly higher risks linked to household indebtedness than if the repo-rate path advocated by the majority is followed. However, the difference in the risk outlook for these two alternatives is almost negligible. | As I in practice have not let concern for households’ rapid build-up of debt affect my view of how the repo rate should be set today, measures of the first type, that is, measures that directly limit vulnerable households’ opportunities to become or remain heavily indebted, would probably also have little effect on my choice of repo rate and repo-rate path. On the other hand, measures that entail an increase in the average lending rates or a weakening of general demand would justify cutting the repo rate. The purpose would then be to counteract the effects of the supervisory measure on total economic developments. However, the supervision measures could nevertheless affect financial imbalances, for instance, by changing the level of household mortgage rates in relation to companies’ borrowing rates. Further macroprudential policy measures thus need not change my view of which monetary policy is most appropriate now. However, such measures are nevertheless important to monetary policy as they can reduce risks and uncertainties. It is easier to conduct monetary policy if financial stability is good. References Blanchard, Olivier and Galí, Jordi (2007), Real Wage Rigidities and the New Keynesian Model. Journal of Money, Credit, and Banking 39(p1), pp. 35–62. Farhi, Emmanuel and Tirole, Jean (2012), Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts. American Economic Review 102(1), pp. 60–93. National Institute of Economic Research (2013), Are households borrowing too much? Article in Swedish Economy June 2013 [NB! only a summary of the report is published in English]. | 1 |
Unlike others, I would not necessarily look for a certain figure (beyond the already 3/4 BIS central bankers' speeches mentioned minimum level of roughly 70–75 percent); I would tackle this issue by approaching real convergence not as a race where the fastest track is also the right one, but rather as a complex process giving the steady runner (a marathoner rather than a sprinter) the opportunity to reap most of the potential benefits, while avoiding excessive risks. Speaking about risks, it is worth noting that relatively sizeable current account and fiscal deficits may erode the very foundation of this edifice that is the national economy. It is therefore much wiser to adjust them in a gradual manner than leave market forces to cause a sudden correction. Fiscal discipline, consistent economic policies and an ambitious, yet viable, calendar should make a successful euro adoption possible, so that the economy adequately withstand competitive pressures within the euro area. Equally important is to reduce the still overly large disparities across Romania’s development regions, as it takes the entire country to join the euro area, not only Bucharest and Ilfov county. Economic growth is not enough, it should be accompanied by lasting economic development. Before ending my speech, instead of my personal view about the future, let me quote a recent column in Financial Times by Tony Barber 2 relevant for the state of affairs in the region: “Nevertheless all is not well in the region. Why? | Such fluid arrangements are also being leveraged to build internal capacity building and support transition. A survey conducted by Capgemini reported that more than 60% of businesses fill new jobs powered by AI and automation with fluid workers first, then gradually seek to transfer knowledge from these specialists to other full-time employees in the organisation. These strategies will have important implications for how we build the future workforce from without rather than within. Such strategies can create greater flexibility for organisations to respond to changing business needs, but they also call for a fundamental re-thinking of pre-existing organisational and cultural norms. As we move forward, deepening employee engagements will become more important to enable firms to better anticipate shifting trends and inform approaches to building a future-fit workforce. It is not uncommon today to find up to four different generations coexisting in many workplaces, each with different perspectives on leadership, learning and workplace culture. Recognising these differences within talent strategies will be important to successfully cultivate a future-ready workforce. Closing message: In closing, I am reminded of the words of Mr. Colin Powell, former U.S. Secretary of State who said: "One of the greatest talents of all, is the talent to recognise and develop talent in others". This lies at the heart of building a workforce fit for the future. We all have a part to play – as employers, professional development bodies, training providers and workers – to build a resilient and sustainable talent pipeline for the future. | 0 |
(a) Excluding Saudi Arabia due to unavailability of data. (b) Weighted averages use each country’s equity market capitalisation as weights. (c) Numbers may differ slightly to those in the text due to rounding. | A reduction in those capital market frictions would tend to lower the asset market spillover costs of the BFSP problem. Finally, what guideposts should be provided by the international community in tackling the BFSP problem? The IMF recently began to explore such a framework (IMF (2011)). This raises a set of key questions about global financial governance. Are global financial network externalities sufficiently large to justify the international community imposing rules of the financial road? And how much driver discretion should instead be left to nation states which ultimately may bear the costs of the BFSP problem? These are big public policy questions. They are by no means new ones. If the quantitative experiments presented here are even roughly right, these questions may assume a new urgency in the period ahead. The BFSP problem is real. It may be rising. The result would be growing waves of global financial exuberance, punctuated by crashing capital busts. This roller-coaster has the potential to leave some nation states feeling queasy. They may even wish to get off. What is at stake may be more than just the future stability of the international financial system. References Barro, R J and Sala-i-Martin, X (1992), “Convergence”, Journal of Political Economy, Vol. 100 (2) pages 223–251. Dornbusch, R, Goldfajn, I and Valdés, R (1995), “Currency Crises and Collapses”, Brookings Papers on Economic Activity, Vol. 26(2), pages 219–294. French, K R and Poterba, J M (1991), “Investor Diversification and International Equity Markets”, American Economic Review, Vol. 81 (2), pages 222–226. | 1 |
It is remarkable how often problems in financial firms can be overlooked because of a sense that are they part of a normal, business-as-usual state of affairs. A diversity of inputs can help us see the flaws in what we accept as normal. Diversity is a frequent topic of conversation, but it is not easy. My view is that, like other ethics, diversity is a habit that takes practice. As first line of defense professionals, try to develop the habit of seeking out other points of view. Diverse points of view may come from junior employees in your line of business. They may also come from HR professionals, sociologists and psychologists, communications experts, even lawyers. For financial firms, prudential supervisors can also contribute to a diversity of viewpoints. Their horizontal view of practices across firms not only helps promote a more stable financial system, but also helps firms identify problem areas. A diverse set of views, professional training, and life experience may help you see shortcomings in your risk management framework—even in the three lines of defense model. Just because three lines of defense is a sensible way to manage risk does not mean it is perfect—no model is. A diverse set of inputs will help you figure out how to apply more effectively the three lines of 2/7 BIS central bankers' speeches defense in your organization. Choice architecture I recommend as well that you pay attention to choice architecture in deciding how best to construct a first line of defense. | Michael Held: The evolving first line of defense Keynote address by Mr Michael Held, Executive Vice President of the Legal Group of the Federal Reserve Bank of New York, at the 1LoD Summit, New York City, 17 April 2018. * * * Good morning. It’s an honor to join you at the 1LoD Summit. The views I express today are my own, not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.1 I’ve heard it said that being in the risk control business can be, and often is, a thankless task. We get all the blame when something goes wrong, and none of the glory when things go right. So, I want to start my remarks with a word of gratitude to you, my fellow travelers in the world of risk controls. Thank you—not just for the invitation to speak today, but also for the work you perform each day at your firms. The growing sophistication and stature of the first line of defense is, in my view, an unqualified improvement in corporate governance—especially at financial firms. Let’s begin with what you are defending. The credibility and reputation of your colleagues, your employer, and your industry. The trust of your customers and clients. And, perhaps most important, the public interest. From my perspective, you are not just a first line of defense for your organization. You are the first line of defense against significant risks to the financial system. This may sound inflated to some. | 1 |
The Governing Council therefore supports the implementation of the ambitious objectives described in the evaluation report.” In terms of the broader service to Spanish society we have just mentioned, let me remind you that three CEMFI faculty members currently participate in the Council of Economic Advisors of the Spanish Ministry of Economic Affairs, two have recently been appointed members of the Advisory Committee of the Ministry of Inclusion, Social Security and Migration, one is a member of the Advisory Board of the Spanish Independent Agency for Fiscal Responsibility, and another one is chair of the Scientific Committee of the Spanish State Research Agency. In addition, last December, CEMFI signed an agreement with the Ministry of Inclusion, Social Security and Migration to collaborate in the evaluation of 34 pilot projects to improve the design of poverty reduction policies. CEMFI will participate both in the design and the evaluation of the projects, and researchers will be able to use the data generated by these evaluations for the production of papers publishable in scientific journals. Carrying out these evaluations will allow CEMFI to take a qualitative leap forward, positioning itself as an academic institution of reference in the evaluation of public policies in Spain. I would like to thank Samuel Bentolila and Mónica Martínez-Bravo for leading this important initiative. | To address current structural and cyclical challenges we need to rely on the analysis and advice of well-trained economists whether they are in the academia, in the public administration, central banks or the private sector. This is why it is so important to have academic institutions like CEMFI, that produce groundbreaking research and invest heavily in boosting the single most important determinant of economic growth: human capital. Students of the class of 2022, what you take from here – your knowledge and the tools needed to analyse and understand reality – is the accumulated capital stemming from what is probably the most important investment you will make in your whole life. You have invested your time and effort. And the yield on this investment will be a wide array of opportunities. But, above all, this human capital you now possess is something that nobody can take away from you. It will accompany you everywhere you go and you can apply it in every endeavour you may undertake. Besides the Master and PhD programmes, organised in collaboration with the Universidad Internacional Menéndez Pelayo, the CEMFI provides other valuable services, such as a summer school that brings leading academics to teach courses in relevant areas to participants – among them a large number of central bankers – and a highly valued summer internship programme for top undergraduate students. And it also collaborates with the Banco de España in various research activities, including the organisation of workshops and international conferences. | 1 |
William C Dudley: Regional economy and trends in household debt Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the quarterly regional economic press briefing, New York City, 14 February 2011. * * * Good morning and welcome once again to the New York Fed’s Quarterly Regional Economic Press Briefing. I am pleased to have this opportunity to talk with the journalists covering our region – and through you, to the people in our District. This morning I will discuss national and regional economic conditions, with particular attention to household debt in the nation and especially in the Second Federal Reserve District, which covers New York; northern New Jersey; Fairfield County, Connecticut; Puerto Rico; and the U.S. Virgin Islands. Following my remarks, my colleagues will provide more detail. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. National economic conditions To provide context, let me first comment on national economic conditions. Since the Great Recession ended in 2009, the economy has grown at a modest pace. When we last met, in October, the available data showed that we hit a soft patch at mid-year. The recovery had slowed, extending the time before employment and inflation could be expected to return to levels consistent with the Federal Reserve’s dual mandate. And, with the loss of economic momentum, downside risks had increased. | This monitoring and research on household debt and credit conditions helps us better understand the connections between financial market developments, the broader economy and families’ well-being. We follow a variety of metrics, including lending activity, the level of interest rates and of interest rate spreads, survey data on lending standards, delinquency rates on loans, and home and other asset price changes. One new, key source of information on household debt and credit conditions is the New York Fed’s Consumer Credit Panel. As you heard a few moments ago, these data are now available for all of 2010. They come from a nationwide sample covering all households where at least one member has a credit report. The records tell us about five major categories of household debt – mortgages, home equity lines of credit, and credit card, auto and student loans. To set the stage, one can think about the recent path of household debt in three phases. During the run-up to the recession – the years leading up the crisis – households borrowed a lot of money. They took on higher credit cards balances, auto loans, student loans and, especially, mortgages. BIS central bankers’ speeches 3 As the crisis unfolded in 2008, many families’ debt burdens proved unsustainable: delinquencies rose dramatically and household debt began to fall sharply. Now, we appear to be entering a process of gradual convalescence, as delinquencies begin to subside and some households begin to expand their borrowing again. | 1 |
And from a broader medium-to-long-term perspective, we also see encouraging potential that likewise merits a favourable judgment. However, in order to project ahead a positive growth differential relative to the prevailing pattern in the industrialised countries, we must not lapse into complacency and must keep reform firmly on the agenda. Evidently, reforms will have to be different from those adopted to date, but should be based on a similar philosophy: to maintain fiscal soundness against a background of macroeconomic and financial stability, to push ahead with liberalisation and market flexibility, and to give weight to education and training. If I had to opt for just one of these messages, highlighting what I consider to be the main task needed to anchor the dynamism of the Spanish economy in the long run, I would not hesitate to say that it is to improve the levels and quality of education. Thank you. BIS Review 32/2007 5 | José De Gregorio: The international financial crisis and its impact on the Chilean economy Speech by Mr José De Gregorio, Governor of the Central Bank of Chile, presented before the Honorable Senate of the Republic, Santiago de Chile, 8 October 2008. * * * Mr. President of the Senate, In response to your invitation to participate in this special session of the Honorable Senate, I would like to share with this audience our vision on the severe financial crisis the world economy is enduring, as well as its implications on our country. The world financial crisis and international growth The financial crisis being experienced by developed countries is the outcome of a period of stability, with abundant liquidity, fast economic growth and an asset price bubble. This combination of aggregate factors yields, as it frequently happens, to a cycle of high credit growth. The problem is that this occurred during an extremely accelerated process of financial innovation in market segments that were poorly or ambiguously regulated – mainly in the US. Low interest rates prompted an intense search for higher returns. Individuals with little or no ability to repay were lent for housing and, to reduce risks, credits were securitized and often taken out of the banks’ balance sheets (i.e. Structured Investment Vehicles and conduits). Money was lent on the assumption that housing prices would continue on the rise, so the mortgage was all that was needed to relax lending standards. | 0 |
The forecasts in our main scenario are always based on a combination of model analyses and judgements that take into account factors which the models either cannot capture at all or are unable to capture in a way we consider reasonable. These “hands-on” adjustments become particularly important when the historical correlations on which the models are based appear to have changed. The judgements may be of different types and opinion may be divided as to which factors are most important to take into consideration at any given meeting. My view is that the judgements should as far as possible be reflected in the forecast figures for inflation, the real economy and the repo rate that a monetary policy decision is based on. But I believe that we must learn to live with the fact that it is impossible to quantify all of the factors we monetary policy decision-makers consider should be taken into account in the monetary policy decisions. As I see it, there is no point in trying to produce, at any cost, a quantified adjustment of the forecast just to make a judgement one considers relevant fit into the monetary policy discussion. There must be scope to put forward arguments that appear reasonable, without necessarily having to translate them into exact probabilities or quantifying their effects on inflation and the real economy. As I see it, there is nothing wrong with having “misgivings” about a particular development and allowing this to affect the decision, without being able to exactly quantify the risks it entails. | When wage formation is decentralised, monetary policy will instead influence wage growth via market mechanisms, by stabilising aggregate demand. The existing monetary policy guidelines will function effectively whether wage bargaining is at a centralised, local or individual level. There is a fine balance in the division of roles between fiscal policy, wage formation and monetary policy. This balance will be disturbed if the objective of monetary policy is changed or broadened. Should monetary policy give particular weight to asset prices? House prices in Norway have risen sharply and probably excessively. The level of house prices in Trondheim in central Norway was an eye-opener for the American Nobel Laureate Georg Akerlof, who happens to be of Swedish ancestry. At a family gathering, he was told that a distant relative had bought a house in Trondheim at a price equivalent to more than USD 1 million, providing a source of inspiration for his and Robert Schiller’s book “Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism”. 5 4 OECD Interim Economic Outlook, (March) 2009. 5 Georg Akerlof and Robert Shiller (2009): “Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism”, Princeton University Press. BIS Review 119/2009 5 Self-reinforcing mechanisms in financial markets, which lead to slower credit flows and falling asset prices in downturns and the inverse in upturns, pose a challenge to monetary policy. | 0 |
And that’s probably because the UK economy has weathered the squalls of the past few years rather better than both the US and the euro area. Since 2000, we have grown more strongly than the euro area, and more steadily than the US; indeed we are alone among major industrial countries in not having experienced a single quarter of falling output for more than a decade. As a result the UK emerged from the slowdown in the world economy with less slack than other economies. That is the key reason why we were the first to start raising interest rates last November, when world activity started to pick up and demand at home accelerated. Since then, a number of other countries, including the US, have begun to raise their rates to more normal levels. When I joined the Monetary Policy Committee a year ago, both the Fed and the ECB had just cut their interest rates to exceptionally low levels, reflecting real concerns about the strength of the world recovery. Activity picked up sharply in the US last autumn, but the mood only changed decisively early this year, when a million new jobs were created in just three months. It is now clear that a broad based world recovery is well under way, led by the US and Asia, especially China, but spreading to other regions. The news from Japan is more encouraging than it has been for over a decade. | The UK’s major markets in Europe are benefiting from strong demand for their exports; and the latest news suggests that domestic demand in most of these countries is finally picking up, though consumers probably still remain a little wary. As the news from abroad has steadily improved, we have also seen a marked strengthening in demand at home. After a fairly weak first half, retail sales bounced back, the housing market took on a new lease of life and investment began to recover. It now looks as if the UK economy has been growing around or above trend since the middle of last year. It was against that background that the Monetary Policy Committee raised interest rates in three further stages to 4.5%. Meanwhile inflation remains low, well below the Chancellor’s target of 2%. This might seem to bear out the old taunt, that central bankers are the sort of people who want to close the bar as soon as the party starts to go with a swing. It would be fairer to say that we want to be sure that the party remains under control. We don’t want to encourage binge behaviour any more than you do, and for much the same reason; it makes life unpleasant for other people, and it leaves a nasty mess behind. That points to taking action at the first sign of trouble, and preferably before. In current circumstances, strengthening demand is beginning to put upward pressure on costs. | 1 |
