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On the one hand, it allows diverse experiences, arguments and points of views being brought to the table. On the other hand, there is a shared responsibility for the common decisions taken. It is not a single individual but the entire institution which is behind these decisions. To my mind both aspects are crucial for a strong and independent central bank. For these reasons accountability and transparency are both more easily and more appropriately implemented in the relationship between the public and the central bank as an institution, rather than primarily with respect to individual central bankers. In this relationship the public acts as a principal who delegates the task of monetary policy to the central bank as its agent. The act of delegation can be one-off, of a constitutional nature, or it can be periodically renewed. In both cases it is crucial that the central bank can be held accountable for its performance by the public. This can be achieved in different - more or less formal - ways. Even if no explicit contractual elements and specific sanctions are incorporated in this relationship the delegation of decision-making authority to an independent central bank establishes a kind of quasi-contractual relationship. The delegation of authority represents an act of trust on the part of the public and it represents a promise and an obligation on the part of the central bank to fulfil its mandate. So, should we - should you - have faith in central banks? The answer is yes and no. | This is the basis for central bank independence. If price stability, by contrast, were regarded as just one out of a long list of political and economic objectives - rather than as a common goal and a precondition for the successful pursuit of other objectives - then there would be no legitimacy for entrusting this task (and only this task) to independent central banks. Making value judgements when trading-off different objectives and balancing conflicting interests is the legitimate job of elected politicians with a popular mandate and not of appointed technocrats. An independent central bank thus pre-supposes a broad consensus on the “quasi-constitutional” nature of the common good of price stability. Assigning the central bank a clear overriding objective also imposes limits on its discretionary exercise of power and makes it easier for the public to hold the central bank accountable for its mandate. This is important to keep in mind if we entertain the possibility that while, yes, “money is too important to be left to the politicians” one could similarly concur with Poincaré that “money is too important to be left to central bankers” (as quoted by Milton Friedman in his 1962 essay on “Should there be an independent monetary authority?”). In other words, why should one trust central bankers more than politicians? | 1 |
However, growth in Norway’s total exports excluding oil and gas is lower than import growth among our trading partners. Mainland fixed investment has gradually become an important driving force in the upturn. Investment has picked up in most industries and growth was stronger than expected towards the end of 2004. Norges Bank’s regional network has registered rising investment in all industries. Petroleum investment in particular appears to be growing at a rapid pace. This may continue to boost mainland output. Even with a strong upturn in the mainland economy, the increase in the number employed has been relatively modest. Productivity rose fairly sharply in the first few quarters after economic growth picked up. Normally, when productivity growth is strong, enterprises again begin to hire new staff. The current upturn has lasted about two years. The fairly low level of growth in employment, as measured by the number of employed, must be seen in the light of the sharp decline in sickness absence through 2004 after rising for several years. The decrease in sickness absence has increased the supply of labour to companies and reduced the need for new employees. Measured in person-hours worked, employment growth was solid last year. Person-hours worked increased by 2.2% from 2003 to 2004. A corollary to the increase in the number of person-hours worked is partly reduced sickness absence and partly three more working days in 2004 compared with 2003. Inflation has been low in recent years. Initially, the fall in prices for imported consumer goods pushed down underlying inflation. | It is important that we succeed in maintaining an industry structure that promotes learning, innovation and development. The Government Petroleum Fund was established in 1990 with a view to safeguarding long-term considerations in the use of petroleum revenues. In March 2001, the fiscal rule and new guidelines for monetary policy were introduced. The fiscal rule implies that the central government budget deficit shall be equivalent over time to the expected real return on the Government Petroleum Fund. The new guidelines for economic policy received broad support in the Storting. The rule specifying that only the real return on the Petroleum Fund is to be used means that the capital in the Fund is not depleted. The capital in the Petroleum Fund will increase as long as there is a positive cash flow (to the central government) from petroleum activities. When the conversion from petroleum revenues to financial wealth has been completed, the objective will still be to restrict withdrawals so that the real value of the Fund’s capital is maintained - in principle, indefinitely. The fiscal rule thereby provides a long-term anchor for fiscal policy. It provides a stable framework that contributes to curbing fluctuations in the Norwegian economy that are caused by converting petroleum revenues into investment at home and abroad. The new guidelines have changed the interaction between the different components of economic policy. Monetary policy has been given a clearer role in stabilising economic developments. A clear monetary policy objective is a necessary complement to the fiscal rule for ensuring reasonable macroeconomic stability. | 1 |
We are not at this stage yet; however we are working hard in this direction. I should now like to say a few words about our immediate priority tasks. First, we are making sure the measures resulting from the asset quality review are strictly applied with a focus on the capital buffer replenishment plans as prescribed for some of the banks. Second, we are finalising the plan to further enhance the work of the banking supervision. That is a continuation of the plan we have been implementing for the last almost two years now and whose fulfilment has produced good results. The new accents are: internal regulations, 1/2 BIS central bankers' speeches information systems, and increase of resources, including appointment of the additional number of people as provided for in the original plan, which, unfortunately, takes more time than we expected. Third, we adopted a combination of measures to make the already developed system for recovery and resolution of banks fully functioning. In this area we have prioritised two sets of measures: the approval of resolution plans for the systemically important domestic banks (something that we have already done for the subsidiaries of EU banks); and the joint work with the Ministry of Finance of possibilities for the BNB to provide liquidity support. | For large banks, we are making progress on resolution planning, and this world is different to five years ago, but we are not there yet by any means. I have a background in resolving banks, and I regard having the capacity to resolve failed large banks – including the largest – as the holy grail of resolution. Unlike the legendary Holy Grail, I think there is a good reason to believe that the objective of being able to resolve large banks that fail can be within our grasp. I am very clear that when firms mess up, they should be allowed to fail, and by doing so they are putting at risk the money of their shareholders and if necessary after that those who provide debt funding according to levels of seniority. But I am also very clear that really achieving the objective of avoiding a no failure regime requires a fundamental change of mindset both inside firms, the authorities and in society more broadly. Fear of failure is an important conditioner of behaviour in a financial regulator, and achieving a change on this front depends on establishing a wide acceptance of our approach that orderly failure which does not compromise our public policy objectives is an acceptable outcome. BIS central bankers’ speeches 3 To be clear, we should be criticised where failure compromises those objectives and we could have taken steps to avoid it. | 0 |
National and industry players have to work closely together to address the many challenges faced by Islamic finance as it internationalizes into new markets. This morning, let me touch on just three issues, which I am sure you will be discussing in greater depth during the course of the conference. 11. First, there is a fundamental need for further standardization and harmonization of both regulatory and Shariah standards across the Middle East and Asia. The greater use of standardized legal documentation will increase efficiency, certainty, transparency and liquidity. This would allow for easier cross-border offering of financial products that would reach a wider investor base and thereby bring about greater economies of scale and reduce transaction costs. Standardisation will also enable better risk management by ensuring that risks are clearly identified and appropriately mitigated between financial institutions and their 4 Asian Development Bank, Asian Development Outlook 2011 (April 2011). 5 Economist Intelligence Unit, “GCC trade and investment flows: The emerging-market surge”, 2011. 2 BIS central bankers’ speeches counterparties. Shariah scholars and multilateral agencies such as the IDB, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) are already working to address these critical issues. As a member of the IFSB, the Monetary Authority of Singapore (MAS) will work with them in their efforts to allow greater access to an even larger global community, including non-Muslim countries. 12. | BIS central bankers’ speeches 1 need to create stronger linkages in the vital areas of trade and investment, business as well as financial linkages. There are several ways to achieve this: 6. Firstly, the Asian Development Bank (ADB) has identified growing South-South economic linkages via trade and investment as a potential driver of global growth and emphasized the need for policymakers to further reduce barriers to trade and investment4. Trade between Asia, Middle East, Africa and Latin America has developed over the past two decades but still remains a relatively small 17% proportion of world trade. Asia’s share of total trade with the GCC grew from just 10% in 1980 to 36% in 20095. Having identified this as a priority area, ASEAN and GCC foreign ministers met in Singapore last year and agreed upon a Plan of Action to boost cooperation in trade and investment, among other areas. Islamic finance can potentially play a part in facilitating more trade between Asia and the Middle East with the involvement of more global and Islamic banks from both regions. 7. Secondly, the high level of savings and wealth accumulation in the GCC and Asia should also be mobilized by the financial sector and channeled towards more productive economic uses in both regions, especially to meet the demand for national infrastructure such as power plants, hospitals, roads and rail networks. The ADB Institute estimated that Asia will need $ trillion in infrastructure investment between 2010 and 2020. | 1 |
Spain’s net borrowing, although it has continued to increase, is doing so more slowly than in previous years. The changes I have described in GDP composition on the expenditure side have been feeding through to the various productive branches which, as a whole, have remained most robust in the first half of this year. Noteworthy in this respect is the strength of industrial production and the mild slowdown in construction activity. But the most notable feature on the supply side was again the abundance of labour resources, which continue acting to smooth the adjustment of activity to the buoyancy of demand, preventing cost pressures and excessive prices. The growth of consumer prices, spurred by a temporary turnaround in oil prices in the first half of the year, posted a year-onyear rate of 2.2% in August, leaving the differential with the euro area close to its historical low. However, it is very likely that, once the base effect of the energy price falls in the closing months of 2006 has been stripped out, inflation will again rise and that at the end of this year it will reach levels similar to those at end-2006. This is in fact suggested by the HICP growth flash estimate of 2.7% for September. In examining the outlook of the Spanish economy for the coming quarters, it has to be kept in mind that there are still few indicators of the situation since the turbulence erupted on international financial markets. | Miguel Fernández Ordóñez: Recent developments in the Spanish economy Testimony of Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, to the Parliamentary Budget Committee, Madrid, 9 October 2007. * * * Ladies and gentlemen, My appearance before this Committee as part of the Parliamentary discussion of the State budget for 2008 comes at a time when shocks are still reverberating through some of the major international financial markets, and the attendant uncertainty inevitably bears on the analysis of the economic situation. In my appearance before the Parliamentary Committee on Financial Affairs on 17 September, I examined in detail the origin and the main implications for ECB monetary policy and for the Spanish economy of these shocks, which emerged last summer against a background of marked momentum of the economy and of world trade. A significant part of this dynamism – reflected in growth rates above 5% for world output and above 6% for trade – derives from the sound performance of the emerging economies in recent years; indeed, they seem to have been less affected by the shocks than the more developed Western economies. This is, in fact, a significant feature of the present bout of turbulence which, if I may briefly recall, originated in a financial market of a developed country (the US sub-prime mortgage market). | 1 |
Low deposit rates and economic upturn in CEE after EU accession encouraged both financial institutions and individuals to move toward more risky forms of investment. As a result, real estate prices soared after 2004 and equities listed on stock exchanges reached historical highs. Since 2003 major stock exchange indexes in CEE increased on average by almost 300 percent. While part of this asset price and credit growth may be explained by structural factors often referred to as “convergence”, the observed rates of growth are clearly unsustainable and they contribute to economic imbalances. This poses additional policy challenge for central banks and financial market regulators in the region and may warrant further actions aimed at maintaining prudential lending practices. And finally one comment about the eurozone entry. According to official government and NBP forecasts Poland will fulfill all eurozone entry criteria this year (fiscal deficit, public debt, inflation, long-term interest rates). The only criterion not met will be two-year ERM2 membership without significant currency depreciation. If Poland had joined the ERM2 in the first half of 2005, as I formally proposed in January 2005, we would have been able to join the eurozone in January 2008. This opportunity has been lost, and now meeting the Maastricht criteria will become more challenging. If agflation is with us to stay, and central banks decide to keep CPI close to the target, high sacrifise ratio implied by flat Phillips curve may require significant growth slowdown. In such case meeting fiscal criteria will be challenging amid slowing tax revenues. | Three alternatives for supervision The first alternative is to give the home supervisor the role of lead supervisor with full responsibility for EU operations, branches as well as subsidiaries. This is the proposal from the European Financial Services Roundtable (EFR). The lead supervisor would be the single point of contact for reporting and would validate and authorise internal models, approve capital and liquidity allocations, decide about on-site inspections. In short, the lead supervisor would have full supervisory responsibility. The role of host supervisors would be as advisers in a college of supervisors. However, host supervisors would have no formal power. Also, when it comes to financial stability and crisis management, the lead supervisor would only have a national mandate. Thus, there would still be a need for cross-border regulatory cooperation. The second alternative, which is put forward by the two authors, is to give the home supervisor the role of lead supervisor with an EU mandate. The lead supervisor would work as in the EFR model, with the difference that the lead supervisor is given a “European mandate to ensure that the interests of all depositors/countries are taken into account”. In this model there is a decision-making agency of European Financial Supervisors at the centre, which is delegating the task of supervision to each respective home supervisor. Regarding financial stability issues, the home country central bank would also be involved, acting on behalf of the European System of Central Banks (ESCB). | 0 |
BIS central bankers’ speeches 7 Table 1 The credit cycle and subsequent crises Total peaks 1880–2008* Crisis years** within 5 % peaks with crisis years within years following a peak the following 5 years AUS 9 6 67% CAN 11 6 55% DEU 9 2 22% DNK 10 4 40% ESP 8 5 63% FRA 5 3 60% GBR 9 7 78% ITA 11 8 73% NLD 8 1 13% NOR 13 5 39% SWE 10 4 40% USA 9 6 67% 112 57 51% * Interwar data missing for most countries. Data coverage incomplete for other countries e.g. only post-1945 data available for France. ** Defined as years in which either a banking crisis or a currency crisis or both (“twin crisis”) occur. Source: Bordo et. al. (2001) and Bank calculations. Reproduced from Aikman et al (2010). Table 2 International experience with macro-prudential tools Country Action Other Sweden Risk weight floor on residential mortgages of 15%, from an average of 5%. Followed LTV limit. Announced intention to increase to 25%. Switzerland Sectoral capital buffer of 1% on residential mortgages Limited impact so far. Also followed an increase in risk weights on high LTVs. | There has also been some further deregulation. For instance, state monopolies have been abolished and freedom to establish new companies with regard to, for instance, transport, communications and energy has been introduced. Changed competitive conditions thus affect productivity growth, but they can also affect price developments more directly. Despite the fact that we gained much stiffer legislation on competition in 1993, developments in this field appear to be moving slowly. Swedish prices remain higher than in other countries in several areas without explanations for this in the form of differences in VAT rates and wage levels. Increased competition can contribute to price levels converging, but this assumes that the relative price changes will be accepted and it can entail, as in the 1990s when electricity and telecommunications were deregulated, such large price reductions in some sectors that our inflation rate will be lower than that of other countries. Special interests and consumer interests Limits to competition are a clear example of how special interests dominate over general consumer interests. There are many examples of this in various areas of the Swedish economy, and in particular the construction sector. This means that we allow inefficiency to remain, which reduces growth and the development of most people’s standard of living. One interesting and very recent example of how special interests have declined concerns pharmaceutical prices. | 0 |
Both opinions have high-profile advocates. As yet, we do not know who is closer to the truth and it will probably be some time until it will be possible to say with any great certainty. 9 The global level of interest rates will probably remain low for a long time Regardless of how the sluggish recovery from the financial crisis can best be explained, a central issue is that of how long the level of interest rates will be low. If the global interest rate were to start to rise fairly soon, this would increase scope for monetary policy – the problem would “solve itself”, so to say. However, empirical estimates suggest that the forces that pushed the global interest rate down will be relatively persistent and that the level of 9 One further hypothesis is that growth is being restrained by a decrease of productivity-enhancing innovations combined with various restraining forces (‘headwinds’) (see Gordon, 2102, 2015). Like secular stagnation, this is expected to affect the economy for a long time to come. However, unlike secular stagnation, there is no chronic deficit in the aggregate demand (no negative output gap), as it is the growth of potential output that is assumed to have slowed down. BIS central bankers’ speeches 7 interest rates will remain low for a fairly long time to come. 10 For example, Rachel and Smith (2015) estimate that the global real interest rate will be about or just below 1 per cent in the medium to long term. | In such situations, the central bank needs, in both word and deed, to put inflation first, in the same way as the Riksbank needed to do when the inflation target had recently been introduced at the start of the 1990s and confidence in the target needed to be built up. Of course, back then, the situation was the reverse – what was needed was to restrain inflation, not make it increase. So, to summarise my comments so far. A number of factors have led to the scope for monetary policy now seeming to be more limited than it was ten or so years ago. The most obvious of these is that the global real interest rate, that has long shown a decreasing trend, has now reached very low levels. There is also an ongoing debate on whether the actions of large, dominant central banks place clear restrictions on which monetary policy can be conducted in small countries. The main line of inquiry so far, at least for industrialised countries with floating exchange rates, is that a sufficient degree of monetary policy autonomy exists in normal cases. But under certain circumstances – such as when an 8 6 I am not going to discuss in any more detail why it is important to defend the inflation target. This has been discussed in depth elsewhere, both by me and by other representatives of the Riksbank, for example in Skingsley (2015) and Flodén (2015). | 1 |
Ravi Menon: Myanmar must open up at a measured pace Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at High-Level Seminar on Financial Sector Liberalisation, Nay Pyi Taw, Myanmar, 10 January 2014. * * * His Excellency U Win Shein, Union Minister, Ministry for Finance and Revenue, His Excellency U Kyaw Kyaw Maung, Governor, Central Bank of Myanmar, distinguished guests, ladies and gentlemen, good morning. A defining moment I am pleased to be here for this high-level seminar on financial liberalisation. This collaborative event is a clear testimony to two things: • first, the commitment and resolve of the Myanmar government and central bank to modernise and develop the financial sector; and • second, the warm relationship and close co-operation between the central banks of Myanmar and Singapore. Myanmar is at a defining moment. There is a distinct sense of optimism, as the country rejoins the global economy. A strategic location at the intersection of China and India, a generous endowment of natural resources, and a large, youthful and literate population – Myanmar is poised to be the next economic frontier in Asia. Finance is a handmaiden to the economy. As Myanmar opens up its economy and seeks to achieve sustained growth, it is important to liberalise and develop its financial sector in concert. But it must do this in a progressive and calibrated manner, step-by-step, making sure the fundamentals and preconditions are in place. | Thus, in the year to date, the 12-month EURIBOR has increased by around 290 bp, while the 10-year OIS rate, which acts as the euro area long-term risk-free interest rate, has risen by almost 250 bp. The cost of corporate debt issuance has also risen significantly, in line with risk-free interest rates. The increase in market interest rates has also started to pass-through to the average rates applied on new loans to households and firms. In the coming months, this passthrough is expected to continue. The rise in market interest rates is also gradually increasing the average cost of outstanding debt for both households and firms. The speed of this process depends on the maturity of the instrument (short vs long-term) and the type of contract (fixed vs floating rates). For the euro area as a whole, the share of short-term and floating-rate loans in the stock of loans is much higher for firms than for households. This means that outstanding debt is repriced faster for firms than for households. Besides the tightening in financing conditions in terms of cost, the credit standards for new loans to the nonfinancial private sector also tightened across the board during the first half of 2022, according to the July Bank Lending Survey (BLS).6 This is attributable to banks’ heightened risk perception and lower risk tolerance. In July banks expected a further contraction in credit supply for the third quarter. So what can we expect for the financial system in 2023? | 0 |
The economic crisis, continuing into 2010, only confirmed these expectations of mine. Banks not only did not become the reason for deepening the problems in our economy, but they were also the main pillar of stability and driver for overcoming the problems. The Bulgarian banking system continued to be a paragon of stability and predictability in the face of the unprecedented slowdown in over a decade. As regards the blatantly provocative “projections” of some domestic and foreign “analysts”, just a few days ago I reminded you of their fantasies in a sort of a chart of “unfulfilled black predictions” about the Bulgarian banking system. The coming year 2011 is a year of elections. We at the Central Bank are well aware that it could be possible for some of the local candidates for glory – the eternal candidates to come back on the big political scene – to actively try and “sell fear” during the elections year 2011. So watch out! The situation is very complicated, and yet the banking sector stays flexible and efficient; while the number of non-performing loans is on the increase, the system goes on generating current profits. Despite the deteriorated quality of loan portfolios, Bulgarian banks did manage to keep considerable capital buffers, given the provisions of over BGN 4.5 billion allocated only by October. Is there any other country among the 27 EU member-states, apart from Bulgaria, that in these circumstances could be proud of the remarkable 18% capital adequacy and total liquidity ratio of nearly 22%? | That is why in the case of essentially technical judgments it is sensible to rely upon collective wisdom, and there are other areas in which we do precisely that. The Law Lords, for example, reach their decisions by aggregating individual judgments, and the same is true in the United States Supreme Court. The MPC is based on the same principle. For such a system to work it is crucial that the individual members of the MPC give their best judgment and do not try to reach an artificial consensus. When policy is clearly off-track, as in the spring of last year, it is not difficult to reach unanimous decisions, as the Committee did through 1997. But when policy is finely balanced, disagreements about the precise level of interest rate are not only likely but an indication that policy is broadly on-track. That is why the motto of the MPC should perhaps be “divided we stand, united we fall”. Some commentators have been unable to resist labelling members of the Committee as either “hawks” or “doves”. There is a fundamental problem with this labelling. It makes no sense in the new system to describe individuals as hawks or doves. Each member of the Committee has the same inflation target. Unlike some other central banks, MPC members cannot entertain closet views about the attractions or dangers of slightly higher or lower inflation. Their task - to which they will be held personally accountable - is to hit the Government’s inflation target. | 0 |
In particular, increased trade openness and stronger international competition from low 2 BIS Review 74/2007 cost suppliers in emerging economies has resulted in lower prices of imported goods and limiting pricing power of domestic firms. In addition, higher international wage competition in labour markets, as well as upward pressure on productivity growth (albeit this is difficult to distinguish from effects of technological developments), have provided downside risks to inflation. On the other hand, higher commodity prices due to stronger demand for energy related commodities and industrial raw materials pose an upside risk for inflation. Secondly, the monetary policy transmission mechanism has been changed by financial globalization. Policy interest rates influence short-term interest rates. But recently, the response of long-term rates to changes in the policy instruments has become less apparent. This raises concerns of whether central banks’ monetary policy is becoming less effective, particularly given that savings and investment decisions are more influenced by long-term rates. Additionally, the conduct of monetary policy has become harder in light of financial globalization. A policy rate increase to tame inflationary pressures may induce further capital flows, thus bringing more liquidity into the domestic market. Thirdly, domestic financial stability is to a greater extent affected by global liquidity conditions. For instance, growth in cross-border financial flows increasingly influences domestic asset prices. However, this effect can be broken down into two main scenarios. The first is through changes consistent with fundamentals. | The SSM is the fruit of all these lessons… and, under your responsibility, the best guarantee for the future. Thank you for your attention. 3/3 BIS central bankers' speeches | 0 |
The FPC and the PRC are announcing that they will stress test the UK financial system for resilience against different climate pathways. The design of this stress test will start in the autumn, and the tests will be completed in 2021. The stress test will reveal the UK financial system’s ability to withstand the financial risks from climate change that arise from the increased frequency of weather events and from the transition to a carbon-neutral emission economy. The test will motivate firms to address data gaps and to develop cutting-edge risk management consistent with a range of possible climate pathways: ranging from early and orderly to late and disruptive. This test will be the first of its kind to integrate climate scenarios with macroeconomic and financial models. The Bank will develop the approach in consultation with industry, including insurers, and other informed stakeholders including experts from the Network for Greening the Financial System and the PRA’s Climate Financial Risk Forum. With this new supervisory approach, the Bank will help ensure that the financial system is resilient to the risks and can take full advantage of the enormous opportunities in a carbon-neutral economy. The path to a carbon-neutral economy will affect every institution in this country—very much including the Bank of England. We need to do more than just cutting out cups and bringing up bees.35 We must lead by example. From next year, the Bank will become the first central bank to adopt the TCFD recommendations across our entire operations. | Rapid expansion of exports and moderate increase of imports led to improved trade and current account deficits, contributing to foreign currency demand and supply balancing and increased exchange rate stability. Monetary and fiscal policies have conveyed a careful macroeconomic stimulus. Withdrawal of the fiscal stimulus during the second half of the year, led to a more stimulating monetary policy, by reducing the key interest rate in July and a fuller introduction of it into the financial markets during the following period. Financial markets were characterised by an improvement of liquidity indicators and a decline in interest rates in almost all financial instruments. Furthermore, a prudent fiscal policy rendered budget deficit and public debt in line with 2010 forecasts. These developments are expected to be brought forward, in broad terms, in 2011 as well. Economic growth is expected to remain comparable to levels of 2010. However, it is expected to be driven by domestic demand to a large extent. The banking system is in a much better position compared with two previous years in terms of supporting the increase of domestic consumption and investment with funds. Moreover, inflation pressures are forecasted to be under control, budget deficit and public debt are expected to be further consolidated, and external position of the economy is expected to be more stable. Respecting this picture has important implications, which I will address later in more details, for policymakers and economic agents. Latest developments in global economy are characterised by continued economic growth in most developed countries and emerging economies. | 0 |
The banks, on the other hand, were funded by deposits and short-term bonds, but were not allowed to issue long-term 2 BIS central bankers’ speeches mortgages. However, the mortgages were indirectly funded by the general public’s savings in that the banks were forced to invest in housing bonds. In the 1960s, the general pension fund (AP fund) was established, which meant that the state gained further control over savings in the economy and over the conditions for the banks’ funding. When pension allocations began to be deposited with the AP fund, it quickly grew to become the largest investor in mortgage bonds, among others. Developments accelerated when the credit and currency markets were deregulated in the mid-1980s at the same time as technological developments were beginning in the financial markets. New participants entered the markets and began to offer new financial products, such as saving in unit trusts. The Swedish banks were not slow in following the trend and began to offer their customers their own unit trusts. Saving in unit trusts involved gains for both the banks and households. The banks gained a new source of income and households were given the opportunity to actively invest their savings and spread risk. State initiatives have since continued to push household saving towards the securities market. “Allemansfonder” (national public saving funds), investment savings accounts, unitlinked insurances and individual pension savings are all examples of savings forms that are under certain circumstances taxed at a lower rate than savings in traditional bank accounts. | These reforms have enhanced the credibility and independence of public institutions and, in particular, the central bank’s role and independence. They were not guided by the wish and goal to join Europe, but rather to build a society similar to the European one. By achieving economic, political and social convergence in these countries, each of them hopes to become a worthy partner to the developed Europe, and adopt the euro as the final phase of this transformation process. From this viewpoint, the European integration process, European Commission and the euro became powerful external anchors for each SEE country. Current developments have diminished the anchoring role of the EU and the euro. Consequently, the European Commission and all European decision-making authorities should, in the future, pay greater attention to the characteristics of countries and regions aspiring to EU membership, and engage in closer cooperation with the respective national authorities. It is, however, important to emphasize an evident and indisputable fact to all of us: external factors cannot safeguard long-term stability if internal anchors are missing. The current situation in Europe shows that the integration process does not prove to be a sufficient anchor, be it both inside and outside the euro area, as long as the internal economic and political choices are not stable in the long run. This conclusion underlines the role and importance of internal anchors as warrantors for macro-financial stability and continuation of structural reforms that have brought our 2 BIS central bankers’ speeches economies to this point. | 0 |
