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The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the fed funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve. The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. In the longer run, the Committee intends to hold no more securities than it will need to implement monetary policy efficiently and effectively, and that the SOMA will consist primarily of Treasury securities. Given the $ trillion in large-scale asset purchases (LSAPs) conducted since September 2012, the level of reserve balances in the system will be significantly higher during normalization than was envisioned when the 2011 principles were adopted. In light of this, as I just outlined, the FOMC has judged it appropriate to operate with a framework for interest rate control that is based primarily on administered rates rather than reserve draining tools. Given the unprecedented nature of this framework, the Committee has made clear that it is prepared to adjust the details of its approach in light of economic and financial developments. The FOMC has consistently adapted its policies as needed in recent years and will no doubt continue to do so as necessary throughout the normalization process in order to foster conditions consistent with its dual mandate. | The FR 2420 data is used to support the implementation of monetary policy and the analysis of money market conditions. 5 The Board of Governors of the Federal Reserve System is responsible for setting the rate of interest on reserves. Since December 16, 2008, the interest rates on required reserve balances and excess reserve balances have both been ¼ percent, but the rates need not be the same. More information can be found in Regulation D. See http://federalreserve.gov/bankinforeg/reglisting.htm#D. BIS central bankers’ speeches 3 transaction I just described is not riskless. As a result, many lenders limit their risk exposure to any individual bank, reducing the force of competition in the market for funds. 6 In addition, while banks do not need economic capital to conduct this arbitrage, they do face regulatory balance sheet costs from expanding their assets, even in the form of excess reserves, that is, cash. Some of these costs are direct, such as the FDIC fees paid by domestic banks on their liabilities less capital and transactions costs in brokered markets, while others relate to the costs associated with regulatory requirements on capital and liquidity ratios. Even if the market for funds were perfectly competitive, these costs should drive a wedge between IOER and other money market rates. As a result, the IOER rate does not directly establish a firm floor under money market rates, but instead can be thought of as a magnet, with the strength of its pull determined by these balance sheet and competitive frictions. | 1 |
That put excess upward pressure 4 BCBS report on “Early lessons from the Covid-19 pandemic on the Basel reforms”. 5 FSB report on “Lessons learnt from the Covid-19 pandemic from a financial stability perspective: Interim report”. 6 See statements made by the PRA, FPC, European Central Bank (ECB) and BCBS early on during the Covid-19 pandemic. 7 See October 2020 speech by Randal Quarles: “Lessons from Covid-19 stress on the financial system”. 4 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 4 on requirements. And firms’ liquidity positions were initially worsening, including as they fulfilled debt buyback requests whilst supporting an increase in credit facility drawdowns. We were worried that the combined effect of these concerns would mean that banks either did not have enough resources to support the economy through the Covid period and the recovery from it; and/or that, even if banks did have enough resources, they would nevertheless act in a procyclical way by hoarding liquidity and restricting lending for precautionary reasons, amplifying the standard cyclical effects of the shock. This underpins the prudential actions I noted earlier. Recap on buffers As indicated earlier, an important feature here is the presence of various regulatory buffers in the framework that the Basel Committee introduced after the financial crisis. These are intended to absorb the effects of stress and ensure that banks can continue to lend to support households and businesses: it is our expectation that they will be used as necessary to support the economy. | The crisis also left some lessons for the profession and the way we use our highly stylized models in policy-making. The narrow view is to think they are a precise description of how the world works, when in truth it is much more complicated. However, the other extreme view – and a very bad one for policy-making – is disregarding all that we have learned from academic work. We need to be humble about the extent of our knowledge, but we also have to be rigorous and serious about policies. 6 BIS central bankers’ speeches References Acharya V. and H. Naqvi (2010), “The Seeds of a Crisis: A Theory on Ban Liquidity and RiskTaking over the Business Cycle,” mimeo, NYU. Bernanke, B. (2011), “The Effects of the Great Recession on Central Bank Doctrine and Practice,” speech at the Federal Reserve of Boston 56th Economic Conference. Bernanke, B. and M. Woodford (1997), “Inflation Forecast and Monetary Policy,” Journal of Money, Credit, and Banking, Vol. 29, No. 4, part 2, pp. 653–684. Davies, H. and D. Green (2010), Banking on the Future. The Fall and Rise of Central Banking, Princeton University Press. De Gregorio, J. (2007), “Defining Inflation Targets, the Policy Horizon and the OutputInflation Tradeoff,” Working Paper N° 415, Central Bank of Chile. De Gregorio, J. (2008), “La Gran Moderación y el Riesgo Inflacionario: Una Mirada desde las Economías Emergentes,” Estudios Públicos, N° 110, pp. 5–20, otoño. Galí, J. and L. Gambetti (2009), “On the Sources of the Great Moderation,” American Economic Journal: Macroeconomics, Vol. | 0 |
The first is that Hungary has managed major breakthroughs in the recent past which were just as difficult as these future challenges: over the past five years, real privatisation accompanied by a fundamental shift in the structure of industry and services; and, more recently, the handling of a macroeconomic crisis situation. The second is that most of these challenges are akin to those encountered by modern Western societies. For these challenges Hungary is in good company. THE MONETARY POLICY ENVIRONMENT Two recent changes have occurred regarding the institutional environment in which the National Bank of Hungary is operating. I welcome both of them. 1. The possibility of the direct financing of the budget deficit by the NBH has been eliminated. This is in conformity with the provisions of the Maastricht Treaty, and is a measure which has already been implemented by all fifteen member countries of the European Union and which the EMI closely monitors. To remind you, this provision of the Treaty applies to the member countries at this stage, prior to effectively entering EMU. It would seem to me impossible for Hungary to join the European Union without this change in the law governing the operations of the NBH, even if Hungary’s participation in the euro area were to come at a later stage. But this is only an institutional or political argument. There is more to it. Maastricht or no Maastricht, eliminating the direct monetary financing of budget deficits is simply economic common sense. | Some of this deficit was covered by direct foreign investment, but the greater part of it was financed by borrowing, as a result of which by the end of 1994 the net external debt had reached 46% of GDP and the exceptionally high level of more than 160% of exports of goods and services and unrequited transfers. 2. I have not yet seen the full 1996 figures, but estimates based on the first eleven months suggest a current account deficit of around (or even less than) $ billion. This looks much more reasonable, not only because it was more than covered by foreign direct investment but also because of what lies behind this improvement. The $ billion drop in the current BIS Review 16/1997 -2- account deficit between 1994 and 1996 was made possible (a) by a 35% increase in exports, accompanied by a modest increase in imports of about 14%, and (b) by the steady and rapid increase in services income, mainly (but not exclusively) derived from tourism. 3. Since there was also a sizable inflow of foreign direct investment in 1995 and 1996, the country’s net external debt dropped from $ billion at end-1994 to about $ billion at end-1996. Net external debt declined to 31.2 expressed as a percentage of GDP, and to 71.6 as a percentage of exports of goods, services and unrequited transfers. | 1 |
During this period, the insurance landscape is expected to change in ways that will have a direct and profound impact on the experience that consumers and businesses have with insurance. As major intermediaries between insurance providers and consumers of insurance products and services, how insurance agents think about their business and interact with their customers can make an important difference in helping millions of individuals, families and businesses across the country who remain ill-prepared for losses arising from unforeseen events. Addressing this protection gap is ultimately the goal that we must all aspire to, to promote a resilient economy and the well-being of our society. 4 BIS central bankers’ speeches | So I’d like to begin by taking an opinion poll! I’d like to put to you two questions. The first is how many of you agree that monetary policy should have the control of inflation as its overriding objective? May I ask all those of you who agree that monetary policy should have control of inflation as its overriding objective, please, to raise a hand. Now please would those who disagree that monetary policy should have control of inflation as its overriding objective please raise a hand. Now let me ask you a second question - and I’m afraid that only those who voted in favour in response to the first question are entitled to vote this time - I don’t want a biased result. Given the objective of control of inflation - the 2½% inflation target - please would those of you who think interest rates should be higher than they are at present raise a hand? Please raise a hand now if you think interest rates are at the right level? And will those of you who think that interest rates should be lower than they are at present now please raise a hand - but remember you can only vote if you agreed that monetary policy should be directed to controlling inflation! Welcome to your first meeting of the Monetary Policy Committee! Your votes will all be individually recorded by the Chairman and published with the minutes in a fortnight’s time! | 0 |
4 The requirements will be eased when the assessment indicates that imbalances in the housing market have receded. Similar measures have been introduced in the UK. Views on how actively this type of instrument should be used vary both among researchers and international fora. In particular, the question of whether frequent changes are appropriate has been raised. As I mentioned earlier, high and rapidly rising credit has historically been associated with more frequent and deeper financial crises. This would imply that there are substantial gains to be made from introducing measures to dampen credit swings. On the other hand, it has been pointed out that experience of using these instruments is limited and that their effectiveness is still an open question. A policy in the direction of fine-tuning credit may in addition dampen key market mechanisms that contribute to channelling credit to where it can obtain the highest return. A highly ambitious use of the instruments also places considerable demands on the level of coordination. In Norway, shortcomings in banking regulation have in recent years been addressed primarily by means of structural measures. The permanent capital requirements for banks have been increased. In early summer this year, the Ministry of Finance designated three banks as systemically important and will be subject to additional capital requirements. In addition, Finanstilsynet (Financial Supervisory Authority of Norway) has tightened requirements for banks’ internal risk models, which will contribute to increasing the equity banks will have to hold against residential mortgage loans than was the case earlier. | Chart: Early warning models for financial crises The chart shows estimated crisis probabilities for Norway based on various combinations of explanatory variables and trend estimation methods. A clear pattern is that crisis probabilities increased markedly in the years ahead of the banking crisis in 1988–1993 and ahead of the financial crisis in 2008–2009. Both of these periods featured rapid growth in credit and real estate prices, combined with a surge in banks’ wholesale funding ratio. The chart shows that the estimated crisis probabilities have declined since the financial crisis, although the spread between the predictions from different variants of the model is considerable. The relationship between the indicators and the probability of a crisis in the model is not linear. The greater the magnitude of the financial imbalances at the outset, the more pronounced the effect of an increase in credit growth or house price inflation will be. We have seen that financial imbalances often wind down in connection with crises. The ratio of household debt to GDP fell markedly in Norway in the wake of the 1990s banking crisis and it has fallen in countries such as Spain, the UK and the US after the financial crisis in 2008. In Norway, household debt has continued to grow faster than income, which may indicate that the vulnerabilities that built up prior to the crisis are still present. An assessment of systemic risk must include an analysis of both the probability and consequence of a crisis. | 1 |
Sources: Statistics Sweden and the Riksbank 10. GDP gap, September and in real time Per cent 6 6 4 4 September 2011 Real time 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 05 06 07 08 09 10 11 12 13 Note. September 2011 refers to the PF gap. Real time refers to the HP gap except from October 2010 and onwards when the PF gap is used. Sources: Statistics Sweden and the Riksbank BIS central bankers’ speeches 13 11. Capacity utilisation Per cent, seasonally-adjusted data 100 100 Capacity utilisation in the manufacturing sector 95 95 Mean, 1996-2008 90 90 85 85 80 80 75 75 70 70 95 97 99 01 03 05 07 09 11 Source: Statistics Sweden 12. | It is key for this framework to be rigorously applied, including in terms of the indicators used, in order to consolidate the effectiveness of this new procedure to assess in particular euro area Member States experiencing sustained losses of competitiveness and large current account deficits. The focus needs to be on the prevention of situations creating risks to economic, budgetary and financial stability in the euro area. In addition, this macroeconomic surveillance procedure should rely on transparent and effective trigger mechanisms. Conclusions Let me conclude with three key messages to policy makers – in advanced and emerging market economies alike – who all have a role to play to address the challenges that are ahead of us. First, what has already been decided has to be implemented expeditiously, comprehensively and fully. This requires resolve and fortitude on the part of the public authorities, but also lucidity on the part of the private sector. Second, there can be no complacency as regards the unfinished part of our reform agenda for a stronger international financial architecture. And I cannot help saying that on top of what is clearly identified by the international community as the urgent issues under discussion in the Financial Stability Board and the G20, we are far from understanding the potential global systemic instability that is associated today with the sheer size of the non-banking sector which experienced an exponential growth over the last 20 years. | 0 |
From the very beginning, we have been aware of the fact that keeping our non-standard measures in place for longer than necessary would entail the danger of creating harmful distortions. Therefore, we designed the measures with exit considerations in mind. In view of the improvements in financial market conditions seen since last spring, we have started to gradually phase out some of them. More specifically, we have stopped providing liquidity in foreign currencies, and we have stopped operations involving maturities longer than three months. Also, we have decided to return to variable rate tenders in the regular three-month operations towards the end of this month. However, the Eurosystem will continue to provide liquidity support to the euro area banking system at very favourable conditions in its shorter-term refinancing operations (that mature after one week and after approximately one month). We have decided to do this for as long as necessary and at least until mid-October this year. The speed and path of the subsequent gradual phasing-out of the non-standard measures will depend on economic and financial market developments. The remaining measures are not many. They include, inter alia, the tender procedures to be applied in the main refinancing operations and the operations with a duration of one maintenance period, approximately one month (which could be returned to variable rate tenders). All our actions will remain fully in line with the objective of maintaining price stability over the medium term. We do not know today what normality will look like after the crisis. | Hong Kong is fortunate to have a strong presence of international financial intermediaries who can leverage on their global network of expertise to develop and structure a variety of Shariahcompliant products here. 16. It is also crucial for fund raisers and investors to be aware of the benefits of Islamic capital market instruments and understand their structures and operations. So, we have been working very closely with the TMA and international bodies like the IFSB in bringing Islamic finance seminars and workshops to Hong Kong market participants, like the seminar today, in an effort to raise the awareness and deepen the knowledge of Islamic finance among the financial community. With the gathering of such a distinguished group of speakers, I am sure that we shall obtain useful insights and get a clearer picture on how to prepare ourselves for the exciting developments in the years to come. 17. I wish this seminar every success, and to our overseas friends, an enjoyable stay in Hong Kong. Thank you. BIS central bankers’ speeches 3 | 0 |
Those techniques are tried and tested in the US, and are the basis for resolutions of regular commercial banks in many other countries. They do not involve taxpayer solvency support. I am doubtful, however, whether those established techniques would work for a complex investment bank or a global commercial bank. Universal banks are typically run on an integrated basis, across functions and regions, so that capital can be reallocated easily as opportunities shift around. It would be a nightmare to execute over a weekend a split of any of these groups, with multiple entities across scores of countries, into those parts providing services that must be sustained at all costs and a remainder that could be wound down as part of a resolution. Moreover, this is not just a matter of critical versus not-so-critical services. Even if, contrary to my doubts, it were possible to execute that separation in the midst of a crisis, winding down a complex trading book would be hugely hazardous, with very nasty spillovers to the rest of the financial system. Quite separately, P&A techniques might also fall short in handling the failure of mediumsized commercial banks in highly concentrated banking systems. Crudely, there may be few or even no potential buyers of the deposit book in such circumstances. That is the background to the so-called ‘bailin’ technique which, within the official sector, takes its inspiration from the way insolvency practitioners effect a capital restructuring of distressed but viable non-financial firms – for example, Chapter XI in the US. | 11 See Tucker, P. M. W. (2012), The role of deposit insurance in building a safer financial system. BIS central bankers’ speeches 7 Finally, whatever types of deposit end up being preferred, there should be no discrimination on grounds of location or nationality. The chosen creditor hierarchy should apply the same way to all branches of a bank throughout the world. The Financial Stability Board Key Attributes are clear about that.12 I do not need to remind this audience that depositor preference would not be a guarantee against the relevant uninsured deposits (or the DGS) ever taking losses. But they would be exposed to loss only after bonds, as well as equity, had been wiped out. The greater the gone-concern LAC requirement for bond issuance, the lower the probability of any preferred deposits incurring loss. Group structure: having LAC in the right place, and operational dependencies It will have been apparent from my earlier description of high-level resolution strategies that where and how a group maintains its LAC will vary somewhat according to whether the preferred resolution strategy is SPE or MPE. For SPE resolutions, sufficient loss-absorbing capacity must be at the topco. But more than that, there has to be a mechanism for transferring losses from operating subsidiaries, wherever they are in the world, to the topco. One way of doing that would be for Topco to guarantee the performance of the obligations of its systemically significant and other key operating subsidiaries. | 1 |
Moreover, climate change claimed its first S&P 500 bankruptcy last year,3 climaterelated shareholder resolutions spiked to 90 last year,4 investment managers controlling over 45% of global assets under management now back shareholder actions on carbon disclosure, and companies representing over 90% of all shareholder advisory services now support the TCFD. Not surprisingly, the supply of disclosure is responding. Over 600 organisations, with a total market capitalisation of $ trillion, have endorsed the TCFD recommendations since 2017. The TCFD’s September 2018 Implementation Report assessed, using artificial intelligence, some 1800 companies, and analysed in detail an additional 200 of the largest companies, drawn from eight representative sectors from across the G20.5 In both cohorts, the majority of companies were already disclosing information in their 2017 filings that aligned with one or more of the TCFD’s recommendations. This is commendable given companies only had six months to respond to the final TCFD recommendations, but more progress is needed. In particular: Financial implications are often not yet disclosed; Disclosures are often in multiple reports making comparisons harder; and Disclosure varies by industry and region, with higher percentages of European firms and higher shares of those on the climate frontline – such as the energy sector – disclosing more information aligned with the recommendations. | In pursuit of that New Horizon, let me briefly discuss progress and prospects in three critical areas reporting, risk and return. First, reporting Three years ago in response to a call from G20 leaders, the FSB began addressing the financial stability risks associated with climate change by ensuring the market had the right information to price climate risk and reward climate innovation. The FSB established the Task Force on Climate-Related Financial Disclosures (TCFD) led by businesses from a wide range of industries across the G20. Eighteen months later, the TCFD delivered to the Hamburg G20 Leaders Summit its recommendations for voluntary disclosures of material climate-related financial risks. Since then there has been a step change in both demand and supply of climate reporting. On the demand side, current supporters of the TCFD include three-quarters of the world’s globally systemic banks, 8 of the top 10 global asset managers, the world’s leading pension funds and insurers, major credit rating agencies and the Big Four accounting firms.2 In total, these financial firms manage almost $ trillion in assets. 1 Carney, M. (2015). Breaking the Tragedy of the Horizon. Available: https://www.bankofengland.co.uk/speech/2015/breaking-thetragedy-of-the-horizon-climate-change-and-financial-stability 2 Full list of current TCFD supporters available on: https://www.fsb-tcfd.org/tcfd-supporters/ 2 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 2 As a consequence, the incentives for companies to disclose and manage climate-related risks have increased dramatically. | 1 |
