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20 See, for example, the above-referred to Goodhart and Rochet and also M. Woodford, “Inflation Targeting and Financial Stability”, speech at the conference “The Future of Central Banking”, in Rome, September 2010. 6 BIS central bankers’ speeches Focus on the repo rate over the coming six months Correspondingly, we should concentrate on assessing the repo rate in the coming period, as there is such great uncertainty over the repo rate in the longer run. The Riksbank sets the repo rate. This means that we normally have a fairly good idea of the repo rate level over the coming period, although the situation can sometimes change rapidly and radically as it did in autumn 2008. Market expectations prior to a monetary policy meeting also normally agree with the decision we make regarding the repo rate. Any surprises in the actual decision on the repo rate are normally very minor (see Figure 12). However, there is great uncertainty over the repo rate in the longer run. This is illustrated by the fan chart showing the repo rate. Whether the repo rate path will agree with the forecast will of course depend on how the economy develops in the future. If inflation and resource utilisation develop in line with the main scenario, the repo rate should follow the repo-rate path outlined in the main scenario (the middle line in the figure). | While financial consumers now have a greater array of choice, the challenge is in choosing the most appropriate financial product commensurate to their needs. Lessons learned from other markets showed that high-profile cases of mis-selling of investment-linked and pension products extols the importance of ensuring consumers are properly adviced on the key features, terms, conditions and suitability of a financial product before they enter into any financial contract. Assisting consumers to make wise financial choices As FAs, you have the responsibility to educate consumers on the importance of financial planning, such as saving for the first home or a child’s future education, or buying insurance protection to safeguard against unexpected losses. FAs can assist consumers in better understanding their current and future financial needs and circumstances. FAs can provide independent and impartial advice which is tailored to the consumers risk appetite and financial needs. Apart from educating their clients on what they should be investing in, FAs also play an important role in educating their clients on what they should not be investing in. As you are the industry’s front-liners and are actively meeting with potential customers on a daily basis, FAs can be relied on as a key source of information to prevent consumers from falling prey to financial scams. | 0 |
7 [13] Figure 7. Households have increasingly high debt and shorter interest-rate fixation periods Household indebtedness has increased Shorter interest-rate fixation periods for household mortgages 100 100 80 80 60 60 40 40 20 20 0 98 01 04 07 Variable 10 13 16 0 Fixed Note. Left-hand graph. Percentage of disposable income. Total household debt as a share of their disposable income, totalled over the past four quarters. Right-hand graph. Percentage of mortgages. Refers to loans from mortgage institutions. Percentage of mortgages in each category is calculated based on the value of the loans. Variable rate refers to interest-rate fixation periods up to and including three months. Fixed rate refers to interest-rate fixation periods over three months. Sources: The Riksbank and Statistics Sweden Most households can continue to pay their mortgages even at significantly higher interest rates ... The question is whether households’ interest-rate sensitivity – in combination with rising interest rates – might result in them quite simply not being able to meet their interest payments. This could lead to banks incurring direct credit losses on their mortgages, which in turn might affect financial stability. But I am not overly worried about this risk. Banks do what is known as a “left-tolive-on” or “discretionary income” calculation, as part of their credit assessment. As a rule, they don’t grant mortgages if there is a deficit in the calculation. | The estimated interest rate they use in the calculation is on average around 7 per cent, which is some way above a long-term normal level, which can be assumed to be between 4.5 and 6 per cent. 7 Calculations done by the Swedish financial supervisory authority, Finansinspektionen (FI), on a sample of new mortgage holders show that only just over 5 per cent of households have a deficit in their discretionary income calculations if the mortgage rate rises to 7 per cent. 8 There is hence nothing to indicate that the household sector as a whole would encounter significant problems in paying their interest expenses even if interest rates were to rise substantially in relation to their current levels. And, as I said earlier, our forecast indicates extremely limited rate increases in the years to come. But when the rate rises, many households might have to adapt their consumption to cope with the increased interest payments. From a macroeconomic and monetary policy perspective, it is therefore important to understand how household consumption is affected when interest rates change. 7 I have assumed a mark-up on the mortgage rate of 2 percentage points over the interval for the long-term repo rate of 2.5-4 per cent. 8 See Finansinspektionen (2018), “The Swedish mortgage market”. | 1 |
These rates are not only modest, but are also subject to certain risks, which, on balance, point to even lower increases in economic activity. Turning to prices, for some months now inflation has been well short of the 2% benchmark, which is the ECB’s medium-term monetary policy target. The forecasts available continue to point to the risk of inflation remaining too low for too long. The ECB’s latest projections entail a further downward revision, with inflation expected to stand at 0.7% in 2015 and 1.3% in 2016. In recent months, against a background in which, given the weakness of demand and fierce competition, firms have limited price-setting power, the slump in the price of oil has exacerbated the drop in inflation. At the end of 2014, the annual rate of inflation stood at –0.2% (the average rate in 2014 was +0.4%) and it is expected to remain at very low or negative levels in the early months of 2015. This heightens the risk of second-round effects on wages and prices that could have an adverse impact on inflation expectations in the medium term. Indeed, the latest private sector forecasts have seen substantial downward revisions for all terms. Thus, for example, according to the January edition of Consensus Forecasts, the leading private sector economic forecast publication, the average rate of inflation forecast for 2015 is just 0.1%, compared with 0.6% forecast for the same period a month earlier. | The monetary expansion measures taken by central banks are unquestionably vital for achieving the objectives in terms of inflation rates and credit flow stimulation and of the financing of the economy. However, sustainably bolstering economic activity and job creation requires the monetary stimuli to be accompanied by measures in other areas. In the European case, the reform drive has to be maintained to ensure the proper functioning of the markets and fiscal policies favouring growth while at the same time meeting the commitments assumed under the Stability and Growth Pact. Position in the cycle and monetary policies of the main developed economies To conclude, I would like to refer to the different position in the cycle of the leading developed countries. In the United States, and to a lesser extent in the United Kingdom, both of which are at a much more advanced stage of economic recovery than the euro area, the monetary policy debate now centres on when and how rapidly to start withdrawing part of the monetary stimulus, whereas in the euro area and in Japan further stimulus measures are being introduced. This difference in cyclical position is affecting prices on the financial markets, and particularly exchange rates. | 1 |
In some economies, such as the UK, the biggest risks are associated with the housing market, which is why macroprudential actions have been taken. More generally, as the FSB has recently concluded: “there are increased signs of complacency in financial markets, in part reflecting search for yield amidst exceptionally accommodative monetary policies. Volatility has become compressed and asset valuations stretched across a growing number of markets, increasing the risk of a sharp reversal.” Those risks arise against a backdrop in which assets managed by investment funds have reached almost 90% of global GDP – more than two thirds the size of the commercial banking system. The growth of the asset management sector brings welcome diversity to financial intermediation. However, there must also be a focus, as there has been with banks, on the systemic risks it could create. Although the sector is becoming more concentrated, the risks don’t simply arise from the size of asset managers. They arise from the particular activities some in the sector undertake. The biggest risks arise from combining high levels of leverage with holdings of illiquid assets and commitments to provide liquidity at short notice. In the current environment, those types of activities need careful monitoring, and possibly a deliberate policy response. Conclusion There is no doubt that the reforms made thus far, along with a stronger framework for global co-operation mean we are in a better position to face new risks. | We care about the health and stability of the tri-party repo market both because of our interest in promoting stable and liquid financial markets and because we use it to implement monetary policy. The recent financial crisis showed us that the tri-party repo market was inherently unstable due to deficiencies in the settlement infrastructure. Prior to 2008, there was limited recognition of the ways in which adverse developments in this market could quickly transmit risk to other parts of the financial system with unforeseen consequences. We now know, with the benefit of hindsight, that the market was overly reliant on massive extensions of intraday credit by the clearing banks to the broker-dealers, that market participants did not adequately appreciate the magnitude of the risk embedded in the role played by the clearing banks, and, as a result, market participants underpriced risk in ways that undermined the market’s resiliency during periods of stress. These vulnerabilities were made apparent in the spring of 2008 when the events surrounding Bear Stearns demonstrated the run risk that existed more broadly in the tri-party repo market, prompting the Federal Reserve to intervene in order to restore confidence and market functioning. This intervention took the form of the creation of a Primary Dealer Credit Facility in March 2008, and a subsequent expansion of the facility in September 2008. The scope and scale of the market disruption were clearly very troublesome. | 0 |
Third, and this is the trickiest of the three, is when individuals consciously tap on these cognitive biases to their own advantage. The rise of the asset management industry is one example, where asset managers’ herd behaviour may be looked at as perfectly rational. An IMF researcher referred to such situations as “rational bubble-riding”, whereby financial benchmarking and the short-term nature of performance appraisals imposed on asset managers, lead them to consciously ride on bubbles, despite believing that the prices are unjustified by fundamentals. Investors may be incentivised to herd, preferring to succeed or fail together to prevent reputational damage. As John Maynard Keynes famously said, “It is better for reputation to fail conventionally, than to succeed unconventionally”. Whether these cognitive biases are unconsciously wired in us or consciously being tapped on, we ought to recognise the power of perception. Edward de Bono aptly pointed out that “perception is real, even if it is not reality.” In reality, a few of these misperceptions result in tangible consequences that influence the ringgit exchange rate level. Let me cite five instances of misperceptions that have been making its rounds in the market: First, the perception that the ringgit is driven by oil prices. This was derived from fact that Malaysia is one of South East Asia’s net exporters of oil and gas. Petronas is also one of the world’s largest producers of LNG. | Most of these are not statistically based, but rather convenient rules-of-thumb that ended up shaping our perception and driving sentiments. Unfortunately, in this information age, these perceptions and negative sentiments can be perpetuated rapidly and become self-fulfilling. The widespread negative coverage in the mainstream media feeds on our confirmation bias, where we seek out information that confirms rather than contradicts our preconceptions. And when such information becomes widely available, we risk falling into a self-reinforcing process known as the ‘availability cascade’, whereby a simple idea, whether it be right or wrong, gains traction given repetition and inherent simplicity. As the saying goes, “Repeat something often enough and it will become true.” Second, we tend to, in some other instances, base our perception on prior evidence and situations that we are familiar with, rather than update our views with new information. For many economists and analysts, Malaysia is an oil-dependent economy. When the oil price goes south, the Malaysian economy suffers. While this was true many years ago, these simple relationships are continuously assumed to be fixed and hold to perpetuity. Despite the many structural changes leading to a more diversified Malaysian economy and reduced reliance on oil, this perception has persisted. For the uninitiated, the percentage of oil revenues to government 2/7 BIS central bankers' speeches revenues was 41.3% in 2009 compared to only 14.6% in 2016. This fact seems to elude many analysts. | 1 |
For example, the rate cuts in 1996 and 1997 had caused a decrease in the CPI via housing costs. This could have resulted in the claim that interest rates should have been lowered further, as a direct consequence of the fact that they had only just been cut sharply. However, it wasn’t until the turn of the year 1998/1999 that the Riksbank developed a coherent, explicit approach to these issues. It had been preceded by a long discussion, where the main idea had been to change from the CPI to a different index, in which the components that fluctuated most due to temporary reasons would be excluded. However, the more we discussed this the clearer it became that there was no index that always provided the best picture of inflationary pressures in the economy. For this reason we opted instead for an approach whereby we, in connection with each decision, would make it as clear as possible what considerations were guiding policy at the time. This would enable our actions to be evaluated in a better way than before. The clarification states that monetary policy should normally be centred on bringing inflation to target one to two years ahead. It also identifies two cases when the Riksbank may depart from this rule: transitory effects on inflation and large deviations from the target. | The MIFC initiatives that were announced yesterday would propel Malaysia into becoming a vibrant, innovative and competitive international Islamic financial services industry supported by high calibre human talent, world-class infrastructure and best international standards. Building on what we have, we need to create a global brand to be promoted more aggressively in the global arena. This will be key to penetrate markets as well as to attract global players to our shores, henceforth enhancing the viability and sustainability of Malaysia's Islamic financial system. Malaysia will embark on more strategic promotional and marketing efforts through greater collaboration and smart partnership. MIFC WILL BE OUR GLOBAL BRAND. 2 BIS Review 75/2006 On this note, on behalf of the hosts and organisers, I would like to thank the distinguished panellists and moderators, media and the respected audience for making this Forum a success, and I hereby declare the forum officially closed. Thank you. BIS Review 75/2006 3 | 0 |
Despite some recent easing, tightness in financial conditions still persists and the tightening of business loan lending standards continued – albeit at a slower pace – during the second quarter. We predict that bank lending rates for consumer loans would follow gradually, as the lagged effects of cumulative easing of 950 basis points since November 2008 would start to ease credit conditions towards the last quarter of this year. However, the current unfavorable labor market conditions are expected to restrain the recovery in consumption, and therefore domestic demand conditions would continue to support disinflation. The fiscal discipline is crucial in maintaining low levels of medium and long-term interest rates for the recovery of both consumption and investment. The implementation of a credible fiscal framework would bring down risk premiums further, and hence lead to a permanent fall in longer-term interest rates. This, in turn, would foster investment and labor demand, and thereby support the recovery process, providing the Green Shoots with the breathing room. Therefore, the determined execution of the medium-term program to ensure fiscal discipline and debt sustainability would have an expansionary rather than contractionary impact on economic activity. In sum, while Turkish economy contracted sharply during the recent crisis, its well capitalized and sound financial system is likely to support the economic activity along the recovery. In fact, recent GDP releases suggest that economic activity in Turkey displayed a solid rebound in the second quarter. | Therefore, we feel that the worst episode of the crisis is now behind us, which should in turn support Turkey’s economic prospects. However, it remains to be seen whether recent improvements in leading indicators will translate into a long lasting and durable recovery, since part of the rebound reflects the impact of the fiscal stimulus packages. The situation is similar across the globe: recovery has started in the global economy, yet the extraordinary policy measures taken since the last quarter of 2008 makes it harder to interpret the underlying trends. Given the elevated levels of unemployment and ongoing de-leveraging process, the recovery is likely to be gradual. Distinguished Guests, Let me close my speech by turning to the main theme of this session. Overall, I am encouraged to recognize initial signs of recovery but also I am anxious that the green shoots that have sprouted may still expose to a spring frost. “Green shoots” may not be vigorous enough and important downside risks still remain. However, unlike a couple of quarters ago, we should also acknowledge that we can now at least talk about upside risks – that is, “blossoming shoots”. Thank you. 4 BIS Review 123/2009 | 1 |
They now expect the economy to grow by 0.9 per cent in 2023, 1.5 per cent in 2024 and 1.6 per cent in 2025. At the same time, our past rate increases are being transmitted forcefully to financing conditions and are gradually having an impact across the economy. Borrowing costs have increased steeply and growth in loans is slowing. Tighter financing conditions are a key reason why inflation is projected to decline further towards our target, as they are expected to increasingly dampen demand. Our future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our two per cent mediumterm target and will be kept at those levels for as long as necessary. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, our interest rate decisions will continue to be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The Governing Council confirms that it will discontinue the reinvestments under the asset purchase programme as of July 2023. The decisions taken today are set out in a press release available on our website. I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions. | Financial and monetary conditions Our monetary policy tightening continues to be reflected in risk-free interest rates and broader financing conditions. Funding conditions are tighter for banks and credit is becoming more expensive for firms and households. In April lending rates reached their highest level in more than a decade, standing at 4.4 per cent for business loans and 3.4 per cent for mortgages. These higher borrowing rates, together with tighter credit supply conditions and lower loan demand, have further weakened credit dynamics. The annual growth of loans to firms declined again in April, to 4.6 per cent. The month-on-month changes have been negative on average since November. Loans to households grew at an annual rate of 2.5 per cent in April and increased only marginally month on month. Weak bank lending and the reduction in the Eurosystem balance sheet led to a continued decline in annual broad money growth to 1.9 per cent in April. Month-on-month changes in broad money have been negative since December. In line with our monetary policy strategy, the Governing Council thoroughly assessed the links between monetary policy and financial stability. The financial stability outlook has remained challenging since our last review in December 2022. Tighter financing conditions are raising banks' funding costs and the credit risk of outstanding loans. Together with the recent tensions in the US banking system, these factors could give rise to systemic stress and depress economic growth in the short term. | 1 |
In this environment, both the negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential. These measures allow us to ensure price stability – and thus fulfil our mandate in the interests of the country as a whole. Facilitating and securing the operation of cashless payment systems is part of the SNB’s mandate. And for good reason: A smoothly functioning payment system is critically important to the performance of an economy. Payments connect buyers and sellers; borrowers and lenders. The ability to make payments securely and irrevocably is fundamental to sustaining confidence in the financial system. Digitalisation and the proliferation of mobile internet services are changing the way we pay for things. New applications and technologies promise ever faster, easier and cheaper payment options via smartphone, tablet or smartwatch. The entire payments ecosystem is set to undergo profound change as a result. My colleague Thomas Moser and I will take a more detailed look at how innovation is shaping developments in the payments arena. We will focus in particular on the challenges such innovation presents to central banks. In the past, payment innovations have often been driven by the private sector. Facilitating – and especially securing – the operation of payment systems has long been a fundamental task of many central banks, however. It is thus essential that all the various stakeholders maintain a constructive dialogue. | But an appreciably weaker development of consumption, which was a prominent component of one of the alternative scenarios, seems to have become somewhat less probable. Exchange rate The Riksbank does not target the exchange rate. The monetary policy target is price stability. But the exchange rate does feature as one important factor in the Riksbank’s assessment of inflation in the coming two years. The exchange rate conditions demand in the economy, particularly in the export sector, and also affects inflation directly in the form of import prices. The latter, more immediate effect is, however, transitory and of secondary interest provided it does not influence inflation expectations and thereby price and wage setting behaviour. An assessment of future inflation therefore requires a forecast or judgement of the exchange rate in the coming two years, yet this is a variable that is notoriously difficult to predict and has fluctuated widely for Sweden since 1992. A natural starting point for this is the current exchange rate together with an estimate of what a reasonable long-term level might be in relation to competitiveness, financial saving, etc. The past six months provides an example of how the argument might go. Since October 1996 the krona’s effective exchange rate has weakened by about 7 per cent. Most of this change stems from the appreciation of sterling and the US dollar against currencies in continental Europe (Diagram 6). | 0 |
Therefore, the number of observations in common with an artificially reduced register could be very low or even zero. The path to striking a balance between giving access to the research community to the more interesting databases while ensuring confidentiality and anonymisation could much benefit from the experience of other institutions. To this end, a few years ago several central banks set in motion the so-called INEXDA network. At present this network comprises central banks, including the participation of the ECB Statistical Directorate, and other statistical institutes, like Eurostat. In this forum participants from the statistical areas and datalabs exchange experiences in the management of micro data, the aim being to guarantee the harmonisation of certain procedures and share best practices in this domain. Access to the information in the hands of private sources is also a very interesting field where we can make further progress. INE had a very good experience this year in exploiting data from mobile phones to analyse citizens’ mobility in different cities and regions, easing and lessening the cost of developing such statistics, with the help of new technologies. The need to better understand and organise the transition from customer data, privately used by service corporations, to citizens’ micro data, of interest for public analysis, has to be studied thoroughly. That is why I welcome and congratulate INE on recently launching a Business to Government Working Group (B2G WG), under the name of “WG about the role of official statistics on data stewardship”. | Indeed, as part of the Eurosystem, as a participant in the Single Supervisory Mechanism and given its responsibility for the proper functioning and stability of the financial system, the Banco de España regularly collects a wealth of financial and supervisory information from credit institutions, which is key to performing all our duties. This information is also necessary for strengthening the performance of other functions of the Banco de España, such as the conduct of monetary policy, the oversight of the stability of the financial system and the compilation of statistics. We are also responsible for designing financial reporting as efficiently as possible and, in this endeavour, both the Banco de España and the European authorities have some substantial challenges ahead. I shall refer to these later. Some of the key statistics produced by the Banco de España are present in the Spanish National Statistical Plan (the PEN, as we refer to it). They include some macroeconomic statistics, such as the balance of payments and the financial accounts, which complement and have to be consistent with those compiled by INE. In this regard, I think we can be proud of the long-standing tradition of close and candid cooperation between our two institutions. Joint discussion continuously enriches our professionals, and their efforts to ensure the consistency and complementarity of the results are a guarantee of the quality of the statistical system. | 1 |
Obviously this can delay the whole process - a point to which I will return later. This is only a very short description of the mechanics of a workout and hardly does justice to what can be an enormously complicated exercise involving banks with widely different levels of security as BIS Review 45/1999 2 well as non-bank creditors whose interests also need to be taken into account. But I hope that I have given you enough to illustrate the central principles of the process: a willingness by the debtor to recognize that there is a problem and to approach the banks to seek assistance, matched by support and forbearance by the banks and a willingness to work together to reach a solution by consensus. That solution may not be the optimum one for every individual bank but the objective should be that each bank is at least better off than it would be in a liquidation and is treated fairly vis-à-vis others. In the course of preparing this speech I have had the benefit of talking to a number of market participants about how effectively the workout process in Hong Kong and the HKAB Guidelines are working. It is fair to say that there are varying shades of opinion on this point, but there is general agreement that the Guidelines have made an important contribution in codifying what is expected of banks in Hong Kong. It is equally true that there may be room for improvement in the workout process. | 1 BIS Review 45/1999 It is important to note that workouts should not be seen as a soft option for the debtor or an act of charity on the part of the creditors. Banks will generally only be prepared to embark on a workout if the prospect of eventual recovery is greater than it would be in a liquidation. Bearing in mind the generally low recovery rate that unsecured creditors obtain from liquidations, workouts will usually be the better option. But the threat of liquidation must always be there as a last resort to provide an incentive for the debtor to face up to its problems and to agree to cooperate with the banks. Workouts have a long history in Hong Kong but the principles that govern them were only recently codified in the form of the Guidelines on Corporate Difficulties issued by the Hong Kong Association of Banks in April 1998. These are generally known as the “HKAB Guidelines”. The Guidelines are non-statutory, but they are supported by both HKAB and the HKMA and all banks are expected to use their best endeavours to comply. In my view, this represents one of the most important initiatives of HKAB in recent years, taken as it was at a time when the economy was in the early stages of recession and when the need for workouts would inevitably rise. | 1 |
Exceptionally low short-term interest rates have alleviated some of the burden borrowers face in servicing their debts. Low long-term interest rates – partly a consequence of Quantitative Easing – will have given a lift to asset prices, and so to wealth and the cost of capital. It is arguable that this defers some of the rebalancing needed in the real economy, but overall it reduces the risk of unnecessary destruction of the economy’s productive capacity. That stimulus can be sustained only so long as medium-term inflation expectations remain anchored to our target of 2%. We must be alert to the need gradually to withdraw stimulus as and when recovery builds. And we must be alive to the possibility that the alleviation of current macroeconomic problems could sow the seeds, somewhere in the financial firmament, of the next set of imbalances. Where risks to stability do emerge, we must use what other instruments we have to try to temper them. This can never be perfect, but it can be better. BIS central bankers’ speeches 11 Chart 1: Chart 2: Spain’s net external balance sheet Italy’s net external balance sheet Source: Eurostat Source: Eurostat Chart 3: Chart 4: Gross external liabilities 10-year spot real interest rates Source: International Financial Statistics. 12 Source: Bloomberg. | With regard to the operation of the secondary market of government bonds, the Bank of Thailand is currently working on the promotion of a full-fledged primary dealership system to facilitate the conduct of open market operations. We aim for the primary dealers to eventually provide marketmaking functions for both government and private securities. The operation of primary dealers or counterparties of the central bank will be complemented, should market participants deem it useful, by the presence of inter-dealer brokers, who can assist in ensuring continuous two-way quotation, as well as helping to preserve the anonymity of transactions or positions held by a market participant. In August 1999, we appointed 9 counterparties, which comprised eight banks and one securities firm. Starting 19 January 2000, the Bank of Thailand also began trading outright with the 9 counterparties. This operation serves as a monetary policy instrument as well as the mechanism to promote the development of the secondary bond trading. At this early stage, the outright operations will be conducted primarily in the benchmark issues or those with potential to become benchmark issues. These selected counterparties are expected, ultimately, to become primary dealers and we are currently working on putting the right incentives to ensure that appropriate rights and obligations be accorded to these primary dealers. The third area I would briefly touch on is infrastructure issues. Here, work is ongoing to promote a fully automated system of delivery versus payment (DVP) settlement, information disclosure, and instituting appropriate code of conduct on market participants. | 0 |
While affected by some market instability and uncertainties, it has not, however, undermined the development of the global Islamic financial system that has now become an increasingly integral component of the international financial system. The approach to building a sustainable and progressive domestic Islamic financial system involves the creation of the key components comprising the Islamic banking industry, Islamic financial markets, the Islamic insurance or takaful market, and fund management industry given the strong linkages, inter-dependence and synergies among these components in the system. In addition, to the financial intermediaries and fund managers, other institutional players such as brokers, specialists and corporate treasurers also have important roles to play. Another area of focus is the growth of non-bank Islamic Financial institutions. In Malaysia, the first included Tabung Haji, the Pilgrim Fund Board. Other components include institutions such as waqaf, corporate zakat, investment trusts, mutual funds and inheritance management. This is part of wealth management that will become more significant as the domestic economy enters into its next level of development and as savings across borders becomes more institutionalized. This will become an important source of funding for productive investment, in particular for large-scale investments. New forms of financial structures may be developed for this purpose. In promoting Islamic finance in the Labuan offshore financial center, emphasis is being given to several of these areas, in particular, to promote the fund management industry including via the Labuan International Financial Exchange (LFX). Labuan will also be promoted as a center for waqaf administration. | In this regard, the IFSB has already made progress in developing the prudential standards on the capital adequacy and risk management framework, and has commenced work on developing standards on corporate governance. Appropriate accounting standards have also been put in place to reflect the true and fair value of banking operations that would lead to greater accountability and responsibility on the part of financial institutions. While the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has made a significant contribution in formulating and issuing accounting and auditing standards for Islamic financial institutions, efforts need to be intensified to promote of the adoption of these standards. The International Islamic Financial Market (IIFM) further provides the environment that will encourage active participation by both Islamic and non-Islamic financial institutions in the secondary market for Islamic financial instruments. Several global sovereign sukuks have been issued in the international market that has attracted wide interest, both by Muslim and non-Muslim investors. The next phase in this development is the raising of funds from this market by multinational corporations and multilateral institutions. As the volume increases, it would strengthen the inter-linkages and integration amongst the Islamic financial centres. In addition to structuring a variety of attractive off-the-shelf instruments, efforts need to be intensified to create a benchmark curve for future issues. With a well-developed system, the trading of instruments would encourage the free flow of capital movements and would in turn facilitate greater Islamic fund management activities. | 1 |