Second, financial system transformation affects the implementation of monetary policy. I will give you an example. Our weekly main refinancing operations with money market counterparties are conducted on the basis of repurchase agreements ("repos"). This requires a list of eligible collateral for such operations. In a changing financial environment, a central bank has to ensure that eligible collateral allows market participants to have efficient and equal access to central bank liquidity. My third example of the importance of financial system transformation to central banks relates to the payment systems function. Most central banks in industrialised countries run a large-value payment system and are involved in the oversight of other payment and securities settlement systems. For reasons of efficient liquidity management by private banks, the Eurosystem's TARGET system allows for intra-day overdrafts that are fully collateralised. For TARGET to perform efficiently, it is therefore very important that securities settlement systems are interlinked or consolidated in a way which allows a smooth flow of collateral across the euro area. Fourth, past experience has shown that structural change in financial systems may have an impact on financial stability. Hence, the structure and modus operandi of the authorities responsible for supervising financial markets and institutions must be designed to prevent any instability from arising. This is, as you are aware, quite a topical issue in the European Union. Central banks have a genuine interest in this issue, which clearly has its origins in the Treaty on European Union. | Our speaker in the third session, Jean-Pierre Danthine, will illustrate the benefits from the discipline that economic theory can impose on our thinking when analysing European equity market integration. He will also present a generalised approach to estimating the importance of country and sector effects in portfolio allocations. One of his discussants, Bruce Carnegie-Brown, will draw on his experience as a market expert to interpret for us recent developments in bond markets. Finally, as already mentioned, the policy panel, which will be the final session of the conference, will discuss the role of central banks in the maintenance of financial stability 2 BIS Review 60/2002 against the background of the transformation of the European financial system. I am particularly pleased to see that we have been able to bring together such highly esteemed policy-makers and academics for this purpose. Ladies and gentlemen, I should like to finish at this point and hand over to our first speaker. I sincerely thank you again for coming here today. I wish you a very interesting and stimulating discussion, and I look forward to hearing about the results of the second ECB Central Banking Conference. BIS Review 60/2002 3 | 1 |
There is also evidence of them arising from coordination failures, which generate spillover effects across banks and countries. 1 See IMF (2010). BIS Review 168/2010 1 Drawing on this evidence, Section 5 identifies some implications for the design of public policy. It suggests that neither monetary nor micro-prudential policy may be well-equipped to tackle the credit cycle. Instead, some new policy apparatus may be needed which (unlike monetary policy) targets bank balance sheets directly but which (unlike micro-prudential policy) does so systematically. This is one key dimension of so-called macro-prudential policy. 2 Various international macro-prudential policy committees are, or are about to be, put in place – in the US the Financial Stability Oversight Committee, in the euro-area the European Systemic Risk Board and in the UK the Financial Policy Committee. These provide one element of a macroprudential policy framework. Other elements remain to be put in place. Knowledge of the sources and dynamics of the credit cycle will be important in assembling those missing pieces. This paper is intended to be a contribution towards that goal. 2. A model of the credit cycle We begin by sketching a model which captures some key features of past and in particular the present, credit cycle. There are a number of existing models of the credit, or leverage, cycle. In all of these models, cyclicality in financial variables is aggravated by various microeconomic frictions. These frictions typically then amplify fluctuations in the real economy. | The reason for the figure of 2 per cent was not that research had determined that this was the absolutely most appropriate level; it was probably more because this was the approximate level of inflation in most of the countries that began to introduce inflation targets and it appeared to be a reasonable figure in general. And until the financial crisis there was no real reason to question whether an inflation target of 2 per cent entailed a sufficient buffer for monetary policy. However, since the crisis, many countries have cut their policy rates to the “near zero lower bound” and been forced to change over to other, more unconventional means of conducting monetary policy, sometimes for several years. If the inflation target had been set higher from the start, there would have been a greater possibility to stimulate the economy in the normal way, through lower real interest rates. It is possible that the effects of the crisis would then have been less and it would have been easier to emerge from it into a more normal situation, some people argue. 15 Examples are Blanchard et al (2010), Ball (2014) and Krugman (2014). Representatives of central banks have also taken up this issue recently, see Rosengren (2015), for instance. BIS central bankers’ speeches 7 Many say that the motives for a higher inflation target have recently been reinforced and are not merely linked to the fact that it would be easier to extricate oneself from crises. | 0 |
As new liquidity-providers enter the market, execution certainty and price efficiency might be expected to improve. Inventory and information risk would thereby fall and, with it, bid-ask spreads. Some of the early empirical fingerprints suggest just such a pattern. For example, Brogaard (2010) analyses the effects of HFT on 26 NASDAQ-listed stocks. HFT is estimated to have reduced the price impact of a 100-share trade by $ For a 1000-share trade, the price impact is reduced by $ In other words, HFT boosts the market’s absorptive capacity. Consistent with that, Hendershott et al (2010) and Hasbrouck and Saar (2011) find evidence of algorithmic trading and HFT having narrowed bid-ask spreads. Chart 8 plots a measure of bid-ask spreads on UK equities over the past decade, normalising them by a measure of market volatility to strip out volatility spikes. It confirms the pattern from earlier studies. Bid-ask spreads have fallen by an order of magnitude since 2004, from around 0.023 to 0.002 percentage points. On this metric, market liquidity and efficiency appear to have improved. HFT has greased the wheels of modern finance. But bid-ask spreads can sometimes conceal as much as they reveal. For example, by normalising on volatility, Chart 8 air-brushes out what might be most interesting: normalising volatility might normalise abnormality. It risks falling foul of what sociologists call “normalisation of deviance” – that is, ignoring small changes which might later culminate in an extreme event. 8 So is there any evidence of increasing abnormality in market prices over the past few years? | By that metric, the contribution of equity markets to economic growth in the US, Europe and Asia has been static, at best mildly positive, during the course of this century. Yet that picture of apparent stasis in equity markets conceals a maelstrom of activity beneath the surface. To see this, Chart 2 plots stock market turnover in the US, Europe and Asia over the same period. It shows a dramatic rise, especially in the world’s most mature equity market, the United States. Equity market turnover in the US has risen nearly fourfold in the space of a decade. Put differently, at the end of the second World War, the average US share was held by the average investor for around four years. By the start of this century, that had fallen to around eight months. And by 2008, it had fallen to around two months. What explains this story? Regulation is part of it. Two important, and almost simultaneous, regulatory developments on either side of the Atlantic changed fundamentally the trading landscape: in the US, Regulation NMS (National Market System) in 2005; and in Europe, MiFID (Markets in Financial Instruments Directive) in 2004. Though different in detail, these regulatory initiatives had similar objectives: to boost competition and choice in financial market trading by attracting new entrants. Central exchanges for the trading of securities evolved from the coffee houses of Amsterdam, London, New York and Paris in the 17th century. | 1 |
Traditional backward-looking models based on historical trends may no longer be reliable, so the development of forward-looking 4 1/4 BIS central bankers' speeches approaches grounded in scenario-based analyses may be necessary. 4 Perhaps even more importantly, physical and transition risks will likely introduce new strategic risks associated with the challenges and opportunities of sectoral reallocations of economic activity, new production patterns and evolving industry exposures. Range of Practices Given these emerging risks, what are large financial institutions actually doing to identify, monitor, and manage them? This is a new and rapidly evolving field, so we are far from coalescing around best practices or industry standards. Nevertheless, some emerging themes are emerging from the largest, most complex financial institutions. I will touch on governance, risk identification and management, scenario analysis, and transparency. I’ll begin with governance. Boards of directors and senior management are increasingly attuned to the risks posed by climate change as pressure from various stakeholders intensifies. For example, some firms are establishing internal climate-related working groups to develop enterprise-wide climate frameworks and to ensure climate considerations such as geographic concentrations or regulatory changes are better integrated into strategic decision-making. Some senior leaders are discussing risk materiality in geographic and sectoral reviews and results of forward-looking climate scenario analyses. Few firms, however, have formally modified or qualified enterprise-wide risk appetite statements to acknowledge climate to date, although some are considering this. Based on our observations, information flows and detailed climate reporting appear more prevalent at the management committee level rather than boards of directors. | ‘Too large’, and central banks may find themselves accused of usurping the role of financial markets, harming innovation and inducing imprudent behaviour; fuzzying the boundary between monetary and fiscal policy, providing a ‘dangerous temptation for … the political class’1; or giving unmerited financial rewards to reserves holders.2 ‘Too small’, and central banks may be criticised for being asleep at the wheel3 at times of crisis; failing to play their part in ensuring an adequate supply of risk-free assets in the economy to maintain financial stability during peacetime4; or hampering the effectiveness of monetary policy transmission.5 Chart 1: Central bank balance sheets compared Source: Individual central banks’ published data, IMF The Bank of England has found itself on both ends of this debate in the past 10-15 years. Before the financial crisis, our balance sheet was modest, at 4% of GDP. Since then, and in direct response to the crisis, that figure has risen to around 30%: a more than seven-fold increase. Other regions have seen similar, or in some cases much larger, expansions (Chart 1). But by the UK’s own standards this is truly exceptional. You have to go back to the end of World War 2 or the early 18th century to find anything even approaching the same highs (Chart 2). | 0 |
As emphasised in our Financial Stability Report published last May, the first of these risks is that derived from the possibility that asset prices may undergo a downward adjustment as a result of rising risk premia. The potential triggers of this situation are a slowdown in economic activity and geopolitical uncertainty. 13/17 Trade tensions indeed seem to have grown and the risk of a hard Brexit now seems greater. In addition, the economic situation in the euro area has deteriorated more than in other areas, particularly in some countries such as Italy and Germany. Meriting special mention are some emerging economies where Spanish banks operate, which are undergoing difficulties associated with their high net borrowing in foreign currency and lack of a substantial cushion of international reserves. Thus, Turkey, which went through a recession in the second half of 2018 and has shown weak momentum in recent months, is moreover facing a complicated political situation which has given rise to significant depreciation of the lira in the past year. Meanwhile, the economic plan implemented in Argentina as part of the financial support programme agreed with the International Monetary Fund is helping to reduce its fiscal and external imbalances at the cost of a sharp recession, but has not altered the deterioration on the inflation front. Additionally, much uncertainty persists mainly in relation to the results of the presidential elections to be held at the end of the year and which will define the economic model for the coming years. | Sunil Mendis: Creating a challenging and stimulating work environment New Year Message 2005 by Mr Sunil Mendis, Governor of the Central Bank of Sri Lanka, to all employees of the Central Bank of Sri Lanka, Colombo, 1 January 2005. * * * I issue this traditional New Year message at a time when the whole of Sri Lanka has been engulfed by a national tragedy caused by “tsunamis” that hit the country on 26th December, 2004. I take this opportunity to express our deepest condolence to the members of the families of bank employees who have lost their lives and to our employees and their loved ones who have suffered by this calamity. At the same time, I wish to share the sorrows of those employees who have lost their property. Words are insufficient but hope that they would move forward from this tragedy. With the magnitude of the disaster, there is no question that our nation needs to be rebuilt. Hence, as employees of a state organization which is at the apex of the country’s financial system, we have an invaluable task to perform. In this context, I place my message before you with the plea that we take part in the nation-building task by offering our maximum efforts. I have been greatly encouraged by the positive response which all the employees have demonstrated towards the provision of relief to victims and rebuilding of the nation. | 0 |
For instance, Norges Bank (2012) writes: “At the same time, interest rate setting should be robust and counter the buildup of financial imbalances in the economy.” The Reserve Bank of New Zealand (2012) has the following wording: “In addition, the PTA’s [Policy Targets Agreement] stronger focus on financial stability makes it clearer that it may be appropriate to use monetary policy to lean against the build-up of financial imbalances, if the Reserve Bank believes this could prevent a sharper economic cycle in the future.” The Bank of Canada (2012) makes it clear that these deliberations can imply that it takes longer for inflation to attain the target: “[A] tighter monetary policy that keeps inflation below target longer than usual could help to prevent excessive borrowing and a broader buildup of financial imbalances.”25 In countries where the housing market collapsed in connection with the financial crisis, and where housing prices have already fallen heavily, the deliberations have of course been somewhat different. There, the monetary policy discussion has mainly concerned ways to stimulate the economy and get out of the deep recession. | Therefore, to improve financial stability by a lower degree of financial integration would certainly be the wrong measure. We should not undo those reforms which have paved the way to financial integration and revert back to a retrenchment within the national borders. This is certainly not the right strategy for the euro area, and it would be undesirable at global level. Admittedly, financial integration generates greater interconnectedness, which in turn may increase the risk that failure in one part of the system may trigger chain reactions in the formation of expectations which could have a destabilizing effect. But financial isolation – the opposite of financial integration – is not the rational answer to such a risk. We nowadays live in a global world, where not only financial, but also economic and cultural links have become increasingly tighter. News spread instantaneously and shape global market sentiments; products are designed, assembled and sold in different countries; political events in a small region can send shockwaves around the world. It would be naïve to think that a country could isolate itself financially. And even if it were possible, the costs in terms of lost efficiency and productivity would far outweigh any possible benefit. 2 BIS Review 81/2010 2. Financial development – opportunities and risks If financial integration is both an irreversible process and a process we do not wish to reverse, finance per se is not always good in any form and size. This is where we can and should have a reasonable and fruitful discussion. | 0 |
There are really three key areas: • First, there is uncertainty about what in fact is happening on the supply-side of the economy, that’s to say how rapidly can aggregate demand be allowed to increase before it begins to run ahead of supply and put upward pressure on inflation or, alternatively how rapidly must demand increase in order not to run below supply-side capacity and cause inflation to fall significantly short of the inflation target. The target is, of course, symmetrical; • Secondly, and specifically in relation to the labour market, at what point does the growth of employment or the fall in unemployment lead to a rate of increase in pay settlements, or earnings growth, which would subsequently lead to accelerating inflation in goods and services markets; and • Thirdly, what is happening or is likely to happen to the rate of growth of aggregate demand in the economy anyway. Now, as I said earlier, there is not a great deal that we – through monetary policy – can do directly to affect the first two of these areas of uncertainty, which relate to the supply-side of the economy. The major challenge for us in these areas is in assessing – or quantifying – their impact. And that’s not at all easy because, while the effects gradually become apparent over time, many of the relevant developments cannot be directly observed or measured; nor therefore can they be predicted with any great confidence. | Also, the banks with Albanian capital have expanded their network and have properly utilized the advantages of better recognition of the domestic market. As a result of active business development policies, the banking sector has experienced a steady growth of deposits and credit expansion. It suffices to say that at end-2004, total loan accounted for only 7% of GDP, while today it accounts for approximately 40%. About two-thirds of loans are extended to the private sector, while the rest to households and individuals. In business sector, loans are extended to the most important and fast-growing sectors, such as trade, other services, transport and construction. Almost all business loans are extended to private sector, though recently an increase in loans for public sector’s projects / investments is registered. On the other hand, the expanded banking network and better use of new technologies have enabled the pursuit of more competitive policies, attracting a high number of depositors and providing valuable services to citizens. Deposits continue to represent the main source of banking sector financing, an element that highlights its stability. Interest rates on loans and deposits have reflected the banks’ targets on financial indicators, the monetary policy at home and in the countries of the major currencies, as well as the country risk margin. We deem that over this period, these interest rates have been appropriate for a sustainable development of the banking financial intermediation. During the last 2–3 years, the country’s economy was affected by the global economic and financial crisis. | 0 |
See May 2020 Monetary Policy Report and ‘Millennium of Macroeconomic data’ See 2015 report on the impact of climate change to the insurance sector and 2018 report on the impact to the banking sector 3 Record-breaking temperatures of 38°C were reported in Verkhoyansk, Siberia, Russia on 20 June 2020 1 2 2 All speeches are available online at www.bankofengland.co.uk/news/speeches 2 While these risks manifest as the credit, market and operational risks we know well, they have distinctive characteristics and therefore require a different approach if we are to manage them well. First, they are far-reaching in breadth and scope. They will affect every consumer, every corporate, in all sectors and across all geographies. Their impact will likely be correlated, non-linear, irreversible, and subject to tipping points. They will therefore occur on a much greater scale than the other risks we are used to managing. Second, these risks are simultaneously uncertain and yet totally foreseeable. It is difficult to say now what exact combination of physical and transition risks we will experience. But what is absolutely certain is that some combination of these risks will materialise - either we continue on our current emissions pathway and face physical risks or we change our emissions pathway and face transition risks. And we cannot let that uncertainty lead to inertia and inaction. | Role of the Bank of England That brings me to the role of the Bank. Our work is focused on building resiliency to the risks from climate change into the financial system, so that it can steward the real economy to an orderly transition to net-zero. Being resilient means pro-actively managing climate risks and pre-emptively reducing them. This is central to the Bank’s mission. Indeed earlier this year climate change was made one of the Bank’s strategic priorities.8 I became the Executive Sponsor for the Bank’s work on climate change in 2016, at a time when there was only a handful of people at a handful of central banks working on climate-related issues. But since then the scope and depth of our work and that of other central banks has expanded significantly. We are working domestically and internationally with key stakeholders including government, industry, investors, regulators, and climate scientists to further this critical agenda. 8 Bank of England Annual Report 2020 4 All speeches are available online at www.bankofengland.co.uk/news/speeches 4 Climate action at the Micro-level: Disclosure and Risk Management So what are we asking financial firms to do? Put simply, they need to make financial decisions that take the risks and opportunities from climate change into account. The first step in achieving that is to have the right information. That is why the Bank has been making the case for some time for consistent, comparable, and comprehensive climate disclosures. | 1 |
Credit scoring, advanced statistical analysis, and financial modelling are among the ever expanding range of tools that credit officers and others use to lend more rigorous insight into risks that were once thought not readily quantifiable. The businesses of banking and risk management will always be more art than science. Still, the metaphor of the crossroads of subjects related to numbers reminds us that, for our system of supervision to remain relevant in the twenty-first century, it must reflect the industry’s advances in quantifying risk and in developing other tools to measure and manage risk. At the conclusion of this seminar, I hope that all of us will return to our home countries with deeper insight into Basel II and into our own readiness for a new approach to banking supervision. A Spanish proverb reminds us to “drink nothing without seeing it; sign nothing without reading it.” It is in that spirit that I would like to begin the substance of my remarks with my thoughts on why we need Basel II. Do we need Basel II? As you know, Basel II has attracted much more attention, from more segments of society, than probably any other reform of bank supervision. Mainstream newspapers have reported extensively on it. Politicians of all views have addressed it. Even non-financial business owners have discussed it extensively. The level of public debate reminds us that banks are charged with a special public trust and that capital requirements are intended to safeguard their ability to discharge that trust. | Paraphrasing Einstein ‘a good framework should be as simple as possible, but not simpler’ Much of the complexity in Basel II actually stems from the diversity existing in real world and from the many options that the rules provide. Many of those options reflect banks’ own requests to address the rich variety of risks and practices in existence today; some banking organisations thought that a “blanket rule” would unfairly burden them. By providing a range of options, we are better able to fit the regulatory framework to each bank’s profile, rather than the other way around. Similarly, some of the complexity in Basel II stems from the details we provide to clarify expectations for banks and supervisors and to promote a more level playing field. Many bankers and supervisors asked the Committee to provide greater details where they thought a danger existed for differences in interpretation to arise across jurisdictions. We have worked hard over the past years to clarify the rules, to simplify those thought to be the most complex, and to provide options for those wishing to use a simpler approach. In fact, as the Basel Committee demonstrated in an annex to the third consultative paper, supervisors can select options that would result in a very simple set of rules that can be specified in just 12 pages of text. That is approximately equal in length to the original 1988 Accord. | 1 |
In the United States there seems to have been a further extension of the upward phase this year and a slowdown may be softer and more cautious than anticipated earlier. Even with stronger international growth, external price pressure is likely to be weak. For one thing, after the Asian crisis there is still some unutilised capacity on the whole in the global economy. Other factors are increased price competition and an expected appreciation of the krona. Economic prospects in Sweden also look brighter. Besides the positive cyclical signals from abroad and their expected effects on the Swedish economy, there is the stronger growth of domestic demand. Firms as well as households are optimistic about the future. There are a number of reasons for this. Real wages and employment are rising rapidly and public sector finances are becoming stronger. Fiscal policy in 2000 and 2001 is now assumed to be somewhat more expansionary. All in all, GDP growth is judged to be 3.6% in 1999, 3.8% in 2000 and 3.0% in 2001. These assessments are based on the technical assumption that the repo rate is kept unchanged. The strong growth trend means that in the coming years the economy’s unutilised resources at present will be utilised more quickly than the Riksbank envisaged earlier. Inflation is accordingly judged to move up somewhat faster than the Riksbank assumed earlier. In the main scenario the underlying rate of inflation, measured as UNDIX, is judged to be 1.8% twelve months ahead and 2.1% after twenty-four months. | The main scenario in the Inflation Report that is published today does not represent a future development of inflation that threatens price stability. But every inflation forecast contains an element of uncertainty and the risk spectrum also has to be considered when formulating monetary policy. The present Report concludes that higher inflation compared with the main scenario is more probable than lower inflation. Remember, moreover, that to be most effective, monetary policy has to focus on the situation one to two years ahead. This suggests that the Riksbank is moving towards a situation in which the repo rate will be raised. Yesterday, however, the Executive Board decided in favour of an unchanged repo rate. But sooner or later, if developments continue along the lines in the present assessment, a repo rate increase will be called for. If some kind of international shock with a probable downward effect were to occur, or if indications of more subdued economic activity or prices were to be observed, that would naturally be taken into account in our future assessments. Why a higher repo rate? A repo rate of 2.90% is probably too low over a complete business cycle, even in an economy where inflation expectations have settled down around the targeted rate of 2%. Under such circumstances, the direction of monetary policy can be described as expansionary. This is not countered by a restrictive fiscal policy. | 1 |
We will continue to carefully monitor – as we always have done – the possible side effects of accommodative monetary conditions. It is crucial to remain vigilant and to use the available micro- and macroprudential policy tools as necessary. I will say more on this during the hearing in my capacity as Chair of the European Systemic Risk Board. The low yield environment needs to be understood in the context of the protracted decline in real yields we have witnessed since the 1980s. And this trend is not unique to the euro area. It largely reflects more structural factors such as a slowdown in productivity growth, which can be reversed through an ambitious structural reforms agenda. In other words, we need a coherent economic strategy in the euro area that complements and enhances the effectiveness of monetary policy. This is why there was unanimous consensus in the Governing Council that fiscal policy must make a more decisive contribution. In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space that are facing a slowdown should act in an effective and timely manner. Where fiscal sustainability is ensured, the potential effectiveness of countercyclical fiscal policy is reinforced in the current environment, given that 4/5 BIS central bankers' speeches fiscal multipliers are higher in a low interest rate environment. At the same time, governments in countries with high public debt should pursue prudent policies and deliver on structural balance targets. | As I argued in my introduction, the best way to preserve the ECB’s independence is to ensure a commensurate degree of central bank accountability. During the past eight years, our accountability practices have evolved and intensified in response to the quest for scrutiny that emerged from the crisis.2 I have always appreciated the ability of this Parliament to react to citizens’ demands, support, concerns and channel them in a constructive manner during our discussions here. And I would like to personally thank you for this. I am confident that this Parliament – and this Committee in particular – will continue the good work it has done during my term as ECB President. This, in turn, will further strengthen the effectiveness of the ECB’s actions and citizens’ trust in the EU project. Thank you for your attention. I am now at your disposal for questions. 1 See Draghi, M. (2011), “Hearing at the Committee on Economic and Monetary Affairs of the European Parliament”, Brussels, 19 December. 2 See Fraccaroli, N., Giovannini, A. and Jamet, J.- F. (2018), “ The evolution of the ECB’s accountability practices during the crisis”, Economic Bulletin, Issue 5, ECB. 5/5 BIS central bankers' speeches | 1 |
(Indeed, the mere chance that this may occur may be diminishing the degree of accommodation in place today.) The economic thresholds I am proposing put a higher and more predictable standard on the removal of accommodation. Conclusion I would like to conclude by noting that I have undoubtedly generated some discomfort in the room tonight by saying that even with the large degree of accommodation already in place, monetary policy can and should take additional steps to facilitate a more robust economic expansion. Central bankers naturally worry about such statements. We think back to the 1970s, when our failure to appreciate the changing structure of the economy led to over-stimulative policy and eventually to stagflation. It’s in our DNA to have these concerns; and they remind us of the need to continually do our best to calibrate important markers such as the natural rate of unemployment, keep close tabs on inflation expectations and have our eyes open for early warning signs of financial instability. But I believe a greater risk today is that we buy too quickly into thinking that the equilibrium rate of unemployment has jumped 2 or 3 percentage points or that long-run inflation expectations have become so fragile that they are on the verge of spiking well above 2 percent. I just don’t see the evidence out there supporting this view. But if we do buy into it, then we’ll end up following overly restrictive policies that could unnecessarily risk condemning the U.S. economy to a lost decade – or even more. | W A Wijewardena: Why inflation tax is an evil? Article by Mr W A Wijewardena, Deputy Governor of the Central Bank of Sri Lanka, published in Sunday Times on 10 June 2007. * * * A popular folk story talks of a villager making a chance meeting of a demon in the forest and using his craftiness to get the demon to work for him. Understandably, the demon being an untiring person proves to be a marvelous worker. His contribution to the villager far exceeds that of even a thousand workers. According to the story, everything is well and good as long as the villager is able to keep the demon under his control. But, on the day the villager loses his grip over the demon, it would set upon the villager and devour him. So, though the villager would have a jolly-good life in the short run, he runs the great risk of losing everything, including his life, in the long run. Governments’ use of inflation as a tax to force-mobilize resources for funding government projects has been equated to the fate of the villager in that folk story. In the short run, a government could forget about all its fiscal problems and enjoy the temporary solace provided by it. But in the long run, when inflation becomes uncontrollable, it will have to sacrifice all its temporary gains. When an initially mild inflation degenerates into an uncontrollable hyper-inflation later, it has been termed as a mass killer. | 0 |