What is often left out of the euro area storyline is the fact that the monetary union came on top of diverging trends in total factor productivity (TFP) as the catching-up process in the EU came to a stall during the early 1990s 9. A reversal in the catching-up process came regardless of high investments in some peripheral countries and high capital output ratios – rather than a sign of success, high investments were an indication of deeper-rooted problems. 10 Many peripheral countries did not need more investments per se to restart convergence – what they needed was a more efficient allocation of investments. The efficiency of investments fell victim to poor economic governance, rigid labour and product markets, low investments in information and communication technologies, defunct educational systems and the poor quality of corporate management. What the monetary union accomplished against such a background was to create an illusion of continuing convergence on the back of increasing foreign borrowing and investment in non-tradables, rather than to enact discipline in the economic governance of peripheral countries. The adoption of the single currency, followed by the consistent private sector interest spread, elimination of exchange rate risk and implied fiscal bail-out clause, cemented the duality in the quality of economic governance and boosted the suboptimal reallocation of resources in the periphery. So, we have observed financing low-productivity sectors (via real estate or government spending) with debt inflows, instead of capital flows fuelling further “catching-up”. | Once the investors in these financing arrangements – many conservatively managed money funds – withdrew or threatened to withdraw their funds from these markets, the system became vulnerable to a self-reinforcing cycle of forced liquidation of assets, which further increased volatility and lowered prices across a variety of asset classes. In response, margin requirements were increased, or financing was withdrawn altogether from some customers, forcing more de-leveraging. Capital cushions eroded as assets were sold into distressed markets. The force of this dynamic was exacerbated by the poor quality of assets – particularly mortgage-related assets – that had been spread across the system. This helps explain how a relatively small quantity of risky assets was able to undermine the confidence of investors and other market participants across a much broader range of assets and markets. Banks could not fully absorb and offset the effects of the pullback in investor participation – or the "run" – on this non-bank system, in part because they themselves had sponsored many of these off-balance-sheet vehicles. They had written very large contingent commitments to provide liquidity support to many of the funding vehicles that were under pressure. They had retained substantial economic exposure to the risk of a deterioration in house prices and to a broader economic downturn, and as a result, many suffered a sharp increase in their cost of borrowing. The funding and balance sheet pressures on banks were intensified by the rapid breakdown of securitization and structured finance markets. | 0 |
Lorenzo Bini Smaghi: What future for financial globalisation? – sovereign debt and the global economy Dinner speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, at the Joint European Central Bank–Journal of International Economics (ECB-JIE) conference on “What future for financial globalisation?”, Frankfurt am Main, 9 September 2010. * * * Ladies and gentlemen, It is a pleasure to welcome you to this conference on “What future for financial globalisation?” A discussion on this topic could not be more timely as policy-makers and academics are currently making great efforts to make sense of what happened before and during the financial crisis. Questions are being asked about what lessons can be learned and what adjustments need to be made to economic policy in the future. When policy-makers have the opportunity to talk to academic researchers many synergies can be identified. That is why I am pleased that this conference has attracted so many excellent researchers in the fields of international macroeconomics and finance. I am especially happy that the conference has been co-organised by the Journal of International Economics. I should like to thank the journal’s Editor, Charles Engel, for helping to organise this two-day event. | There are concerns regarding the burden of adjustment on deficit countries and its impact on the world economy. If debtor countries adjust internal imbalances and raise national savings – thus avoiding the scenario of resurging global imbalances – which country would then act globally as the consumer of last resort? In other words, can we avoid a scenario in which there is protracted slow growth across all regions of the global economy until imbalances are eliminated? Admittedly, this is not a new question, but it is more pertinent than ever. The typical answer is that, in order to avoid the slowdown, surplus and, in particular, creditor economies should rebalance growth within their economies by increasing domestic demand, strengthening non-tradable sectors and reducing reliance on export industries. Thus the policy recommendation to surplus countries is to stimulate domestic demand, in particular through fiscal policies or structural reforms aimed at reducing the level of net savings. The problem is that surplus countries are in surplus in the first place either because they are fiscally more conservative, at least compared with the more profligate countries – and rightly so I should add – or are facing a situation in which private savings are very high and might even increase if public dis-savings were to rise. Since surplus countries are reluctant to embark on expansionary domestic demand policies, the correction of payments imbalances is faced with some form of asymmetry, a situation that is often disliked by deficit countries. | 1 |
Recently we have extended the model to include financial frictions and also an explicit banking sector and a housing market. As soon as we abandoned an exogenous assumption of future key policy rates, we had to take a stand on how to formulate monetary policy within our core model. Analytically, deriving the monetary policy reaction pattern with a loss function is a useful and practical approach. We have developed an improved apparatus for solution algorithms for DSGE models in order to be able to solve for the endogenous interest rate path in different ways and under different assumptions. The interest rate path that we derive from the model analysis serves as a benchmark for the policy discussions of the Executive Board. The analytical loss function that we use in NEMO to solve for this path reflects our criteria for an appropriate interest rate path. The first criterion is that the interest rate should be set with a view to stabilising inflation at target or bringing it back to target after a deviation has occurred. The second criterion is that 8 For details, see Qvigstad, J. (2005): “When does an interest rate path “look good”? Criteria for an appropriate future interest rate path – A practician’s approach,” Norges Bank Staff Memo 6/2005. 9 The key policy rate is the interest rate on banks’ overnight deposits in Norges Bank. 10 Norges Bank has developed a system, SAM (System for Averaging Models), for averaging short-term forecasts for inflation and mainland GDP provided by different models. | If interest rates rose faster and reached a level 100 basis points higher in 2020 than what the CBO has assumed, the net debt service burden would be about 3 ¼ percentage points higher by 2020, all else equal. Given the uncertainties around economic forecasts that far into the future, it would be highly desirable for the fiscal authorities to put in place a medium-term program of fiscal consolidation now, while market conditions are benign. At the same time, I think we must be careful and not focus exclusively on the imperative of fiscal consolidation. That is because fiscal policy adjustments have important implications for 1 2 The 2011 remittance figure is a preliminary unaudited estimate. BIS central bankers’ speeches the level and composition of economic activity more broadly–both here and abroad. If we must undertake fiscal consolidation– and over time we must–then we need to be cognizant that this adjustment will need to be accompanied by other offsetting changes in the composition of economic activity in our and the global economy. 2 One way of illustrating these interrelationships is to use the following accounting identity, which imposes an adding up constraint on the overall economy: If you define private-sector net saving as the private balance and public sector net saving as the public balance, then: Private balance + public balance = current account balance. | 0 |
Milesi-Ferretti (2010), “The cross-country incidence of the global crisis”, CEPR Discussion Paper, No. 7954. 2 See H. S. Shin (2012), “Global banking glut and loan risk premium”, mimeo, Princeton. 3 See V. Acharya and P. Schnabl (2012), “Do global banks spread global imbalances? The case of assetbacked commercial paper during the financial Crisis of 2007-09“, NBER Working Paper, No. 16079. 4 See V. Acharya, P. Schnabl and I. Drechsler, “A tale of two overhangs: The nexus of financial sector and sovereign credit risks”, 15 April 2012. 2 BIS central bankers’ speeches financing in foreign currency of long-term investments (maturity mismatch) and insufficient prudential standards leading to excessive risk taking and rent seeking behaviour. Unfortunately the warnings were not taken seriously until the issues and risks materialised first with the depreciation of the Thai baht in July 1997. Perhaps we have not learnt enough from the past! As growing financial market tensions made the financing of these deficits ever more difficult, the last and most unexpected layer of the iceberg – namely the so-called “redenomination risk”, the possibility of a break-up of the euro area – came to the surface in the middle of last year. By that time, the sovereign spread of high-yield euro area countries relative to other euro area countries had widened to an exceptional extent, hardly justified by fundamentals and fundamentally incompatible with a well-functioning monetary union. | The second group of implications then offers more a practical view which can be summarized as follows: a) the ‘policy decision-making’ body should have a strong background in law, b) the meeting devoted to monetary policy should not deal with any other issue, c) the forecast and economic analysis should be submitted by the staff so as to constrain ‘information filtering’, d) the decision makers should interact with the staff. 2 BIS Review 88/2005 | 0 |
In addition, expectations for increased investor demand for euro-denominated investments, together with the possibility of reduced participation by speculative and arbitrage trading accounts, are likely to have an effect on spreads of fixed-income securities to Treasuries. Traders in various fixed-income markets already have begun to note increased levels of spread volatility and expectations for higher absolute spreads relative to historical levels in response to these market dynamics. In this environment, managing market risk will become more difficult as the nature of fixedincome spread products changes. As we recently have learned, spread relationships that had endured for many years can break down suddenly, thereby increasing the already complex task of hedging positions. The increase in the liquidity premium for on-the-run Treasury securities last fall resulted in increased hedge-related activity in both the interest-rate swap and Treasury futures markets. Traders have continued to explore the usefulness of non-Treasury fixed-income securities as hedging vehicles. Risk managers must, therefore, be especially rigorous in analyzing their firms’ positions and hedging strategies, particularly when historical experience may not be as predictive a guide as it once seemed to be. I am encouraged by some recent market efforts to improve risk management practices. In lending, the risk-return discipline has been greatly enhanced at some international banks. These institutions have introduced measures to compare credit spreads with historical loss rates on well defined categories of credit. They also have enhanced the methods they use to assign internal risk ratings to individual credit exposures. | Better information about the credit risk profiles of the largest, internationally active banks, including the composition of their portfolio by internal ratings, would also be useful. A commitment to the use of advanced analytical tools, stress testing, and improved disclosure comes under the widely discussed rubric of seeking out and adopting industry-wide best practices. It is, perhaps, most important to note that the development of best practices is a dynamic, not a static, process that can only be enhanced by consistent risk management efforts over a long time horizon. In sum, I am led to conclude that diligent market discipline using techniques such as those I suggest here is in the long run the essential element needed to achieve both public and private goals. All market participants bear the difficult responsibility of determining and exacting adequate compensation for risk. While the public sector has a responsibility to increase the effectiveness of its overall regulatory and supervisory framework, it is the private sector’s continuous reassessment of risk and advancement of risk management techniques that ultimately will serve to preserve a safe and sound financial system while simultaneously rewarding individual institutions with long-term profitability. In the public sector, we can help markets work more effectively by ensuring that regulated financial institutions support the trading process by making sound credit decisions. We can also work to improve bank supervision by our ongoing examinations of bank risk measurement and management processes, a major focus of the examination process. | 1 |
Various proposals have been formulated in this regard, including: strengthening the capital requirements for counterparty credit risk exposures arising from derivatives, repos and securities financing activities; a leverage requirement (capital divided by total exposure) to put a cap on the level of leverage in the banking sector; and internationally harmonised global liquidity standards, including a liquidity coverage ratio and a structural ratio (measuring the amount of longer-term stable funding sources to cover the liquidity needs for funding assets over the period of one year). Finally, governance of financial institutions must be strengthened, for instance with regard to remuneration incentives. 13 The regulatory community is well aware of the fact that the reform must be introduced in an ordered manner in order to ensure the resilience of the financial system as a whole, while also supporting economic growth over the longer term. The proposals are currently the subject of extensive consultations with the banking system. In addition, an impact study will be conducted to assess the implications of the various measures. Based on the outcome thereof, the aim is to arrive, by the end of 2010, at an appropriate calibration for the new requirements in terms of the level and quality of capital, in order to find a balance between financial innovation, financial stability and sustainable economic growth. The Basel reform will be phased in gradually as financial conditions improve and the economic recovery strengthens, with the aim of implementation by the end of 2012. | The steps taken by central banks have taken them into, up to now, uncharted territory. Interest rates have been reduced to very low levels by historical standards, clearing the way for significantly lower bank interest rates (although with a significant time-lag), thus supporting credit demand from households and firms. At the same time, non-conventional measures have been adopted with the aim of bringing abnormally high money market spreads down and ensuring a proper transmission of the monetary policy impulse. These exceptional measures have had important effects on macroeconomic and financial stability, and improved the overall conditions on financial markets. 19 In particular, they have helped to “liquefy” assets that could otherwise have caused the insolvency of many financial institutions. More generally, they have helped to restore confidence by reducing uncertainty. In addition, they have prevented contagion effects that can arise in the financial system as a result of the inter-connectedness between various market participants. The monetary policy intervention also helped to restore the profitability of banks as the fall in short-term interest rates steepened the yield curve, to the benefit of the banking system, which usually funds itself in the short term in order to provide credit for longer terms. This profitability also helped to support the flow of credit to the economy. Financial measures have also been adopted, such as increased deposit insurance, guarantees for bank liabilities, and injections of capital. In addition, fiscal budgets have supported aggregate demand via automatic stabilisers and expansionary measures. | 1 |
However, for a production increase brought about by adjustment in stocks to be durable, it must be supported by a lasting increase in demand. Household consumption continued to increase, but there was no upturn in investment. The imbalances in trade and industry in the USA were perhaps more tangible than many had anticipated. Bankruptcies and accounting scandals created further unease on the financial markets, which then fell at a rate reminiscent of the 1930s crisis. In Europe the signs of economic recovery mainly concerned more optimistic expectations; expectations which were not later realised. The largest euro economy, Germany, in particular proved to be in a poorer condition than anticipated. However, here it was not a question of imbalances like those in the USA, but structural problems, such as a high level of unemployment that had set in and weak public finances, which made it difficult to conduct an economic policy that would support the business climate. Furthermore, the expected supporting forces from the other side of the Atlantic for the export industry were weaker the expected. In Sweden, the slowdown during 2001 had a limited effect on unemployment. The Riksbank’s calculations at the beginning of 2002 indicated that resource utilisation was relatively strained. Economic policy had a stimulating effect on the economy, through lower taxes and higher transfers. | The personal independence of members of the ECB’s decisionmaking bodies is also unaffected, as they remain protected from arbitrary dismissal under the Treaty irrespective of the tasks they are exercising. Is the principle of independence under Article 130 of the Treaty applicable to the ECB in its macroprudential role? The last question I would like to analyse is whether the principle of independence under the Treaty is also applicable to the ECB’s role in macroprudential supervision. As a general principle, macroprudential competence lies at the national level. This is a reflection of the principle of conferral that governs the division of powers between the European Union and the Member States. According to that principle, the Union should act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. [50] Where a competence is not conferred upon the Union in the Treaties, it remains with the Member States. [51] http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14] Central bank independence revisited The primacy of national competence in the field of macroprudential policy is clarified in Article 127(5) of the Treaty, which states that “the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the stability of the financial system”. This implies that, in general, the Eurosystem has only a contributory role to the formulation of macroprudential policies. | 0 |
For instance, the supervisory authority may put pressure on banks to increase the level of capital – for example, through upward adjustment of capital requirements under the Basel III framework. In addition, authorities may resort to bail-in measures whereby a bank’s existing debt holders would be forced to convert parts of their debt into bank equity or to accept a (partial) write-down of their claims. Of course, authorities face several constraints, due to the lack of specific powers to force resolutions, for example, or incentive problems leading to delayed action. For instance, bail-in measures may take some time to administer because of the complexity of large banking groups and the various legal issues involved. In this context, Europe faces specific challenges given the lack of harmonisation of national systems, which strongly complicates the resolution of cross-border banks. Significant steps are being taken to overcome these shortcomings. I will return to this topic after discussing the implications of deleveraging for monetary policy. Monetary policy and the deleveraging process Whereas the deleveraging of the banking sector is a necessary process to correct the imbalances built up prior to the crisis and to bring the economy back to strong and sustainable growth path, “disorderly” deleveraging can represent a serious threat to price stability. I have already described some of the mechanisms through which deleveraging can spiral off. I would like to now focus on the implications of deleveraging for the transmission mechanism of monetary policy. | Otherwise, such differences might become a source of financial fragmentation in their own right. Neither of these criteria is easy to fulfil. As the experience with Lehman Brothers has demonstrated, failures of large, integrated financial institutions can have devastating consequences for economic stability. Risks of contagion from one institution to entire financial sectors greatly complicate any effort to establish a more symmetric risk and rewardstructure for banks. Harmonising financial sector policies across countries in turn requires substantial operational and legislative efforts, given that national institutions have evolved separately and are now heterogeneous in many regards. All these difficulties can be addressed and, in fact, they are being addressed by European policy-makers. In particular, the recent initiatives at European level comprise several crucial steps to achieving a more incentive-compatible as well as a more integrated and coherent framework among countries. Let me elaborate on several concrete elements. The first step is the establishment of a Single Supervisory Mechanism (SSM). The SSM aims to ensure that all supervisory decisions about euro area banks are taken in a consistent and stringent manner, independently of the country in which it is located. Once fully effective, this will reassure markets that all banks face the same scrutiny and thus will counteract financial market fragmentation in the euro area. Moreover, by delegating supervisory decisions from the country to the euro area level it facilitates the internalisation of cross-country spill-overs, thus allowing for more efficient outcomes. | 1 |
At conferences like these, we tend to focus on the cost of misconduct. But, getting rid of scandals should not be the sole reason for changing culture.3 The public expects more from the financial sector than a lack of another financial crisis or scandal. The industry would do well to listen to Baroness Onora O’Neill: Think about your purpose.4 What are you for? Surely, no one would answer that question by saying, “We’re for a lack of misconduct.” Rather, the financial services industry should support a well-functioning, growing economy, reflecting the interests of all its stakeholders. Banking in particular should provide critical intermediation services—the economic infrastructure that allows businesses to grow, families to save and invest, and standards of living to improve over generations for as broad a cross section of people as possible. When society prospers, the financial services industry prospers, too. Creating a culture that encourages and rewards diversity of thought, perspective, and experience is one means by which the industry can both do good and do well at the same time. Thank you for your kind attention. 1 See Preet Bharara, Criminal Accountability and Culture, Remarks at the Federal Reserve Bank of New York’s Conference: Reforming Culture and Behavior in the Financial Services Industry: Expanding the Dialogue, Oct. 20, 2016. 2 In re Wells Fargo, Consumer Financial Protection Bureau Administrative Proceeding 2016-CFPB-0015 (Sept. 8, 2016) (Consent Order) ¶¶ 8-9. | People want to be team players.1 Those behavioral traits can be amplified through a firm’s culture, which can weigh on one’s willingness to do the right thing. This is, unfortunately, what seems to have occurred at Wells Fargo, one of the largest retail banks in the United States. Whether to obtain a bonus or simply to keep a job, employees felt they had to keep quiet and meet sales targets despite the cost to customers.2 1/3 BIS central bankers' speeches So, how do you change a culture where silence leads to misconduct? I will offer two ideas that might help and one idea that will not. Here is what will not work: Merely telling your employees to speak up. Cultures do not change simply by exhortation. Eloquent speeches, a well-phrased value statement, and an annual requirement to acknowledge the code of conduct are just not sufficient. That’s the easy one. The two ideas that might work are harder. First, managers have to lead by example. Senior executives must be seen within the firm to expect and respect challenges, and in turn must challenge ideas themselves. And, they have to explain difficult decisions to their employees—sharing not only the news of what they have done, but why. More important, mid-level managers have to do the same. Of course, mid-level managers will not generally behave that way unless they see their senior leadership setting the example. Second, if your organization values people when they raise their hand, your incentives have to reflect that. | 1 |