In addition, the electoral debates in several European countries and the United States reveal a higher probability of a shift to more protectionist policies. On the bright side, it is possible that the impulse policies, in the developed world and in China, will succeed more effectively in boosting global growth. Finally, the situation in Latin America is also an important source of risks that, if they come true, could have negative effects on both financial conditions and external demand facing Chile. One preoccupation is the increased exposure of the region to the Chinese economy and the need of several economies to make an additional adjustment. All this in a context where inflation has risen in several countries, inflation expectations are above the target and the room for further monetary stimulus and/or taxes has narrowed. Plus the increased political risk, in Brazil and Venezuela. Meanwhile, it is worth mentioning that in Argentina there have been adjustments and negotiations with creditors, which could open the door for them to international markets. At home, recent data show output and demand losing strength, a struggling labor market and still pessimistic expectations of consumers and firms. In this context, slower growth than was assumed in the baseline scenario cannot be ruled out, should any of these events intensify. Still, since our economy is well balanced from a macro standpoint, with virtually zero public debt, well-anchored inflation expectations and a stable, well regulated financial system, more favorable news may cause growth to recover faster than assumed in the baseline scenario. | 11 This outcome would be undesirable for us, as we aim to steer secured short-term Swiss franc money market rates so that they remain close to the SNB policy rate. By reducing the stock of excess reserves, we also reduce the supply of reserves in the interbank money market. This lets us steer money market rates closer to our policy rate of 0.5%. That is precisely what the second element of our implementation approach accomplishes. To absorb excess reserves, we use open market operations. Specifically, we use term repos and SNB Bills, the latter being marketable debt claims on the SNB. 12 Term repos have a term of one week and are auctioned daily. SNB Bills, on the other hand, are auctioned on a weekly basis and with different terms from week to week. As Slide 8 shows, the effect of these operations is to replace the light-blue shaded rectangle with a light-green one. Our reserve-absorbing operations are offered with interest rates that are close to 0.5% on an overnight-equivalent basis. 13 This makes them particularly attractive to banks that hold excess reserves. By purchasing the instruments we offer, these banks can reduce the stock of excess reserves, which would otherwise be remunerated at 0%. It is important to emphasise that both interbank trading and the SNB’s reserve-absorbing operations are mechanisms for reducing the stock of excess reserves, possibly to the point where all excess reserves have been ‘soaked up’. How does the SNB’s approach determine money market rates? | 0 |
Having worked with financial firms to improve their risk management and resilience over a quarter of a century, I remain, perhaps surprisingly, optimistic that we will be able to work through the differences, although I will be the first to acknowledge that there are no easy answers. The four Rs each prompt a more detailed question that take us to the main issues we need to resolve in the coming months in order to make sure regulatory reforms (reforms being a bonus R) are geared to enhancing the prospects for success: First, thinking about the governance and management needed for success: how do Boards take responsibility for the particularly long-term nature of BPA business? Second, what does effective risk management look like for BPA firms today, given the continuing evolution of MA asset portfolios and exposure to long-term economic uncertainty? Third, in aligning resilience to risk taking, what roles do balance sheet valuation and capital requirements each play in a going concern regime? And finally, in designing and maintaining a regulatory regime that has robust and risksensitive qualities, what package of Solvency II reforms will support the risks being taken now and for the long term? Responsibility of the Board Let me start with the inherent challenge of making decisions for the long-term. Imagine that instead of packing a suitcase for our 2022 summer holiday, we are instead asked to pack all of the suitcases we will need for every holiday over the next 30 years. | When evaluating possible packages of quantitative reform, an important validation point for the PRA is whether the resultant liability values, including the risk margin, are adequate relative to the transfer values implied by actual buy-out transactions. If current liability valuations were to be insufficient to fund these observable transfer costs, then the balance sheet would lack the resilience that it would be expected to have under Solvency II and a key safeguard of policyholder protection would be put at risk. In other words, we could no longer be confident enough that if an insurer failed in the future, its liabilities could be safely transferred to a third party. The long-term security of policyholder benefits would then be in question. The PRA is continuing its work to assess the extent to which different reform combinations lead to an adequate transfer value being achieved and see this as a key validation tool when assessing the merits of any package. Page 8 Regulation I now come to the final R – regulation – and want to focus remarks today specifically on the work to reform the existing regulatory framework for insurers – Solvency II. The interlinkages between the first three Rs I have covered help explain why such regulatory reform needs to be considered as a package: changes in one part of our regulatory and supervisory framework have consequences for others. | 1 |
(2015) indices of capital controls policy for Chile and other EMEs (net easing) Inflows Outflows 4.0 12 4.0 3.5 10 3.5 3.0 8 3.0 2.5 6 2.5 2.0 4 2.0 1.5 2 1.5 1.0 0 1.0 0.5 -2 0.5 -4 0.0 Total number of policy actions: 1 Jan 2001 - 31 Dec 2015 (*) baseline models include the 11 most active countries 300 15 250 10 200 150 5 100 0 50 01 03 05 07 09 11 13 15 -5 01 03 05 07 09 11 13 15 EGY CZE MEX MAR POL IDN CHL HUN RUS COL BRA PHL TUR THA ZAF ARG KOR CHN MYS PER IND 0 0.0 (*) Blue bars are countries with fewer than 32 actions in sample. Red bars are those with at least 32 actions in sample. Red/blue shaded bars represent countries with more than 32 actions in sample but no inflow targeting actions. Sources: Pasricha et al. (2015) and BIS. Besides the Chilean approach to deal with FX risk at the banking level and the recent trend that has deepened financial liberalization, the possibility to activate capital controls under extreme circumstances is still part of our constitutional law. | International Capital Flows in the Post-crisis World, September 2019 CENTRAL BANK OF CHILE Monetary policy framework and its effectiveness Monetary policy is strongly supported by the free-floating FX regime 10Y interest rate and FX volatility (*) Currency implied volatility 1-month EE (sample: 2017-2018) (percent) 30 FX Median 10-year interest rate (weekly change) 0.14 20 Brazil Egypt 0.12 Nigeria Turkey 10 0.10 Philippines 0.06 Indonesia 0.04 Vietnam 0.02 0.00 0 Jan.10 Romania 0.08 Bulgaria Peru Mexico Croatia Hungary Poland 10-y rate Median Jan.14 Jan.16 Jan.18 (percent) 0.6 0.4 Russia 0.2 Chile 0.5 1.0 Exchange rate (weekly percentage change) Jan.12 10Y rates volatility 1-month EE South Africa India Thailand Malaysia China 0.0 Colombia 1.5 0.0 Jan.10 Jan.12 Jan.14 Jan.16 Jan.18 (*) Red points correspond to economies with free-floating FX regime according to IMF classification (Annual Report on Exchange Rate Arrangements and Exchange Restrictions, 2017). Source: IMF and Bloomberg. This framework has basically remained in place for almost two decades and its effectiveness has improved as markets, agents and institutions have adapted to it. | 1 |
Despite the fact that we left interest rates on hold again last week, we have certainly not gone to sleep! | In fact, such an EU fund would be better diversified than the national funds are today, which all else equal would enable it to charge lower fees or hold a bigger risk-adjusted buffer. In the event of really large banks or several large banks failing, there could be an established system of committed drawing rights, where the EU fund has the right to raise funds through national governments’ ability to raise tax. Regarding liquidity support, the ECB would be given the role as lender of last resort. To convince national governments to commit such guarantees would of course demand very strict and well thought-out rules governing what actions the EU fund should be allowed to take in the case of a bank failure. These rules could be inspired by the US FDIC’s very strict mandate to always choose the least cost solution. Among other things, this would in some cases mean allowing shareholders as well as uninsured depositors and debt holders to lose their money. Since to my knowledge most EU countries lack the rules on how to handle large bank failures, it would also be very positive from a contingency planning and moral hazard point of view. With a strong legal framework, the EU would be able to let investors in even the biggest banks take full financial responsibility. | 0 |
The ESRB has repeatedly noted8 that a lack of tools is hampering authorities’ ability to address financial stability risks beyond the banking sector. The ongoing review of the prudential rules governing investment funds and insurers provides opportunities for legislators to assign the power to operate such tools to the authorities. And the ongoing review of the rules governing central clearing offers an opportunity to enhance authorities’ monitoring capacity through better data quality. The ESRB has provided extensive input to the these legislative reviews, setting out what it believes is necessary.9 Hybrid risks The ESRB has devoted a substantial amount of efforts in recent years to advance our understanding, assessment and macroprudential policy response capacities to the so-called “hybrid” risks, in particular, cyber threats and climate risks.10 As regards cyber risk, at the ESRB we are concerned that a major, i.e. systemically relevant, cyber incident has the potential – in a worst-case scenario – to trigger financial contagion and erode public confidence in the financial system. If the financial system is not able to absorb such a shock, financial stability is very likely to be put at risk. This concern led the General Board of the ESRB to adopt in December 2021 a Recommendation to establish a pan-European systemic cyber incident coordination framework (EU-SCICF).11 The aim of this recommendation is to 8 See, for example, Macroprudential policy beyond banking: an ESRB strategy paper, ESRB, 2016. | Recent bank instability episodes outside the EU are a further reminder that we need to remain vigilant. The resilience of the financial system is essential. Only a resilient financial sector will be able to support the real economy during times of stress,14 and all financial authorities and institutions across the EU must contribute to this end. In this regard, regulatory actions and policies towards banks and NBFI intermediaries must aim to preserve shock absorption capacity in the form of capital and liquidity buffers. 14 See also Macroprudential policy in Europe: building resilience in a challenging environment, Welcome remarks by Christine Lagarde, President of the ECB and Chair of the European Systemic Risk Board, at the sixth annual conference of the ESRB, December 2022. | 1 |
The infrastructure of business laws, accounting rules and public disclosure requirements must also be conducive to prudent management and market transparency. Payments systems must be enhanced to reduce the risk of systemic instability. 29. These are all areas where progress is being made throughout the region. I detect few signs of complacency among my fellow regulators or of a tendency to rest on past successes. We all recognize that banking stability is something that requires constant attention to keep up with changes in the economic environment and with market developments. There is also, I believe, a strong appreciation of the need to work together to promote stability. This is shown by the regional initiatives, through groupings such as EMEAP, to promote cooperation in supervision and in other financial sector issues. International institutions such as the Asian Development Bank also have an important role to play in encouraging financial market development. I am sure that this Forum will be helpful in addressing some of the issues involved, and I am grateful to the ADB and the IIF for organizing the event and for giving me the opportunity to speak. BIS Review 55/1997 | This was formalised in guidelines set out in the Exchange Rate Regulation laid down by Royal Decree of 6 May 1994. If stabilisation policy is to have the intended effect, all components of policy must function effectively. This has not been the case in the last three years. For several years, average annual growth rates and employment growth have been markedly higher in Norway than the average for the rest of Europe. In part fuelled by the sharp expansion BIS Review /1998 –2– in petroleum investment, pressures built up in the economy, accompanied by growing labour shortages. Following the currency crisis in autumn 1992, Norwegian interest rates rapidly fell to European levels. The interest rate level in Europe fell after the turmoil early in the 1990s. As growth gradually picked up in Norway, the economy was stabilised by tightening fiscal policy. In order to stabilise the krone exchange rate, Norges Bank reduced its key rates at the beginning of 1997 after the krone had appreciated markedly over a period. Fiscal policy is an important instrument for smoothing fluctuations in the economy. However, it has proved difficult to prevent fiscal policy from being influenced by mood shifts that occur when the economy approaches a peak and memories of earlier recessions fade. Monetary policy shall provide a nominal anchor for economic developments. With exchange rate stability as the anchor, monetary policy may be pro-cyclical in periods. | 0 |
In 2020, the Central Bank sold foreign currency in the amount of 144 b.kr. in order to prevent lower interest rates from causing excessive, unwarranted depreciation of the króna. It is also possible to imagine that, in the future, the Central Bank could absorb excess capital inflows into Iceland if this should prove necessary. In the future, the Central Bank will need to use its balance sheet to ensure effective monetary policy transmission and ward off potential financial side effects. Nevertheless, in the long run, the future of monetary policy lies in using a greater number of policy instruments and in coordination with macroprudential policy and financial supervision. Here lie the opportunities for Iceland’s tiny currency area. Honoured guests: Yet another anniversary is uppermost in my mind today: the one-year anniversary of the merger between the Central Bank and the Financial Supervisory Authority – the reunification, we could say. The Financial Supervisory Authority was once part of the Central Bank, called the Banking Supervision Department. But in 1998 the banking supervision function was carved out of the 3/5 BIS central bankers' speeches Bank, right around the time the two State-owned banks were being prepared for privatisation. | And from then until last year, we had a central bank that had been deprived of the authority to intervene in the functioning of the financial system. But the Central Bank is not alone on the stage. Sound economic policy is a triumvirate comprising the Central Bank, the Treasury, and the labor market partners, all of which must work together to keep the economy in balance. These three members of the triumvirate must act in concert in order to ensure stable prices, stable purchasing power, and low interest rates for the long term. We can do this just like other countries can. We will do it. And the Central Bank will do its part. Sixty years of Central Bank operations should give us a reliable roadmap to the future. We who work for the reunified Bank are champing at the bit in our excitement to take on the tasks that await us. Now let us watch the video about the design of Iceland’s banknote series, in commemoration of the 40th anniversary of the redenomination of the Icelandic króna. Thank you 5/5 BIS central bankers' speeches | 1 |
Finally, I would like to discuss the importance of Islamic finance as an important mode for financing economic transformation. Islamic finance requires financial transactions to be supported by an underlying productive economic activity that will generate legitimate income and wealth. This gives rise to a close link between financial transactions and productive flows. Therefore, the growth in Islamic financial assets is generally in line with the growth of underlying economic activities, thereby ensuring that the financial system is always grounded to the real economy. Other inherent features arising from risk sharing also contribute to the stability and integrity of Islamic finance. Thus, Islamic finance, embraced in its entirety, is supportive of sustainable economic growth. Islamic finance offers an extensive range of innovative financial products and services from consumer financing, asset and wealth management to Islamic insurance and capital markets. The sukuk market has become a highly competitive fundraising option for large scale projects and infrastructure development. With an annual growth rate of 40 percent, sukuk instruments are fast emerging as an attractive new asset class for investors, while evolving to become a preferred financing and capital raising option for issuers. In Malaysia, the sukuk market now accounts for more than fifty percent of our bond market, drawing the participation of not only our own corporates but also a wide range of international corporations and multilateral agencies. In Malaysia, a comprehensive Islamic financial system operates in parallel to the conventional financial system. This is now internationalized to enhance our interlinkages with other emerging economies and traditional markets. | Our global coordinators were amazed by our determination to create an innovative “Tap Facility” to allow the continued block creation of more Tracker units from the remaining portfolio of shares. Also we insisted on not giving any discount to the public at launch of the IPO and instead we offered an innovative back-end loaded incentive scheme in the form of a loyalty bonus. From the Government perspective, we had by April 2001 recouped more than the $ billion used by the Exchange Fund in the stock market operation. In total, we sold $ billion worth of shares into Tracker, received $ billion from dividends on our shareholdings and still retained $ billion in the Exchange Fund’s long term equity portfolio when the "tap" into Tracker was terminated. We could not have achieved this without the dedication and support of our highly professional project team members: Tracker Fund’s manager and custodian (our hosts tonight), the three global coordinators, the lawyers, the Marketing & PR Firms, colleagues at BIS Review 142/2009 1 the SFC, HKEx & CCASS, and of course the Chairman (Mr TL Yang), all the directors and fellow staff of EFIL. If one were to mark the Tracker Fund as an exit strategy, I think it deserves a fine report card. We did dispose of the shares with minimal disruption to the market. | 0 |
The domestic legislative and regulatory requirements are largely in place, and firms have provided their plans to implement them in time for the government’s 2019 deadline. Firms are working to implement the plans. There are many challenges ahead. We will work closely with firms as they change their structures and transfer business activity, assets and liabilities between entities. They must manage the impacts on customers, employees and other stakeholders. The implementation process coincides with a period of heightened uncertainty before the UK – and therefore the banking system – adjusts to a new relationship with the European Union. I won’t pretend this is a perfectly happy coincidence: in an ideal world we would not restructure our banking system and extricate ourselves from the EU at the same time. But the execution risks of managing these changes simultaneously are outweighed by the benefits of increasing firms’ resolvability and removing the public subsidy from banks. So it is full steam ahead. Alongside ring-fencing, the other major reform which is progressing through implementation, and is key to making big banks resolvable without recourse to the taxpayer, is bail-in. Here in the UK work on this is being led by my colleague Sir Jon Cunliffe, and we will shortly publish our final policy. 5 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 5 At these two frontiers, and across the whole reform programme, we must secure the progress that has been made as memories of the last crisis fade. | 6 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 6 happy to debate this and I expect there will be good grounds for some exemptions. We will seek views on this, and weigh the costs and benefits, before deciding how to move forward. Sharp edges So while the design of the reform programme is clear, we are still mid-step in implementing it. Of course things could go wrong, in transition or in the end-state. The world certainly gives us plenty to worry about. But I am absolutely unwilling to have things go wrong because we have retreated from the reforms agreed over the last eight years. For the avoidance of doubt: what was intended will be implemented. I hear many pleas for “tweaks”. Some of these are not quite as modest as is claimed. We are wise to the disguise. But we will of course work to identify and pursue opportunities to give a smoother finish to the reforms, addressing unintended consequences. Solvency II provides one example. It introduced a risk margin: the compensation that a third party would require to absorb the assets and liabilities of another firm that runs into trouble. This provides an extra degree of protection for policyholders, and therefore advances the PRA’s objectives. But because of its design under the current legislation, the risk margin is very sensitive indeed to risk-free rates. This level of volatility is not justified by the historical evidence and does not in my view serve a useful purpose. | 1 |