Or carburettor would have been blocked. The mechanic would hypothesise all possible reasons for the failure of the engine. Third, experiments are designed to test each hypothesis made. The mechanic may open the fuel tank to see whether there is fuel. If there is no fuel, he will try to start the engine having filled the tank with fuel. If there is fuel in the tank, then he would examine the second hypothesis, that is, whether there is a blockage in the tube that distributes fuel to the engine. If there is a blockage, he will clean it and try to start the engine. If there is no blockage, then he would experiment the third hypothesis, namely, the working of the electrical system. In this manner, he would experiment all the hypotheses he has made one by one and make relevant conclusions. Fourth, the results of the experiments are analysed in order to ascertain whether the hypothesis is proved. Or else, when several hypotheses have been made, to ascertain which hypothesis has been proved. Fifth, making final conclusions out of the observed results of the experiments. A disciplined motorcycle mechanic would follow these steps involved in the scientific method and attend to the required repair of the fault in the motorcycle. In this sense, a sideway motorcycle mechanic is not different from a trained scientist, since both follow the scientific method in reaching conclusions. | As such, there is no dearth of hypotheses which scientists could make and a dearth of theories which they can formulate. That is good news for prospective scientists. However, one theory which is valid today could be disproved by another theory to be formulated tomorrow. Hence, all theories are subject to the same property: the property of refutability. In fact, Karl Popper’s argument was that if a theory cannot be refuted, then it does not become a theory. Hence, any scientific research will discover only a truth and not the truth. This means that all scientific research studies undertaken in all the disciplines would produce only a relative truth and not the absolute truth. With all the scientific apparatuses, techniques and computing capacity available today, science still cannot reach out to the absolute truth. As such, the task of finding the absolute truth has been relegated to religion and mystics. This may be discouraging news for those who are engaged in scientific research. But, that has been the way of science throughout its history and such discovery of relative truth has been adequate for the purpose of building the human knowledge base and putting it to practical use by mankind. In the modern world, the discovery of absolute truth may therefore be irrelevant. Conclusions A researcher is not a propagandist or a dictator. His task is to follow an accepted set of principles, guidelines and an ethical and moral code to discover a truth, and not the truth, and add it to the extant knowledge base. | 1 |
Dimitar Radev: Accession to the euro area - a catalyst for social and economic prosperity Summary of a statement by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the Annual Government Meets the Business conference, Sofia, 29 January 2019. * * * During the Annual Government Meets the Business conference dedicated to Bulgaria’s path to the eurozone, the Bulgarian National Bank’s Governor, Mr. Dimitar Radev, outlined the activities of the central bank in this process and the anticipated effects for the economy and the business from the national currency’s entry into the Exchange Rate Mechanism (ERM II) and the adoption of the euro in Bulgaria. Provisionally, the work will be conducted in two stages: a short- and long-term. The short-term stage is linked to the preparation for simultaneous accession to the Banking Union and lev’s entry into ERM II. The second stage is Bulgaria joining the euro area. Mr. Radev underlined that the BNB is currently focused on the first stage, the outcomes of which will determine the next steps to follow. In terms of content, the first stage consists in joining the Single Supervisory Mechanism and the Single Resolution Mechanism. As regards the Single Supervisory Mechanism, the BNB is concentrated on three work blocks. The first one is creating the necessary regulatory framework. Overall, work in this direction was completed with the adoption of the necessary package of legislative amendments by the National Assembly at the end of last year. | So, imposing new trade barriers – or “bilateral deals” – on some trade partners not only has almost no chance of eliminating the overall current account deficit, but it also threatens long-run economic growth. Alternatively, it would also be misleading for countries to carry out non-cooperative domestic macroeconomic policies. Competitive devaluations first: after some unilateral and unfortunate declarations last week, several of us on the Governing Council of the ECB felt the need to reiterate that during the last IMF Annual Meetings in DC last October we committed with all our partners to a multilateral approach saying that, I quote, “we will not target our exchange rates for competitive purposes”. Any deviation from this common rule would be at the cost of breaking mutual trust and global growth. Speaking of the Governing Council of the ECB, let me say a few words on our monetary policy. It is following, with confidence and with patience, a path of gradual normalisation. But one shouldn’t focus excessively on the sole instrument of monthly net asset purchases: whether we end them in September or taper them somewhat more gradually is not a “deep existential” question… There are two more important issues: First, we prefer, as in Irish dancing, a four-hand reel rather than a solo; we will rely more and more on the entire policy package, including the sizeable stock of acquired assets, the forthcoming reinvestments and the forward guidance on interest rates. And we will follow a predictable sequence. | 0 |
It is easy to understand why lenders may find credit sensitive alternatives attractive in the short-term, but what is less clear is why non-financial borrowers who look to their financial service providers to help them manage their risks would want to see their cost of borrowing being driven by thin liquidity in CP and CD markets. And it is clear they don’t, in a survey of borrowers by the Alternative Reference Committee’s Nonfinancial Corporates Working Group in March this year, over 80% of respondents would prefer alternatives based on SOFR than on credit sensitive alternatives. [16] In fact if lenders looked past the short term benefits of substitutability they too would see that when Descending safely: Life after Libor ‐ speech by Andrew Bailey | Bank of England Page 5 the limited durability of these credit sensitive rates is combined with the need, and in some jurisdictions the requirement, to ensure there is access to robust fallbacks the sensible option is to make your primary rate selection the most robust you can. In the UK there is a clear consensus that credit sensitive rates are not required or wanted as part of sterling LIBOR transition and in my view this is sensible. Widespread use of RFRs will ensure we are using benchmarks that will remain transparent to users and embed rates that have long-term durability for the future. Conclusion The use of SOFR in US dollar markets is growing. | For instance, the International Monetary Fund (IMF) expects a current account deficit in the United States of just under 3% of GDP this year, while the Chinese surplus is expected to have fallen to around 2½% of GDP. But, as with the euro area, the crucial question is how much of this narrowing is simply a reflection of the cyclical weakness in the deficit economies or whether it represents a more durable shift in the pattern of demand in both deficit and surplus economies. If it is down to the former, then the imbalances can be expected to reemerge as recovery proceeds. The answer to this question depends very much on the degree to which the substantial shortfall, relative to pre-crisis trends, of activity in the deficit economies represents a permanent impairment of supply potential as a result of the financial crisis and subsequent recession, or whether it will ultimately be reversed. Successive Inflation Reports and speeches by several MPC members 6 have addressed this issue in the context of the United Kingdom, and I think it is fair to say that the evidence is presently inconclusive. | 0 |
For the SNB, as Switzerland’s central bank and monetary authority, the ECB’s project raised the issue of whether the Swiss franc should be included as a settlement currency on the 9 In October 2000, the SWX-Repo was integrated into Eurex under the name Eurex-Repo. 10 Markets in Financial Instruments Derivative: This European law aims to increase competition and consumer protection in investment services. As of 1 November 2007, it replaced the Investment Services Directive. 11 SIX Group Media Release, 15 March 2011. 4 BIS central bankers’ speeches T2S platform. Although the formal decision was solely the responsibility of the SNB, in the spirit of the “Gemeinschaftswerk” the central bank consulted all stakeholders (including the SIX Group) before reaching an informed decision. On the basis of the stakeholders’ costbenefit analysis, which highlighted the complexity of the market infrastructure challenges confronting the Swiss market, the SNB decided not to include the Swiss franc as a T2S settlement currency at this stage12. That said, though Switzerland decided to stand back from this process, T2S will nevertheless impact the Swiss market and accelerate structural reforms of Switzerland’s FMI, which will in turn affect our money market operations. After all, securities denominated in foreign currencies are accepted as collateral on the Swiss repo market. In fact, collateral denominated in euros account for about 50% of the posted securities. In the future, settlement of these securities and potentially also of the securities denominated in other eligible currencies will involve some use of the T2S infrastructure. | But it illustrates vividly that the interpretation of ex post outcomes depends critically on understanding the ex ante process which generated those outturns. Another example shows that it is not just lay people who find statistical inference difficult. Experts of all kinds do too. The advent of DNA profiling in the 1980s led to the use of match probabilities in criminal cases. The jury is told that the probability of finding a match between the sample taken from the scene of the crime and the DNA of the defendant is, for example, only 1 in 500,000. That is sometimes taken as evidence that the probability of the defendant being innocent is also only 1 in 500,000. Such an inference is incorrect. In a city such as London where there might be about 5 million people who could have committed the crime, around ten people would have DNA that matched the relevant sample. Hence, in the absence of any other evidence, the probability that the defendant is guilty, far from being overwhelming, is only one in 10. Of course, in practice other evidence is usually available. But this incorrect statistical reasoning has swayed enough cases to be given its own name - the prosecutor’s fallacy.11 The cases of Sally Clark and Angela Cannings, both convicted and imprisoned for the alleged murder of their own children, show the desperate consequences of the false use of statistics to create a presumption of guilt to resolve the cause of apparently inexplicable events. | 0 |
These preliminary estimates suggest a one-off inflation impact of 1 to 2 percentage points. Moving forward, the impact would ride on the range of products affected, as well as, among other things, on the timeline: whether it would be a one-step or a two-step move. The many unknowns in this area prevent us from making any final estimates. When making this decision we certainly took into account that potential changes to the tax system are not impossible. These have been discussed and will be discussed moving forward. While we are on this subject, we would like to ask the Government to make the parameters of these initiatives known before they are implemented so these could be reflected in our monetary policy, enabling a consistent and smooth monetary policy stance. This is what we would like of the Government in relation to tax reforms. QUESTION from TASS Agency: When you reviewed lending to the economy, were you guided by certain adjustments to the macroeconomic forecast? Also, could you please comment on capital outflow. Were there any revisions in the three-year estimate? Thank you. ELVIRA NABIULLINA: Yes, we have indeed made some corrections. Overall, as I have noted, our assessment of 2017 is more positive, while 2018–2019 assumptions are unchanged. This does indeed translate into movement in various indicators. On the subject of lending, we are expecting growth, and we expect this growth to be gradual and sufficiently smooth. | Up to now payments for over 14 thousand businesses and over 93 thousand households, totalling more than BGN 9 billion, have been suspended , which really and considerably eases the financial conditions during the hardest time of the crisis. The crisis has moved the external financing conditions issue to the top of the agenda. You know that the crisis triggered the accumulation of deficits which must be financed and the required financial buffers must be maintained. Therefore, we had to give an additional signal to markets and investors that Bulgaria stays stable in the crisis in terms of its financial position and its 1/2 BIS central bankers' speeches monetary regime. This signal was given with the EUR 2 billion swap line set up between the European Central Bank and the Bulgarian National Bank, and it has been read unequivocally as a positive one by markets, rating agencies, and investors alike. I want to point out one very important thing – the conclusion about Bulgaria’s strong financial position remains valid now, despite the developments in the last months. A drastic change of this direction would be a mistake with serious repercussions. All measures so far pursued in relation to the banking sector, which I believe were successful and timely, do not, in any way, diminish our concern of what is happening and is going to happen in the coming months. | 0 |
In a situation where the proportion of public spending has reached a very high level (in 1999 it accounted for 49% of GDP in the euro area, compared with only 39% in Japan and 34% in the United States) and where government deficits are limited by the Treaty and can no longer be covered by inflation, the role of private savings in the future financing of retirement attains a crucial dimension. I should like to end this first part by saying that the positive effect of price stability on domestic savings naturally contributes, in the world capital market we live in, to guaranteeing the lasting attractiveness of the euro area for long-term financial investments by non-residents. This also requires that other economic policies contribute to a favourable environment, through structural measures aiming at increasing flexibility in the labour market and efficiency in the markets for goods, services and capital. I have emphasised the effects of the Eurosystem’s monetary policy on the volume of savings and its consolidation. The creation, with the euro, of a vast currency zone also contributes to a more efficient management of savings. BIS Review 6/2000 2 2. The creation of the euro is leading to larger and more integrated financial markets, improving the allocation of financial savings. The creation of the euro has accelerated the development and integration of the capital markets in Europe, which have been helped along in recent years by financial liberalisation and technological innovation. | From a portfolio theory point of view it could be argued that the optimum result is achieved through using a combination of all three approaches, and that this combination is far better than any of the individual options alone. Rules constitute a very direct approach and one that offers the greatest clarity to institutions on what supervisors expect from banks, thereby leading to a higher level of transparency from both the perspective of the banks and the supervisors, and promoting comparability between institutions. However, adopting a rules-based option alone, even if they are market friendly, entails certain disadvantages. It tends to be inflexible and therefore might preclude innovation. It could also fail to take account of bank or business line specificities. This is why the Committee decided to complement the minimum capital requirements with the second pillar, known as supervisory review. This allows a discretionary approach according to the situation of specific banks or types of business - very much like the principles-based policy approach. The benefits of such an approach are flexibility and adaptability to specific needs, both now and over time as situations and responses change. 2 BIS Review 47/2003 But this approach alone would also have its shortcomings. Market participants could find it difficult to compare banks. The lack of a common standard across institutions might actually reduce transparency, since markets might not know or understand why supervisors established particular requirements for certain banks but not for others. | 0 |
However, the Taylor Rule is a rule-of-thumb, whose claims of empirical validity are based on its ability to track policy during periods of relatively modest volatility.2 The current recession is outside of the empirical experience of Taylor Rules calibrated to describe Federal Reserve actions. We need to look beyond heuristic descriptions like the Taylor Rule to a more complete analysis of optimal monetary policymaking within a dual mandate framework. This topic has been studied extensively in the macroeconomic literature. Interestingly, one of the first 1 The Committee’s interpretation of its mandate often is expressed as inflation of “2 percent, or a bit less.” This does not mean keeping inflation in a narrow band capped by 2%. The “2 percent, or a bit less” interpretation of our price stability mandate comes from the responses to the Survey of Economic Projections which FOMC participants submit four times per year, and in which the majority of participants have said 2% is their long-run forecast under conditions that include appropriate monetary policy. Because inflation is determined in the long run by monetary policy, it follows that these long-run forecasts can be interpreted as participants’ views on the level of inflation most consistent with the Committee’s mandate. The “or a bit less” is added because a minority of participants submit long-run forecasts that are below 2%. 2 The exercise is described in Taylor, John B. 1993. “Discretion Versus Policy Rules in Practice,” CarnegieRochester Series on Public Policy 39, pp. 195–214; and Taylor, John B. 1999. | “An Historical Analysis of Monetary Policy Rules,” in John B. Taylor (ed.) Monetary Policy Rules, University of Chicago Press. BIS central bankers’ speeches 3 modern treatments is due to John Taylor in an article published in Econometrica in 1979.3 This framework continues to be a mainstay of optimal policy analysis, as evidenced by a large literature that includes work by Michael Woodford in recent years.4 Taylor expresses the central bank’s dual-mandate objective as monetary policymakers attempting to minimize the weighted sum of squared deviations of inflation and the level of output from their goal values. That is, a central bank attempts to minimize a simple quadratic loss function like the following: L = (π – π*)2 + λ * (y – y*)2 Here π and y are inflation and the (natural) logarithm of output, and π* and y* are the policy goals for these variables. In most formulations, y* is the log of the level of potential output – the level of output at which resource slack has a neutral influence on the level of inflation. Thus, (given the properties of logarithms) y – y* is the usual output gap, the percentage difference between actual and potential output. And π – π* is the gap between the actual and desired rates of inflation. Ideally, we’d like both of these gaps to be zero, but this usually won’t be the case. | 1 |
In other words, the countries with surpluses had exported many more goods than they had imported. In return, they had invested the surpluses in bonds and other assets in the countries with deficits. One could say that this reflected an increased willingness to save in the world economy – a global savings glut. This surplus contributed to pushing down long-term interest rates in the world. At the same time, there was a lot of capital to invest in the countries with deficits. A large share of this found its way into the property markets, where prices soared. It is not unusual for such international imbalances to lead to problems sooner or later. The situation is reminiscent of that which arose following the oil crises in the 1970s. The large increases in oil prices then meant that the oil-producing countries were sitting on huge amounts of dollars, the currency in which oil is normally traded. These so-called oil dollars, or petrodollars, were channelled through banks in the west into loans to countries in, above all, Latin America. However, it was gradually revealed that the loans had been granted on overly optimistic grounds, and many countries found it increasingly difficult to pay the interest on their debts. This led to the debt crisis at the beginning of the 1980s. We thus now have a similar problem with global imbalances in the form of large current account surpluses in some countries and deficits in others. | In earlier times, the compliance function was largely left to a single, usually mid-level, individual within the organisation, whose principal job was to serve as a contact point with the regulator, or to handle matters relating to anti-money laundering and counter financing of terrorism. Today, almost all financial institutions have a compliance function, staffed with whole teams dedicated to all aspects of a firm’s compliance with relevant laws, regulations and internal policies. Indeed, we have progressed. Many efforts have been taken to continuously strengthen the supervisory framework. Bank Negara Malaysia has identified the compliance function as one of the key control functions in a financial institution – right up there with senior management, risk management function, and finance and reporting functions. In 2015, we issued the compliance standard for financial institutions, which raised our expectations of boards and management to address the full breadth of structural, operational, resource and process issues that go into assuring compliance. We also issued strengthened corporate governance standards which reinforce the accountability of the boards in overseeing an effective compliance function. While it should be obvious why compliance is so important, I think it bears repeating. If motivations for an increased focus on compliance are exclusively driven by the avoidance of regulatory fines, then we are missing the big picture. We should be aware that a strong compliance function and culture makes good business sense. Today I would like to address the following matters: i. | 0 |
The BNB Governor also outlined the second work block in this direction, on which the BNB is currently working, i.e., the overall framework of determining the amount of funds to be contributed by banks to the Single Resolution Fund and the amount and way of transferring funds from the Bank Resolution Fund in Bulgaria, which was set up in 2015, to the Single Resolution Fund. The third work block covers the overall activity of planning and conducting resolution activities, including the distribution of responsibilities and tasks between the Single Resolution Board and the BNB after our country joins the Banking Union. With regard to the expected effects on the economy and the business, the BNB Governor highlighted that it was positive to reaffirm Bulgaria’s strategic course, and that the process is already being filled with content and specific timeframe. The whole process stands as a positive counterbalance against the more general uncertainty from the global and European economic environment. 1/2 BIS central bankers' speeches Among the more direct positive effects from this first stage on the path to the euro area is the anticipated improvement of the country’s credit rating, as announced by the credit agencies, should the process run successfully in the short-term. That would improve the funding conditions in the country. At the same time, the effects of joining ERM II will not be tangible in regard to the macroeconomic policy and neither will our monetary regime change. | Dimitar Radev: Accession to the euro area - a catalyst for social and economic prosperity Summary of a statement by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the Annual Government Meets the Business conference, Sofia, 29 January 2019. * * * During the Annual Government Meets the Business conference dedicated to Bulgaria’s path to the eurozone, the Bulgarian National Bank’s Governor, Mr. Dimitar Radev, outlined the activities of the central bank in this process and the anticipated effects for the economy and the business from the national currency’s entry into the Exchange Rate Mechanism (ERM II) and the adoption of the euro in Bulgaria. Provisionally, the work will be conducted in two stages: a short- and long-term. The short-term stage is linked to the preparation for simultaneous accession to the Banking Union and lev’s entry into ERM II. The second stage is Bulgaria joining the euro area. Mr. Radev underlined that the BNB is currently focused on the first stage, the outcomes of which will determine the next steps to follow. In terms of content, the first stage consists in joining the Single Supervisory Mechanism and the Single Resolution Mechanism. As regards the Single Supervisory Mechanism, the BNB is concentrated on three work blocks. The first one is creating the necessary regulatory framework. Overall, work in this direction was completed with the adoption of the necessary package of legislative amendments by the National Assembly at the end of last year. | 1 |
Muhammad bin Ibrahim: Of perception, sentiment and reality Opening remarks by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Persatuan Pasaran Kewangan (PPKM) Annual Dinner "Of Perception, Sentiment and Reality", Kuala Lumpur, 17 November 2017. * * * Thank you for the invitation to address the members of the financial market industry at this Financial Market Association of Malaysia’s (FMAM) annual dinner. l always look forward to this event as it provides the central bank with the platform to share our thoughts and expectations for the industry. We are operating in a very dynamic environment. Last year, I stood here and explained in detail why it was a challenging year. This year is no different. As the operating climate changes rapidly around us, we need to adapt. The theme of my speech will be a bit different this year. Titled “Of Perception, Sentiment and Reality”, it will be a bit longer than usual. I shall cover four parts; financial market review, factors that drive the level of the exchange rate, comments on ringgit exchange rate and interventions, and initiatives to build resiliency and liquidity for our market. Part I – Financial market review It has been an eventful year and our financial market industry has gone through significant changes and developments. The ringgit, for one, has seen significant developments. Last November, it was one of the most volatile currencies. A year later, it has not only strengthened but has greatly stabilised. | It continues to record robust activities in the financial market, reaching daily volume as high as USD16.1 billion compared to USD14.1 billion recorded in 2016, The onshore market volume on forwards and swaps alone has surpassed the observed offshore forward market volume which now records an average of USD1.0 billion a day. In addition, there is a narrowing of bid-offer spreads that would indicate an improvement in liquidity. Anecdotal evidence suggests that market participants, including corporates, continue to access the market to meet their business needs; Risk exposure from high non-resident participation in the onshore market has effectively reduced. Risks from high non-residents holding have significantly subsided as footloose short term positions have exited the market in the early part of the year. The non-resident investors that remain in the domestic market comprise mostly of long term investors. They are less affected by short-term market dynamics. Their investments tend to remain stable and at times act counter cyclically to short-term investors, providing stability to the overall bond market; 4/7 BIS central bankers' speeches On reserves, our level is sufficient to meet our needs. A point often overlooked, is that the central bank’s international reserves is not the only source to meet external liabilities. The availability of external assets and also currency denomination of the external liabilities are alternative sources of funding. In fact, BNM holds only 25 percent of the system’s foreign currency reserves. The rest is with the financial system itself. | 1 |
We therefore aim to agree a glide path to the new level, which, depending on circumstances at the time, could involve a multi-year transition period of incremental increases. But let me emphasise one perhaps rather obvious but nevertheless vitally important aspect of this – that a clear path to profitability (whilst meeting full capital requirements) is a necessary condition for success in this part of the climb. Two other points are worth emphasising here. The two factors that invariably provide a harness to firms that are successful in climbing the competitive and regulatory mountain are the quality of their governance and the strength of their relationship with the PRA. Our expectations of boards are high – and rightly so. Good, proactive governance is key to delivering a sound and well-run business. And, I should note, the opposite is often a leading indicator of a firm in trouble, and the root-cause of firm failure. In addition, just as mountain guides require an increasingly diverse set of skills as they ascend the varied terrain of the mountain, so too does the board. This means the board composition will invariably have to change as the firm grows, not only to become predominantly independent but also to ensure sufficient diversity of specialisms to support the executive and hold it to account. Relationships with the PRA need to be open, honest and constructive too. And for local entities of international groups, this is true not only for the local entity but for our relationship with the group and home state supervisor. | BIS central bankers’ speeches 7 Similarly, reforms designed to reduce bottlenecks to new investment that come from onerous business conditions should also have mainly benefits in the short-term. This would include measures such as reducing the administrative burden on young firms, or speeding up insolvency proceedings that raise the opportunity cost of investment by tying up capital for years longer than initially assumed. For many euro area countries there are several “low hanging fruit” that can still be picked in this area (Chart 10). The EAGLE simulations show that if reforms are also well coordinated across the euro area, the short-term benefits for a medium-sized country can be further maximised, especially in terms of limiting the downward effects on inflation (Chart 12). This reinforces what I have said about the need for stronger common governance of structural reforms in the euro area: if all countries reform together, then all countries benefit more. And these findings hold even under the assumption that monetary policy is constrained. Interaction with other policy measures But it is also important to underline that this assumption is in fact inaccurate for the euro area today. Contrary to models in the literature, monetary policy is not constrained because we have reached the lower bound. Rather, as I laid out in a recent speech in Washington, I think we have demonstrated in recent months how effective monetary policy can be when it has to resort to unconventional measures. | 0 |
Hamad Al-Sayari: Corporate governance for banks in the Kingdom of Saudi Arabia Speech by His Excellency Hamad Al-Sayari, Governor of the Saudi Arabian Monetary Agency, at the High-Level Roundtable Discussion for Bank Executives on Corporate Governance for Banks in Saudi Arabia, Institute of Banking, Riyadh, 22-23 May 2007. * * * Dear Distinguished Audience It is a great pleasure for me to welcome you, and I am delighted by your participation at this important conference on "Corporate Governance" organized jointly by the Institute of Banking and the IFC. Corporate Governance is popularly defined as a structural organization and executive procedures used to direct and manage business to achieve the objectives of the company and ensure its financial stability. In the past decade, this subject has taken increasing worldwide prominence because of its importance and relevance for the enhancement of macro-economic development and growth and the stability of the national financial systems in particular. In spite of the scarcity of books issued in Arabic on this subject, it is worth referring to two books; the first entitled "Corporate Governance" issued by Mr. Abdulmajeed Al-Bastati in 2004 and the second entitled “The Way towards a Governing System for Corporations" issued by Dr. Ibraheem AL-Muneef in 2006. The latter refers to a third book, which I have not read, issued by Mr. Saleh Ali Husein in 2003 under the title "Practicing and Managing the Authority in Business Organizations". | 3 3 All speeches are available online at www.bankofengland.co.uk/news/speeches 3 And all these systems in the UK – whether card or bank payment – still depend on existing core infrastructure meaning they either carry the associated costs and limitations on speed or they require the right point of sale infrastructure for their full benefits to be realised. The scope for improving cross border payments is bigger still. These can cost up to 10 times their domestic equivalent.9 Anti-money laundering checks that are rightly required can be cumbersome, and settlement is slow with money taking up to a week to reach the recipient. Most fundamentally, the new payment system must end the inequity that the people with the least money pay the most for financial services. The revolution of payments may not be driven by the old bank-based systems but by a new architecture. Major changes are on the horizon, bringing enormous advantages but also more than a few new challenges. That’s why the Bank fully supports the Payments Strategy Review the Chancellor has launched this evening. To support private innovation and to empower competition, the Bank is levelling the playing field between old and new. This means allowing competitors access to the same resources as incumbents while holding the same risks to the same standards. The Bank is in the midst of an ambitious rebuild of its Real Time Gross Settlement (RTGS) system, which processes £ billion of payments on average every day. | 0 |