Andrew G Haldane: A leaf being turned Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, to Occupy Economics, “Socially useful banking”, London, 29 October 2012. * * * The views are not necessarily those of the Bank of England or the Financial Policy Committee. I would like to thank Mark Cornelius, Paul Fisher and Varun Paul for their comments and contributions. The theme for tonight is “Socially Useful Banking”. And what better place to discuss it than tonight’s venue – the main meeting hall of The Friend’s House, traditionally the venue for the annual meeting of the Quakers. The Quaker movement famously gave us two of the UK’s largest banks, Lloyds and Barclays. Between them, these banks have almost 600 years of history. For most of that period, no-one questioned their social usefulness. They extended loans to businesses and helped families buy homes. Nationally and regionally, they were part of the social fabric. Today, that fabric is torn. As the CEOs of these two institutions have both recently said, these banks need to rediscover their social usefulness. But this is not only a question for the banks. It is a key issue for wider society too, who have after all felt the financial consequences of banks’ failings and failures. What do we want our banking system to do? And how do we create that system? This is where Occupy enter the picture. | Additional challenge #1: Reinhart and Rogoff’s great contraction and debt overhang The Financial Crisis of 2008 left an enormous obstacle in the path of the U.S. recovery. From peak to trough, $ trillion of wealth was erased from household balance sheets. Although the value of households’ assets declined dramatically, their debt levels remained roughly the same. Many borrowers took on additional debt during the period of high and rising asset valuations, and high employment and income growth were key fundamentals for servicing these debt payments into the future. These debt burdens are key contributors to the headwinds I discussed earlier when I talked about the economic outlook. As I noted then, they appear to be substantially more onerous than we had expected. In their book This Time is Different, Carmen Reinhart and Ken Rogoff documented the substantially more detrimental effects that financial crises typically impose on economic recoveries.7 Recoveries following severe financial crises take many years longer than usual, and the risk of a second recession before the ultimate economic recovery returns to the previous business cycle peak is substantially higher. In a related study of the current U.S. experience, Reinhart and Rogoff show that the current anemic recovery is following the typical post-financial crisis path quite closely, given the size of the financial contraction.8 It would be nice to point to some features of the recovery that suggest greater progress relative to the Reinhart-Rogoff benchmark. But those are hard to come by. | 0 |
Such a system is a strength of the Spanish economy which should be preserved so that, once the crisis is behind us, a sustainable growth path underpinned by the efficient allocation of all resources, including financial ones, may be resumed. This central role of a financial intermediation system explains why the State has, in addition to other support measures I have previously discussed, shown its readiness, like other governments, to provide capital to viable credit institutions that need it. These contributions, or any other assistance, must nevertheless be conditional upon the restructuring of the institutions that receive these public funds, so as to seek both the lowest cost for taxpayers and maximum efficiency. This approach squares fully with the common principles agreed upon in the international fora of which Spain is a member, and which have been backed expressly by Parliament with a broad consensus. Hopefully, these principles and this spirit of cooperation in matters relating to the stability and resilience of our financial system may soon result in a series of legal provisions that reinforce the ability to deal with potential problems, in line with the tradition of the Banco de España and in keeping with the specific nature of the tensions we are currently experiencing. Cooperation, in this case among international authorities, will also be necessary to further the design of the new, globally applicable guiding principles for the working of markets and financial – banking and non-banking alike – intermediaries. Earlier I referred briefly to the significant challenges emerging in this area. | With hindsight, it was clearly a mistake to assume that financial markets had virtually unfettered capacity to improve risk management, and to have given excessive leeway to selfregulation. Further, the continuous expansion of spending in some advanced economies on the basis of growing private debt was a key component of the so-called “global imbalances”, about whose dangers many reports warned. But the detection of the problem did not suffice either to properly diagnose its potential scope or to act accordingly. Indeed, economic policies – and monetary and financial policies in particular – were, broadly speaking, clearly excessively lax during the upturn. Economic authorities now face the challenge of designing appropriate mechanisms to strengthen institutions in their economies and, once the crisis is behind us, to prevent such trends from recurring. This challenge firstly involves a far-reaching review of some of the basic principles underpinning financial market regulatory and supervisory policies in recent years. A new BIS Review79/2009 1 balance must be struck between regulation and self-regulation, providing both financial institutions and other investors with appropriate incentives to curb the natural tendency of financial systems to accentuate business cycles. It will also be necessary to extend the purview of regulators and supervisors, avoiding the presence of “blind spots” in financial systems, and seeking a suitable response to the fact that markets and many market players are increasingly more global, both in terms of the geographical scope of their actions and of the products they trade. | 1 |
6 Climate Bonds Initiative and UNEP Inquiry into the Design of a Sustainable Financial System (2015) “Scaling up green bond markets for sustainable development”. 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 such a shift is in its infancy and is an area where further research and collaboration is needed to support progress. Experts and financiers in the City and China have a role to play here. The work being done by the Taskforce in its pilot is to be commended. Mobilising private capital today is essential. Almost two thirds of required financing will need to be directed at sustainable projects in developing countries. Governments alone will not be able to meet this challenge. Yet it is not obvious that private investors will naturally fill that gap. For instance, debt instruments issued by emerging market firms often do not fall within the mandate of advanced market investors due to a missing, or too low, credit rating. It is in this context that bilateral partnerships such as the UK-China Taskforce are so important in accelerating progress. | For a region where socioeconomic disparities are wide, where the rural-urban divide is pervasive and considerable segments of society are still excluded from the economic and social mainstream, these developments have enormous potential to transform the current state to one where the financial needs of all segments of society are catered to. Several pre-conditions however must exist to realise this potential, and they all have to do with securing the trust and confidence of consumers in the digital financial system. This includes a regulatory framework that is appropriate and proportionate, a secure digital financial infrastructure and incentive systems that are aligned with providers that are both responsive and responsible. In Malaysia, efforts that are underway to enact a new Consumer Credit Act will further strengthen the foundations for the development of consumer finance in the digital age. The proposed legislation is important on several levels. First, it will reinforce fundamental protections provided to consumers in the provision of credit, including that provided by a growing number of nontraditional entities through digital solutions. Second, it will institutionalise inter-agency arrangements between authorities responsible for regulating consumer credit activities to promote consistent minimum protections and fair treatment of borrowers. And third, it will provide stronger assurance of more responsive and coordinated consumer protection arrangements to take into account the fast-evolving financial services landscape going forward. Equally important is a strong focus on financial education to promote financially and digitally literate consumers. | 0 |
There is also great uncertainty about how strong and stable the recovery will be. It is positive that there has been a clear improvement in the situation on the financial markets. This reduces the risk of a serious setback. On the other hand, the situation on these markets has not completely normalised. Central banks around the world will continue to use various measures to help the banks find funding. The extensive fiscal policy stimulation measures that have been and are being implemented in all the major economies have in all likelihood helped to dampen the fall in GDP. But, they are also leading to increases in national debts. This can create anxiety among the households and thus entails a risk that recovery will stop short. Nevertheless, the situation looks brighter today than it did a couple of months ago. This in itself justifies a somewhat tighter monetary policy than that which we regarded as a wellbalanced monetary policy in July. However, there are also factors that can have the opposite effect and thus represent arguments for a more expansionary monetary policy. The development of the krona has been stronger than we expected. Just as it is difficult to explain the earlier weakening of the krona in terms of developments in the Swedish economy, it is difficult to explain the recent appreciation in the krona. The best explanation might be that it is a question of an adjustment towards more normal levels after the exchange rate had strongly deviated from its long-term reasonable rate. | On the other hand, I believe that it is worthwhile for a central bank to act with some caution in areas where it does not have any previous experience to draw on. This is why I feel that it was justified to reduce the repo rate in small stages when we were already at a record-low level in the initial position. BIS Review 111/2009 3 Measures when the interest rate is close to zero What then should a central bank do when the policy rate can not be lowered to the level justified by the state of the real economy? Many central banks have struggled with this question during this crisis. One possibility is to allow the policy rate to remain at the lowest possible level for a longer period than would otherwise have been required. The effects of such a decision can also be reinforced in several ways. The central bank can, for example, lend money to the banks at a fixed interest rate at a maturity that corresponds to the period during which the policy rate is expected to remain at this low level. This can increase the credibility of the forecast that the rate will remain unchanged in the year ahead. It should also push down some interest rates at longer maturities. We decided to implement both of these measures. Since the monetary policy meeting in February, our forecast has comprised a low repo rate during a relatively long period of time. | 1 |
As the Government has initiated various efforts to integrate people with disabilities into all aspects of life, the financial industry should also continue to play a more pro-active role in providing an enabling environment to ensure that their fundamental rights to have access to the banking and insurance products and services are actively promoted. Taking into account the Persons with Disabilities Act 2008, the financial industry are expected to give appropriate consideration and take necessary measures to ensure services and facilities are accessible by all in the OKU community. Clearly, these obligations signify our accountability and responsibility towards providing the necessary access for members of the OKU community and not to deny their rights to be included in our financial system. Moving forward, under the RMK11 recently announced, the Uniform Building By-Laws, 1984 is going to be strengthened with greater mandate to include the enforcement power of the authorities. With this possible enhancement to the legislation, the financial industry need to be ready to face this changing landscape whereby there is a possibility that action could be taken against those service providers that fail to provide the enabling environment to the OKUs. Against these backdrop of higher expectation from the OKU, stronger legislation and our aspiration of more inclusive financial system, today’s program provides a platform for us to further understand the needs of the disabled, to be more preemptive and anticipatory in our approach and to collaboratively work towards ensuring that the financial industry of Malaysia becomes completely disabled-friendly and truly inclusive. | Emilija Nacevska: Strengthening the capacities of the system for fight against counterfeiting of the euro Speech by Ms Emilija Nacevska, Vice Governor of the National Bank of the Republic of Macedonia, at the opening conference of the Twinning Light Project "Strengthening the capacities of the system for fight against counterfeiting of the euro", Skopje, 15 January 2019. * * * Dear Minister Oliver Spasovski, Your Excellencies Samuel Zbogar and Thomas Gerberich, dear Project Leaders Biljana Celeska Anevska and Peter Spicka, dear Mr Damir Bichanic, distinguished representatives of the Delegation of the European Union in the country and representatives of the Ministry of Interior, distinguished colleagues, dear guests, It is my honor and pleasure to greet you on the behalf of the National Bank and to welcome you to today’s event held in our institution, marking together the beginning of this very important Twinning Light Project aimed at strengthening the capacities of the institutions involved in the system for fight against counterfeiting of euro. At the very beginning of my speech, I would like to express the gratitude of the National Bank to the European Union, because it has recognized the determination of our key institutions responsible for fighting money counterfeit to put their maximum in establishing a strong and efficient system for protection of the national, as well as the financial interests of the Union. | 0 |
2 BIS central bankers’ speeches employment since 1997. It is difficult to understand why firms should increase employment so significantly if their existing workforce is not fully utilised. Some of this behaviour may be explicable if employment growth were concentrated in sectors of the economy which are expanding most quickly, especially those orientated towards the export sector. But it is striking that this pattern of rising employment and weak productivity is common across most sectors of the economy (Chart 2).5 It is also possible that firms in some parts of our economy are having to work flat out just to generate the same amount of business. Estate agents, for example, trying to match buyers and sellers in a thin housing market. Or M&A teams pitching for new business. The extra effort that is required may explain why these types of companies do not report much spare capacity. But it does not help to explain why companies facing these types of pressures should want to expand greatly their workforces. It is hard to reconcile the number of new jobs created over the past year with the belief that firms are sitting on a substantial margin of spare capacity. The recent weakness in productivity may also have been exaggerated by the sheer difficulty of measuring economic activity in real time. We know that early estimates of output are often revised as more comprehensive data become available. Recent productivity may look less disappointing if subsequent estimates of output are marked up. | But it was evident too in the formation earlier last BIS Review 8/2002 1 year of the Guild of International Bankers, our co-hosts this evening, and of which you, Lord Mayor locum tenens, are the Founding Master. It takes on the mantle - or, perhaps more appropriately, takes over the ledger - from the Bankers Club which has contributed so much to the City's professional esprit de corps over so many years. So it has, as I said, been a long, hard year, President, but it has certainly had its positive moments. And I should like to conclude by paying tribute this evening to the role of the City Corporation and of the Mayoralty, and their contribution to many of the positive developments we have seen - through their own example in promoting community involvement, including their support for the Heart of the City campaign; through their own role in maintaining security and co-ordinating the "public" infrastructure - both vital to all our contingency plans; and through their support for the fundamentally international character of the City, not least in opening the way to the Guild. I am profoundly grateful to them for all the help and support they give to us all. It is in that context that I ask you now to rise and join me in a toast to "the Rt Hon The Lord Mayor, the Corporation of the City of London and the Sheriffs." 2 BIS Review 8/2002 | 0 |
Any action taken by a central bank today must be based largely on considerations about the rate of inflation one to two years down the road. So even though the underlying rate of inflation has been lower, central banks have to consider what is likely to happen to prices in the future. Long and variable lags made it difficult to know what the appropriate policy was at each moment for the purposes of fine tuning future economic activity. In addition, political pressures tended to emphasize the immediate or short-term benefits of stimulating the real economy at the expense of long-term increases in inflation from such policies (myopia). The combination of these lags and myopia imparted an inflationary bias to policy with the result that in the 1 BIS Review 95/2000 long run inflation was higher than it otherwise would have been, with no gain in real output. The more systematically monetary policy was used to fine-tune economic activity, the more the inflationary consequences of such policies were anticipated. An anticipated monetary stimulus would be passed through immediately to prices with no affect on real output. A second problem of the monetary policy is the need for a nominal anchor. If monetary policy could not be expected to dampen business cycles by fine tuning, it might do so by stabilizing inflation expectations as the result of a clear and credible commitment to a nominal anchor that is believed to stabilize prices on average in the long run. | Such a policy has two goals: the first is to provide the market with reliable information on what the rate of inflation will be so that investment, wage setting, and other market decisions can be made with greater confidence in what the future price level will be. The second is to ensure that the inflation rate is very low in order to improve the quality of price signals. Such a policy might minimize the gap between actual and expected inflation that spill over to the real economy. By removing the inflation bias of discretionary policy, nominal interest rates would be lower, and by diminishing uncertainty over the future price levels, a credible nominal anchor would reduce the inflation risk premium in both nominal and real interest rates. Here, there is a need for clear operational rules to know what short-run stance of policy would be appropriate for the future. The purest examples of such rules are a fixed exchange rate and a fixed rate of growth in a monetary aggregate. Either rule provides a clear anchor for inflation expectations. A credibly fixed exchange rate is the most transparent nominal anchor. A floating exchange rate with a money growth rule as the nominal anchor is also easy to monitor, if somewhat more difficult to achieve. Both anchors suffer, to some extent, from being indirect routes to the real objective of monetary policy, which is price stability. | 1 |
Financial regulation – How to promote safe and secure financial innovations A sound legal framework is important for private service providers to develop secure and efficient payment services and for authorities to keep the confidence of users in the regular functioning of the payment system. The development of payment services is a continuously evolving dynamic process, driven by technological advances. Market players design new services that better adapt to users’ needs in order to expand their business. In doing so, they try to balance the new opportunities the market opens up with the financial regulation they have to comply with. However, private players want to maximize their profits and may not have the right incentives to reach a socially viable equilibrium. In this sense the regulator monitors the development of the market and technological advances to be able: to foster innovation (and better customer experience); strike the right balance between security and efficiency; adapt the regulation to new services; put in place effective consumer protection measures; ensure fair competition among market players; avoid regulatory arbitrage. The new regulatory framework in Macedonia which is in an advanced stage of drafting, aims at balancing safety and creativity. In order to protect consumers and maintain financial stability, the new framework envisages licensing regime for the non-banking payment service providers as well as an appropriate safeguarding measures for client’s funds. However, it supports the grow of start-ups in the Fintech sector by easing some of the regulatory requirements related to the initial capital, BCP, external audit etc. | Another aspect of EMU governance is strengthening the economic part of EMU. This requires structural reforms aimed at enhancing potential growth, reducing structural unemployment and increasing national economies’ resistance to shocks. While many euro area countries undertook a wave of reforms during the crisis, today, across much of the area reforms have stalled. This is not a uniform picture. Malta is enjoying robust economic growth despite regional headwinds, largely as a result of reforms implemented in recent years that stimulated the development of new areas of economic activity and increased labour participation. Malta has also taken full advantage of its membership of the EU and its adoption of the single currency. Resilience to shocks can also be built up through deeper economic integration. Indeed, as the Five Presidents’ report argues, financial integration helps to share risk across EMU member countries. The completion of a Banking Union, which will strengthen the European banking sector, is a key objective in this regard. In this area, success so far has been partial. The Single Supervisory Mechanism involving the ECB via the Supervisory Board and the national supervisory authorities is up and running, following a comprehensive health check of the euro area banks. The Single Resolution Mechanism is also operational and is being funded according to plan. As regards the third pillar of Banking Union, the European Deposit Insurance Scheme (EDIS), negotiations are still under way. We believe that EDIS is will increase confidence in banks across the euro area. | 0 |
Some calm has come to the external financial markets, originating, among other causes, in the announcements that steps will be taken towards a banking union and the statements by the governor of the European Central Bank regarding the possibility of shortly implementing a sovereign bond purchase plan, upon previous political agreement on a fiscal austerity program. Besides, no significant sovereign debt payments from peripheral economies have fallen due in the past several weeks. However, the region faces a tough path, because of considerable difficulties to carry out these actions. For example, how a banking union for the 4 BIS central bankers’ speeches Eurozone could be materialized is unclear and, for the time being, there is no unanimous support from member countries. In addition, there is the negative outlook placed for Germany’s and other central Eurozone economies’ ratings. Plus, in the coming months, several events will occur that may revive market tensions. For September there is, among other developments, the evaluation of the tripartite group on the degree of compliance with agreed adjustments in Greece and the possibility of a new program, aside from the voting at the German constitutional tribunal on the legality of the ESM. For October, there is a strict calendar of debt maturities in Spain, which entails refinancing obligations in international markets. The impulse from abroad on the Chilean economy will be somewhat milder than was foreseen a few months back. | Indeed financial services are instrumental for broader human development, as people invest in themselves and seek protection from external shocks. Distinguished Ladies and Gentlemen, as you are no doubt aware, the results arising from the 2005 FinScope demand side study which aimed at measuring access, usage, perceptions and the demand patterns on financial services offered in Zambia were not encouraging. The findings of the study indicated that only 33.7% of the adult population was financially served. This entailed that 66.3% of the Zambian population were financially excluded or not using banks or other financial institutions. Furthermore, the supply side study conducted in 2007 also highlighted a number of weaknesses in the financial sector including, limited outreach of banks and financial institutions to the general populace, high spreads between deposit and lending rates, excessive collateral requirements and poorly managed cost structures which contribute to limiting outreach. As a consequence of the low levels of access to financial services, the Bank of Zambia adopted financial inclusiveness as one of its strategic objectives to ensure improved levels of access for all. In this regard, it is gratifying to note that following the survey, commercial banks and other non-bank financial institutions including Celpay have increasingly become receptive to the calls for increased provision of financial services. | 0 |