The economic environment we live in today is inherently dynamic and continuously evolving. We therefore need to be aware of both old and new challenges to inflation targeting as a monetary policy framework. Some observers have cautioned that Thailand’s inflation targeting regime has not been truly tested. In particular, there has not been an incident that gives rise to a severe tension between inflation stabilization and other objectives. For example, Thailand has not experienced sharp exchange rate movements that come into conflict with the inflation objective. Nor has the country been in a situation where persistent supply shocks lead to a significant slowdown of the economy amidst rising prices. Operationally, there are also issues on how far we should push transparency. A few inflation targeting central banks now put forecasts of policy rates in their inflation reports. Should Thailand follow these practices? Should we publish our MPC minutes as the FOMC does? And should we announce the weight we put on output gap stabilization relative to inflation stabilization explicitly in the inflation report. In the past, we only mentioned these weights occasionally in passing. All these questions will sooner or later have to be tackled when our inflation-targeting regime gains maturity. Ladies and gentlemen, The issues I have mentioned, as well as other challenges confronting the conduct of inflation targeting in emerging economies, are the main focus of this international symposium. | Figure 2 GDP and final demand (annual change, percent) 20 20 15 15 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 04 05 06 GDP 07 08 09 Domestic demand 10 11 12 Final demand 13 Source: Central Bank of Chile. BIS central bankers’ speeches 7 Figure 3 Inflation indicators (annual change, percent) 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 06 07 08 09 10 11 CPI 12 13 CPIEFE Source: National Statistics Institute (INE). Figure 4 Real exchange rate (*) (index, 1986=100) 120 120 110 110 100 100 90 90 80 80 70 70 ( ) 88 g 90y 92 94 RER 96 98 00 02 1998-2012 average 04 06 08 10 12 1993-2012 average (*) Includes information up to 27 August. Source: Central Bank of Chile. | 0 |
Mandate Most economists would agree that the core task is ensuring price stability. This consensus rests on the conviction that in the long term, when all the lag effects have come to an end, monetary policy only determines the price level, not, however, output or employment. Thus the primary obligation of a central bank to maintain price stability does not imply that priority is given to price stability in preference to full employment. Rather, it is in the economic nature of monetary policy instruments that they are suited for influencing price level trends, not, however, growth or employment trends. Yet in the short term, ie within the monetary policy transmission process, monetary policy does have real effects. The problem can easily be illustrated if one tries to picture a shock, eg a massive rise in oil prices. The immediate consequence will be an increase in the price level and a fall in production. This constellation confronts the central bank with a trade-off between price stability and growth. If the bank’s sole concern is a quick restoration of price stability, it will raise interest rates and consequently exacerbate the loss of output. If, on the contrary, it reacts solely to the production effect, it will strengthen the shock-induced deviation from the goal of price stability by lowering interest rates. Reacting to shocks may lead to a trade-off between the variability of output and the variability of the price level (King 1999, p 12). This trade-off in itself is an extremely complex phenomenon. | 37 Nor was this decision criticised by the business sector or the press, and in its publication “Økonomiske utsyn over året 1949”, Statistics Norway wrote that “the Norwegian external economy is so closely linked to that of the UK, that there was hardly any alternative to following the pound sterling”. See Jahn, Eriksen and Munthe (1966), p. 371. The decision to devalue the krone in 1949 is also discussed in Jansen (1975). BIS Review 147/2010 9 that alone. From a consequentialist standpoint, it matters little whether the intentions were good, if the consequences of the decision were not. Our decisions are good only if we reach the objective of price stability. As mentioned, our performance cannot be measured by whether inflation is always at target, partly because the economy is frequently exposed to abrupt and unexpected shocks. We will nearly always be slightly over or slightly under the target. But over time we can expect that these disturbances will even out, and in the long run we must also be evaluated on whether or not we achieve the objective of monetary policy. Have we, or have we not, achieved price stability these past ten years? 8. Conclusion Making a good decision is of little use unless one also manages to have it implemented. Norges Bank enjoys a privileged position. When we make a decision, we can also implement it. Our independence gives us the freedom to decide what the key policy rate shall be. | 0 |
But much of my talk will focus on the unique complications associated with negative nominal interest rates and the extent to which these complications constrain how low the rates can be set. After outlining these challenges, I’ll suggest that the zero lower bound on policy interest rates is much like the low tide mark on a beach: Standing at that border between the land and the ocean, you can continue to lower your elevation by walking into the water, but with each additional step, you will need to push against the increasing resistance of the water. There is a distinct qualitative difference between positive and negative nominal interest rates, just as there is a distinct qualitative difference between the beach and the ocean. The zero lower bound is marked by this same qualitative difference: zero is a rate below which a central bank encounters the distinctive and increasing costs of a negative nominal rate, relative to a nonnegative rate of interest. Purpose In September 2014, the ECB lowered its deposit rate to its current level of negative 0.2 percent. More recently, in late 2014 and early 2015, the SNB, DNB, and Riksbank reduced their policy rates to levels below zero, with the SNB and DNB setting their rates at negative 0.75 percent. 1 These central banks established their negative rates for various reasons. Both the SNB and DNB established negative policy rates primarily to deter capital inflows and reduce the appreciation pressure on their currencies. | 4, part 2 (November 2000): 1007–35; Miles Kimball, “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide,” Confessions of a Supply-Side Liberal blog, September 20, 2013. BIS central bankers’ speeches privacy. If these aren’t enough however, let me suggest another, very important benefit of currency that I explored in a paper with Charles Kahn and William Roberds. 3 The anonymity afforded by currency transactions prevents a buyer from suffering from any actions taken after the transactions that could exploit the knowledge gained by the seller of the buyer’s identity. For example, identity theft, or theft of credit or debit card information, is avoided through the use of currency. This is an economic benefit that is distinct from valuing privacy from a civil liberties point of view. If currency cannot be used in transactions, buyers are at a disadvantage, and many otherwise beneficial transactions (not related to buyers seeking to engage in tax evasion or otherwise illicit activity) would not take place. It is important to consider whether the move to eliminate currency, or to alter radically how currency works, represents a degradation or an improvement in technology. Should society voluntarily abandon a widely used technology that has enormous benefits and features that are currently irreplaceable, such as the privacy that comes with an untraceable transaction? While some of those features are used by criminals to facilitate socially destructive activities, the vast majority of currency uses are legal and productive. | 1 |
In July, the repo-rate path was lowered substantially, and without this downward revision to the path, the forecast for inflation would have been even lower. 8 See also my speech “Monetary policy and macroprudential policy”, published on 25 January 2013. 4 BIS central bankers’ speeches In principle, macroprudential policy tools can reduce the risks linked to household indebtedness in two different ways. First, one can increase the resilience of the financial system through, for instance, higher capital levels in the banks. It reduces the risk of a macroeconomic shock, for instance, a sharp fall in Swedish housing prices, developing into a banking crisis if the banks have more capital to absorb loan losses. Second, one can try to directly slow down growth in household indebtedness through, for instance, different types of limits to how much household are allowed to borrow. However, Sweden has long lacked a framework for macroprudential policy, with clear guidelines as to which authority should take action and what tools they should use. I and several of my colleagues have called for such a framework on many occasions. Now we have this framework in place. I now intend to describe the framework, the measures that have been taken and what remains to be done. The allocation of responsibility for the tools and the establishment of a Financial Stability Council The Government announced last autumn that Finansinspektionen would have the main responsibility for decisions on macroprudential policy measures and that a Financial Stability Council would be established. | An independent regulator for utilities is the norm throughout mainland states. By leveraging the expertise and reputation of existing independent regulatory agencies, Puerto Rico may improve the efficiency of its public corporations while reassuring investors. As a fifth step, the Commonwealth could benefit from adopting fiscal institutions more like mainland states. Balanced budget rules are far from perfect, but by following the states’ model – splitting the budget into an operating piece that must be balanced and a capital piece that can be financed with debt – Puerto Rico could better align financing methods with its spending priorities. A sixth step is for the Commonwealth to implement a framework to help ensure that budget targets are met. A key aspect of such a framework would require that the authorities implement multi-year budgeting, in which revenue and expenditure plans are articulated over a three to five year horizon. Such a framework should also incorporate a review of the central government’s macroeconomic and fiscal forecasts by a non-partisan independent entity, the views and analysis of which could be published in coordination with the Commonwealth’s proposed budget for any given fiscal year. New York City, for instance, uses this type of framework. The steps should be viewed as potential ways to improve Puerto Rico’s finances over time and I present them to you for consideration and discussion. The decisions are obviously up to you. Other countries, U.S. mainland states and municipalities facing similar fiscal issues have been able to overcome them. | 0 |
If they are seen as credible backstops, these programs can increase confidence and move financial conditions back toward normal levels. This feature was discussed earlier in the context of the TALF, in terms of the sizable market impact relative to the amount of risk taken. Second, liquidity programs designed in this manner have a good chance of generating positive income for the central bank. The reason is that financing is offered at a time when market risk premiums are very high. The central bank therefore captures a high expected return relative to the actual risk it is assuming, especially when the lending is adequately collateralized to limit such risk. Indeed, the Federal Reserve is likely to make substantial returns from the liquidity facilities launched during the financial crisis. 5 Achieving these returns, of course, was not an objective of the programs, but it does suggest that the Federal Reserve was prudent in the way in which it established these programs. Third, this approach gives the facilities a self-liquidating property. Loan rates are set at penalty levels that are not attractive in normally functioning markets. Given the scarcity of liquidity and the extreme movements of risk premiums during a crisis, the penalty rates are readily accepted by market participants in those circumstances. However, as the market gains confidence and returns to normal functioning, users of the facility have an incentive to stop borrowing from the central bank and to pursue better rates in private funding markets. | These developments paved the way for subsequent commercial mortgage-backed deals to come to the market without TALF support. The TALF accomplished these benefits while exposing the Federal Reserve to a limited amount of risk, as its design provides considerable protection. As I mentioned earlier, loans were made only against the highest rated asset-backed collateral. 4 Moreover, TALF borrowers contributed significant capital in the form of a risk-based haircut, which means that the market value of collateral pledged exceeded the principal amount of the TALF loan. The prices of securities pledged to the facility have risen, giving the Federal Reserve an even larger cushion against loss, and no securities have been put to the facility to date. In addition, Treasury backstopped the facility by committing up to $ billion to absorb any losses associated with the loans before the Federal Reserve would be at risk. And lastly, the interest earned on our loans is accruing, with about $ million earned to date, and serves as a buffer against loss. 3 Sources: Morgan Markets; Bloomberg L.P.; Federal Reserve Bank of New York. 4 Importantly, the Federal Reserve performed due diligence on each of the bonds pledged to the facility as a part of a detailed risk assessment process. 4 BIS Review 80/2010 The risk to the Federal Reserve is also limited by the amount of balance sheet employed, which has been considerably less than envisioned at the height of the crisis. | 1 |
Looking at on-going developments, we are better able to interpret the current situation and assess the fiscal and monetary stances. A good example of this improved understanding is the development of the SYNFINT, the Synthetic Financial Integration Indicator, presented in our Report and that is based on measures of crosscountry price dispersion in the money, bond, equity and banking markets in euro area countries. Looking ahead, we are also better equipped to warn about looming systemic risks or adjustment failings, as well as to identify strengths. 9 Macro-prudential policy will have an important role to play One of the more important goals of the on-going research is the grounding and calibration of macroprudential instruments. The need for a macro-prudential perspective is one of the main lessons stemming from the crisis. In fact, the whole regulatory reform after the crisis was internationally discussed in Basle or in the FSB and the G20, from the macro-prudential perspective. Indeed improving the design of Financial Regulation to ensure a resilient system is the first instrument of macro-prudential policy. I see macro-prudential policy as particularly important for the single currency, as macroprudential tools can in principle allow policymakers to address financial imbalances in a more country-specific and granular way. 9 See Fecht, Gruener and Hartmann, “Financial integration, specialization and systemic risk”, Journal of International Economics, Vol. 88, 2012. BIS central bankers’ speeches 5 I acknowledge that we do not yet have a large body of evidence on the effectiveness of these policies, especially in advanced economies. | Mugur Isărescu: Opening speech – conference “Investment and Investment Finance in Romania” Opening speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the conference “Investment and Investment Finance in Romania”, organized by the National Bank of Romania and the European Investment Bank, Bucharest, 13 February 2020. * * * Vice President McDowell, State Secretary Gyorgy Attila, Distinguished audience, Ladies and gentlemen, It is a pleasure for me and the Board of Directors to welcome you at the National Bank of Romania, to the conference dedicated to Investment and Investment Finance in Romania. This conference has been organized by the European Investment Bank in partnership with the National Bank of Romania. In fact, this partnership has had a long standing as a pillar for progress and investment in Romania. Please allow me to express a heart-felt welcome and to extend my warmest thanks to Mr. Andrew McDowell, Vice-President of the European Investment Bank and to Ms. Debora Revoltella, Chief Economist of the European Investment Bank, for their continuous support and deep commitment to develop investments in Romania, and, moreover, for being trusted partners and friends. I am glad that we have decided to co-organize this conference here in Romania, at the central bank, as this year we honour two landmarks with historic importance. One is the National Bank of Romania’s 140th anniversary and the other is the 20 years’ celebration of the day (February 15th 2000) when the EU formally started the accession negotiations with Romania. | 0 |
An increase of over 16 000 jobs is thus not very far from the middle of the preliminary range of 10 000 to 25 000 jobs saved that I mentioned at the Monetary Policy Meeting in October. To sum up, a reduction of the repo rate path by 0.25 percentage points 6 BIS Review 22/2010 over four quarters will thus give, all else being equal, an increase in inflation of just over 0.4 percentage points and, if employment varies one-to-one with hours worked, an increase in employment of approximately 0.35 per cent, which is equivalent to an estimated figure of over 16 000 jobs. We see in Figure 3 that the consequences of an unanticipated reduction of the repo rate are less than those of an anticipated reduction. In such a case, hours worked increase by 0.23 per cent, equivalent to just under 11 000 jobs, when calculated on the same basis. These estimates are unbiased estimates and forecasts of the effects of a lower repo rate path. The actual effect may be larger or smaller. It is possible that the effects of the repo rate on the economy are smaller than normal when the repo rate is close to zero. It is also possible that a reduction of the repo rate path, in a situation in which the market’s repo rate expectations remain higher than the repo rate path, can have a larger than normal downwards effect on repo rate expectations, thus increasing the effects on the economy. | Repo rate 0,5 1-quarter inflation 0,5 0,5 0,0 0,0 0,0 0,0 -0,5 -0,5 -0,5 -0,5 0 4 8 12 16 0 20 Real repo rate 4 8 12 0,5 16 20 Real exchange rate 0,5 0,5 1,5 0,0 0,0 1,0 1,0 -0,5 -0,5 0,5 0,5 -1,0 -1,0 0,0 0,0 0 4 8 12 16 20 0 4 8 4-quarter inflation 12 1,5 16 20 GDP 0.5 0.5 0.4 0.0 0.0 0.2 0.2 -0.5 -0.5 0.0 0.0 0 4 8 12 16 20 Hours worked 0.4 0 4 8 12 0.4 16 20 0.4 Anticipated 0.2 Unanticipated 0.2 Note. All x-axes refer to quarters. 0.0 0.0 0 4 8 12 16 20 0.35 per cent of an estimated potential employment rate of, conservatively, 93 per cent of a labour force of approximately five million is equivalent to over 16 000 jobs. Calculating on the basis of 93 per cent thus entails assuming a rather high figure for long-term unemployment of 7 percent. | 1 |
This included measures to ensure adequate levels of capital and liquidity for the distressed foreign entities operating in their jurisdictions, or to ensure an orderly unwinding of their local operations in some cases, while maintaining confidence in the overall financial system. And third, while there were significant benefits associated with a closer exchange of information and policy discussion between regulators at the international level and the regional level, the conduct of policy actions that followed was more on a bilateral basis. A case in point was the US dollar swap lines which were available selectively. So, while financial systems in Asia were able to successfully weather the impact of the global crisis, recent experience points to an important gap in the coordination of supervisory policies and crisis resolution, both at the international and the regional levels. BIS Review 105/2010 1 Currently, as we know, efforts to strengthen financial regulation and supervision are being undertaken at all levels. The most important and also the most widely known is the BCBS’s reform, which aims to increase the quality, quantity and international consistency and transparency of bank capital, to strengthen liquidity standards, to discourage excessive risk taking, and to improve the overall risk coverage framework. The proposed new international standards, while important, are complex and will pose a critical adoption and implementation challenge. Another important point at issue is the proper treatment of macroprudential policies in the context of financial regulation and supervision. | This is an important step that would provide additional room for the country’s rapid convergence and for Bank of Albania’s rapid and irreversible development in line with the models of its European counterparties. 2 BIS central bankers’ speeches | 0 |