Germany is growing rapidly, led in part by an expansion in exports to the booming Asian economies. The countries of the periphery are, however, struggling in the face of significant fiscal and structural challenges. While the countries of the euro-area periphery are each confronted by specific challenges, they all need to restore their competitiveness without the option of devaluation. Instead, in the absence of effective structural reform, they face the prospect of sustained low growth in order to drive down wages and prices. That itself makes the task of stabilising public debt harder. Support to Greece and Ireland from the IMF and rest of the European Union has given those countries a breathing space in which to undertake the necessary adjustments. Financial support for other countries may or may not prove necessary – only time will tell. But the important thing for us is whether an intensification of the difficulties in the euro-area periphery could also derail the recovery here. 2 Analysis of the earlier phases of quantitative easing both here and in the United States suggest that purchases of the order of 12–14% of GDP have lowered longer-term government and corporate bond yields by around 70–100 basis points relative to where they would otherwise have been. | Arthur Yuen: Remarks Discussant´s remarks by Mr Arthur Yuen, Deputy Chief Executive of the Hong Kong Monetary Authority, at the AMPF 2021 and MAS-BIS Conference on Macro-Financial Stability Policy, 28 May 2021. * * * Opening 1. It gives me great pleasure to share my views on Hong Kong’s experience in the use of macroprudential measures to safeguard financial stability. I am grateful to Mr (Robert) McCauley and Professor (Catherine) Schenk for their research efforts, and their recognition of the effectiveness of the macroprudential measures implemented by the Hong Kong Monetary Authority (HKMA) since the 1990s. The importance of macroprudential policies 2. Today’s discussion on macroprudential policies is timely considering recent market developments. The accommodative monetary policies adopted by major economies in response to the COVID-19 health crisis have provided renewed impetus to rising property and asset prices in many markets. How to rein in asset price inflation and prevent it from endangering financial stability in the event of an abrupt price adjustment is a topical issue within the central banking community. 3. As mentioned in Robert and Catherine’s joint paper, the HKMA’s macroprudential measures on mortgage lending were first introduced in 1991. They have helped Hong Kong weather several crises including the Asian Financial Crisis, during which property prices plunged by as much as 70% between 1997 and 2003. Being an early adopter, we are encouraged to see that macroprudential measures have gained wider international acceptance after the Global Financial Crisis (GFC). | 0 |
When speaking at the monetary policy meetings I have gone a stage further. On these occasions I have in principle never discussed underlying measures, but focused entirely on CPIF inflation. What have we learnt? There can be a lot of white noise in the time series data used for economic analysis. This applies in particular to monthly data. One therefore needs to adjust the data for white noise and seasonal variations. If one wants to analyse the development of inflation, for instance, one must make these adjustments. The purpose is to calculate the underlying rate of inflation, or, in other words, core inflation. There are largely two different ways of doing this. One is to use more or less advanced statistical methods to adjust for white noise and temporary changes. It is also possible to exclude goods and services groups that have proved to have volatile prices. Today I have presented a number of examples of measures calculate with the different methods. There are a number of important properties that one wants these measures to have. They should, for instance, show the same basic development as the non-adjusted series. There are measures that are better or worse with regard to how well they fulfil the criteria for desirable properties. But there is no measure that is unequivocally better than all the others. And this is where the problems arise for the monetary policy decision-makers. There is, on the one hand, a need to approach the existing data with caution and to regard them from different perspectives. | These small value purchases are concentrated in newly issued agency MBS in the To-Be-Announced (TBA) market, which is expected to undergo changes next year due to the FHFA’s Single Security Initiative and the introduction of Uniform MBS (UMBS). Given these changes, the Desk plans to develop its operational readiness for conducting transactions in UMBS and, to more efficiently manage the SOMA portfolio, convert some of its agency MBS holdings to UMBS where appropriate. See the Statement Regarding Agency Mortgage-Backed Securities, September 14, 2018. 14 5 limited impact from the reduction in holdings on Treasury yields and MBS spreads thus far. As shown in Figure 6, comparing a matched sample of survey respondents in our July 2017 surveys to the September 2018 surveys, the expected impact on 10-year Treasury yields and 30-year MBS option-adjusted spreads (OAS) during the two-year period following implementation of the change to the reinvestment policy has declined, likely in part reflecting expectations for the balance sheet to normalize at a larger size. 15 Looking forward, the median respondent currently anticipates the cumulative impact over the next two years to be 17 basis points for the 10-year Treasury yield, and 12 basis points for the 30-year MBS OAS. This gradual expected increase contrasts with the experience of the so-called “taper tantrum” in 2013, which showed that markets can have outsized and sharp reactions to changes in balance sheet policy even before they happen. | 0 |
Over the last ten years, Nordic banks have increasingly established operations in other countries in the region and have begun to offer their services to households and companies across national borders. Swedbank, for example, accounts for almost 45 per cent of total lending in Estonia, while SEB accounts for 1 I have chosen to define the Baltic region as Sweden, Denmark, Finland, Northern Germany (i.e. the federal states of Schleswig-Holstein, Mecklenburg-Vorpommern and Hamburg), Poland and the Baltic states – Lithuania, Latvia and Estonia. 2 Refers to the population of EU25. BIS Review 105/2009 1 30 per cent of lending in Lithuania. 3 Prior to the beginning of the crisis, the operations in the Baltic states also generated an increasing proportion of the earnings of these two banks (see Figure 1 and Table 1). Other major players are Nordea and Danske bank, which can now regard practically the entire Baltic region as their domestic market. This financial integration has many economic advantages, but it also poses major challenges. I do not intend to discuss this further here, but will simply say that when the financial systems of different countries become intertwined, the risk increases that problems will spread across national borders. As far as Sweden is concerned, this has resulted in a decline in confidence not just in the Baltic economies but in the Swedish economy too. This is because there is a risk that developments in the Baltic states will entail substantial loan losses for the Swedish banks. | This is reflected, for example, in the fact that the credit spreads, that is the difference between the interest rates on corporate bonds and the interest rates on government bonds, have returned to the levels that applied before Lehman Brothers filed for bankruptcy protection. The difference between interbank rates and the expected policy rate has also decreased (see Figure 15). The credit markets are also steadily improving. Companies that just a few months BIS Review 105/2009 7 ago found it difficult to issue bonds now have access to the market again. Companies with a good credit rating can now borrow at a lower cost, at longer maturities and with lower collateral requirements than before the summer. It thus appears that the situation on the financial markets is beginning to ease and that confidence is slowly returning. This is in turn a precondition for the continuation of the recovery of the real economy. Global monetary and fiscal policy is still highly expansionary and there is plenty of spare capacity in most countries. It is not unreasonable to assume that a rapid recovery of the financial markets can also facilitate a more rapid recovery in the real economy. There are thus several reasons why it is reasonable to be cautiously optimistic. We must also remember, however, that we are still emerging from a severe recession and it may therefore take time before global demand recovers completely. | 1 |
Dimitar Bogov: We will need foreign loans also in the coming years Interview with Mr Dimitar Bogov, Governor of the National Bank of the Republic of Macedonia, in Utrinski Vesnik, conducted by Ms Nina Nineska-Fidanoska and published on 22 August 2013. * * * Mr. Bogov, in June, lending grew by only 3.7 percent, which is considered a very low rate. Few months ago, businessmen called for an annual credit growth rate of 8 to 10 percent. Is there a chance to reach that goal and when? It is usually considered that credit growth should be two times the nominal growth of the gross domestic product. This means that if we want to achieve long-term real GDP growth of some four to five percent and inflation of two to three percent, then certainly I would say that credit growth of 10 to 15 percent is normal and desirable. But we were in a period of slower economic growth, so that the credit growth rate was relatively low in the last year. This year it continued, and in June we had an annual credit growth rate of 3.7 percent. It is low, but in line with our projections. For the entire year we expect credit growth of 7 percent and we believe we will achieve that rate. In June and July we already have a more intensive monthly credit growth compared to the previous months and we expect that trend to continue. | Large economies like Turkey or Poland can afford a floating exchange rate, but small economies cannot. It is much better to have a fixed exchange rate and disciplined policies. A few weeks ago you said that a reduction of the budget deficit to the level that does not increase the public debt should be considered. What did you actually want to say? I gave the same or similar statement a few times in the past. And it is not very different from what competent ministers think and say. In 2008, after the outbreak of the global economic crisis, we had a large room for fiscal support, because we had a low public debt, previously we had no budget deficit and the fiscal policy significantly supported the economic growth in the period when private consumption and external demand were shrinking. But in the past four years, the level of government debt increased to 34 percent of GDP. Although it is still a moderate level, a gradual reduction of the budget deficit to a level that will stabilize the level of public debt should be considered. What is the level of budget deficit that is optimal for Macedonia? There is no clear limit as to that level. Any limit we set might be a mistake. It depends on a number of factors – what is the economic growth in the country, at what interest rate we are borrowing, what is the creditors’ trust in our economy. | 1 |
Some of the Primary Dealers who are dealing outside the Scripless Securities Settlement System could have caused potential threats to the system. This may have been particularly due to the fact that using SWIFT was considered to be an expensive method of transferring data. Therefore, the Central Bank has now introduced a low cost method of transferring data using the Wide Area Network connecting them with the Central Bank. Accordingly, all Primary Dealers are now urged to use this method to ensure retail transactions are not proceeded outside the system. Two new laws, namely the Prevention of Money Laundering Act No. 5 of 2006 and the Financial Transactions Reporting Act No. 6 of 2006 have been enacted last year to prevent money laundering and terrorist financing and to strengthen the reporting mechanism for financial transactions. Arising from such initiative, the Financial Intelligence Unit has already been established to investigate and take action to combat money laundering and terrorist financing. The work of the FIU will be further expanded during the year 2007. In line with the global trends, we will be taking steps to further promote corporate governance in the financial sector by implementing several measures. Mandatory corporate governance rules covering important areas of corporate governance principles will be introduced in place of the existing voluntary codes. | The floating exchange rate system has served well in the conduct of monetary policy. As in the past, the Central Bank interventions in the foreign exchange market would be limited to building up the international reserve position and to stabilise any undue fluctuations in the foreign exchange market due to excess or shortage of international currencies. As per available international data, the global economy is projected to grow at around 5 per cent in 2006 and is expected to moderate to around 4.7 per cent in 2007. Sri Lanka’s major export markets such as the United States of America (USA) and the Euro area and other trading partners are also expected to grow at healthy rates. It is therefore likely that the continuation of favourable global economic conditions will generate healthy external demand for Sri Lanka’s goods and services. Based on the external and internal factors, the Sri Lankan economy is expected to grow by 7.5 per cent in 2007. Growth is also expected to be broad-based, with all three sectors, Agriculture, Industry 1 Broad Money (M2b) is complied consolidating the operations of the Central Bank and operations of domestic banking units and off shore banking units (OBUs) of commercial banks. 2 The money multiplier is the amount of money created by an additional unit of reserve money. BIS Review8/2007 7 and Services, poised to grow at healthy rates. | 1 |
To explain this, allow me to draw your attention to developments in yields on bonds with a BBB rating, i.e. among the less high quality bonds in the Fund’s portfolio. The above chart shows the pronounced changes in the difference in yield between these bonds and government bonds, or the credit spread. This does not per se reflect a higher risk of bankruptcies. If this were the case, perhaps half of these solid companies would have to file for bankruptcy in the course of a few years. In this analysis from the Bank of England, risk premiums on corporate bonds are instead divided into three components. One component takes account of expected losses and another uncertainty with regard to expected losses – in other words, fear. The third primarily indicates that these bonds have become illiquid, or more difficult to buy and sell. These liquidity premiums, and perhaps also premiums for the initial panic and fear, do not pose a problem for a fund like the Government Pension Fund. On the other hand, a prolonged period of fear and liquidity shortages – if the authorities are not able to reverse these developments – could lead to higher future losses. The Fund’s fixed income portfolio is well diversified across different types of bonds and different regions and the active strategies had low correlation in normal markets. However, the financial crisis revealed that these strategies were exposed to more underlying, systematic risk. | Second, saving banks may well need a sound corporate governance scheme precisely because of the special ownership and control structure. Third, corporate governance that reinforces transparency is always an important contribution to increased efficiency. Fourth, we supervisors see corporate governance as a way not just to safeguard minority shareholders, but also depositors, arguably the weakest part of the banking framework. As regards the efficiency of institutions, we all know that the application of appropriate corporate governance rules improves the quality of their management, their reputation, their stability and, by extension, their risk profile. This is why the Banco de España is and has always been in favour of strengthening corporate governance and transparency in savings banks and will assign more resources to analysing both corporate governance requirements and the practical application of these requirements at each institution. Conclusions To conclude, let me add that the process of improving efficiency levels should not be viewed as a solution for times when the revenue arising on ordinary activity is adversely affected. Rather, it should be tackled as a process to be pursued over the medium and long term, in parallel to the improvement in risk management systems. BIS Review 31/2003 5 | 0 |
Due to the recent events, therefore, researchers have focused their attention on testing for the endogeneity of optimal currency areas, further enriching the vast literature on the synchronisation of business cycles 4. This literature substantiates the conclusion of diverging real and financial cycles across member states, both during the pre-EMU and post-EMU regimes. The single monetary policy has not 2 D. Miles, Monetary Policy and Forward Guidance in the UK, speech given at the Northumbria University, Newcastle, 2013, D. Kapp, M. Vega, Real Output Costs of Financial Crises: A Loss Distribution Approach, MPRA Paper No. 38988., 2012, A. G. Haldane, The $ Billion Question, comment by Andrew G. Haldane, Financial Stability, Bank of England, Institute of Regulation & Risk, Hong Kong, BIS Review 40/2010. 3 Constâncio, V. (2015): Financial stability risks, monetary policy and the need for macro-prudential policy; speech at the Warwick Economics Summit, 13 February 2015 (https://www.ecb.europa.eu/press/key/ date/2015/html/sp150213.en.html). 4 Grigora, V., Stanciu, I.E. (2015): New Evidence on the Synchronization of Business Cycles: Is there an European Business Cycle?, National Bank of Romania, Macroeconomic Modelling and Forecasting Department, Bucharest University of Economic Studies; Basten, C. (2006): Business cycle synchronisation in the euro area: Developments, determinants and implications, Working Paper Series, Research Notes 22, Deutsche Bank research; Stremmel, H. (2015): Capturing the financial cycle in Europe, Working Paper Series, No.1811/June 2015, European Central Bank; Sybille, L. (2012): Has the Euro Changed Business Cycle Synchronization? Evidence from the Core and the Periphery, Ifo Working Paper No. | European and national authorities should launch a comprehensive strategy that combines a range of suitable tools to deal effectively with Europe’s NPL problems. A key aspect of that strategy will be aligning incentives between the parties involved: banks, investors and the authorities. A number of tools look particularly promising. National asset management companies (AMCs), if designed correctly, have been successful in relieving banks’ NPL burdens and recovering asset value. A blueprint for national AMCs in the euro area – essentially, a manual for setting up an AMC – would save authorities time and money. In addition to clarifying in detail how AMCs can be made compatible with the EU legal framework, such a blueprint should identify international best practices for key aspects of AMCs such as eligible asset classes, participation requirements, 1/2 BIS central bankers' speeches asset valuation, capital and funding structures and governance. Apart from AMCs, securitisation schemes also have the potential to kick-start the NPL secondary market, but may require public intervention to signal that governments are determined to follow through with structural reforms that will improve asset valuations. NPL trading platforms or clearing houses should also be fully explored, even at euro area level, to increase NPL transparency and stimulate transaction activity. To be successful, however, all of these options require a considerable push for structural reforms related to debt enforcement and a reduction of information asymmetries. If these measures become credible, investors will recognise the shift in policy and should ultimately be willing to pay higher prices for NPLs. | 0 |
That is doubly unfortunate, as it means debtor discipline will be weakest among institutions for whom society would wish it to be strongest. Worse than that, bigger banks will then benefit from an implicit state subsidy, for cheaper debt means fatter profits. That might itself encourage further risk-taking. There has been considerable recent interest in the scale of this too-big-to-fail subsidy. Indeed, eliminating this subsidy has been taken as a bellwether of the authorities’ success in tackling the too-big-to-fail problem (Treasury Committee (2010)). Various attempts have been made to quantify this subsidy (Oxera (2011), New Economics Foundation (2011), Haldane (2010)). The two most popular approaches use credit ratings or option-implied distributions. The ratings-based approach looks at the difference between the standalone (“no support”) and “support” ratings of a set of banks. It uses this difference to determine how much higher funding costs would have been in the absence of support (Haldane (2010), New Economics Foundation (2011)). The options-based approach builds on Merton’s framework (Kou (2004)). A distribution is fitted to banks’ assets. Whenever assets fall below a certain threshold, the probability of government support can be estimated. Table 1 looks at some empirical estimates of the implicit subsidy using the two methods, for a sample of the four largest UK banks and 22 large international banks. The estimates are shown over the period 2007–2010. For UK banks, under either measure, the implicit subsidy amounts to at least tens of billions of pounds per year, often stretching to three figures. | This means that where the Accord treats exposures too harshly relative to their inherent risks, we expect to reduce the capital requirements. A good example would be the treatment of retail exposures, where the Committee found good economic evidence supporting a significantly lower requirement compared to earlier drafts of the new rules. But where the risk is greater, and where the existing rules fail to assign adequate capital, it should not be surprising that capital requirements are raised. We will continue to evaluate the assumptions in the New Accord and their relative degrees of conservatism in the final months ahead. Competition and consistency of application Conservatism in the framework raises concern in the industry partly because banks welcome the great flexibility they will enjoy in other areas of the New Accord. A key example would be the ability to develop their own risk measurement tools and use their own models to estimate the drivers of credit – or operational – risk. Yet the great flexibility banks will enjoy raises the concern among some that too much flexibility might allow competitors at home or abroad to employ methods subject to less rigorous supervision. This brings us to the final theme we noted in our consultations, namely the need to maintain a level playing field and promote competition. Ensuring the consistent application of the New Accord in its entirety is a critical concern for the Committee. | 0 |
SPEECH Monetary policy in the euro area Karl Otto Pöhl Lecture by Christine Lagarde, President of the ECB, organised by Frankfurter Gesellschaft für Handel, Industrie und Wissenschaft Frankfurt, 20 September 2022 I am honoured to deliver the Karl Otto Pöhl lecture this evening on the topic of monetary policy in the euro area. After a long period when inflation in the euro area was too low, it is now far too high. We are in the tenth consecutive month of record-high inflation rates and we may see this streak continue in the near term. Inflation is being caused by a series of unprecedented shocks, which have led to turning points in the global economy. As a result, price pressures have proven much stronger and more persistent than originally projected. In this setting, monetary policymakers must ensure that inflation does not become entrenched and that it returns to target in the medium term. And our policy response will need to account for the special combination of shocks that we are facing in the euro area. In my remarks this evening, I would like to address two issues. First, the nature of the inflation shock we are facing in the euro area today, and second, the implications this has for monetary policy now and in the future. The shocks hitting the euro area economy In our monetary policy strategy, the appropriate response to a deviation of inflation from our target depends on three factors: the source, size and persistence of that deviation. | Tarisa Watanagase: The Thai economy – challenges and prospects Speech by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the European Heads of Mission Luncheon, Residence of the Ambassador of the Federal Republic of Germany, Bangkok, 21 February 2007. * * * Ambassador Brümmer, Your Excellencies, Ladies and gentlemen, At the outset, I would like to thank Ambassador Brümmer for inviting me to speak at this luncheon. It gives me great pleasure to share my views on Thailand's economic prospects with all of you. This talk is most timely for these are difficult times for Thailand. In the past year, Thailand under major political developments. We saw mass street protests against the previous administration, a military coup and the annulment of the 1997 constitution. The present government has promised an election and a new constitution but, as year-end bombings painfully show, political uncertainties remain. Economic uncertainty has also increased. In the past few months we saw rapid baht appreciation and declining consumer confidence. The threat of a disorderly unwinding of global imbalances still persists. In addition, the implementation of the reserve requirement and the introduction of the amended Foreign Business Act proved to be unpleasant surprises to investors and the global community. These are indeed difficult times. And difficult times require difficult choices to be made. Some of you may be concerned that Thailand may not be able to weather all these challenges. Some of you may fear that Thailand is turning her back on globalization. | 0 |
That seems a very difficult task to work out in my opinion. It implies that such rules would need to be designed to treat broad issues, such as increases in financial system leverage or aggregate credit growth, rather than more limited sectoral issues. This may work well in some circumstances in which the financial excess is occurring broadly, but might not be very effective when the problem, while extreme, may be more narrowly based. Historical experience suggests that past bubbles in the United States that have threatened financial stability have taken many different forms and affected many different sectors of the economy. Often, the bubbles have occurred in response to some important innovation in the economy or the development of instruments that facilitated real estate lending to lowerquality borrowers. Examples of these include the development of the internet in the technology stock boom of the late 1990s, and subprime lending and mortgage securitization innovations prior to the financial crisis. These innovations, in turn, sparked changes in belief systems that turned out to be false – such as, the rise in home prices reinforced the view that housing is an excellent investment and that national home prices can never decline. When the assumption that widely supports a boom is revealed as false, the consequence is often a sharp reversal in behavior and prices as the boom deflates quickly. I think it is very hard to anticipate these episodes and put rules in place that would limit such excesses. | As a result, I suspect it would be difficult to get all the relevant regulators on board in a timely way to implement macroprudential tools successfully. In principle, the Financial Stability Oversight Council (FSOC) might be well placed to coordinate a response across different regulatory jurisdictions. But, I believe this is likely to prove difficult to do in practice. Each of the regulatory agencies guards its own authority and prerogatives, and may not always be responsive to pressure from other regulators or the U.S. Treasury. There is also the problem of responding to an emerging financial stability risk in a timely manner. First, the emerging problem needs to be identified. Then alternative policy responses need to be analyzed and debated. And, there is an understandable bias to start small and to escalate only as needed given the lack of understanding about how big an impact a particular tool may have on the economy. So, even if the FSOC could be effective in developing a consensus among the regulators, I wonder whether it could do this in a timely way. The housing boom in the U.S. that culminated in the financial crisis began in 2002 and 2003. By the time that it was broadly identified as an issue in 2005 and 2006, it might have been too late to do much to temper its effects, even with a sound macroprudential response by the regulatory community. In the remainder of my time, I will discuss two topics in more detail. | 1 |
Against that background, a number of economists have recommended that inflation-targeting central banks should not only adjust interest rates on the basis of forecasts for inflation and the real economy but also should respond ”separately” to changes in assets prices. The debate on this subject has not been all that easy to follow, not least because the various conclusions from the debate are based on different models with their specific assumptions.2 However, I think you can say that the dominant view today, at least in the central bank world but – as I have understood it – also in academic circles, can be described as follows. A flexible inflation-targeting policy is a sufficiently good “tool” for dealing with problems that can arise via price developments in asset markets. A forward-looking central bank should keep in mind the long-term consequences of, for example, a prolonged rise in asset prices when making interest rate decisions, but there is no reason to take account of asset prices over and above their consequences for the ultimate objectives – price stability and real stability. On the other hand, in some situations it may be necessary for the central bank to attempt to look further into the future than normal in order to ”include” the impact on inflation and the real economy that asset price developments may give rise to in the long term. This is an important dimension of the flexibility in a flexible inflation-targeting policy. | This kind of speculation has likely pushed up house prices in above all Australia, but presumably also in the UK, the US and Ireland. BIS Review 88/2005 1 Another reason why the developments in the housing market and households’ high debt levels are unlikely to pose a threat to financial stability is that households’ ability to service debt is good. On the whole, households are judged to have financial margins that enable them to cope with rises in interest rates or a temporary loss in income without encountering payment difficulties. In addition, the banks’ earnings are good. Past experience also shows that it is unusual for the household sector to cause the banks’ particularly large loan losses. This is fairly natural in one sense. The decision to invest in a home is one of the most important a household makes, and when the decision has been taken the household is often prepared to make rather big sacrifices to meet its obligations. It is worth noting that during the crisis years at the beginning of the 1990s, losses on loans to the household sector accounted for only 7 per cent of the banks’ total loan losses. Instead, it was the commercial property market that accounted for the major losses in the banking system during the property crisis. This, too, has fairly natural explanations. An office building differs from a home in the sense that interest expenditure is intended to be covered by rental income, i.e. income that is generated by the investment itself. | 1 |
The rule deals with provisioning for non-performing loans (NPL), taking into account the duration of the NPLs, and also calls for a specific buffer linked to the gap between provisions and NPLs. Safeguarding fiscal stability by expanding growth…competitiveness is key Economic and financial stability also require fiscal consolidation, so that the deficit progressively declines towards the Fiscal Compact target. The debt-to-GDP ratio is expected to reach a plateau and then start declining, as planned by the Government. Budget figures project the debt-to-GDP ratio at 73% in 2013, along with a deficit ratio of 2.7%. An exit from the Excessive Deficit Procedure is essential. BIS central bankers’ speeches 3 Indeed, the Fiscal Compact involves strict budgetary commitments and places limits on the Government’s deficit. Moreover, even in the absence of the obligations under the Fiscal Compact, public debt cannot be allowed to accumulate persistently as this could lead to unsustainable debt dynamics. GDP growth reduces the debt ratio first by automatically raising tax revenues and reducing Government spending. Second, it expands the denominator of the debt-to-GDP ratio. Obviously, resolving fiscal excess through an expanding GDP is less painful. To sustain economic growth, the economy needs to offer products and services with high value added and at competitive prices. The alignment of wages and productivity is crucial for competitiveness, particularly at a time when neighbouring economies are undergoing an internal devaluation. | In the four years since our last gathering, we were hit by a sequence of global shocks, unprecedented in their diversity and density of occurrence – first the pandemic, then the energy crisis, the full-fledged war on European soil and the refugee crisis, and all coupled with the long-standing and ongoing climate crisis. These shocks further triggered some major structural changes – the pandemic speeded up digitalization and changed the working habits all over the globe, but also led to severe global supply disruptions. On top of that, the war led to global trade and investment fragmentation, 1/4 BIS - Central bankers' speeches and further exacerbated inflation pressures, thus forcing the central banks to aggressively raise interest rates. Quite a different world than when we last met here on a similar occasion. As stressful and demanding these recent years have been, for policymakers and economists they were also a lifetime opportunity for learning important lessons. In times like these we often say: "Don't waste a good crisis.". From each and every of them we can learn something and by doing that we can benefit. When it comes to these recent crises, I would highlight three key lessons we should take away – resilience, adaptability, and cooperation. First, on resilience. We live in an increasingly shock-prone environment in which unpredictability is becoming the norm. Who would have thought in 2019 that we would have a pandemics and major war in Europe in next three years? | 0 |