I anticipate this could play out in three dimensions: • First, there will be a need to facilitate the further development of the RMB banking market so that offshore RMB liquidity can be efficiently allocated, which would enable banks in need of RMB to easily obtain it from banks with surplus liquidity. We can already see the market moving in this direction as banks begin to diversify and expand their RMB assets progressively. Meanwhile, the introduction of a crossborder collateral management arrangement opens an efficient channel for financial institutions to widen their liquidity sources and obtain offshore RMB liquidity from Hong Kong, using even non-RMB papers for repos. • Second, there will also be a need to facilitate the development of RMB capital markets. On this front, Hong Kong’s dim sum bond market has shown encouraging development. Already, multilateral companies and international financial institutions such as the World Bank and the Asian Development Bank have tapped the dim sum bond market. For the market to develop further, there will be a need to continue to broaden the participation of both issuers and investors. Additionally, the tenor and variety of debt instruments will need to increase to meet the financing requirements of different issuers while satisfying the appetites of different investors. There has been repeated RMB sovereign bond issuance by the Ministry of Finance and more regular issuance in due course will help to gradually build a benchmark yield curve. | Public-Private Partnerships 21 Moving on, I would like to touch on public-private partnerships – the other equally important arm of our alternative risk transfer strategy. 22 Continued industrialisation, expanding cross-border trade, and infrastructure development are at the heart of Asia’s growth. These create vast investment opportunities in the region, and will also drive demand for insurance solutions to mitigate a variety of business risks. 23 One such initiative is China’s One Belt One Road (OBOR) initiative, the most ambitious infrastructure project of its kind to-date. OBOR seeks to connect China and countries across Asia, the Middle East and Europe through a series of land and sea trade routes. Vital public infrastructure, such as roads and railways, gas pipelines, power plants and ports will be built in over 60 countries, with total estimated infrastructure investment to exceed USD 1 trillion. 24 However, modern risks lie along these ancient routes. There are a myriad of geopolitical, legal, credit and environmental risks in many countries along the corridor. Political instability, rioting, terrorism and conflict can lead to contractual issues and financial losses. Unfamiliarity with legal frameworks and regulations can lead to expensive delays. Non-payment risks can be exacerbated by emerging markets’ vulnerability to external shocks, such as currency and commodity price volatility. 25 The MAS is thus seeking to co-create new risk solutions with regional governments and the industry, and utilise these solutions on a pre-emptive basis to help governments and investors safeguard against key risks like natural catastrophes, construction risks and political risks. | 0 |
In particular, wages in the private sector rose by an average rate of 12.2% in 2022. Lastly, allow me to point out that progress was also recorded in 2022 in terms of improvement in the stability of both foreign and public sector's balance sheets. In more concrete terms, Albanian exports grew by 42% in 2022, driven by a growth in tourism income, which opened the way for the reduction in both the trade deficit and the current account deficit of the country. The latter dropped to 6% of GDP in 2022 from 7.8% of GDP in 2021. Along with the rapid increase in foreign direct investments and the stability of domestic financial markets, they paved the way for a strengthening of the lek exchange rate over the year. Also, the budget deficit of Albania, according to fiscal data, dropped to 3.7% of GDP in 2022 from 4.6% of GDP in 2021. Public debt was reduced to 64.6% of GDP in 2022 from 74.5% in 2021, while public debt was reduced to 64.6% of GDP from 74.5%. This improvement reflected both an increased effect of the nominal base of revenues and the fiscal consolidating stance implemented throughout 2022. Honourable Members of Parliament, The Bank of Albania is confident that the normalisation of monetary policy is the right monetary policy stance, in compliance with our legal obligations and for the purposes of safeguarding the macroeconomic balances of Albania and for the sustainable and longterm growth of society's welfare. | In fact, economic indicators for July showed the continued expansion on both production and demand sides. Farm income from major crops was up by 69.5 percent from the same period last year, due to expansion of both production and prices of paddy rice, rubber, and oil palm. Manufacturing production also registered a satisfactory growth of 11.3 percent during the first seven months. On the demand side, private investment and consumption continued its recovery trend. Exports also expanded well in line with production expansion. Meanwhile, imports accelerated, partly in response to improvement in domestic demand. Even though this resulted in a current account deficit, strong external stability has been reflected by high level of international reserves and low external debt. For the entire 2008, the central bank’s July Inflation Report has projected a growth rate of 4.8-5.8 percent with a more moderate growth in the second half, in line with the global economy. While this forecast has already taken into account a number of key risk factors, potentially prolonged political tension and uncertainty remain a prominent one, with little known about when and how it will unwind. This is reflected in the recent plunge in consumer confidence index. In a pessimistic extreme scenario, the government budget disbursement may delay if the upcoming budget process in parliament is disrupted and mega-project investment could fall behind schedule. Prolonged disagreement could also soften domestic demand and tourism, which would be unfortunate given that the tourism high-season is approaching. | 0 |
As an example, the HKMA and our peer authorities in the region have adopted fintech sandbox 3/4 BIS central bankers' speeches regimes, which are effectively testing grounds with a well-defined scope and a clear timeline. The authorities do not generally stipulate an exhaustive list of regulatory requirements in these sandboxes; rather, the products are to be developed flexibly, and requirements would be evaluated during the process. Coordination among regulators has also already begun as the Global Financial Innovation Network (GFIN) is now inviting applications for cross-border testing of financial innovations. That said, while providing a conducive environment to support innovation, central banks and regulators would have to strike a good balance with its other functions in consumer protection and financial stability, especially as the new and innovative services grow in scale or become widely adopted. Cross-border coordination is also required to address potential arbitrage across jurisdictions, given the much wider reach of fintech products and services. Derivatives markets, on the other hand, have a much longer history. The regulatory framework should therefore be informed by history, and lessons from the global financial crisis must not be forgotten. Regulators need to guard against the problems that plagued derivatives markets before the crisis: namely, the overuse of leverage, excessive interconnectedness, and opacity. I don’t need to “preach to the choir” on the tremendous efforts exerted by regulators and market participants internationally to solve these problems. | In two weeks’ time an in-depth assessment will be published of Swedish monetary policy during the period 1995-2005, that is, the ten-year period during which the inflation target has been the official anchor for Swedish monetary policy. This report, which is written by researchers Francesco Giavazzi and Frederic Mishkin, will deal with the formulation of the inflation target, to what degree the monetary 7 Chapter 1 in Blinder, A. S. (2004), The Quiet Revolution – Central Banking Goes Modern, Yale University Press, contains a discussion of political and economic cases for central bank transparency. 8 See, for example, Eijffinger, S., and P. Geraats, (2006), ”How transparent are central banks?”, European Journal of Political Economy, 22, 1-21. 9 See Leeper, E. (2003), ”An Inflation Reports Report”, Sveriges Riksbank Economic Review, 2003:3, 94-118, for an evaluation of the Riksbank’s Inflation Reports. 6 BIS Review 111/2006 policy conducted by the Riksbank has contributed to attaining the target during the period, and the bases and forms for monetary policy decisions. I and my colleagues on the Executive Board are very much looking forward to the analyses and debates this assessment will inspire. Thank you. BIS Review 111/2006 7 | 0 |
When the pandemic broke out, the Riksbank already had a large portfolio of government bonds. We therefore primarily purchased mortgage bonds, whose risk premiums had risen rapidly at the start of the pandemic. This market is key to banks’ lending, as most of their mortgage loans to households are funded via mortgage bonds. The purchases reduced risk premiums, which supported credit granting in the economy. Risk premiums had also risen on corporate bonds. To reduce the risk premiums on corporate loans and support credit granting in general, 39 See Gertler and Karadi (2013). 40 See Elmér et al. (2012). 41 See Alsterlind et al. (2015). 42 See Melander (2021). 43 See also Sveriges Riksbank (2020b). 18 [35] we therefore also purchased corporate bonds – although on a much smaller scale than the volume of mortgage bonds. A large balance sheet may be the new normal The Riksbank’s balance sheet is currently very large, and this is mainly due to the purchases of government bonds we began making in 2015, and to the measures taken during the pandemic. However, the balance sheet usually varies considerably over time. In a historical perspective – since the year 1800 – today's level is certainly the highest ever, but the balance sheet has been up at similar levels on several occasions, see Figure 10. The way the Riksbank has used the balance sheet over time thus varies a lot. The level does not stand out if one compares it with other central banks’ balance sheets, see Figure 11. | However, in crisis situations the banks sometimes do not want to borrow, as this could signal that they have financial problems, as was the case in the United States during the financial crisis 20082009. Former Fed Governor Ben Bernanke says that the unwillingness to borrow from the Fed could have been reduced if they had a larger balance sheet. If the banks had had substantial deposits and larger loans with the Fed and thus been in the habit of having transactions with the Fed during normal circumstances, the stigma of borrowing in a crisis situation could have been alleviated. Among European banks, unwillingness to borrow from the ECB during the financial crisis was a much smaller problem than for the Fed. Bernanke points out that one possible reason for this could have been that the ECB had a larger balance sheet even prior to the crisis and that the banks in Europe therefore were used to making large transactions with the ECB. Increased supply of safe assets for the banks in the economy 50 The demand for safe and liquid assets with a short maturity has been huge around the world for a long period of time. This is often seen as one of the main reasons for the low global interest rates. If the Riksbank has a large balance sheet and 47 See Duffie and Krishnamurthy (2016) and Bertsch and Molin (2016). 48 The interbank market is one where the banks can borrow money from one another at short notice. | 1 |
Exports being our only area of sunshine, we have to make sure that the increasing exports are maintained until such time that investment or consumption is taking place normally and this can only be done with a low interest rate and a competitively priced baht. For this reason, it is our belief that the low short-term interest rate, coupled with the long-term interest rate of the same level as the EU and the US, is a correct strategy that we will try to maintain. Inflation is still low, around 2% headline and less than 1% core. This looks like a good level of economic numbers to nurse and nurture an economy that is still weak and recovering with a capacity utilization of only 54%. Astute investors will I think see all this and invest in the country just as they did two years ago when I lowered interest rate from the very high and unbearable level to the low level of today, against many contradictory advice from people who should know better. Whilst nursing the economy though, let me emphasize that we intend to put in mechanisms to improve the sustainability of growth and stability, some of which occurrence I have outlined in this speech, and others we are working on as we learn more and more about the economy and improve the accuracy and speed of our data collection and dissemination system. Ladies and gentlemen. In ending my statement let me recall that I began by stating that we still have plenty of problems. | Lessons learnt at great cost of human suffering and political upheaval may help us formulate sounder policies for the future. A thorough comparative study would occupy several PhD theses. But a brief review of what happened in each country will be a useful basis for examining some of the major themes for strengthening the global financial system. Asian crisis – what happened Thailand The crisis began in Thailand after a long boom. The establishment of the Bangkok International Banking Facility or BIBF and the implicit guarantee of a fixed exchange rate encouraged unhedged borrowing in foreign currency by Thai companies. This led to a build-up of external debt and an asset bubble. As the Thai economy weakened, the balance of payments deteriorated and the baht came under pressure. Attempts to defend the baht were costly and ultimately unsuccessful. When the baht was finally allowed to weaken, its sharp fall triggered the collapse of many Thai corporations as well as the banking system. The Thai economy contracted sharply. The aftershocks of the Thai problem affected many other Asian economies. Confidence in the whole region was shaken. Both domestic residents and foreign investors alike rushed to hedge or reduce their exposure to the region. Malaysia Malaysia was among the next to be affected. Its economy was fundamentally sound although there were concerns over a property boom and over investment in infrastructure. An acute loss of 1 BIS Review 93/1999 confidence, partially prompted by Thailand’s problems, led to a sell-off of Malaysian shares and the ringgit. | 0 |
In such cases, maintaining the medium-term orientation in the definition and attainment of the target would be all the more advisable. How is expected inflation over the medium term measured? First, it is important to clarify that predicting inflation over a two or three-year horizon is a very challenging task. Especially in a setting as uncertain as the current one. Therefore, like other central banks, we at the ECB use various indicators of future inflation, such as surveys of professional forecasters and financial market prices, which I will come back to later. Key data in this regard are the ECB staff projections, which in turn draw on a wealth of economic and monetary analysis. As I have said, the latest projections published in September put average inflation in 2024 (the end of our medium-term horizon) at 2.3%, clearly above our target. These projections were based, among other considerations, on a future path of euro area interest rates – implicit in the financial market data available when the projections were prepared (specifically, as at 22 August 2022) – that began with a hike of 50 bp at our September meeting, followed by subsequent further increases.8 Accepting that, in line with our mandate, interest rates will have to rise to a level that allows us to ensure a gradual convergence of inflation to our medium-term target, returning inflation 8 Specifically, the projections were based on short-term interest rates of 0.2% in 2022, 2.0% in 2023 and 2.1% in 2024. | Under this framework and, as I have said earlier, in a setting in which inflationary risks have tended to increase over the last few months, in March we discontinued net purchases under our pandemic emergency purchase programme (PEPP) and we agreed to gradually reduce net purchases under our asset purchase programme (APP). In June we decided that as the three conditions established by our forward guidance for raising interest rates had been met,5 net purchases under the APP would end on 1 July, and we informed of our intention to raise policy rates in July and again at our September meeting.6 In July, we decided to raise all three ECB policy rates by 50 basis points (bp), taking the deposit facility rate to 0%, thus moving out of negative territory for the first time since 2014. This was a larger increase than signalled at the previous meeting, for two reasons. First, the updated assessment of the risks to inflation, which included the materialisation of certain upside risks in the short term relative to the June projections. Second, we took into account the reinforced support for the effective transmission of monetary policy provided by the new Transmission Protection Instrument (TPI), which was approved at that same meeting. Subject to fulfilling established criteria, the TPI will enable the Eurosystem to make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals, to counter risks to the monetary policy transmission mechanism to the extent necessary. | 1 |
Indeed the key results of Tobin’s and Markowitz’s work are labelled the “benefits of portfolio diversification”. Managers and academic economists have long been aware of the necessity of taking risk, as well as returns, into account when making portfolio decisions. The first pioneering contributions on money and asset pricing were therefore made in the 1950s, with the analysis focusing on the case of a closed economy. In this setting, for given risks, a rise in the expected excess returns implies a lower demand for money. In the course of the last 20 years, the globalisation of financial markets owing to the reduction of transaction costs and the enhancement of information flows has increased the share of global wealth invested outside investors’ home jurisdictions. The models of Tobin and Markowitz have become, therefore, much more complicated when extending the analysis to the global environment. Portfolio theory suggested that assets should be considered imperfect substitutes for each other, with the differences in their expected yields reflecting their marginal risks regardless of the economy being open or closed. However, the representative agent model is no longer applicable in the case of an open economy, as the presence of international capital flows requires either asymmetric information or heterogeneous belief among various agents. This makes the theoretical and empirical efforts to search for policy solutions a very complicated business. In an open economy setting, for given risks, a rise in expected excess returns does not necessarily imply a lower demand for money. | The growing size of international capital flows associated with globalisation of financial markets has made the analysis of monetary aggregates, for the purpose of extracting information for assessing price stability, increasingly more complex. BIS Review 149/2007 3 This brings me to discuss the third point: the implications of globalisation and of international capital flows for monetary policy. If globalisation and, specifically, cross-border capital flows can affect the dynamics of monetary aggregates, how can we conduct monetary policy? An improved shared understanding of the influence of global liquidity and cross-border capital flows on the monetary policy transmission mechanism is necessary to enhance the analysis underlying our decisions. Our role and responsibilities as central bankers remain intact in the globalised economy, but the performance of our task may be becoming more challenging. Certainly, there is a need for timely and open exchange of information among central banks and for further collaborative research efforts. Still, let me stress that the globalisation of financial markets does not affect the central role and overriding responsibility of central banks, which is to preserve price stability within their respective jurisdictions. Central banks throughout the world have been assigned responsibility for keeping domestic inflation at low and stable rates. Cross-border capital flows may affect the velocity of money, but the basic principle for anchoring monetary policy – that is the Friedman’s view that “…in the long run, inflation is always and everywhere a monetary phenomenon” – remains valid. | 1 |
Thomas Jordan: Swiss National Bank monetary policy in light of financial market disruptions Introductory remarks by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the end-of-year media news conference, Zurich, 11 December 2008. * * * Situation in the financial markets Looking at the financial markets, we currently find ourselves in a historically unprecedented situation. The financial crisis has escalated dramatically since September. In the course of the past three months, it has taken hold in almost every market segment around the globe. At the time of the last news conference in June, we had already experienced three waves of money market turbulence; now, a fourth wave has eclipsed all others (cf. chart 1). 1 The situation in the money markets has calmed somewhat since November. This is due in part to the measures taken by central banks and governments, in particular the generous amounts of liquidity injected into the system, the recapitalisation of banks, the provision of state guarantees for bank liabilities and the transfer of risk positions. After unsecured money markets had all but frozen in the autumn, central banks increasingly found themselves acting as lender of first resort, in other words, they were becoming the primary supplier of liquidity to the financial system. To this end, new monetary policy instruments and facilities were introduced, and the liquidity supply was expanded significantly. | In recent weeks, the SNB has pursued a policy which has brought the repo rates close to zero. This does not mean, however, that our monetary policy will cease to transmit further expansionary impulses. In addition to the short-term repo rate, we use a whole range of other methods to pursue a more expansionary monetary policy. We can, for instance, extend the maturities of our money market transactions or intervene in markets other than the money market. Updates to monetary policy instruments The SNB’s monetary policy instruments have fared quite well since the onset of the crisis. However, a review has highlighted two areas in need of adjustment. First, a liquidityabsorbing instrument was found to be necessary, and second, the conditions of the liquidityshortage financing facility were no longer deemed appropriate. The liquidity-shortage financing facility serves to bridge unexpected, short-term liquidity bottlenecks. It can only be accessed if a bank has a corresponding limit and if that limit is fully covered by securities at all times. Let’s start with the liquidity-absorbing instrument: The crisis has made it clear that a central bank must be able to offer large quantities of liquidity at short notice and do so via a number of channels and with different maturities. Repo transactions and foreign exchange swaps meet these requirements very well. However, the SNB lacked a separate liquidity-absorbing instrument to handle large volumes. We therefore introduced our own debt certificates – SNB Bills – to our range of instruments in October. | 1 |
As a result, the Swedish banks are sensitive to disruptions both in the primary markets and the swap markets. This was a problem we saw during the crisis, when the Riksbank was forced to lend large amounts of foreign currency. Our outstanding US dollar loans peaked at USD 30 billion. Increased capital requirements for the trading book As I mentioned earlier, the current capital adequacy regulations have taken far too optimistic a view of market risk. To correct for this the banks must now complement their calculation methods to take into account potential losses even under stressed conditions. This means that the capital requirement for assets in the trading book will be increased. In addition, banks that trade in derivatives must use central counterparties to a greater extent than is the case today. The idea is to reduce the banks’ counterparty risks and thus reduce contagion risks. For trading where central clearing is not possible or appropriate a more sophisticated method is being introduced to calculate capital requirements for counterparty risk. By and large these changes mean that the banks will need to hold more capital to protect themselves against changes in counterparty risks. This means, for example, that if a counterparty’s CDS premium rises then the bank concerned will face a higher capital requirement. This is of course a good thing. It was precisely in trading in financial instruments that a large part of the losses that affected the banks in the financial crisis arose. | However, the Swedish banks need to retain the capital they have at present and, therefore, should not pay any extra dividends. Neither does the introduction of the leverage ratio look like being any great problem if the banks maintain current capital levels. We have looked more closely at the four major banks (Nordea, Swedbank, Handelsbanken and SEB) and, at present, none of them falls below the minimum requirement of three per cent. However, the Swedish banks are finding it difficult to comply with the new liquidity requirements. The greatest challenge will probably lie in complying with the structural requirement. Here, the banks have two alternatives – either cutting back on the commitments that require stable funding (for example lending for housing purchases) or exchanging shortterm funding for long-term funding. This second alternative could well result in the banks’ funding costs increasing, which should push lending rates up somewhat. As yet, we have no exact figure on what this may cost in terms of basis points, but we assess that, despite everything, these costs will be small. 10 BIS central bankers’ speeches How all this will affect the banks’ customers is hard to say. In the final analysis, the question of how these costs will be divided among the banks’ owners and customers is a question of competition. But, as we are now introducing regulations to reduce the risk of bankruptcies, I think it would be reasonable to assume that the banks’ financiers will lower their expected return. | 1 |
This is why in many countries the governments have tried to make the agents amenable to public’s requirements through the implementation of such devices as “people’s charters”. The result is the production of the agent remaining at low quality, becoming unreliable and failing to satisfy the users. The same fate has befallen the governmental organisations that produce and supply statistics to the public free of charge. Many have witnessed the increasing occurrence of the “misuse of statistics” by those who produce and supply statistics to the market. The Google search machine has documented some 2.5 million cases of the misuse of statistics from around the world. The misuse of statistics Why does the production of statistics become unreliable? There are many pitfalls to which statisticians fall when they produce statistics. Wikipedia, the cyber-encyclopaedia, has listed out these errors often committed by statisticians. According to Wikipedia, “a misuse of statistics occurs when a statistical argument asserts a falsehood”. It could be due to both accidental and purposeful. When it is purposeful, it is always perpetrated in order to gain an undue benefit to the perpetrator. The danger with the wrongful use of statistics is the creation of a statistical fallacy that would be costly to those who make use of the deliberately doctored statistics. Such statistics are damaging to the quest of knowledge in the sense that, once they are rooted in the minds of the people, it would take years to correct the falsehood that it would have created in the society. | Many member countries of the International Monetary Fund have adopted such a code in the form of signing for following the principles of outlined in a general data dissemination system and, at a more stringent level, a special data dissemination system. The Central Bank of Sri Lanka is a signatory to the IMF’s General Data Dissemination System. The final message In summary, if statisticians are desirous of supporting economic development, they should necessarily produce and supply statistics to meet the requirements of the market. It is essential that they produce such statistics as a readily usable product that could be sold in the market at a price. It is now time in Sri Lanka for the private statistics-producers to enter the vast market of information. The universities in this sense are in an advantageous position, because they have the best human talents with them. It is unfortunate that they sit idly on this vast wealth of resources. It is time that universities in Sri Lanka reorient themselves to gain advantage from the market resources and become financially self supporting. In addition, the universities should train their statistics students to become entrepreneurs of statistics rather than becoming employees of agencies that may plan to hire statisticians. BIS Review 36/2009 3 | 1 |
See for example, Allard and Blavy (2011): “market-based economies experience significantly and durably stronger rebounds than the bank-based ones (in particular the more bank-based economies of continental Europe).” 5 Carney (2014) 6 In contrast, at Northern Rock over the second half of 2016 retail and wholesale deposits each fell by nearly 60%. 4 All speeches are available online at www.bankofengland.co.uk/speeches 4 In a major crisis, market-based finance might therefore be expected to be a materially less disruptive way of passing very substantial losses back to end investors than bank lending. This is particularly true in the case of international capital flows where bank lending across borders, particularly short term inter-bank lending, can create an explosive channel of transmission of systemic risk from one jurisdiction to the next if banks do not have the resilience to absorb major losses and authorities are not able to resolve them safely if they fail. 7 It is no accident that the ECB identified market-based finance as an important risk sharing mechanism between euro area countries and encouraged the development of an EU Capital Markets Union. 8 Risks in market-based finance I have noted the trend in market-based finance away from the activities that amplified stress during the financial crisis. And I have tried to explain why, viewed through the lens of financial stability, I see major benefits in a strong market-based channel of finance. | Much of the post-crisis reform effort has been aimed at reducing the systemic risks that derivatives can create through the way they interconnect multiple actors in the system and can amplify market shocks. Mandatory margining, central counterparty clearing and trade reporting are all designed to create resilience and to simplify the network and make exposures more transparent. It may be however that widespread and increasing use of derivatives by market-based finance will over time make the opacity and complexity too difficult to manage. What is sensible for risk management at the fund level simply may be too difficult to manage risk at the system level. 18 Hedge funds and banks have different business models, which complicates comparisons of financial leverage. But, in aggregate, hedge funds’ non-derivative liabilities (made up primarily of borrowings through repo and prime brokerage) are roughly the same size as their total net asset value. Banks’ non-derivative exposures are over 15 times greater than their tier 1 capital. However, whilst the hedge funds industry’s financial leverage is lower than banks, some individual hedge funds make extensive use of financial leverage. 8 All speeches are available online at www.bankofengland.co.uk/speeches 8 Second, and more importantly, given the channel of interconnectedness created by funds’ use of derivatives, to what extent could the failure of a fund or a number of funds create systemic risk? Again, the post crisis reforms around margining and clearing reduce that risk. | 1 |
Consistent with this global scenario, the ECB has done and, within its mandate, will continue to do whatever is needed to pursue its price stability objective which now implies also trying to foster growth, in order to close the negative output gap that is putting negative pressure on inflation. However, other policies must also act to deliver a lasting and sustainable improvement in economic growth prospects. Such a common European effort should entail a three-point action plan: 1 Since June 2014, euro area government bond yields have fallen, on average, by around 120 basis points. Furthermore, funding conditions for banks and companies in the euro area have improved markedly: the respective bond yields have declined by around 65 and 55 basis points on average. 2 Bank lending rates for non-financial corporations in the euro area have fallen on average by some 80 basis points since June 2014. Lower lending rates, in turn, have triggered a marked response in the supply of, and demand for, bank credit: the volume of credit to both euro area households and firms has been on a steady recovery path since mid-2014. 3 ECB estimates suggest that, had there been no asset purchase programme (including the recalibration of December 2015), inflation would have been negative in 2015. ECB assessments also suggest that the asset purchase programme (including the recalibration of December 2015) will contribute to raising the GDP of the euro area by around 1.5% in the period 2015–18. | In the past few months, a discussion has started about the need for a new risk reduction agenda. But, before discussing such further steps, it is worth recalling that we have already made significant progress – since the beginning of the crisis – in “de-risking” Europe’s financial system. We enhanced and implemented the single rulebook; defined a common resolution framework for banks to protect European taxpayers; established the Single Supervisory Mechanism and Single Resolution Mechanism, and conducted a Comprehensive Assessment of banks to deal with legacy issues before the start of Banking Union. The results are tangible. The Common Equity Tier 1 ratio has risen, on average, from around 9% to 13% since 2012 for significant institutions. Most European banks have managed to meet the fully-loaded capital requirements by now. While a lot has been achieved, there is no room for complacency: too many of our banks are still troubled by the ghosts of the past, legacy assets and NPLs. The ECB as supervisor is actively looking into this and has identified the issue as a priority. So, what is left to be done to mitigate the remaining risks and make the financial system more resilient? It is important to further improve and fine-tune what we have started. First, there is still room for improvement when it comes to establishing a truly level playing field, for example by creating a truly single rulebook. | 1 |