In such a situation, the central bank would have to buy the domestic currency and pay with foreign exchange reserves, which are finite and would eventually run out. When the market realises that there is a difference between maintaining a fixed exchange rate when the 12 McCallum, B. (2000), “Theoretical analysis regarding a zero lower bound on interest rates”. Journal of Money, Credit, and Banking. v. 32, 870-904. 13 See Svensson, Lars E.O. (2001), "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Monetary and Economic Studies 19(S-1), February, 277-312; Svensson, Lars E.O. (2003), "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," Journal of Economic Perspectives, 17(4) 145-166. 6 BIS Review 19/2009 currency is strong and when it is weak, the high demand for the domestic currency will cease and the foreign exchange reserves will return to a more normal level. This method is a very drastic action. It shows that the central bank really means business and lends credibility to the price level target. It may therefore affect expectations of the future price level much more than any other measure. The method is verifiable as it consists of action and not just talk, and its logic is very clear. Raised inflation expectations would reduce the real interest rate, stimulate the real economy and increase inflation, and the price level would move upwards towards the price level target. | It is thus necessary to keep watch on inflation expectations, to counteract expectations of falling inflation, and preferably to create expectations of higher inflation. In this type of situation it may be desirable to create expectations that actually exceed the inflation target. The Riksbank’s current regime, with a credible inflation target and the publication of forecasts, including their motivation, for inflation, the real economy and the repo rate, provides a very good base for maintaining confidence in monetary policy, for upholding inflation expectations and preventing them from falling too low, or even from falling unchecked. If, contrary to expectations, this should not prove sufficient, and inflation expectations were to threaten to become too low, it is possible that tightening the inflation target, in the form of a temporary target for prices, might work better. This type of temporary price target could be introduced in the form of an average inflation target, so that inflation over the coming five years should on average be 2 per cent. If inflation then falls below 2 per cent during a period of time, it must be kept above 2 per cent during a period of time to ensure the average will be 2 per cent. With a well-motivated average inflation target it may be easier to justify this monetary policy and to create confidence in allowing inflation to exceed 2 per cent during a period of time in order to provide a sufficiently low real interest rate. | 1 |
These advantages and disadvantages, however, represent an opportunity for the financial sector to further focus on financial support through financing these enterprises, commensurate with risk level that must be taken into consideration when financing SMEs, and to set appropriate finance prices commensurate with risk levels. 2 BIS central bankers’ speeches Ladies and Gentlemen, Business Enterprises have witnessed significant growth in recent years. The number of enterprises subscribing to the Social Insurance System went up from about 121.5 thousand in 1426H to approximately 218.4 thousand in 1430H, recording an annual average growth of 16 percent. Individual proprietorship firms represented 93.1 percent of the total of annual average growth, limited liability Enterprises 4.7 percent and holding Enterprises 0.6 percent. Economic activity of these enterprises was focused in three areas: commercial activity 34.3 percent, construction and building 32.3 percent and manufacturing industries 14.6 percent. Small Enterprises with less than 5 employees accounted for the largest share of 55.5 percent of the total number of enterprises at the end of 1430H, while the rest, enterprises with more than 60 employees represented 3.8 percent. These data show that most of the enterprises in the Kingdom are small, in terms of the number of workers. SMEs’ contribution to the Kingdom’s GDP is very low, accounting for 33 percent, while SMEs constituted 64.3 percent of Japan’s GDP, 43.3 percent of Spain’s GDP, 56 percent of France’s GDP, 44 percent of Austria’s GDP, 43 percent of Canada’s GDP and 33 percent of Australia’s GDP. | SMEs’ contribution to the U.S.A’s GDP is more than 50 percent. The insignificant contribution of SMEs to the Kingdom’s GDP may be due to the Oil and Governmental sector which represent the major impetus of economic activity. Dear Brothers and Sisters, SMEs are facing clear challenges in gaining the necessary funding for meeting their expansion needs due to various reasons including poor management, and lack of adequate guarantees and, subsequently, the difficulty of obtaining the necessary funding. In order to overcome this problem in the Kingdom, the Ministry of Finance, in collaboration with Saudi banks, established a guarantee program (Kafalah) for financing SMEs. The program, with a capital of Rls 200 million, is managed by Saudi Industrial Development Fund to cover a proportion of the risk of the financing entity in case of the failure of the guaranteed activity in repaying the finance or part thereof. The program also aims at encouraging banks to finance SMEs that have the constituents for success, but at the same time, they cannot present the necessary guarantees or accounting records to prove their eligibility for funding. The program has recorded good performance since its inception in 2006 until 1-Oct-2010, as the number of guarantees approved by the Ministry of Finance during that period reached 1,668 with a total value of Rls 644 million, while loans granted by banks under the umbrella of the program amounted to Rls 1.6 billion, benefiting about 1,113 SMEs. | 1 |
Gent Sejko: The economy and banks, present and future challenges Speech by Mr Gent Sejko, Governor of the Bank of Albania, at the round table on “The economy and banks, present and future challenges”, organised by the Bank of Albania and Government of Albania with the banking system, Tirana, 16 September 2015. * * * Your Excellency Prime Minister, Honoured representatives of international institutions, Dear bank executives and representatives, This meeting seeks to once again draw the attention on non-performing loans, an issue that has been discussed extensively over the recent years. It aims at fostering the shared and concrete commitment to reduce the stock of non-performing loans, increase the financial intermediation by the banking sector and underpin Albania’s economic growth. Following, I would like to list some facts. The high level of non-performing loans has not affected the banking sector’s stability. Liquidity and capitalisation indicators remain adequate and the financial performance has been positive and improving. But, the still-high percentage of non-performing loans has contributed to a higher perception of risk by banks; in turn, they have adopted a more conservative approach to lending. Our survey data point to tightened lending standards; meanwhile, the lending volume, albeit positive, is still considered as low. The credit quality has improved during this year. The non-performing loans ratio, after peaking 25%, fell to around 21% in July 2015. | By contrast, the inflation outlook has improved appreciably. This has increased the SNB’s room for manoeuvre. Finally, there is a risk that the financial crisis will cause a deterioration in financing conditions for the economy as a whole. These are the considerations that have prompted today’s decision to cut the three-month Libor target range by another 50 basis points. Given the expected deterioration in the Swiss economy and the imponderables linked to the long and variable monetary policy transmission lags, a further rate cut appears appropriate. With this action we are reducing, to the extent possible, the risk of an even more pronounced economic downturn. Inflation forecast chart How has our inflation forecast been revised? The dashed red curve on the chart represents the new forecast. It covers the period from the fourth quarter of 2008 to the third quarter of 2011, and maps the future development of inflation on the assumption that the three-month Libor remains unchanged at 0.5% over the forecasting period. For purposes of comparison, the dash-dotted green curve shows the inflation forecast of the September monetary assessment, based on a three-month Libor of 2.75%. The new forecast shows a rapid fall in inflation over the next few quarters. It drops back below the 2% mark as from the fourth quarter of this year. | 0 |
Employment in different sectors during the 20th century 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1900 1910 1920 Agriculture BIS Review 137/1999 1930 1940 1950 1960 1970 Public and private sector 4 1980 1990 2000 Industry The employment trends in different sectors, as a proportion of total employment, shows the Swedish economy’s transformation during the 20th century. Three different stages are especially clear. Firstly, fewer and fewer people earn a living from agriculture over the years. Having provided employment for around 60% of the labour force at the beginning of the century, agriculture now engages only a couple of per cent. This change reflects a dramatic increase in agricultural productivity and thereby internal migration. The population in rural areas falls and large cities such as Malmö, Gothenburg and Stockholm grow. It is also primarily in these regions that growth is generated. Secondly, the shrinking agricultural sector is reflected in a corresponding increase in industrial employment. Manufacturing occupied over 30% of the labour force in the 1950s when this part of Sweden’s corporate sector was largest in terms of employment. Thereafter, the proportion of employed in this sector has fallen. Finally, the really dramatic development as regards increased employment is the expansion of the service sector. | Put to good use, this transformation can probably create stronger potential growth, lead to higher productivity growth and lower inflation, and benefit employment. The favourable changes that have occurred over a number of years in the Swedish economy since the 1980s suggest that such a development is within our grasp. All forecasts to date about the spread of the Internet have been on the low side. In the United States, it was 38 years before 50 million households had radio sets, while the intervals for television sets and cable television were 13 and 10 years. The Internet, however, had reached 50 million households after only 5 years and according to some estimates the number of users will increase greatly during the next few years. It has been said that whereas conventional telephony in Sweden is growing by 7% a year, traffic on the Internet is currently rising at this rate every week. It is not just that more and more people are subscribing; those who surf on the Internet are doing so more and more. The number of surfers is measured by Sifo Research & Consulting; the figures show that almost 3.5 million people in Sweden surf, which is not quite half of the population aged 12 to 79. Of these, as many as 2 million stated that they surfed on a daily basis. Another noteworthy figure is that in the age group 50-79 years, almost 20% are active users of the Internet. So the Internet is not something that only young people find attractive. | 1 |
Annual percentage change 5 Interest rate costs Food 4 5 4 Energy Good 3 3 Services 2 2 CPI 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 08 09 10 11 12 13 Source: Statistics Sweden All in all, given the relatively weak development abroad, it is thus not difficult to understand the division in demand that has marked the Swedish economy in recent years. What can monetary policy do today? Swedish monetary policy cannot do anything about the causes of the weak demand from abroad, but it can mitigate the effects on the Swedish economy. How low the repo rate needs to be, and how quickly inflation should rise towards the target are ultimately questions of judgement. I believe that it is appropriate that the Riksbank has let the repo rate remain at one per cent since the end of last year in order to boost the Swedish economy and to get inflation to rise to 2 per cent. According to the forecast, the repo rate will remain at this level until the end of 2014. In the forecast, the real interest rate will remain negative until the beginning of 2015, which shows that monetary policy is expansionary. | Moreover, if the weak development of exports and investment during, above all, 2012 had not been counteracted by household consumption, then the latest slowdown in the Swedish economy would have been more pronounced. Households have become more optimistic over the last 12 months and this is reflected in higher housing prices, increased lending and increased consumption. They have been helped by the increase in their disposable incomes over a period of several years. Low interest rates have of course contributed to this development in the household sector. Turning to the labour market, employment has increased but unemployment is nevertheless higher than it was a year ago as the labour force has increased relatively quickly. This is partly due to an increase in those of working age in the population, but also to the government’s labour-market reforms, which are both factors of a structural nature. At the moment unemployment is approximately 8 per cent and with the Riksbank’s current forecast we are approaching the interval of 5 to 7.5 per cent within which the Riksbank believes the long-run sustainable rate of unemployment lies.1 If we look at the situation in different sectors we can see that employment has increased in the service sector while the weak demand for Swedish industrial products is in part responsible for the weak development of employment in the manufacturing industry. | 1 |
It would appear, therefore, that as the economy responds to a gradual improvement in external demand, it may still be constrained by its own rigidities. Removing these obstacles and correcting the resultant imbalances is, therefore, a precondition for achieving more rapid growth, which in turn is the key to accelerating convergence with euro area income levels. 2 BIS Review 154/2009 Faster growth is achievable but depends on … The Roman writer Ovid said that times change and we change with them. That may be so, but what really matters in today’s circumstances is how rapidly we read the signs of the times and adapt to them. I will focus on three directions of necessary change. The first is towards greater competitiveness. The second, and related thrust, would be to promote higher productivity. The third focuses on fiscal consolidation and the pursuit of sound public finances. Before proceeding, however, I should stress that none of these objectives is attainable without further structural reforms, debunking the popular notion that the State has an unlimited capacity to satisfy demands for free goods and services and an end to inefficient practices that involve subsidies. … greater cost competitiveness … First of all, in Malta’s case sustained economic growth depends largely on our ability to attract export-oriented foreign direct investment. Given the past increases in unit labour costs, the only way of maintaining a competitive edge is by ensuring that these costs rise by less than those of our competitors. | To prevent these problems from getting out of hand, our country’s development should be undertaken in a way that does not place importance on GDP growth at the expense of all else, but aims to strike a balance between GDP growth and the preservation and conservation of natural resources and the environment. Rapid development should not be undertaken unless the environment and natural resources are able to sustain and support such development. The public needs to have greater interest in resource management, particularly water management, in order to allow sustainable use, alongside the growing needs from agriculture and industry. We need to restore nature and the natural balance of the environment, which can thrive in parallel with the growing economy, increased tourism demands, as well as improved living standards for all Thais in general. Hence, in order for economic development to continue in the right direction, development should not be measured solely by GDP growth, but by other development indicators as well. There has been increasing discussion on the concept of Green GDP, although this has not yet been put into practice. [In Bhutan, instead of adopting traditional GDP measures, the Bhutanese have adopted “Gross National Happiness”, or GNH as their development philosophy. In recognition that human happiness is a composite of both the material and non-material needs, GNH is meant to address this. GNH is a more comprehensive measure that incorporates economic development, environmental preservation, cultural promotion, and good governance.] | 0 |
But as markets attained a global dimension, encouraged by financial liberalisation and the advance of information technology, they became far less tolerant of weaknesses than before, and the markets responded to weaknesses with harsh punishments, which many considered grossly unfair. But this is the reality that we face. And if we are to continue to benefit from the greatly enhanced efficiency of global financial markets in international financial intermediation - a process that has contributed so much to development - we have to get on with the necessary reforms. These include the domestic structural reforms to the financial and corporate sectors, to make sure that we can manage the risks and cope with the volatility that are part of that efficiency. And, to the extent that consensus can be reached, they also include measures to strengthen the international financial architecture. Thus, with some encouragement from the Bank and from others, and more importantly, urged on by the brute forces of the market, significant progress has been made in the domestic structural reforms of individual economies in the region. I applaud the progress and the achievements; and I sympathise with the pain and suffering which they have entailed. With the economic recovery of the region now well under way and international funds flowing back into the region, I would also urge a continued commitment to structural reforms and caution against complacency. | The latest business surveys and economic data point towards some moderation of late, which is 1/4 BIS central bankers' speeches not specific to France but also seen in other euro area economies. GDP growth in the first quarter could thus prove somewhat softer than previously anticipated. However, the underlying momentum remains solid and broad-based, and we interpret recent data as reflecting a temporary pull-back from the very strong and above-trend pace recorded in the second half of last year. It does not alter the inflation outlook over the medium term horizon that is relevant for our monetary policy. [slide 6] Against this backdrop, we forecast GDP growth in France to remain robust in 2018, at 1.9%, after 2.0% in 2017, and to stabilize at around 1.6%-1.7% per year in 2019–20, which would remain above potential. Thanks to this performance, the output gap is expected to close in 2019. The engines of growth should be more balanced. Household consumption is expected to accelerate somewhat, with significant gains in the purchasing power of households of + 1.5% to 2% per annum. In particular, the tax measures set out in the budget laws should help to boost household income from the end of 2018. Total investment should lose some momentum but remain a significant contributor to output growth. And as exports pick up, the contribution of external trade should turn neutral. [slide 7] The performance on the labour market has been very encouraging as well. | 0 |
We have encouraged banks to become more transparent in providing the public with more timely and transparent information on bank management, especially information relating to non-performing loans, lending to related parties, and violation of the Bank of Thailand’s regulations as well as the fines incurred. In addition, we have encouraged banks to give greater importance to and abide by the best principles of corporate governance by limiting the number of outside directorships which the bank directors or bank senior executives may hold to not more than three, as well as not being an authorised director. Before the announcement made on this issue by the Bank of Thailand on 17 September 1999, there were a total of 82 bank directors holding more than 3 outside directorships. The number has now reduced to 22, and should be finally phased out. To reduce the risk of economic bubbles and the consequence to financial institutions, the Bank of Thailand plans to reduce the reliance of the private sector on bank credits, from a share of 77 % of the total sources of funds, presently, to 55 % in the next 10 years. This requires that Thailand must have strong markets for debt instruments and equities. Thus, the development of the bond market is among the major tasks the Bank of Thailand has undertaken during the year, as it will provide the infrastructure for the conduct of monetary policy through open market operation, as well as enhancing the country’s long-term economic development. | The Bank will continue to support this need as it is deemed possible, under the Inflation Targeting framework. As for the exchange rate, the stability of the baht has improved, due to measures that have been implemented. The Bank of Thailand will continue to closely monitor international capital flows and exchange rate movements in order to ensure timely policy responses to different circumstances. In the area of international reserves, the Bank of Thailand has set a plan to repay loans. However, given our relatively modest reserves, it might be appropriate to consider using new interest incomes that will accrue from these reserves to repay loans. This may be deemed a better alternative than to keep on accumulating reserves, whilst taking on new borrowings to repay existing debts. What I have said so far should help make it clear that, in spite of increasing global risks in the next year, we remain in a position to be able to steer our economy towards another year of satisfactory rate of economic expansion. As for the economic problems that remain to be solved, this should not be a cause for much concern, as we have already prepared the appropriate policy framework and strategy to address them. It is only for the newly formed government to give importance to these policy frameworks, as well as to pay attention to the following three areas that are critical to the long-term survival of the Thai economy: 1. | 1 |
I would add one other thought on the demand for banknotes, which is more to do with human psychology. I suspect most people, however much they use cards, feel a degree of comfort from knowing that they also have cash in their wallet or purse, even if it is as a back-up. What does this analysis tell us about future demand for cash? As a central bank responsible for the issuance of banknotes, two principles are at the front of our thinking: first, that we issue central bank money, in the form of claims on the Bank of England; and second, that in doing so we must meet the public’s demand for our notes. By issuing central-bank money, we are providing both a means of payment and a store of value. But I think we should recognise that the paradox of banknotes that I have described indicates that there may well be a limit to the growth of the value of notes in circulation insofar as the use of banknotes as a means of payment is not increasing. This is, though, a broad assessment, and I would not wish to offer a judgment on the level at which the demand of the public to hold more banknotes will peak. An important reason for this uncertainty is that, as recent experience indicates, the demand for banknotes as a store of value is dependent on the state of the economy and the financial system. | Also on the policy response to the crisis, we have invested in stress-testing to examine how the balance sheet performs under stress, and thus establish whether the bank is robust in terms of its loss absorbency to extreme but plausible outcomes. This is a central part of what we describe as our forward looking judgemental approach to supervision. I have not so far mentioned one other very important part of the post-crisis reform package, namely ensuring that banks can be resolved if they fail. This should be done without recourse to public funds or the disruption of the critical economic functions provided by banks, such as continuity of access to deposits. At the heart of the resolution reforms is the concept of bail-in, which is that private creditors of a bank absorb the cost and provide the new equity to sustain the provision of these critical functions in the event that it suffers large losses that cause failure. There is nothing radical about the concept of bail-in, which is a debt-equity conversion should a trigger event occur. That is consistent with well-established principles of company restructuring. But with banks it has to happen very quickly if the trigger event that the bank is no longer viable occurs. We cannot wait for a lengthy bankruptcy process. TLAC (Total Loss Absorbing Capacity) or MREL (Minimum Requirements on Eligible Liabilities) are used to describe the specific liabilities which banks will be required to maintain to ensure there are enough liabilities which can feasibly and credibly be converted. | 0 |
The economic model they have developed – of ‘diagnostic’ expectations – is appealing because it starts from research on how humans form beliefs about the future, and how they act on those. The way in which investors and markets form expectations of the future is clearly an area that merits further research. As I will go on to discuss, it is important to those of us responsible for financial stability to understand what is driving the expectations of the future that underlie risk-taking And what drivers kick in when those expectations meet the future and have to be adjusted. Macroprudential Policy As I said at the outset, I expect the next ‘crisis’ to involve some form of over-valuation of assets, over-extension of credit and losses when this corrects. While infrequent, significant adjustments seem to be a feature of the system. The more important question, in my mind, is whether those adjustments destabilise the financial system and lead to very disruptive economic impacts. Will adjustments lead to ‘great financial crises’ as they did 10 years ago or will the system be able to absorb the adjustment and perhaps even dampen its impact? In the first instance, it does not matter whether expectations are rational and are then significantly adjusted because of ‘news’ or whether they are irrational and extrapolative and get adjusted because reality has caught up. Either way, the costs of financial crises can be minimised and perhaps avoided if the system is resilient to shocks that are possible even though they are very unlikely. | 1 16 All speeches are available online at www.bankofengland.co.uk/speeches 16 | 1 |