Accordingly, we continue to estimate that the current high level of inflation will be temporary, a vision that is shared by market agents, as inflation expectations one and two years ahead have remained around 3 percent (figure 4). As I said at the beginning, the biggest news in several months comes from domestic demand and output, which posted a quite weaker performance than our forecasts. In the second quarter GDP grew 1.9 percent while domestic demand dropped 0.9 percent annually (figure 5). Expenditure’s poor performance permeated its every component, where worth noting was the fast deterioration of the most persistent ones, such as non-durable consumption and investment in construction and engineering works. By sectors, trade, especially wholesale, fell in annual terms, while a large number of manufacturing branches posted meager results. Only those most linked to the export sector show marginally more favorable figures. The evolution of expenditure has also driven a reduction in imports, causing a sharper adjustment to the current account (figure 6). In fact, while a year ago the annual deficit of the current account amounted to 4 percent of GDP and was expected to increase further, at the end of the second quarter it was at 2.4 percent of GDP and is now expected to end the year at 1.8 percent of GDP. This level, plus the peso depreciation and its effects on exports, mean that we can look at this variable’s future behavior with ease. | Trade liberalisation, political changes, technological advances, and a sharp reduction in transaction costs have fuelled a globalisation process that seems to have accelerated over the last 15-20 years. As a result, cross-border flows of goods, services and capital are growing at a markedly faster pace than world production. Few countries are benefiting as much as Norway – and losing as little – in the current environment of freer trade and increased cross-border labour mobility. Prices for goods we import are falling in relation to prices for goods we export. Norway’s terms-of-trade are improving. The Norwegian economy has experienced a strong positive income shock. Real national disposable income will increase by 25-30 per cent in the period from 2003 to 2006. The impact of the rise in oil and gas prices is particularly strong, but the terms-of-trade gains for the mainland economy have also been high. The situation in Norway differs from that of our Nordic neighbour countries. Sales of Swedish and Finnish high-tech products are growing strongly in volume terms, but prices are falling. Denmark has a diversified business sector, which is overall moving on a steady path. The terms-of-trade gains partly stem from a sharp rise in prices for oil, gas and other commodities. Strong global economic expansion in combination with rapid production growth in China, India and other newly integrated economies has led to a substantial rise in demand. | 0 |
It can be argued that such policy instruments should be on the law books by the time the auction of offshore krónur takes place because, if the auction is as successful as we intend, it is possible that confidence in Iceland will grow still further and capital inflows will increase. BIS central bankers’ speeches 3 Why do we need all of these additional tools and contingency measures? An important reason is the risk to financial stability that accompanies excessive and volatile capital movements that are unconnected to economic fundamentals. Another important reason is that in an increasingly financially integrated world, it is more difficult for small countries to deviate too far from the monetary policy pursued in the larger countries that determine global financial conditions. We saw this before the financial crisis, in New Zealand and here in Iceland. And we have seen it more recently, in countries like Switzerland and Sweden. We can better understand why this is so if we consider a situation where cross-border financial integration is nearly perfect, so that capital movements very quickly even out the difference in risk-adjusted real returns on assets in different countries. The interest rate channel of monetary policy transmission then becomes clogged up in small, open, and financially integrated economies, where long-term interest rates are determined by rates in large countries and transmission takes place largely through the exchange rate channel. | Furthermore, it is at the core of central banking to prioritise macroeconomic objectives over the central bank’s own finances. Moreover, this situation could make it possible to resolve most of the problem in the auction, in a more permanent way than was previously envisioned. Preparations for the auction are now well underway, and the date and format will be publicised soon, so that the auction can take place in the first half of the year. Other things being equal, it should then be 2 BIS central bankers’ speeches possible to move relatively quickly towards lifting capital controls on residents, as the current account surplus, foreign exchange inflows, and robust foreign exchange reserves provide ideal conditions for it. On the other hand, it is important to reach successful conclusion regarding offshore krónur before general liberalisation of controls on residents can take place. Now I would like to turn to longer-term issues regarding monetary policy and its relationship to other aspects of economic policy and prudential policy. In its reports entitled Monetary policy after capital controls and Prudential rules following capital controls, published in 2010 and 2012, respectively, the Central Bank described the new monetary policy framework and prudential rules that will be necessary to preserve financial stability and support monetary policy after the capital controls are lifted. | 1 |
The growing sophistication and complexity of financial activities, brought on by financial innovation and globalisation, have made risk management a key and important task for all banks. In particular, the integrity of real-time information on changing prices, valuation of financial position, and warning on breaches of internal control is most critical now for bank’s top management in taking timely and prudent decision. The recent episode in the global financial market has demonstrated again the costly implication of weaknesses in this area. For these reasons, information technology and its management has become a key part in business strategy as it can provide lever to create competitive edge and innovate business model, especially for providing customer reach in a cost-effective manner. But on top of this, pressure from competition and the need to cut costs also have forced banks to rethink their business models and strategies, leading to fundamental changes in the business process that include the proliferation of outsourcing, electronic banking, and the use of the internet. Again, while these developments are positive, they also expose banks to a different aspect of risk management, for example how to manage and control outsourced activities. Such an environment, if not properly managed, can lead to greater technological and security risk, as well as to malicious activities. For central banks, one of our key mandates is to ensure financial system stability. | Ardian Fullani: Agreement between the Bank of Albania and the Competition Authority Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the signing of the Memorandum of Understanding, Tirana, 17 July 2007. * * * Dear participants, I am pleased to have concluded this co-operation agreement between the Bank of Albania and the Competition Authority. In observance of the legal responsibilities of the institutions we represent, this agreement concludes the formal basis for cooperative efforts, in terms of achieving the objective of enhancing the competition conditions, in which the banking and financial activity is being conducted. Fair competition promotes the efficiency in the banking business and refines the composition and the functioning of the banking market, by providing significant services to clients and the public at large, being users of banking and financial services. It has been for some years now that the Albanian economy and the financial system are in an intensive process of integration into the regional economies and markets. This process requires the improvement of the legal and regulative framework for developing the business and the enhancement of the human and institutional capacities to cope with the challenges deriving from the economic openness and the enhancement of competition. | 0 |
In parallel with the role of ERTEs, it is important to ensure the proper functioning of the different labour flexibility mechanisms available to firms, whose function is particularly useful in these circumstances for efficiently accomplishing the adjustments arising from the crisis. Active labour market and training policies for the unemployed and workers affected by ERTEs also take on considerable importance. Once suitably re-designed, these policies should be geared to boosting employability and smoothing the relocation of the workers most affected by the crisis to sectors or firms with greater growth potential. The criteria whereby support instruments are maintained, but after being appropriately designed so as not to distort the necessary adjustments in the economy, are also important. And particularly so those expressly intended to sustain the income of the most vulnerable households. The necessary implementation of an ambitious structural reform agenda Let us look beyond the policies needed in this phase of incipient economic recovery. Taking a broader view, the extraordinarily complex setting envisaged by the Banco de España’s latest economic projections - and those of the vast majority of analysts - for the coming years also means we should define a reform agenda aimed at tackling the structural challenges our economy faces, and which this crisis has made more pressing. In this setting, an ambitious reform strategy would be an essential lever for positioning the Spanish economy on a sustainable path of growth, job creation and well-being. One of the key structural challenges is that relating to the need to increase our economy’s growth potential. | Concluding, I would like to thank all the researchers, the speakers, the audience and our collaborators, who responded positively to our call for participation. With these words, I wish you all fruitful deliberations, I wish the conference all success and I wish all the guests an enjoyable stay in Tirana. Thank you! 2/2 BIS central bankers' speeches | 0 |
The aspiration and objectives of a national strategy for financial literacy have been carefully articulated by the Financial Education Network (FE Network), which was established in late 2016. Strategic outcomes, priority areas and target groups have been identified. The national strategy for financial literacy have identified five strategic priorities which cover all life stages – from nurturing values among young children, to inculcating positive behaviour for adults and preparing Malaysians to retire comfortably. Specific action plans would be formulated to reach out to the masses as well as meeting the needs of specific target groups. The second key thrust is “collaboration”. I believe that shared responsibility and concerted efforts are integral to the successful implementation of the national strategy to realise our desired outcome. It requires strong and long-term efforts by all stakeholders, including regulators, private and public sectors, non-governmental associations and the consumers themselves to realise the desired outcome of improving financial literacy. Each stakeholder has its own strength. While some are subject matter experts providing reliable financial education to the targeted audience, others may have access to critical contact points to reach out to the masses. Often times, many agencies are also well-positioned to leverage on “teachable moments” such as at the stage of starting a job; getting married; or preparing for retirement, where key financial decisions are made. The national strategy will be a catalyst for the stakeholders to leverage on each other’s strengths, resources, expertise or even authority in providing a holistic financial education and in reaching out to Malaysians nationwide. | It may be useful to distinguish between three channels through which monetary policy operates: • The demand channel • The exchange rate channel • The expectations channel The effect on inflation of changes in interest rates occurs with a lag and may vary in intensity. In the time it takes for a change in interest rates to feed through, other factors will also have an impact resulting in changes in inflation and output. We cannot assume that the various relationships are entirely stable. As interest rates fall, household and municipal consumption and investment will tend to accelerate. This is because they have more money left over after servicing their debt and because borrowing is less expensive. Corporate finances are strengthened and investment may become more attractive. Higher demand leads to higher output and employment. Wage growth may pick up. Higher wage growth combined with higher profit margins will result in higher inflation. The effect of interest rate changes may be amplified because the interest rate also affects the krone exchange rate. When interest rates are lower, more people will borrow money and fewer will invest in NOK. Lower interest rates will thus normally lead to a depreciation of the krone. Imported goods will then become more expensive and inflation will accelerate. A weaker krone also boosts exports and improves profitability in Norwegian business and industry. The effect on the exchange rate of a change in interest rates will vary as themes and sentiments shift in the foreign exchange market. | 0 |
With respect to prices, inflation has been running somewhat below the Federal Reserve’s objective of a 2 percent annualized rate for the personal consumption expenditures (PCE) deflator. For example, over the past twelve months, the overall PCE deflator has risen by 1.4 percent, and the core PCE deflator, which excludes food and energy, has increased by 1.5 percent. Moreover, for the next few months, inflation is likely to moderate further as the impact of falling gasoline prices and the firmer dollar feed into the official U.S. inflation statistics. Thereafter, I expect that inflation will begin to move back towards our 2 percent objective, pushed there as slack in the economy continues to diminish and pulled there by well-anchored inflation expectations. In assessing inflation expectations, I currently put more weight on survey-based measures of inflation expectations as opposed to market-based measures. Survey-based measures have been generally stable, consistent with inflation expectations remaining well-anchored. However, market-based measures, such as those based on breakeven inflation derived from the difference between yields on nominal versus Treasury Inflation-Protected Securities (TIPS), have registered declines over the past few months, even on a 5-years forward basis. Research done by my staff suggests that much of this decline in market-based measures of inflation compensation reflects a fall in the inflation risk premium – that is, what investors are willing to pay to protect themselves against inflation risk. Adjusting for the fall in the inflation risk premium, inflation expectations appear to have declined much less than implied by TIPS inflation breakeven measures. | Denis Beau: Financial supervisory and coordination - new issues and challenges regulatory policy Contribution to the panel discussion by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Salzburg Global Finance Forum, 22 June 2021. * * * Regulatory policy and Supervisory coordination has always been fraught with challenges. I remember panel discussions with market participants about this very topic at the BIS twenty years ago. No surprise for me that it is still a topic today, because there is a deeply rooted reason for it: the inevitable tension between market forces on the one hand, which push for a borderless financial system in many of its layers, despite step backwards, as we have seen since the Global financial crisis, and on the other hand the jurisdictions in which regulators and supervisors operate, are accountable and must discharge their obligations, which at best are regional for some and most often are national. This observation does not mean that we have not made progress in addressing this tension over the last decades. Nevertheless, I would differentiate between coordination issues to manage large-scale crisis and to prevent those crisis. Regarding the former, I think it is fair to say that the Covid-19 pandemic acted as a test of the resilience of our global coordination framework, which has improved with a strong G20 dimension after the GFC. | 0 |
To further develop the operational framework for financial stability, and following the implementation in 2010 of the new accounting rules, in line with international standards, as well as those related to the assessment of the risks associated with new financial products, a regulation on the identification, measurement, and management and control of the liquidity risk was enacted by the Council on Money and Credit in May 2011. This regulation introduces a minimum short-term liquidity ratio which must be met by banks and financial institutions at all times. In the same vein, the Council on Money and Credit has also enacted in May 2011 a second regulation establishing an internal surveillance system and a ceiling by counterpart regarding interbank outstanding lending and borrowing, especially those occurring in the money market. The assessment made by the Bank of Algeria for 2013 suggests that all banks meet the liquidity ratio requirements (169.87% at the end of 2013), despite the relative stabilization of banking liquidity over the past year. In terms of banking sector depth, it is worth noting that the ratio of collected resources (demand and term deposits excluding hydrocarbon deposits) to nonhydrocarbon GDP increased in 2012 and 2013 (62.73%) after a stabilization at 61.44% in 2011. The upward trend between 2008 and 2013 of the credit to the private sector as a proportion of private sector deposits in local currency, in a context of increased financial transformation, is another relevant indicator of the banking system depth. | Thomas Jordan: International money market disruptions, central bank reactions and lessons learnt 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, 13 December 2007. * * * As early as the first half of 2007, turbulence could be observed now and then on international financial markets. However, each event was isolated and short-lived. In the second half of 2007, there was a fundamental change in the situation. The sub-prime mortgage crisis in the US had a substantial impact on international financial markets, the extent of which had never been anticipated. I will cover three areas in my following remarks. First, I will discuss the upheaval on the international money markets. Then I will talk about the reaction of central banks, in particular that of the Swiss National Bank. Finally, I will outline some of the lessons learnt from this crisis to date. Serious disruptions on international money markets At the beginning of August, the US sub-prime mortgage crisis spread like a shock wave into the money markets of the most important currencies. In doing so, it hit the vital nerve of the international financial system. Well functioning money markets are essential in ensuring that financial market participants can adjust their liquidity positions. Ultimately, they are crucial for banks' solvency and long-term commercial viability. | 0 |
– Requirements for sustaining pegs have become very demanding in an environment of high capital mobility; however, “intermediate solutions” may still remain a relevant option for a number of countries; particularly for open economies with close links to a partner country or a partner single currency area that maintains price stability or for countries experiencing high inflation, where anchoring the currency provides a simple and credible rule for monetary policy. Needless to say that the intermediate solutions are considered particularly appropriate in the European framework where the belonging to an exchange rate mechanism plays a major role in the preparation to join the single currency. – In cases where countries need to respond to very large capital inflows and related risks of inflation and real appreciation, greater exchange rate flexibility might become desirable. Let me conclude these considerations with two observations: – First, we should concentrate all our efforts on implementation of existing codes and standards. Implementation is the key word at present times. Applying standards and codes in 3 BIS Review 52/2000 all economies of the world, including emerging economies and economies in transition is an immense, challenging and urgent endeavor. – Second, as regards the private sector involvement, I will recommend being as pragmatic and as consistent as possible. Pragmatic because a case by case assessment is always needed and there is, in my opinion, no mechanistic “a priori” approach which would be advisable. | In the financial domain, the valuations of certain assets in some jurisdictions and segments of the capital markets have increased most markedly, suggesting that there has been an increase in the risk of there being corrections in the coming years potentially affecting financial stability. I would also like to refer to the economic risks posed by the political situation in Catalonia. In our Financial Stability Report, published early last November, the Banco de España estimated a range for the economic impact of the tensions in Catalonia drawing basically on assumptions about their duration and intensity. The conjunctural information for the final 5/6 quarter of 2017 indicates that economic activity is expected to have slowed in Catalonia in the closing months of the year to a greater extent than in the other main regions with the greater GDP; at the same time, it seems clear that the application of Article 155 of the Constitution has contributed to easing economic tensions, as shown by recent developments on financial markets, where a correction has been observed in the higher volatility and more negative dynamics that stock markets and the Spanish sovereign debt risk premium had experienced in the opening weeks of October. Indeed, the risk premium stood today below 85 basis points relative to the German benchmark, the lowest level since 2010, following the upgrade announced by a rating agency. | 0 |
Fifth, the risk of default on the country’s sovereign debt must be viewed as negligible, to ensure both that the currency is a stable store of value and that continuous, deep liquid domestic markets will be available regardless of the economic circumstances. Sixth, the country must have a credible central bank that is insulated from political interference and committed to keeping inflation low and stable – a necessary condition for a reserve currency to be a reliable store of value. I think that the U.S. dollar satisfies these general criteria. That is why over 60 percent of foreign exchange reserve holdings are denominated in dollars – a share that has been quite stable in recent years. The dollar’s share has remained steady despite the presence of a number of currencies that broadly satisfy the attributes that I have just discussed. But should the U.S. be concerned if more countries satisfy the attributes needed to be successful reserve currencies? Would it be problematic for the United States if the U.S. BIS central bankers’ speeches 1 dollar share of foreign exchange holdings slipped over time because of progress made elsewhere? I think the answer to both of these questions is “no.” It would seem positive to me if a decline in the U.S. market share reflected the following developments: a greater number of stable and effective central banks and fiscal authorities, more investors who are reassured about countries’ institutional arrangements and financial stability, and deeper and more liquid capital markets outside the United States. | After the introduction and the keynote, the conference explores four directions of thought on the topic of monetary unions in history. A panel is devoted to each of them. The first panel will explore the link between monetary unions and economic integration by offering a glimpse in their history. The second session will focus on twentieth century monetary unions following the great and continuous economic stress of the First World War. The third panel will examine monetary unions as facilitating tools for greater customs and economic integration within the Comecon and the Austro-Hungarian Empire. Finally, the last session will address the question to what extent the political relations transcend in the monetary unions as well illustrated by the Great Britain and the member-states of the European Union. This program will break for a discussion between leading academics and policy-makers on the issue of the parallel currencies in history. I would not crowd out the precious conference time by dwelling on each piece of research to be presented and discussed today. Let me pause here, to give way to interesting and open exchange of opinion and deliberations which I believe this conference will stimulate. And once again – welcome to Sofia and enjoy your stay in Bulgaria! Thank you. 2/2 BIS central bankers' speeches | 0 |
Second, a greater capital requirement also increases the stakes for shareholders as it decreases the degree of leverage of the financial institute. This somewhat alleviates (although it does not fully resolve) the asymmetry problem facing limited liability shareholders and thus improves their incentives to undertake risk monitoring. Third, to the extent that equity capital is more expensive than debt, a capital surcharge works like a tax. It lets the firm decide on its optimal size but in so doing forces it to integrate the fact that a larger size imposes an extra cost to society and is thus only warranted if the additional benefit for the firm justifies the additional social cost. In other words: be big if you are convinced of the benefits of size but cover the social cost of your decision!11 Imposing organisational measures The level of the capital surcharge for systemically relevant institutions can, in the spirit of the Pigovian approach, be decreased if the size of the TBTF externality is further reduced by other means. This provides the rationale for imposing organisational measures with the goal of making partial bankruptcy possible.12 The aim of organisational measures is to encourage banks to isolate the divisions that assume essential systemic functions from those that do not, so that the functioning ability of the former can be maintained in a case of nearbankruptcy, while the latter can be wound down. | What follows is a review of the situation of these stakeholders in relation to the desired risk profile of a typical bank.3 Depositors Deposit insurance ensures that it is not the business of depositors to worry about the amount of risk that the bank, in which he or she has deposited his money, decides to take. A key lesson of the Great Depression was that deposit insurance is a socially justified feature of the banking system. This follows from the fact that banks are institutions vulnerable to bank runs, no matter how well they are managed. The principle of deposit insurance is widely accepted and I will not further question it. Yet, the extent of deposit insurance and the form of its financing are important questions. Recent history has refocused our attention on these matters, but these are not the issues I would like to deal with today. Shareholders The incentives for shareholders differ from those of depositors. At first sight shareholders, as ultimate owners of the bank, can be counted on to discipline risktaking by the institution they own. After all, they stand to lose their entire stake if the risks taken lead to bankruptcy. However, this is only true to a limited extent. Indeed, if we go beyond an initial, superficial consideration of the situation, we soon realise that shareholders cannot be expected to discipline risk-taking by a bank. There are a number of reasons for this. | 1 |
4 4 CPI CPIX 3 3 2 2 1 1 0 0 -1 -1 00 01 02 03 04 05 06 07 08 09 10 11 Sources: Statistics Sweden and the Unit labour costs for the economy as a whole Annual percentage change, seasonally adjusted data 8 8 Unit labour cost Hourly labour cost Productivity 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 94 96 98 00 02 04 06 Sources: Statistics Sweden and the Rik b k 6 BIS Review 22/2008 Weak GDP growth in the USA in 2008 Consensus and the Riksbank’s forecasts for GDP growth in the United States in 2008 at different points in time 4.0 4.0 The Riksbank 3.5 3.5 Consensus 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Jan Feb M ar Apr M ay Jun 2007 Jul Aug Sep Oct Nov Dec Jan 2008 Feb Sources: Consensus Economics Inc. and the Riksbank Monetary policy considerations Financial turmoil High cost pressures – Inflation above the target Subdued growth in the United States BIS Review 22/2008 7 The interest rate path is a forecast not a promise Per cent, quarterly average 7 7 90% 75% 50% Repo rate 6 6 5 5 4 4 3 3 2 2 1 1 0 0 Mar-03 M ar-04 Mar-05 Mar-06 Mar-07 M ar-08 Mar-09 Mar-10 Mar-11 Source: The Riksbank What can monetary policy accomplish? | Most of them were industry-oriented with special tax advantages, but with a fragile financial base and a lack of managerial integrity and experience. Against that background, the system was highly inefficient and proved poorly effective because it was unable to develop its role of channelling saving to the most productive uses and, without any doubt, it held back economic growth. At the same time, the Spanish regulatory and supervisory framework was weak and outmoded, based mainly on a simple leverage ratio. In turn, supervision was geared towards formal compliance with administrative regulations. The need for a change in the supervisory framework to preserve the soundness of the banking system became apparent when the oil crisis of the early 70s prompted the Spanish economy into a profound recession, leading to the deepest crisis of recent Spanish banking history. Up to 50 banks went bankrupt, involving 20% of the deposits of the banking system. It is interesting to analyse the effect of the crisis and the limitations of the regulatory and supervisory framework at that time, in the light of the framework set by the Core Principles [for effective Banking Supervision] developed by the Basel Committee on Banking Supervision. Allow me to summarise the main group of principles that would have been breached. First, the principles related to licensing criteria would not have been accurately met. Indeed, the process of licensing did not consist of a proper assessment of the fitness and propriety of Board members and senior management, including their strategic and operating plan. | 0 |
Over the last three decades in our journey to develop Islamic finance, a holistic infrastructural ecosystem devoted towards talent development has been conceptualised. To move forward, we need to continuously create distinct value propositions for Islamic finance to chart into new areas of growth. In the case of Malaysia, the need for a new breed of talent is pressing, as we embark on an ambitious target of 40 percent market share for Islamic finance by 2020. The need is also evident at the global level, as many jurisdictions aspire to develop an Islamic finance centre of their own. It is from this perspective that it becomes even more critical for us to nurture the right talents with the best minds to propel the industry into the future, that is estimated to grow its financial assets to USD3.2 trillion by 20201. There is much we can derive from the lessons of history. Historical evidence showed that Islamic civilisation was driven by visionary thinkers and their propensity and ability to engage in vigorous intellectual discourses. Indeed, many of the breakthrough thinking, concept and ideas were only possible because of the conducive environment that emphasised intellectual rigour. Their contributions were immeasurable. Their wisdom and foresight were unsurpassed and far superior to others. In many cases they were a few hundred years ahead of their time. | Liquidity management in the Islamic financial system and the institutional arrangements for resolution are among the other areas that need further development. Of critical importance is for the board and management of Islamic financial institutions to institute higher standard of leadership and a comprehensive governance culture and framework. Mutual recognition in Shariah and human capital challenges On this occasion, I would like to touch on two areas confronting Islamic finance firstly on, the issue of mutual recognition in Shariah and secondly the human capital development in the industry. Malaysia takes cognisance of the diversity of Shariah views within the region and among jurisdictions. Although Islam welcomes diversity of views, there is also a need to promote greater harmonisation among jurisdictions on the specific issues relating to Islamic finance. Such convergence is important for the long-term sustainability of the sector. Malaysia has taken the initiative to organise Regional Shariah Scholars Dialogue in 2006 and 2008 as part of the efforts to foster greater engagement among the Shariah scholars in the region. Indonesia has been active in these dialogues. Moving forward, the newly established International Shariah Research Academy (ISRA) has been entrusted to intensify the regional Shariah Dialogues as well as to enhance further the international engagement among Shariah scholars in our pursuit for Shariah harmonisation. Most encouraging is the greater appreciation and understanding that has been achieved in these deliberations of the Shariah practices that are peculiar to the respective jurisdictions. | 0 |
Figure 12: The average lifetime cost of risk factors associated with sexual exploitation Average cost per individual Preintervention Postintervention Control group Going missing Substance abuse Accommodation Total needs £ Disengagement from education £ £ £ £ £ £ £ £ £ £ £ £ £ £ Source: PBE (2011). BIS central bankers’ speeches 25 Figure 13: Benefit of Centrepoint intervention to the public purse, average per Centrepoint client Central scenario £ 2010/11 prices) 6,989 12,332 2,639 46 188 117 –136 22,174 Avoided welfare benefits Tax raised Crime (avoided costs) Mental health issues (treatment costs avoided) Class A drugs (treatment costs avoided) Cannabis (treatment costs avoided) Alcohol (treatment costs avoided) Benefit of Centrepoint intervention to the public purse Source: PBE (2013). Note: row totals do not add to the total benefit due to rounding. Figure 14: Reasons for not participating in volunteering-related activities, 2010/2011 (% of respondents) Work commitments 60% Doing other things with spare time 34% Looking after children/the home 31% Studying commitments 14% Not knowing any opportunities to help 14% Not knowing of any groups needing help 14% Looking after someone elderly or ill 8% Feeling too old 3% Feeling too young 1% Source: UK Civil Society Almanac (2014), Citizenship Survey (2010/11). 26 BIS central bankers’ speeches | Another problem sometimes mentioned is that there may be difficulties in communication in the cases where the central bank has a different view from the market as to what constitutes a reasonable future development for the policy rate. 7 The forecasts for developments in the real economy and inflation that are published will under such circumstances not be the ones that the central bank believes to be the most likely and the value of the published forecast is therefore diminished. This is the same type of problem as with constant repo rate forecasts, although the problem is probably less on average over time. Most of these problems can be avoided if the central bank instead bases its inflation forecasts on its own forecast for the development of the policy rate. 8 However, the primary reason for publishing one’s own interest rate forecast is that it makes it easier for the central bank to steer expectations. With this assumption for the interest rate, the central bank can explain more clearly to the general public and the financial markets how it envisages future interest rate developments and how it reasons when making monetary policy decisions. The interest rate development that follows on from market expectations does not always give a good picture of all of the considerations a central bank must make when discussing what provides a reasonable development in interest rates. | 0 |