A Background Note of the Financial Stability Board.” 22 The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Systems’, Pew Centre of The States, April 2011. 10 BIS central bankers’ speeches Summary and conclusions The international reform agenda to make firms more resilient, and especially to address the Too Big To Fail problem, is absolutely essential, the number one priority. But we should take care not to neglect the importance of the rules of the game for capital markets. Once upon a time banks extended and held illiquid loans, overseen by banking supervisors. And in a largely separate universe, securities regulators policed the integrity of individual transactions and offerings on public exchanges served by specialist intermediaries. The growth of private markets, over the counter markets, derivatives, securitization, and banks as intermediaries in capital markets has changed all that, as the crisis cruelly exposed. Banking supervisors are having to recover their historic mission for systemic stability, but this time round that calls for greater attention to markets and, in particular, not simply assuming that what’s in a bank’s trading portfolio and warehouse must be liquid. Securities regulators are having to look well beyond their roots, accepting that their rules and policies influence the resilience of the system. And financial stability authorities, including central banks, have to become as comfortable debating the (hard and soft) infrastructure of core capital markets as they are with, say, the intricacies of the capital structure of banks. | Benoît Cœuré: Completing Europe’s Economic and Monetary Union Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Palestinian Public Finance Institute, Ramallah, 23 September 2012. * * * I would like to thank Stefan Huemer for his contributions to the speech. I remain solely responsible for the opinions expressed herein. Mr Governor, Mr Consul General, Mr Vice President of the Board of the Palestinian Institute for Fiscal Policy, Deputy Ministers, Heads of Public Administration, Directors General, Ladies and Gentlemen, It is a great honour for me to speak at the Palestinian Public finance Institute. The establishment of the Institute marks an important step in the development of the economic governance framework in the Palestinian Territories. I wish this project every success. It relies on the commitment of so many dedicated people in the Ministry of Finance and in Adetef. As Jean Monnet, one of the founding fathers of the European Union, once put it: “Nothing is possible without men; nothing is lasting without institutions.” His words related to Europe but in fact they are relevant worldwide. The Middle East and Europe have always had close ties. They are both part of the Mediterranean region, which is economically and financially interlinked. And currently, both are experiencing an institutional transformation. In this part of the world it has come to be called the “Arab Spring”. | 0 |
The reason for that partly stems from the lack of statistical knowledge about the interaction between variables. Therefore, the models mostly tend to rest on simplified assumptions based on subjective judgments. I do not want to go into details about the technical aspects of the risk measurement methods, but I would like to emphasize that it is necessary to combine them with sound judgment and common sense. Since these models are no more than simplified and limited images of the real world, they are better to be used having this fact in mind and the decisions must be taken not solely relying on the results of these models. The results should be supported with scenario analysis, stress testing and most importantly with the sound judgment of the decision makers. Another important aspect of risk analysis is that it should be integrated, meaning that the analysis results for different risk types should be comparable with each other to facilitate decision making. It necessitates that the assumptions, data, valuation models used in analyzing different types of risks be the same or at least consistent with each other. Organizationally, the integration of risk analysis requires that there be a single, common risk management authority for the whole organization. At the beginning, it might not be easy to look at risk on an institution wide basis. Since it requires a considerable amount of capital to be invested either in terms of technology, or in terms of staff. | This is no surprise given the rich cultural heritage in both our countries. It seemed to us, however, that as central banks we should devote today’s symposium to economic history and analysis. Japanese philosophy teaches us that “visiting the past teaches us new things" (“fuluki wo tazume atalashiki wo shilu”). I’m pretty confident that the historical approach of our morning session will shed light on the more recent economic developments that will be our focus this afternoon. Modern central banks emerged with the advent of industrial economies in order to facilitate trade and centralise the regalian function of issuing currency. While being strictly national, the issuing banks of 150 years ago quickly became used to keeping pace with globalisation. From the nineteenth century onwards, the appearance of central banks and the emergence of their role allowed them to meet the needs of economies that were already global, with an integrated production function in the wake of the industrial revolution. Lenders of last resort in critical moments and ultimate guarantors of their currencies, central banks extended their role in the twentieth century to include the construction and monitoring of business cycle indicators by drawing on highly-specialised knowledge of the credit sector, built up both in France and Japan through their branch networks. As well as producing statistical data and remaining vigilant with regard to internal stability in a more open and flexible environment, our central banks also became responsible for the external value of money in this period, and played an active role in international bodies. | 0 |
It is precisely the increases in asset values and increased ability to borrow that stimulate the economy that are the proper concern of prudential regulation.” The hypothesis that there is a risk-taking channel for monetary policy is not undisputed, but it has become increasingly accepted and the empirical support for it is increasing (see, for instance, Altunbas et al., 2014 and Gungor and Sierra, 2014, for a couple of recent contributions). 6 BIS central bankers’ speeches Let us be more concrete – some simple calculations So far, I have spoken about monetary policy and macroprudential policy in theoretical terms. Let me now go on to talk about them in more concrete terms with regard to resolute decisions. An obvious problem we need to deal with immediately is the high and increasing indebtedness in the Swedish household sector. On aggregate, household debt currently amounts to 174 per cent of their total income.16 However, this figure is based on all households, regardless of whether or not they have any loans. If we only include households that actually have loans, the figure is higher, 263 per cent, which is shown by data from the eight largest banks in Sweden gathered by the Riksbank. The same data show that the figure has risen to 313 per cent, if we only include households with mortgages. These figures give cause for concern, and should not just be allowed to continue growing; we will unfortunately need to deal with this situation in the foreseeable future. | However, since four of the national central banks which form part of the ESCB continue to conduct their own autonomous monetary policies, one cannot accurately refer to the ESCB as the authority responsible for conducting monetary policy in the euro area. We must instead use the term “Eurosystem”, which comprises the ECB and the 11 national central banks of those countries which have adopted the euro, and which has been adopted as a “user friendly” expression to denote the form in which the ESCB performs its tasks and responsibilities. The Eurosystem is set up, like the Federal Reserve System, in a distinctively decentralised manner. At the same time, however, the Eurosystem disposes of marked centralised structures, since the definition and implementation of the single monetary policy are carried out under the exclusive responsibility of BIS Review 4/2000 2 the decision-making bodies of the ECB. These are, first of all, the Governing Council, which defines the single monetary policy for the euro area and takes all other decisions of fundamental importance to the Eurosystem. The Members of the Governing Council are the Governors of the 11 national central banks and the six members of the Executive Board of the ECB. Basically, all decisions are taken by simple majority, whereby each member has one vote. The other important decision-making body is the Executive Board of the ECB, which is basically responsible for the implementation of monetary policy in accordance with the decisions taken by the Governing Council. | 0 |
Over the past five years, Switzerland has BIS central bankers’ speeches 5 been the sixth largest FDI investor and eight largest job provider through foreign investment in the U.S.13 Conclusion: the current account and SNB monetary policy Let me return to the question of Swiss monetary policy and the current account posed at the beginning of my speech. I have argued that the key components driving Switzerland’s current account surplus – notably financial services, merchanting, and direct investment income – are not closely linked with either the exchange rate or the domestic economic situation. I have also argued that, historically, an appreciation of the Swiss franc has not led to a reduction in Switzerland’s current account. Yet this disconnect between the exchange rate and the current account balance does not diminish the exchange rate’s importance for the Swiss economy. Given the high degree of openness of our economy, the exchange rate – next to the interest rate – is the key definer of monetary conditions and thus has a strong impact on both prices and production. The Swiss economy has shown in the past that it can handle volatility and appreciation in the real exchange rate when these are based on fundamentals. However, excessive and abrupt appreciations driven by financial market turmoil have a disruptive impact on prices and production, resulting in deflation and recession. What, in practical terms, does this mean for the SNB’s monetary policy? It means that we do not gear our monetary policy to the current account. | BIS Review 71/2009 1 Evidence from South East Asia indicates that capital flows engendered a financial crisis in that region in 1997 and 1998. In light of this evidence, the results of the Foreign Private Investment and Investor Perception Survey are intended to assist the Government to effectively monitor private capital flows. Accurate and reliable data on private capital investment will be helpful in understanding recent developments in the Zambian economy. Better information on investor perceptions will assist Government in designing policies that will attract more investment into our economy. Further, the results of the survey should prove useful to the private sector and other stakeholders. On the whole, the importance of timely and reliable information on capital flows in the design of appropriate policy responses by Government and thus enhancing macroeconomic stability can hardly be overemphasised. Adequate and consistent information on capital flows will also greatly improve Balance of Payments Statistics for Zambia and serve as an early warning system for Government on potential international financial crises and other external shocks. Mr. Chairman, Zambia, like many other developing countries, has inadequate capacity to collect, analyse and disseminate data and information on foreign private capital investment. Compared with other countries in the African sub-continent, Zambia has serious gaps with respect to data on foreign private capital investment. For instance, while we are now at the second phase of the Survey, Uganda, Tanzania and Malawi are in the sixth, fourth and third phases, respectively. | 0 |
We have seen the emergence of principal trading firms, changes in regulations of key intermediaries, and the growth of nonbank financial institutions.2 With this evolution, it is vitally important to ensure that safeguards and systems also evolve so that these markets function well in all circumstances and conditions, including unprecedented events like the pandemic. We need to reflect on and learn from these experiences and consider ways to make these and other markets more robust, thereby minimizing the potential negative consequences to the economy and the need for extraordinary policy responses. Market Conditions in September and March I know it might seem like a lifetime ago, but allow me take you to mid-September of last year. A number of otherwise ordinary occurrences—including corporate tax payments and settlement 1/4 BIS central bankers' speeches of newly issued Treasuries—were expected to put some upward pressure on short-term rates, but the market response was out of proportion to the magnitude of the shock. Conditions in funding markets became highly volatile, with both secured and unsecured lending rates rising sharply. Indeed, the size of the reaction in repo rates, the spillover to the federal funds market, and the emergence of strains in market functioning were well outside of recent experience. And the market stress was looking to get worse, not better. 3 4 In response to these developments, the Federal Reserve conducted a series of large-scale repo operations with the aim of calming conditions in funding markets and bringing the federal funds rate within the target range. | We need to do this in order to rebuild confidence and to ensure that we do not repeat the type of financial boom and bust that has characterized this cycle. Thank you very much for your kind attention, I would be happy to take questions. BIS Review 28/2009 7 | 0 |
For the future, it becomes an important task to encourage research to improve our understanding of measures of expectations. 8 BIS Review 39/20086 Inflation expectations surveys (weekly average, percent) 5,0 5,0 4,5 4,5 4,0 4,0 3,5 3,5 3,0 3,0 2,5 2,5 2,0 Jan.06 2,0 May.06 Sep.06 Jan.07 Money desks 1 yr. ahead EES 12 months ahead (*) May.07 Sep.07 Jan.08 Money desks 2 yrs. ahead EES 24 months ahead (*) Economic Expectations Survey (EES). Source: Central Bank of Chile. Forward inflation compensation from swap rate average (moving weekly average, percent) 4,5 4,5 4,0 4,0 3,5 3,5 3,0 3,0 2,5 2,5 2,0 2,0 1,5 Jan.05 1,5 Jul.05 Jan.06 IC 1 in 1 Jul.06 Jan.07 IC 5 in 5 Jul.07 Jan.08 IC 3 in 2 Source: Central Bank of Chile. BIS Review 39/2008 9 Inflation compensations and analyst’s forecast error variability (percentage points) 4,5 4,5 4,0 4,0 3,5 3,5 3,0 3,0 2,5 2,5 2,0 2,0 1,5 1,5 1,0 1,0 06 IC 1 in 1 IC 3 in 2 IC 5 in 5 Jul. 07 Jul. 08 Bloomberg analyst’s forecast error variability Sources: Central Bank of Chile and Bloomberg. | All this can derive on an inflation spiral, fueled by higher prices, higher indexation practices, accelerating wages and increases in inflation expectations. These processes can be very persistent and extremely costly to the economy. In some cases they may even result in sudden uncontrolled inflation acceleration with catastrophic consequences. Nevertheless we have learnt the lesson, and we know today the importance of price stability and appropriate risk management. References Bernanke, B. (2007), “Inflation Expectations and Inflation Forecasting,” speech delivered at the Monetary Economics Workshop of the NBER Summer Institute, Cambridge, Massachusetts, July 10. De Gregorio, J. (2007), “Comments,” in Clarida, R. (ed.) G7 Current Account Imbalance, Sustainability and Adjustment, NBER and Chicago University Press, also as Documento de Política Económica No. 115, Banco Central de Chile. Fatas, A. (2002), “The Effects of Business Cycle on Growth”, en N. Loayza y R. Soto (eds. ), Economic Growth: Sources, Trends and Cycles, Banco Central de Chile. Galí, J. y L. Gambetti (2007), “On the Sources of the Great Moderation”, mimeo, UPF. Mishkin, F. (2008), “Monetary Policy Flexibility, Risk Management, and Financial Disruptions,” speech delivered at the Federal Reserve Bank of New York, January 11. Obstfeld, M. and K. Rogoff (2007), “The Unsustainable Current Account Revisited,” in Clarida, R. (ed.) G7 Current Account Imbalance, Sustainability and Adjustment, NBER and Chicago University Press. Ramey, G. y V. Ramey, (1995), “Cross-Country Evidence on the Link between Volatility and Growth”, American Economic Review, Vol. 85, No. 5, pp. 1138-1151. BIS Review 39/2008 11 | 1 |
Finally, on 22 January 2015, the ECB announced a quantitative easing programme going well beyond market expectations in terms of length, target volumes and the wide range of the securities eligible for purchase. The euro lost even more ground against the US dollar and the pound sterling. For its neighbours, the ECB’s monetary policy easing had both positive and negative effects. On the one hand, the measures promised to support economic recovery in the euro area, which, thanks to real economic linkages, would also benefit neighbouring states. On the other hand, as with the US dollar and the pound, it led to increased upward pressure on the euro area’s neighbour currencies. Switzerland’s monetary policy situation saw a fundamental shift. Let me explain this situation by means of interest rate differentials on call money (cf. chart 15).7 The call money rates enable the best comparison of monetary policy restrictiveness. In a positive interest rate environment, they reflect movements in the main refinancing rate, and in a negative interest rate environment, they follow central bank deposit rates. In the phase leading up to the crisis, the interest rate differentials between the euro area and the Czech Republic, Denmark and Sweden were close to 0%. In contrast, Swiss interest rates have historically been below the euro area’s interest rates. This interest rate differential reflects Switzerland’s status as a safe haven. In exchange for the greater security of Swiss investments, investors accept lower interest rates than they would receive abroad. | The annual yield – including the gold price movements – fluctuated very strongly between minus 25% and plus 20%. For the assessment of future developments in earnings, these figures are only of limited significance, however. The level and spread of our earnings are determined by the balance sheet total, the structure of the assets and the achievable financial market yields. Since these measures change over time, it is rather difficult to estimate the long-term earnings potential of the SNB. At the end of 2004, the National Bank’s assets amounted to CHF 118 billion. After distribution of the proceeds from the gold sales in spring 2005, the invested funds contracted by CHF 21 billion. Furthermore, higher profit distributions to the Swiss Confederation and the cantons should deplete the existing distribution reserve by 2012, thus decreasing our assets by a further CHF 10 billion as compared with the end of 2004. From today’s perspective, this leaves the SNB with assets in the region of CHF 85 billion. At present, the National Bank’s assets comprise 25% Swiss franc investments, 45% foreign exchange reserves and 30% gold. Foreign currency investments generate interest and dividend income. Given the globally low inflation rates, the nominal interest income is currently substantially lower than in the 1980s and 1990s. In addition, the valuation of bond and equity portfolios, foreign exchange positions and gold holdings at market prices result in valuation gains and losses. Meanwhile, the interest income on Swiss franc assets – primarily repos – is marginal. | 0 |
BIS Review 33/2010 7 But there are also many uncertainties affecting the current outlook for the global economy and I would highlight four key influences which will shape the recovery which does unfold over the next few years. First, I have argued that an improvement in business and consumer confidence has been a key ingredient in the economic turnaround so far. And in the absence of further shocks to the global economic system, we should expect confidence among firms and households to continue to recover, supporting the growth of private sector spending and helping the recovery to build momentum. But given our experience in recent times, we cannot rule out new shocks which could set back recovery. Second, a major financial adjustment is taking place in the major economies of Europe and the United States as banks adjust their lending behaviour and seek to rebuild their balance sheets. This adjustment will continue to dampen the recovery in demand on both sides of the Atlantic too some degree, though its impact should lessen as the process of financial repair and rebuilding progresses. Third, world growth in the recovery so far has been particularly strongly driven by the performance of Asia and other emerging markets, and their dynamism has to a large extent offset slower growth elsewhere. In my view this is not a flash in the pan, but a structural feature of the world economy that we are now living in, and we should expect a continuing impetus to global growth from this direction. | For example, the volume of international air traffic, which is highly sensitive to world growth trends, was 6.4% up on a year ago in January 2010. 3 Despite the gloomy headlines surrounding the release of the latest UK trade figures last week, the UK economy is benefiting from this revival in world trade and activity. The latest trade data show that since the second quarter of last year, the volume of UK goods exports, excluding oil and erratics, have risen 8.5%. 4 This is equivalent to an annual growth rate of 15% – around three times the trend rate of UK export growth since the early 1990s. 5 But imports have bounced back too, which is why the trade deficit is not shrinking at present. In the short-term that should not be a source of concern – rising imports at this stage of the cycle are usually a sign of a recovery in demand and a turnaround in the stock cycle. But over time, we should see rising exports helping to close the UK’s trade deficit. The very positive responses on export orders and confidence shown by a range of recent business surveys suggest that there is a significant further boost to our international trade performance on the way – supported by the competitiveness benefits of sterling’s depreciation since mid-2007. This bounceback in the world economy is much stronger than we might have expected a year ago. 6 So what has been driving it? And how resilient might it prove to be? | 1 |
However, where the service provider is not the regulator, it is hard to coordinate and preserve the character of accessibility. The UK regulators have taken bold steps to outsource the service provider’s role and concentrate on the regulatory role, while USA, Sri Lanka and India are still trying to strike a balance between the dual roles, which we have inherited for decades. 2. Retail payments outlook and prospects 2.1 Retail banking is still the main force in banking, and is likely to stay that way for the foreseeable future, despite the relentless growth of investment banking, corporate banking and other forms of services. In 2006, retail banking business accounted for euro 1,220 bn in revenue, or about 57% of the global banking revenue pool of euro 2,150 bn. The world over, banks continue to open branches and attempt to make their branches more attractive for retail payments. Sri Lanka, India, Bangladesh and many of the SAARC countries are members of the South Asia Free Trade Agreement (SAFTA), Asia-Pacific Trade Agreements (APTA), The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), Comprehensive Economic Partnership Agreement (CEPA) and several other trade agreements. During 2002-2006, exports in the SAARC region as a ratio of world exports rose from 1.09 to 1.29 percent, of which India accounted for more than 75 percent. Although firm numbers are not available for 2007, exports are estimated to have increased at a significant rate followed by higher cross-border payments. | The optimal mix depends on the level of development of the financial market, but a more active role has to be played by the authorities to achieve the public policy objectives of retail payment reforms. 4.3 Policy elements 4.3.1 Central banks to play a catalytic role: Central banks should be at the centre, take the leadership and coordinate the development process as other stakeholders tend to have vested interests. While it is important to enhance oversight and supervisory functions by the central banks and ensure that governance arrangements for infrastructure and service providers are in place, it is also necessary to ensure that such arrangements do not lead to unnecessary restrictions on competition and innovation. 4.3.2 Stakeholder participation: It is essential that central banks engage in effective participation and secure cooperation from all stakeholders in the payment systems, through establishing National Payment Councils (NPC) or National Payment Committees/Advisory Councils etc. India, Sri Lanka, Pakistan and some others have already established NPCs and they are the highest level policy making authorities for development of national payment systems. Banks have a good opportunity to give their inputs at these meetings, especially on operational matters. 4.3.3 Declare public policy objectives of retail payment system development: The undeclared and unsaid public policy objectives have been a contributory factor for ad hoc retail payment system developments in the past. | 1 |
Also, the improvement of domestic consumption and investment are slow due to a cautious private sector’s confidence. Externally, Thai economy is affected by the current uneven recovery of global economy which hinders Thai export growth. However, Thai economy is expected to recover up to 3.8% GDP growth this year from a mere 0.8% last year. Private consumption and the government expenditures will play key roles for 2015 outlook. 4. On the bright side, Thailand has been riding on the back of China’s economic prosperity. In other words, the regional prospect has pinned on improvement in intraregional trades of goods and services. China’s economic figures may be somewhat lower than its historical average, as a result of the sluggish recovery of the global demand and the continued structural reform in China. However, China growth rate is still at a satisfactorily high level. And China has yet remained an important engine in support of the growth of the Thai export sector. For the past few years, Thailand has become one of the most popular destinations among Chinese tourists, thanks to popularity of the ‘Lost in Thailand’ movie. Each week, hundreds of flights between Thailand and China have been landed to accommodate the increasing interest of Chinese visitors. We value this considerably as it not only helps boost the tourism and services sector of the Thai economy, but also tightens our cultural connections. 5. As we all know, Chinese economy has become a necessary ingredient for our secret recipe for the past decade. | Since China has been an important economic partner of Thailand and the region. To further strengthen these flows of trades and investments, close financial cooperation is the key. The Renminbi / Baht Bilateral Swap Agreement (or BSA in short) and the establishment of the Renminbi Clearing Bank here in Bangkok are the great examples. 6. The BSA is designed to be a backstop liquidity facility, which will help boost confidence of the private sector in using the local currency in trade and investment settlement. After the first signing of the BSA in 2010, the use of the Chinese Renminbi in trade and investment settlement between Thailand and China has grown remarkably. The share of trade settlement in Renminbi quadruples between 2010 and 2014. As for investment BIS central bankers’ speeches 1 settlement, the share climbs up dramatically from a mere 1% in 2010 to 14% in 2014. In spite of the rapid increases, the volumes are still small compared to other major currencies. 7. The Renminbi Clearing bank is the next important step from the BSA. Its Renminbi settlement mechanism is the sequencing plan of the Renminbi scalability. I could see its merit which fundamentally paves the way for further Renminbi internationalization as well as the role of Renminbi in global financial markets that will become increasingly prominent in the near future. 8. There is, however, some room for improvement in order to realize the full economic benefits between Thailand and China. | 1 |
The period leading up to and immediately following the Asian financial crisis is a prime example of this interaction. In that case, rapid movements of capital flows into and out of emerging markets interacted with financial system underdevelopment, deficient bank supervision, and balance sheet weaknesses, resulting in a boom-bust cycle. In contrast, the experience of developed economies is more generally characterized by one where large shocks typically result in substantial asset price volatility and substantial financial losses that are not accompanied by significant disruption to either short run or long run economic growth. A rigorous assessment of the challenges of monetary and financial stability in emerging market economies therefore must explicitly recognize this underlying difference in the economic backdrop. Let me now turn to the second part of my lecture and discuss the implications of these differences on the pursuance of monetary policy and financial stability. In light of the unique agglomeration of factors in emerging market economies outlined above, the pursuit of monetary and financial stability in emerging markets has two key facets. The first is to address the immediate short run concerns emanating from the various shocks; and the second is to implement structural reforms to ensure that financial stability becomes embedded in the underlying economic structure of emerging markets in the long run. The former essentially concerns the challenge of maintaining economic stability through appropriate policy settings and actions to offset the various shocks hitting the economy at any given point in time. | These developments and the banking crisis contributed to the currency crisis that struck in the first half of 2008. The Bank’s two publications on post-capital controls monetary policy and prudential rules have stood the test of time, as many of the proposals in them have already been implemented. We now intervene in the foreign exchange market with the aim of smoothing out fluctuations due to temporary capital flows and mitigating short-term exchange rate volatility. We no longer have a free-floating currency, but a managed float. We have adopted prudential rules that severely limit the banking system’s ability to take risk in foreign currencies. We have established a Financial Stability Council and a Systemic Risk Committee in order to monitor financial system risk more effectively than we did previously, and we are developing prudential rules and macroprudential tools to respond to systemic risk. This will also support monetary policy. One important step remains, however: to develop policy instruments that can be applied so as to curtail carry trade-related capital inflows when such inflows interfere significantly with the transmission of monetary policy along the interest rate channel, as was the case last summer and autumn. Analysis of the options available has been underway in the recent term, but these mainly involve a tax or a special reserve requirement. In both instances, statutory amendments would be necessary. | 0 |
The financial authorities within countries, and on a collective basis internationally, may also have a role to play in developing recognised common standards in these arenas of technology and security. The second characteristic deserving our special attention is the nature of the person or company which is offering us banking or payment services over the internet. If we are merely using electronic services provided by our usual bank, which we know to be sound and to be supervised by an acknowledged regulator in a known jurisdiction, then we should be in no more danger of losing our money than we would be by banking with the same bank in the conventional manner, provided of course that both the bank and the regulator have kept pace with the requirements of internet banking, such as in respect of the security aspects discussed already. But it is quite a different story if we are tempted to part with money to some organisation masquerading as a bank, or which actually is a bank but is registered in a jurisdiction with lower supervisory standards than those to which we are accustomed. In Hong Kong, in order to protect the public we already have legislation governing usage of the word “bank”, and governing the advertising for deposits within our boundaries by anyone not authorised to take deposits in Hong Kong. But we cannot protect people from the possible consequences of clicking onto a website in a far-off place which is luring them to part with their money. | In particular cases where monetary policy is supported by capital controls, however, internet banking may make enforcement of such controls more difficult, since it would be operationally easier for those wishing to evade regulations to maintain offshore bank accounts. Of course, every bank in reputable jurisdictions has in place rigorous procedures to combat money-laundering, but these procedures do not normally result in customers being turned away if they are merely trying to escape capital controls or the tax regime in their home countries. Similar considerations lead some observers to enquire whether the internet might encourage substitution out of the national currency, resulting in dollarisation and also perhaps weakening the central bank’s influence over domestic monetary conditions. If internet facilities enable or encourage people either to economise on the usage of money (for example by netting payments due among two or more parties or by practising barter) or to reduce the frequency of movements of money (for example by leaving export receipts in an internet account in order to pay for imports, rather than repatriating them first), then there may be a prospect of a general reduction in transactions traffic in all currencies. The usage of some may fall more than others. I do not, however, see anything particularly sinister in such developments, except to the extent that the internet might facilitate avoidance of rules on remittances. | 1 |
We are all in agreement that if a country decides to adopt Basel II, the timing should be determined by its own circumstances, not the timetable for Basel Committee members. Unlike the 1988 Accord, which was relatively simple to adopt, Basel II is more complex and demands more of banks and supervisors. Therefore, we don’t expect Basel II to be adopted as widely and quickly as the 1988 Accord, at least at the outset. However, we expect and hope that the number of countries that adopt the new framework will grow over time. We believe that countries should adopt the options and approaches contained within the framework that are most appropriate for the state of their markets, their banking systems, and their supervisory structures. Basel II is not a “one size fits all” framework. Supervisors can adopt the framework on an evolutionary basis and use elements of national discretion to adapt it to their needs. For any country that is considering adopting Basel II but may not yet be ready, I like to suggest a three-stage approach towards building a foundation for the new framework: (1) strengthening the supervisory infrastructure; (2) introducing or reinforcing the three pillars; and then (3) making the transition from the 1988 Accord to Basel II. The first stage is strengthening the supervisory infrastructure. Basel II is not intended simply to ensure compliance with a new set of capital rules. Rather, it is intended to enhance the quality of risk management and supervision. | Capital regulations will have to be complemented with prudent banking that includes enhanced underwriting standards, effective internal controls and risk management, as well as strong corporate governance. In achieving your future goals and aspirations, significant benefits can be derived from Basel II provided that your institutions undertake the necessary efforts to align your strategy and business orientation with the new standards. Your interest, participation and decisive actions on the new accord are therefore important in positioning your institution in this increasingly competitive and more dynamic environment. Thank you. BIS Review 21/2004 5 | 0 |