Despite a challenging environment, new issuance of sukuk in the global sukuk market rose by 43 percent to $ billion in 2009. However, developments in Europe resulted in a more cautious market and the global sukuk issuance declined by about 20 percent in the first half of this year. In the coming period, this trend is expected to improve as the Governments in Asia and the Middle East have already initiated the raising of funds for the implementation of infrastructure development and investment projects. This extensive interest in Islamic finance from different parts of the world is driving the international dimension of Islamic finance. This has contributed to the strengthening of financial and economic linkages between the more established financial centres of the Western world and the newly emerging financial centres in Asia and the Middle East. This has thus contributed to the more efficient allocation of funds across borders from centres with surplus funds to regions with investment opportunities. It has also allowed for more inclusive participation regardless of size and stage of development. Islamic finance now provides the range of financial products and services to multinational corporations, to micro enterprises and to households while at the same time, facilitates financing of international trade and cross border investment activities. This recent decade has also seen significant milestones being achieved in the area of international financial infrastructure that supports the development of Islamic finance. | Nor Shamsiah Mohd Yunus: Reshaping Malaysia's future - setting the goal for greater governance and transparency Keynote address by Ms Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 10th International Conference on Financial Crime and Terrorism Financing "Reshaping Malaysia's Future – Setting the goal for greater governance and transparency", Kuala Lumpur, 30 October 2018. * * * A very good morning to all of you. It is my pleasure to address all of you today at this very important conference. Financial crime. Terrorism financing. Corruption and money laundering. These are heavy words that carry the feelings of outrage and displeasure, amongst others. The United Nations Office of Drugs and Crime estimates that every year globally, a staggering amount of USD2.6 trillion is stolen through corruption. Yet, I suspect, in reality, figures like these are so large that many may find it hard to relate to it. To put it in perspective, the figure is around eight times larger than the Malaysian economy. Let us also take the UN Sustainable Development Goals that aims to improve the lives of the poor, improve governance and address inequality. Some estimate that it will take around USD5-7 trillion to meet all the SDGs. This represents 2-3 years’ worth of money lost to corruption. In other words, the money lost through financial crimes is a devastating opportunity cost, draining the resources that could have been used to permanently uplift the lives of billions in this world. | 0 |
On the one hand, Malta’s successful experience with a peg in terms of price 4 BIS Review 61/2004 stability, coupled with the importance of exchange rate fixity for a small open economy that is heavily dependent on foreign trade and investment, suggest that it would be desirable if the features of the present exchange rate regime - predictability and stability - were preserved while Malta participates in ERM II. On the other hand, the appropriate width of the bands in ERM II is inversely related to the degree of convergence achieved with the euro area, but positively related to the size of the fiscal deficit. Whether the continuation of the features of the current regime will remain possible or not, with all the advantages that it brings to the business community, thus depends on the extent of progress with structural reforms and fiscal consolidation. It is, therefore, vital that the reform agenda remains on track. It is in the common interest to ensure that the economy converges faster towards the high levels of efficiency and living standards of the euro area. The business community clearly has an interest in contributing to the achievement of this objective, both by modernizing its structures and operational practices so as to be better placed to seize the opportunities and also by participating constructively in national fora such as the MCESD. BIS Review 61/2004 5 | Today, I will first elaborate on two challenges that will continue uniting us: the need for good national economic policies, pro-business and long-term oriented; and the need for active multilateralism to face our global challenges. Then, I will dwell on a challenge that we will have to address together: our future relationship and Brexit. ** I. The need for pro-business and long-term national economic policies Let me start with the challenge of national economic policies. In the euro area, the economic recovery is now robust and broadly-based across countries and sectors. GDP growth should stand at at least 2.2% in 2017 according to our ECB forecast. The ECB’s accommodative monetary policy has contributed to this acceleration of growth in the euro area. Yet monetary policy cannot be the only game in town. Structural reforms in each country, along with stronger European coordination, are of the essence to boost potential growth in the medium term and to treat the fatal disease of mass unemployment. In recent years, several European countries, including in Southern Europe, have successfully carried out in-depth reforms that are yielding positive results in terms of growth and employment. Germany, the Netherlands and Nordic countries, as well as Spain and Portugal, are proof that economic success, a solid single currency, and the European social model are compatible. We should run pro-business, long-term oriented, fiscally sound economic policies, while keeping the core elements of a common social model, which can be the DNA and pride of Europe in this highly divided world. | 0 |
For Islamic financial institutions, this goes beyond strategy alignment and culture, which has been the primary focus to date, to building or acquiring the fundamental skillsets, required to implement sustainable financing and risk management practices. Without these, VBI cannot hope to progress very far. To illustrate, a study by the National Bureau of Economic Research found that jobs requiring a higher intensity, and concentration of “green skills” to support the transition to greener economies, lies among high-skilled professional profiles. In other words, if Islamic financial institutions are serious about adopting VBI, the complement of skillsets at the management levels of the organisation will need to be fundamentally re-assessed. Relevant skills that need to be brought into the organisation include engineering and technical skills in the design, construction and assessment of technology; science skills; and monitoring skills focusing on observing compliance with environmental laws and standards. Even boards too have to learn and adapt to the demands of the new operating environment. Relevant skillsets are also critical to support innovation within the financial sector to capture opportunities and improve the delivery of Islamic financial solutions. Indeed, technology can be better optimised to revolutionise the way Islamic finance operates and offer innovative solutions to customers. For example, blockchain or artificial intelligence applications hold enormous potential for simplifying documentation requirements associated with Shariah contracts, thus improving the overall efficiency of business operations. | It should be abundantly clear by now to any financial institution that is serious about VBI, that, the task of building the human and intellectual capital to achieve and sustain value-based business models cannot be left solely to the human resource departments. It requires nothing less than strategic direction and resourcing decisions at the highest levels of the organisation. Changing mindsets Einstein once said “The world as we have created is a process of our thinking. It cannot be changed without changing our thinking”. The world today continues to push the limits of social and environmental thresholds, that are posing increasingly serious threats to humanity. VBI is therefore, much more than a current and passing fad, but a deeper conviction of the critical need 3/4 BIS central bankers' speeches to begin the process of changing mindsets in a lasting way. Financial institutions are a key, but not the only catalysts in this process. Customers and investors need to be supported with relevant information, along with the means and ability to compare such information, in order to better understand the value propositions of Islamic finance. The encouragement of pension and institutional funds with a sustainable investment orientation, particularly in markets where such funds remain largely underdeveloped, would be important to provide a stronger impetus for VBI. Credit rating agencies could also be important contributors to a new landscape, with stronger emphasis on economic, social and environmental sustainability in assessment frameworks and methods. | 1 |
Moreover, risk appetite at domestically focused banks is still high, as is reflected in the interest rate and affordability risk exposures in their mortgage business. Stress tests carried out by the Swiss National Bank suggest that these risks are currently sustainable, thanks to good capitalisation overall. Against the backdrop of persistently low interest rates, this is welcome. In the future, too, a decisive factor for financial system stability will be the banks’ ability to maintain risk exposures at a sustainable level. The current low interest rate environment creates strong incentives to increase interest rate or affordability risk exposures in lending business. For instance, there is a public debate about whether the imputed interest rate used to assess affordability should be reduced. The level of this imputed interest rate is not set by the Page 2/3 Berne, 15 December 2016 Fritz Zurbrügg News conference regulator and varies between banks. However, it does play a key role in affordability assessments. Banks typically use a rate of 5%. Let me go into this topic in further detail. While today’s period of low interest rates could well persist and the rise in interest rates might only be very gradual, mortgages generally influence borrowers’ financial situation and banks’ balance sheets over a period of decades. As such, when assessing affordability and calibrating risk exposure, long-term interest rate developments are also relevant. Despite the current pressure on interest rate margins, banks should therefore continue to take a long-term view in their risk policy. | While undoubtedly exciting, these developments bring in their own unique risks and challenges. I would like to flag a few of them, particularly from the standpoint of financial stability. First, cyber security risk is becoming an increasingly major part of banks’ operational risk landscape. As various hacking episodes illustrate, now fraud can be perpetrated swiftly, remotely, and on a massive scale. Though such occurrences are still uncommon, the impact is substantial, given the high degree of interconnectivity of our systems and markets. Second, fintechs are unbundling parts of the finance value chain, offering financial services directly to customers. Apart from increasing competition, and squeezing banks’ profits, fintechs are moving part of the banking business to shadow banking which remains lightly regulated, if at all. Likewise, tech-enabled peer-to-peer lending and crowdfunding can further 2 expand the scale of shadow banking, and may also exacerbate procyclicality. As this discussion indicates, innovations are by nature a disruptive force, causing a considerable degree of instability. Therefore, regulators face a daunting task of keeping financial systems safe and stable while continuing to ensure the convenience and efficiency that modern technologies offer. To ensure that, we must strengthen our own capacity to identify, monitor, and mitigate the risks from technological innovations. This would require closer cooperation with the banking industry as well as among regulators, both within a country and across the borders. Yet that is not enough; we also need to leave our comfort zone and engage with other stakeholders, primarily the tech firms themselves. | 0 |
So on that point, there is no ambiguity at all. We are also strongly thinking that better coordination for big cross-border institutions is absolutely necessary; even if we could cope with all the issues at stake in the present circumstances, we should not forget that. It's clear that we can improve the present framework and we have to improve it. Some avenues have already been suggested by Ecofin. There has already been a consensus on appropriate Memoranda of Understanding. But going further in this direction also seems important. At this stage, I have to say, I do not have a full-fledged Governing Council position. We are still reflecting, and we will see what will be the position of the Governing Council. But I understand that the European Parliament has carried out several works which have been done within the suggestion that the ECB would play a particular role in this domain for the coordination of surveillance for cross-border institutions – a little bit like in the US. The Federal Reserve has a position which concentrates very much on the big cross-border institutions. And I see also suggestions coming from the private sector, coming from the industry, that we could play a more important role in this domain. | We had to test the capacity to have such teleconferences at very short notice, in order to be sure that we could confront any new situation. We had a large number of teleconferences with the Governing Council. You see there…[points to telephones on table] If the situation were to demand now that we had in one hour and a half a teleconference with the Governing Council, we will then indeed have a teleconference in one hour and a half. The full continent would be there. That’s very impressive, because this would mean all members of the Governing Council from Ljubljana to Helsinki and from Lisbon to Dublin. FT: And as you say, an exceptional crisis, a global crisis. How much worse would it have been without the euro? Trichet: It is very difficult to reconstruct history with new assumptions. But my memory of what we experienced together in the old days is certainly that we would have had a situation which would have been very difficult, because on top of all of these global challenges that are without precedent, we would have had to cope with the intra-European tensions, the BIS Review 159/2008 1 equivalent of the intra-ERM 1 tensions, and that would have been demanding. There is no doubt from that standpoint that the enormous challenges we had at the level of the euro area as a whole were, very fortunately, not the result of intra-euro-area tensions, and that is something which is important. | 1 |
BIS central bankers’ speeches Together these dynamics have raised desired savings and lowered desired investment. With more savings chasing fewer investment opportunities, equilibrium safe returns have fallen sharply towards zero (Chart 8 – see also Annex). Colleagues at the Bank of England estimate that these factors can explain around 400 of the 450 basis points fall in global longterm equilibrium rates since the 1980s. 4 The persistence of many of these trends suggests that the global neutral real rate could settle around 1% over the medium to long term. Chart 8 Secular drivers pushing down on rates Why does that matter? Central banks must set their policy rates with regard to equilibrium interest rates in order to maintain demand growth in line with supply growth and to stabilise inflation. Setting real interest rates substantially above the equilibrium rate would, in time, generate rising unemployment and falling prices. The opposite is true of setting rates substantially below the equilibrium rate. The substantial variance of the equilibrium rate over time means that a 4% policy rate would have been highly stimulative in 1980 but would be highly contractionary today. At the onset of the crisis, as households and firms sought to de-lever, the equilibrium rate fell sharply, calling for reductions of conventional policy rates to unprecedented levels. The necessary easing, however, went well beyond what central banks could deliver with short rates alone. | 8 I remember this period very vividly, because I was fortunate to have the opportunity to discuss and debate the problems of current monetary policy, deflation and liquidity traps in a group of great economists at Princeton University that included Ben Bernanke (before he left to be a Governor at the Federal Reserve Board), Alan Blinder, Paul Krugman, Chris Sims and Michael Woodford. 9 See Svensson (2003a) for a discussion of policy options before and in a liquidity trap. 10 Kohn (2008), after extensive discussion, concludes that there is insufficient evidence that low interest rates would have contributed much to the house-price boom and that higher interest rates would have had much dampening effect on it. Del Negro, Marco, and Christopher Otrok (2007) find small effects of Fed monetary policy on house prices during 2001-2005, whereas Iacoviello, Matteo, and Stefano Neri (2008) find larger effects, although their including the Regulation-Q period in their sample may increase the apparent monetary policy effect on housing. BIS Review 112/2009 5 One obvious conclusion is that price stability is not enough to achieve financial stability (Carney 2009, White 2006). Good flexible inflation targeting by itself does not achieve financial stability, if anyone ever believed that. Specific policies and instruments are needed to ensure financial stability. Another conclusion is that interest-rate policy is not enough to achieve financial stability. | 0 |
Meanwhile, PIs are the adjectives of this new vocabulary, describing the elements of each financial transaction. Together, LEI-nouns and PI-adjectives are key building blocks of a new common financial language. LEIs and PIs have natural counterparts in the world of product supply chains. For LEIs read GLNs – the Global Location Numbers that uniquely define nodes in the global supply chain. GLNs are ultra-flexible. They can denote something as macro as a Wal-Mart warehouse or as micro as a specific shelf in a Wal-Mart store. They provide the co-ordinates of a high-definition map of the global supply chain. For PIs read GTINs (Global Trade Identification Numbers) and the GDSN (Global Data Synchronisation Network). Together, these identifiers define not only products (such as toothpaste) but their attributes (the dimensions of the box the toothpaste is stored in). They too are ultra-flexible. These identifiers define the DNA string for everything from chocolate wafers to collateral swaps. LEIs and PIs are being cast from a similar mould to GLNs and GTINs. International efforts so far have focussed on global LEIs. These are means of capturing, in a common data string, the old banking maxim of “know your counterparty”. In today’s financially interconnected world, knowing your counterparty may be insufficient. So global LEIs aim to barcode counterparty linkages at any order of dimensionality. In November 2010, the OFR issued a policy statement on LEIs.29 This kicked-off an industry process, led by the Securities Industry and Financial Markets Association (SIFMA), aimed at settling on a single, industry-wide entity identification standard. | Our model suggests that the desire to signal ability, 17 We also conducted some probit regressions using lagged real credit growth to predict the probability of banking crisis, following Schularick and Taylor (op.cit.). We replicated their results: lagged real credit growth (up to five or six years) was jointly significant in positively contributing to the probability of there being a subsequent banking crisis, and robust across sub-samples pre and post WWII. The joint significance of fivesix annual lags of real credit growth is consistent with our depiction of the credit cycles as a medium term phenomenon in which sustained booms are statistically significantly related to banking crises. 18 See also Bordo and Haubrich (2010), who show that more severe financial events are associated with more severe real effects in the US 1875–2007. 19 There are, of course, alternative explanations. See, for example, Gomes, Kogan and Zhang (2003), whose model predicts counter cyclical dispersion driven by productivity shocks. Our explanation differs both in that (a) we relate dispersion to lower frequency fluctuations in fundamentals than the business cycle and (b) we stress imperfect information, and in particular the incentive to convey type, which is absent in their model. 16 BIS Review 168/2010 rooted in imperfect information and short horizons, may be a cause of counter-cyclical dispersion in banking returns. 20 Charts 14 and 15 look at the same metrics for UK banks. We have also examined return patterns among the largest global banking and non-financial firms. | 0 |
However, there are clear differences between so-called financial risks (such as credit and market risk) and non-financial risks, which by their nature are more difficult for credit institutions and supervisors to address. Non-financial risk is directly related to malpractice or non-compliance proper to conduct risk; but going beyond this conference’s theme, it also refers to IT events, reputation, governance and cyber security. Unlike credit or market risks, non-financial risk is unconnected to specific financial decisions, is much more difficult to quantify than traditional risks and can only be reduced or mitigated. Despite all these difficulties, or perhaps precisely because of them, non-financial risk has been firmly on regulators’ and supervisors’ radar screen since at least 2004. This followed the approval of Basel II which, as I indicated earlier, included a capital requirement for operational risk. Today, the measurement and management of these risks remains equally complicated, but their importance for banking business has in fact increased. Evidence of this is the map of risks and vulnerabilities annually published by the Single Supervisory Mechanism (SSM). Viewing the snapshot for 2021, we can see how a large portion of the sector’s weaknesses are related to non-financial risk. This is not really anything new. In previous exercises the SSM has also included these components. And logically so. | The outlook for global growth is nevertheless subdued, and has, if anything, deteriorated since the last monetary policy assessment. The most recent US economic data have been somewhat better than expected, but the escalation of the European debt crisis has clouded the economic outlook for the euro area. Bond yields for fiscally weak states have risen markedly. The growing unease among market participants is also reflected in the increased volatility on the financial markets. Mounting borrowing costs and the high level of uncertainty are contributing to a marked worsening of the business climate in the euro area. BIS central bankers’ speeches 1 The SNB has adjusted its growth assumptions for the euro area over the next three years substantially downwards. For the rest of the world, on the other hand, our forecasts remain essentially unchanged. Uncertainty about the future outlook for the global economy remains extremely high. In particular, the European sovereign debt crisis poses grave risks for the international financial system and the real economy. Swiss economic outlook In Switzerland, the pace of growth slowed considerably in the third quarter. According to preliminary estimates, annualised real GDP increased by only 0.9%. In particular, the substantial appreciation of the Swiss franc over the summer is weighing heavily on the Swiss economy. Exports fell sharply. At the same time, domestic final demand stagnated. The economic slowdown was accompanied by a slight decrease in technical capacity utilisation. In manufacturing, it is now around the long-term average. | 0 |