An economist 3 in Norges Bank has found, using a stylised model, that in order to minimise restructuring costs over time, petroleum revenue spending should be limited in such a way that a constant share of imports can be financed by petroleum revenues for an indefinite period. Furthermore, he found that spending one per cent of total petroleum wealth per year would achieve this. Petroleum wealth comprises here both financial wealth accumulated in the petroleum fund and the value of oil and gas under the seabed. The rule implies that petroleum revenue spending would not affect the real exchange rate. This work focused on minimising restructuring costs, and did not analyse the issue on the basis of a more general welfare function. Moreover, the flexibility of the economy to adapt to a shifting economic environment may change over time. Increased flexibility and efficiency in labour, capital and goods markets may reduce the need to take restructuring costs into consideration. I will come back to our current fiscal rule for petroleum revenue spending shortly. The need for some sort of rule in fiscal policy aimed at restraining petroleum revenue spending should become clear when we look at our experience over the last 30 to 40 years. The government began at an early stage to budget on the basis of future strong growth in petroleum revenues. The result was that we spent a large share of our petroleum income in the 1970s and 1980s. Welfare schemes were expanded significantly. | But the most debatable issue is the imposition of new restrictions on temporary hires, especially if permanent hiring does not improve sufficiently. In the current conditions, with more than 4.5 million Spaniards unemployed, all job creation opportunities must be kept open and not in the least impaired until the new channels for permanent hiring prove effective. In short, the fiscal consolidation programme, the pension reform proposals and the labour market reform measures are three areas in which significant advances have been made by the authorities in the last few weeks, but in which much work remains to be done. Let me now move on to the area of reform which falls directly under the responsibility of the Banco de España, namely the restructuring of the financial system and, more specifically, of the savings bank sector, where there has been appreciable progress in recent weeks. In the last few months a very significant portion of Spanish savings banks has concluded merger agreements with other savings banks, in what is the largest restructuring of the Spanish banking sector in a long time. These movements started with the creation of the FROB (the Fund for the Orderly Restructuring of the Banking Sector) in June 2009, nearly two years into the international banking crisis affecting the markets and financial systems of all developed countries, and to which Spanish financial institutions were exhibiting a marked resilience that most have maintained to date. This new Fund responded to the need to downsize the Spanish banking sector, particularly the savings bank segment. | 0 |
Whether the measure would be the right option or not depends on the reason for the high risk premium. The measure could have a rapid effect. Short5/9 BIS central bankers' speeches term money market rates play an important role for Norwegian banks’ funding costs. A reduction in risk premiums will therefore have an impact on much of banks’ outstanding debt and not just on new loans. Foreign exchange market measures A few words on the exchange rate. For small open economies like Norway, the exchange rate is an important transmission channel for monetary policy. Changes in the exchange rate influence both inflation and the real economy via firms’ competitiveness. Foreign exchange interventions have been used, and continue to be used, by many central banks worldwide. Inflation-targeting countries use interventions less, and often not at all. Norges Bank has not intervened to influence the exchange rate since 1999. The policy rate is the primary instrument of monetary policy and the exchange rate is free floating. In recent years, the exchange rate has been a valuable shock absorber for the economy. Chart. Exchange rate floors for Switzerland and the Czech Republic Some inflation-targeting countries have intervened directly in foreign exchange markets over the past decade. The Swiss and Czech central banks have kept their exchange rates weaker than a given level against the euro. | But an environment in which borrowing is free and the real interest rate is considerably lower than trend growth in the economy is unlikely to be sustainable over time. Chart: Estimates of the neutral interest rate The neutral interest rate cannot be observed and must be estimated. In the Bank’s Monetary Policy Report, the current neutral real interest rate in Norway is assumed to be around zero. The estimate is based on calculations from a range of different models. As we can see in the chart, these calculations show that the neutral interest rate has fallen to a historically low level close to zero over the past 20 years. With an inflation target of 2 percent, this means that setting the policy rate at zero would enable us to bring the real interest rate down to 2 percentage points below its equilibrium level.1 2 In Norges Bank’s assessment, monetary policy has sufficient room for manoeuvre with an inflation target of 2 percent. First, international experience has shown that the room for manoeuvre in monetary policy is not exhausted when the policy rate is close to zero. I will come back to this. Second, our calculations show that over the past 20 years, the real interest rate has normally remained less than 2 percentage points away from its estimated equilibrium level.3 This may suggest that a real interest rate that is 2 percentage points below equilibrium has in most cases provided sufficient economic stimulus. | 1 |
Measured in local labour costs, cost competitiveness has been deteriorating since 1997. For a time, profits in the exposed sector were not affected by the increase in labour costs, as the krone depreciated. However, this depreciation could not last, as it would have ignited domestic inflationary pressures. Tight labour market conditions warrant a relatively tight monetary policy. Norwegian interest rates are not very high, however, when our wage growth is compared with that of other countries. On the contrary, the recent appreciation of the krone will have a cushioning effect on inflation and thus on interest rates. Since 1998, the increase in labour costs has been between 5 and 7 per cent. This year’s wage negotiations were no exception. It now seems evident that wage growth will be significantly higher than our previous estimate of 5 per cent this year. The carry-over to next year is also substantial, especially in retail trade and the public sector. It is evident from this year’s wage negotiations that our labour market is tight. Norges Bank kept interest rates unchanged at the Executive Board meeting on Wednesday, 22 May. The Bank changed its stance on future inflation risks. The main reason was the higher-than-projected wage increases. According to the Bank’s assessment of the risks associated with the inflation outlook, the appreciation of the krone cannot fully counteract stronger wage growth, faster growth in consumption, a higher oil price and a somewhat more favourable global economic outlook. | The wave of consolidation has, however, created mega-exchanges in the U.S. and Europe, and competition among them has proceeded at a furious pace. The Chicago Board of Trade (CBOT) faces a serious challenge on its home turf from Eurex, the all-electronic exchange owned by Deutsche Börse and the Swiss Stock Exchange. Eurex is now offering electronic trading in U.S. dollar denominated fixed income futures which have been the mainstay of the CBOT. The pan-European exchange, Euronext.Liffe, is offering electronic trading in Eurodollar futures contracts in direct competition with the Chicago Mercantile Exchange (CME). CME has responded quickly, announcing initiatives to accelerate the migration of its flagship Eurodollar contract to GLOBEX, its electronic trading platform. And just this month, it was reported that the New York Stock Exchange may enter the derivatives market too. Hardly a week passes without press reports of strategic moves by the exchanges. Securities exchanges have not been spared from the competition. London Stock Exchange (LSE) will launch its Dutch Trading Service, euroSETS, in May this year. This will allow the most liquid stocks listed on Euronext-Amsterdam to be traded through LSE. This bold move is being watched closely by the industry, and may challenge conventional wisdom on the contestability of stock exchange liquidity. The outcome of these contests could significantly alter the competitive landscape for exchanges in the next few years. Key drivers of consolidation and competition One key driver behind the consolidation and competition is technology. Exchanges and clearing houses are very much technology businesses today. | 0 |
Other ways of making monetary policy more expansionary could be by intervening on the foreign exchange market and giving loans directly to companies via the banks. Mortgage borrowers more sensitive to interest rate changes The falling real interest rates are one of the reasons that indebtedness has risen over the last twenty-year period. Inflation targeting was formally introduced in 1995 when households’ debt-to-income ratio – debt in relation to disposable income – was around 90 per cent. Today, just over 20 years later, indebtedness has pretty much doubled and is almost 180 per cent. 12 The rising indebtedness and many people choosing a variable interest rate on their mortgages has made households more sensitive to interest rate adjustments. The importance of monetary policy for households with high indebtedness, in practice mortgage borrowers, has therefore become greater. In an example calculation, four economists from the Riksbank have attempted to shed light on how an interest rate rise today would affect mortgage borrowers’ consumption, compared with 20 years ago. 13 The following scenario could provide a backdrop to these calculations. To fund loans for housing, the Swedish banks issue mortgage bonds, among other things. These are partly funded by foreign investors. If these foreign investors, for whatever reason, should lose confidence in the Swedish economy and the mortgage bonds, the banks may become very vulnerable. They may find it more difficult to obtain funding on the international markets, at the same time as interest rates start to rise. | Figure 7(a) foreign currency reserve in relation to GDP and to the Swedish banking system’s foreign funding and Figure 7(b) foreign currency reserve as a proportion of the country’s short-term debts in foreign currency 2016 7(a ) 15 7(b) 100 Reserves to FX funding Reserves to GDP 342 90 322 80 12 124 70 66 60 52 9 50 41 40 6 36 30 26 20 0 0 02 04 06 08 10 12 14 16 14 18 9 10 6 7 8 8 3 4 4 4 4 5 1 1 2 2 2 3 3 IRL CYP NDL GRC MLT BGR FRA DEU BEL GB SWE prel FIN EST ESP ITA SVN CAN AUT SVK AUS SWE SGP NOR HKN JPN CHE CZE ISL KOR 10 3 Note. Fi gure 7(a), per cent. Foreign funding refers to Swedish banks’ (including Swedish subsidiaries but excl uding foreign s ubsidiaries) market funding and deposits i n foreign currency. The broken part of the l ine represents the Riksbank’s forecast based on the reduction of the currency reserve proposed i n the draft. Figure 7(b), countries marked in grey belong to the euro a rea. Sources: IMF, Statistics Sweden a nd the Riksbank. Conclusions for monetary policy I opened by noting that these are unusual times in the Swedish economy. | 1 |
Having previously also served on the interim Financial Policy Committee (FPC) for 2 years, and the MPC for 5 years, I want to use this lecture today to set out how the three policy committees of the Bank work together. I have seen and heard assertions in the press and other commentary that the three committees with their different objectives will inevitably be in conflict. Whilst there are many difficult policy challenges for each of the committees, and different judgements can be reached by reasonable people on any policy question, I will argue today that conflict is not inherent in the structure in the sense of having to choose between competing objectives. There should not be any compromise in terms of achieving those objectives over the medium term, even if the actual setting of each policy lever needs to take others into account. The key to realising this outcome is effective co-ordination. Much of the economics literature around policy co-ordination traditionally focussed on two problems: the coordination of monetary and fiscal policy, especially in the case of an independent central bank; and international macroeconomic policy co-ordination 1. In the past decade or so there has been rather more on inter-institutional coordination 2. I will be drawing on that body of established work and applying it to the challenge of co-ordination faced by the Bank’s three policy committees: the MPC, the FPC and the PRA Board. First, what are their objectives? | Coherence vs agreement I believe I have set out so far a reasoned view that the three Bank policy Committees – the MPC, FPC and PRA have a coherent set of objectives, structures, appropriate policy tools and coordination to ensure that there is not any inherent absolute conflict in the framework. And the strategic changes internally at the Bank announced earlier this year could be seen as being a reinforcement to that structure by maximising the synergies across the Bank, including the PRA. But coherence doesn’t always mean agreement. There will no doubt be disagreements at some point. Indeed, the appointment of independent members to the policy committees is intended to ensure challenge and the absence of “group-think”. Dissenting views on the MPC are not only an established part of the culture but actively encouraged by the Treasury Committee in Parliament. The FPC and PRA Board, in contrast, generally work by consensus, although there are provisions for recording dissent and votes if necessary. But disagreements over judgements between individuals are normal – that’s why we have decision making by committee in the first place. What we have not seen is any reason why the structure should be regarded as internally conflicted. How likely is it that there will be dissent across committees? There are mitigants in place to reduce the chances of that. | 1 |
Looking at the region as a whole, after some very difficult years, inflation has come down dramatically from very high levels at the beginning of transition to single-digit levels today. Long-term interest rates have also fallen substantially, reflecting the gradual anchoring of inflation expectations. The countries of the region have also made remarkable progress in terms of institutional and structural convergence. In particular, we have witnessed the building of appropriate institutions, increased trade integration with the euro area and improvements in the business environment. Naturally, this progress has been reflected in per capita income convergence. Over the last 20 years, per capita income has risen to an average of 63% of the EU average if adjusted in terms of Purchasing Power Parity (PPP). But combining low inflation with real convergence has posed a serious challenge in many countries. Let me elaborate on this. The very process of real convergence entails upward pressures on prices, which can be hard to avoid in terms of both relative prices and the overall price level. Among other things, these pressures stem from high productivity growth as well as the processes of price liberalization and tax harmonization. Price increases related to productivity growth are usually referred to as the BalassaSamuelson effect. But most studies have found this effect to be relatively limited.1 Convergence in price levels, which stood on average at two thirds of the EU average in 2010, seems to have surpassed convergence in income levels in all countries of the region. | A bombardment of high definition images of nature in photographs and film, may have numbed some of us to nature’s wonders. For example, I am not sure how many of us are still captivated or awed anymore by the sight on television of yet another leopard pursuing its lunch. The human hand makes for a much more intimate experience of nature. Back in the days of Maria Merian and General Farquhar, there was no other way of recording the world around us. Now we are seeing a return to paint and other traditional art forms. I am told that painting in general is the art medium that has shown the biggest resurgence recently. Some of the paintings in this exhibition look like photographs, which is a mark of the skill 1/3 BIS central bankers' speeches of contemporary artists. Malaysian painters are as good as any in this category, and they have no shortage of nature at their disposal to paint, compared with their counterparts in New York, London or Shanghai. We should all be celebrating the world around us, not just as artists or eco-tourists, but as inhabitants of Planet Earth. These paintings bring us up close and personal with nature, as it should be. The skilled precision of the work featured by the artists does not diminish the connection and passion that the artists have with and for their subjects. Indeed, it enhances our experience viewing these beautifully executed pieces. Please also do take some time to read the statements by the artists. | 0 |
And those four driving forces I mentioned at the start – the economic pressures on traditional business models, sharply-reduced technology barriers to entry, changing consumer preferences and pro-competition regulation – will only intensify the pace of change in the years 11 ahead. So what are the challenges? I would pick out two . First, customer acquisition is hard! Households and firms are loyal to their traditional suppliers: they will only switch if the offering is genuinely innovative, not just a good-looking piece of marketing. Similar considerations apply to central banking applications. Second, widespread adoption also requires attention to those two traditional characteristics of successful financial systems: scaleability and resilience. It is striking how much our conversations with leading firms have increasingly turned to these issues, even over the short period we have been running our Accelerator project. These topics are dear to central bankers’ hearts, and will play a central role in shaping the next stage in our engagement with FinTech. I look forward to our conversation today. 11 For a similar perspective, see also the most recent World Economic Forum report on FinTech: https://www.weforum.org/reports/beyond-fintech-a-pragmatic-assessment-of-disruptive-potential-in-financial-services. | I hope that what I have just shared with you on the topic of Central Bank Independence and our experiences in adopting inflation targeting as a nominal anchor will be of some uses as food for thoughts. Finally, I truly wish to congratulate the Bank of Ghana for the successful launching of Monetary Policy Committee. Thank you. 4 BIS Review 53/2002 | 0 |
It is often referred to as the distributed ledger’s native currency, used as a medium of exchange and store of value within the network, for example to pay transaction fees or incentivise users to keep the network secure. But cryptocurrencies have taken a life of their own outside of the distributed ledger – and this is the source of the crypto world’s problems. Cryptocurrencies are actively traded and heavily speculated upon, with prices that have nothing to do with any underlying economic value related to their use on the distributed ledger. The extreme price volatility of cryptocurrencies rules them out as a viable form of money or investment asset. This speculation in cryptocurrencies is what MAS strongly discourages and seeks to restrict. Let me now elaborate on Singapore’s strategy to develop a digital asset ecosystem as well as our regulatory approach to manage the risks of digital assets. SINGAPORE’S STRATEGY TO DEVELOP A DIGITAL ASSET ECOSYSTEM Our vision is to build an innovative and responsible digital asset ecosystem in Singapore. This is a core part of MAS’ overall FinTech agenda. As with everything else we do in FinTech, innovation through industry collaboration is key to growing the digital asset ecosystem. Crypto technologies are promising and there is great potential to improve financial services – this is a common goal shared by MAS, the financial industry, and the FinTech community. But the only way to find out what works is through experimentation and exploration – “learning by doing”. | In this respect, savings banks have always paid particular attention to the financial needs of households and companies integrated into the social fabric. Thus, by granting access to financial services to a large segment of society, they have made a considerable contribution to the increased efficiency of the financial sector and the economy. Secondly, we should not forget that savings banks allocate a high percentage of the profits they generate each year to financing social projects. Last but not least, the close relationship savings banks have with the region in which they are established is another of their differentiating and defining features. Throughout their history, they have been clearly committed to strengthening the social and economic fabric of their heartland, thus becoming key players in regional development. This, in turn, provides them with greater retail customer loyalty, which no doubt offers a higher degree of stability for their business model. Yet while all the foregoing is acknowledged and given the broad consensus that savings banks should retain their social commitments, I believe it should not be forgotten that, above all other considerations, they are deposit institutions. As such, and so as to promote the sound working of the financial system risk management, profitability and solvency should be at the heart of their concerns. Indeed, it is precisely through controlling risks, maintaining acceptable profitability and a level of solvency appropriate to their risk profile that savings banks will be able to survive and prosper over time. | 0 |
Should such a scenario materialize, a policy mix of low policy rate and high reserve requirement ratios may be implemented for a long period, both to balance domestic and foreign demand and for macroprudential purposes. If global economic problems further aggravate and domestic economic activity assumes a stagnation trend, we may have to utilize all policy instruments with their effect being on the easing side. Although downside risks persist, there are also upside risks regarding global economy, particularly driven by the lagged impacts of the exceptionally loose policies implemented by the advanced economies over the past two years. If the global economy assumes a faster-than-expected recovery, global inflationary pressures may occur and thus trigger a tightening in the monetary policies of advanced economies. The materialization of such a scenario would mean higher global interest rates and domestic demand-driven inflationary pressures, and thus necessitate increasing both policy rates and reserve requirements. Oil and other commodity prices have displayed rapid increases in the recent period. If the rise in commodity prices persists, this may have implications on the general pricing behavior given the strong pace of domestic demand. Should such a risk materialize in the upcoming period and hamper the attainment of medium-term inflation targets, there may be stronger tightening than was envisaged in the baseline scenario. However, the policy mix may vary depending on the developments regarding foreign demand, capital flows, and the outlook for credit growth. We will continue to closely monitor fiscal policy developments while formulating our monetary policy. | Exceptionally loose monetary policies adopted by advanced economies to eliminate the downside risks on economic activity not only boosted global liquidity but also stimulated the search for yield, which encouraged more capital flows into emerging economies. Moreover, the weak recovery in developed economies – Turkey’s main export destinations, dampened foreign demand growth (Figure 2). Low interest rates across the globe, soaring imports driven by strong credit growth amid increased short-term capital inflows, and weaker foreign demand caused the current account deficit to widen rapidly in 2010. All of these developments prompted the CBRT to adopt a strategy, which partly targets financial stability besides the main objective of price stability, parallel to the conditions referred to as the “new normal”. In this context, as stated previously, the CBRT has actively begun to use tools such as required reserves and liquidity management, in addition to the one-week repo auction rate, the main policy instrument. 1. Inflation developments Having summarized the global economic conditions and the implications of this outlook on the monetary policy, I would now like to inform you about the inflation developments of the last quarter. As you will recall, we underlined in the October 2010 Inflation Report that the increases in unprocessed food and tobacco prices – which are beyond the immediate control of the CBRT – added about 5 percentage points to annual inflation, and suggested that these items would leave sizable room for disinflation. Indeed, inflation dropped by 2.83 percentage points, yielding a rate of 6.4 percent, meeting the year-end inflation target. | 1 |
Lately, we seem to have done better: market BIS central bankers’ speeches 5 participants now seem to share the Committee’s current assessment that policy rates will likely remain exceptionally low for a considerable period of time, even now that the asset purchase program has been completed. As you know, we’ve taken a number of steps in recent years to increase transparency and improve our communications. This includes regular press conferences by the Fed chair following FOMC meetings; the publishing of growth, inflation and short-term rate forecasts of FOMC participants; and a concerted attempt to lay out the guideposts that the FOMC will look at to assess progress toward our mandate. We are, though, still learning how to more effectively communicate, especially given our new and expanded set of policy instruments. A second area in which we can and must do better is safeguarding financial stability. Simply put, we failed to act both early enough and decisively enough to stem the credit excesses that spawned the financial crisis and the Great Recession. The U.S. was not alone in this shortcoming, but given our position in the global financial system, we especially should have done better. We’ve taken important steps through new legislative mandates and a broader effort to rethink our regulatory and supervisory framework. In particular, systemically important banking organizations must now hold amounts of capital and liquidity that are better aligned with their risk profiles, and the official sector is making progress in ensuring no financial firm will be too-big-to-fail. | So there is a limit to the scope of the Bank’s activities in this area. The success of the policy is not to be judged by the increase in bank lending. Its aim is to increase the money supply. There are already tentative signs that the programme is beginning to have beneficial effects with the growth rate of broad money picking up. So there are certainly grounds for believing that the rapid falls in activity are coming to an end. But there are some equally solid reasons for believing that the path to full recovery could be protracted. The most obvious is that the supply of bank lending to companies and BIS Review 76/2009 1 households remains constrained. The stock of bank lending to non-financial companies has been falling in recent months, and household lending has been flat. Part of this undoubtedly reflects weak demand in the face of the recession. But the evidence from prospective borrowers, and the terms on which lenders are willing to extend credit, suggest that banks’ ability to finance a sustained recovery remains impaired by low levels of equity capital. Stress tests designed to assess the viability of banks are very different from tests of the capacity of the banking system to finance a recovery. Investors continue to demand high returns to finance banks. Put bluntly, market data on credit spreads imply that some banks are viewed as a worse credit risk than some of their customers. | 0 |
Finally, it is important throughout the process of restructuring a banking system that the general public does not have to fear for the loss of their life savings. A reliably funded deposit insurance mechanism, a central bank that can provide liquidity to solvent, viable banks and a wellfunctioning payments system are essential elements of the public sector safety net. The safety net’s true beneficiaries are not financial institutions, but the general public. IV. The Role of the Basle Committee What do I see as the near and medium-term role of the Basle Committee and this organization of banking supervisors? What should be our goals to meet before the next such conference, to take place in New York in the Year 2000? Let me begin by saying that the Core Principles lay out the major highway to effective banking supervision, but do not provide a detailed street plan. One important element of feedback we are receiving from the Core Principles Liaison Group, consisting of members of the Basle Committee and members of the emerging markets, along with more informal feedback, is the need to provide more detailed street plans. There are several ways to achieve that. BIS Review 86/1998 -8- The first is to continue to elaborate on the Core Principles by producing papers on key topics to augment and update the Compendium. The Compendium is the set of relevant papers issued over the years by the Basle Committee which elaborate further on the Core Principles and provide the next level of detail. | As banks develop new methods of evaluating capital adequacy, we can consider whether these approaches provide new tools for assessing capital adequacy from a supervisory perspective. The second area is transparency. The challenge of understanding the impact of changes in the financial system on banks and financial markets should add impetus to our efforts to increase transparency in the financial markets. As understanding the nature of the borrower and its risks becomes more complex, the demand for better and more timely information is increasing. Moreover, we supervisors have a special interest in putting good information in the hands of investors, lenders and counterparties, and that is the powerful assistance that market discipline can provide supervisors. We have seen how a bank’s equity price, its funding spreads and its access to markets can provide feedback on the bank’s prospects, and how these market signals can be a decisive factor in motivating management to address problems. We also have seen through current events how the absence of sufficient information can mask critical weakness in the corporate and banking sectors, leading initially to an over-optimism that is followed by excessive risk aversion. The Basle Committee has created two working groups, the Transparency Subgroup, led by Susan Krause of the Office of the Comptroller of the Currency, and the Accounting Task Force, led by Nick LePan, of the Office of Supervision of Financial Institutions in Canada, to suggest ways in which banks, bank supervisors, the accounting community and others can further transparency. | 1 |
Secondary market purchases of Treasury securities reached about $ billion per month during the second LSAP program (a time when proceeds from agency debt and MBS were being reinvested in Treasuries), and we doubled our per-issue concentration limit from 35 percent to 70 percent. Meanwhile, monthly purchases of agency MBS were successfully ramped up from a pace of $ billion per month for just reinvestments in the first half of 2012 to more than $ billion per month later that year when additional purchases under the third LSAP program were also conducted. This volume represented a substantial share of monthly gross issuance.25 Staff actively monitored indicators of market functioning available in the broader market and through our own operations for signs of any material deterioration.26 As necessary, we modified our operational schedules (while still meeting the policy directive we were given) to ensure smooth functioning, such as periods of ramping up or winding down purchase programs. The Fed also put in place active policies to help prevent market dysfunction as a result of its operations. Preventive measures included concentration limits on holdings of individual Treasury securities and prohibitions against purchasing some specific, highly-demanded securities. | However, even once the Fed normalizes the size of its balance sheet and securities portfolio, the composition of its securities portfolio will not yet be “normal.” The projections I mentioned earlier—which assume ongoing implementation of the FOMC’s capped portfolio reduction strategy—estimate that the domestic 3 / 13 BIS central bankers' speeches securities portfolio could contain more than $ trillion in agency MBS at the time the balance sheet reaches a normalized size, even though the FOMC has indicated a preference to hold primarily Treasury securities in the longer run. Meanwhile, the maturity profile of the Treasury portfolio at that time is projected to be more skewed towards longer-term holdings than it was before the crisis, when the Fed held one-third of its portfolio in Treasury bills, and about twothirds of its holdings matured in less than three years.16 A role for asset purchases at the zero lower bound As they digest the experience of the past decade, policymakers, academics, and market participants are engaged in an active dialogue on appropriate monetary policy strategies and the role of unconventional policy tools in future zero lower bound episodes.17 Amid widespread concerns of a secular decline in nominal interest rates, this is not just a theoretical discourse. The median of FOMC participants’ projections for the longer-run value of the nominal federal funds rate is currently 2¾ percent, leaving little room to ease the stance of policy through changes in overnight rates. | 1 |