Given this, the Executive Board has decided that the total fixed-income investment should have a modified duration of 4.00. This choice is based on a consideration where the price risk 17 is not assessed to offer a threat to the capital. 12 The Riksbank invests in the following institutions: Tennessee Valley Authority and the mortgage institutions Federal Home Loan Bank, Fannie Mae and Freddie Mac. 13 Changes in the slope mean that the yield curve becomes steeper or flatter when the long or short end of the curve moves. Changes in curvature involve the long and short ends moving in the same direction, while the middle segment of the curve moves in the opposite direction or remains unchanged. For a detailed description of the yield curve, see for instance Golub & Tilman (2000). 14 Modified duration is a linear description of the relationship between a bond portfolio's market value and interest rates. 15 Although the yield curve normally slopes upwards, it would be risky to take this for granted. During different period of time, parts of the yield curve have been both horizontal and downward sloping. 16 Reinvestment risk arises when capital is to be invested over several periods, as the reinvestment interest rate during the later periods is not known now. By investing assets with the same duration as the accounting period, one is only exposed to reinvestment risk and the annual result will be known at the beginning of the year (this applies to assets without credit risk). | But, as a citizen, I cannot help and feel proud of having one the two main currencies in the world. In sum, benefits of the euro include a high degree of credibility of monetary policy reflected in the level of long-term interest rates; diminished exchange rate volatility; completion of the single market and encouragement to cross-border trade. None of this, of course, can be taken for granted. Benign conditions currently prevailing on financial markets can be reversed. External or internal shocks may be coming, which would impact negatively European economies. The American economy could for example slow down more sharply than anticipated. Fuelled by an excessive expansion of credit, some internal imbalances, although in no way comparable to those in some other developed economies, could also develop in the euro area, especially in the housing sector. But I have the strong conviction that we are fully equipped to deal with any contingency, and, provided the necessary structural reforms are undertaken, keep the economy on a path of growth and stability. BIS Review 3/2007 1 2) How have those successes been achieved? A lot comes, in my view, from the institutional and operational framework in which monetary policy is developed and implemented. The independence of the ECB and of the 12, very soon 13, participating NCBs is enshrined in the Treaty. They are institutionally, operationally and financially independent from European Community institutions and national governments. We have a clear and transparent definition of price stability: inflation below but close to 2% over the medium-term. | 0 |
This was due, on the one hand, to measures taken by the ECB, and on the other, to the fact that, in the US, the ‘fiscal cliff’ was averted. As recent weeks have shown, conditions on the financial markets can change again swiftly. In Japan, there has been a sharp correction on the stock market and the yen has again gained somewhat in value. Meanwhile, in the euro area, there is a discrepancy between the generally favourable trend on the financial markets and the disappointing economic data. Finally, in the US, a certain degree of uncertainty about the future monetary policy direction of the Federal Reserve (Fed) has gained ground. Overall, the market BIS central bankers’ speeches 1 environment continues to be dominated by high levels of uncertainty, thereby remaining susceptible to sudden shifts in mood. Management of currency reserves The easing of tensions on the financial markets also affected the Swiss National Bank’s (SNB) currency reserves. These are mainly composed of foreign currency investments and gold. At the end of May, the SNB held foreign currency investments of just over CHF 440 billion (cf. chart 1). Due to our liquidity and security requirements, a large portion of our foreign exchange holdings are in government bonds and deposits with other central banks. This portion amounted to 78% at the end of the first quarter of 2013. To further diversify investment risk and increase investment in real assets, we raised our proportion of equities from 12% to 15% in the first quarter. | Switzerland has a long tradition of organising its core financial market infrastructure as a joint enterprise, according to the ‘user-owned, user-governed’ principle. In the case of the repo market, the current solution has proven its worth. Nonetheless, due to changes in the stock market and regulatory environment, the SNB has undertaken a reassessment of the situation. In the light of this, the SNB has decided to conduct its monetary policy operations via a new trading platform, provided by SIX Group Ltd, as of May 2014. In this way, the repo market will be based on an integrated solution, in which the trading platform, securities settlement system and payment system are covered by a single source. Moreover, further developments will also be possible, for example the expansion of trading to incorporate further products. Since the new trading platform will resemble the existing Swiss franc repo system (Eurex Repo), access for market participants will entail only minimal adjustments. We are confident that an integrated solution is the best means of ensuring a robust repo market infrastructure. BIS central bankers’ speeches 3 Charts 4 BIS central bankers’ speeches | 1 |
Role of technology in optimising potential of Islamic finance One final point before I conclude – technology makes the impossible possible. Recent financial technology advancements enable Islamic finance industry players to deliver practical yet value-adding solutions. For instance, application of blockchain6 to address challenges7 in managing endowment fund (waqf). Fintech is rapidly changing the facets of the global financial industry, reshaping expectations of consumers and businesses on financial services. There are untapped opportunities of fintech to develop financial solutions that can help drive Islamic finance to deliver even greater, wider and deeper positive impact – particularly in realising its promise in risk-sharing and providing support for genuine and productive economic activities. Technology can also widen access to and increase outreach of social finance instruments through digitisation of collection and disbursement of the proceeds. Fintech startups such as LaunchGood and SkolaFund are already making their name in social impact initiatives, which is a promising start. Conclusion Financial institutions need to look beyond short-term profitability. It is imperative for financial 2/3 BIS central bankers' speeches intermediaries to be seen fulfilling the needs of the economy, society and environment at large. Moving forward, ‘change of mindset’ is eminent. While considering profit, financial institutions should not forgo the element of being socially and environmentally responsible. I believe setting the ‘Tone from the top’ is key in this process. The organisation of today’s roundtable forum is indeed very apt. | But the work must start now, and it must start right by taking a broader and integrated approach to implementation. Today’s workshop aims to bring some of the most important issues in implementation to light, and provide you with valuable insights from our distinguished speakers and subject matter experts. With greater clarity and knowledge to inform careful preparations, insurers can be confident of not just achieving a smooth transition to IFRS 17, but of laying strong foundations for long term growth and success. 4/5 BIS central bankers' speeches That is the ultimate goal. 5/5 BIS central bankers' speeches | 0 |
At the same BIS Review 72/2000 4 time, there are similarities with regard to the strong penetration of information technology in the economy, although we are also later in this development. As in the USA, high asset prices and strong optimism have stimulated demand and increased the level of indebtedness in the Swedish economy. Although it is not yet possible to write off the risk of financial imbalances building up the USA imbalances that can have negative effects for the American economy - it now seems as if the American economy may be on its way to a soft landing. However, there still remain the global financial imbalances that have been built up over many years with very high saving in Japan and very low saving and high indebtedness in the USA. We have still not seen how these imbalances are to be resolved and the consequences this will have for the world economy. Although there are some indications that the Swedish economy is experiencing a similar development as the American, the structural differences cannot be disregarded, which probably create greater inertia in the Swedish economy than in the American. One such area is the labour market. Considerable barriers to competition remain in the Swedish economy as well. Another difference is that the cyclical upswing we are now experiencing is taking place at the same time as an increase in growth and resource use in the rest of the world. | Some analysts have attributed this lack of BIS central bankers’ speeches 1 trade in service and manufacturing sectors to lack of competitiveness and products that insurer the exporter against any unforeseen losses. The demonstration by ATI of their credit risk insurance products in this workshop will therefore, play a very important role in promoting trade and exports of Non-Traditional Exports which lead to a diversified economy, job creation and sustainable economic growth. The credit risk insurance products also spur trade within Africa by helping our local companies to become more competitive through increased access to credit facilities. ATI has therefore, truly had a significant impact in Africa, which is reflected in the over $ billion worth of trade and investments it has attracted into the continent over the past decade. Distinguished Guests, Ladies and Gentlemen, as you are aware, staying competitive is what all companies strive to do. Innovation plays a key role in this equation. I am therefore elated that this morning ATI will speak about how it is providing innovative products and services to better suit the needs of banks and financial institutions. I am confident that the strategic partnerships of local banks and ATI will provide an opportunity for growth in credit particularly to the Small and Medium Enterprises which face major challenges in the trade sector. | 0 |
Both indicators were registered at 3.5% in November. Seasonally adjusted monthly price growth has been around 0.2% since June.For food products, this indicator came in even lower in October and November. If we transform these monthly indicators into annualised form, the result will be lower than 4%. However, looking at the key product groups, while annual food and non-food price growth keeps falling, services prices increased slightly faster in November with their growth rate reaching 3.9%. This was mainly owing to the market services segment, which could be an early sign of a potential revival of demand. Survey results also indicate an improvement in consumer sentiment. As to the next year, our inflation forecast for the first quarter is below 3%. This decrease will be temporary. It is in line with our expectations and is explained by the fact that the effect of the VAT rate increase will be factored out from the calculation of annual inflation. In the second half of the year, inflation will be returning to around 4%. This will be helped by the monetary policy easing that the Bank of Russia has implemented this year. I would like to reiterate that monetary policy measures influence the economy and inflation in a gradual manner. The accumulated effect of the earlier key rate decisions will manifest itself throughout 2020. Therefore, it may take some time to assess the necessity for a further key rate reduction. | This is associated with oil price trends and external demand. The financial account balance of the private sector will shrink to about 1% of GDP in 2020–2022. As usual, making our decisions, we also factored in risks. We are currently talking a lot about disinflationary factors, and they do prevail for the moment. However, there are also proinflationary risks over the forecast horizon. First, such risks are associated with external factors, which include the world economy and global financial markets. Second, it is hard to exactly assess the extent to which the inflation slowdown in the food market is caused by temporary factors, the timing and the likelihood of the turnaround in their dynamics and the intensity of balancing changes in food prices given the current low base. Third, as we have noted, the aggregate effect of five earlier key rate cuts will be gradual and its estimation will take time. As for the fiscal policy, the situation seems more balanced in terms of its effect on inflation in 2020, given that budget spending, including into the national projects, will be distributed over time. Let me remind you that the next policy meeting of the Board of Directors will also be a core one, same as today. This is associated with the changes in the schedule of the Board of Directors’ policy meetings. We are going to sum up the results of 2019 at our next meeting. | 1 |
According to some, in the past few years alone Hong Kong has been diagnosed with a whole collection of terminal diseases brought by the handover in 1997, the recent regional financial crisis, the “threat” not just from Shanghai but also from Seoul, Singapore and Sydney, the high cost of doing business, declining educational standards, worsening pollution and, believe it or not, too stable a currency as well, and a whole host of other factors. The impending “catastrophe” of China’s entry into the WTO is the latest spectre on the horizon, and no doubt when that one passes without incident more demons will be conjured up. Yet, in this moribund state, we are still managing to struggle along with GDP growth - projected for this year - of 8.5% and export growth at double-digit rates in recent quarters. The World Bank projections on the effects of WTO entry - a doubling in the space of five years of China’s share in international trade (which is itself projected to grow at the rate of about 6% per annum) - suggests that the business “creation effect” stimulated by WTO accession will far outweigh the “diversion effect”. There should, in brief, be more than enough work to keep both Shanghai and Hong Kong busy for a long time to come, and more than enough skill and enterprise available in both cities to enable each to focus on the opportunities that WTO entry will bring. | Hong Kong’s banking sector, with its strong reputation and long involvement in mainland business, stands to benefit greatly from the liberalisation in this area, providing that it can position itself to make the best out of the opportunities. In the monetary sphere, the various predictions about the future development of the renminbi in the light of WTO membership - which include the possibility of greater exchange rate flexibility - would most likely have positive implications for Hong Kong’s economy as a whole, and should create no difficulties for Hong Kong’s entirely separate and soundly based currency. The role for Hong Kong in the context of a WTO that includes China, would, I believe, give even fuller scope for the qualities that, in the assessment of the Cato Institute, make Hong Kong the freest economy in the world. All of this therefore leaves a small question in my mind about the title of this BIS Review 68/2000 6 conference, and I hope the organisers will forgive me for raising it. The phrase “Hong Kong’s Legacy, China’s Future” has a bit of a morbid ring about it. It suggests that we in Hong Kong are bequeathing something to China before we breathe our last, and that you are assembled here for a funeral, or at least a deathbed scene. This cannot, surely, be the intention behind the conference. | 1 |
Lim Hng Kiang: Brief overview of economic links between Vietnam and Singapore Opening remarks by Mr Lim Hng Kiang, Deputy Chairman of the Monetary Authority of Singapore and Minister for Trade and Industry, at the Launch of Vietnam-Singapore Listing Preparatory Program, Hanoi, 2 April 2007. * * * His Excellency, Vu Van Ninh Minister of Finance of the Socialist Republic of Vietnam Distinguished Guests Ladies and Gentlemen It gives me great pleasure this morning to join His Excellency, Minister Vu and all of you in Hanoi at the official launch of the Vietnam-Singapore Listing Preparatory Program. As Minister Vu has shared earlier, today’s programme adds yet another pillar to our growing economic relationship. Today’s launch is especially meaningful for me, as looking back at 2005, our two countries inked a historic Framework Agreement on Vietnam-Singapore Connectivity to strengthen our relations and to cooperate across the many areas in which we have shared interests. I am thus very glad that my officials from the Monetary Authority of Singapore have been working closely with Vietnam Ministry of Finance and the State Securities Commission to see through the implementation of the terms provided under the Connectivity Agreement. The objective of the Connectivity Agreement had been to build closer Government-to-Government relations between Vietnam and Singapore, to bring about more opportunities for mutual collaboration and exchanges between our two countries. | Officials from the Monetary Authority of Singapore have been in close dialogue with Vietnam MOF and SSC to develop a meaningful programme catered at helping Vietnamese enterprises understand the workings of the international capital markets and the regulatory standards as well as market standards required for a listing in an international market outside of Vietnam. We have invited representatives from the Singapore Exchange, as well as professionals from leading investment banks, accountants and lawyers to join us at today’s seminar, and they will cover a wide-ranging programme that helps to prepare Vietnamese enterprises on cross-border listings, training on corporate governance, listing rules and accounting standards, amongst others. I understand that there are also plans for Vietnamese companies to be introduced to institutional investors based in Singapore at a later stage. All these efforts will pave the way for Vietnam to tap on Singapore’s capital markets as an additional channel to connect with global investors. We believe this will contribute to speeding up the pace of Vietnam’s economic growth, even as you are taking significant measures to develop your own capital markets. Singapore is now home to a wide pool of institutional funds, with more than $ billion of assets under management. As a well-managed pro-business marketplace, Singapore is particularly BIS Review 35/2007 1 attractive to international companies seeking an offshore listing. Currently, more than 700 companies are listed on the Singapore Exchange. Amongst them, more than 30% are foreign companies from around the globe. | 1 |
The IFSB now has 137 members that include 35 regulatory and supervisory authorities, five international inter-government organisations including the BIS, World Bank and the IMF, and 97 market players and professional firms from 22 jurisdictions. Of significance to note is that the membership of the IFSB comprises several authorities and international institutions from the non-Muslim countries. The IFSB complements the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) which was established earlier in 1991, to set the accounting standards to ensure that the true and fair value are reflected in the financial transactions and to ensure greater accountability and responsibility of the financial institutions. Finally, these developments have been reinforced by greater liberalisation to increase the international dimension of Islamic finance. With increased international participation in Islamic financial markets, it has prompted increased cross-border Islamic financial flows. In addition, Islamic financial institutions that had previously operated only in their own domestic jurisdictions have begun to venture abroad to tap new growth opportunities in other regions. This new international dimension of Islamic finance has enhanced further the international inter-linkages in this more globalised environment. Islamic finance: operating in a challenging and evolving environment The evolution and expansion of Islamic finance has occurred in a fast changing and dynamic international environment. In the context of a more challenging and competitive environment, the issue of financial stability, viability and competitiveness are paramount. This is particularly evident in the recent developments experienced in the international financial system. | Jean-Pierre Danthine: The Swiss National Bank’s 2012 Financial Stability Report Speech by Mr Jean-Pierre Danthine, Vice Chairman of the Governing Board of the Swiss National Bank, at the Media News Conference of the Swiss National Bank, Berne, 14 June 2012. * * * Introductory remarks by Jean-Pierre Danthine I, too, would like to welcome you to this news conference, which for me is also the occasion to present the 2012 edition of the Swiss National Bank’s Financial Stability Report. The report contains the SNB’s assessment of the risks to the stability of the Swiss banking system, and of the need for action. This promotes risk awareness among Swiss banking sector agents, thereby contributing to financial stability. Introduction Economic and financial conditions for the Swiss banking sector have deteriorated since the last Financial Stability Report. The sovereign debt crisis escalated, threatening to spill over from peripheral euro area countries to the core countries of the euro area. In addition, global economic growth lost momentum and tensions grew in the international banking system. There was, likewise, no easing of tension on the Swiss mortgage and real estate markets. The momentum observed in real estate prices and mortgages continued. As my colleague, Thomas Jordan, has already mentioned, under its baseline scenario the SNB expects a gradual improvement in economic and financial conditions over the next 12 months. Although this is considered to be the most likely scenario, the risk of a renewed deterioration in the environment remains high. | 0 |