Apart from the reform of the Basel framework for banks (commonly known as Basel III), a basic pillar of the regulatory reform undertaken by the FSB is the new treatment of so- called “systemic institutions”. Or, in other words, the problem posed by institutions which are too big and complex to fail, meaning the authorities have to recapitalise them with public funds when they are in distress. Identifying an institution as “systemic” has consequences. They are subject to larger capital charges and to a stricter supervisory regime aimed at reducing the likelihood of them getting into difficulties. That said, if there is in fact a key differentiating factor to reduce the impact of the potential failure of a systemic institution, it is unquestionably the new resolution framework. This new framework encompasses (a) legislative reforms; (b) the requirement that institutions have resolution plans in place; (c) assessment of the effective resolution ability of the authorities of the respective Crisis Management Groups; and (d) the need for institutions to have the loss-absorbing capacity or funds to ensure that, in a situation of resolution, it can be carried out “from within”, i.e. without need for capital injections by the relevant authorities and without destabilising the financial system as a whole. Allow me to take a moment to talk about loss-absorbing capacity in resolution, or Total LossAbsorbing Capacity (TLAC). On 10 November the FSB published a proposal on the TLAC requirement to be met by systemically important banks, the final design of which is scheduled for the end of 2015. | In mid-2007, serious problems with structured products backed by sub-prime mortgages put an abrupt stop to the boom in securitisation. False incentives, inadequate control mechanisms, shortcomings in the rating system and insufficient personal responsibility on the part of investors were the main criticisms aimed at securitisation practices. What is important now, is to correct these deficiencies, so that the trust of market participants in these products can be restored. It would be wrong to ban the securitisation of mortgages, since these refinancing instruments generate substantial economic benefit and are an indispensable part of our modern financial system. The mortgage securitisation weaknesses revealed in the financial market crisis do not apply in the case of the Swiss mortgage bond. Consequently, it should definitely have the potential to play an even greater role in maturity-matched refinancing of mortgages in Switzerland in the future. In addition, banks can improve their liquidity by holding portfolios of Swiss mortgage bonds themselves. Mortgage bonds could be converted into liquidity quickly and simply, as required, by means of repo transactions – either in the Swiss franc interbank market or at the SNB. BIS Review 60/2008 1 | 0 |
I want to try and illustrate some of that promise of Big Data, as well as the potential pitfalls, by drawing on examples from recent Bank of England research on the economic and financial system. I will conclude with some, more speculative, thoughts on future Big Data research. 1 The Path Less Followed The first thing to say is that Big Data and data analytic techniques are not new. Nonetheless, over recent years they have become one of the most rapidly rising growth areas in academic and commercial circles. Over that period, data has become the new oil; data analytic techniques have become the oil extraction and 2 refining plants of their time; and data companies have become the new oil giants. Yet economics and finance has, to date, been rather reticent about fully embracing this oil-rush. For economics and finance, the use of data analytic techniques has been the path less followed, at least relative to other disciplines. One simple diagnostic on that comes from looking at the very different interpretations put on the expression “data mining” by those inside and outside of economics and finance. For economists, few sins are more heinous than data-mining. It is the last resort of a scoundrel to engage in “regression-hunting” – reporting only those regression results which best fit the hypothesis the researcher 3 first set out to test. It is what puts the “con” into econometrics. | The history of advance in many scientific disciplines has involved a two-way process of learning between theory and empirics, with theory motivating measurement at some times, and measurement motivating 12 theory at others, in a continuous feedback loop. One example of this approach, discussed by Governor Carney at the time the Bank’s own data analytics 13 programme was launched, concerns the dynamics of planetary motion. It was Sir Isaac Newton (a fellow money-printer, as former Master of the Royal Mint) who developed the physical theory of celestial motion. But this theory was built on the empirical shoulders of another scientific giant, Johannes Kepler. When it comes to planetary motion, empirics first led theory, the inductive led the deductive. The same has been true, at times, when understanding the motion of economies and financial markets. Keynesian and Monetarist theory were both built on empirical experience during the Great Depression. The Phillips curve began life as a Kepler-esque empirical regularity, which was only subsequently given a Newtonian theoretical basis. Many puzzles in finance, which have taxed theorists for decades, began as 14 empirical anomalies in asset markets. In each case, empirics led theory, the inductive led the deductive. My lesson from all of this is clear. If that iterative learning process between empirics and theory is to continue to bear fruit in economics, then deductive and inductive approaches may need to share a broadly equal billing. | 1 |
Their overarching objective should be to create a favourable policy environment for growth and wealth creation. But they should also bear in mind equity considerations. In that regard, the IMF, the European Commission and the World Bank provided valuable advice and support to Latvia. I am convinced that we Europeans can and should also step up our technical assistance to countries in need. The Fiscal Compact and the two-pack can provide a good basis for that. To be effective, they should be implemented in a spirit of mutual trust by the Member States and the European Commission. Last but not least, an important lesson from the Baltics relates to the existence of a broad consensus in society. In my view, beyond economic specificities, the key difference between, say, Latvia and Greece lies in the degree of national ownership of the adjustment programme – not only by national policy-makers but also by the population itself. I cannot but emphasise this again: national ownership and public support for the adjustment programme – these are key lessons from the Latvian experience which are of the utmost relevance to the current situation in Greece. In that regard, the communication policy of the government plays a crucial role. | A recent Banco de España’s research paper documents that this programme also had a positive side effect on the access of SMEs to funding given that banks reallocated the credit previously granted to bond issuers to smaller firms that do not have access to financial markets.7 Among the more permanent factors that could have contributed to the recent trend of financial disintermediation is the introduction of the new global banking regulation as a reaction to the financial crisis. The new regulation aims to improve primarily the resilience of banks to shocks and will have a positive impact on overall financial stability. However, as it has been documented in some papers, these regulatory measures might also reduce somewhat the ability of banks to compete in the intermediation of some financial flows8. But going forward, it is still under debate at the global level to what extent elements of the new regulatory framework should be also applicable to some non bank financing channels, as long as they might share with banking activities similar underlying risks to financial stability, such as maturity transformation and high leverage. If finally applicable, this might imply a more level playing field between banking and non bank intermediation. Another permanent factor that is contributing to the development of capital markets in the EU is the launch of new markets such as the alternative stock and fixed-income markets aimed at attracting medium-sized companies, although the size of these markets is still relatively small. | 0 |
What should drive this debate is market participants’ need for information to make sound and secure credit and investment decisions, rather than the concerns some have about what was once considered secret. Transparency promotes confidence, and in light of the increasingly international nature of markets, we must ensure that disclosure in different countries is sufficient and broadly consistent to promote greater financial stability across markets. That will no doubt require additional harmonization of accounting standards so that supervisors, bankers, and other market participants alike can better understand and act appropriately to manage their exposures to markets or institutions abroad. Managing international financial crises Our efforts to promote stronger banks through changes in the capital accord, while crucially important, also need to be seen in their broader context. The capital accord is part of a broader series of initiatives to promote stronger financial systems globally, and more generally to reduce the likelihood of future financial crises. During the latter part of the 1990s the international financial system has endured perhaps its greatest stress in the post-war period, and currently, we again are seeing signs of strain associated with the global slowdown in growth. The experience of recent years has reinforced old lessons and brought home new insights about maintaining financial stability and sustained growth. In particular, a broad consensus has developed on ways of strengthening the institutional framework at the national and international level to create more robust, and thus more crisis-resistant, economies. | William J McDonough: The role of financial stability An address by Mr William J McDonough, President and Chief Executive Officer of the Federal Reserve Bank of New York and Chairman of the Basel Committee on Banking Supervision, at the XIII International Frankfurt Banking Evening, Frankfurt, Germany, 3 May 2001. * * * Mayor Roth, President Duisenberg, and distinguished guests… It is an honor to address the thirteenth International Frankfurt Banking Evening in a setting so rich in history and tradition. I have been told that this stately building is more than just the busy town hall for a major European city, it is also an ever-present witness to culture and history, having hosted banquets and celebrations for almost six hundred years honoring coronations and the visits of Presidents and Prime Ministers. Indeed, it seems highly appropriate that our dinner this evening, which recognizes the importance of banking and finance to this distinguished city’s heritage, is being held here, so close to one of Europe’s most historic marketplaces. Since medieval times, merchants have traveled great distances to participate in Frankfurt’s many fairs and markets. The wealth that those markets produced no doubt assisted in the development of increasingly sophisticated financial institutions and a stock market as early as the 16th century, plus several of the most storied banking houses in history. Those institutions, in turn, contributed to Frankfurt’s ascent to prominence by financing additional trade and commerce here and abroad. | 1 |
14 [18] weight to “green assets”34 or perhaps avoid “brown” assets? If climate change is seen as a threat to financial stability, it may seem unreasonable that central banks themselves should hold bonds, the market pricing of which does not take into account the climate-related risk that the company contributes to. An alternative to the purchase of green bonds could be to refrain from buying bonds from companies that create carbon emissions over a certain level. I do not have an answer to the question of what action the Riksbank will take in this issue if we are faced with a scenario where we need to decide whether to extend and broaden our bond purchases. My message today is that we are participating in the ongoing international work to analyse and draft recommendations on an appropriate way forward. These questions are extremely complex. They require analysis of legal frameworks, of how green and brown assets are defined, any potential side-effects, how effective the measures would be compared with other types of measures, and the effects of policy tightening, i.e. selling assets if the economic cycle turns.35 Central banks are taking the climate issue seriously The Riksbank constantly faces new challenges that affect price stability and financial stability. Climate adaptation is one of many changes currently affecting the Swedish and the global economy. Digitalisation, a greying population, trade conflicts and, most recently, the coronavirus are other important issues that also create new challenges for us and for other central banks. | Most of the selling pressure has come from foreign real-money investors seeking to hedge their portfolios from currency devaluation, Brazilian companies hedging their foreign exchange liabilities, and foreign companies hedging their exposure to local assets. There is no foreign currency shortage in the domestic spot market, which the Central Bank monitors continually. And therefore, at the Central Bank of Brazil, we responded to the change in global financing conditions in a classical fashion, through policy tightening, exchange rate flexibility and using accumulated buffers to reduce volatility, avoiding abrupt changes that potentially threaten financial stability. Accordingly, by mid-August, we announced a program of daily FX interventions through foreign exchange swaps and dollar credit line auctions, totaling in 2013 nearly USD 100 billion equivalent and scheduled through the end of the year, providing currency hedge for the private sector. Here the picture is mixed for emerging markets. Some are certainly feeling more the volatility than others. It depends on fundamentals, resilience, position in the cycle with its associated policy response, credibility of the buffers and willingness to use them timely and with a clear unambiguous communication. In sum, while the prospect of interest rate normalization as economic growth recovers in core economies is a net positive, it does create transition risks. The lesson I take from the last few months is that emerging market policymakers need to show that they are ready and capable of stepping in and providing the public goods of financial and price stability. | 0 |
It is too early to declare the problem solved. The longer term bank funding markets remain relatively illiquid, many securitisation markets remain effectively closed (Chart 4), and general market sentiment remains fragile. Only a part of the total losses on sub-prime have yet been declared and not all the questions about the future of SIVs or the capitalisation of monoline insurers have yet been answered. The sub-prime chapter will not be closed for some months yet and there are still risks of re-ignition of the acute money market conditions we saw last month. But there are grounds for hope that we are reaching the end of the beginning at least and that the key challenge is moving from stabilising the financial markets themselves to dealing with the impact on the wider economy. 3 Structured investment vehicles are funds that issue short-term securities in order to invest in longer-term securities. The latter have typically comprised mainly of mortgage-backed securities and other asset-backed securities. Banks sponsored SIVs are managed by banks. 2 BIS Review 7/2008 Macroeconomic impact Judging that impact is not easy. Banking crises have typically reflected macroeconomic difficulties at home. Banks have lent too much and too cheaply at the top of the cycle and have then suffered from defaults when policy tightened and unemployment and failures increased. | In periods of zero interest rates, such purchases help to counter the risk of deflation. The Swiss economy faces an exceptionally difficult year in 2009. Economic activity is set to pick up again gradually over the course of 2010, thanks to the extremely expansive monetary policy. This is, however, conditional upon an economic recovery by our main trading partners, as well as a return to stability on financial markets. The SNB measures are also aimed at reducing the risk of deflation in Switzerland. Despite the creation of massive amounts of liquidity, the SNB remains committed to ensuring price stability in the future. We will use all means at our disposal to reduce liquidity again in good time, so as to prevent any upsurge of inflation in Switzerland once the crisis has ended. BIS Review 33/2009 1 | 0 |
That said, and while acknowledging the low default levels in the Spanish banking system, it seems clear there is no further room for further reductions in the ratio. Looking ahead, against a background of slowing credit growth, these ratios will conceivably tend to rise, converging at levels that may be considered as more normal in such a setting, while similar to those prevailing among our European partners. Moreover, both past experience and the findings of various studies show that risk tends to emerge with some delay in relation to the time it is assumed. In any event, a rise in the doubtful assets ratio should not in itself be viewed as a cause for alarm; it should rather be understood as another of the various indicators needed to assess institutions’ financial capacity. Although deposits trended more favourably in 2006 than in previous years, institutions had to resort to securities issues, subordinated financing and asset securitisations to meet the growing demand from households and firms for funds. Going to international markets in search of funds may make Spanish institutions more sensitive to external difficulties while exerting additional pressure on their operating margins, although it is true that resort is mainly to the euro area markets. Indeed, the fact that Spain has joined this area of stability has meant that our institutions have been able to finance an expansionary process like the one we have experienced. | Developments in the Swiss housing market have been relatively steady, despite the strong demand pressures discernible in certain regions. At present we do not detect any obvious signs of a speculative bubble that might culminate in a sudden fall in prices. The main explanations for the rise in real estate prices in the past few years have been higher expectations and good financing conditions. Around Lake Geneva the pressures on the limited available space and the fast growth in the residential population have acted as special stimulants. Thus there have been no speculative developments as witnessed at the end of the 1980s. Now that the business cycle has peaked in Switzerland, it is very likely that we will move into a phase of more moderate price increases. BIS Review 73/2008 1 | 0 |
However, I am not saying that changes in the monetary policy strategy, for instance in the way suggested by Giavazzi and Mishkin, will never be considered. But we do need further analysis and debate before this can be considered in Sweden. Monetary policy and house prices Another point where I have some doubts is whether house prices should be taken into account in monetary policy. The specific recommendation given in the evaluation is that the Riksbank should clarify that house prices, like other asset prices, are not independent targets for monetary policy. In my opinion, this is a message that we have tried hard to convey recently, which has also been noted in the evaluation. I and other members of the Executive Board have explained, for instance, in several speeches that if prices in the housing market have had an effect on our interest rate decisions, this has not been a reflection of the inflation target being downgraded in any way or that we now have a special target for house prices. The reason is that we believe this the best way to safeguard what we have been set to safeguard – stability in the real economy and inflation. It is claimed in the evaluation that the Riksbank was initially unclear with regard to the reasons for allowing house prices to affect interest rate decisions and that this meant some people had interpreted it to mean that we had introduced a further target in addition to our inflation target. | Now let me come to the risks that a generalised move towards universal banking could entail, and the ways and means of containing them. The main risk, of course, is the emergence of conflicts of interest. One such potential conflict of interest may arise within any bank, between the bank’s own risk-taking activity and risk-taking for its customers. The classic example of this is the potential conflict of interest between credit-granting and securities underwriting, but this is only one example. The traditional way of avoiding the misuse of such conflict-creating situations is (a) to devise an organisational structure with clearly distinguishable lines of responsibility, (b) to avoid flows of “inside” information between the various activities, (c) to attribute to each activity costs, income and profits, and (d) to entrust external auditors with the surveillance of the systems put in place. The end-result will, of course, never be entirely safe. Moreover, the building of “Chinese walls” inside a multi-polar banking organisation may weaken, or even destroy, the synergy between those poles, i.e. it may undermine the rationale of a multi-polar organisation. I would not want, however, to overstate the internal conflict of interest argument. In the long run, the kind of conflict to which I have referred is unlikely to be very strong. In a longer-term perspective, no bank can afford to favour its own risk-taking activity at the expense of its customers - especially if auditing makes it certain that any misuse of the bank’s powers would come to light. 3. | 0 |
And it could do this without actually solving the problem of system risk externalities that aren’t related to balance sheet size. 8 BIS central bankers’ speeches Evaluating the socially optimal size, scope and organizational structure of financial firms is a complicated business, and so is establishing a viable transition path to a system of much smaller firms. It would be helpful in this regard if advocates of break-up solutions would put a bit more flesh on the bones and develop detailed proposals that address essential questions of how such downsizing or functional separation would be accomplished, and what benefits and costs could be expected. Such an analysis should answer several questions: How would you force divestiture (in good times and bad)? Should firms be split up by activity or reduced pro-rata in size? How much would they have to be shrunk in order for the externalities of failure to no longer create TBTF problems? How would global trading and investment banking services and network-type activities be supported? Should some activities be retained in natural monopoly form, but subject to utility type regulation? How costly would it be to replicate support services or to manage liquidity and capital locally? Are there ways of designing size limits that cannot be arbitraged by banks via off-balance-sheet structures and other forms of financial innovation? So far, advocacy for the break-up path has been strong, but without the detail to assess whether this is indeed superior to the course we are currently following. But, I’m openminded. | Following the bankruptcy of Lehman, contagion spread by many channels, including prime brokerage, OTC derivatives positions, money market mutual funds, tri-party repo and wholesale funding markets. The loss in confidence disrupted the flow of credit throughout the global financial system, generating a global economic downturn and the worst contraction in the United States since the Great Depression. Recognition of the costs generated by the Lehman failure led to extraordinary interventions to prevent further catastrophic failures. These included the rescue of AIG, the FDIC’s TLGP program, the ring-fence of Citigroup’s poorer quality assets, and the TARP injection of capital into the largest U.S. financial institutions. Because this solidified in investors’ minds that TBTF firms – after the Lehman debacle – would be protected, this worsened the TBTF problem. The problem was exacerbated during the crisis by the acquisition of weakened firms by stronger firms, a development that was actively promoted by policymakers in a bid to avoid or temper the consequences of their failure. J.P. Morgan absorbed Bear Stearns and Washington Mutual and its assets grew from $ trillion in 2007 to $ trillion today; Wells Fargo purchased Wachovia and its assets increased from $ billion in 2007 to $ trillion today; and Bank of America purchased Countrywide and Merrill Lynch, increasing its assets from $ trillion in 2007 to $ trillion today. This, of course, made the surviving firms even bigger and more complex. When the smoke had cleared, the situation was clearly untenable. | 1 |
Third, the theoretical macro-economic framework we use here – a New Keynesian model with monopolistic competition – may not be appropriate to analyse firm-level changes in mark-ups. The apparent puzzle between the micro-economic and macro-economic evidence deserves further research, given its potential impact on inflation dynamics and monetary policy. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 Market Power – Evidence and Implications There is a rich micro-economic literature that assesses the impact of market power on pricing and other firm decisions (for example, Tirole (1988)). There has been rather less evidence linking the industrial organisation of firms to developments in the wider macro-economy. That has changed recently, with a number of papers exploring the empirical evolution of (firm, sectoral and national) measures of market power and their implications for the macro-economy (for example, De Loecker and Eeckhout (2017, 2018) and Díez et al (2018)). Perhaps the simplest way of capturing market power is through measures of market concentration, such as Herfindahl-Hirschman Indices (HHI) (Hirschman (1964)) or concentration ratios (the share of sales that accrues to the largest firms within an economy or sector). Evidence suggests that market concentration, measured either through HHIs or concentration ratios, may have increased in the US over recent decades, across a broad range of sectors (for example, Autor et al (2017)). This pattern is not uniform, however, with concentration among European companies showing no such trend (Gutiérrez and Philippon (2018)). The evidence on industry concentration in the UK suggests it occupies a mid-Atlantic position. | Similarly, rating agencies should also be regulated, given the key role they play in correcting information asymmetries on financial markets. Lastly, public authorities should pay greater attention to those financial institutions that are central to the supply of market liquidity and financing. An important starting point is to acknowledge that financial system participants have very different functions, pursue different strategies and operate according to different economic models. This diversity is crucial to the smooth functioning of markets. A one-size-fits-all BIS Review 161/2008 1 regulatory framework applied to all participants would certainly give rise to herd behaviour and, consequently, reinforce the endogeneity of certain risks. A gradation could reasonably be applied to the regulations and requirements imposed on financial system participants. Three levels, ranging from oversight to regulation, naturally come to mind. The first level would take the form of a mandatory registration and the commitment to comply with a code of good practices. The second – more restrictive – level would include disclosure obligations with regard to activities and accounts, in addition to the mandatory registration and the compliance with good practices. Hedge funds and, more generally, institutions pursuing strategies essentially based on leverage or risk-taking could have to meet such requirements. Finally, the last level would involve more restrictive regulations with regard to activities and risk-taking, as well as closer oversight. In many respects, this gradation system is not only relevant with regard to prudential requirements. It should also apply to accounting rules for example. | 0 |