Average annual growth of almost 7 percent between 2002 and 2007 faltered in 2008 and turned into a contraction in 2009 as the exports and investment flows dried up considerably due to the global crisis. However, all signs now indicate that the economy has rebounded quickly and is headed towards renewed growth and an improving fiscal balance in 2010. The resilience of the Turkish financial system, combined with our flexible and effective liquidity management framework shaped by the experiences of past crises, has turned out to be considerable assets in managing the recent crisis. As a result, growth forecasts of international institutions for the Turkish economy have been revised upwards repeatedly and reached as much as 7.2 percent, the highest among OECD countries. The crisis and slowly emerging global architecture in its aftermath present major opportunities that have once again highlighted the importance of economic cooperation 2 BIS Review 101/2010 and coordination among countries and economies. In the case of the Middle East this is perhaps best embodied in the multiple synergies in financial integration and joint investment opportunities between Turkey and the Arab world. It is a great pleasure to see that the relations within our region have been strengthening on a solid ground. The strong historical, cultural and social ties among our countries constitute a solid basis to further develop multilateral relations. | Commercial relations between Turkey and the Middle East have been increasing quite rapidly in the last few years, as well as cooperation and exchange of information and dialogue between public authorities. Global crisis made clear that especially our region is one of the high growth bases in the world, which in turn, constitutes a potential to grow tight commercial and financial relations. Recently, Turkey, Jordan, Lebanon and Syria signed a joint declaration on Thursday to launch an initiative to form a free trade zone and a visa-free zone. These nations will also set up a joint cooperation council. Significant steps have been taken towards developing our commercial relations as witnessed by trade volumes between countries. On the heels of 2001 crisis, the trade volume of Turkey with the Middle East Region was just about USD 6 billion. It reached USD 43 billion just before the financial crisis and stood at USD 29 billion as of 2009. In the same period, the share of Middle East in Turkish trade volume climbed up by 5 percentage points to 12 percent, where as the share of European Union declined by 10 percentage points to 43 percent. Let me give you several country specific examples. Syrian-Turkish economic relations have strengthened rapidly in the past few years, particularly following the implementation of a free trade agreement between the two countries in 2007. All in all, trade volume between Syria and Turkey has doubled since 2006 and reached to 1.75 billion USD in 2009. | 1 |
Besides, we are especially concerned about the collateral adequacy and will take further measures to decrease pressure on market-traded bonds through providing liquidity against other types of assets. Amid the increased volatility of the foreign exchange market, the Bank of Russia will stick to the conservative approach to the assessment of banking sector demand for liquidity. Meanwhile, the volume of ruble liquidity provision will be sufficient for the banking system to function properly and the money market rates to remain within the interest rate corridor bounds. The Bank of Russia will also continue to permanently monitor the situation in all the segments of the financial market and is ready to take the required measures to ensure its stable functioning. It is crucial for normal functioning of the economy and successful implementation of all macroeconomic policy measures. Currently the Russian economy faces both external and internal challenges. The uncertainty over further developments is really high and the sensitivity of the economy and especially the financial markets to various developments increases, at some point the reaction can be excessive. In these conditions the Bank of Russia is ready to be flexible and take unconventional decisions in meeting strategic objectives of ensuring financial and price stability. 4 BIS central bankers’ speeches | Wage growth is now put at 4.5-5.0 per cent in most sectors. It is reported to be even higher in building and construction. Profitability continues to improve in all industries in region South-West. In many industries, profitability growth is somewhat lower than in the previous round. The exception is import-competing manufacturing where profitability is stable and in the service industry where it is improving further. So far, the buoyant activity level in the region has resulted in an accelerating rise in prices in highly sheltered sectors such as building and construction and services. More generally, enterprises report that prices have risen in the past 12 months. Six of ten companies expect prices to continue rising at the same pace during the next 12 months, while more than 25 per cent of the companies expect prices to rise at a faster pace. For the country as a whole, inflation has edged up since the beginning of the cyclical upturn. The yearon-year rise in the consumer price index (CPI) was 1.9 per cent in August. Energy products such as electricity and oil has accounted for a considerable portion of the rise in prices over the past year. Electricity prices, including grid rent and taxes, were 25 per cent higher in August than one year earlier, while petrol prices were close to 11 per cent higher. Since the beginning of 2001, energy prices have exhibited an average increase of over 7 per cent. Variations in energy prices may also lead to wide monthly variations in consumer price inflation. | 0 |
The results achieved indicate that in this difficult macroeconomic environment the banking system has not only preserved its reliability, but has continued to perform its economic role of financial intermediary. Another positive trend is especially worth noting, prompted by this Forum. Banks are not focusing only on coping with current issues and obstacles. Regardless of the difficulties, banks are putting much thought and effort into developing and implementing new business solutions and products based on the opportunities offered by the information and communications technologies. New solutions are sought not only in the area of good management of risks and business processes, but also in developing new services and sales channels. I would not allow myself to give examples from the experience of one or another bank. The Forum will provide plenty of opportunities to find this out for yourselves. I will use as illustration of my words the payment infrastructure. The connectivity achieved by the operator of the main retail payment systems in this country in the past year, presently makes available to the Bulgarian banks the so-called SEPA connectivity to several thousand banks in the European Union. This, on its own part, provides new opportunities for providing reliable and high-quality services to ultimate customers. As part of my congratulatory address on the occasion of the opening of this Forum, I will allow myself to pose a question, namely the question of the connection between the information and communications technologies management and sales management, or to put it more broadly – marketing. | I also feel that the ambitions are even greater. This is obvious even from the motto of the forum. So I wish you success in your work! Thank you for your attention! 2 BIS central bankers’ speeches | 1 |
Paul Fisher: The Financial Regulation Reform agenda – what has been achieved and how much is left to do? Speech by Mr Paul Fisher, Executive Director for Supervisory Risk Specialists and Regulatory Operations of the Bank of England and Deputy Head of the Prudential Regulation Authority (PRA), at Richmond, the American International University, London, 30 September 2015. * * * It is now 8 years since the start of the great financial crisis, and 7 years since the collapse of Lehman Brothers and AIG in the United States, followed by the bailing out of HBoS and RBS in the UK. The consequences were not limited to the financial sector – the economic recession that followed in much of the developed world was both deep and prolonged. This naturally created an imperative for changes to the regulation of the financial system to prevent the same thing happening again in future. Since I became Deputy Head of the Prudential Regulation Authority (the PRA) in June 2014, I have been asked a number of times to comment on how far the regulatory reform agenda has advanced. How close are we to ending “too big to fail”? How much more regulatory change can one expect? | Today, although I will focus mainly on the U.S. economic outlook, I also will discuss how global economic and financial market developments factor into my thinking about U.S. monetary policy. As always, what I have to say today reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.1 U.S. Economic Outlook Recent economic and financial developments have not yet led me to make a fundamental change in my outlook for U.S. growth in 2016. At this point, I have marked down my growth outlook very modestly. However, financial market conditions have tightened since the start of the year, mostly in response to international developments. If this tightening of financial conditions were to persist, it could potentially lead to a more significant downgrade to my outlook. I continue to expect that the economy will expand over the course of this year at a pace slightly above its long-term trend – sufficient to push the unemployment rate down a bit further and to more fully utilize the nation’s labor resources. On inflation, we continue to fall short of our 2 percent objective for the personal consumption expenditure (PCE) deflator. This shortfall looks likely to continue longer than I had earlier anticipated due to the persistent strength of the dollar and weakness in energy prices. However, I continue to expect a gradual return to our 2 percent objective as the transitory factors that have held down inflation dissipate. | 0 |
Warning notes have been sounded, of course, about the need to avoid a lumbering, slow-moving bureaucracy, and the need to ensure that regulation is appropriate for the type of market. I understand those points and, particularly as far as you are concerned, the need to distinguish between professional wholesale markets and the retail sector. There are some interesting developments in that direction in the US at present, which we shall certainly look carefully at as we decide our own new structures. But, overall, I sense that we begin the task with some goodwill in the marketplace. I was particularly interested to see the summary of the views of members of your Association on regulation in the Price Waterhouse report published late last year. That is a helpful document which we will take into account. I was struck by the importance you attached to a clear but flexible regulatory environment, which scored highly as a success factor as far as the London market was concerned. And I took the strong point made about the need for cost control, on the one hand, and to provide a framework which facilitates innovation. When it came to structure, your views were divided. But I was encouraged that the option of an enlarged SIB incorporating the SROs was the one which received the strongest favourable response. There was also quite a bit of support for taking banking supervision out of the Bank of England. | I note with interest that your own assessment is that the best option for the futures and options business in London would be for EMU to go ahead and for the UK to participate in the first wave. It is a moot point as to whether the impact on the profits and bonuses of derivatives traders will be the number one criterion in the minds of Labour MPs when they come to reach a view on EMU, but I will certainly draw it to their attention if you would like me to do so. BIS Review 67/1997 -3- By contrast, you are slightly, though not exaggeratedly pessimistic about business opportunities in London if EMU goes ahead with the UK a ‘slow track’ country. I regard this as a pessimistic assessment, and will attempt this morning to persuade you that you are wrong. My first point, and perhaps the strongest, is that uncertainty about UK participation in EMU has persisted now for a considerable number of years - perhaps indeed since the late 1970s when the UK government’s response to the original EMU plan was distinctly lukewarm. And certainly no British Prime Minister has given an enthusiastic endorsement of the most recent Delors Plan for EMU, at any stage. | 1 |
The priority was to create a secure arrangement that will provide both exporters and importers with a simplified way to settle their transactions with a degree of ease similar to that with which they effect payments within their own countries. From this point forward, there is no doubt that the private sector will take it upon itself to create new financial products and further deepen the real-peso market. Indeed, deepening of the real-peso market, reduction of trade obstacles and access on the part of small and medium exporters are the primary objectives of this initiative. Despite noncompulsory, the facilities and lower costs of the SML should attract exporters and importers. There will be no foreign exchange contracts, despite documentation currently required will remain mandatory. The essential alteration for Brazilian exporters will be the need to register the operation in real. With elimination of a third currency in direct transactions among companies, exporters will set their prices in the currency of their own countries. Thus, they will be better able to calculate their margins precisely, since they will no longer be exposed to exchange rate risk. At the start, it will be possible to carry out trade operations between the two countries with terms of up to 360 days. Payments of services related to trade (for example, freight and insurance) can also be made in own currencies. | Operations may be contracted on the basis of an exchange rate negotiated with financial institutions or the SML rate itself, calculated based on the average real-dollar rate published daily by the Central Bank of Brazil, and the Argentine reference peso-dollar rate. At the closing of both markets, the SML rate will be announced daily. Financial settlement of operations carried out through the system will take place in three business days (d+2). Banking institutions that have Reserve Accounts at the Brazilian Central Bank may be accredited to operate in the system. Authorization to operate on the exchange market is not a prerequisite. The SML is a highly promising initiative for small and medium businesses that have less access to derivative mechanisms to neutralize foreign exchange risk. At the same time, large companies have also shown interest in the system, primarily those that already have mature operations in the two economies. BIS Review 124/2008 1 There is no doubt whatsoever that the system we have just inaugurated will not only stimulate trade transactions between Brazil and Argentina but also enhance competitiveness in both countries. This initiative is a first and important step forward toward greater integration of our economies and of Mercosul. Congratulations to all of those who have played a role in making this historic moment feasible. Thank you. 2 BIS Review 124/2008 | 1 |
13.12.2019 Welcome address Conference “Financial integration and inclusive development: A view from the Mediterranean Countries”/Banco de España e Instituto del Mediterráneo (IEMed) Pablo Hernández de Cos Governor Good morning ladies and gentlemen, It is a great pleasure for me to welcome you all to this Conference on Financial integration and inclusive development: A view from the Mediterranean Countries, hosted by Banco de España and jointly organised with the European Institute of the Mediterranean (IEMed) and the support of the Organization for Economic Co-operation and Development (OECD). Let me start by thanking our colleagues from the European Institute of the Mediterranean and from the OECD for their cooperation in organising this Conference. The European Institute of the Mediterranean (IEMed), created in 1989 with the participation of the Spanish Ministry of Foreign Affairs and Cooperation, the Government of the Autonomous Community of Cataluña, and the Barcelona City Council, incorporates a broad representation of civil society and is a leading institution in the analysis of Euro-Mediterranean relations. In accordance with the principles of the Euro-Mediterranean Partnership's Barcelona Process, and with the objectives of the Union for the Mediterranean, the aim of the IEMed is to contribute to mutual understanding, exchange and cooperation between the different Mediterranean countries. And Banco de España is delighted to collaborate to this objective in the field of economic and financial relationships. Our second partner today, the OECD, is playing an invaluable role in the international arena to shape policies that are decisively contributing to the well-being for all. | It is no exaggeration to say that the world count on the leadership of the OECD in many fronts such as those that we are going to discuss today: financial inclusion, capital flows, migration, among others. This is the fifth edition of this Conference organised by IEMed, with the support of the Banco de España, to discuss economic and financial matters in the Mediterranean region. The first and third editions took place in Barcelona, in 2014 and 2017, the second in Rabat in 2015 and the fourth in Tunisia in 2018, on those occasions with the support and hospitality of Bank Al-Maghrib and the Central Bank of Tunisia. Past editions of this conference had provided useful exchanges of ideas between different actors with interests in the economic and financial developments in this region. I firmly believe that forums like this are particularly relevant to shape public policy in times of change as those we are witnessing today. The deep-rooted transformations in economic and financial relations globally force us to re-think the design of economic policies in order to better contribute to the progress of our society. In particular, these forums are instrumental for central banks in its role of providing guidance for economic policies that are not in their mandates. Let me add that in order to exert this role of assessing public policies, central banks need to be granted with political and operational independence, in order to provide recommendations free from political pressure or vested interests. | 1 |
The Governing Council is constantly and carefully monitoring all developments and stands ready to do all that is necessary to maintain price stability. Later today, Jürgen Stark will present the outcome of our enhanced monetary analysis that enlarges our toolkit to pursue this aim. Beyond our role as guardians of the euro, we also have to deliver on our responsibilities as part of European and global economic governance. In this context, I would like to touch on the work programme of the Van Rompuy Task Force, which was established by the European Council in March 2010 and in which I am participating. Vítor Constâncio and Lorenzo Bini Smaghi will go into greater detail, and I will highlight a few elements of the task ahead. BIS Review 97/2010 5 First, national fiscal reforms – to which I alluded before – need to find an anchor and a collective guarantee in renewed and strengthened institutions for multilateral budgetary surveillance. National fiscal frameworks will receive a blueprint of good practice, which will ensure that commitments to fiscal prudence are internalised first and foremost in the national Parliaments. A new code for statistical reporting will support the legislatures in enforcing their fiscal plans. This will be the first line of defence against the accumulation of fiscal imbalances. We will have a second line of defence at the level of the EU27, and in particular within the euro area. | Just like consumers and countries, governments cannot live beyond their means forever. Fiscal authorities need to look beyond the current cyclical upturn. There is no alternative to that. Let me remind you of an often forgotten remark by John Maynard Keynes from 1937, in the aftermath of the Great Depression, when he said: “Just as it was advisable for the government to incur debt during the slump, so for the same reasons it is now advisable that they should incline to the opposite policy”. 1 Fiscal consolidation and growth are not mutually exclusive. I disagree with the view that reducing public expenditures will hinder economic growth. On the contrary, prudent fiscal management provides the basis for balanced and sustainable growth. Stability-orientated fiscal policies will foster confidence among households, entrepreneurs and investors, which will ultimately increase our welfare by creating new jobs. 2. How should we address European modalities of today’s global challenges? I have outlined three key areas for efforts to shape the contours of the post-crisis world – reform of the institutions of global governance, reform of the financial system and reform of public finances. These are global challenges affecting in particular the industrial economies. I would now like to explain how Europe specifically is responding to these challenges. An ambitious agenda lies before the continent. It is not only a visionary agenda: it has to be pursued with determination right now. | 1 |
Despite the recent recovery observed in Spanish banking system profitability, the present levels are below the pre-crisis levels and below the cost of capital estimates available. This situation is not exclusive to Spain, but is in fact quite widespread within the euro area. Indeed, the average profitability of Spanish banks is currently somewhat higher than that of the main European banking systems and the euro area average. The breakdown of the return on assets shows that the main reason why Spanish banks’ profit levels are higher than the euro area average is that their net interest income is higher. This reflects the larger relative share of Spanish banking business in less mature markets, such as the Latin American economies, where margins are higher. Conversely, Spanish banks have higher impairment related expenses and provisions than their euro area peers. Average return on equity among Spanish banks is also higher than for banks of other European countries such as Switzerland or the United Kingdom or for Japanese banks. But it is lower than average return on equity observed in other more profitable banking systems, such as the United States, Sweden, Norway, Canada and Australia. In any event, there is a high level of dispersion in profitability between banks, both in Spain and in the rest of Europe. This shows that profitability problems do not affect the sector evenly, given the range of banking business models, both between countries and within each jurisdiction, and also the combination of multiple explanatory factors. | In any event, in order to assess the overall effect of interest rates on the profitability of banks, it is necessary to take into account that interest rates not only impact the net interest margin but they also impact other items in the income statement. In particular, lower interest rate levels help to lessen losses in the credit portfolio due to their favourable effect on borrowers’ repayment capacity associated with both the lower cost of credit, and higher income and lower unemployment tied to the macroeconomic impact of lower interest rates. These effects may be particularly important in countries like Spain where the banking system started out with a high level of non-performing loans and where short-term or variable rate lending was prevalent, since this results in movements in market returns passing through rapidly to the costs of outstanding debt2. Thus, part of the fall in the non-performing loans ratio in recent years can be explained by this effect. Furthermore, declines in interest rates contribute to increasing the prices of financial and real assets. This effect is immediate for fixed-income securities, particularly long-term ones since prices are more sensitive to changes in yields. Valuations of equities and real assets, such as housing, are also boosted by the fall in interest rates due to the effect on the discount factor, although the price of these other assets is influenced by other conditioning factors such as macroeconomic expectations. | 1 |
As a result, they have been, and probably still are, able to increase production to a fairly large extent without any substantial increase in real capital and employment. There are prospects of solid growth in productivity in 2004. Nevertheless, our regional network reports that companies in a number of industries are now considering an increase in employment. After rising sharply for several quarters, economic growth in the US slowed in the second quarter and employment growth appears to have stalled this summer. Economic growth has picked up from a low level in the euro area. Economic growth has also gained momentum in Sweden and the UK. Strong growth in the US and China exerted upward pressure on commodity prices in 2003 and the beginning of 2004. Since then, price inflation has been dampened. Oil prices have risen considerably during the summer. Interest rate expectations indicate interest rate increases in a number of countries. The effects of oil price developments on the Norwegian economy are mixed. Persistently higher oil prices may eventually contribute to higher petroleum investment and increased activity in sectors affected by petroleum activities. A sharp rise in oil prices, however, restrains global economic growth and affects demand for our other export products. The analyses in Norges Bank’s last Inflation Report in July 2004 are based on the technical assumption that interest rates will move in line with forward interest rates. | And are the authorities in the latter countries prepared to relinquish the responsibility for an essential part of their financial system to the home country of the parent bank? These are not just abstract issues, as can be seen from the fact that Nordea, domiciled in Sweden, is now the largest bank in Finland and that Swedish banks own the major part of the banking systems in the Baltic states. Thus, it seems that the supervision of international bank groups could lead to problems of coordination and duplication. On the whole, there appears to be no lack of incentives to supervise cross-border banking operations. The problem is rather that in certain cases the rule system prevents the most active countries for exercising supervision, so that this is liable to fall between two stools. On the other hand, an excessively generous right to supervise can lead to the burden of supervision being unduly heavy for individual banks. That could hamper integration as well as efficiency. Formalising crisis management is more difficult than other parts of the work on stability. Discussing crisis management can be perceived as sensitive and troublesome because to some extent it concerns the state’s willingness to assist the financial sector with liquidity. The dividing line between whether or not this should be discussed openly often runs between countries that have experienced a financial crisis and those that have not. Those which have lived through a crisis are generally in favour of a transparent process. | 0 |
I’ll just have to say that I’m fact-based. New York Fed is fact-based. And I hope we stay that way. Maureen O’Hara: Do you have alternative facts? Just checking, just checking. President Dudley: Look, I think a healthy debate is a good thing about what facts matter and how the world works. You know, people can have different models about how the world works and what’s important, and what’s not. But I think that they have to be based on real evidence. So, I’m going to continue to live in my world, which is very much fact-based. Maureen O’Hara: I think we have time for one more question, and we have someone back there who’s got a mike. Audience Member: Yeah, Mr. Dudley, I have a question. You mentioned that there was some nefarious behavior by banks. I heard you mention that there was some nefarious behavior going on by banks during the financial crisis. President Dudley: Well, the employees of banks. Audience Member: Ok, employees of banks. My question is, there was – some of the big banks, including J.P. Morgan and Bank of America, basically bailing out the government and the FDIC, buying institutions like Countrywide, Merrill Lynch, Washington Mutual. In some of these cases, they were given winks and nods by the government that they were not going to be held accountable for let’s say the sins of these institutions that they took over. | What I think is what’s new is we have to do a better job in terms of retraining people, getting people the mobility they need so they can actually feel that they have a place in the new economy. I was thinking about this question about technology and you think about the U.S. farm sector. You think about how many people in the United States worked on farms in 1900 and how few people work on farms today. Same kind of tech, same science and process of technological transition, but the good news is we were able to find things for those people to do. 4 / 13 BIS central bankers' speeches People always have for many, many years, talked about how technology is going to put everyone out of work, and everyone’s just going to have a lot of leisure. That has not panned out up to now at all, and so I’m just a little bit skeptical that now we’re at that critical turning point. I could be wrong. This time could be different. But if you think about how long we’ve had these conversations about technology obsoleting everyone’s skills and leading to massive unemployment, this has been a conversation that we’ve been having for hundreds of years, literally. Maureen O’Hara: It’s tricky now, though, isn’t it? I mean in the past, I think you used to think about technology as taking away some of the lower-skilled jobs, and yet now we’re seeing it kind of marching its way up. | 1 |
In fact findings show that the implications of this in the long term for the ability of households and businesses to get a loan are relatively modest – although there is considerable uncertainty around this result. As such, while other risks may arise during a transitionary phase, the most significant risk arises from the potential for stablecoins in particular to undermine confidence in money and payments, and hence in the wider financial system. As we discussed a few minutes ago, the risk of a loss of confidence in the credibility and stability of private money is not theoretical. Loss of confidence in private money can be a major threat to financial stability. But it is equally true that private money can be made acceptable as a widespread means of payment – indeed, as I covered earlier, the vast majority of money held for transactions in the United Kingdom is already private. So, with the right regulation, a stablecoin could potentially be made safe for wide-scale use. Our existing regulatory framework seeks to ensure that the public is able to trust the reliability and stability of the money it uses every day. Banks are subject to extensive rules and requirements to ensure that consumers can use privately-issued money with confidence and interchangeably with cash. These core rules and requirements were developed over time – in many cases via trial and error, with new rules introduced following financial crises. | This ensures that temporary liquidity issues arising from difficulties selling assets backing the value of stablecoins don’t result in firm failure; and A backstop to compensate depositors – or in this case coinholders – such as the Financial Services Compensation Scheme (FSCS) (or in other countries deposit insurance), in case of failure. This ensures that, even if a firm fails, transactional deposits up to a certain amount remain exchangeable for central bank money. Notably – one of the key responses to the Northern Rock episode was to increase FSCS coverage in the United Kingdom. This is not to say the regulatory model for stablecoins needs to be identical to banks. It could include different applications of the above features. For example, if stablecoin operators are restricted to backing themselves in high quality liquid assets they won’t need regulation to cover credit risk. If they only back themselves in central bank reserves, which are inherently liquid, they don’t need liquidity facilities. Ultimately, the specific requirements may well be different from those applicable to banks, but the outcome will be the same – that systemic stablecoins used as money will offer the same protection to coin holders as commercial bank money. Conclusion The title of this speech is a cliché: Everything that is old is new again. But I am going to end on a different cliché: the definition of insanity (widely – and inaccurately – attributed to Albert Einstein) is doing the same thing over and over again but expecting different results. | 1 |
A little over 350 years ago, Stockholms Banco, which later became the Riksbank, became the first issuer of modern paper banknotes because people wished to avoid having to carry heavy copper coins around. Now we are facing a situation in which we will perhaps be among the first in the world to launch a new kind of central bank money, a kind adapted to today's digital society and the needs that exist there. When market conditions are changing rapidly due to new technical innovations and increased European integration of technical systems, the Riksbank must adjust its range of services. Among other things, we are planning to modernise our range of settlement services. I also think that we should extend the opening hours of RIX and ensure that our systems are technically constructed so that we can offer the possibility of settling instant payments in central bank money so that the market does not start to use alternative, less efficient solutions. There are also interesting possibilities here for an e-krona to cover the need for central bank money for the general public in a digital world. One possible way forward is for us to continue to analyse and develop a pilot version in 2019. There is also reason to review how legislation regarding the legal tender can be adjusted to the new digital reality. How else will the position of the Swedish krona be protected if cash disappears? All of these issues must be managed together with other players such as the market, public authorities and legislators. | SPEECH DATE: 4 June 2018 SPEAKER: Stefan Ingves VENUE: Stockholm School of Economics 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 Money and payments – where are we heading? Today, I am going to talk about money. This is a subject that concerns us all – most of us use money practically every day. But we probably don’t give much thought to how important it is that our daily purchases can be carried out smoothly. It's more or less the same as not giving so much thought to your health as long as you’re healthy. But once you get sick, it becomes almost the only thing you can think about. Our system for payments is similar; as long as it works securely and efficiently, we don’t think about it. And, to continue the analogy: It is the Riksbank's task to ensure that the payment system remains healthy and contributes to a well-functioning society. Right now, we, at the Riksbank, are devoting a lot of time to issues regarding payments and the payment system. The background to this is formed by the rapid changes on the payment market and the rapid decrease in cash usage in Sweden – a development that we are practically alone in, worldwide. Only a few other countries are undergoing a similar, albeit less dramatic, development. | 1 |