In essence, pricing at penalty rates incorporates an exit strategy into the design of the programs. But while the various liquidity programs shared these features, they differed in other dimensions, and it is these differences that prompt questions about the future scope and design of liquidity facilities. A primary question is whether liquidity support during times of stress should be offered only to banks or to a wider set of financial institutions. We have a financial system in the United States that is heavily dependent on nonbank institutions in the extension of credit to firms and households. Indeed, as noted earlier, the amount of credit provided by the securitization market has rivaled that provided by banks. Moreover, nonbank firms in many cases are just as vulnerable to liquidity pressures and run-like dynamics as are banks. Accordingly, there may be benefits to having the central bank extend credit to both banks and nonbank financial intermediaries during periods of financial stress. The experience with the TALF suggests that nonbank lending efforts can be successful at restoring market functioning and the flow of credit to firms and households. A second issue is the extent to which the Federal Reserve should be flexible in setting the structure of its liquidity programs to meet the needs of the market. As noted earlier, the TALF did this in several ways, including its extension of the duration of the loans beyond the shortterm nature of most other liquidity facilities. | These developments paved the way for subsequent commercial mortgage-backed deals to come to the market without TALF support. The TALF accomplished these benefits while exposing the Federal Reserve to a limited amount of risk, as its design provides considerable protection. As I mentioned earlier, loans were made only against the highest rated asset-backed collateral. 4 Moreover, TALF borrowers contributed significant capital in the form of a risk-based haircut, which means that the market value of collateral pledged exceeded the principal amount of the TALF loan. The prices of securities pledged to the facility have risen, giving the Federal Reserve an even larger cushion against loss, and no securities have been put to the facility to date. In addition, Treasury backstopped the facility by committing up to $ billion to absorb any losses associated with the loans before the Federal Reserve would be at risk. And lastly, the interest earned on our loans is accruing, with about $ million earned to date, and serves as a buffer against loss. 3 Sources: Morgan Markets; Bloomberg L.P.; Federal Reserve Bank of New York. 4 Importantly, the Federal Reserve performed due diligence on each of the bonds pledged to the facility as a part of a detailed risk assessment process. 4 BIS Review 80/2010 The risk to the Federal Reserve is also limited by the amount of balance sheet employed, which has been considerably less than envisioned at the height of the crisis. | 1 |
So far they have found them in bio-fuels, which in turn put pressure on agriculture commodity prices. Signs of mounting cost-push pressure from oil and commodity prices can be observed in the recent acceleration of domestic headline inflation, which rose above 5 per cent in February. 2 BIS Review 33/2008 Such increase, if continued, can pose risk to the incipient recovery in private consumption as it lowers households’ purchasing power. Rising production and construction costs can also dampen business profit, especially in the face of tight control on final goods prices. Dampened prospects for profits in turn may lead to delays of planned investment. While this downside risk is substantial, there is also an upside. Higher commodity prices strengthen farm income, which tends to benefit a large section of the Thai workforce. Ladies and Gentlemen, The risks to global growth and global inflation have both increased in the near-term. At this point, we cannot be sure how the slowdown of global growth will affect global inflation this year. And even though, from an asset price perspective, there is a positive probability for a correction in oil and commodity prices going forward, we cannot be certain that such correction will be substantial enough to bring the inflation risk down. One thing is more or less certain, however: Global financial interconnectedness almost all but ensures that we should expect higher financial volatility in the near term, as market players alternate between yield-seeking and risk-aversion investment strategies. | The outcome on this front is quite favorable, as headline and core inflation were well contained at 2.3 and 1.1 percent, respectively, by end2007. Despite the unusual global situation, the Thai financial markets also remained resilient through 2007 with only moderate fluctuations. And while credit and deposit grew slowly, profitability of banks and financial institutions remained at a satisfactory level. Overall NPLs in the banking system remained moderate, as low income households’ ability to service debt started to decline mostly on account of slow income expansion. Ladies and gentlemen, These growth and stability outcomes under significant downside risks paint a picture of a resilient economy. As far as the outlook for the Thai economy in 2008 is concerned, I would like to address first the growth momentum and then talk about the risks and uncertainties confronting the economy this year. Preliminary data indicate that private consumption and investment are firming up after recovering during the fourth quarter last year. This is good news, as private consumption and investment constitute almost 70 per cent of total demand. Clearer political landscape postelection and continued spending by the government has helped revive private demand. Reflecting that, we have started to see strong pickup in imports in January. February data also confirmed the strength of imports. Moreover, plans for further fiscal stimulus as well as accelerated budget disbursement should ensure that domestic demand revival is firmly in place. | 1 |
Let me be clear. We must deal with the fire sale issue in tri-party repo and the heightened run risk it creates. I believe there are three potential ways forward, all of which are superior to the status quo. First, tri-party repo transactions could be restricted to open market operations (OMO) eligible collateral.11 Such collateral would likely remain quite liquid during a time of crisis.12 In addition, such collateral could, in a crisis, potentially be passed directly by a broker-dealer to the discount window under Section 13.13 authority, or, because of beneficial treatment under Section 23A of the Federal Reserve Act, be financed by a banking affiliate that would then itself borrow at the discount window. Thus, one could construct an effective lender of last resort backstop for an OMO-eligible- only tri-party repo system. However, there are also some significant disadvantages to such an approach. The less liquid collateral could just migrate to be financed elsewhere, with associated run and fire sale risks. Also, given that housing finance reform could cause the agency debt and agency mortgage-backed securities (MBS) of Fannie Mae and Freddie Mac to be replaced by something different that was not OMO eligible under the Federal Reserve Act, the share of assets that are OMO eligible could diminish over time. Finally, this approach would do little to mitigate the risk of fire sales of a defaulted dealer’s collateral by its investors once a dealer is bankrupt. | M R Pridiyathorn Devakula: Efficiency enhancements and risk management Remarks by Mr M R Pridiyathorn Devakula, Governor of the Bank of Thailand, at the Asian Bankers’ Seminar, Bangkok, 16 March 2006. * * * Distinguished Guests, Fellow bankers, Ladies and Gentlemen, Today’s seminar covers wide-ranging topics of interests to the banking community ranging from efficiency enhancements to risk management needed to achieve sustainable business growth. While these issues are topical and useful to bankers, I believe that one cannot simply reduce risks by relying on risk management process alone. An effective risk management system has to be supported by proper governance of the bank’s Management and its Board of Directors. One of the painful lessons of the 1997 crisis was that improper governance practices at the Board level were amongst the root causes of the downfall of too many financial institutions. Back then, it was not unusual for banks to lend to related parties with close connections to their owners, directors, and management without the proper credit analysis. Board members of banks often neglected their responsibilities to blow the whistle against these imprudent activities. Many Board members also did not have adequate and timely access to the necessary information to detect such misdeeds so that appropriate actions could be taken to prevent the resultant damages. The concept of “governance” as understood in Western society and now introduced into our business organizations, including financial institutions, has served as a good starting point to rectify some of the root causes of the crisis. | 0 |
These CoCos can be converted into CET1 equity or written off in order to absorb losses in current operations. When accumulating the necessary bail-in instruments and high-trigger CoCos, banks have the opportunity to replace existing instruments with the required higher-quality instruments. The further strengthening of resilience through the accumulation of high-trigger CoCos, as foreseen by the regulations, is important and necessary. One reason for this is the big banks’ loss potential, which continues to be substantial relative to their capitalisation. Given their Page 1/3 Berne, 15 December 2016 Fritz Zurbrügg News conference significance to the Swiss economy, it is important that the big banks remain adequately capitalised, even in the event of such losses occurring. A second reason is the critical assessment by the markets as regards the resilience of banks, both in Switzerland and worldwide. By strengthening their resilience, banks can convince the markets of their soundness. The likelihood of share price collapses and sharply increased premia for credit default swaps, such as those observed at some banks this year, would thus be reduced. In addition to a strengthening of resilience, it is also essential that the big banks further improve their resolvability. This requires both sufficient holdings of bail-in instruments and the formulation of credible emergency and resolution plans. Emergency plans are aimed at ensuring that, in the event of imminent insolvency, functions that are important for Switzerland can be maintained. | Such emissions are chiefly responsible for the polluted air we breathe. Apart from its effect on pulmonary diseases and people’s quality of life, pollution correlates with a rise in the planet’s average temperature. That may severely affect the economy, tourism and agriculture, prompting potential humanitarian or migratory crises we can hardly evaluate at present. I believe we will all agree that climate change is the most global matter we can imagine, both in its consequences and its causes. Clearly, a potential rise in temperatures affects the entire planet. And evidently, too, atmospheric pollution does not stop when it reaches a border. Fortunately, most countries are adopting strategies to reduce greenhouse gas emissions as a way to mitigate the associated risks. Let us not forget that, despite this being a global problem, the rise in temperatures would have different effects from one country to another,3 hence the importance of international agreements being reached. 1 Among the key pieces of legislation setting ceilings on pollutants in Europe are the 2008 Directive on ambient air quality (2008/50/EC) and the 1996 Framework Directive on ambient air quality assessment and management (96/62/EC). See https://www.eea.europa.eu/ 2 http://www.realinstitutoelcano.org/wps/portal/rielcano_es/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_es/z onas_es/encuesta-espanoles-ante-cambio-climatico-sep-2019 3 Some studies indicate that global warming may be proving economically and socially beneficial for the rich countries, in particular the coldest ones such as Sweden and Norway, while adversely affecting poorer countries. See Noah S. Diffenbaugh and Marshall Burke, “Global warming has increased global economic inequality”. | 0 |
Third, the statement gives an indication of how the MPC intends to respond to future data developments. In line with the argumentation that I have already offered, it emphasises that the MPC will be focused on ‘indications of more persistent inflationary pressures’ – in my view, this places emphasis on identifying potential second-round effects in price and wage setting behaviour. This helps to clarify how the MPC defines it policy ‘reaction function’ at present, prioritising the more persistent component of inflation developments over the headline spot measure. Fourth, by signalling preparedness to ‘if necessary act forcefully in response’ to indications of Page 11 greater persistence in inflation, the statement reflects both my willingness to adopt a faster pace of tightening than implemented thus far in this tightening cycle, while simultaneously emphasising the conditionality of any such change in pace on the flow of new data and analysis. Much remains to be resolved before we vote on our August policy decision. How I vote on that occasion will be determined by the data that we see and my interpretation of it. And finally, harking back to the opening section of my remarks, the statement places a direct and clear statement of the MPC’s commitment to return inflation to target at its heart. This is something all MPC members agree on – and the main message addressees of the statement should extract. As I said earlier, it is also the message I would like you to take from my comments today. | Improving access to finance and responsible lending by the financial institutions coupled with sensible and prudent use of credit by the borrowers are an imperative for the consumers and for the wider economy. Being financially competent can also act as the first line of defence against falling prey to financial scams or frauds and abusive selling practices. Indeed, financial education initiatives complemented by fair and responsible business conduct are not only essential complements to financial inclusion, they contribute to broader financial stability and consequently improving the lives of members of society. For financial educators and policymakers, the challenge ahead is a daunting one, given the scope of the task and the rapidly changing environment. There has been no time like the BIS central bankers’ speeches 1 present, where the financial education and financial inclusion agenda has risen to such prominence at the global, regional and national levels. We should seize this opportunity. The increased visibility of financial education and financial inclusion should at least make our work a little bit easier especially in securing top level commitment to advance this agenda and ensure better alignment among various stakeholders. It is in this context that the global leadership of institutions like the OECD, the Alliance for Financial Inclusion (AFI) and the World Bank is important to sustain the momentum for greater progress and champion the financial education and financial inclusion agenda. | 0 |
This amplified the cyclical upturn in our part of the world. Towards the end of the decade, during the financial crisis, policy interest rates were reduced sharply and to record-low levels. That was a natural and necessary response. But a persistently low interest rate poses challenges in an economy where there is a strong appetite for borrowing and property prices are rising, as this may increase the risk of imbalances further ahead. BIS central bankers’ speeches 1 These experiences have provided new insights into how the interest rate functions under an inflation targeting regime. Norges Bank’s analyses and communication have evolved. Economic agents have become familiar with our response pattern. When setting the key policy rate, we do not exclusively assign weight to bringing inflation back to target, but we also take into account the impact of the interest rate on output and employment. Inflation targeting has become more flexible. In our most recent Monetary Policy Report, published in March 2012, we further clarified the Banks’s response pattern. By way of three criteria, we highlight what we take into account when we set interest rates. The first criterion states that the interest rate should be set with a view to stabilising inflation at target or to bring it back to target if a deviation has occurred. The second criterion states that the interest rate path set by the Bank for the period ahead should provide a reasonable balance between the path for inflation and the path for overall capacity utilisation in the economy, i.e. | When these young economists returned home, they had learned that another world was possible. They had received key inspiration about the proper business of a central bank and the proper conduct of monetary and credit policy. Today, the Bank has a Research Unit. The research is useful but it is a drop in the ocean compared with the research taking place in the wider world. But the Research Unit is important for ensuring that we are vigilant. It is the Bank’s bridge to the academic world inside and outside Norway. Internationally recognised scholars visit the Bank on a weekly basis to relate the latest news from the research front and challenge our perceptions and ways of thinking. The actual presence of in-house researchers with specialist expertise in central banking sharpens the minds of other Bank staff. The Research Unit ensures that as an institution the Bank does not isolate itself and become inward-looking and self-satisfied. The third measure is to ensure that the Bank’s governing bodies and Bank staff work together as a team. Most of the literature on “making good decisions” focuses on the composition of the governing board (external vs. internal and governance by experts vs. general governance expertise) and work structure (collegial committees vs. individualistic committees). Just as important is how the governing board manages to make the most of staff expertise. If an institution like the central bank slowly slips into mediocrity, it will not be discovered until it is too late. 12 BIS central bankers’ speeches | 0 |
In the first months of 2020, CPI inflation slowed substantially, reflecting a fall in electricity prices. The rise in the CPI adjusted for tax changes and excluding energy products (CPI-ATE) moved up through spring and summer and remained above the inflation target, primarily owing to higher imported goods inflation. Higher imported inflation reflects the krone depreciation in early 2020. Annual CPI inflation was 1.3 percent in 2020, while CPI-ATE inflation was 3 percent. Towards the end of 2020, higher electricity prices pushed up CPI inflation. In March 2021, the 12-month rise in the CPI was 3.1 percent, while underlying inflation was somewhat lower. Surveys indicate that inflation expectations are firmly anchored around the 2 percent inflation target. In the immediate aftermath of the Covid-19 outbreak in Norway, housing market turnover fell and house prices edged down. But through spring 2020, housing market activity picked up and prices rose. In April 2021, house prices were more than 12 percent higher than at the same time in 2020. Growth in household credit increased slightly through 2020, but is still lower than in the 2/4 BIS central bankers' speeches years prior to the pandemic. Economic policy Let me now say a few words about the economic policy conducted since Covid-19 hit Norway. Fiscal policy has taken the lead and played a decisive role in limiting the adverse economic impact of the pandemic and the measures to contain it. | [12] As we move forward, we will reassess whether a normalisation strategy is sufficient to bring us back to 2% inflation over the medium term. Ultimately, the terminal rate at which our hiking cycle ends must be compatible with inflation returning durably to our target – and that rate will depend on how the economic environment evolves around us. One key factor will be how the persistence of the shocks we are facing affects inflation expectations and potential output. If there were evidence that high inflation risked de-anchoring inflation expectations, then the policy rate that is compatible with our target would lie in restrictive territory. Similarly, were we to conclude that ongoing supply shocks had durably lowered economic potential, we would have to ensure that demand remains aligned with supply. Another key factor will be how the growth outlook affects inflation. Negative supply shocks will result in a growth slowdown, which will likely have an impact on the prevailing inflation rate. In past euro area recessions going back to the 1970s, headline inflation has fallen by about 1.1 percentage points a year later, while core inflation has fallen by about half that amount. [13] But this is not a hard-and-fast rule: in some recessionary episodes, such as those triggered by a worsening of supply conditions, inflation has stayed the same or even risen. | 0 |