And yet many of the observations made about liquidity and market conditions over recent years have potential implications for monetary policy. Changes in risk premia, the level of asset prices, credit spreads, and interest rates, and in realized and expected volatility of asset prices – these can all affect the pace at which overall demand grows, and can therefore potentially affect future inflation. In discharging their responsibilities for the maintenance of price stability, central bankers need to be eclectic in looking at a range of different ways of measuring the stance of monetary policy, and its effects on the future path of growth and inflation. No indicators of liquidity or overall financial conditions provide a ready guide to judgments about monetary policy. But all these indicators merit careful attention, and they strengthen the argument against narrow or mechanistic approaches to thinking about the monetary and broader economic outlook. BIS Review 19/2007 3 Ultimately, though, ex ante judgments about leverage, concentrations and liquidity risk will continue to prove elusive. Our principal focus should therefore be not in the search for the capacity to preemptively diffuse conditions of excess leverage or liquidity, but in improving the capacity of the core of the financial system to withstand shocks and on mitigating the impact of those shocks. And, as always, central banks need to stand prepared to make appropriate monetary policy adjustments if changes in financial conditions would otherwise threaten the achievement of the goals of price stability and sustainable economic growth. Thank you. | Timothy F Geithner: Liquidity and financial markets Keynote address by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 8th Annual Risk Convention and Exhibition, Global Association of Risk Professionals, New York, 28 February 2007. * * * We have been in a period that market participants have characterized as one of exceptional liquidity. This is both a reflection of, and has contributed to, the ongoing expansion in the world economy. I want to focus my remarks today on the role of liquidity in markets, and what supervisors and market participants can do to make markets more robust against the shocks that we know will occur from time to time. These remarks are directed to a general phenomenon related to developments in the financial markets in recent years, and not to the specific conditions of the moment. Liquidity plays a central role in the functioning of financial markets. Structural changes in the financial system that have been underway for some time increase the importance of market liquidity. The allocation of capital increasingly relies on securities markets, where funds for investment in the real economy are raised through the direct issuance of securities to investors. A greater diversity of financial institutions, institutions other than banks, now play a more active role in the provision of credit and liquidity. Liquidity can mean many different things. | 1 |
If a central bank is committed to its price stability mandate and given enough time for the monetary transmission mechanism to work, there should be no reason why we should not be able to meet our inflation targets. However, there are two caveats here: – 2 In pursuit of its inflation target, a central bank can and might be forced to engage in un-conventional monetary policy tools. This is very much the case when central banks are flirting with the limits of conventional instruments of monetary policy (zero lower bound of policy rates or extreme risk aversion in the financial system). As we know, un-conventional tools can be both distortionary and present us with the risks of unintended consequences in terms of financial stability. Under certain premises, the risk associated with employing un-conventional monetary policy tools might be sufficiently strong to revisit the scope or the speed of fiscal consolidation; BIS central bankers’ speeches – – A prolonged undershooting of the inflation target might decouple inflation expectations from the inflation target of central banks requiring a more active monetary policy. This is not an argument against the policy mix per se; rather, it is a reminder of the crucial role that central bank communication and management of expectations should have. Third, we should avoid burdening monetary policy with too many goals or risk losing our credibility. With public finances highly indebted, politicians have been only too happy to place the burden of economic recovery on central banks. | The most important question is how the central bank can embrace this objective without impairing price stability and without creating unrealistic expectations about what it can and cannot do given limited tools at its disposal. Second, with the global financial crisis revealing many regulatory gaps, especially in advanced economies, many new proposals have, understandably, been made to reform international financial regulations. However, it is important to note that attempts to fix the last crisis may not prove effective in preventing the next one, as crises always come in different shapes and forms. In addition, some proposed new standards, such as Basel III, appear to mainly address the problems of banking systems in developed countries whose business models and risk-taking behaviour may well be very different from those of emerging markets. Therefore, the key challenge for policymakers in these countries, going forward, is how to adapt the global standards to best suit local needs, bearing in mind the enormous economic costs of over-regulation. Third, differential growth outlook between advanced and emerging markets in the aftermath of the global financial crisis is inducing large and persistent capital flows to emerging markets with implications for the exchange rate, inflation, and the risk to financial stability. In light of this, policymakers in emerging markets would find it more difficult to use traditional instruments to achieve domestic objectives. They must be more wary of the buildup of financial imbalances and may even have to rethink the exchange rate management strategy. | 0 |
This naturally served to temper the degree of exuberant risk-taking. Partners or managers in a bank were in for the long haul, with their investments and family wealth tied into the firm until retirement. So it was not just their next year’s bonus that was at risk. This evident “alignment of interest” between the bank owners or managers and the bank’s customers and creditors clearly helped promote trust. 8. That said, although some US investment banks only moved from the partnership to public ownership model in the past 25 years, it is the case that other commercial banks have been structured as public joint stock banks with limited liability since the 19th century. So if limited liability has existed for two hundred years, in at least commercial banking, with the attendant potential “agency” risks (i.e. shareholders with limited skin in the game and managers with relatively little capital invested), what else has been at work to create the problems which so vividly surfaced in the Global Financial Crisis? What has changed: bank management 9. First, bank employees’ time horizons have shifted. By this I mean that in the past employees, for a variety of reasons, tended to be much more “stable” in the sense of their ties to a given employer. An employee might join a bank, work their way steadily up through its ranks and then, on retirement after 30 or 40 years of service, receive a pension from the bank. | This is Statutory Instrument 32 now revised and re-named SI 55 on the Monitoring of Balance of Payments. Ladies and Gentlemen, as the name of the SI suggests, the aim is to “monitor” and not to “control”. There has been much public debate on this subject matter which seems to suggest a public misunderstanding of the intentions of the SI. Some quarters have gone so far as to link the issuance of SI 55 to the earlier issued SI33 as amended through SI78 (Currency Regulations) and concluded that Government is introducing exchange controls. BIS central bankers’ speeches 1 Managing Director, Distinguished invited Guests, Ladies and Gentlemen, allow me to clarify that SI33 was issued with the primary intention of reinforcing the use of Kwacha, which legal tender, for all domestic transactions. This is in line with practice in most countries around the world. The SI has is no way intended to stifle business. The initial Monitoring of Balance of Payments regulations were initially issued under SI 32. When the Government issued SI 32, Bank of Zambia embarked on an exercise to seek the views of the financial system players, the business community and the public at large. Arising from these stakeholder engagements, it became clear that some of the provisions of SI 32 would impede the smooth flow of business. It was also evident that the timeframe within which stakeholders were supposed to prepare for the implementation of the SI was not adequate. | 0 |
Jiří Rusnok: The future of monetary policy - what can we see as the dust has settled? Opening remarks by Mr Jiří Rusnok, Governor of the Czech National Bank, at the High-Level Economic Conference, Prague, 16 June 2019. * * * Ladies and gentlemen, dear guests, I wish you a good morning. It is my pleasure to welcome you all to this high-level conference on “The Future of Monetary Policy: What Can We See as the Dust Has Settled?” hosted by the Czech National Bank. This conference is organised as part of this year’s celebrations of the 100th anniversary of the introduction of our national currency – named the koruna – in 1919. Before I give the floor to the distinguished speakers, let me first make a few remarks that will set the stage for the upcoming event. During the past 100 years, our currency and the overall economic situation of our country has enjoyed times of economic prosperity, but also some more difficult periods. This alternation between good and bad times applies elsewhere. Before the outbreak of the Global Financial Crisis (GFC) in 2008, it seemed that monetary policy had triumphed. Inflation in advanced countries and elsewhere had decreased to low and stable levels. The goal of price stability had been achieved. Central banks were using standard tools with well understood transmission mechanisms. The outbreak of the Great Recession suddenly changed this perspective. The GFC brought significant economic slack and deflationary tendencies to many countries. In response, central banks started using unconventional tools. | On the other hand, the experience with models based fully on rational expectations sometimes shows that certain aspects or policy implications are at odds with what is considered reasonable. One example is the forward guidance puzzle, i.e. the unrealistically large responses of inflation, long-term rates and output to the announcement of the future path of interest rates. Therefore, we as macroeconomists want to reconsider the assumption of superrational agents and replace it with something more realistic. The second session on Friday will be devoted to two papers that may challenge our ideas about the economy and the way we think in terms of our usual models. It is always extremely useful to listen to new concepts and visions and to rethink our current approaches. Discussing thoughtprovoking and stimulating papers is the only way to avoid rigidity in ideas and opinions. Rigidity that will – sooner or later – lead to wrong attitudes and decisions. I believe that good policymaking will always benefit from cutting-edge research. I would therefore like to thank the participants of the high-level policy panel, the presenters and commentators in the individual sessions, and all other participants for coming to our event. Ladies and gentlemen, thank you for your attention. I wish you all an interesting conference, fruitful discussions and an enjoyable stay in Prague. 2/2 BIS central bankers' speeches | 1 |
The growth in international capital flows is the result of greater financial liberalization and sophistication in markets around the world, the rise of institutional investors such as mutual and pension funds, and growing financial innovation and intermediation, especially in derivative products. We all know that capital movements help growth through a more global efficient allocation of resources and bring new knowledge and technology to emerging economies. 4. On the other hand, international capital flows can be very volatile in nature, with the tendency of reversing direction when there is the slightest hint of risk, whether it is in the conduct of macroeconomic policies or concerns over the fragility of the financial sector. Capital flows now drive the balance of payments more than trade flows. Portfolio shifts operate on the basis of market expectations of risk, return and liquidity. A high level of arbitraging, such as the borrowing of funds from one market to invest in another market, leads to contagion effects. Losses in one market therefore result in sales in another. This is a risk that should be addressed not only by those who are now under the process of capital liberalization, but also by the whole international community. Global markets mean global contagion. This is no longer a uniquely Asian problem. 5. Let us now consider the recent Asian market turbulence in the global context. Until recently, Asia enjoyed the benefits of the high global liquidity, and recorded admirable levels of capital inflows, as driven by the high global liquidity in G-3 economies. | As Chairman Greenspan said recently, "in retrospect, it is clear that more investment monies flowed into these economies than could be profitably employed at modest risk". 8. The strong Asian growth would have continued but for the fact that global competition in external trade has emerged with newly industrialized and export-oriented economies with cheap labour, such as China, India, Latin American and Eastern Europe. The failure of central planning has brought at least three billion new workers and consumers into the global market. These new markets began to benefit from the growing trade liberalization and inflows of foreign investments, thus putting greater pressure on the markets of the earlier “tigers” of East Asia, leading to a widening of their current account deficits as they continued their investments in infrastructure and real estate. Issues in Asia 9. If we look more closely at the situation in Asia, the economic fundamentals remain intact. Asia has been the fastest-growing region in the world, recording growth rates of around 5%-9%. Asian economies have low inflation rates and exchange rates were stable until recently. Current account for the region as a whole is broadly in balance, while the fiscal account, excluding Japan, is in surplus. Asia has exceptionally high savings rates of above 30% of GDP. Official savings, in terms of foreign currency reserves, were even higher. In Asia, 70% of the inflows contributed to reserve accumulation. As a result, Asian central banks are now holding about 40% of the world’s foreign exchange reserves. | 1 |
Some of the disadvantages of unilateral adoption could be reduced by negotiating a bilateral agreement with the anchor country providing for central bank liquidity facilities for the domestic banking system, a share in seigniorage revenues, renewal of banknotes and coin, and participation in monetary policy formulation. Such an arrangement would somewhat resemble euro area membership. But it could be difficult to obtain such a commitment from another country, and there is no precedent for it. At all events, it is likely that such an agreement would be conditional upon giving the anchor country and its central bank a say in the domestic financial system regulatory framework and allowing it to participate in domestic financial supervision, as the historical origins of financial supervision are in central bank liquidity facilities and lending of last resort. In that case, a bilateral agreement of this type would entail relinquishing considerable sovereign powers, even more than in the case of euro area membership. 8 BIS central bankers’ speeches 1.6 Flexible exchange rate and improved framework for demand management and the financial system As has already been discussed, Iceland’s experience of independent monetary policy and a flexible exchange rate has been mixed, to say the least. Monetary policy has not been effective enough, and more often than not the exchange rate of the króna has been a source of shocks rather than a shock absorber. | Adopting an exchange rate peg and a deviation band in an international collaboration with other countries could prove more propitious, however. Such a policy would be more credible because it would be supported by the actions and credibility of the other countries. The Bretton Woods exchange rate system, which was in place from the end of World War II until 1973, is an example of this. The difference, however, was that most participating countries also had capital controls. ERM-II, on the other hand, is an example of an exchange rate targeting system based on international cooperation and unrestricted movement of capital. It works because of the ECB’s credibility and its obligation to intervene, and because it is defined as a temporary arrangement with a clear exit path towards the euro area. The markets are thus not tempted for an unlimited period by a commitment to a peg that they can speculate against. A currency board has the same advantages as a conventional exchange rate peg in that, in the long run, average inflation should align with that in the anchor area (see Chapter 18). Because a currency board is based on a pledge enshrined in law or even the country’s constitution – a pledge to convert the domestic currency to the anchor currency at a predetermined exchange rate – volatility vis-à-vis the anchor currency disappears. Because the pledge is more stringent than that implied by a conventional unilateral peg, it can also be more credible. | 1 |
As such, a key lesson from the financial crisis is the need to expand the range of instruments available to policymakers, so they are better equipped to ensure the resilience of the financial system. This missing instrument problem provides the backdrop to the Government’s announcement earlier this year that it intends to create a new policy committee in the Bank – the Financial Policy Committee – which will have responsibility for conducting macroprudential policy. In 2010, quantitative easing was entered into the Oxford Dictionary of English, along with chillax and defriend (don’t ask!). I predict that 2011 may be the year of macroprudential policy. The legislation determining the precise tools and objectives of macroprudential policy is still to be enacted. But as the Governor recently emphasised, the over-riding objective is to ensure the resilience and stability of the banking system. 4 If successful, macroprudential policy will represent a significant advance. As we have seen repeatedly through history and across countries, banking crises come hand-in-hand with deep and costly recessions. Promoting the resilience and smooth functioning of the financial and banking system in bad times as well as good would contribute greatly to our future economic stability. But it would be wrong to conclude from this that macroprudential policy is likely to solve the missing instrument problem entirely. That is for at least three reasons. First, macroprudential policy is not the instrument that will solve the problem of global imbalances. | 8 But that does not mean that equity-financed booms and busts cannot have sizeable macroeconomic consequences via other channels, such as misallocating resources, wealth effects and their impact on confidence. In the 5 years 4 King (2010). See also Tucker (2009) and Haldane (2009). 5 Bean (2010). 6 IMF (2010). 7 See Tucker (2009). 8 See Mishkin (2008). BIS Review 161/2010 5 following the dotcom bust, GDP growth in the US averaged almost two percentage points lower than in the preceding 5 years; this despite a very aggressive easing in monetary policy. Third, as Claudio Borio of the Bank for International Settlements and others have stressed, actions necessary to preserve the resilience of the banking system may not be sufficient to prevent credit cycles altogether. 9 A much-studied example of this comes from Spain. Since 2000, Spain has had a system of dynamic provisioning whereby banks had to put aside more capital as they increased lending. This increased the resilience of the Spanish banks, but it did not prevent a large run-up and subsequent crash in house prices in the Spanish property market. If – and it is a big if – macroprudential policy could be used to prevent such credit cycles it could potentially have even greater benefits for our economy. | 1 |
Against the above-mentioned developments, monetary indicator analysis confirms controlled inflationary pressures originating from the domestic economy. Money supply annual growth was 12.2% in April, staying close to its historic trend. Monetary expansion reflected the accumulation of liquidity in the banking system, revealing the households’ preferential behaviour towards saving. Our assessments point out that monetary expansion is compliant with the private sector’s demand for real money, thus indicating controlled monetary-related inflationary pressures. The contained behaviour of the private sector about spending and investing is reflected also in a low demand for bank lending. Annual growth rates of lending to the private sector ranged 10%–12% in the four first months of the year, on average, only 2 percentage points higher than a year earlier. The business 2 BIS central bankers’ speeches demand to cover liquidity needs was their main driver for loans, while lending to households increased by low rates. Developments in financial markets speak of low risk premiums and liquidity. Short-term interest rates in the inter-bank market stayed close to the key interest rate and demonstrated contained volatility. In the primary market, government securities yield surged in the last three months, in response to a higher demand of the public sector for funding. Nevertheless, their curb remains lower in comparison with a year earlier, pointing to more favourable financial conditions in the economy. Looking ahead, assessments and projections of the Bank of Albania suggest continuation of positive growth in the upcoming period. | Ardian Fullani: Recent economic and monetary developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on the Monetary Policy Decision of the Bank of Albania Supervisory Council, Tirana, 29 June 2011. * * * Today, on 29 June 2011, the Supervisory Council of the Bank of Albania reviewed and approved the monthly Monetary Policy Report. Based on an analysis of Albania’s latest economic and financial developments and following discussions on their performance outlook, the Supervisory Council of the Bank of Albania decided to leave the key interest rate unchanged at 5.25%. The Supervisory Council holds that the actual monetary conditions are appropriate for meeting the inflation target and for continuing to stimulate the economic activity. Let me now proceed with an overview of economic developments and main issues discussed at today’s meeting of the Supervisory Council. *** Annual inflation pointed to 4.2% in May, remaining close to preceding months levels. Under higher foreign prices pressure, the prices of “processed foods” and “non-food consumer goods”, including oil, were the main contributors to inflation rates. In the meantime, the seasonal effect of increased domestic supply of fruits and vegetables is reflected in a lower contribution of the “unprocessed food” to inflation. The rise of some administered prices and the effect of higher excise tax rates for some goods continued to provide a constant, but positive, contribution to annual inflation. | 1 |
There is no scope for any mechanical adjustment of asset prices or bubbles. The central bank's reaction will not be stable but shift with its judgment and, counter to substantial parts of the literature, I do not believe that it is productive to discuss these issues directly in terms of the central bank's reaction function, for instance as modifications of a Taylor rule (Svensson 2003b, 2005). Asset-price movements and asset-price bubbles may directly threaten financial stability and cause the financial-stability constraints on monetary policy to bind. Thus, the central bank may want to respond to asset price developments that increase the risk of financial instability in the future. Again, in many realistic situations, the difficulty in making such judgments will be very great and there will be insufficient information for taking such preemptive action in many cases. Now, is there any reason to modify this view of monetary policy and financial stability given the experience of the financial crisis so far? Let me approach this question by asking what the causes of the financial crisis are, what the role of monetary policy is in causing the crisis and whether a different monetary policy was warranted and could have prevented or reduced the size of the crisis. 4. | One important lesson from the financial crisis is that financial factors may have a very strong and deteriorating effect on the transmission mechanism, making standard interest-rate policy much less effective. This motivates more research on how to incorporate financial factors in the standard models of the transmission mechanism used by central banks, and a rapidly increasing volume of such research is now being produced by academic and central-bank researchers and presented at an increasing number of conferences on financial factors and monetary policy. Important questions include how potential output and neutral real interest rates are affected by financial factors and financial distortions (Curdia and Woodford 2009, Walsh 2009), and what impact financial factors have on the general equilibrium effects of 6 BIS Review 112/2009 alternative policy-rate paths on inflation and resource utilization forecasts. 11 Before such extensions to the modelling framework are operational, policymakers and staff have to improvise and apply unusual amounts of judgment on the effects of the financial crisis on the transmission mechanism. Even with much better analytical foundations concerning the role of financial factors in the transmission mechanism, there will of course, as always, be considerable scope for the application of good judgment in monetary policy. | 1 |
Replacing missing prices in this way is usually referred to as imputation. The total weight in the CPI for the products where prices are imputed in this way is not particularly large; it amounts to just under 3 per cent of the total weight of the CPI, see Figure 2. The percentage of imputed prices is at present much higher in other parts of Europe. Figure 2 shows the aggregate weight for the product groups where imputation has been necessary in total for the euro area and the larger euro-area countries. The statistics refer to the harmonised index for consumer prices, the HICP.3 2 See the press release and the material presented at an extraordinary meeting in the Consumer Price Index Board on 1 April. 3 The HICP was developed by Eurostat, which is the EU’s statistical body. The measure was designed to facilitate international comparisons of inflation. 3 [6] Figure 2. Percentage of imputations in the HICP 4 Per cent Source: Eurostat What do the many imputations abroad entail for the quality of the statistics? The conclusion in a current working report written by two world-leading researchers in this field is that the principles recommended by international organisations lead to underestimation of the rate of inflation and overestimation of the real increase in consumption.5 However, this is probably no major problem for Sweden, as the percentage of prices imputed is relatively low. The problems could be much greater for other countries, and therefore for international comparisons. | SPEECH DATE: 17 June 2020 SPEAKER: Deputy Governor Henry Ohlsson VENUE: riksbank.se SVERIGES RIKSBANK SE-103 37 Stockholm (Brunkebergstorg 11) Tel +46 8 787 00 00 Fax +46 8 21 05 31 [email protected] www.riksbank.se Monetary policy during the economic crisis* The economic crisis the world economy is now experiencing is the deepest for many decades. Both demand and supply have declined substantially around the world. Economic policy faces major challenges. Sweden, which is a small open economy, has been severely affected by the reduced economic activity in the world around us. Naturally, we have also been affected by how international economic policy to deal with the crisis has been formulated. I will in this speech highlight three challenges that monetary policy has faced during the spring. These challenges have by no means disappeared, we will continue to deal with them. The first challenge has been that the financial markets function less smoothly during severe economic crises. This has been an important base for the Riksbank's monetary policy during the spring. Monetary policy aims to attain the inflation target. A second challenge at present is that the inflation statistics are difficult to interpret. For instance, there are no prices for many goods and services because there is quite simply no economic activity on these markets. Monetary policy must also be forward looking. Under normal circumstances this means that monetary policy is formulated according to forecasts of future economic developments. | 1 |
The Maiden Lane II and Maiden Lane III assets continue to generate substantial proceeds, which are distributed monthly to pay down the New York Fed’s Senior Loans to the respective Maiden Lane LLCs. While the New York Fed may direct its investment manager to sell Maiden Lane II and Maiden Lane III assets into the market at any time, as a practical matter, the value maximizing strategy has been largely to hold the assets to maturity while collecting interest income, and principal repayments. Currently, the hold-to-maturity expected proceeds of each LLC’s portfolio are greater than the LLC’s debt to the New York Fed. As of May 20, 2010, the balance on the New York Fed’s Senior Loan to Maiden Lane II was $ billion (inclusive of accrued interest), while the total asset value was $ billion. The balance on the New York Fed’s Senior Loan to Maiden Lane III was $ billion (inclusive of accrued interest), while the total asset value was $ billion. In sum, the LLCs have repaid approximately $ billion of the loans made to them by the Federal Reserve. Based on the current performance of both portfolios, as well as our analysis of forecasts provided by our investment advisor, it is anticipated that the proceeds from both portfolios will exceed the principal and interest due on the New York Fed’s Senior Loans to both Maiden Lane II and Maiden Lane III. We expect to recover our principal and interest on the loans to the LLCs, and on the Fed Facility. | On the evening of September 16th, we advanced $ billion in credit to AIG through a fully collateralized lending, and announced the term sheet for what would become an $ billion revolving credit facility with AIG (Fed Facility). 1 Some have asked why the Federal Reserve did not see the threat that AIG posed to the financial system before September 16th. The short answer is that AIG had hundreds of regulators, none of which was the Federal Reserve. The Federal Reserve had no regulatory authority over the firm – no authority over its capital, no authority over its liquidity, and no oversight over its control functions. The Federal Reserve was not engaged in supervision of AIG. It did not have the legal authority to do so. These roles and responsibilities remained with state insurance regulators, and with the comprehensive consolidated supervisor, the Office of Thrift Supervision. Throughout the weekend of September 13th and 14th we were assured by those regulators that a private sector consortium of commercial banks had a solution to AIG’s liquidity problems, and we had no basis to question those assurances. But then Lehman filed for bankruptcy protection and the private sector consortium unequivocally stated that they were no longer prepared to lend to AIG. The AIG situation is both different and similar to that of Long-Term Capital Management (LTCM), a hedge fund that nearly collapsed in the fall of 1998. | 1 |
It will take time for the measures introduced to affect all households with mortgages It is now important to take measures to improve the long-term functioning of the housing market, which will both reduce the risks we find worrying and also create the conditions for the healthy development of society. Measures within several policy areas will be needed to achieve this. One area where we have seen measures is macroprudential policy. Finansinspektionen (the Swedish financial supervisory authority) has taken measures to reduce the risks inherent in household indebtedness and to increase resilience against shocks. This is welcome and positive. However, the measures introduced, such as a loan-to-value limit and amortisation requirements, affect new loans only, and it will therefore take time before they affect all households with mortgages. Some of the macroprudential policy measures have also been criticised. Among other things, the amortisation requirements have been accused of making it difficult for some groups, such as first-time buyers, to enter the housing market, as the requirements restrict households’ scope for borrowing. This is, however, part of the aim of the amortisation requirements and, without these restrictions, household indebtedness would also risk continuing to increase at an excessively rapid rate. Without an effective macroprudential policy, borrowing households would choose to borrow more and demand more housing, without considering that, when all borrowers behave like this, housing prices are pushed upwards. 4 Higher housing prices mean that borrowers must cut back on other consumption and work more, which decreases their welfare over the long term. | It should also be remembered that households still have the possibility of borrowing large amounts to finance housing purchases. I consider that it is therefore somewhat misleading to claim that certain groups have been completely ‘excluded’ from the housing market due to the amortisation requirements. As far as newly built homes go, these are exempt from the amortisation requirements and it is up to individual banks to decide whether their customer’s credit 23 European Commission (2019). 24 Finansinspektionen (2019). 25 See also Cunliffe (2019) for similar results in the United Kingdom. 8 [13] rating makes additional amortisation necessary. Consequently, the amortisation requirements, at present, should benefit newly built tenant-owned apartments. The aim of the macroprudential policy measures is to strengthen households’ long-term resilience in two ways: by ensuring that they do not borrow excessive amounts in relation to their incomes or the value of their homes, and to encourage households to create buffers by gradually amortising their loans. High stress rates in the calculations made by the banks to estimate households’ ability to repay loans are, in turn, aimed at ensuring that the households will be able to cope with a significantly higher level of interest rates than prevails at present. 26 If a household fails the credit assessment, it is conceivable that the household will have to increase the proportion of capital it invests, borrow less and/or purchase a cheaper home. | 1 |