The FPC has a crucial role both to scan the financial system for threats to that resilience, and to ensure by recommendation, or in some situations direction, to those bodies such as the PRA and FCA directly charged with institutional regulation, that mitigating actions are put in place. It is therefore quite natural that the FPC is interested to know that the PRA is conducting stress testing of insurers, and to know whether those tests are appropriate to the objectives of financial stability. Moreover, the FPC needs to question whether, even if individual firms are doing the right thing, the system as a whole is resilient. This is the essence of macro-prudential regulation. It can, and should, ask questions which transcend firm level supervision, such as whether the level of inter-connectedness of participating firms is a cause of excessive weakness in its own right. We want the public to have confidence in the financial system, and let’s face it in some areas we have a lot of hard work to do. Now, to do that, we have to build a better understanding of the new regime and what we are trying to do to achieve our statutory objectives. The old ways of doing things were surrounded by some mystique and a lot of privacy. There is a need for appropriate privacy because the firms we regulate embody important private interests, and those are crucial to a functioning market economy. Regulators do not run firms; that is not our job. | Bank of France reports industrial output continued to increase in all sectors in February 1997 BANK OF FRANCE, MONTHLY BUSINESS SURVEY, 17/3/97. In February, according to the business leaders surveyed by the Banque de France, industrial output continued to increase in all sectors. The capacity utilization rate rose slightly. Overall demand grew at a moderate pace. There was strong demand from foreign markets, particularly from northern Europe, including Germany and the United Kingdom, and from the United States and Asia. The rise in the dollar and in sterling reinforced the competitiveness of French products. Growth in demand on the domestic market was much more moderate. Order books are deemed to be satisfactory in all sectors, with the exception of the food-processing industry, where they declined slightly and appear to be insufficient. Inventories of finished products are still somewhat above normal levels. In particular, they are considered to be above desired levels in the food-processing, intermediate goods and automobile sectors. In the coming months activity should continue to increase in all sectors, with the exception of the automobile sector. Commodity prices were stable overall. However, price rises were recorded in certain parts of the intermediate goods industry, such as the rubber and plastics, metal-working, and wood-processing sectors, and in the food processing industry owing to the appreciation of the dollar. Intense competition prevented these increases from being passed on to sales prices, which scarcely changed, except in the automobile sector, where they declined. The business leaders surveyed continued to be cautious in their investment plans. | 0 |
The SNB’s expansionary monetary policy contributed to the depreciation of the Swiss franc over the course of the year and thus also supported the economy. Inflation is currently negative, due to the appreciation of the Swiss franc following the discontinuation of the minimum exchange rate and to the reduction in commodity prices. We expect it to return to positive territory in 2017. We will keep our options open should other measures be necessary to fulfil our mandate. But, as always with monetary policy decisions, we need to carefully weigh up the pros and cons to serve the interests of the country as a whole. In the wake of the financial crisis and the use of unconventional measures, central banks have become the focus of intense public interest. Various reform proposals are being discussed and we welcome these public debates. New ideas need to be seriously considered and evaluated. The intentions behind the sovereign wealth fund and sovereign money projects are commendable. But, on closer examination, the drawbacks outweigh the benefits in both cases. Finally, on behalf too of my colleagues in the Governing Board, Fritz Zurbrügg and Andréa Maechler, I would like to take this opportunity to thank our employees for their hard work and dedication. We would also like to thank our shareholders for their solidarity with the SNB and for their loyal support. | I see this as a reasonable possibility, and therefore I think it might be possible that the decline in reserve balances has pushed up overnight rates a bit over time. 17 At this point, I see no evidence that we are at, or close to, the “steep” portion of the demand curve. 18 Let’s run through some places where evidence of such a possibility might be found. To begin with, if we were closing in on the “steep” part, I might have expected to see more above-IOR lending in the unsecured overnight markets, as at least some banks each day found themselves short of reserves and had to borrow them from another bank. In fact, the amount of such above-IOR lending remains low as a share of the overnight bank funding market, as shown in Figure 9. 19 I might also have expected to see shifts in bank payments behavior—for example, more daylight overdrafts or more effort by banks to “optimize” their payment flows— but I have not seen this either. But, most fundamentally, I might have observed a day-to-day relationship between shifts in the stock of reserves and overnight interest rates. Figure 10 shows a scatterplot of daily changes in reserve balances against daily changes in the spread between the IOR rate and the effective federal funds rate; there is no visible relationship. 16 The classic paper on this topic is Poole (1968). | 0 |
The main thing to understand is that, even if domestic monetary policy has some bearing on real interest rates, at least for a while, it is not their ultimate determinant. In the end real rates are driven to their natural level by deeper economic forces. The policy rate is but one expression of those forces. 8 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 8 Chart 9: Long term real interest rates are With open capital markets, and for a small economy determined globally like the UK, one can actually go further than that: it’s unlikely that any domestic factor, whether monetary policy or anything else, can be the predominant influence on longer-term real interest rates, as these are determined globally. Consistent with this, longerterm real interest rates are tightly correlated internationally (Chart 9). In particular, they all share the same downward trend over the past couple of decades. With inflation relatively stable in all these countries, it’s hard to believe central banks were doing much else than simply following a similar Sources: King and Low (2014), Rachel & Smith (2015), Bloomberg, Consensus Economics, IMF, Thomson Reuters Datastream.7 decline in the neutral rate of interest – the level consistent with stable inflation. It’s also hard to believe that, whatever its cause, UK real rates could have escaped this decline. 8 As I say these points have been made before . And in making them again, I don’t want to underplay the potential significance of pension fund deficits. | It is another matter that things may not go quite as quickly and become as widespread as the greatest optimists foresaw just a year or so ago. People in Sweden do not suddenly stop going to shops just because websites make it possible to buy clothes, shoes, cars and food, for example, on the internet. Alternatives in the form of mail order firms, newspaper advertisements and the telephone have been available for many years, yet many people still prefer to do their shopping in the traditional way. But it does seem very probable that computers in various forms will render many production and purchasing processes increasingly efficient as time goes by. The effects of the new technology will occur in various parts of society. It is easy to think of a number of uses. And as the innovations become cheaper and cheaper, there will be growing incentives to 2 BIS Review 90/2001 apply them in many economic activities. The price of computers, for example, has fallen in the past four decades by around 20 per cent a year. In literal terms, that means that a computer which costs 10,000 kronor today would have cost almost 50 million kronor in the early 1960s. So prices have fallen dramatically. Our own history clearly shows that the combination of major technical breakthroughs and a sizeable price fall can lay the foundation for outstanding economic growth. | 0 |
Because the quantity of funds to be injected is known in advance, this mechanism poses fewer complications for our ability to reduce volatility in the fed funds rate around the target. The auction facility and other measures we have taken to address market liquidity problems do not directly address the balance sheet or capital constraints facing financial institutions. Nor can they be expected directly to reduce the perceived risk in exposure to other financial counterparties. But by providing a more effective form of access to liquidity, these new measures can help reduce the uncertainty that gives institutions the incentive to secure liquidity in ways that might lead to a further deterioration on market conditions. Major financial institutions in the United States and elsewhere entered this period of adjustment with capital substantially above the various regulatory thresholds. These capital cushions have enabled banks to expand their balance sheets as they have met contingent commitments and as the economics of other non-bank financing vehicles have deteriorated. This has been an important part of the adjustment process in markets. We have also seen some early steps by a range of different institutions to bring new capital into the banking and financial system. This is a healthy development. It reduces the need for further asset sales to preserve capital ratios. And it gives those institutions that acted earlier and on a more substantial scale the flexibility to play a greater role in markets and in the economy going forward. | Finally, let me say something about future challenges in this area that are of special relevance to today’s conference and to the research agenda in which you are all engaged. We are already involved in a coordinated review with other central banks and supervisors of how we should adapt policy and supervision in the wake of this financial crisis. Two issues are of particular interest in the context of this conference. The first relates to the incentives we create, through regulation and supervision and other policies, for influencing how financial market participants manage liquidity risk. Several aspects of the existing capital framework and other parts of the policy and regulatory 2 BIS Review 149/2007 framework affect these incentives. In addition, the evolution of the financial system has altered the role and importance of liquidity provision by banks and how that provision of liquidity responds to different types of stress to the financial system. The second issue relates to the tools that central banks have at their disposal for providing liquidity in ways that do support our monetary policy objectives. Do we need additional instruments that would better enable us to mitigate marketwide liquidity problems? And how can we mitigate the moral hazard risk inherent in such instruments? Efforts are underway to address these issues both within the Fed and among our central banking colleagues around the world. We will be looking both to financial market participants and to the academic community for advice. | 1 |
In my regular visits, I have criss-crossed the Province and come to realise how important is the business community as the agent of change and reconciliation. It is a challenge to which you continue to rise with spirit and determination. And it is why I enjoy coming here to meet with you, to learn about your progress, and to appreciate the extraordinary beauty of the Province. I am conscious that there are significant differences between the economies of Northern Ireland and the rest of the United Kingdom. Tonight, however, I want to focus mainly on the economic outlook for the United Kingdom as a whole. What are the Bank of England’s diagnosis, prescription and prognosis for the UK economy? At one level, the diagnosis is self-evident. Growth has been much weaker than most commentators expected. In fact, according to the official figures, there has been barely any growth at all over the past 2½ years. Unemployment, at a rate of almost 8%, is markedly higher than the level of around 5½% before the crisis. And inflation, despite its fall over the past fifteen months from over 5% to around 2½%, remains above our 2% target. Living standards have been squeezed for longer than at any time in living memory. | There were also inadequacies with regard to credit granting. Large loans were made to new customers, new sectors and new geographical areas. This type of lending strategy is not wrong in itself, but it requires that the credit-granter has done his homework and is aware of the possible risks. In some parts of the banking world, they talk about credit-granting according to the church tower principle, i.e. that loans should be primarily made to customers living and active close by. How this principle was applied in connection with investments in Atlanta or Brussels is not easy to see. In addition, the banks contributed to their customers building up a comprehensive credit exposure in foreign currencies, regardless of whether or not they had matching income in their loan currency. As the krona exchange rate was high, some borrowers chose to take out loans in foreign currencies that had a lower nominal interest rate. The risks with this strategy became evident after the krona’s rapid fall of almost 25 per cent in six months, calculated from when the krona was allowed to float in November 1992. When the banks’ borrowers found that their debt amounts had increased by up to 25 per cent, calculated in kronor, many of them were unable to meet their obligations and the banks’ loan losses increased further. These actions by the banks are actually quite remarkable. | 0 |
But given the strong contractionary tendencies in the economy, we decided that further stimulus was needed. So in March, we announced a programme to purchase £ bn of public and private financial assets, financed by issuing extra Bank of England reserves – an action going by the unlovely description of Quantitative Easing. And at our meeting at the beginning of this month, we upped the total amount of purchases to £ bn, about half of which have so far been made. The ultimate aim of these measures is to boost the annual rate of growth of nominal spending in the economy, which has been roughly flat over the past year, to a level consistent with a sustainable level and rate of growth of real activity and inflation meeting our target. Quantitative easing has been described in some quarters as “printing money”, though it is not literally that. It is more akin to us buying the asset with a cheque drawn on the Bank of England, which the seller then deposits with his own bank. As a consequence, the quantity of bank deposits in the economy goes up, while the claims that the banks hold on the Bank of England also increase. The immediate impact of these purchases should be to drive up the price of the assets that we are buying, or equivalently to reduce their yield. That is indeed what we have seen, with gilt yields falling nearly ½ percentage point when the programme was initiated. | Jean-Pierre Roth: Once a student, always a student Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the University of Bern, Switzerland, 9 February 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Like all decisions relating to the future, monetary policy decisions involve numerous uncertainties. Economic researchers are divided as regards both the effects of monetary policy and the form that this policy should take. There are a number of competing models in economic theory, and their policy recommendations often vary. Relationships that have been stable in the past may change at any time, due to the fact that the structural equations used in economic models are not based on the laws of nature. The Swiss National Bank's monetary policy concept takes account of these uncertainties. Our inflation forecast is a key element in this concept and combines the results obtained by a variety of different models. Research is extremely important in our changing world. We can only be sure of identifying new developments as early as possible and basing our monetary policy decisions on a solid foundation if we engage in constant research. BIS Review 9/2006 1 | 0 |
Given a stock market climate already depressed by the ongoing correction of the bubble that affected the technology and communications sector, this lack of confidence further propelled the downward trend on the equity markets, which favoured the fixed-income markets. Moreover, the crises in certain emerging economies continued, especially in Latin America, and this also contributed to the general risk-aversion of investors on international financial markets. A key feature of recent developments in the world economy is that the aforementioned shocks, whose common denominator is their impact on agents’ confidence, affected all the developed economies and some of the emerging ones almost simultaneously. This highlights how, in an increasingly globalised world, the transmission channels on which expectations turn (and which exert a key influence on the financial markets) are extremely rapid. All economies, especially the most developed ones, are prone to the impact of this type of disturbance, whose origin may be very remote and whose relationship to a specific national economy’s fundamentals may seem far-removed. The loss of confidence stemming from the aforementioned shocks was, in turn, amplified by various deep-seated imbalances in the world economy which have not been corrected or have even worsened, including most notably the US current-account deficit and persistent deflation in Japan. These underlying weaknesses stoked up uncertainty and a climate of mistrust in various segments of the world economy, all of which contributed too to checking and postponing the onset of recovery. | It also involves patrolling the frontiers of our powers and 6 Id. at 483. 7 Dodd Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, 124 Stat. 1376 (2010). 8 12 U.S.C. § 5365. 9 12 U.S.C. § 5365(a)(1). 10 12 U.S.C. § 1842 (c)(7). 11 Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System, September 18, 2013, Press Conference. BIS central bankers’ speeches 3 recognizing where and when the rule of law forecloses options. This is essential to the credibility of the central bank, a concept closely connected with the public’s trust. To conclude, I hope these remarks about financial stability also reflect on what our legal colleagues have accomplished at the ECB. In this regard, I pay tribute to the leadership of Antonio Sáinz de Vicuña, and to his work not only in presiding at the birth of the euro, but guiding the ECB to take the extraordinary actions necessary to preserve the euro. As President Draghi accurately forecast, they have been enough. Antonio, as you step down as general counsel, I congratulate you on the accomplishment of the mission, and applaud you for a job well done. Thank you, ladies and gentlemen, for your kind attention. Disclaimer: The views expressed are the views of the author and do not necessarily reflect the views of the Federal Reserve Bank of New York, or any component of the Federal Reserve System. 4 BIS central bankers’ speeches | 0 |
William C Dudley: New York City's return from the brink Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Lotos Club, New York City, 19 October 2016. * * * It is a great pleasure to have the opportunity to speak here this evening at the Lotos Club, one of America’s oldest and most distinguished literary clubs. I am, of course, very happy to participate in tonight’s public affairs dinner and to accept the Lotos Award of Distinction. Tonight I would like to take a moment to discuss some of New York City’s recent history and its return from the economic brink. Aside from being a story of historical interest, I believe there are lessons embedded in New York City’s experience that are relevant to other cities and municipalities that find themselves struggling today. As always, what I have to say reflects my own views and not necessarily the views of the Federal Open Market Committee or the Federal Reserve System.1 Given the historical relevance of today’s date, it seems appropriate to start by recalling what happened on this day 29 years ago. In what has come to be known as “Black Monday,” the U.S. equity market suffered one of its steepest one-day drops in history, with the Dow Jones Industrial Average falling 508 points—a decline of more than 20 percent. This capped one of the worst weeks ever for the U.S. stock market. | One consistent source of strength for the city has been immigration. Over this period, New York City benefited from a sizable influx of immigrants, which more than offset out-migration in many neighborhoods. To illustrate this, let’s take a look at one such neighborhood in Brooklyn, Sunset Park, that was losing residents to the suburbs in the 1960s and 1970s. As property values fell, new migrants from Puerto Rico, the Dominican Republic and Central America moved in. By 1990, Hispanics comprised about half of all Sunset Park residents. These new residents developed a thriving community, which boosted property values. There was also an influx of Chinese residents, and part of Sunset Park has come to be known as Brooklyn’s Chinatown. There are many other examples where immigrants revitalized whole neighborhoods: Russian and Ukrainian immigrants in Brighton Beach; Chinese and Korean immigrants in Flushing; and Indian immigrants in Jackson Heights, just to name a few. So, has it been all good news for New York City in recent years? Certainly not. Many challenges remain. One by-product of a strong economy and real estate market has been a decline in housing affordability, and an increase in homelessness. It is estimated that there are over 60,000 homeless people in New York City today—almost double the number from 10 years ago and more than four times as high as in the early 1980s. Moreover, poverty rates remain high in many parts of the city, and the education system can certainly be improved. | 1 |
The goal, of course, is to be able to resolve distressed giant institutions, complex institutions, without taxpayer solvency support, but also without disastrous disruptions to the flow of essential financial services to our economies. I would say two substantive things about the tools needed to make this feasible. First of all, as the crisis around the world has demonstrated, we need to extend the basic resolution toolkit I was talking about beyond commercial banks to bank holding companies and to affiliated companies; in other words, to groups. And we must extend the scope of the basic resolution regime to non-bank financial institutions and groups in circumstances where their distress could prove systemic. This is essentially what the Dodd-Frank Act does in the United States. It makes it possible for the FDIC to manage and run down a SIFI from a bridge company. This could work well in some circumstances; for example, where there are buyers for parts of the business in the wings, as with Lehman. This is, therefore, a resolution instrument which we should seriously contemplate adopting in Europe. I am not certain that it would definitely work in all circumstances; eg if there were no buyers in prospect, the state ends up running the group, which could be quite a thing, with a risk that staff and counterparties may drift away. But even in those circumstances it would surely be preferable to a normal liquidation. | More specifically, the TALF was designed to support the market for securitized credit. Overall, the TALF performed impressively in meeting that objective. The program contributed to a substantial improvement in conditions in the securitized credit market, facilitating an increase in the availability of credit to households and businesses. Moreover, it achieved this outcome with limited risk to the Federal Reserve’s balance sheet. Let me begin with some general background information on securitized credit markets. Securitization is an important funding source for bank and nonbank lenders. When a lender extends credit, it makes the decision of whether to keep loans on its books or to securitize and sell them to other investors. If kept on the lender’s books, the holdings have to be financed, either by borrowing or by using funds that could be deployed for other purposes, including making other loans. Thus, in many circumstances the lender finds it advantageous to sell assets through the securitization channel, allowing other investors to ultimately hold the assets and hence bear the risk. The amount of credit financed through securitization rivals that provided directly by banks. Indeed, even excluding the sizable securitization markets for mortgage credit, approximately $ trillion in loans to consumers, students, and businesses were securitized over the past decade. 2 The securitization market became significantly disrupted during the financial crisis in 2008 and 2009 in all areas outside of conforming agency mortgage-backed securities. Liquidity for securitized products deteriorated, leading to an unprecedented widening of spreads. | 0 |
VOLATILITY IN THE FUND’S VALUE Let me now turn from expected returns to the return volatility that must be expected when different equity allocations are applied. The most common measure of risk in financial markets is standard return deviation, i.e. return volatility around the average. The standard deviation of the fund’s benchmark portfolio is determined by two factors: equity return volatility and bond return volatility, and the degree of covariance between the two asset types. Chart: Equity allocation and volatility Volatility is lower for bonds than for equities. As illustrated by the straight line in the chart, this means in isolation that portfolio risk increases with the increase in equity exposure. There is a pattern in our data showing that the standard deviation for equities has over time been two to three times higher than for bonds. The analyses do not support estimates that differ from those of ten years ago for equity risk relative to bond risk. Equity and bond returns do not move in tandem. As a result, bonds reduce the variation in the fund’s value in addition to the contribution from lower volatility. For a given equity allocation, portfolio volatility will be smaller the lower the correlation between equities and bonds is, as illustrated by the dashed curves in the chart. The blue curve assumes a degree of positive correlation between equity and bond returns. This means that although bond and equity price often covary, this is not always the case. For the purple curve, we have assumed that the correlation is negative. | When equities were included in the investment portfolio in 1998, the strategic equity share was set at 40 percent, and the equity share in the actual portfolio had reached this level by June of the same year. 1/7 BIS central bankers' speeches In June 2007, it was decided to increase the strategic equity share further to 60 percent. The implementation of this strategic change took place during a demanding period. Financial market uncertainty was elevated. Although equity markets declined sharply in autumn 2008 and winter 2009, the new strategic equity share was maintained. The increase in the equity share was been completed by June 2009, and Norges Bank had purchased NOK 1000 billion in equities for the fund over this two-year period. The fund’s average ownership stake in global listed companies had increased from 0.4 percent to 1 percent. A large share of the equities held by the fund today was purchased during these two years. In 2010, the GPFG’s investment universe was expanded to include unlisted real estate. Since then, the fund’s strategic benchmark index has been composed of 60 percent equities and up to 5 percent real estate, with the remainder in bonds. As real estate investments involve some equity risk, the equity share in the strategic benchmark index, in an index composed solely of equities and bonds, is now slightly higher than the allocation defined in 2007. The question of the fund’s strategic equity share is once again on the agenda. | 1 |
Third possible avenue: Diversify the risk management tools of financial institutions As I mentioned earlier, even the best techniques can have adverse effects when used on a standard basis and by all participants. To some degree, this is perhaps what has happened to value-at-risk based techniques, which have been, for very good reasons, massively adopted by the financial industry. Because they use more or less similar parameters and suffer from the same weaknesses – for example, they did not take market liquidity into account adequately at the time of the 1998 crisis –, BIS Review 28/2002 5 such tools might tend to give converging signals to those that use them. They thus encourage the mimetic behaviour that I discussed previously. Of course, the fact that some market participants are more sophisticated than the average is a guarantee that standardisation will remain limited, since they will develop techniques that are little used by others. However, supervisors might help, and obviously are already helping to spread the idea that financial institutions should round out their current range of risk management tools to include extensive use of stress testing. This technique offers a better reflection of the varying situations of institutions and of the diverse perceptions that institutions have of exceptional events. The application of stress testing techniques and their results are thus inherently more diversified than those resulting from methods based on the value-at-risk approach. 3. | If you want to maintain confidence, you simply do not have the luxury of time. But even if you cannot hinder a crisis, addressing it as early as possible and with determination can at least limit its effects. So my second principle of effective crisis management can be summed up as acting swiftly. While this principle is easy to support, crisis management in practice is often characterised by the opposite: taking too little action, too late. Essentially, there are two main reasons for supervisory and other authorities to neglect taking sufficient action in time – they lack either the willingness to act or the ability to act – sometimes both. There are many reasons for supervisory and other authorities to not want to act. Pressure from the industry and politicians is one of the first that springs to mind. Sometimes – consciously or unconsciously – supervisory and other authorities also want to let banks gamble on turning themselves around. And banks and their shareholders are often more than willing to play along – they face a one way bet as they approach the brink of failure. But in the end, the longer you wait, the harder you fall. For that reason, I don’t have a high opinion of regulatory forbearance or other excuses for supervisory inaction. Ability to act may also be constrained. First and foremost, the ability to act is, of course, dependent upon the tools available. | 0 |
It also means the macroprudential authority has no framework and tools for loosening regulatory policy to prevent the self-reinforcing deleveraging spirals that kick in in the downturn of the cycle. Second, it is difficult to know ex ante how strong the next credit cycle is going to be and so where to set underlying policy. The FPC faced some of these issues in the design of the UK’s “leverage ratio” capital framework which the Committee agreed last year. Our conclusion, informed by an assessment of the economic costs and benefits, was that provided we had the ability to vary leveragerelated capital requirements countercyclically, in the same way that we could vary the riskweighted capital requirements, we could set the minimum leverage requirement at a lower point. The second approach is to try to maintain the overall resilience of the system over the cycle. The underlying regulatory framework is of course intended to cope with a wide range of risks. It is intended to keep such risks firmly located in the tail of the distribution. But the distribution BIS central bankers’ speeches 5 of risks changes through the cycle. One approach to time-varying macroprudential policy is to aim to ensure that tail risks do not increase with the credit cycle – ie that the resilience of the system is maintained over time and does not change with the distribution of risks. Stress testing of banks can play an important part in making an assessment of resilience through the cycle. | This is becoming a more pertinent issue in the UK as we move into a more normal phase of the credit cycle; credit is beginning to grow again albeit at rates below the pre-crisis peaks. And within the aggregate numbers some sectors are growing relatively quickly. Time-varying macroprudential policy is hard and there is much new ground to be broken. But there is a benefit in ensuring that the financial system maintains resilience as the distribution of systemic risks moves through the cycle and where necessary trying to ensure that such risks do not build up unchecked. I am conscious that I have spent the last half hour talking about the role of policy through time. Einstein, of course, taught us that time was in the end indistinguishable from the dimensions of space: “for us physicists believe the separation between past, present and future is only an illusion, although a convincing one”. There is I am afraid only so much brilliant simplicity an economic policy maker can take. So I fear that for the immediate future at least we will need to maintain that convincing and indeed convenient illusion and set policy accordingly. BIS central bankers’ speeches 7 | 1 |
But the rate of interest required to stabilise the economy was extremely high at that time, much higher than it is today. So despite the higher stock, interest payments on mortgages are well below the pre-crisis average. Looking ahead, from these very low levels, the neutral rate of interest is more likely to rise than fall over the future. But it would have to rise a long way – and certainly by a lot more than is currently priced into government bond markets – even for household interest payments to return to that average. The fact that mortgage debt is higher than it was a generation ago doesn’t make it “unsustainable”. Third, the fact that growth rates are better indicators than levels may be telling us something more fundamental, not just that there are structural differences in affordability. In particular, it could be that the things that drive speculative, riskier lending tend to develop faster than the fundamentals that determine more sustainable levels of debt. Those fundamentals can vary (the decline in the neutral rate of interest is an example), the sustainable level of debt along with them. But perhaps they usually do so only gradually. If so, very rapid growth of debt would often be a sign of something else – of looser credit supply and a rise in the proportion of lending that’s riskier, less sustainable and more prone to default. | This structural change may have some implications for payment systems and market infrastructures, especially in periods of financial distress. One important implication is that more than ever before, the smooth functioning of the financial system is dependent on the assumption that the option to trade can be exercised even under stressed market conditions. This is a natural consequence of the development of markets and instruments which are actively traded or that are held in the expectation that, should the need arise, they could be traded. Moreover, the new financial environment appears to be more reliant on the immediate availability of funding liquidity. Funding liquidity is critical for the orderly execution of trades and it can become scarce at times of distress, precisely when 3 For further details see Claudio E.V. Borio (2007): Change and constancy in the financial system: implications for financial distress and policy. 4 BIS Review 130/2007 it is most needed, as market participants cut credit lines and/or raise margin requirements to protect themselves against counterparty risks. In conclusion, the stability of the financial system is also dependent on the assumption of ample market liquidity and, most critically, of the smooth functioning of the payment systems and market infrastructures. Second, the complexity of the financial system has greatly increased. This complexity applies not only to individual financial instruments, but also to the financial system as a whole. Its various segments have become more closely interconnected and the linkages across them more opaque. | 0 |