Not only does this raise serious concerns on the risk to systemic stability, it also undermines the integrity and efficiency of the markets. By virtue of their sheer size and aggressive trading strategies, the highly leveraged institutions, through their agencies, who usually also provide them with the credit, and possibly also ride along with them, often use their market power to influence the prices in smaller markets. Almost always an attack on a currency in Asia starts late on a Friday afternoon when the domestic markets in Asia are thin and when the international currency markets in London and New York open for business. Almost always a succession of big sell orders is placed for execution in a short period of time. And almost always the banks, when asked, say that they are executing those orders on behalf of their customers, whose identity and purpose cannot be disclosed because client secrecy is sacrosanct. And all this is supported with an immaculately timed commentary of gloom and doom. Some are more objective than others, but regrettably the impression one gets, particularly as a regulator, is that they are aimed at generating undue pessimism and panic, and consequent sharp and widespread movements across the currency and other related financial markets in favour of those behind the attacks. Most of the activities of the highly leveraged institutions are carried out through the OTC markets, which are very opaque. | Second, the inflation target is quantified. The actual target varies, however, from one country to another. In some countries, such as New Zealand and Israel, the target has been set as a target band for inflation, and not as a single target figure. Other countries like Canada and Sweden have a target figure with a target band around it. Common to all inflation-targeting countries is the existence of symmetry: It is equally important to avoid an inflation rate that is too low as it is to avoid an inflation rate that is too high. Monetary policy in the US and the euro area is not usually considered to be inflation targeting. In the US, low and stable inflation is an important long-term monetary policy objective, but no explicit target has been set. In the euro area, price stability is the most important monetary policy objective. This is stipulated by a treaty. The ECB has defined price stability as a rise in consumer prices that is less than but close to 2 per cent. This means that there is no symmetry. The ECB differs here. It also appears that the ECB has a longer time horizon for its assessments, and the bank emphasises developments in the money supply. For most inflation-targeting countries, the explicit target is linked to a level or a band for the consumer price index. Some of the prices in the consumer price index vary considerably, however, due, for example, to tax changes, weather and wind. | 0 |
It is the combination of accounting and prudential rules which shape the incentives of investors and managers. Partial reform, limited to the prudential field for instance, will not suffice and could even introduce additional distortions. The Basel Committee has come out with a comprehensive approach to capital and accounting reform to reduce procyclicality, embodied, in particular, in the Principles for revision of IAS 39 (“Financial Instruments: Recognition and Measurement”). It should be strongly supported. Second, on leverage. Excessive leverage has been a major cause of the crisis. In many instances, it could not be detected early enough, because attention was focused on riskweighted measures of capital utilisation. There is great merit, therefore, in introducing a leverage ratio as an essential tool of macro-prudential supervision. It is also envisaged as part of the capital requirement regime as a complement and "backstop" to risk-weighted measures. It may be almost impossible, however, to use it as a binding instrument on an international basis. The reason is simple: while it is relatively easy to measure the evolution of the leverage ratio over time for an institution or group of institutions, it is almost unfeasible to 2 BIS Review 133/2009 measure it consistently across countries, due to differences in accounting regimes and banking structures. An enormous amount of work is therefore necessary before integration of a leverage ratio into the Basel framework can be implemented. In particular, full convergence in accounting measurements of both assets and capital is an absolute prerequisite. | So for example, in the most recent fielding of our survey, the panel was asked: 4 BIS central bankers’ speeches In your view, what would you say is the percent chance that the following things may happen to the rate of inflation/deflation over the one-year period between February 2013 and February 2014? Chart 6 gives you the question in full. We have been fielding the forward inflation expectation question since spring 2008, and Chart 7 contains some time-series information from the responses. We use established statistical techniques to estimate continuous probability distributions from each individual set of responses. We then find the median of the medians of the individual distributions to represent the average forward expectation and the upper and lower quartiles of the individual medians to measure disagreement across respondents. For our measure of uncertainty we report the median of the individual inter-quartile ranges. As a complement to attempting to improve the measurement of household forward inflation expectations, we have also been investigating expectations about wage growth. Because firms and workers may negotiate changes in wages to be in line with their expected rate of inflation, data on wage expectations are an additional information source for analyzing inflation dynamics and the interaction between wage and price determination. Furthermore, discrepancies between expected changes in wages and expected inflation may affect households’ financial decisions. Despite the obvious importance of wage expectations, information on wage expectations is particularly scarce. | 0 |
Today I shall confine my brief remarks to some aspects that have to do with the fact that shares now weigh considerably more heavily in household financial portfolios than was the case thirty years ago. As I just said, this development has coincided with a return on shares that has been very high historically. Sooner or later, however, there will be a normalisation, more or less in line with what has happened in the past. This is so because the return on shares is ultimately determined by corporate profits, which are bound up in turn with economic development in general. GDP represents the sum of all profits and wages in the economy and it is hard to see how an annual real growth rate of around 2 per cent could result in a development of corporate profits that warrants a real annual return on shares that averages around 20 per cent. A more “normal” combination of stock-market returns and risks makes saving in shares more troublesome than it has been with the good returns in the past twenty years. The financial system will need to do more than before to help households manage the risks associated with stock markets. The question is how this change is likely to occur. BIS Review 5/2002 1 Greatly increased household saving in shares One factor behind the growing interest in share investment in Sweden in the late 1970s may have been the low valuations initially. | 15 See also Blume, M. (2000), The structure of the U.S. equity markets, Rodney L. White Center for Financial Research, paper 17-00, The Warton School, University of Pennsylvania. BIS Review 5/2002 7 conclusion at present could be that certain tendencies that were evident in the United States may also have been present in Sweden. How can households’ risks be reduced? Besides calling for more knowledge about what actually happened while the IT bubble was growing, the course of events raises what is perhaps the more important question of what can be done to provide more support in the future for long-term saving by households. It is essential for society in general that stock markets function properly. At the same time, households need an adequate return on their savings and should be in a position to identify and manage different types of risk. Basically, this is a matter of education. Over the years, the Swedish Share Promotion Association and the Swedish Shareholders Association have done much to improve people’s knowledge of these matters. Information that is prompt, up-to-date, correct and relevant is likewise crucial. The new technology is inundating us with information but more does not necessarily mean better. It follows that households must be helped to interpret the information and pick out what matters most. An import role in this respect is played by independent analysts and consultants, not to mention media. These agents can see through and criticise corporate managements that are unduly optimistic or provide information selectively. | 1 |
First proposition: The need for radical changes in national economic policy-making Let me begin with my first proposition, that membership of EMU entails much deeper policy changes than were previously acknowledged. The crisis has shown very clearly that countries that adopt the euro have to alter the conduct of their economic policies. These changes are fundamental. Among them, three are particularly relevant. First, in a monetary union fiscal and supervisory authorities have to adopt policies that counteract the emergence of private financial imbalances at the national level. This is a consequence of the ECB’s legal obligation to maintain price stability in the euro area – defined as an inflation rate of below, but close to, 2% over the medium term. Private debts denominated in euros cannot be “inflated away”. Second, fiscal and other national macroeconomic policies have to ensure competitiveness by resisting increases in nominal trends. This is the implication of sharing an exchange rate; devaluation cannot be used as a tool for any one country to regain competitiveness. Benchmarking against other euro area countries is unavoidable. Third, fiscal authorities have to build up sufficient buffers in good times to withstand adverse conditions. This follows from the prohibition on monetary financing which prevents the central bank from directly financing governments as well as the so-called “no bail out clause” of the Treaty which prohibits a Member State to assume the liabilities of another Member State. | This allowed a certain country to run deficits over 3% of GDP every year it was in EMU and never face corrective action. Moreover, the euro area surveillance framework was “blind in one eye”, with no formal framework for monitoring macroeconomic and financial imbalances. The Lisbon Strategy focused on the structural level, but on policy implementation rather than imbalances. Eurogroup discussions on imbalances had no enforcement mechanism. The Lamfalussy framework for financial supervision did not use the concept of systemic risk. Thus a situation prevailed where countries could be congratulated for strong headline fiscal numbers when these data in fact reflected substantial imbalances that were building up in the private sector. To a certain extent, the weakness of these governance procedures was linked to a misplaced faith in market discipline. The institutional design of EMU gave market discipline a central role in economic governance. The absence of a transfer mechanism between Member States was supposed to encourage markets to actively discriminate between euro area issuers. This was based on the assumption that financial markets would always have perfect incentives to enforce the “rules of the game”. This assumption, in retrospect, looks somewhat naïve. It is well established in the academic literature that markets have complex incentives and dynamics. Market psychology tends towards pro-cyclicality. Perceptions converge around certain information sources, such as ratings, or certain benchmarks, such as indices, which creates herd behaviour. | 1 |
As part of efforts to ensure sustainability in this new and more challenging environment, a Task Force on Islamic Finance and Global Financial Stability was formed by the Islamic Development Bank (IDB) and the Islamic Financial Services Board (IFSB). The report, which was completed in April this year, sets out eight areas that need to be further strengthened to bring the Islamic financial system to a 2 BIS Review 95/2010 higher level of performance in this new economic and financial order that is emerging. A recommendation of the report is the establishment of an Islamic Financial Stability Forum (IFSF) based at the IFSB as a strategic platform for productive dialogues to promote financial stability in Islamic financial system. The IFSF would also be a platform for the Islamic financial system to interface with the conventional system via the Financial Stability Board to facilitate the common objective of achieving global financial stability. To enhance the efficiency of the Islamic financial institutions, a solution is currently being developed to facilitate liquidity management at both national and international level. A Liquidity Management Task Force was established by the IFSB and the IDB to develop this solution. This task force is expected to make key announcements later this year to facilitate cross border liquidity flows for efficient resource utilisation by Islamic financial institutions. Islamic finance has come a long way and is set to continue its trajectory upwards and onwards. | This is largely due to the scarcity of the instruments in the market. In Malaysia, the growing ringgit sukuk market has resulted in an active secondary market. This is largely due to the regular and varied issuances throughout the year. This is supported by the investment in research and development and in talent development to ensure the availability of expertise in the structuring of sukuk instruments and in sukuk documentation. Having the potential to innovate new instruments will depend on having the necessary talent. This is an area of focus in Malaysia to develop the skills, expertise and capability. The Islamic financial system in Malaysia now offers a wide range of financial products and services that are competitive and able to meet the changing requirements of the domestic and global economy. Way forward for the global Islamic financial system As we advance forward, we need to recognise the forces of change and the transformation taking place in the international financial system and global economy. Relentless efforts have been initiated to reform the international financial system by the international community to address the weaknesses that have contributed to the recent crisis. In this environment, Islamic finance needs to continue to evolve to remain effective and competitive. The Islamic financial system does not exist in isolation and will continue to develop as an integral part of the global financial system. | 1 |
16 supply of safe European assets, facilitating the general functioning of financial markets and the specific conduct of monetary policy. 17 References Aguilar, P., Ó. Arce, S. Hurtado, J. Martínez-Martín, G. Nuño and C. Thomas (2020). “La respuesta de la política monetaria del BCE frente a la crisis del COVID-19”, Occasional Paper, Banco de España, forthcoming. Andreeva, D. and M. García-Posada (2019). The impact of the ECB´s targeted long-term refinancing operations on banks’ lending policies: the role of competition, Working Paper No. 1903, Banco de España. Arce, Ó., R. Gimeno and S. Mayordomo (2017). Making room for the needy: the creditreallocation effects of the ECB’s corporate QE, Working Paper No 1743, Banco de España, forthcoming in Review of Finance. Arce, Ó., I. Kataryniuk, P. Marín and J. J. Pérez (2020). Thoughts on the design of a European Recovery Fund, Occasional Paper No 2014, Banco de España. Arce, Ó., M. García-Posada, S. Mayordomo and S. Ongena (2018). Adapting lending policies when negative interest rates hit banks’ profits, Working Paper No 1832, Banco de España. Arce, Ó., G. Nuño and C. Thomas (2019). “The Eurosystem’s monetary policy following the end of net asset purchases”, Analytical Articles, Economic Bulletin 1/2019, Banco de España. Bernanke, B. S., M. T. Kiley and J. M. Roberts (2019). “Monetary Policy Strategies for a LowRate Environment”, AEA Papers and Proceedings, No 109, pp. 421-426. Brunnermeier, M. K., and Y. Koby (2018). The Reversal Interest Rate, NBER Working Paper, No 25406. Eggertsson, G. and M. Woodford (2003). | The Zero Bound on Interest Rates and Optimal Monetary Policy, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 34(1), pp. 139-235. Fiorentini, G., A. Galesi, G. Pérez-Quirós and E. Sentana (2018). The rise and fall of the natural interest rate, Working Paper No 1822, Banco de España. Galesi, A., G. Nuño and C. Thomas (2017). “The natural interest rate: concept, determinants and implications for monetary policy”, Analytical Articles, Economic Bulletin 1/2017, Banco de España. García-Posada, M., S. Mayordomo and S. Ongena (2018). Holston, K., T. Laubach and J. Williams (2017). “Measuring the natural rate of interest: international trends and determinants”, Journal of International Economics, No 108, pp. 59-75. 18 | 1 |
In particular, it’s self-evident that central bankers need some way of judging the degree of slack in the economy and its effect on prices. If there are either ample underused resources or binding capacity constraints, monetary policy may need to respond pre-emptively. But the concept of the output gap becomes less useful, in my view, if it morphs from being a broad signpost for policy into a de facto intermediate target for policy. If policymakers start to believe that they can steer the output gap towards zero – effectively, to “fine-tune” policy in order to achieve that – they are liable to come unstuck. And our recent experience in the euro area, coupled with my assessment of how the economy is evolving, only reinforces that view. There are three main reasons why I say this. The first is that estimating the output gap in real time is fraught with uncertainty, and the misleading signals this can give to policymakers have been painfully exposed by the crisis. In 2007, real time estimates from a range of international institutions – the European Commission, the IMF, the OECD – envisaged the euro area output gap at that time to be in the range of minus 0.6% to minus –0.2%. According to the most recent estimates, however, we now think that the euro area output gap in 2007 was in the range of plus 2.6% to 3.3%. This shows how wrong real-time estimates can be. | This is equivalent to over half of the global investment needed to contain temperature rise by 1.5°C1. 5. The public sector alone cannot meet the enormous financing needs. Commercial banks can and do play a crucial part in fostering the green transition. They can do so by adopting clear strategies and targets to develop green finance products and services to support the transition of the real economy. 6. We fully recognise that commercial banks are at various stages of this green transformation, and there is much scope to create synergy among banks in the region. The Alliance serves as a platform to foster this much needed public-private sector partnership. The IFC offers a deep pool of knowledge and expertise in climate finance across the globe. The HKMA will leverage Hong Kong’s international financial centre status as a focal point to promote green banking in the region. 7. Since its launch, the Alliance has organised capacity building events on a wide array of green finance topics, including green bank transformation, green building, voluntary carbon markets, climate risk management and green capital markets. 8. Today the Alliance is taking another big step forward by enlarging our network of partners through a membership programme. 9. The programme aims to connect banks that are aware of the urgency in green finance and are committed to mainstream green banking to help tackle climate change. | 0 |
While the number of foreign banking organizations operating in the US has contracted over the last decade, the overall importance has grown. Foreign banking organizations now account for 45 percent of total banking assets in the United States, up from around 40 percent a decade ago, and they account for a substantial share of total securities underwriting in this market. Our framework for supervision and regulation is supportive of innovation. Much of the most transforming innovations in finance started in our markets or were adopted more quickly and more broadly here than in many other financial systems. The U.S. system, relative to the model in many other countries, has involved a continuous, risk-focused process of supervision and a strong enforcement mechanism working alongside the supervisory community. In addition, we have traditionally assigned a more important role to market discipline, importantly through a strong disclosure regime, in reinforcing the supervisory regime, than has been the case in other markets. Our system is successful in matching capital with ideas, in allocating savings to where returns are highest, in creating opportunities for households to better withstand the costs of change and dislocation that are inevitable offshoot of an open and dynamic market economy, and in spreading risk to where it can be best absorbed. The high degree of competition and flexibility that characterize our approach helps drive the pace of innovation, both in new forms of financial instruments and in new ways to manage risks. No financial system, of course, is without vulnerability. | One – perhaps extreme – characterisation of such robust control thinking starts from the adoption of a so-called MINIMAX strategy to monetary policy decisions.16 Even if it is too abstract to offer a practical guide to monetary policy, it can act as a device to help clarify some ideas underlying the policy debate. The MINIMAX approach involves choosing the policy setting which works best in the worst circumstances that you might face across the possibilities of how the economy behaves. More precisely, if we characterise uncertainty as being reflected in a set of different possible models of the economy, policymakers seek to minimise the welfare cost in that model where those welfare costs are highest, given the observed developments in macroeconomic data. The intuition here can be understood using a recent practical example. Most new Keynesian macroeconomic models have more than one steady state. But the inflation targeting literature originally focused on developments around one of those states, namely – and of course unsurprisingly – that defined by the inflation target itself. But in the face of deflationary risks and the aftermath of the global financial crisis, another steady state – one characterised by the zero lower bound on nominal interest rates, the liquidity trap and the threat of persistent deflation spiral – could no longer be ignored. Since this other steady state entailed lasting deviations from the inflation target, the threat of falling into it weighed heavily on central bank thinking. | 0 |