But we regulate the activities that surround virtual currencies if these pose specific risks. An example would be the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) requirements that we have imposed on intermediaries providing virtual currency services. We are assessing if additional regulations are required for investor protection. Another example is the wave of new payment services that have been enabled by new technology. Consumers are increasingly making and receiving payments through digital payment platforms, which fall outside of our existing regulatory frameworks. In recognition of the risks that these digital payment platforms can pose to the system as a whole if they are not adequately secure, MAS will be issuing a new Payment Services Bill (PSB). This will streamline the regulation of payment and remittance service providers under a single regulatory framework, and calibrated to whether an entity offer one, some or all parts of the retail payments value chain. It will also seek to enhance user protection and facilitate the adoption of electronic payments. 3/5 BIS central bankers' speeches 20 Regulations should not stifle innovation. The reality is that innovations will always move ahead of rules. The key is in understanding whether a particular innovation or new business model is simply a regulatory arbitrage. If so, we should deal with that directly such as by bringing that activity within the regulatory ambit or even banning it altogether. Another consideration is whether an innovative business model while purposeful will create incoherence or inconsistency of treatment. | At a global level, the buoyancy of EMEs has resulted in higher commodity prices, which coupled with some specific factors, such as weather problems impacting agricultural production and tensions in the Middle East and North Africa, have pushed food prices to record highs and oil prices to very high levels as well. This price shock, coupled with strong domestic activity, results in inflationary pressures that must be contained with tighter monetary policy. Contrary to the situation in advanced economies, international price (supply) shocks find fertile territory to propagate to wages or other prices when the economy is in a strong cyclical position. BIS central bankers’ speeches 1 This uneven recovery of the world economy is resulting in an uneven monetary policy landscape (Figure 2), which strengthens currencies in EMEs and induces capital inflows to these countries. Free trade and export-led growth have been a successful growth strategy in developing countries, which see the strengthening of their currencies as a threat to this strategy. Consequently, many countries have been trying to fight the appreciation via capital controls and exchange rate intervention. China and the U.S. deserve special mention, as they are at the center of the tensions of the adjustment. China has been the growth engine of the world, and it would not be an exaggeration to call it the “grower of last resort” for the global economy. They have decided to appreciate gradually, much more slowly than most EMEs and commodity exporters. | 0 |
Ida Wolden Bache: Norges Bank's management of the Government Pension Fund Global Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the hearing of the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 18 April 2023. *** Thank you for the invitation and for the opportunity to talk about Norges Bank's management of the Government Pension Fund Global. 2022 saw substantial movements in global financial markets. Interest rates rose, and both equity and bond markets gave negative returns. The fund's return last year was equivalent to a drop in value of NOK 1 637 billion. In absolute terms, this is the weakest return in the fund's history. With such a large fund and an equity allocation of 70 percent, we need to be prepared for substantial fluctuations in returns The objective for Norges Bank's management of the fund is the highest possible longterm return within the constraints set by the Ministry of Finance. The Ministry has defined a benchmark index for the fund, and we manage the fund close to this index. Over time, the return on the fund has been higher than the return on the benchmark index. The Executive Board is satisfied with this. The excess return in 2022 was equivalent to NOK 117 billion. The Executive Board has overriding responsibility for Norges Bank's management of the fund. We adopted a new strategy for the management of the fund towards the end of 2022. | Norges Bank will be an active owner and support companies through the climate transition, encourage climate reporting, and further develop our analysis of the fund's exposure to climate risks and opportunities. At the heart of our efforts is driving portfolio companies to net zero emissions by 2050. An operationally robust organisation helps safeguard the fund's assets. Geopolitical risk may be a greater source of uncertainty in the management of the fund in the years to come. Organised cyber-criminals are becoming increasingly specialised, sophisticated and well-funded. It is difficult to identify geopolitical events before they occur or lead to financial losses for the fund. For a large, global fund, there is nowhere to hide. Risk in the Government Pension Fund Global is reduced by diversifying its investments across asset classes, countries, sectors and companies. This should continue. The Sverdrup Committee, which is centre stage in this year's white paper, found that the fund is, in principle, well equipped for an uncertain future, but that its ability to deal with various changes and crises could be improved. We share this view and strive continuously to strengthen our situational understanding, develop our work on scenarios and stress testing, and improve our contingency planning. The Ministry of Finance announced in its white paper that it will be reviewing the matter of investing in unlisted equities. Norges Bank looks positively on this review, and we will return with our advice and assessments towards the end of the year. | 1 |
Two particularly important exceptions have been the gradual fixing of the exchange rates between members of the European Union, culminating in monetary union, and the more or less formal policies of the newly industrialised Asian countries and Japan to keep the value of their currencies stable against the dollar. Moreover, the Asian central banks have been accumulating large dollar reserves. For most of the post-war period, the quantity of central bank reserves held by Asian central banks was of the same order of magnitude as the reserves held by the G-7. Over the past 15 years, both Japan and non-Japan Asia have rapidly increased their reserves, which are now nearly ten times as large as the combined reserves of the rest of the G-7. Two thirds of these reserves are in dollars, a much larger proportion than the US share of world output. The counterpart to the Asian bloc’s current account surpluses and acquisition of dollar reserves has been large current account deficits in the US. There is nothing inherently wrong with such ‘imbalances’. In principle, they reflect the use of financial markets to allocate savings from around the world to the most profitable investment opportunities. But there is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay. | My main conclusion is that the international monetary system should be seen not as a series of bilateral relationships, but as a multilateral arrangement, albeit one where a small number of the key players can usefully communicate with each other. I believe that we need to rethink the role of the IMF in the international monetary system. I encourage the Fund to articulate a positive vision for the management of the international monetary system in its forthcoming strategic review. I am not convinced that the future of the Fund is primarily as an occasional international lender of last resort for middle-income countries suffering financial crises. At this Conference the emphasis is naturally on ways to promote productivity and enterprise. Monetary stability at home is now widely recognised as a necessary condition for a successful economy. It provides, as I said at last year’s conference, a springboard for enterprise. But international monetary stability is no less important if trade is to prosper. In The Importance of Being Earnest, Cecily is instructed by her tutor, Miss Prism, to read her political economy. But Miss Prism continued, “The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side.” What would poor Cecily have made of the recent melodrama surrounding the values of the dollar, the euro and other paper currencies? | 1 |
Sachs established an 30 For more on ownership strategies, see the NBIM website: http://www.nbim.no/en/Investments/ownershipstrategies/ 31 For more about the UN guidelines, see “Global Compact”: http://www.unglobalcompact.org/. For more on the OECD guidelines, see: http://www.oecd.org/topic/0,3699,en_2649_37439_1_1_1_1_37439,00.html 32 South Africa received NOK 149.5 million in development assistance from Norway in 2010. See Norad website http://www.norad.no/en/tools-and-publications/norwegian-aid-statistics BIS central bankers’ speeches 9 institute where advanced mathematical methods were applied to study the relationship between the position of the stars and the fates of human beings. 33 Collett was more down-toearth. He studied new methods of crop cultivation and was a keen supporter of the cultivation of potatoes here in South-Eastern Norway. 34 As a contributor to sustainable growth, we would have to say that Collett was closer to the mark than Sachs. Norway’s proximity to valuable natural resources has created substantial opportunities. New technology and new oil finds are still increasing the value of our oil wealth. Two North Sea fields where oil and gas were recently discovered, Galtvort (Hogwarts) and Gygrid (Hagrid), have been given names from the Norwegian version of Harry Potter. One of the books features the lucky potion Felix Felicis. This magical potion is difficult to make. The consequences can be catastrophic if the ingredients are mixed incorrectly. But if mixed correctly, the drinker will succeed in all that he undertakes. The potion also has some highly detrimental side-effects. If taken in excess, it may cause giddiness, recklessness and dangerous overconfidence. | There were too few left in the business sector to bear the welfare state. The resource curse also increases rent-seeking at the expense of value creation, as the economist Trygve Haavelmo noted. Many countries that have experienced a windfall of wealth have been victims of this curse. The state of Alaska has chosen its own institutional solution to avoid rent-seeking among special-interest groups. Once the real value of Alaska’s oil fund, the Alaska Permanent Fund, is secured, dividends are distributed to the owners. Each resident receives an annual cheque that can be spent as desired 13, providing a strong incentive to protect the capital in the fund. 14 The choice of building up a sovereign wealth fund must also be seen in connection with the state’s substantial pension obligations under Norway’s National Insurance Scheme. For the Norwegian state it would not have made sense to choose a solution like the Alaska fund without also addressing the issue of pension obligations. 11 See for example the obituary “Gunter Sachs”, in The Telegraph, 9 May 2011: http://www.telegraph.co.uk/ news/obituaries/8503379/Gunter-Sachs.html 12 Jeffrey Sachs and Andrew Warner (1995): “Natural Resource Abundance and Economic Growth”, NBER Working Paper 5398. 13 See for example the Alaska Permanent Fund website: http://www.apfc.org/home/Content/dividend/dividend.cfm 14 This would be comparable to using the return on the fund as tax relief. | 1 |
It seems that strong competition between various producers within the food industry and the construction industry has had a dampening impact on inflation. In addition, productivity growth in retail trade has been high in the past few years. Intensified competition may also have contributed to curbing the rise in prices for banking and insurance services. Several factors point to higher inflation in the period ahead. Capacity utilisation in the Norwegian economy is picking up. This will contribute to a higher rise in prices for domestically produced goods and services. A tighter labour market will probably lead to higher wage growth in the coming years. High energy prices are feeding through to producer input prices. Outlook for the years ahead Growth in disposable income has been high in recent years. Lower interest expenses and relatively high real wage growth have resulted in an increase in household purchasing power. The rise in house prices may also have fuelled growth in private consumption. With high growth in employment and falling unemployment, consumption growth is expected to be high again this year. Since the publication of the June Inflation Report, electricity prices have increased to a further extent than expected. Forward prices for next winter have also increased. Higher electricity prices may in isolation reduce household purchasing power somewhat. On the other hand, growth in household income is high and market expectations indicate a fall in electricity prices later next year. A continued rise in house prices may contribute to holding up consumption growth. | The Basel Committee may therefore need to review the standards for the LCR and the NSFR. 12 See EU Commission (2023), https://finance.ec.europa.eu/publications/reform-bank-crisis-management-anddeposit-insurance-framework_en. 10 [30] Another lesson is that Silicon Valley Bank did not take sufficient account of its interest rate risks. Here I would like to emphasise the importance of all banks – including in Sweden – having a good margin for the risks that interest rate changes can entail. 30 years of low interest rates have contributed to increasing the risks in the financial system. Households and businesses in many countries have large debts while prices of homes, commercial properties and financial assets are high. The sharp and rapid rise in global interest rates experienced over the past year has brought interest rate risks into sharper focus. Current global standards require supervisors to take interest rate risk into account as part of the supervisory process, known as Pillar 2. The consequence is that these risks are managed very differently in different countries, and potentially even between different banks. Finansinspektionen has a well-developed model for estimating these risks for the Swedish banks, but, as I said, the rules vary from country to country. In my view, there is reason to harmonise some of these rules. A third lesson is that accounting rules play an important role. When macroeconomic variables change significantly, the difference between the valuation of assets at fair value and at amortised cost can be large. Silicon Valley Bank had invested heavily in US long-term bonds. | 0 |
Like so many aspects of culture and values, it’s not a project with a deadline, where we can say, “OK, we’re done now.” Instead, we need to be constantly reassessing our goals, refining what we do, and how we do it. We need to be vigilant, attuned to change, and open to new ideas. Because it’s one thing to create an open culture, but a much harder challenge to keep it that way. I’m reminded of a quote by Brené Brown, which I believe sums this up: “To not have the conversation because of discomfort is the definition of privilege…” When we step back, when the dialogue—however uncomfortable it may be—stops, or is never initiated in the first place, is when there’s a problem. It’s the conversations that aren’t spoken that erode trust, alienate people, and take us back. I’d like to conclude where I began. I spend a lot of time examining data, and it’s a source of constant disappointment and frustration that LGBT people, women, and people of color continue to have less economic opportunity than their straight, white, male counterparts. Creating equality of opportunity at the national level is a challenge the United States continues to struggle with. But it’s both the right thing to do and the only way we’ll reach our full economic potential. Creating a more diverse—and equally important—a more inclusive Federal Reserve is a key 2/3 BIS central bankers' speeches priority. We have come a long way, but there’s no doubt we still have far to go. | But even this combination, which can only be temporary, cannot in the long run prevent a sharp rise in prices if the gap between demand and supply is too wide - as demonstrated by the rise in prices after 1980.” In Norway, the efforts to develop an economy under strong centralised coordination and control culminated in the 1973 proposal to establish an incomes policy council.5 According to the proposal, the social partners would undertake a commitment through the council to keep negotiated wage increases within specific limits. It was also stipulated that demand management policy should be included as part of incomes policy. The proposal to establish an incomes policy council did not receive support. There was ultimately too much control and coordination. Now, only 30 years later, virtually nothing of this system remains. The structure was not solid enough. We know from experience that fiscal policy alone cannot ensure a high level of employment. The structure of the labour market and wage formation are probably of greater importance. The direct regulation of credit, interest rates and capital movements collapsed and was phased out in the 1980s. The krone is floating. Price regulation no longer plays a role as a macroeconomic instrument. The scope of business policy has become more general. State ownership in the Norwegian business sector remains extensive, but ownership management has been reorganised following the negative experience of companies in Kongsberg, Mo i Rana and Syd-Varanger. The economic policy of the 1970s and 1980s contributed to wide fluctuations in the Norwegian economy. | 0 |
Today’s allocation of zakat contribution to INCEIF by the three Islamic banks is another commendable act of industry in support of learning. INCEIF has received monetary contributions from several other Islamic financial institutions since 2007. This has enabled INCEIF to continuously enhance its internal capacity as the leading provider of Islamic finance education and knowledge. The contributions are being utilized to create the provision of scholarships, research and facilities development. In this regard, INCEIF has recently been accorded the “Project of National Interest” (Projek Berkepentingan Nasional) status. This status, which accords contributors with tax benefits in the forms of tax rebates for zakat contributions and tax deductions for non-zakat contributions, will incentivize more individuals and institutions in providing monetary support to INCEIF. The contributions will indeed go a long way towards the growth and development of Islamic finance in Malaysia and beyond. Thank you. 2 BIS Review 87/2010 | But since the target is set at 2.5% on a symmetrical basis, the concept of “prudence” cannot be applied in the same way. The result is that we worry as much about being below the target as we do about being above it. And I believe this makes good economic sense: the problems of severe deflation are at least as great as severe inflation. The particular indexed measure of inflation the Chancellor has chosen is RPIX, that is the headline RPI number after excluding - this is the X bit - mortgage interest payments. Some believe that we should move to the Harmonised Index of Consumer Prices (HICP), widely used in Europe and, accordingly, making comparison with Euroland inflation easier. HICP inflation in this country has been running consistently below RPIX by about 1%. This reflects differences in the construction of the index, in particular the treatment of depreciation of property costs. Some have argued - most recently the Engineering Employers’ Federation - that if we moved to HICP, then interest rates could immediately be lowered. But this does not follow. If we moved to a different calculation of inflation, it would seem natural to revise the target at the same time. A 2.5% target for HICP would mean that we are targeting a higher level of inflation than we are at present. | 0 |
Challenges stemming from integration Two major challenges for authorities in charge of financial stability emerge from the common wholesale banking system: vulnerability to common shocks and potential contagion of major problems across many countries, should such problems arise. Let me take the issue of common shocks first. Clearly, integration opens up a wide range of opportunities for growth and contributes to increasing the resilience of the system. It brings along a wider range of funding sources and – on the asset side – the degree of diversification of exposures increases. But integration also renders financial institutions more exposed to common shocks. For the largest banks, area-wide risks affecting specific lines of business increasingly matter more than the home country-related risks. One way of illustrating this point is to take a look at banks' share price development. Since the beginning of the year, the share prices of almost all major European banks have declined. The 30 largest banks have lost, on average, around 25% of their value. The overall deterioration in global macroeconomic conditions and financial market volumes has affected all institutions, as banks' profit outlook has deteriorated following the likely increase in provisioning needs and reductions in income from market-related activities. However, the stock market changes for these 30 banks range widely from a small plus to very significant minuses of over 50%. In line with the notion that the home-country risks have lost in importance, banks' nationality is no longer a very relevant determinant of the size of the stock market reaction. | As I have already mentioned, all the key participants in the settlement system have initiated measures to reduce operational risk and improve contingency arrangements. Safety in the Norwegian retail payment system appears to be high. Therefore, I believe that the Norwegian retail payment system largely satisfies the principle of safety and operational reliability. As I have already said, Norway has a very efficient retail payment system. Therefore, the system complies with the core principle concerning efficient and practical payment solutions. Banks have clear rules about the criteria which new participants must satisfy in order to gain access to the common systems. The terms and conditions are publicly disclosed and the Norwegian Competition Authority has had no comments to them. The core principle concerning objective and publicly disclosed criteria for participation is therefore regarded as satisfied. The systems’ organisation largely satisfies the core principle concerning effective, BIS Review 66/2002 9 accountable and transparent governance. The additional recommendation, i.e. compliance with the core principle concerning final settlement on the day of value, is also satisfied in Norway. Internationally, central banks have also shown increasing interest in efficiency in retail payment systems. Norges Bank’s work with retail payment systems In the spring of 2002, we published a policy document that provides an account of our responsibilities in the payment system area. In this document, we discuss our earlier work in this area and premises and plans for future work. Norges Bank monitors developments in the market and documents this in its Annual Report on Payment Systems. | 0 |
The unwillingness to take new loans could persist to a great degree even if the Riksbank tried to counteract the fall in demand by conducting an expansionary monetary policy. In this case we would experience what is sometimes referred to as a balance sheet recession 8 . It could also mean that the banks 8 The term balance sheet recession was introduced to explain the problems that Japan struggled with during the 1990s, see Koo, R.C., Balance Sheet Recessions: Japans Struggle with Uncharted Economics and its Global BIS central bankers’ speeches 7 would find it very difficult to fund their operations. Once such a process has begun it is difficult to stop it by easing monetary policy; this is shown not least by the example of the United States. Once you are in it then it is too late! It should therefore be avoided. It is perhaps unlikely that the scenario I have presented here will actually occur, but if it does the consequences will be extremely costly. As I mentioned earlier, my assessment is that our forecasts for inflation and resource utilization, that is highly “conventional” monetary policy arguments, are already arguments for an increased repo rate. It is also reasonable to assume that gradual repo rate increases will help to dampen household borrowing and this will reduce the risk of having to make painful corrections of financial imbalances further ahead. | The performance of Swedish two-year forward rates since the early summer illustrates this, see Figure 1. We can see that two-year forward rates, adjusted for a risk premium 3 , at the beginning of the summer were at approximately the same level as the money market agents’ two-year reporate expectations according to Prospera. Subsequently, however, there was a clear downward trend and from early June to mid-September the two-year forward rate fell by approximately 80 basis points. In my opinion, a substantial downward shift in monetary policy 3 The forward rates in Figure 1 are adjusted using a constant risk premium of approximately 25 basis points, which is a rough estimate of the average size of the risk premium for this time to maturity. BIS central bankers’ speeches 3 expectations in this period was hardly realistic given the fact that the Swedish economy was, at the same time, surprisingly strong. Later, during the autumn, two-year forward rates increased and were roughly half a percentage point below the expectations in the surveys. An interpretation that I find more likely is that the development of forward rates in Figure 1 mainly reflects an international fall in risk premiums and, as so often in the past, it seems to be the development of interest rates in the United States that sets the tone. On this occasion it was probably the Federal Reserve’s plans to purchase additional long-term assets that had a downward effect on risk premiums. | 1 |
In order to implement these changes, improve monitoring and analysis of unsecured money markets, and support supervisory objectives, the Fed recently proposed a number of enhancements to the FR 2420 data collection, which are intended to capture a larger share of fed fund and Eurodollar transactions. 27 These enhancements would add about 30 new 24 The FR 2420 reporting form is available at http://www.newyorkfed.org/banking/reportingforms/FR_2420.html. An April 8, 2015, Liberty Street Economics blog post provides additional analysis, available at http://libertystreeteconomics.newyorkfed.org/2015/04/the-fr-2420-data-collection-a-new-base-for-the-fedfunds-rate.html. 25 For information on principles guiding this international work, please refer to the Principles for Financial Benchmarks, Final Report (The Board of the International Organization of Securities Commissions, July 2013), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf. 26 The February 2, 2015, statement regarding planned changes to the calculation and the publication of an overnight bank funding rate is available at http://www.newyorkfed.org/markets/opolicy/ operating_policy_150202.html. 27 The proposal is available at https://www.federalregister.gov/articles/2015/04/07/2015–07920/proposedagency-information-collection-activities-comment-request. 10 BIS central bankers’ speeches domestic institutions that are fed funds borrowers and lead to the collection of much more robust Eurodollar activity, including Eurodollar transactions from Caribbean branches that are managed and controlled by the U.S. offices of foreign banks. These proposed revisions are available for public comment until June 8, 2015, and implementation of the changes to the published rates will occur after revisions to the FR 2420 are complete, which is expected within a year. | The Committee said that it does not currently anticipate selling agency mortgage-backed securities (MBS) as part of the normalization process, but noted that limited sales might be warranted in the longer run to reduce or eliminate residual holdings. 2 BIS central bankers’ speeches First: IOER. The Federal Reserve began paying interest on reserve balances in October 2008; interest rates on required and excess reserve balances have both been ¼ percent since mid-December 2008. 4 The Federal Reserve intends to use adjustments to the IOER rate – a rate it directly administers – as the main tool for moving the fed funds rate and other short-term interest rates into its target range. The IOER rate is essentially the rate of return earned by a bank on a riskless overnight deposit held at the Fed, thus representing the opportunity cost to a bank of using its funds in an alternative manner, such as making a loan or purchasing a security. In principle, no bank would want to deploy its funds in a way that earned less than what can be earned from its balances maintained at the Fed. Even though banks are the only institutions eligible to earn IOER, arbitrage should lift market rates up to the level of the IOER rate. | 1 |
According to this forecast, and assuming that the SNB policy rate remains constant at −0.25%, the rate of inflation will temporarily decline before rising back to 2% over time. Had we not raised our policy rate in June, inflation would very probably have been well above this level over the medium term, and thus persistently outside the range of price stability. Our monetary policy decision in June must also be seen as a weighing-up of various risks. Tightening too soon or too strongly could have stalled economic development, and possibly even led to renewed deflationary risks. In Switzerland’s case, however, these factors were clearly outweighed by the risks of tightening too late. Waiting could have necessitated a more abrupt and stronger rate increase at a later date, with the risk of a more severe economic downturn and threats to financial stability. The SNB’s experience in the late 1980s and early 1990s, the most recent phase of higher inflation in Switzerland, shows that it can become necessary to pursue a markedly restrictive monetary policy with serious consequences for the real economy once inflation exceeds a certain level. Our substantial change in course at a comparatively early stage regarding the development of inflation, and the fact that we envisaged possible further tightening in the near future, were thus aimed at ensuring price stability over the medium term without placing an excessively heavy burden on the economy. This weighing up of various risks takes place in an environment marked by exceptional uncertainty. | On the one hand, micro price Page 5/16 data point to Swiss companies having adapted their pricing policy in recent months in line with the higher rate of inflation (cf. Chart 7). For example, there has been an increase in the proportion of goods and services in the Swiss consumer price index with rising prices, whereas the proportion with declining prices has remained virtually constant. On the other hand, our delegates for regional economic relations serve us well. Their one-on-one discussions with companies allow us to better understand price-setting behaviour. These talks show that companies’ long-standing reluctance to raise prices has largely disappeared. The change in their behaviour has resulted in prices becoming more flexible overall. This is facilitating the spread of price rises to other categories of goods and services. These findings make it clear that the increase in inflation should not be seen solely as a consequence of the temporary supply shocks triggered by the pandemic and the war. This strengthened our resolve in deciding to react relatively quickly to the rise in inflation. The longer-term outlook for monetary policy is also subject to high uncertainty. Structural factors such as the transition to a greener economy, rising sovereign debt worldwide, the demographic transition and ultimately also the fact that globalisation appears to have peaked – at least temporarily – could lead to persistently higher inflationary pressure in the coming years. | 1 |
This theory, which Rey formulated with emerging markets in mind, could very well also be correct and relevant for more developed economies, like Sweden. My interpretation of such arguments is that monetary policy in Sweden then cannot deviate too far from monetary policy in the United States and the euro area without giving rise to an unjustified appreciation of the krona.23 Misinterpreted: Inflation is also low in countries with more expansionary monetary policy Inflation is also falling now in countries and currency areas where the central banks have conducted a more, sometimes much more, expansionary monetary policy than the Riksbank. I have sometimes heard these observations put forward as arguments proving that a more expansionary monetary policy would not have much impact. This is not a very convincing conclusion. To begin with, it is only a year or so ago that there was much international discussion as to why inflation was so surprisingly high.24 The background to this discussion was that the weak economic developments in many parts of the world did not appear to have any great effect on inflation. Despite the low demand in the economy and high unemployment, inflation remained at levels that did not appear compatible with historical patterns. 25 To some extent, one can probably say that monetary policy abroad was more successful in stabilising inflation than economic activity, at least for a period of time. Without the powerful monetary policy stimulus, inflation would probably have been much lower. | Martin Flodén: The low inflation – should we be worried and can we do anything about it? Speech by Mr Martin Flodén, Deputy Governor of the Sveriges Riksbank, at SACO (the Swedish Confederation of Professional Associations), Stockholm, 14 May 2014. * * * Thank you to Björn Andersson, Charlotta Edler, Gabriela Guibourg, Kerstin Hallsten, Marianne Sterner, Christina Nyman, Stefan Palmqvist, Ulf Söderström and other employees at the Riksbank for valuable discussions and views on earlier versions of the text, and to André Reslow for help with data production. The views expressed in this speech are my own and are not necessarily shared by the other members of the Executive Board of the Riksbank. Those of you who follow the debate on monetary policy will probably not be surprised that the theme of my speech today is the low rate of inflation. This is the most important question for monetary policy right now. Over the past year, I have emphasised the importance of ensuring that inflation does not get stuck far below the target of two per cent and said that monetary policy therefore needs to focus on avoiding such a situation. Consequently, I entered a reservation against holding the Riksbank’s policy rate unchanged at the most recent monetary policy meeting in early April. Instead, I was in favour of a repo rate cut of 0.25 percentage points. Today I intend to focus on two issues. First, I wish to explain why I am worried by the low inflation rate. | 1 |
We refer to this as the lack of a macroprudential perspective. 3 In general, we have not taken enough account of systemic risks; that is risk that can spread throughout the financial system. In a capital adequacy context, the lack of a macroprudential perspective is reflected in the fact that the banks have calculated their capital adequacy requirements on the basis of the risks to their own operations. They have thus ignored the negative external effects that banks may have on the system as a whole. This has led to a banking system with too high a level of risk and too small buffers in terms of capital and liquidity. It has also led to the risk of distorted market prices for risk, capital and liquidity. Another example is that the models that the banks have used to calculate their capital requirements for market risks systematically underestimate the risk of losses under stressed market conditions. As a result, the calculated capital adequacy requirements have been too low to enable the institutions concerned to manage the losses that occur in serious economic downturns, like the one we have just experienced. A third and closely-related example is that the banks have not held sufficient capital for the counterparty risks that they are exposed to in their derivatives trading. As financial assets, including derivatives, are accounted in accordance with the real value principle, changes in counterparty risks enter the banks’ balance sheets via their income statements. | Low inflation expectations However, as has been said, it is also important not to increase interest rates too early and thus dampen growth unnecessarily. A difficult question that the Riksbank must take a position on in its assessment of inflationary pressure is whether the relationship between growth and inflation has changed and, in this case, which factors have contributed to this. A concept that has been frequently discussed during the past year is the “new economy”. Discussion has above all centred on the American economy, which now seems to be at the end of a long period of high growth. It seems as if the USA has skipped an entire business cycle. This was in fact also the case in the 1980s. There was an upswing in 1982 and no downturn occurred before 1990-91. However, it is now speculated whether the new technology, IT investments and computerisation have changed transaction costs, management functions and production processes so that the growth in productivity has been durably increased and that growth has therefore been able to increase more quickly without leading to increased inflationary pressure. The hypothesis about the new economy has also been put forward with regard to the Swedish economy. However, it will be first in ten years’ time when researchers have long and many series of data to analyse that we make any more certain pronouncement about the actual situation. | 0 |