Using the atrium as a large communicative zone within the two tower buildings was also welcomed. The Governing Council noted that all requirements for the energy concept had basically been fulfilled and that the design complied with the relevant regulations in the fields of building and environmental law. 2 BIS Review 5/2005 Next steps So where do we go from here? The Governing Council decided that the next step would be an “optimisation” phase in which the selected architect would again review his design on the basis of further guidance from the ECB. We will reassess the ECB’s functional and spatial requirements and, on that basis, seek to further optimise the design with the aim of reducing costs. With regard to the cost, the estimates available at present, taking into account the optimisation potential, suggest that the construction costs will be about € million. The total investment costs, however, will be higher, since they include additional elements, such as the cost of purchasing the Grossmarkthalle site, planning fees and other infrastructural costs. Some of these additional cost items are related to the construction costs, while others depend on further deliberation and specification. More precise information on the cost aspects of the project will be provided at the end of the detailed planning phase. I should like to emphasise that we will continue to work closely with the City of Frankfurt authorities in the coming phases of the project, especially in view of the urban development plan that will be adopted by Frankfurt’s City Council. | Similarly, the insurance and risk management markets will have to be developed further to meet corporate and individual needs. There is already a momentum, with capital markets in China, India and ASEAN economies developing well. In bigger economies, micro-finance, mobile finance and rural finance are also being developed. Cross-border financial activities within Asia are also showing signs of increase. These are positive changes, as the development of a deep and integrated financial system provides a vital support for structural adjustments in the region. Economic and financial linkages between France and Singapore Let me now say a few words on how Singapore is responding to these challenges, and how the French business and financial community can collaborate with those in Singapore to promote growth in Asia. The Singapore government has set up an Economic Strategies Committee to identify policy changes to strengthen Singapore’s value as a vibrant global economic node in the heart of Asia. Singapore’s connectivity enables it to facilitate the flow of goods, services, capital and ideas. The value of Singapore as a stable, trusted hub that respects the rule of law, and its value as a consistent regulatory regime are our core strengths. But these will need to be enhanced with new capabilities in knowledge creation and innovation, as well as the development of deeper talent pool, in order for the business community to seize new opportunities. The connectivity and ease of doing business is well acknowledged by global businesses. Today, over 26,000 international companies use Singapore as a base for their operations. | 0 |
Chart 3: Occupational representation Per cent 100 80 60 40 20 0 1994 2019 White male 1994 2019 White female 1994 2019 Ethnic minority male 1994 2019 Ethnic minority female Managers, professional and associates Administrative Skilled trade Personal, sales and customer Process and plant Elementary Source: ONS Labour Force Survey and Bank of England calculations. 7 All speeches are available online at www.bankofengland.co.uk/speeches 7 Chart 4 shows the composition of the UK labour market by sector. The vast majority of men across both ethnic sub-samples work in the ‘industry’ sector (including manufacturing, utilities and mining) and trade and transport sectors. The latter is particularly important for ethnic minority males, where close to 40% of this sub-group works. On the other hand, the public sector is dominated by females of both ethnicity backgrounds. The share of people working in professional services and finance is similar across the board. Chart 4: Sectoral representation Per cent 100 80 60 40 20 0 1994 2019 1994 White male Industry 2019 White female Public 1994 2019 Ethnic minority male Trade and transport Professional 1994 2019 Ethnic minority female Finance Other Source: ONS Labour Force Survey and Bank of England calculations. (b) Pay Trends Table 1 shows summary statistics of the distribution of earnings across gender and ethnicity. | A common challenge our emerging economies are facing is the need to speed up convergence towards the development level of mature economies. In order to achieve this, the responsible policymaker should be concerned with steady progress and not with delivering bouts of accelerated growth, which may turn out to be reversible. This brings us to the need to address bottlenecks to potential growth – even though in Central and Eastern Europe, for instance, growth is now much stronger than in the euro area, most countries have still work to do in order to ensure that potential growth matches the catching-up needs. At least in the non-euro EU members in Eastern Europe, bottlenecks to sustainable growth usually stem from structural impediments to labour supply (high emigration, low participation rate, decline in working age population, skill mismatch), inefficiencies in public administration, quality of institutions, in general, and in some cases, inadequate infrastructure. 1/3 BIS central bankers' speeches While inflation has reemerged in Central, Eastern and South-Eastern European countries, in most cases it remains tepid (broadly, around 2 percent). Nevertheless, it has spiked in such cases as Romania and Turkey, where it currently stands at 5 percent and 11 percent respectively. Part of this reemergence is related to the global cycle, as it comes from international commodity prices, with idiosyncratic supply-side factors and domestic demand pressures accounting for the rest of the explanation. | 0 |
To illustrate what we are doing today we can use a simple equation that describes the banks' lending rate – that is the rate charged to households and companies – as the repo rate plus a premium. Image 4: Monetary policy and financial stability are interlinked itlending = it + m(ct ,...) The size of this premium depends on the bank's demand for compensation for, for example, credit risks, any differences in periods to maturity and the need to retain sufficient capital to cover the loans. What we are doing now is partly to control the first term, that is the policy rate, and partly to attempt to influence the second term, that is the risk premiums that are today reflected in large credit spreads as a result of the financial turmoil. To do this we must use tools from both of the toolboxes. It is against this background that we can view the monetary policy measures of a more or less unconventional nature that are now being taken in various parts of the world. I will now try to discuss this in a little more detail. Unconventional monetary policy As I mentioned earlier, the central banks have reduced policy rates quickly and dramatically in order to mitigate the effects of the financial crisis. At the end of last year, the US central bank cut its policy rate target to an interval of 0-0.25 per cent. | Then comes a layer that describes the financial landscape. This consists of financial players, institutions, markets and 1 Joseph Mallord William Turner (1775–1851), British artist most famous for his Romantic landscape paintings, whose style can be said to have paved the way for Impressionism. BIS Review 41/2009 1 instruments. Over this there is yet another layer that describes the regulatory landscape, that is the special legislation, regulations and supervisory arrangements that cover the activities of financial companies. Somewhere in the middle of the picture, symbolised by the steam boat that is trying to navigate the right course through the snow storm, we have the Riksbank which is fighting to both meet the inflation target and safeguard the stability of the payment system. For the Riksbank, as for steam boats at sea, the room for manoeuvre is determined by the conditions in the surrounding landscape. We have to understand how the weather, visibility and other prevailing factors affect our chances of steering the boat in the right direction. This becomes particularly important when conditions are difficult, when there is a snow storm raging at sea. This – in a nutshell – is what my speech today will be about. First, however, it may be interesting to look at how we sailed into the storm. From fair weather to the perfect storm – what went wrong? The metaphor of the different layers in Turner's painting can be used to describe the causes of the current crisis. | 1 |
Risk analysis and buffer-raising will also be a challenge for Eesti Pank in the forthcoming periods. The central bank just finished its first year as a member of the euro area, with one of the lowest equity to monetary policy assets ratios among euro area central banks. We must bear in mind that the revenues and expenditures of monetary policy operations are shared within the Eurosystem in proportion to the central bank’s participation in the total capital. The Supervisory Board of Eesti Pank thus resolved to raise the central bank’s capital adequacy ratio to the average level of euro area central banks in the long term. In order to bring the ratio into line with Eesti Pank’s participation in the Eurosystem, the capital adequacy ratio must be raised. This means that the central bank’s equity must be raised from 0.37 billion euros to approximately 1.3 billion euros. Eesti Pank’s equity currently stands at 0.07% of the Eurosystem’s total equity, while Eesti Pank’s participation in the Eurosystem stands at 0.26%. [QUO VADIS, EURO AREA?] 1. It is not only the central banks that can contribute to a successful exit from the crisis – the governments of member states must, as soon as possible, implement the measures taken and agreements made by the European Council and the euro area heads of state and government. Closer cooperation in the field of economic policy, along with clear-cut, functional rules, serve the interests of all members. 2. | 12 08 09 Assets 10 Net -12.000 | 0 |
In this current environment, the emerging economies are challenged by both the weakening global growth and the spillovers arising from the policy actions in the major advanced economies. While continuing to register reasonable economic growth, the momentum of the growth has moderated in most emerging economies, affected by slowing external demand and uncertainty in the financial markets. Nevertheless, current ongoing shifts occurring in the emerging economies have contributed to sustaining our economies. It is the growing importance of domestic demand in most of the emerging economies in Asia that is creating a 2 BIS central bankers’ speeches huge cumulative domestic market, and this is resulting in greater regional integration with an increase in intra-regional trade. Greater regional and inter-regional integration of the emerging economies through the proliferation of interlocking networks of trade, investment and finance, has contributed to provide mutually reinforcing support to economic activity in the emerging economies. In Malaysia, the decline in external demand while affecting overall growth, has been partially offset by stronger domestic demand, following the robust resumption of private consumption and investment activities, and the diversification of exports to the regional economies. In addition, the wide-ranging reforms implemented since the Asian financial crisis have resulted in strengthened financial intermediaries and a more developed financial system. This has allowed for the economy to better intermediate the volatile cross-border flows without disruption to the financial system. | Zeti Akhtar Aziz: Big shift – traversing the complexities of a new world Luncheon address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Khazanah Megatrends Forum 2012: “Big shift – traversing the complexities of a new world”, Kuala Lumpur, 2 October 2012. * * * The global economy has now entered into a period of slower economic growth despite the significant and wide ranging pro-growth policies that have been implemented across the world. Why then has the world not been able to achieve a sustained long-lasting recovery? What has been holding back this prospect? In addition, the rapid and significant changes in the global environment have also brought with them new demands and new challenges. Our understanding of the factors that are containing the global growth prospects and the consequence of the new environment will better position us to face the fundamentally new landscape and to manage its consequent challenges. Let me first thank Khazanah for the invitation to speak at this Khazanah Megatrends Forum. The topic on the Big Shift that is being experienced in the world today is indeed highly relevant. While the international and national attention is currently focused on the immediate challenges of the global environment, equally important, however, is to recognise the long-term changes that will reshape our future. The first part of my remarks today will focus on the immediate challenges of the global economy, taking into account the fundamental factors that are likely to affect the growth outlook. | 1 |
Norman T L Chan: The risk of asset-price bubbles Speech by Mr Norman TL Chan, Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong Economic Summit, Hong Kong, 14 December 2009. * * * Introduction 1. I am very honoured to have this opportunity to speak to you today at the Hong Kong Economic Summit. Potential risks of an asset bubble 2. Recently, many people in Hong Kong have become concerned about the emergence of an asset-price bubble. As we all know, interest rates are now very low due to the extremely loose monetary policies around the world. Attracted by a promising outlook for economic recovery, large amounts of funds have flowed into Asia, including Hong Kong. From October last year up to now, more than $ billion have flowed into the Hong Kong dollar. This will certainly exert an upward pressure on local asset markets. I am sure you are all aware that the Hong Kong asset markets have become very active again. In particular, the prices of residential properties rose for 10 consecutive months from the beginning of this year, and prices and turnover have returned to levels we saw before the financial crisis. Many people are asking whether there is already a bubble. 3. Bull markets normally occur in times of rapid economic growth, abundant liquidity and strong investment sentiment. However, as to how far a bull market can develop before it becomes a bubble, there is no easy answer. | As the fundamental role of the financial system is financial intermediation, or the channelling of funds from those who have a surplus of it to those in need of it, the comparison should usefully be made in respect of the three channels of financial intermediation, namely, that of banking, equity and debt. The total assets of the banking system of Hong Kong are equivalent to 21% of those of the Mainland. You may think that this is not high; but if you put this along with similar comparisons for population, which is only 0.5%, or gross domestic product, which is 8%, you can appreciate the significance of the banking system of Hong Kong in the context of the country as a whole. What is more, the quality of assets in the banking system of Hong Kong is superior and the efficiency in financial intermediation, in mobilising savings in the form of deposits into the hands of borrowers who are credit-worthy, is also a lot higher. Capitalisation of the equity market of Hong Kong is 2.6 times that of the Mainland. The amount of funds raised in the past ten years in Hong Kong, through Initial Public Offerings (IPO) and other fundraising activities, is nine times that on the Mainland. The turnover value in 2005 was about 1.5 times that on the Mainland, and Hong Kong also has an active derivatives market, which traded 25 million contracts in stock futures and options last year. | 0 |
That is the purpose of my comments today: to diagnose some of market failures or frictions in stress-testing practices highlighted by the crisis; and, more speculatively, to suggest some practical ways in which stress-testing might deliver answers which are “roughly right”. The Golden Decade To understand the recent failures in risk management, some history is instructive. Prior to the current financial crisis, the previous two low tide marks for the financial system and risk management were the stock market crash of October 1987 and the failure of the hedge fund LTCM in September 1998. Both prompted a sea-change in risk management practices and technologies. BIS Review 18/2009 1 The October 1987 crash in many respects marked the birth of Value at Risk (VaR) as a key risk management tool in financial firms. By 1989, Dennis Weatherstone, JP Morgan’s thenchairman, called for a “4:15 Report”, which combined all of the firm’s data on market risk in one place. That report should contain information sufficient to answer the question “How much could JPM lose if tomorrow turns out to be a relatively bad day?” With this as the top-down edict, it is perhaps unsurprising that JP Morgan were an earlydeveloper and early-adopter of VaR. By 1996, they had published their methodology and the detail of the parameterisation of their risk models. In 1998 RiskMetrics Group, an independent for-profit business, spun off the JP Morgan methodology and began offering consultancy services to the risk management community. | Suffice to say, time is very unlikely to tell whether Mr Viniar’s empirical observation proves correct. Fortunately, there is a simpler explanation – the model was wrong. Of course, all models are wrong. The only model that is not wrong is reality and reality is not, by definition, a model. But risk management models have during this crisis proved themselves wrong in a more fundamental sense. They failed Keynes’ test – that it is better to be roughly right than precisely wrong. With hindsight, these models were both very precise and very wrong. For that reason, 2008 might well be remembered as the year stress-testing failed. Failed those institutions who invested in it in the hope it would transform their management of risk. Failed the authorities who had relied – perhaps over-relied – on the signal it provided about financial firms’ risk management capabilities. And, perhaps most important of all, failed the financial system as a whole by contributing, first, to the decade of credit boom and, latterly, the credit bust. That is a stark conclusion. But it is a conclusion which is hard to escape. When tested against real stress, large parts of the financial system seized-up and a number of financial institutions failed. Against that backdrop, now is as good a time as any for candour about what went wrong. | 1 |
At the same time, because of our large petroleum revenues, the Norwegian authorities do not face the same budget constraints on their fiscal policy as other countries faced when they introduced inflation targets. Several of the OECD countries have substantial budget surpluses now, however. Finland expects a budget surplus of 5.3 3 per cent of GDP this year. New Zealand and Ireland have introduced fund schemes where they invest their budget surpluses in anticipation of higher pension disbursements later in this century. The new Regulation on Monetary Policy was adopted on 29 March 2001. Section 1: Monetary policy shall be aimed at stability in the Norwegian krone’s national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment. Norges Bank is responsible for the implementation of monetary policy. Norges Bank's implementation of monetary policy shall, in accordance with the 1 From 1931-1933 Sweden had a regime defined as "and with all existing means to preserve the domestic purchasing power of the Swedish krona" (my translation). This must be interpreted as an inflation target. 2 A. Schaechter, M. R. Stone og M. Zelmer: "Adopting Inflastion Targeting: Practical Issues for Emerging Market Countries". IMF Occasional Paper 202. Washington 2000. 3 OECD Economic Outlook no. 69 - table "General government financial balances" BIS Review51/2001 1 first paragraph, be oriented towards low and stable inflation. | The operational target of monetary policy shall be annual consumer price inflation of approximately 2½ per cent over time. In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances shall not be taken into account. Storting Report no. 29 of 2001, "Guidelines for economic policy" states: "Consumer price inflation is expected to remain within an interval of +/-1 percentage point around the target." The inflation target of 2½ per cent over time is slightly higher than the targets in Sweden, Canada and the euro area, but corresponds to targets in the United Kingdom and Australia. In the US, consumer price inflation has been somewhat higher the last ten years. The target is approximately in line with the average inflation rate in Norway in the 1990s. In our view, with its change in monetary policy, the Government has recognised low inflation as a benefit in itself. History has shown that high inflation does not result in either sustained economic growth or lower unemployment rates. A track record of low inflation since 1990 has provided Norges Bank with a good basis for implementing monetary policy even though, as I mentioned, the inflation target was introduced during an upturn. Higher interest rates curb demand for goods and services and reduce inflation. Lower interest rates have the opposite effect. If evidence suggests that inflation will be higher than 2½ per cent with unchanged interest rates, the interest rate will be increased. | 1 |
In the 18 months since 1 January 1999 when the euro was introduced the US current account deficit was something over $ compared with net long-term capital inflows of nearly $ Meanwhile the Eurozone was in small current account surplus but saw net direct investment and portfolio outflows of some $ The conventional “fundamentals” - which one would still expect to reassert themselves in due course - have been overridden for the time being by these massive international capital flows. To the extent that the capital flows have indeed been driven by an improvement in prospective rates of return in the US associated with the productivity “shock” - and I freely acknowledge that this explanation may be oversimplistic - one would expect that at some point it would be discounted through a change in relative asset values, including the change in the exchange rate. The problem is that we simply do not know how close we are to that point - or indeed whether we have already passed it. Putting that question to the market was, for me, the real point of the recent G7 intervention. We all need to understand much more about the nature of the capital flows and in particular about what motivates the market participants who initiate them. My immediate point, however, is that on the basis of what we do know it seems unlikely that the euro’s weakness in the foreign exchange market is pushed by any obvious macro-economic failure in the Eurozone. | Moreover, the investment environment in Saudi Arabia has improved, and the Kingdom has obtained the eighth rank at the global level for attracting foreign direct investment (FDI), according to the UNCTAD’s report. On the other hand, Saudi Arabia has recently been lauded by FATFS’s report issued at the end of last June for its commitment to the nine Special Recommendations related to Terrorism Financing combined with the forty Recommendations on Anti-money laundering. As a result, Saudi Arabia occupies the first rank at the Arab level, and one of the G-20’s top 2 BIS Review 128/2010 ten positions. The tribute paid to the Kingdom is as an appreciation by the international community of the Saudi efforts in combating the crimes of money laundering and financing of terrorism, and it highlights the soundness of the Saudi stance stemming from its adherence to the tolerant Shari’a, implementation of the resolutions of the UN and Security Counsel and implementation of the best practices in this field. All these achievements have been accomplished by the grace of Allah Almighty, and then thanks to Your diligence and guidance, may Allah safeguard You. The Kingdom of Saudi Arabia is one of the first countries giving priority to combating the phenomenon of money laundering and financing of terrorism. In addition, it has been in the lead in combating this phenomenon due to its security, social and economic repercussions. | 0 |