With regard to this last point, the Committee has decided that the amount of excess provisions that can be included in Tier 2 capital will be limited to a certain percentage of a bank’s risk-weighted assets, which is still to be determined. This change represents a major improvement that will go a long way toward ensuring that a bank’s capital will adequately protect it against unexpected losses and that it will provide incentives to sound provisioning. I am also pleased to note that the early reactions to these changes have been positive. Securitisation The second note published in January addressed changes to the treatment of securitisation exposures. We are particularly committed to developing an appropriate and balanced treatment for banks’ exposures to securitisations since the 1988 Accord does not address this important risk management tool. At the same time, a securitisation transaction can result in an extremely intricate structure, which makes it hard to specify a simple rule. Public comments on our proposals acknowledged this challenge, as many found the proposed capital rules in the third consultative paper for securitisations to be among the most complicated parts of the New Basel Accord. Many also thought the treatment to be perhaps too conservative. In response, members of the Committee pledged in Madrid to streamline the relevant proposals. Equally important, we wanted to adopt, where possible, requirements that are more compatible with the best practices in use today. The note released in January illustrates the progress we’ve made. | Firstly, financing Asia’s retirement funding gap. Asia is experiencing declining fertility rates, increasing life expectancy, and a rapidly aging population. Between 2011 and 2030, Asia’s share of population aged 60 and above will increase from 40% to almost 50%, compared to the global average of 20%7. At the same time, public retirement and pension systems remain inadequate, and the retirement funding gap is estimated to be up to 13 years of retirement savings8. Insurers can play a pivotal role in financing individuals’ retirement security through pension, annuity and saving products, complementing public pensions. 6 Source: Munich Re Study on Asia-Pacific Insurance Market 2020 (March 2012). 7 “Financing Social Protection in Developing Asia: Now and In the Future”, NUS, 27 May 2013. 8 2013 Manulife Investor Sentiment Survey. 4 BIS central bankers’ speeches 22. Insurers in Asia stand to benefit from robust premium growth on the one hand; but will also be subject to greater volatility from fluctuations in the economic and financial market cycles on the other. The low-interest rate environment is likely to magnify the present value of future increases in longevity, which will in turn, affect the solvency position of annuity providers and pension funds. While this can have unintended consequences on insurers’ role in supporting retirement adequacy, it can provide the impetus for product innovation and alignment with the new investment and regulatory climate. | 0 |
The vulnerability of countries to financial crises when private capital is freely mobile was uppermost in the mind of officials then, and has recently returned to prominence in the wake of recent crises. Capital flows do, however, bring real economic benefits. They enable savings from around the world to move to those countries with the most profitable investment opportunities, benefiting lenders and borrowers alike. And such capital flows also transfer knowledge and expertise. The most important task of any financial system is to guide the allocation of scarce capital. As Larry Summers, the former US Treasury Secretary, said earlier this year, "If you are looking for reasons why some countries succeed and why other countries do not succeed in the new global economy, a very large part of it goes to the greater success of the successful countries in channelling capital into the right places, and then making sure that it is used in a disciplined way." At Bretton Woods it was thought that post-war reconstruction could be financed by capital provided by the new World Bank, the twin of the International Monetary Fund. Hence it would be possible to finance reconstruction from long-term investment supplied by official institutions, without the necessity of allowing free movement of private capital that might raise the problem of the "impossible trinity". Soon, however, the demand for capital imports exceeded the ability of international institutions to supply loans. Private capital markets came into their own. | Jiří Rusnok: Basel Consultative Group Meeting - welcome speech Welcome speech by Mr Jiří Rusnok, Governor of the Czech National Bank, at the Basel Consultative Group Meeting, Topic "Regulatory Treatment of Sovereign Exposures - Survey of Recommendations", Czech National Bank and Bank for International Settlements, Prague, 4 October 2016. * * * Dear Basel Consultative Group members, Dear experts from all around the world, Dear ladies and gentlemen, Let me warmly welcome you to the Czech National Bank (CNB). We are proud to host the expert meeting on the Basel regulatory reform and its design, using the perspective of emerging markets and developing countries. In the wake of the recent global financial crisis, the Basel Committee on Banking Supervision (BCBS) is making reform steps towards more healthy, stable, and resilient banks and financial systems. The latest Basel reform includes more and better bank capital, leverage and liquidity requirements, as well as macro-prudential measures, ranging from G-SIB surcharges to countercyclical capital buffers. The reform effort is successfully underway and new standards are gradually being implemented worldwide, covering advanced as well as emerging markets and developing countries. When designing further details of the regulatory reform, we have to pay special attention to differences in financial systems among countries and regions. Namely, financial systems in emerging markets and developing countries are often shallower and less liquid than in advanced economies. Therefore, emerging market countries can hardly take over all regulatory measures without modifications. | 0 |
And say that the standard households are affected by this and must therefore take on a larger share of unsecured loans at an interest rate of 6 per cent and moreover pay off the unsecured loan over 10 years. This would entail increased interest expenditure corresponding to between 0.4 and 1 per cent of disposable income, and amortisation corresponding to between 2.8 and 7 percent of disposable income. The total increase in expenditure in this example thus corresponds to between 3.2 and 8 per cent of disposable income. This is comparable with how much household expenditure would increase if the mortgage rate instead increased by just over 1.9 percentage points. Amortisation as a form of saving Many of you will know that regulations of this type have often been circumvented in various ways. One way for the banks to make the mortgage cap less binding for their customers and enable them to take on more loans, for instance, is not to require amortisation on first loans. When it comes to amortisation culture, we in Sweden differ quite substantially from what seems to be common in many other countries. In Sweden, around 40 per cent do not amortise at all. Of those who do, a good 40 per cent do it in such a way that it will take 50 years or more before they are free of debt. | Thomas Jordan: Current challenges for the Swiss National Bank in the area of monetary policy Summary of a speech by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the Money Market Event of the Swiss National Bank, Zurich, 27 March 2008. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * With its forecast that GDP will grow by 1.5%-2.0% and the average inflation rate will amount to 2%, the National Bank is cautiously optimistic for the Swiss economy in 2008. However, since the summer of 2007, the international environment has taken a clear turn for the worse: Financial markets are in a serious crisis, the major economies are weakening and inflation rates are rising worldwide. This means that the SNB’s monetary policy is facing challenges on several fronts simultaneously. With regard to economic growth, the SNB is called upon to assess the consequences of the international financial crisis for the Swiss economy as precisely as possible and to analyse their implications for monetary policy correctly and at an early stage. On the inflation front, it must ensure that the measures taken in connection with the financial market crisis do not jeopardise the credibility of a monetary policy geared to long-term price stability or shake established inflation expectations. Finally, the challenge in the money market is two-fold. | 0 |
In addition to earnings, equity must generate a reasonable surplus so that the Riksbank has profits that can be used to build up equity in the event of losses. The Inquiry’s proposals restrict the Riksbank's equity to SEK 60 billion, calculated only using inflation. As I have said, one interpretation of this is that the Inquiry sees a return to a steady state in which the balance sheet should be small – and, in such a world, a small amount of equity is adequate, assuming that the real interest rate returns to at least 1 per cent and that adjustments to the repo rate are enough to achieve the monetary policy objectives. The proposed act certainly makes it possible for the Riksbank to ask to raise the capital ratio, for example if seigniorage should fall or the real interest rate become lower. The problem is that, if the earnings capacity is initially set to just cover expenditure, there will be no scope to use the profit to build up equity independently. If revenues fall because real interest rates are low, it will not matter if target equity is higher – the Riksbank will make losses until the framework triggers a recapitalisation. When it comes to allowing for a larger balance sheet, the problem is that risks can increase quite quickly – and then, the Riksbank could find itself in a situation where retained profits are not enough to build equity up quickly enough. | We have been able to affect expectations for the following years through our communications. Other central banks that have not traditionally engaged in this type of communication have, as I mentioned earlier, experimented with different forms of rough ‘triggers’ of various kinds. The academic background to the concept is the insight that expectations of future policy rates are at least as important as their current level when it comes to affecting investment and consumption decisions. In normal cases, the central bank is assumed to be able to influence expectations satisfactorily through its systematic monetary policy. But when the policy rate reaches its lower bound, it is possible to communicate an intention to diverge from normal behaviour and keep the rate low for a longer period and thus substitute, to a certain extent, for an immediate policy rate cut. There has been, however, some discussion of how effective such communication actually is, particularly over longer horizons. 12 The Riksbank's method provides a more complete picture of how we see the situation and the development of the economy. But other ways of communicating about the future have their advantages. One variant of this is the state-contingent US approach: saying that the policy rate will not be raised until the outcome for inflation has reached 2 per cent. 13 In situations where the market does not share the Riksbank’s view of the development of inflation, the US way of communicating can provide more information than inflation and interest rate forecasts. | 1 |
In November 2000, the ECOFIN Council – bringing together the Economics and Finance ministers of the EU Member States – formally adopted the position that unilateral euroisation is not compatible with the Treaty and cannot be a way to bypass the convergence process foreseen by the Treaty for the adoption of the euro. The ECB fully subscribes to this position of the EU Council. Allowing a Member State or a future Member State to take a “short-cut” to the euro, rather than following the official roadmap, could be detrimental to that country and possibly the euro area. Because 1. a sustainable convergence that is conducive to the maintenance of price stability and the coherence of the euro area may not have been achieved. 2. It would breach the principle of equal treatment. 3. It would not ensure that the country in question pursues the right policies to thrive under the euro. This raises the question of the approach to be taken towards countries, which would in principle qualify for EU membership (Art 49 TEU) but do not formally aspire to join the EU and are thus not candidate countries. This is the category of countries like Iceland. Here, both the rule of law and the principle of equal treatment provide answers. 1. The Treaty does not provide a framework for euro adoption by non-candidate countries. | The economic convergence criteria ensure that the applicant countries have established economic conditions that are conducive to the maintenance of price stability and the 2 BIS Review 17/2008 coherence of the euro area. The framework of analysis comprises developments in prices, fiscal balances and debt ratios, exchange rates and long-term interest rates, together with other factors. A number of general rules are used in the application of these criteria. 1. The individual criteria are interpreted and applied in a strict manner. 2. The criteria constitute a coherent and integrated approach. They must all be satisfied. The Treaty lists the criteria on an equal footing and does not suggest a hierarchy. 3. The criteria must be met on the basis of actual data. 4. The application of the criteria should be consistent, transparent and simple. 5. Convergence must be achieved on a sustainable basis and not at a given point in time only. This approach is firmly based on economic arguments. It is generally recognised that a monetary union requires sustainable macro-economic convergence among the participating countries. Once a country joins a monetary union, it loses the possibility to use the nominal exchange rate as an instrument to correct a loss in competitiveness. As monetary policy decisions in the EMU are taken in the light of the economic conditions prevailing in the entire area, economic convergence is required to ensure that a country’s economy is sufficiently prepared for the monetary union. | 1 |
Both exchange rates and interest rates then determine monetary conditions in Switzerland, and thus eventually output and inflation. Although short-term interest rates are the main monetary policy instrument, the SNB has, in recent years, been using exchange rate interventions as an additional tool. Due to the safehaven status of the Swiss franc, the SNB has been active on the foreign exchange market. We are also willing to intervene, as required, as part of our current monetary policy. Once again, banks have been at the heart of monetary policy transmission. They have acted as intermediaries of the SNB’s foreign exchange interventions. 4 With depressed international demand and a strong Swiss franc weighing on GDP, credit availability has been crucial for the domestic economy. Low interest rates and ample liquidity provision by the SNB have facilitated banks’ intermediation activities. In short, the SNB’s 4 2 For further details, cf. Lukas Altermatt and Romain Baeriswyl, The effect of the monetary base expansion on the balance sheet of domestic banks, SNB Quarterly Bulletin, 1/2015, and Raphael Auer, A safe haven: international demand for Swiss francs during the euro area debt crisis, SNB Quarterly Bulletin, 2/2015. BIS central bankers’ speeches policy has supported the banks’ provision of credit to the real economy. The banking sector, which is traditionally procyclical, has in turn benefited from improved economic conditions. In order to fulfil our mandate we need a stable banking system. Financial stability is key, both for the SNB and the whole economy. | In a crisis there should not be any need for systemically important banks to be bailed out by the state. Monetary policy and macroprudential measures are closely linked. Sometimes monetary policy demands a low policy interest rate in order to ensure price stability and support economic activity, especially if the Swiss franc is overvalued. However, low interest rates can translate into a build-up of imbalances on the mortgage and real estate markets. To increase banks’ resilience to the correction of these imbalances, macroprudential measures are needed. The countercyclical capital buffer, for which the SNB may propose changes, is one such measure. Stability: a long-term asset with potential short-term costs Ladies and Gentlemen, price stability and financial stability are indeed important long-term assets for the financial sector and the entire economy. As an independent central bank with its own currency, the SNB has been successful in providing long-term stability. Switzerland has had significantly lower and more stable inflation rates than most other countries (cf. chart 2). Our long history of price stability, a reliable political and legal environment, and efficient institutions have resulted in an interest rate bonus. This is more pronounced for the long-term part of the yield curve than for the short-term part. Ten-year government bond yields have typically been lower in Switzerland than in Europe and the US. In addition, having its own currency plays an important role in Switzerland’s attractiveness. It makes it possible for us to conduct our own monetary policy, with monetary conditions adapted to the Swiss economy. | 1 |
From today’s vantage point, it is easy to forget how revolutionary the introduction of RTGS was back in 1996. Before RTGS, all interbank payments were subject to some element of settlement risk – the risk that a bank would fail between the time it promised to make a payment, and the time it delivered on that promise. By allowing banks to settle high value transactions between each other, electronically, in real time, RTGS eliminated settlement risk on the largest payments flows – the ones most likely to threaten financial stability by bringing down the system if they failed. But that is not the only innovation that RTGS has delivered over the years. As the financial system has evolved, RTGS has been regularly updated, introducing a raft of new functions and risk mitigants to respond to changing demands. Today, we are announcing that the Bank has completed, or agreed steps that will complete, all the actions in response to the Deloitte report 4 published in March last year following the RTGS outage in October 2014. Looking forward, as we celebrate RTGS’ twentieth birthday during 2016, it is again time to ask fundamental questions about the shape of the Bank’s settlement operations. The way payments are made has changed dramatically in recent years, reflecting changes in the needs of households and companies, changes in technology, and an evolving regulatory landscape. The range of payment providers is growing rapidly. | The rules and procedures of the various payments systems that settle in RTGS – CHAPS, Bacs, FPS, LINK, Cheque & Credit, and Visa Europe – are maintained by their respective private sector members, though there is close cooperation between the schemes and the Bank’s operational team. The recognised payments schemes are themselves supervised by the Financial Markets Infrastructure Directorate of the Bank. We will want to examine the Bank’s role in delivering payments and settlement services, looking closely at how the United Kingdom compares to elsewhere around the world and the international guidance on risk standards set out in the Principles for Financial Market Infrastructure. The Bank’s experience, particularly during the financial crisis, has been that having direct operational control over RTGS has paid substantial dividends in terms of the delivery of its mission, so I think it is fair to say we start with a certain bias in that regard. But the appropriate model for IT development, service governance and risk management depends quite heavily on the chosen way forward for the RTGS infrastructure. In light of the emerging results of the blueprint, the Bank’s supervisory function will review whether any changes are necessary to the supervisory model for the high value sterling payments system. A blueprint with buy-in The agenda I have set out today is an ambitious one, with important implications both for the many institutions and infrastructures that interface with the system today and for those that might do so in the future. | 1 |