Good analytical tools, however, can be helpful even in this respect, by enabling the simulation of different alternative scenarios in a consistent manner. After this general introduction, let me now briefly speak about the progress we have so far achieved in forecasting at the Czech National Bank. We now have more than five years of experience with inflation targeting. The new regime was introduced in a challenging situation, after a period of currency turmoil in May 1997, which ended the fixed exchange rate period and resulted in higher inflation and rising inflation expectations. The economy needed a new nominal anchor in order to return to a disinflation path. Inflation targeting was chosen as “the best of all bad” alternatives at the time. Such a sudden switch from a fixed exchange rate system to inflation targeting required a radical and fast change in the central bank’s mentality. This was perhaps the biggest challenge that the CNB had to face. Over the past five years it has involved much work on improving our forecasting tools, leading to substantial development in our internal analytical processes. These changes culminated a year ago, when the CNB settled on a new forecasting process. This integrates expert judgement and short-term analyses - which were the key pillars of the CNB’s forecasting tool-kit in the first years of inflation targeting - with a small-scale macroeconomic model developed by the CNB’s staff with the assistance of the International Monetary Fund. | 9 All speeches are available online at www.bankofengland.co.uk/news/speeches 9 Chart 12 Impact of debt vulnerabilities on depth of economic earthquakes Cumulative impact on 5th percentile of GDP growth over next three years (pp) 0.5 0.0 -0.5 -1.0 -1.5 Impact of 10pp increase in credit to GDP ratio over past 3 years Impact of 1pp widening in the current account deficit (as % of GDP) -2.0 Household credit Corporate (PNFC) credit External imbalance Notes: Figure based on Aikman et al. (forthcoming). It shows the impact of an increase in each vulnerability indicator at time t on the 5th percentile of real GDP growth over the next three years. The cumulative three-year impact on the left-hand tail of GDP growth is shown. For household and corporate credit in turn, the impact of a 10pp increase in the credit to GDP ratio over the subsequent three years is shown. For the current account, the impact of a 1pp (relative to GDP) widening in the deficit is shown. For reference, for the UK 19802018, a one standard deviation increase in three-year credit growth was 5.9pp (household) and 8.1pp (corporate) and for the current account was 1.7pp. Using these estimates we can add up the different developments in debt to see what they might mean for the overall degree of underlying economic vulnerability. Chart 13 shows their sum total over time. Two points stand out from this chart. First, the sum of recent developments isn’t elevated. | 0 |
And we’ve been on our own ever since. Iceland has a number of unique characteristics that complicate economic policy. The economy is extremely small. Its export sectors are homogeneous and prone to cyclical fluctuations. Most of its financial markets are relatively shallow and illiquid, which complicates price formation. Not only is our currency small, it is also bordered on both sides by two of the largest currency areas in the world – which cannot but make independent monetary policy conduct more difficult. And there are other factors as well. Icelanders demonstrate a decided herd mentality in their consumption decisions, which causes wide fluctuations in private consumption. With its small population, Iceland has a limited number of workers to do all that is needed – operate the healthcare, education, and administrative systems – and conduct monetary policy as well. Anyone discussing Iceland’s monetary policy concerns is bound to acknowledge these problems. On the other hand, it is clear that the greatest problems facing domestic monetary policy do not stem from the structural flaws inherent in Iceland’s history and geographical characteristics – flaws that are unlikely to change. The biggest problems are institutional, political, and – perhaps most of all – societal: They centre on fiscal policy decisions, collective bargaining agreements, and overall societal consensus. These we can change. | We are implementing Professional Conversion Programmes (PCPs) to pre-emptively reskill employees whose roles are impacted by change. We launched the IBF Careers Connect two months ago to help our workforce navigate career changes, acquire relevant skills, and be job-ready. We are working with SkillsFuture Singapore (SSG) and Workforce Singapore (WSG) on a Skills Framework for Financial Services that will provide individuals with information on employment, career pathways, occupations, job roles, emerging skills and competencies, as well as relevant education and training programmes. As leaders of our institutions and businesses, we have a special role to play. If each of us can commit to plan for our own workforce, to develop them and give them the best opportunity to stay relevant, the transformation of our workforce will be that much 2/3 BIS central bankers' speeches smoother. Let us mobilise and inspire our staff to inculcate a growth mindset to stay competitive and step up to take action. To help do that, IBF is pleased to launch of the #FutureMeNow movement. This is a call to action, for industry professionals and leaders to take ownership and contribute to enabling our workforce for the future. Individuals can pledge to learn something, talk to someone about their career plans or be a mentor. IBF will work with the pledgees to realise their pledges. There are about 500 of us gathered here today. I invite you as industry leaders here tonight to be the first to be active multipliers. | 0 |
If one waits so long in raising the policy rate in an economic upturn, it is likely that inflation will then overshoot the target for a period of time. The way I see it, the Executive Board of the Riksbank has taken a step in the direction of this kind of conditioning by opening up for inflation overshooting the 2 per cent target before it is time to make monetary policy less expansionary. For this type of strategy to function well, it must have the support of a majority, and it will be particularly powerful if communicated by a unanimous Executive Board. Interesting change of strategy by the Federal Reserve Safeguarding the symmetry of the inflation target, and thereby the inflation target per se, appears to have been an important motive for the changes made by the US central bank, the Federal Reserve, just over a month ago with regard to its strategy and objectives.15 The changes were the first to be made since 2012, when the inflation target was introduced, and the review that preceded the changes was motivated by conditions since then having changed in three important respects: 13 For a detailed review of the Riksbank’s experiences of publishing repo-rate forecasts, see Sveriges Riksbank (2017). 14 In academic literature this type of strategy is usually called conditional “forward guidance”. 15 For a description of these changes, see Federal Reserve (2020) and Powell (2020), Clarida (2020), Brainard (2020). | When we make forecasts for the labour market, we also have to take into account the fact that the labour supply will increase when economic activity strengthens. This is a normal pattern. The Government’s policy will probably also mean that the number of persons in the labour force increases slightly more than has been usual in previous economic upturns. The fact that the labour supply increases will mean that unemployment will fall at a slower rate than employment rises. With regard to inflation, we expect it will fall over the coming six months. It is the large fluctuations in energy prices that make an impact on inflation in the short term. We cannot – and should not – do much about this type of short-term fluctuation in inflation. In the longer term we are expecting inflation to rise and be close to 2 per cent two years ahead. One might wonder, if inflation is now expected to fall in the short term, what reason do we have to believe that it will rise to 2 per cent in the longer term? One important reason for this forecast is that productivity growth should be more modest in future. Over the past two years we have been able to note that productivity growth has slowed down compared with the years before that. This indicates that productivity growth is about to slacken to a more normal level, seen from a long-term perspective. | 0 |
It is in no way justifiable to allow bank customers or taxpayers to pay for either exorbitant profits or inefficient operations, which is happening in many countries in the euro area. There is no doubt that we in Sweden can also do more to promote competition in the financial market, not least when it comes to banking activities aimed at private customers and small firms. The largest market players continue to enjoy a high level of market concentration. However, the establishment of a number of new niche banks in the past few years and the recently raging price war on credit for tenant-owned apartments show that deregulation gradually leads to increased competition and consequently to lower prices for consumers. Continued reforms necessary To sum up, we have reason to be proud of the reforms introduced in Sweden over the last decade. They have resulted in Sweden today having a higher growth potential than several of the large economies on mainland Europe. At the same time, we cannot settle for what we have done so far. Sweden must continue to remain a step ahead on the reform agenda that the EU Member States BIS Review 45/2003 5 decided upon in Lisbon in 2000 and which aims to make the euro area “the most competitive and dynamic knowledge-based economy in the world by 2010”. Reforms are under way in a number of countries in the euro area and will in the long run make the euro area countries more attractive to international investors. | Philipp Hildebrand: Global economic prospects and key challenges for monetary policy Summary of a speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the Money Market Event, Zurich, 23 March 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch) * * * Summary Current economic developments are basically in line with the SNB’s expectations. Global economic activity is robust and the outlook is bright. The SNB expects broad-based growth of over 2% for 2006 and a moderate rate of inflation of approximately 1%. In addition to the usual economic risks, monetary policy today is faced with three key challenges. First, the effects of globalisation on inflation must be anticipated. Second, the way in which the interaction between globalisation and an ample supply of liquidity affects the price development of several assets needs to be analysed. The SNB's monetary policy concept enables it to take a long-term view and to recognise possible distortions early on. Third, identifying the neutral interest rate has become more difficult in today's environment. Many factors tend to support a lower neutral interest rate, while others would support a higher neutral rate. Against this background, the SNB will continue the gradual normalisation of its monetary policy. The scale and timing of this normalisation process will depend on further economic developments. Owing to a favourable inflation trend and well-anchored inflation expectations, we are in a position to cautiously approach a neutral interest rate level. | 0 |
Chart 15 takes the UK flows of funds map shown earlier and colour codes this according to one measure of its data availability. There remain a number of key areas for improvement, particularly within the nonbanks part of the intermediation chain, as well as among companies, households and externally. In response to this, the Bank and the UK’s Office for National Statistics (ONS) have recently initiated a project to improve the UK’s flows of funds data. Although at an early stage, this aims to provide more granular picture of sectoral (“who-to-whom”) flows. Once complete, this should enable interactions between and within the financial and real sectors of the UK economy to be better tracked and modelled. This pattern of data gaps is mirrored globally. Global flow of funds data beyond banking is patchy. Data on flows, and in particular stocks, of cross-border portfolio and foreign direct investment are often low in quality and lack timeliness. For example, official data suggest the UK has a net external liability position of around 20–30% of GDP. But if foreign direct investment stocks are valued at market (rather than book) prices, this switches to a net asset position of around the same amount (Bank of England (2014)). Derivatives positions and net foreign currency positions are also imperfectly captured in global flows of funds data, particularly for companies. For example, over recent years many emerging market companies have borrowed cheaply in dollar-denominated instruments. | This provides a powerful secular incentive for non-decomposable socio-economic systems. Moreover, if these hyper-connected networks do face systemic threat, they are often able to adapt in ways which avoids extinction. For example, the risk of social, economic or financial disorder will typically lead to an adaptation of policies to prevent systemic collapse. These adaptive policy responses may preserve otherwise-fragile socio-economic topologies. They may even further encourage the growth of connectivity and complexity of these networks. For example, policies to support “super-spreader” banks in a crisis may encourage them to become larger, and more complex, still over time (Haldane (2009)). The combination of network economies, and policy responses to failure, means socio-economic systems may be less Darwinian, and hence decomposable, than natural and biological systems. It is against this backdrop that a complex, socio-economic “system of systems” may emerge. This can defined as one comprising an interlocking set of individually complex webs ((Gorod et al (2014)). The system of system concept initially emerged for engineering and enterprise systems, which involved the multi-layered assembly of component parts. But it has since found its way into a number of other domains including military planning, ecological evolution, power grids, transport networks and neurological structures (Gao et al (2014)). Although still in its infancy, there are some general properties of a “system of systems” perspective that are worth bringing out. For example, Kurant and Thiran (2006) look at the behaviour of a particular topology – a layered complex network. | 1 |
Incomes have also developed positively – at least for those who still have jobs. Another important explanation of why house prices have not fallen more is that the real interest rates faced by the households are at historically low levels. The construction of new housing has also been at a low level since the crisis of the 1990s. This is despite the fact that in most of the large urban areas it pays to build new house in comparison to what it costs to buy an existing house. 9 At the moment, when the crisis appears to have bottomed out and optimism has begun to grow, housing prices are beginning to increase again, especially in the major cities. The Riksbank will closely monitor developments in the period ahead with regard to both the housing market and the market for commercial properties. The Swedish banks can cope with large losses in the Baltic states In the deep recession that we are now experiencing, it is not possible to dismiss the fact that the Swedish banks are facing significant loan losses. During the first six months of this year, these losses amounted to SEK 30 billion, which translated into annual figures is equivalent to 0.84 per cent of total lending. A large part of these losses, 44 per cent, stem from the Swedish banks' operations in the Baltic states. | There were large savings deficits in both the private and public sectors and a high level of indebtedness in the private sector. The loans also gave rise to a growing currency crisis. In addition, increasing cost pressures gradually undermined the competitiveness of the three countries. When the global financial crisis broke out, economic growth in the Baltic states had already begun to decline. Declining growth and the large current account deficits led investors to begin reappraising the value of eastern European and central European assets. Capital inflows dried up, which made it more difficult to fund many projects and further reinforced the downturn in economic activity. The credit rating agencies downgraded the Baltic states, one after the other, which further aggrevated the shortage of capital. The lack of capital thus helped to reinforce the downturn in the same way that the surplus of capital once reinforced the dramatic upturn. There are some signs that the real economy in this part of the Baltic region has now begun to stabilise, but unfortunately the recovery may be a long, slow process. This is partly because external demand is still weak as a result of the global recession. Above all, however, it is because domestic demand is low due to the fact that the Baltic states are now carrying out so-called internal devaluations. This means that wages and other costs have been substantially reduced to restore competiveness and to counteract the serious weakening of public finances. | 1 |
Frequently, the disadvantaged and those who are not able to access the formal financial system have resorted to the informal financial systems. Recourse to these financial sources have also been due to the lack of awareness. These may be in the form of deposit schemes that entail high risk, access to financing from sources that are highly costly, and almost inevitably against high collateral. Very often, the practices are unfair and deceptive. Examples in predatory lending are found to be unscrupulous and highly disadvantageous to the borrower. Fourthly, in some Asian societies, traditions continue to create cultural pressures that restrict a woman’s choices and liberties. Though there is increased freedom for women to pursue education and careers, in some societies, cultural pressures still make it more difficult for a woman to get the exposure on financial matters. In addition, the increased incidence of divorces and single parenthood mean that more women are left to fend for themselves and their children. In certain Asian societies, single women may face unusual difficulties in arranging their finances. In some cases, a woman may even have difficulty claiming her legal rights in a contract, even though the law does not dispute such a right. Deeply entrenched human behaviour is not able to change as rapidly as the financial system is evolving. Fifthly, statistics on life expectancy confirm that women tend to live longer. | Let me stress two elements in this direction: • We are data driven, we are not forecasts driven. And recent data show that even if we are obviously still far from the inflation target, our monetary policy is at work, and is working : inflation has peaked in the euro area, core inflation has declined for the second consecutive month, and there are several other signs that underlying price pressures are softening. According to yesterday’s inflation forecast, which is a rather cautious one, inflation should be at 3 % in the euro area by the end of this year, and at 2% by 2025: we are confident that we will deliver on our inflation target in the next two years. • We have already shown our determination on interest rates through this overall 400 basis point increase. We obviously covered most of the Page 2 sur 6 ground, and we are clearly in restrictive territory on all maturities: the key issue now is the transmission of our past monetary decisions, which is proceeding forcefully to financial conditions but could take up to two years for its full economic effects. Hence, the duration matters more than the level; persistence matters more than the peak. II. Forces pushing for greater diversification in the IMS Despite the end of the Bretton Woods system in the 1970s, the US dollar still plays a dominant role in the international monetary system (IMS). | 0 |
Ardian Fullani: Overview of Albania’s latest economic and financial developments Speech by Mr Ardian Fullani, Governor of the Bank of Albania, on the Monetary Policy Decision-Making of the Bank of Albania’s Supervisory Council, Tirana, 29 January 2014. * * * Today, on 29 January 2014, the Supervisory Council of the Bank of Albania reviewed and approved the Monetary Policy Statement of the Bank of Albania on the second half of 2013. Given Albania's latest monetary and economic developments and discussions on their outlook, the Supervisory Council of the Bank of Albania decided to keep the key interest rate unchanged, at 3.0%. The Supervisory Council deems that the inflationary pressures from the real and financial sectors of the economy are weak and will remain so. These circumstances require maintaining a stimulating monetary policy over the period ahead. The monetary stimulus, transmitted through the low key interest rate and ongoing liquidity injection, provides the proper conditions for meeting our inflation target in the medium term. Let me now proceed with an overview of the economic developments and key issues discussed at today’s meeting. *** Year 2013 was a difficult one for the Albanian economy. Aggregate demand and economic growth remained at low levels; inflation fluctuated around Bank of Albania's lower targeted band, while the budget deficit and public debt increased sharply. The unfavourable economic environment, both at home and abroad, led to this performance. Moreover, Albania’s June parliamentary elections added uncertainties to the economy and financial markets. | However, the lek loan price has not fully reflected our monetary policy, indicating the presence of high risk premia and containing the monetary stimulus transmission to the economy. These risk premia are also reflected in other lending terms, unrelated to the loan price, and appear tighter as compared to their historical performance. *** Under the Bank of Albania's baseline scenario, the economy will improve slightly during the current year. Increase in exports and a better performance of consumption and investments will continue to support the aggregate demand. The monetary policy will support the domestic demand, by maintaining macroeconomic stability and ongoing injection of monetary stimulus in the economy. Also, payment of arrears will help improve the balance sheets of firms and the private sector, and is expected to improve business borrowing. Excluding the payment of arrears, the 2014 budget has projected a fiscal adjustment needed against the backdrop of a rapidly increased public debt. Reflecting the weak economic and monetary dynamics in the country, inflationary pressures are expected to be weak. After four quarters, inflation is expected to vary 0.7%–3.8%, with a 90% probability of occurrence. This will require maintaining a stimulating monetary policy even in the medium term. *** At the end of discussions, the Supervisory Council decided to keep the key interest rate unchanged, at 3.0%. Given the expected inflation developments, the Supervisory Council deems that the monetary policy will remain stimulating in the medium term. | 1 |
If it is decided that the resources available for resolution lie principally within the existing waterfall, that would further suggest that resolution authorities must have the ability to intervene and to take action before the end of the waterfall. But where does that boundary lie? The UK resolution regime sets the statutory definition for entry to resolution as being the point where the CCP is failing or likely to fail and there is no reasonable prospect of action being taken to restore it to viability. Integral to this test is the principle that this is a forward-looking judgement, capable of being exercised flexibly at different points in a CCP’s distress and dependent on a multitude of factors that drive an eventual decision at the time. That can make it difficult to pin down a single universal trigger point but it is possible to identify some circumstances that could be indicative of this boundary being reached. Those possible scenarios could include an assessment that the default management procedures of the CCP have failed, or are likely to fail, to both absorb losses fully and replenish the CCP’s resources in a sufficiently timely manner to allow the CCP to continue to operate. That failure might arise through legal challenge hindering the default management process or from an assessment that if the losses were allowed to continue they would exceed caps on contributions and could not be credibly absorbed via other means. | Mr. Carse reports on the initiatives taken concerning financial industries in Fujian, Hong Kong and Taiwan Speech by the Deputy Chief Executive of the Hong Kong Monetary Authority, Mr. David Carse, at the Symposium on the Financial Exchange and Cooperation of Fujian, Hong Kong and Taiwan, held on 8/8/98. I am pleased to be here this morning to welcome you to this Symposium. The Chinese Banks’ Association is to be congratulated for organizing this important initiative with the co-sponsorship of the Fujian Provincial Government and Chinatrust Commercial Bank. The idea of the Symposium, as I understand it, is to facilitate the exchange of ideas concerning the financial industries in the three regions and the exploration of cooperative opportunities between them. 2. Such an initiative could not have come at a better time. The current financial crisis is creating havoc among the Asia economies. Initially, the damage was felt in the financial sector. But the full impact is now being seen in the real economy as output and trade are crippled by higher interest rates, the burden of foreign currency borrowing and the credit crunch. The Mainland of China, Hong Kong and Taiwan have survived the crisis in better shape than most other economies in the region. But they have not been unaffected as events of this week have demonstrated in Hong Kong where we have witnessed further speculative pressure on the Hong Kong dollar. 3. | 0 |
(Figure 2) BIS central bankers’ speeches 3 Figure 2 The banks’ funding December 2010 Per cent Source: The four major banks’ reports and the Riksbank. At the same time, the Swedish banks’ exposures towards the Baltic countries became increasingly onerous. The global financial crisis became the factor to trigger an economic crisis in the Baltic countries. Investors saw the Baltic as a high-risk region where the devaluation of the currencies was also expected. Knowledge of these risks made international investors increasingly unwilling to lend money to Swedish banks. Even the Swedish banks that did not have any lending activities in the Baltic were affected by this, to a certain extent. The Riksbank’s measures dampened the negative effects When the crisis had finally struck with full power, we acted rapidly and forcefully. Over three months, the Riksbank lent an amount corresponding to about SEK 500 billion to the banks. This meant that the Riksbank’s balance sheet increased from about SEK 200 billion to about SEK 700 billion. We acted in our role as lender of last resort.3 All lending took place against collateral. So as to avoid restricting the banks’ opportunities to borrow, we eased the regulations for collateral slightly. Among other changes, we accepted more types of security than previously. However, these new types of collateral were also of very high quality. To make it possible for several institutions to use certain of the Riksbank’s lending facilities, we also decided to increase the number of counterparties. | I am looking forward to learning from what I hope will be both an open-minded and a constructive dialogue about the future of monetary and macroprudential policies. Thank you. BIS central bankers’ speeches 1 | 0 |
Over time this should also be fostered by an improvement in employment and employment expectations. This is our assessment and it is supported by the available forecasts and projections. Obviously, any such forward-looking evaluation is conditional and subject to risks. At this juncture, risks are primarily related to the persistent imbalances in some regions of the world and the weakness of private consumption in the euro area. Concerning private consumption, European citizens who still perceive that inflation is higher than measured by official indices should be assured that the official measures are accurate and that we will continue to maintain price stability in the future. Moreover, the prevailing uncertainties surrounding fiscal policies and structural reforms in some euro area countries may have had a negative impact on consumer sentiment. Ensuring clarity about the content and timing of these reforms and a better understanding of their benefits to all citizens would make a very important contribution to supporting household confidence. Turning to price developments, we expect some short-term volatility in HICP inflation rates to continue. According to Eurostat’s flash estimate, annual inflation in the HICP was 1.6% in March, unchanged from February and down from 1.9% in January. However, over the coming months, annual inflation rates could edge up again, on account of less favourable base effects and increases in indirect taxes. BIS Review 20/2004 1 Looking beyond these short-term fluctuations, we expect price developments to remain in line with price stability. | In this context, the Bank of Albania will continue to work on improving the control and management systems, to reduce operational risks and improve communication and transparency. In addition, the Bank of Albania emphasizes the need to continue structural reforms, which will allow faster, more sustainable and more inclusive growth for different social levels of the society. Thank you! 2 BIS central bankers’ speeches | 0 |
In carrying out this review, is it a condition for the ECB that countries commit themselves in advance to covering a capital shortfall if necessary? This asset quality review will provide clarity about the banks’ balance sheets. Of course we don’t want to take on any “bad eggs”; the reputational risk is ours alone. However, from our perspective, a lack of clarity about the balance sheets is one of the main obstacles preventing banks from extending more credit. Clarity would also improve the functioning of the interbank market. In that sense, the review is not a threat but an opportunity. If it is to be a success, we must know what will be done should a capital shortfall emerge. If there is no BIS central bankers’ speeches 3 answer to that, people will suspect that the review was too favourable. That doesn’t help anybody. So you are confident, all in all. But some observers find that the crisis is unresolvable, pointing to what they see as unbridgeable conflicts of interest. Yes, I have a fundamentally different view. Look at what has happened since 2012, much of that would have been hard to imagine in advance. To name a few examples: the fiscal compact, the German-style debt brake in 25 EU countries, the steps towards banking union with the single supervisory mechanism and the ESM. I am aware that the ESM is controversial in Germany, but as a crisis management tool that did not exist before, it nonetheless fills an institutional gap. | You have clearly argued in favour of indicating who voted for what and why. Now it seems that these will be more like summary accounts indicating the primary arguments. My opinion has not changed. I do indeed believe that demands are higher today in terms of transparency. The ECB was once right at the forefront in this regard, when it introduced its monthly press conferences. Now, though, we are lagging way behind when you see what other central banks are doing. That’s why I believe that publishing accounts that summarise the general course of the discussion would be helpful. I personally would also be in favour of indicating how people voted. That would require all members of the Governing Council to explain how their own arguments and their own voting behaviour were in line with the ECB’s European mandate. What about the argument that individual central bankers would then be put under pressure? I think the concerns that the pressure would become too great have been exaggerated. Someone who takes on a job like that must be capable of withstanding pressure. Nobody will be put in prison for voting for an interest rate rise in the euro area. People shouldn’t be that sensitive in this regard. I was in favour of OMTs because they were – and still are – the right response for Europe, despite the fact that many in Germany are opposed to them. The OMT programme has made a significant contribution to the easing of the euro crisis. | 1 |
Financial soundness improved, while capitalisation and liquidity stand at optimal parameters, at 16% and 4%, respectively. According to the latest data, as at November 2015, the performance of deposits was positive, increasing over EUR 130 million, thus confirming the public trust in the banking system. BIS central bankers’ speeches 1 After long-standing efforts, having increased for seven years, we provided for the reduction of non-performing loans below 20%. The lowering of the non-performing loans ratio, as financing costs in the financial market stand at minimum historical levels, allows for a reliable recovery of credit to economy in the period ahead. We believe that, as a result of the joint action plan with the Government, the non-performing loans ratio will continue to fall in the year ahead. Also, in 2015, a new investor, the American Bank of Investments, entered the banking market, being the first one after 2009. We consider the new investment as a very positive development for the promotion of competition within the system. The Bank of Albania will continue to promote banking system consolidation and adhere to rigorous requirements for a responsible and proactive management of each bank. In 2015, the most delicate developments coincided with the complex political and financial situation in Greece. The banking sector in general and individual banks in particular weathered with success all the difficulties. The Bank of Albania, in addition to the constant monitoring of developments in Albanian banks with Greek capital, intensified the communication with the respective authorities in Greece and in the euro area. | In concrete terms: • the management structure of the Bank of Albania was completed; • the Audit Committee, composed of three Supervisory Council members, started its activity; • the Inspector General resumed reporting to the Supervisory Council; • the Medium-term Development Strategy and Medium-term Budget for 2016–18 were approved; • the new organisational structure was approved; • the head offices renovation and construction works were completed; • and the Museum of the Bank of Albania was launched. These highlights contributed to strengthening good governance, accountability and subsequently enhancing public confidence in the Bank of Albania. The monetary policy intensified the simulating stance during 2015. The Bank of Albania lowered the key rate twice, continued to inject the necessary liquidity in the financial markets and clearly communicated the future monetary policy stance. Our monetary policy was successful in easing the financing conditions in the economy and helped in the return of the Albanian economy to a positive development track. In particular, interest rates on new lek loans and servicing costs of existing credits fell. Lek credit increased, offsetting the continuous fall of the credit portfolio in foreign currency. Also, the share of lek credit in the total credit portfolio has been increasing, from around 28% in 2008 to 43% in 2015. These actions have played a vital role in accelerating the economic growth during the last two years. During 2015, the banking system continued to expand its activity. | 1 |