My assessment is that leverage ratios and countercyclical buffers are good instruments for the management of systemic risks which will help us strengthen the financial system when the need arises. But they have their limitations. Both of these instruments are indiscriminate and it will be difficult to determine when it will be appropriate to increase or decrease the countercyclical capital buffers. If we are to be able to combat risks efficiently, we will also need instruments that can be directed towards the areas in which the problems exist. Variable risk weighting – a usable instrument One instrument that a growing group of countries is choosing to introduce is variable risk weighting for lending. 11 These can be seen as a complement to countercyclical capital buffers and are aimed at counteracting the build-up of risks in lending to specific sectors. Varying risk weighting is thus a more focused instrument than countercyclical capital buffers. 9 This work is being conducted within the framework of the government’s inquiry Fi 2012:05 “Inquiry on capital adequacy regulations”, to be concluded in the spring of 2013. 10 This capital conservation buffer is to be held in the form of core Tier 1 capital and is to consist of 2.5 per cent of the risk-weighted assets. 11 In the United Kingdom, the Financial Policy Committee has been given a mandate to introduce risk weighting, so-called sectoral capital requirements, see Financial Policy Committee statement, March 2012. See also Bank of England Instruments of macroprudential policy, a discussion paper, December 2011. | Even if Finansinspektionen’s justification for the mortgage ceiling was to protect consumers, the measure can also be used for macroprudential supervision. From a stability perspective, the credit risks in the banks’ credit portfolios could be reduced if the rule contributes towards reducing the economic vulnerability of households. The loan ceiling may also contribute towards more stable price formation on the housing market, as the rules influence how much money households are willing to put into purchasing housing. If this counteracts excessive price variations on the housing market and the unsustainable accumulation of debt among households, it will also likewise contribute towards reducing the risk of loan losses in the banking system. 12 See, for example Lim, C., et al., (2011), “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences”, IMF Working Paper, 11/238. 6 BIS central bankers’ speeches A loan ceiling based on income would have largely the same characteristics as one based on the value of housing, but may have certain advantages. If debts are not linked to price movements on the housing markets, this avoids the problem of price increases and indebtedness reciprocally being pushed upwards in a rising spiral. Effectively combating future financial crises will require flexibility An efficient financial system is a prerequisite for a modern economy. A shock leading to the breakdown of any of the financial system’s functions can have major economic costs in the form of sharp falls in GDP and high unemployment. | 1 |
The reason for this is that adjustments to the policy rate have large and direct effects on the CPI which are not connected to underlying inflationary pressures and which are also counter-productive. This means, for example, that interest rate cuts, which are intended to bring inflation up, instead further lower CPI inflation over the short term as the costs for mortgages fall. For this reason, the CPIF, i.e. the CPI with a fixed interest rate, has increasingly acted as guidance for monetary policy. But large variations in the CPI in recent years, due to adjustments to the policy rate, have sometimes led to problems in communication. By switching to the CPIF, we are making monetary policy clearer. The target is that the annual change in the CPIF shall be 2 per cent. However, it is not possible for the Riksbank to achieve this target every single month, so, for * I would like to thank Magnus Jonsson for his help with writing the speech and Goran Katinic for his help with data and figures. I would also like to thank Carl Andreas Claussen, Charlotta Edler, Cecilia Roos-Isaksson, Martin W. Johansson, Ann-Leena Mikiver, Marianne Nessén, Marianne Sterner, Ingvar Strid, Ulf Söderström, Anders Vredin and Daniel Wallemo for valuable comments and Calum McDonald and Gary Watson for helping to translate the speech into English. 1 [23] various reasons, inflation will vary around 2 per cent. | The currency reserve should thus be seen as an insurance policy that not only reduces the risk of crises, but also ensures good protection when they nevertheless occur. The cost of borrowing the currency reserve should therefore be funded by the banks that create liquidity risks in foreign currency. The possibility of transferring this cost to the banking sector should be investigated as soon as possible. 21 See Bryant et al. (2012), who discuss the background for why coordination can increase social benefit, and Jonsson and Moran (2014), who illustrate this in a number of example calculations. See also Spencer (2014) for an interesting discussion. 22 See IMF (2016). 23 See the Riksbank’s financial independence and balance sheet (draft proposal) from the Ministry of Finance. 19 [23] The currency reserve’s share of the banking system’s foreign funding in 2016 was on the same level as in 2002, but would – if the Government’s proposal were to be implemented – fall dramatically (see Figure 7(a)). This is also a very low level from an international perspective (see Figure 7(b)). The countries with lower currency reserves are the euro countries (with the exception of Bulgaria) which, similarly to the United States and United Kingdom, enjoy the benefit of possessing a reserve currency. Furthermore, as members of the euro area, they also have greater chances of receiving liquidity in euros from the ECB. Figure 7. | 1 |
Thus, the three-month euro Libor, which had generally been 1.5% higher than the three-month Swiss franc Libor, saw its spread widen to 2.2% in 2007 and 2.7% in 2008. Our policy of stabilising the three-month Swiss franc Libor therefore enabled us to at least partly shield the Swiss economy from the repercussions of the international financial crisis. Unfortunately, the effect of relaxing monetary conditions since last autumn in order to lower the Libor was largely offset by the continuing appreciation of the Swiss franc against the euro. Between October 2008 and March 2009, our currency rose by nearly 10% vis-à-vis the euro, which was particularly inopportune in a phase of rapidly declining inflation rates and the contraction of global demand. On 12 March, to prevent the ongoing appreciation of the franc from neutralising the impact of our policy of lowering interest rates, we decided to buy foreign currencies on the foreign exchange market in conjunction with a further reduction of the Libor, with the aim of avoiding any further appreciation of the Swiss franc against the euro and injecting additional liquidity into the economy. In view of the risk of deflation, decisive action was called for, and we will continue to pursue this strategy for as long as the risk remains. Therefore, after 15 years of absence, we were obliged to intervene once more in the foreign exchange market. This does not, however, represent any reversal of our traditional strategy, which is to pursue an independent monetary policy aimed at maintaining price stability. | We can certainly expect that data quality and analytical frameworks will continue to improve over time. But our understanding of future crisis dynamics will never be perfect. Far from it. This means that we must be prepared to change course when required and acknowledge errors in judgment sooner rather than later, even if it means re-evaluating wellreasoned positions. This brings me to my second point on agility. Financial crises are inflection points of a cycle which materialise in the least predictable manner. This demands a high degree of agility of policymakers and the financial system to adapt to the new operating reality. Such agility is derived from crisis management frameworks that are well-anchored in clearly defined strategic outcomes and accountability structures, but also flexible enough to respond to a range of conditions. And critically, it requires investing in resources with deep experience and knowledge. Going back to the 1996 Everest expedition, Hall and his team had made every reasonable effort to incorporate comprehensive risk management and contingency planning into the preclimb plan. As things turned south, it became clear that the team was unable to respond quickly to the dynamic situation. Outdated and inefficient radio systems led to a communication breakdown of vital information. Physiological, psychological and technical readiness of some of the climbers was also in question. Their inability to respond fluidly to changing conditions created an overdependence on key resource persons. Combined with lack of experience to deal with a series of new challenges, leaders were incapacitated and team dynamics disintegrated quickly. | 0 |
The combination of these three imbalances is the source of the economic slowdown under way, above all in the United States, accompanied by strong inflationary pressures and by financial turbulence unfolding since the last summer. Overcoming the current economic phase implies some correction of the imbalances I have just mentioned. Two questions come to mind: 1. How long will the current critical economic and financial phase last? 2. What can economic policy do to speed up the correction and alleviate its costs? The reply to the first question is that probably more time will be needed than is thought to overcome the current adjustment because the imbalances that underlie this critical period go back a long way and will take time to unwind. Time will be needed, in particular, before American households start saving again in a significant way, to run down part of their debt. In the short term, this may involve slower growth for some years. Time will be needed before the financial operators regain trust in the capacity to resort to sound sources of finance so as to be able to reduce their current high appetite for liquidity. Some financial instruments will remain relatively illiquid, until the prospect of a capital gain will not become realistic gain. It will not however be possible to return to the very low levels of risk remuneration seen in recent years. Credit institutions will have to rethink their business models in order to better assess the opportunities for growth based on the availability of capital. | Jean-Pierre Roth: Ten years’ experience in steering interest rates – taking stock of the Swiss National Bank’s monetary policy strategy Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the University of Fribourg, Fribourg, 20 November 2009. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). * * * The Swiss National Bank’s monetary policy strategy has proved successful over the ten years since its introduction. Throughout this period, the SNB fulfilled its mandate of ensuring price stability while taking into account economic developments. The inflation forecasts, produced quarterly on the basis of various indicators, have proved especially useful. It has always been possible to successfully manage the Libor – the operational objective of the SNB’s monetary policy – despite an international environment which, at times, has been extremely turbulent. The Libor was maintained within a range intended to provide the bestpossible conditions for a favourable development of the Swiss economy. | 0 |
Such concerns about the short run are indeed analysed carefully each month by the Monetary Policy Committee, and the results of that analysis feed into our monthly interest rate decisions. Visits like this give me the chance to listen to you and learn from you and other businesses about what is happening on the ground - not just in the retail sector but in manufacturing and services more broadly. And my visit is the tip of an iceberg because we have a permanent Agency in the North West - staffed by members of the Bank who live and work here. BIS Review 4/2005 1 But I want to step back from the immediate conjuncture and look further ahead. More relevant for our future prosperity is the question not of whether we might save too much but whether we are saving too little. The level of income that will sustain us in the future depends critically upon how much as a nation we set aside today. In other words, what is happening to the national saving rate - the proportion of the net national product that is not consumed by either the private or public sector? Since the late 1960s the national saving rate has been declining fairly steadily, from over 10% to around 5%. Although saving rates elsewhere in the G7 have also fallen, they were higher than in the UK for most of the post-war period. | Surprisingly, in the light of the fall in G7 saving, UK long-term real interest rates as measured by the forward rates implied by the yields on index-linked gilts - are near their lowest levels for twenty years. US and euro-denominated rates are also low relative to past experience. There may be other factors that have offset the effect of fiscal policy on real interest rates, such as demographic developments and higher saving and more open capital markets outside the G7. But there remains a risk, as discussed in the Bank’s recent Financial Stability Review, of an unwinding of low long-term real interest rates as the stimulus from highly accommodative monetary policies across the G7 economies is gradually withdrawn. What do these arguments mean for monetary policy today? They imply, I believe, three main challenges for central banks. First, the factors that affect the level of real interest rates in capital markets around the world also determine whether a given official interest rate is an expansionary or restraining influence on demand. When driving a car we normally know whether our foot is on the accelerator or the brake. That is less obvious in the case of monetary policy - hence the debate among economists about the level of the so-called neutral interest rate. Uncertainty about the extent to which monetary policy is applying the accelerator or the brake justifies central bankers’ continued interest in the monetary and credit aggregates which contain information about the pace of nominal activity and hence future inflation. | 1 |
This is in line with the growth in the activities of the two existing cross border PvP links recorded by us. Since 2010, the combined average daily turnover of the links with Malaysia and Indonesia has doubled, reaching a new record of $ billion last month. This is equivalent to an annual growth of about 23%. Other economies in the region, especially those with significant FX transactions, can similarly be benefited from a reduction in settlement risk and increase in efficiency in the settlement of FX transactions by establishing a PvP link with the USD RTGS system in Hong Kong. 9. The HKMA will continue to watch out for opportunities to collaborate with Asian neighbours to develop infrastructural solutions to meet growing regional demand for more efficient and robust settlement solutions. 10. Lastly, I would like to thank BOT again for the Bank’s commitment and professionalism leading to the successful launch of the PvP link. Based on the solid foundation laid through this project, I keenly look forward to working with BOT in other areas of central bank cooperation to contribute further to regional financial stability and prosperity. 11. Thank you. 2 BIS central bankers’ speeches | Intrinsically Linked, One with the Force The FOMC is mandated by Congress to promote maximum employment and price stability. The goals of our dual mandate are intrinsically linked. Specifically, price stability is essential for the economy to reach its full potential and to sustain maximum employment over the long term. Since the pandemic, imbalances between demand and supply have persisted throughout the economy, leading to high inflation and a tight labor market. Although we have seen some signs of a gradual cooling in the demand for labor—as well as for some goods and commodities—overall demand continues to exceed supply. I'll first discuss what this means for employment. At the national level, job growth has been robust, with monthly job gains averaging about 220,000 over the past three months. Other indicators show that labor demand is gradually slowing, yet remains very strong. For example, job openings have come down from their peak level in March of last year. Still, the ratio of job openings to unemployed far exceeds levels prevailing before the pandemic, when the labor market was very strong. Similarly, quit rates have been gradually declining, but are above pre-pandemic levels. In addition, the unemployment rate is at a historically low level of 3.4 percent. And in April, the employment-to-population ratio for those between the ages of 25 and 54 reached the highest level since 2001. The strength of the labor market is evident in parts of the Federal Reserve's Second District. Fairfield County in Connecticut has fully recovered from the pandemic. | 0 |
1 BIS Review 28/2000 Let me begin by examining the question from the central bank’s stance as guardian of the integrity of the payments system and as banking supervisor. I believe there are perhaps two characteristics of e-banking which may deserve some vigilance here. The first is the technical security of access and messaging. This is a matter of accuracy, safety and secrecy. If we use the internet to move our money, or to hold our money, we expect messages to arrive at their destination without error or interception; we expect the system to be safe from fraudulent or unauthorised access; and we expect to enjoy the same degree of customer confidentiality as with conventional banking arrangements. We want to be assured not only that the execution process is reliable and secure, but also that there are adequate controls on any “read only” access facilities. How can we obtain these assurances? Perhaps some of you mirror my own feeling of personal inadequacy in matters of electronic technology. Inevitably we are dependent on the experts. They have devised sophisticated methods of electronic signatures, encryption, certification, firewalls and the like. One way or another, by obtaining appropriate professional advice, by applying rigorous standards of compliance and computer audit, and so on, those within an organisation should be able to deliver the necessary assurances to customers, and the regulatory or supervisory authorities will need to satisfy themselves as to the dependability of such assurances. | If risks of a new financial crisis were to mount up in some distant future, a central bank could not stand idly by. The type of monetary policy regime with an explicit inflation target that applies in Sweden and other countries does, however, provide ways of coming to terms with problems from fluctuating asset prices. For one thing, the regime means that in the event of asset market instability, the monetary stance is adjusted automatically in a stabilising direction. As asset prices affect aggregate demand and this is an important mechanism for inflation, interest rates will be raised when asset prices move up and vice versa. This can be expected to exert some stabilising effect on asset markets. For another thing, macroeconomic stability as such should have a stabilising influence on financial markets. Focus on the provision of credit While a credible macroeconomic policy is needed to prevent financial crises, it is probably not sufficient by itself. It is also necessary to oversee and supervise the financial system, which includes having appropriate rules for the operations of banks and other credit institutions. In the final analysis, it was the provision of credit that lay at the heart of the events in the 1990s to which I have referred. Extensive credit risks constituted the problem and it seems that banks made similar mistakes time and again. | 0 |
See, C. Toloba and J. M. del Río (2020) “The outlook for the digitalisation of Spanish banks: risks and opportunities”, Financial Stability Review, Issue 38, Spring. 3 necessary.3 It is precisely for this reason that a few years ago the European Banking Authority came up with a set of Recommendations aimed at cloud outsourcing activities.4 This example proves once again the fundamental role that central banks and financial authorities should play in the current digital context, including developing a proactive stance towards digitalisation with a view to ensuring that the latter can take place in an orderly manner. On the one hand, central banks need to boost their understanding of the changes that the industry is now experiencing and how these are likely to impact its present and future structure, and also to identify potential sources of risk for financial stability. Enhancing stakeholder engagement appears to be a cornerstone for achieving this objective. Furthermore, they must be ready to move ahead in deploying tailored, swift and proportionate responses as needed. A very good example of this is the work that both the BCBS and the FSB are steering in terms of assessing the vulnerabilities of crypto-assets and the potential practical strategies to address them in a cohesive way across borders. In addition, financial authorities may wish to show greater ambition and explore how emerging technology can help enhance the way they fulfil their supervisory, oversight or market conduct tasks, to name just a few. | Even though users do not cover costs directly, the costs involved in using these schemes are high, making these solutions an expensive alternative for banks. Eventually, banks’ customers foot the bill one way or another. Cheaper alternatives are on their way. The new solutions could also result in faster payments. National payment card schemes, such as BankAxept in Norway, might provide an alternative to the international card schemes, including access to the new services. New regulations have been introduced to lower the costs related to international cards. A new EU regulation also provides for direct bank-to-bank payments, bypassing the card schemes entirely. Technological innovation has given us not only new methods of payment, but also new forms of money – so-called e-money. E-money is electronic money issued by non-bank entities, but in existing currencies. Paypal customers can make payments through their Paypal account. Facebook has recently applied for a Europe-wide e-money licence. If large providers offer an attractive, user-friendly solution, this method of payment could become widespread. A key issue related to e-money is the question of consumer trust. E-money is a claim on the issuing company. E-money is not backed by a deposit insurance scheme or any authority. Other companies are offering new forms of money – often in the form of a new currency – on closed platforms such as social networks and online games. Examples of such platform currencies are Amazon Coins, the virtual currency used in the online game World of Warcraft and Chinese Q Coins. | 0 |
Hitherto, the Central Bank of Iceland has auctioned unlimited amounts at a fixed rate of interest. Initially the ECB decided both the interest rate and total amount of its repo auctions at any time. The result was that the ECB only accepted a fraction of the bids made for its repos. This arrangement was abandoned and more recently the ECB has invited bids for a specific amount, but not at any predetermined rate of interest. Amounts are decided on the basis of the ECB’s assessment of the credit institutions’ liquidity requirement and the money market interest rates which it aims to achieve. One reason for the ECB’s choice of this format is that the various EMU central banks operated different arrangements for liquidity facilities before the ECB was established, and different viewpoints needed to be reconciled. Regarding other aspects of central bank activities and their effect in Iceland, it should perhaps first be pointed out that the Central Bank of Iceland began increasing the transparency of its activities and actions long ago. Among other things, this is reflected in the Bank’s efforts to explain more clearly its policy and assessment of the economic and monetary situation and outlook. One step in this direction was taken towards the end of 1999 with a thorough review of the Bank’s publishing activities. | We do admit that the higher interest rates affected the stock market and property market. But we should also remember that high interest rates are necessary to cool the overheating in the asset markets that prevailed until recently. Given the excess demand situation in Hong Kong as the economy grew by 6.4% in the second quarter, a correction was expected. A moderation in property prices will help bring houses to more affordable levels to homebuyers. 34. Higher interest rates will also bring down inflation, by encouraging savings. Once inflation and the asset markets correct under the free market regime, Hong Kong will become much more competitive. In real effective exchange rate terms, the competitive effect of neighbouring depreciation will be offset somewhat by a rise in domestic inflation. Higher interest rates will also bring the external account more in line with the fundamentals and improve the trade balance. Hong Kong, as a free market economy, is adjusting exactly according to the textbook. 35. Moreover, our banking sector is very robust and strongly capitalized to withstand any shocks. Operating profits of the local banks grew by about 18% in the first half of 1997 and the bad debt charged fell in the first half of 1997 as the level of classified loans was 2.08%, down from 2.91% a year earlier. The capital adequacy ratios of local banks as a whole exceeds 17%. The average loan-to-value ratio is 70%, with the actual measured loan-to-value ratio being 53.3%, according to our survey at end September 1994. | 0 |
Ex ante assessments, based on the introduction of compulsory impact studies in 2009, have remained under used as a management tool, "too often appearing as a self-serving justification for the laws they accompany". iii Ex-post assessments have also been developed in France either by public bodies or academic research, but contribute more to methodological debates than to any real objectification conducive to action. Dwindling academic research Meanwhile, what can we say about academic and economic research in this area? In the 1980s and 1990s, this was mainly influenced by the New Public Management (NPM) school of thought, which adopted management methods from the private sector, with a focus on incentives for public servants and more variable pay. The Virginia School’s Public Choice theory (Downs, Buchanan, Tullock) even proposed to turn the concept of public action on its head: individualistic officials and policies could pursue private interests rather than spontaneously acting in the general interest. I personally remember the shock that I and the whole generation of civil servants around me experienced when Jean-Jacques Laffont questioned the principle of the "benevolent state" in a presentation he made to the Economic Advisory Council (CAE) in 1999. Fortunately, Jean Tirole has since clarified and qualified the analysis in "Économie du bien commun, iv where he called for the creation of "real public service bosses", and for them to be afforded "considerable managerial freedom accompanied by strict ex-post evaluation". NPM gave rise to performance incentives based on indicators and assessments. | xvi Lastly, we have maintained our nationwide presence by committing to keeping at least one branch in each département. This local presence is a prerequisite for public reform, faced with the impression that medium-sized towns are being abandoned. And this is in no way incompatible with generating substantial savings: we are preserving our front offices and contacts everywhere, but we have consolidated all the back offices in interdepartmental shared business centres, thereby achieving substantial productivity gains. Obviously, the Banque de France is not France and not everything can be transposed. I am sometimes told that we enjoy independence; this is indeed essential for monetary policy and financial supervision, and I should stress the point this year, which marks the thirtieth anniversary of the law of 1993 granting the Banque de France its independence. However, as regards good management, independence is neither sufficient - I even tend to believe that it should require greater exemplarity everywhere it exists - nor necessary: I provided the example of the Public Accounts Directorate. Our experience, along with many others - including those in other countries - can therefore be a source of hope from which I believe we can identify four levers for change. Taking pride in our missions, and their objectification Everything starts with clarification of our missions: pride means being able to explain what concrete services we provide to our fellow citizens. Fortunately, these missions are determined not by ourselves but by the political powers that be, i.e. Parliament and the government. | 1 |
Michael C Bonello: Facing the challenge of today’s economic realities Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the Institute of Financial Services Annual Dinner, St Julians, 14 November 2003. * * * This being my first public statement since my reappointment, I should like to express my appreciation to the Government for the trust that has been placed in me. I am conscious of the magnitude of the task that lies ahead, but I am also comforted by the thought that I shall continue to be supported by a team of competent and dedicated professionals. I am, therefore, able to look forward with confidence to leading an independent Central Bank of Malta into membership of the European System of Central Banks next May, and to cooperating closely with the Government in creating a policy environment which would allow us to guide the Maltese lira smoothly into the euro area. I stress this point because it is only when the economy becomes anchored in the relative safety of the common currency area that the benefits of participation in the European single market can be enjoyed to the full. Early adoption of the euro is, therefore, in the national interest and must become our common objective. Pursuing that goal successfully, however, will require a courageous effort to overcome the obstacles that stand in our way. This much was clear from the beginning. | In a speech I delivered last year, I had shown how Malta’s competitiveness lags behind that of EU member States, mainly because of restrictive practices and other labour market inflexibilities; the maintenance of monopolistic situations in economically strategic areas such as transportation and inland freight; and insufficiencies in our educational system and innovation efforts. These conclusions have been supported by a number of studies since then and remain valid today. Problematic as it is, however, the budget deficit is by no means the only determinant of macroeconomic imbalances. Certain systems and practices which create demand without generating output have equally harmful consequences. A typical example is the welfare system. It has become so entrenched that its benefits are mistakenly considered to be immutable rights; but, as the rapidly growing welfare gap shows, it is a system which carries the seeds of its own destruction. For while the welfare state was born from the noble premise that care for the weak and the needy is the responsibility of society as a whole, in Malta the terms “weak” and “need” are defined very liberally. In so doing, we overlook the fact that generous welfare depends on two details of demography and politics: that there are enough people of working age to fund the claims of those defined as being weak and in need; and that working people are indeed willing to pay the necessary taxes. If these conditions are not met, there can be no other solution but to redesign the welfare system according to the funds available. | 1 |
If actual output equals potential output so that the output gap is closed, inflation is often in line with the Riksbank’s target, provided that monetary policy and the inflation target are credible. The Riksbank and employment That there is no negative long-term relationship between inflation and unemployment is fairly uncontroversial today, not least shown by the developments since the introduction of the inflation target – unemployment and inflation dropped in parallel during the 1990s. Since 1995, when the inflation target came into effect, CPI inflation has averaged 1.4 per cent, while real wages have grown by around 2.6 per cent. The Riksbank’s formulation of monetary policy has its critics, of course – for example, at the Social Democratic Party’s latest congress the inflation target’s superordinate status over other targets was called into question. Attempts to get the economy to grow at a faster pace than is sustainable in the long term through more expansionary and inflation-tolerant monetary policy would, in the long run, only result in higher inflation without any rise in output or employment. In the short term, though, monetary policy can, as I mentioned, through interest rate changes designed to stimulate or cool down economic activity, affect output and thereby also employment. In the highly simplified output-gap world that I just described, there is a straightforward relationship between monetary policy, the output gap and employment – if the Riksbank does not hit the inflation target then employment will be affected. But reality is more complicated than that. | new mountains that underline the importance of policymakers' capacity to climb up the top. In only two years, the world we knew has dramatically changed. The humankind has faced threats that seemed to be forgotten in the modern world, an unprecedented pandemic and a war in Europe, which are not only a human tragedy, but also supply shocks with significant economic costs that may profoundly reshape the world economy and geopolitical landscape. This environment creates many challenges for the macroeconomic policies, as well. 1/4 BIS - Central bankers' speeches The pandemic was a shock of unprecedented nature causing global supply disruptions, supply demand mismatches, and exceptional patterns of economic behaviour. However, the policy response was of unprecedented nature and size, contributing to relatively swift and job-reach recovery. Thus, for example unlike GFC when it took seven years for the euro area GDP and almost twelve years for unemployment to return to its pre-crisis level, this time it took only one year to return to pre-crisis level and unemployment to hit record low. These developments are also relevant for some of the CESEE transition economies with strong trade and financial ties with the advanced Europe. This was a showcase of how a sizable and wellcoordinated monetary and fiscal mix can mitigate the adverse effects of a large exogenous shock. Unfortunately, while calibrating our exit strategies and reverting to a normal mode, another shock wave came pushing energy and food prices further up the curve, hence accelerating inflation while overshadowing growth recovery. | 0 |
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