In some economies, such as the UK, the biggest risks are associated with the housing market, which is why macroprudential actions have been taken. More generally, as the FSB has recently concluded: “there are increased signs of complacency in financial markets, in part reflecting search for yield amidst exceptionally accommodative monetary policies. Volatility has become compressed and asset valuations stretched across a growing number of markets, increasing the risk of a sharp reversal.” Those risks arise against a backdrop in which assets managed by investment funds have reached almost 90% of global GDP – more than two thirds the size of the commercial banking system. The growth of the asset management sector brings welcome diversity to financial intermediation. However, there must also be a focus, as there has been with banks, on the systemic risks it could create. Although the sector is becoming more concentrated, the risks don’t simply arise from the size of asset managers. They arise from the particular activities some in the sector undertake. The biggest risks arise from combining high levels of leverage with holdings of illiquid assets and commitments to provide liquidity at short notice. In the current environment, those types of activities need careful monitoring, and possibly a deliberate policy response. Conclusion There is no doubt that the reforms made thus far, along with a stronger framework for global co-operation mean we are in a better position to face new risks. | The first is an internationally agreed standard on the total loss absorbing capacity (or TLAC) that globally systemic banks must hold. It will be based on clear principles. But it will be much more than a list of aspirations. It will include a detailed indicative term sheet that will cover the amount; the type, and the location of that loss absorbing capacity. It will establish a level playing field between global systemic banks, while taking into account differences in national resolution regimes. It will ensure globally systemic banks finally have the quantum of total loss absorbing capacity that extensive analysis show balances the benefit of greater resilience against the higher funding costs for the banks that results from the removal of public subsidies. It will set clear roles for home and host regulators in a resolution. It will give host nations the confidence that they won’t again be side-swiped by the failure of a large foreign bank. And, by removing the implicit subsidy that systemic banks have long enjoyed, it will reestablish market discipline. Once implemented, it will make our financial systems more resilient and our economies stronger. The proposal will be subject to a rigorous consultation and Quantitative Impact Study and market survey in 2015 and will take into account insights from the FSB’s ongoing Resolvability Assessment Process for every systemic bank’s resolution plan. The TLAC agreement will be complemented by another agreement just announced yesterday. | 1 |
In this regard, I wish to urge all stakeholders in the financial ecosystem to collaborate and contribute to the financial inclusion agenda through the development of appropriate infrastructure, provision of affordable customer centric products, delivery of financial literacy and promotion of consumer protection for the underserved population, particularly in rural areas. Invited Guests, it is important to note that as part of the implementation of the National Strategy for Financial Education, the Financial Literacy Awards are held in October every year to recognize efforts made by individuals and institutions to reach out to the public through financial literacy awareness initiatives. I therefore encourage you to submit your financial literacy activities and initiatives to the Financial Literacy Working group for consideration for this year's awards. In conclusion, I would like to thank the Working Group under the National Strategy on Financial Education Phase II for the organization of the Financial Literacy Week. In particular, the Ministry of Finance and National Planning Financial Education Team, financial sector regulators, (Pensions and Insurance Authority and the Securities and 3/4 BIS - Central bankers' speeches Exchange Commission), the Bankers Association of Zambia, our collaborating partners DSIK (the German Sparkassenstiftung) Zambia, Financial Sector Deepening Zambia and all other stakeholders who have continued to support the Financial Literacy Week commemorations every year. The Bank of Zambia remains committed to supporting this national event and we encourage all financial institutions and stakeholders to participate in the FLW activities across the country. MAY GOD BLESS US ALL. | Denny H Kalyalya: Build your future - be money smart Speech (virtual) by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the Launch of the 2022 Financial Literacy Week, 21 March 2022. *** SALUTATIONS All Senior Governmental officials Chief Executive Officers of Financial Sector Regulators – PIA and SEC All Chief Executive Officers of Financial Services Providers All Cooperating partners Invited Guests Ladies and Gentlemen Good morning I am delighted to welcome you all to this years' launch of the public awareness campaign for the Financial Literacy Week activities, which will run from 21-27 March 2022. The commemoration of the Financial Literacy Week commenced yesterday with a live nationwide television broadcast by the Honourable Minister of Finance and National Planning, Dr. Situmbeko Musokotwane. The commemoration will continue with a number of activities in all the 10 provinces of our country, including public exhibitions, debates, media programmes, an innovation challenge and visits to financial institutions and selected government agencies. This year's theme "Build your Future: Be Money Smart" is anchored on the importance of planning for one's future through making prudent and well-informed financial decisions now. The theme prompts all Zambian citizens, particularly young people, to own the responsibility of securing their financial future. The Financial Literacy Week activities continue to focus on young people in primary, secondary and tertiary institutions to help future adult generations are appropriately equipped to make sound financial decisions for their financial well-being. | 1 |
At the present time, the insurance provided by many monetary authorities may look cheap because inflation is projected to stay low and markets seem to reward those countries which liquefy public debt. However this equilibrium could be unstable and market makers, aware of some inflation “tail risks”, are hedging themselves through gold or currencies like the Swiss franc whose exchange rates have reached historical highs. By contrast, purchases of sovereign debt by the Eurosystem remained very limited and will stay so. Our objective is simple: avoid disruptions in the monetary policy transmission mechanism. Any lasting liquidity backstop has to come from the governments. This is why we are asking for more flexibility in the European Financial Stability Facility (EFSF). Whether amounts are big enough is a matter of opinion but one could envisage to leverage existing commitments to provide greater intervention capacity. At this stage, the euro area is paying a double price. One for its mistakes and one for its virtues. The mistakes were to allow the piling up of debt through unsustainable fiscal policies over a decade, and then to create ex nihilo a doubt as to their ability to pay those debts. But we are also paying a price for our virtue as we refuse to liquefy our debt through massive monetization of our fiscal deficits. Will our virtue be rewarded at the end? I strongly believe so and I will explain why. | At the same time, banks are required to build additional capital buffers, which further constrain their pay-out ratio. So dividend prospects are doubly affected and that explains why share prices are reacting to negative news on growth. This movement has been more pronounced for French banks which are suffering from two specific vulnerabilities, one real, one exaggerated. The real vulnerability is their dependence on dollar funding, due to the scale of their international activities, which they may have been initially too slow to address effectively. It is currently being dealt with through a combination of deleveraging and consolidation. In the meantime, in order to ease this transition, the Eurosystem, together with other central banks across the world, has decided to conduct US dollar liquidity-providing operations with a maturity of three months. A more exaggerated concern about French banks is their exposure to sovereign risk. Let me just point out some facts: total exposure of major French banks to the sovereign risk of socalled “peripheral countries” amounts to € To take an extreme – and from my view point – totally unrealistic scenario – a 50% haircut on Greece and 25% haircut on Italy and Spain would result in a 12% loss of core Tier One capital. In terms of liquidity, the Eurosystem refinancing policy provides for an unlimited provision on an extended period and the collateral held by French banks in eligible assets is much above their present needs. | 1 |
The growth forecast for 2012 we are presenting in this Report, details of which I will be sharing with you in a few moments, runs higher than what we presented before the Finance Commission of this Senate last June. A number of factors have contributed to this growth, including increased personal income resulting from labor market strength, an expansion of credit to firms and households, as well as the impulse from investment in mining and complementary projects associated to the high copper price. Consumer and business confidence has risen or remained in optimistic levels. Another contributor was the drop in inflation in recent months, reflecting the prices of perishable foodstuffs and fuels. The latter, however, has tended to revert in the past few weeks. However, the macroeconomic scenario entails significant risks and, to some extent, opposing ones, that drive monetary policy to face a difficult dilemma. On one hand, the effects of the frail international conditions on world growth and external financial conditions should help to reduce the strength of the Chilean economy. In addition, there is the possibility of a further deterioration of the external scenario, with more acute consequences on our economy. On the other hand, the recent intensification in installed capacity utilization, as well as the widening of the current account deficit, reflect the persistence of a degree of dynamism of domestic demand that also entails medium term risks for inflation and the vulnerability of the country’s external accounts. | The reserves accumulation carried out by the Bank in the past few years, as well as management thereof – details are provided in an Appendix – should suffice to confront extreme episodes. Chile also has sovereign wealth funds that could help alleviate the financing needs in case of increased external tensions as well. The foreign funds of institutional investors can also act as stabilizing agents in this sense. On the other hand, we must always bear in mind that any intervention has associated costs. First, it can blur the objective of the Central Bank: inflation or exchange rate target. In our case, we have dealt with this problem by carrying out transparent, sterilized interventions, with a publicly known timetable that does not conflict with the formulation of monetary policy. In addition, our communication has been straightforward in stating that the objective of our monetary policy is price stability. Second, an intervention entails a significant financial cost for the Central Bank and the country. International reserves are invested in highly liquid assets abroad, whose yield is lower than the interest paid on the debt securities in pesos that are used to sterilize the purchase. In the current scenario, in which external-domestic interest rate differentials are significant and expected to remain so for some time, the financial cost of holding reserves is substantial and negatively affects the Bank’s balance sheet continually. | 1 |
It increases the import bill: widens the current account deficit: adversely impacts on the exchange rate stability; raises domestic fuel prices causing a serious supply side shock; and raises both headline and core inflation since domestic inflation becomes adverse with the demand pressure in the economy and supply side shocks. At a time when the entire world is strengthening its security capabilities to meet the threat against terrorism, Sri Lanka too would need to address the prevailing situation. At the same time, it is important that the business community continues with its investment plans in Sri Lanka because the very concerns regarding security provides a certain “discount” which could be of advantage in a highly competitive global business field. External and internal shocks and vulnerabilities may also thrust fresh challenges to financial system stability. Hence, it would be useful to consider a few such shocks and risks as well. The continuing high growth in private sector credit could also pose threats to price as well as financial system stability. First, it could deteriorate the quality of the assets of commercial banks and that situation could increase the risk of high non-performing loans in the future. Second, such expansion of credit could generate inflationary pressures in the economy through increased aggregate demand. With the rapid and intense integration of the Sri Lankan economy with global financial markets, money laundering, terrorist financing and pyramid schemes could threaten financial stability. | This suggests that the industry is ripe for transformation to a new growth trajectory. The industry in essence has not delivered the required results. Jumping the “S-curve”: The need for positive feedback loops Successfully jumping the cusp of the “S-curve” is the only way to realise the aspiration of a deeper and more diverse insurance market. This calls for transformational change, driven and reinforced by positive drivers that will revitalise the industry. In the context of financial services today, these drivers focus on three “T”s – talent, technology and trust. These three factors can be harnessed to catapult the industry onto a path of new and stronger growth, or they can precipitate its decline over time. The industry must secure the former for its future expansion or else it will continue plateauing. Let me speak briefly on these three factors. Firstly, we must grow the talent we need to bring our insurance and takaful sector to the next level. As our economic structure evolves, we will need a deep pool of insurance and takaful professionals who can develop and support new solutions for managing risks. Unfortunately, talent shortage has been a persistent issue which, if not resolved, will not only hold back the industry from gaining new ground; it could lead to a further retrenchment of business growth. The industry needs to make further efforts to attract and nurture new talents. | 0 |
Therefore, it is essential to look at trends and changes in the governance in the light of the lessons to be learned from the global financial crisis. It would be an unpardonable mistake by exiting the crisis without learning all its lessons. Governance can generally be seen as the manner of exercising power in a country’s economic and social resource management to ensure its development. It should also apply to the regional and global context. We all know that good governance means drafting appropriate policies, programmes and regulations that must thereafter be transposed into legislation. The role of the governments, that is of politicians, is obvious here, and institutions play a major part in a country’s governance, as the American Nobel laureate Douglas North noted. I cannot help emphasising this, the more so as our host today is a citadel of legislative power. There are many aspects one can approach when talking about governance. I would like to say a few words about three levels: macrogovernance, corporate governance and also one of the key themes of these days – governance in the European Union. Let me begin with macroeconomic governance which is closer to my area of concern. I do believe that approaching governance in a broader economic context could prove both relevant and useful. In this context, I cannot stop short of underlying how important consistent economic policies are for ensuring a sustainable development, and to repeat my belief that there is no substitute for consistent, sound and stability-oriented economic policies. | Therefore, I will share with you some of the lessons from my own experience. First, I will refer to the importance of having a good fiscal and monetary policy mix. If fiscal policy is relaxing, then the natural reaction is to tighten monetary policy. But one should take BIS central bankers’ speeches 1 into account that monetary policy cannot always be a substitute to a sound fiscal policy. In other words, not always and in any circumstances can monetary policy steps compensate for fiscal policy measures. Secondly, I will touch upon the risks related to pro-cyclical fiscal policies. We have experimented this in Romania and are fully aware on the risks related to the boom-bust cycles. During booms, as budget revenues pick up there is a strong temptation to spend more and no appetite to publicly debate the issue of structural deficits. On the other hand, when bust emerges one realize how limited your toolkit is and that all measures to address the situation translates in to a prolonged recession and GDP volatility. Last but not least, I will refer to the monetary policy by underlining how essential financial stability is to help achieve our overriding goal which is price stability. As I said before, it is my belief that the two are not conflicting; they may be compatible if your measures are carefully implemented. | 1 |
The "leader" – the social partners – can internalise the monetary policy response and take the "follower’s" – Norges Bank’s – response to their actions into account. This approach is most relevant when wage setting is centralised. A number of studies2 have shown that countries with a relatively high degree of centralisation and coordination, such as Norway, can achieve relatively low unemployment. When wage-setting is decentralised, monetary policy will instead influence wage growth via market mechanisms, by stabilising aggregate demand for goods, services and labour. Monetary policy that is flexibly oriented towards low and stable inflation will function well whether wages are set at the central, local or individual level. 2 In the initial period after the introduction of the inflation target in 2001, it appeared that the social partners had not yet internalised the response pattern ensuing from the monetary policy mandate. We are now well into a cyclical phase with very high capacity utilisation and low unemployment. In this situation, there may be a risk that wage growth will again accelerate. On the other hand, the experience gained by the social partners that large pay rises push up interest rates may have the effect of curbing pay increases. In local wage negotiations at enterprise level, competition, the supply of foreign labour and the possibility of outsourcing or relocating activities may dampen the impact. Low and stable inflation should not be taken for granted. Norway’s and other countries’ economic history shows that inflation and inflation expectations can become unhinged. | How do banks in Hong Kong measure up in terms of environmental issues? As an international financial centre, Hong Kong provides a base for a number of multinational banks that have developed detailed environmental policies and procedures. In the case of local and regional banks, I would say that environmental issues are less highly articulated. This is why I welcome this conference and the involvement in it of the Hong Kong Association of Banks. It is not my purpose in this speech to anticipate the more detailed advice that subsequent speakers are going to offer. But I would like to offer a few general recommendations that banks should take into account in dealing with environmental issues. First, banks should keep themselves informed about international and regional initiatives on the environment, particularly those that directly concern financial institutions. In this connection, I would draw the attention of those institutions that are not already aware of it to the work of the United Nations Environment Programme (“UNEP”). This is the main UN institution that deals with environmental questions. As part of its work, it has established a Financial Institutions Initiative on the Environment which is a partnership between UNEP and leading banking and insurance companies to promote sustainable development and environmentally sound business practices. The basic role of the Initiative is to promote the integration of environmental considerations into all aspects of the financial sector’s operations and services. | 0 |
Let me extend my appreciation to our industry associations and partners, including the Embassy of Switzerland in Singapore, Swiss House Singapore and Swiss Business Hub ASEAN for partnering IBF in its organization of the workshop on “Talent Development in Wealth Management” in November last year; and PricewaterhouseCoopers without whom we would not have had the pleasure of listening to Professor Collard today. I also wish to thank the Singapore Workforce Development Agency and the Monetary Authority of Singapore, for their close collaboration with IBF. I look forward to more of such collaboration between IBF and our industry associations and partners in the year ahead. I wish you a fruitful session ahead. BIS Review 81/2008 3 | Its objective was to identify issues of legal uncertainty which might give rise to material risks, and to consider how such issues might best be addressed. The Committee seeks to meet this objective, first, via liaison with industry and market participants to identify those areas of legal uncertainty with potentially adverse impacts, and, second, by working with market experts to propose solutions. One area in which the FMLC has been active in recent years is in encouraging the development of a smoothly functioning legal framework for cross-border transfers of intermediated securities. In 2005, the Committee undertook a thorough analysis of the advantages and disadvantages of harmonisation of the private international law in this area, as reflected in the Hague Convention. It was, and still is, widely accepted that such harmonisation would contribute to legal certainty by facilitating a clear identification of the law governing the holding and transfer of indirectly-held securities. This is BIS Review 77/2007 7 particularly important in the context of the cross-border use of collateral: a key element of banks’ global liquidity management strategies. Early in 2006, the FMLC published a paper that undertook a full analysis of the Convention and expressed strong support for its central propositions. The FMLC’s work in this (and other) areas has been well received and has contributed to the decisionmaking process for government at the national and supra17 national level. Indeed, overall, the Committee has had some notable successes in addressing and ameliorating legal uncertainty in the financial markets context. | 0 |
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