Where we draw the line within that for being in scope of this initial first step of the strong and simple framework will impact the extent of simplification we can achieve while maintaining strong standards. There is also the risk that simplifying requirements for smaller firms could increase barriers to growth, if the step up to the next level of our framework is too big. That being said, we could in the long run move to a graduated approach that covers all nonsystemic firms. Under such a regime the complexity of the framework would grow 2/5 BIS central bankers' speeches commensurately with the size and complexity of a firm’s activities, minimising potentially steep barriers to growth. This is in fact the long-term vision we have outlined in our paper. But doing this will take time and, rather than delaying the roll-out of a simpler framework for everyone, we thought a better approach would be to do this step-by-step. One possible first step is to start with the smallest firms that would benefit the most from a radically simpler regime – but, as with all the trade-offs in our paper, this is something we would welcome views on. We also need to consider the position of foreign banks that operate in the UK. Internationally active firms will continue to be in scope of international standards; likewise, it may be appropriate for subsidiaries of international groups to stick with the international standards. But we have an open mind on this. | On the one extreme, the PRC and FPC might now decide that the current scope of the framework has served us well, and that it is enough for PRC to continue with its leverage ratio supervisory expectations that currently apply to all firms. On the other extreme, the PRC and FPC might decide that there is benefit in extending the leverage ratio framework to all PRA firms, whether from a micro-prudential or a system-wide perspective. Similarly, the Bank’s MREL review is considering the thresholds for being subject to a resolution strategy requiring use of the Bank’s stabilisation powers, and in connection to that the resulting MREL calibration for mid-tier firms. These links and their implications for the different reviews are being closely coordinated across the three authorities – the PRC, the FPC and the Resolution Authority. No decisions have been made on either, but I expect all three authorities to be saying more on these reviews over the summer – so watch this space. Mortgage risk-weights Finally, I want to close with something that I hope is of interest to both the larger and smaller firms in our audience. Last time I was here, I spoke about the significant decline in UK mortgage risk-weights for firms using internal models – from an average of around 15% in 2009 to around 10% today. This has led to increased prudential risks, and an increasing divergence between firms that use these models and firms that do not. | 1 |
On the other hand, a central bank like the Riksbank has considerable responsibility with regard to managing the consequences of a financial crisis and can therefore also be assumed to have a strong interest in preventing such crises from arising. At the same time, a central bank does not have so many instruments to try to influence developments such as credit growth and asset prices. The policy rate is a fairly blunt instrument in this context. This does not mean that financial indicators are not taken into account in interest rate decisions, which has been the case in Sweden on a number of occasions. But there is also reason to consider the possibility of using other tools than the policy rate. In this speech I shall begin by describing the causes behind the crisis. In this context I will explicitly discuss the question of to what extent monetary policy in the early 2000s might have contributed to developments. I shall argue against the opinion that monetary policy was a crucial factor behind the financial crisis. This does not mean, however, that I do not consider there are arguments in favour of central banks being more active when there is a risk of bubbles building up. I shall attempt to develop these arguments here today. A financial crisis with substantial consequences for the real economy The financial crisis that escalated in autumn 2008 in connection with the Lehman Brothers bankruptcy is the largest since the Great Depression at the end of the 1920s and early 1930s. | There should thus be a better system with regard to the link between the analysis from a macroeconomic perspective and the measures taken for the individual banks. One can therefore wonder whether there might not be better organisational solutions for maintaining financial stability in Sweden. It is difficult to say exactly how this would look. There may be several possible solutions. Finansinspektionen could be given greater resources to monitor systemic risks in a macroeconomic perspective. Another solution might be to extend the Riksbank’s power of authority to be able to initiate cases at Finansinspektionen. A third solution could be to link the work of Finansinspektionen and the Riksbank more closely together and increase cooperation between the two authorities. Regardless of which solution is chosen, I believe that it will lead to positive effects for the Riksbank’s possibilities to take measures if one sees a risk that a bubble is developing on the financial markets. But there is also a tool that the Riksbank already has at its disposal, and which can be used to counteract excesses in the housing market, for instance, namely the repo rate path. The fact that the Riksbank publishes a forecast for the development of the policy rate makes it easier to clearly communicate the longer-term outlook for interest rates. This can reduce the risk of banks and households being led to believe that a low policy rate as a result of a downturn in the economy will continue to apply for several years to come. 12 Giavazzi and Mishkin (2006). | 1 |
While the benefits of greater transparency in supervision are broadly recognized, the level of disclosure remains a challenging issue. This relates to the specifics of the supervision as it obtains sensitive information with respect to the state of individual banks that if publicly disclosed may affect its competitive position. Given this, what one could expect is for supervisors to continue to increase transparency when it comes to the authority itself disclosing more information on the supervisory model and the methodology used to evaluate the risk profile of individual banks, while retaining their “secrecy” when it comes to sensitive information concerning individual banks. This should enable markets to better understand the supervisory actions, enhance accountability of the supervisors in front of the general public while protecting market-sensitive information. Tackling the issue of board effectiveness, there is a growing consensus nowadays that welldesigned committee makes important prerequisite for qualitative decision-making in central banks. The role of the committee for sound policy making is probably best noted by Warsh (2015) in his observation that “monetary policy is made neither by rule nor by discretion. It is made by committee”. The literature shows that the institutional setup of the board indeed matters for monetary policy (Morgan, 2005; Maier, 2010; Sibert, 2006) suggesting guidelines for optimal committee design. Thus, according to Maier (2010) the optimal committee should have clear objective and independence; should not be too large in size (up to five members) and have measures to avoid free-riding and discourage polarization and group think. | They also report higher transparency of banking supervision (based on adherence to the IMF code) in industrial countries than in emerging economies. Another, more recent research (Liendrop at al., 2011) suggests that the overall level of transparency of supervisors in industrial countries is very similar to transparency of supervisors in emerging economies indicating to positive movements in emerging markets in the area in recent years. Indeed, supervisors seem to endorse transparency. In 2006 the Basel Committee on Banking Supervision, in the Basel Core Principles for effective banking supervision, first mentioned that supervisors should follow transparent processes. This means that supervisors should disclose their objectives and 2 BIS central bankers’ speeches framework and be held accountable for performing their duties in line with those objectives and framework. The Capital Requirements Directive IV (CRD IV) stipulates that supervisors need to publish relevant information on the laws, regulations, administrative rules and guidance, information on options and discretions, the general criteria and methodologies used in the supervisory review and evaluation process, and aggregate statistical data on the implementation of the prudential framework, including the number and nature of supervisory measures taken and administrative penalties imposed.The European Banking Authority (EBA) acknowledges the need for supervisory transparency and has set up guidelines for supervisory transparency (CEBS, 2010) intended to increase the transparency of supervisory practices and to enhance the comparability of national practices. Furthermore, EBA publishes relevant information of all EU countries on supervisory laws and regulations and statistical data on national banking sectors, risk indicators and supervisory actions. | 1 |
In the decade prior to the crisis, in both the euro area and the UK, inflation was low, stable and predictable. Inflation targets were achieved without causing undesirable volatility in output and employment, the so-called “divine coincidence”.1 Both regions experienced continuous expansions in activity. It is not entirely surprising that “end of history” declarations of the Great Moderation were increasingly commonplace. But such nominal stability masked growing financial imbalances and increasing strains in competitiveness. The financial crisis would expose how a healthy focus on price stability had become a dangerous distraction. Central banks had won the war against inflation only to lose the peace. When the music stopped, the consequences for the real economy were dire. In both the euro area and UK, output fell by around 6% and unemployment rates rose initially by 2½ percentage points. It took 7 years for GDP per capita to recover to pre-crisis levels. In response, the financial system and the institutional architecture have been fundamentally reformed. The capital requirements of large global banks are ten times higher than the pre-crisis standard. Liquid assets – 1 See Blanchard, O., and J. Galí (2007). "Real Wage Rigidities and the New Keynesian Model". Journal of Money, Credit, and Banking, 39(1), pp. 35-65. 2 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 2 relative to liabilities that can readily run – are also tenfold higher now than before crisis. We are ending too big to fail and transforming the resilience of financial market infrastructure. | In exceptional circumstances, like Brexit, when the economy is facing profound structural change, the MPC can extend the horizon over which it returns inflation to target from above in order to balance the effects on jobs and activity. After all, even though monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, it can influence how this hit to incomes is distributed between job losses and price rises. This flexibility cannot be used without limit of course, and the MPC has set out its framework for managing the trade-off including guidance for its tolerance of the overshoot of inflation.3 Developments in monetary policy In response to the challenging post-crisis environment, the conduct of monetary policy has made important advances that have helped to shape the expectations of both market participants and the public we serve. 2 The ECB also has flexibility to pursue its inflation target, but given the absence of trade-off inducing shocks has not yet had cause to use it. The ECB General Council adopted a quantitative definition of price stability in 1998 as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%; and from 2003, they clarified that this objective was to maintain inflation rates below, but close to, 2% over the medium term. 3 See Carney M (2017), Lambda, speech given at the London School of Economics, 16 January 2017. | 1 |
These near miss events are a window into vulnerabilities that could cause an adverse impact in the future. The risk and control self-assessment process establishes a methodology for business areas to periodically assess their operational risks and ensure that appropriate mitigation is in place for key business processes. Importantly, the Central Operational Risk area is responsible for synthesizing the outputs of these two processes, along with follow-up discussions with business areas, to identify significant Bank-wide residual operational risks. We have found it useful to view operational risk through the lens of processes, risks, and controls. We have defined a comprehensive set of processes to characterize the Bank’s primary services and transactions. Along with that, we have articulated a standardized set of risk drivers, risk events, risk event impacts, and, finally, controls that prevent, detect, or mitigate the consequences of a risk event. We are using this risk taxonomy on a forward- 3 https://www.newyorkfed.org/aboutthefed/audit.html. BIS central bankers’ speeches 3 looking basis to assess the risks of Bank processes and as an analysis tool to investigate risk events after the fact. Using standardized process, risk, and control types allows us to aggregate as well as slice and dice our risks around dimensions of interest. For example, we identify processes associated with the highest levels of residual risk and the largest number of risk events as areas for additional attention. It may be the case that additional mitigation is required or there are weaknesses in controls. | There is a risk the bank will fail and be unable to repay its debts to depositors. Similarly, when a bank lends money to buy a home or start a business, there is a risk that the borrower will default. 2/7 BIS central bankers' speeches In the United States, these risks are mitigated through a combination of public laws and internal controls, including deposit insurance and lending guidelines that, since the financial crisis, have become more stringent. Those are simple examples of risks taken by banks, and there are relatively straightforward ways to mitigate those risks. But the more complex banking activity becomes, the more difficult it is to identify and manage risks. And the more connections exist in a global financial system, the more risk can be distributed or amplified, and the greater the opportunity for new systemic risks to emerge.2 Banks can face risks from employees, some of whom are located in offices in financial centers around the world. Some risks are, again, inherent. We are all human, which means we sometimes make honest mistakes. There is also a risk from intentional employee misconduct. For example, a trader may seek personal gain by taking undue risks in investing someone else’s money. An analyst may disclose confidential information without permission. Or, more simply, in an institution that deals with money, some people may decide to take some for themselves. In some of these cases, the bank may be the victim of the crime. | 0 |
BIS Review 7/2007 1 Other strategies include the following: Improvements to public service • addresses issues relating to public service and improve the delivery mechanism. About 15% of govt. revenue has been provided for administrative, regulatory and other services and improvements to the public service delivery programme to make it more responsive to public needs. In delivering public services the budget advocates to use e-governance structures which are speedier than the present rule based structures. • promotes productivity and request public service to eliminate waste and duplication while encouraging to complete activities which have already begun by spending agencies before venturing into new areas. To further facilitate the completion of unfinished work, the budget enables the roll over of all unspent provisions of previous years to the ensuing year. • addresses the welfare issues of selected community groups and measures to extend the safety nets. Reopening of closed factories and revival of failed businesses In the 2007 budget, the fiscal arm has been extended to promote the re-opening of closed factories, abandoned companies and business entrepreneurs which can be revived through provision of debt relief, 3 year tax holidays and an exemption from economic services tax for a period. The budget proposes to grant Rs. 2 bn. to Lankaputhra Development Bank which will provide equity or debt to such factories on the basis of solid restructuring plans. These efforts will also increase employment throughout the country. | This proposal will enhance worker remittances into the country and help to finance the widening trade deficit and maintain a positive balance of payment position. The budget reiterates the need for permitting professionals to earn in foreign currency and retain such funds in foreign currency accounts within the country. The budget also allows expenditure incurred on acquiring international accreditation as a deductible expenditure from taxation. These measures are expected to enhance foreign currency earnings and further facilitate the management of foreign reserves. The down-side risks Effective policy coordination is certainly the way forward as set out in the budget 2007 and it is interdependent on action by all policy-making authorities. If one or two policy areas lag behind, then the sustainability of achievements over the long term will become an issue. The monetary policy has to play its part to bring down inflationary expectations, while the investment policy has to attract FDIs and BIS Review 7/2007 3 other investment flows. The reserve management policy should attempt to enhance foreign reserves through increased worker remittances and other flows. Pushing all these policy fronts to work within the open economic policy framework and keeping pace with each other is critical to the success of the medium term development plan. Very close coordination is essential for it and it is certainly a challenge. At the same time, the fiscal policy should make all attempts to stick to its revenue and expenditure targets. | 1 |
Developments since May The MPC’s next Monetary Policy Report is not published for another three weeks, and we have not yet begun to discuss what our updated August forecast might look like. What I am going to discuss today will be the MPC’s initial assessment, as set out in the minutes of our June meeting, of what we had learned about the economic outlook since our May MPR, as well as my own interpretation of the very latest data which have come out over the last three weeks since the June MPC meeting. Global growth appears to have been somewhat stronger than we expected in May, largely due to upside news in the euro area. Activity in the US so far looks to have been broadly in line with expectations; but CPI inflation in the US has now reached 5.4% - its highest level since 2008, and 0.5pp above market expectations at the time of release. Despite that, global yield curves, led by US Treasuries, have first risen and then fallen back in recent weeks; the ten year gilt yield is now 10bps lower than at the time of our May forecast, while ten year US Treasury yields are 20bps lower. Bank staff models suggest US factors have been the dominant driver of the movements in UK yields since May. | The economy has proved remarkably resilient to the effects of Covid, and the impact on the supply side has so far been smaller than we might have feared at the aggregate level. That partly reflects, however, the fact that most of the government support schemes for businesses, in particular the furlough scheme, remain in place. As those schemes come to an end it is likely that at least some businesses turn out no longer to be viable, and there is a risk of more substantial impacts. If the effect is unbalanced across sectors then there may also be more substantial labour market hysteresis than assumed in our central May forecast. In addition to any Covid effect, the long run effects of Brexit on the supply side of the economy, in particular on productivity, are largely yet to come through; One additional supply uncertainty that has emerged has been the question of whether temporarily inactive workers will resume their search for jobs – if inactivity remains at a persistently higher level that would reduce the supply of labour and could contribute to wage pressures. Again it is likely that we will not know the answer to this for some time. But it is the balance of demand and supply that will ultimately determine the medium term inflation impact – my third consideration. Inflation expectations One final risk that I will be monitoring closely is the risk that the expected transitory increase in inflation and wages generates expectations of a more sustained rise in inflation. | 1 |
The realisation of the true state of the banking system led to a collapse of confidence around the world and a deep global recession. Over 25 million jobs disappeared worldwide. And unemployment in Britain rose by over a million. To many of you this will seem deeply unfair, and it is. I can understand why so many people are angry. It’s vital that we learn from the crisis. A good place to start is to ask, as the Queen famously did, “Why did no-one see this coming?” The answer is extremely simple: no-one believed it could happen. Recessions were supposed to follow booms and high inflation, not periods of steady and sustainable growth with low inflation. There seemed to be no reason to expect the worst recession since the 1930s. After the ravages of inflation in the 1970s – younger listeners might need to be reminded that inflation hit 27% in 1975 – it was I think understandable that we focussed on the need to bring inflation down. But conquering inflation was not enough to ensure stability. Although inflation was under control, fragilities were building in the banking system. On all sides there was a failure of imagination to appreciate the scale of the fragilities and their potential consequences. No-one could quite bring themselves to believe that in our modern financial system the biggest banks in the world could fall over. But they did. That isn’t to say we were blind to what was going on. | In the movie, several millions of refugees fled their villages and towns to go to Xi’an（西安）, where they hoped they could find food and help, but most of them did not make it and perished during the long journey. In desperation, many parents sold their children for a tiny sum of money or just a bowl of rice in order to survive a few more days. The movie presented graphically a shocking story, a tragedy of the very harsh reality and unspeakable human sufferings endured by our parents’ generation not that long ago. 3. Well, this very depressing and horrible scene was only a movie. We now live in a comfortable world in which food is abundant and there is no shortage of daily necessities. Most of us take good lives for granted. The ugly and unpleasant scenes of parents selling their children as depicted in the movie “1942” were something of the past and do not seem to have any relevance in modern times. Is it so? 4. For those of us who are parents, we are absolutely convinced and determined that we will do our utmost to protect our children. We will give them nothing but the best that we can afford so that they have a good life and a bright future. All of us here would find it unthinkable why any parents would want to give away or mortgage their children. So, why should I choose this subject for tonight’s theme? | 0 |
I am not so pessimistic as to imagine that the best one can do, over the next twenty years, is the negative real return offered by indexed gilts. But one can’t make these predictions with any great confidence. And if that sounds rather non-committal, then it only underlines the point I’m trying to make. Whatever does cause a sustained rise in real interest rates – a lasting solution to the arrangements of the euro area, perhaps, or renewed optimism about global productivity growth – it is unlikely to be the arbitrary whim of central bankers. Those betting on long-term movements in interest rates will have to work a little harder than just listening to people like me. And that sounds like a good place to end. Chart 10 Despite low rates equities have performed poorly over the past 15 years Source: Bank of England References Baldwin, R., and Teulings, C., 2014, “Secular Stagnation: Facts, Causes and Cures”, VoxEU, http://www.voxeu.org/content/secular-stagnation-facts-causes-and-cures Bank of England, 2014, May 2014 Inflation Report, http://www.bankofengland.co.uk/ publications/Documents/inflationreport/2014/ir14feb.pdf Banks J., R. Crawford and G. Tetlow, 2010, “What does the distribution of wealth tell us about future retirement resources?”, A report of research carried out by the Institute for Fiscal Studies on behalf of the Department for Work and Pensions. Barro R., 2009, “Rare disasters, asset prices, and welfare costs”, American Economic Review 2009, 99:1, 243–264. | The economy remains tied to the extraordinary and unpredictable nature of the pandemic. But with continued progress on the economic recovery and a reversal of some of the pandemic’s unusual dynamics, I anticipate that we will soon reach a time when business will be more like usual. I look forward to the Q&A portion of today’s program, and very much look forward to seeing many 3/4 BIS central bankers' speeches of you when we are able to be together again. 1 See Hobijn, Bart, and Ayşegül Şahin (2021), “Maximum Employment and the Participation Cycle,” paper presented at the 2021 Jackson Hole Economic Policy Symposium, August 27. 2 Olivier Armantier, Fatima Boumahdi, Leo Goldman, Gizem Koşar, Jessica Lu, Giorgio Topa, and Wilbert van der Klaauw, “Have Consumers’ Long-Run Inflation Expectations Become Un-Anchored?,” Federal Reserve Bank of New York Liberty Street Economics, September 24, 2021. 3 Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement, December 16, 2020. 4/4 BIS central bankers' speeches | 0 |
These weeks have also seen declines in stock markets and reductions in the prices of some commodities (figure 9). The degree of uncertainty regarding the evolution of the global financial situation is significant. The authorities of the countries involved quickly adopted decisions to contain the impact of these episodes. Of particular note are the coordinated actions taken by central banks to safeguard the provision of liquidity in the markets. Private banks have also made efforts, 4 particularly in the United States. However, there is still anxiety among market agents and volatility remains high. The Chilean banking system is subject to robust regulation and supervision, which prevent situations such as those that triggered the current episode of uncertainty in international banks. The dominant banking business model in Chile is a traditional one. It is focused on granting credit on a more diversified basis of financing and adequate management of maturity mismatches. The regulatory framework has been updated and considers Basel III capital and liquidity standards for all banks. All of them are subject to continuous risk management, capital adequacy, liquidity and transparency supervision processes. In addition, both the Central Bank and the Commission for the Financial Market, CMF, permanently monitor the banks' capacity to withstand adverse events through stress tests. In any case, the shift in the external scenario will have an impact on the local economy. | It is worth noting that the annual variation core CPI has hovered around 11 percent for several months now, despite the fact that most inflation fundamentals have been easing. While the Chilean peso has appreciated around 11.5 percent with respect to the statistical close of the December Report, global cost pressures have decreased. The prices of commodities, including copper, have dropped, supply chains have normalized and transportation costs have fallen too. All in a context in which monetary policy has maintained a clearly contractionary stance (figure 2). In addition, compared to the projection of the last MP Report, the core part of the CPI accumulates an important upward surprise, around one percentage point. Most of the difference lies in the prices of non-volatile goods. In any case, services inflation also showed higher-than-expected increases. In annual terms, it has risen to maximum levels (figure 3). One important factor behind the persistence of high inflation has been the slow unwinding of the high levels of private consumption of previous years. The revised National Accounts that we published on March 20th showed that between 2020 and 2022 household consumption exceeded our forecasts by about 4.3 billion dollars. With this, national savings figures were revised downward and the current account deficit increased, indicating that macroeconomic imbalances were larger. Meanwhile, data for late 2022 and early 2023 show that the pace of reduction in private consumption has been slower than expected (figure 4). | 1 |
In the past year or so, I think we have made quite good progress in providing this peer perspective on risk management and controls. In such areas as corporate governance, economic capital estimation, and anti-money laundering, I think we have been able to be quite specific on how well a given banking organization measures up to evolving industry standards - including what needs to be done to move up to the top rung of performance. I also recognize that there is a tremendous demand for us to provide even more guidance in these dimensions. In the numerous feedback sessions we have had with individual institutions on the quality of our supervisory process, we have heard that message loud and clear. With the maturation of our organizational approach, I fully expect that we will register further improvements in this dimension. The New Accord’s emphasis on risk management processes This brings me to my second broad theme - how the New Basel Capital Accord supports further adjustments in risk management and supervisory approaches and how it fits with the current focus on corporate governance practices. Since many of you do not hail from banking organizations, I’ll take a moment to summarize the objectives the Basel Committee set for itself in re-writing the international rules on bank capital adequacy. The existing rules, which stem from the relatively simple 1988 Basel Accord, represented an important step in answering the age-old question of how much capital is enough for banks to weather economic downturns. | Cards and cash in Sweden Cards compete with cash when we pay directly at the point of sale, for example in supermarkets, petrol stations, restaurants or at cinemas. It is the customers who choose how they want to pay, and as we no longer use cheques in Sweden the choice is between cards and cash. A high level of card usage thus tends to go hand in hand with a low level of cash usage, and vice versa. In Sweden, the use of cards has increased rapidly in recent years. In 2009, the average Swede made 182 card payments but less than 30 cash withdrawals. This means that the value of the payments made by card has increased fivefold, and that the number of card payments has increased more than sevenfold, over the last 10 years. Unfortunately, there are no corresponding statistics for cash payments, but if we assume that the cash withdrawn BIS central bankers’ speeches 1 from ATMs is used to make purchases then the value of all the card payments is three times higher than the value of all the over-the-counter cash payments. Another way of measuring cash usage is to compare the value of the banknotes and coins in circulation, which is usually referred to as MO, with GDP. If we do this we can see that between 2001 and 2010, MO fell from 3.8 per cent to 2.9 per cent of GDP. | 0 |
43 12 All speeches are available online at www.bankofengland.co.uk/speeches 12 Typically, the two sides of this argument are taken to be in a secular struggle: the dark forces of secular stagnation pitted against the dynamic forces of secular innovation. Yet in practice, both arguments have merit. They are certainly not mutually incompatible. It is perfectly possible to imagine a world of rapid innovation which nonetheless leaves large swathes of society in its slipstream. More than that, recent research suggests this is a likely outcome of the Fourth Industrial Revolution. There are good conceptual grounds for thinking the displacement effects of the Fourth Industrial Revolution may be larger than ever-previously. Every industrial revolution has resulted in a hollowing-out, typically of mid-skilled tasks. Historically, that has meant largely manual, labour-intensive tasks. Machine has replaced human in activities that are routine and repetitive. The future could well be very different. For example, the dawning of AI means that humans will no longer have the cognitive playing field to themselves. Thinking or non-routine tasks may increasingly be taken up by machines. They will be able to process more quickly, more cheaply and with fewer errors than their human counterpart, at least in some activities. That could make the hollowing-out of human tasks, now cognitive as well as manual, far greater than ever before. 48 A cottage industry has emerged over recent years manufacturing estimates of job loss that might result from 49 this rise of the robots. | In the century ahead, those skill-shifts may be about to go into reverse. To see why, we need to ask ourselves what sets of humans’ skills robots are likely to find it hardest to reproduce and replace in the period ahead. My reading of the runes is that there are three areas where humans are likely to preserve some comparative (if not always absolute) advantage over robots for the foreseeable future. The first is cognitive tasks requiring creativity and intuition (“heads”). These might be tasks or problems whose solutions require great logical leaps of imagination rather than step-by-step hill-climbing. Existing machine learning algorithms allow huge numbers of solution permutations to be tried quickly and costlessly. This allows these hill-climbing algorithms to scale local peaks in record time. Whether they scale global peaks is altogether another matter. It is harder for machines to solve problems where it is difficult to define the solution steps in a logical sequence in advance. Humans call solutions arrived at in this way “intuition”. Despite rapid progress in deep learning techniques, it remains far-harder to devise search algorithms which solve problems requiring a leap into the unknown. 58 Even in a world of super-intelligent machine learning, a demand is still likely to exist for people with the skills to programme, test and oversee these machines. Some human oversight and judgemental overlay of these automated processes is still likely to be needed. Machine design, improvement and oversight require, at least for the moment, humans and machines to operate in partnership. | 1 |
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