The executive branches have taken the decision to organise a line of defense against the “systemic solvency risk” that was threatening national, continental and global finance. We had asked ourselves for such decisions to be taken. But I certainly will not underestimate the difficulty of the tasks of governments to put taxpayers’ money and risk at stake for the guarantees and the recapitalisation that were necessary. In the euro area, in the UK, in the US, it called for courageous decisions. FT: Are there limits to the effectiveness of monetary policy because of the situation we're in, and if so, should the reaction of central bankers be to do more or less in such circumstances? And then what is the role that should be played by exceptional measures that you have at your disposal, the quantitative easing debate essentially? Trichet: First of all, we made the point clearly that there was a clear separation between monetary policy stance, which was designed to deliver price stability in the medium term in BIS Review 159/2008 5 line with our definition, and our interventions in the money market aiming at permitting a smooth functioning of this market at the level of the short term interest rates that we had decided. And we have continued to look at inflation expectations with extreme care during the entire period. | But to the extent that we are only ten years old, this test is of course particularly important for a young institution. FT: What was the most difficult moment for you at the ECB in terms of crisis management? Trichet: I would certainly say that these were the first hours at the outset of the financial turmoil. The Executive Board had to make a diagnosis of the situation in a very short time span, assess what kind of problem we had to deal with, and take decisions almost instantaneously. FT: …this is July/August 2007, yes…. Trichet: This was on 9 August 2007. We had a very important decision to take, which was in a way the first important decision that central banks had to take in order to confront these exceptional circumstances. I remember I was keen on thinking, “This is a grave situation that calls for appropriate responses”. And then we had a great number of important decisions to take in the subsequent months, which were largely “firsts”, in terms of supplying liquidity at fixed rates and even in terms of expanding our collateral framework which, from the outset, was already a very comprehensive collateral framework. It has been a big challenge. One of our challenges is that we had to take decisions very rapidly at the level of the Governing Council. And we again proved that, thanks to teleconferencing, in one hour and a half or two hours we could make a full judgment and take a decision. | 1 |
The measures implemented by central banks and governments have had a stabilising effect on financial markets. Credit and money market premiums have decreased and activity has picked up. Daily fluctuations have become less pronounced. With the improvement in financial markets over the past six months and the increase in the credit supply, global trade is now picking up slightly, albeit only gradually and from a low level. Manufacturing output has recently risen in the US, Japan and many emerging economies, while it continues to fall – albeit at a slower pace – in many euro area countries. Manufacturing output in Japan and the US is still at a very low level. Despite the pickup in growth, capacity utilisation in advanced economies will remain very low for the next two-three years. 2 BIS Review 139/2009 Uncertainty in equity markets has eased and risk premiums are lower, reflected in a rise in leading US stock indices of more than 50 per cent since equity markets bottomed out at the beginning of March 2009. Oslo Børs has risen by about 70 per cent since the beginning of March. The price of oil has risen somewhat since the June Report, and has doubled since the trough in December 2008. Metals prices have also risen. The increase in oil prices reflects low growth in oil production, more positive expectations as to the world economy and a weaker US dollar. | Petroleum investment has increased considerably in recent years, but is projected to fall somewhat towards the end of 2009. According to the petroleum investment intentions survey from Statistics Norway, petroleum investment will remain high in 2010. Exploration and production spending appear to be increasing markedly, but the increase will to some extent be offset by reduced spending on goods and services for field development and fields in operation. The change in investment composition will contribute to reducing demand for goods and services from the Norwegian supplier industry. Several investment projects are planned on the Norwegian continental shelf for the coming years. There are indications that some of the planned investments will require an oil price of around USD 70 per barrel to be profitable. Our projections are based on a rise in the oil price in line with oil futures prices. These prices suggest that the oil price in 2010 and 2011 will be USD 5-10 above the current level. Petroleum investment is therefore projected to be high in the period 2010-2012. Should the global growth outlook deteriorate again, the price of oil may fall markedly. This might lead to a decline in oil investment and also have an adverse impact on the wider Norwegian economy. On the other hand, a fall in oil prices normally results in a depreciation of the krone. Should the krone depreciate for an extended period, inflation may become too high. | 1 |
We also have a complementary interest in enabling innovation and encouraging competition – including in the fast-moving payments landscape. To deliver against these objectives, we must embrace diversity in the broadest possible sense. As the Bank of England Governor Mark Carney recently stated, ‘a public institution should reflect the public it serves.’2 If we want to respond to the needs of the public, we need to understand what matters to them – and what better way of doing that than having a diverse range of staff reflecting the population? Diverse teams can reduce group-think and excessively optimistic views, and ultimately reduce the likelihood of poor decisions. And research has shown that companies with more diverse leadership teams tend to outperform their peers in terms of profitability and that diversity in companies is positively correlated with innovation. 3 4 Payments is an area which is responding well to an increasingly vocal and diverse range of preferences and demands across the world. Different people want - and may need - different ways to pay. They want genuine choice in how, when and where they make payments: they want a new finance.5 Back in the 17th century, the Amsterdam stock exchange would have been relying on exchanging coins and printed stocks and bonds. The world of payments has grown significantly – banknotes, cheques, credit/debit cards, and now a plethora of mobile payments, e-wallets and even the ability to pay using a watch. | Our network of Bank of England Agents is extremely important in this area. Around the country we have twelve Agencies, in general staffed by long-serving Bank of England people, constantly collecting information at the grass-roots level from their many business contacts. And the information, which they provide direct to the MPC on a monthly basis, can often prove helpful: either in helping us unravel inconsistencies in the data; or, as was the case in the Summer and Autumn of 1998, alerting us to problems in the economy before they show up in the official data. Notwithstanding the help of the Agents, problems with interpretation of the data abound. Some of these will be discussed in our Quarterly Inflation Report, due to be published on Thursday this week. I hope you will have the opportunity to read it. Financial stability Perhaps I could now turn from monetary policy matters to financial stability; and to the second part of my job as the Deputy Governor responsible for this part of the Bank’s work. Go back a little over three years and the Bank had a large department with four hundred and fifty staff supervising banks. Hard on the heels of the decision to grant the Bank independence, the Government decided in May 1997 to establish the Financial Services Authority bringing together existing UK 3 BIS Review 102/2000 financial regulators and supervisors under one roof. | 0 |
For many larger institutions, a release of loan loss reserves has been important in supporting earnings. Credit availability has improved somewhat as very tight standards start to loosen (Chart 9). As a result, some measures of bank credit are beginning to expand again (Chart 10). Second, monetary policy and fiscal policy have provided support to the recovery. On the monetary policy side, the unusually low level of short-term interest rates and the Federal Reserve’s large-scale asset purchase programs (LSAPs) have fostered a sharp improvement in financial market conditions. Since August 2010, for example, when market participants began to anticipate that the Federal Reserve would initiate another LSAP, U.S. equity prices have risen sharply and credit spreads have narrowed (Chart 11 and Chart 12). Long-term interest rates have moved higher after initially declining, but this does not appear troublesome as it primarily reflects the brightening economic outlook. On the fiscal side, the economy has been supported by the shift in policy toward near-term accommodation. In particular, the temporary reduction in payroll taxes is providing substantial support to real disposable income and consumption. This could have a particularly strong impact on growth during the first part of the year. Third, growth abroad – especially among emerging market economies – has been strong and this has led to an increase in the demand for U.S.-made goods and services. Over the four quarters of 2010 real exports rose 9.2 percent (Chart 13). After a disappointing performance earlier in the year, U.S. net exports surged in the fourth quarter (Chart 14). | In this regard, the emergence of Islamic finance into the mainstream of the financial system is an opportunity for the Nusantara financial intermediaries, in particular, for Malaysia and Indonesia and other neighbouring countries, to open new frontiers and in so doing strengthen further the economic and financial linkages. The building of a Nusantara financial platform would not only facilitate and mobilise the pool of investable funds from the respective economies but also allow for the more efficient allocation of the funds into the productive investments in other parts of the region. This would not only contribute towards lowering the cost of funds but it would also allow for greater diversifications of risks. More recently there has been growing interest in cross border participation in investment activities in our respective economies. Malaysia's capital inflows into Indonesia has increased by three-fold totalling USD2.2 billion in 2006 compared to the previous year. It is estimated that Indonesia requires BIS Review 73/2007 1 approximately an annual investment of USD22 billion for the next several years for the development of its infrastructure, with a large part of the funding to be provided by the private sector. In the same way, the Ninth Malaysia Plan for the period of 2006 to 2010 has a financing requirement of RM107.6 billion. The development of our regional financial intermediaries and markets will facilitate the mobilisation of resources towards financing these potential activities and thus contribute to sustaining development in the Nusantara economies. | 0 |
Christian Noyer: Banking in the euro area Speech by Mr Christian Noyer, Vice-President of the European Central Bank, at the 30th Anniversary of the Association of Foreign Banks' Representatives, Frankfurt, 8 November 2001. * * * I am very grateful for the invitation to speak to you on the occasion of the 30th anniversary of the Association of "Foreign Banks' Representatives in Germany". Your Association has 117 members from a large number of countries. Several of the member institutions are counted among the 30 major European banks, or among banks from elsewhere with important operations in Europe. For many banks represented by your Association, the topic of my speech "banking in the euro area" is part of day-to-day business. It is also day-to-day business for the European Central Bank (ECB) and the Eurosystem as a whole, as we conduct our monetary policy operations and run the TARGET large-value payment system. The further integration of the European banking system and financial markets is in the interests of both banks and the central bank. For banks, it means the liquidity benefits of deeper and wider markets and lower costs when operating in several countries. From the central bank perspective, it enhances the efficient and consistent implementation of the single monetary policy. We already enjoy the benefits of a common euro area banking system in important respects. | Finally, I wish you a productive and fruitful time here at the HKMA Fintech Day, and trust that you will benefit from today’s rich plenary and parallel sessions. 21. Thank you very much. 4/4 BIS central bankers' speeches | 0 |
There was a wave of mergers and acquisitions, as institutions sought to diversify risks, reduce costs, and exploit synergies. Financial centres faced similar pressures. As technology eroded time-zone advantages, institutions consolidated their activities within fewer financial centres. We believed that consolidation was imminent in our time zone. If there were to be only a few financial centres left in Asia, we wanted to make sure that Singapore was one of them. So we launched a fundamental rethink of our approach to supervising and developing the financial sector. Creating a more conducive regulatory environment Our new approach could be broadly summarised in four main thrusts. First, we sought to create a more conducive regulatory environment to foster dynamism and innovation, while maintaining the safety and soundness of our financial sector. MAS shifted its emphasis from regulation to risk-focused supervision, so that we could deal with stronger and weaker institutions differently. We wanted to rely more on disclosure and market discipline, with investors judging and taking risks for themselves. We also pushed for higher standards of corporate governance in the financial sector, to cultivate a stronger risk management culture, better internal controls, and greater transparency. Liberalising the financial sector Our second thrust was to liberalise the financial sector to promote competition and enterprise. We deregulated the stockbroking industry, and lowered protective barriers in banking and insurance. This would provide international institutions greater incentive to root more activities in Singapore, while spurring local institutions to upgrade their capabilities and sharpen their competitive edge. | We are happy that during the recent years, our financial sector has also improved in every respect. This is clearly evident when we look around the financial institutions, financial markets and the developments in financial infrastructure. Within the last five years, assets of the licensed banks in the country doubled. Altogether, there has been an addition of over 400 branches of these banks. Other financial institutions including Registered Finance Companies, Leasing Companies, Insurance Companies, Merchant banks, Venture capital firms and Unit Trusts have also grown in sympathy with the banking sector. At the same time, we have also progressed rapidly in the financial infrastructure developments as well. This is particularly visible with the leap forward in the Payment System development as evidenced by the implementation of a Real Time Gross Settlement System in 2003. Now, 84 per cent of the value of country’s payments are settled through the RTGS system. In 2006, we completed the Cheque Image Truncation project, reducing the maximum cheque clearance time to 2 working days, which is another significant achievement. The Colombo Stocks Exchange remains one of the most technically advanced stock exchanges of the world. Soon, we will also have a SWIFT Service Bureau in Sri Lanka and that will help to reduce cost of financial transactions. Together with these infrastructure developments, our banking system has expanded their horizons by introducing several innovative infrastructure facilities and complex financial products as well. | 0 |
The Governor also spoke about the trade-off as part of his speech the “Grand Unifying Theory (and practice) of Macroprudential Policy” available at https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/the-grand-unifyingtheory-and-practice-of-macroprudential-policy-speech-by-markcarney.pdf?la=en&hash=53A55C800C6B04573DC04FD2F9579079A3503FED 7 See https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultationpaper/2020/cp220.pdf?la=en&hash=133449CBB3D0FDD2B03AC6242C99C3F36A150258 8 The second core principle states that ‘[t]he supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources’ (https://www.bis.org/basel_framework/chapter/BCP/01.htm?inforce=20190101). 6 I would like to thank Matthew Willison, Hugh Burns, Nicolo Fraccaroli and David Swallow for their assistance in preparing these remarks 7 Regulatory independence and financial stability in practice Does the evidence support the theory that an independent regulatory body with a clear mandate and strong accountability produces better outcomes? At the Bank, Fraccaroli, Sowerbutts and Whitworth (2019) have been researching whether the institutional structure for prudential regulation affects financial stability in practice. They have done this by analysing whether there is a statistically significant association between the independence of the prudential regulator and/or supervisor and financial stability outcomes. The authors have constructed for different countries and over time an index of regulatory-supervisory independence. The index combines three aspects of independence: institutional; regulatory; and budgetary. The definitions of these aspects can be found in Table 2. Table 2: Definitions of aspects of independence captured in the Regulatory-Supervisory Independence index Aspect of independence Definition Institutional This captures the involvement of political bodies in the appointment and dismissal of the head of the regulatory agency, as well as length of their term. | Furthermore, the Chancellor writes regular letters to both the FPC and the Prudential Regulation Committee, setting out the Government’s economic policy and making recommendations on how they should discharge their functions. Importantly, the PRA takes into account the FPC’s views on financial stability when setting microprudential policy. To give an example of how this works in practice – in 2015 the FPC set out the optimal overall level of UK capital requirements, balancing financial stability against economic growth. The PRC then took into account this judgement when setting individual bank capital requirements. And at the end of last year, the Financial Policy Committee (FPC) raised the structural level of the UK countercyclical capital buffer (CCyB) rate - that is the rate it expects to set in a standard risk environment - from in the region of 1% to in the region of 2%. Then, last month, the PRA consulted on proposals to reduce variable microprudential minimum requirements (so-called variable Pillar 2A capital requirements) to take account of the additional resilience associated with higher macroprudential buffers in a standard risk environment.7 In addition to setting out a clear mandate in primary legislation, there are also a number of accountability mechanisms in place for Parliament to scrutinise the work of the FPC and PRA against that mandate. For example, PRA senior representatives are expected to appear before the Treasury Select Committee (and other Parliamentary Committees), when requested. And the PRA Annual Report is laid before Parliament. | 1 |
Today I will use these elements to talk about the current supervisory stress testing regime and assess whether it continues to address macroprudential objectives. I should note that my focus today is on the broad structure of supervisory stress testing and not on any specific set of stress test results. As you know, the 2018 DFAST results were released yesterday and the corresponding CCAR results will be released next week. I am not going to discuss these results or draw any inferences from them. Comprehensiveness Let me start the discussion with the first of the elements: comprehensiveness. As noted, the set of banks participating in the SCAP accounted for a large portion of the assets and loans in the U.S. banking industry and spanned nearly all significant banking industry activities. In 2009, we argued that this comprehensiveness was essential in achieving the SCAP’s macroprudential goals as the collective stress test results provided a view into a large share of the industry. More important, through the subsequent capital raises, the SCAP helped ensure that this large segment was sufficiently well capitalized to provide a buffer to the broader economy against possible future bad outcomes. After the SCAP, the Dodd-Frank Act expanded the set of banking companies subject to supervisory stress testing to include all bank holding companies with assets exceeding $ billion—about another 15 to 20 firms, including the U.S. operations of many large, foreign-owned banks. In 2018, a total of 35 firms participated in the CCAR and DFAST stress tests. | Given the early state of the art, the SCAP team brought together supervisors, economists, attorneys, accountants, financial analysts, regulatory capital experts and others from the Fed and the other supervisory agencies involved in the program. This kind of multi-disciplinary approach is now embedded in many aspects of supervision, including the LISCC, which includes economists, attorneys and financial market experts, as well as supervisors. The blending of bank-generated and supervisory estimates may be the aspect of the supervisory stress testing regime that has evolved most significantly since the SCAP. Supervisory stress test results are now based on models developed by supervisors that rely on detailed firm-specific data filed through regulatory reports, so the results now represent a fully distinct and independent supervisory view. 4 And, as described above, banks are required to generate their own stress test estimates. Public disclosure of both sets of results based on the common supervisory scenarios has provided diverse perspectives on banks’ capital vulnerabilities. Diverse perspectives, especially those from outside the banking industry and supervisory community, continue to be critical in supporting stress testing’s macroprudential objectives. Academic economists can play an especially important role in helping to foster innovation and creativity by advancing thinking on stress test scenario design and on modeling techniques that better capture the impact of the external environment on bank financial condition. A particularly ripe area for fresh thought, in my view, concerns modeling revenues and non-credit expenses— so-called pre-provision net revenue, or PPNR—an area that is notoriously difficult to assess. | 1 |
But we must be humble and thank those wanting to lecture us on free markets, if only for the purpose of keeping us on our toes. Hong Kong is changing and one would expect any dynamic city to be different after the passage of 20 years. But, surprise, surprise, the policy of positive non-interventionism has not changed. Many may have chosen to ignore or forget the true meaning of this policy, but not the administration of the HKSAR. Certainly, I have not forgotten it. And, having worked continuously and closely with five financial secretaries in succession, I can vouch for all of them in their firm adherence to this policy of positive non-interventionism. It applies also to the specific case of the current intervention in the stock and futures markets. As a firm believer in such a policy, I am responsible for conducting the intervention. The nostalgia has prompted me to take time off watching the markets to read some of the long-forgotten literature on positive non-interventionism. This gives me great pleasure, particularly when I see the rare sentences and, if I am more fortunate, paragraphs attributable to my drafting that survived the final texts. Yes, Sir Philip was a great financial secretary with a great mind. Even many of our critics hold him in high regard. I hope that in quoting him, our stance in the stock and futures market can be put into a context that our critics may be able better to appreciate. | Those are the words of Sir Philip, the architect of that policy and someone who commanded and still commands a lot of respect. Indeed as Monetary Authority chief, I have no responsibility over that policy. It rests on the broad shoulders of Sir Donald Tsang who is carrying it bravely. Let us all make a little effort to give him the support that he needs, spiritual or otherwise, by trying to gain a better appreciation of what the policy of positive non-interventionism really means. BIS Review 67/1998 -4Whilst on the subject of intervention, may I reiterate that our intervention in the stock and futures market to deter currency manipulation does not imply any weakening of our resolve to adhere to the linked exchange rate system. This resolve has never been stronger. Indeed, as I have mentioned elsewhere, there simply is no better alternative for Hong Kong. The experience of many of our neighbouring economies in the past year or so underlines why. As the financial storm in this region spreads to almost everywhere now, and with increased intensity, the discipline of currency board arrangements of our linked exchange rate system is our best safeguard for our long-term prosperity and stability. BIS Review 67/1998 | 1 |
In the Annales, he wrote: “The destruction of private wealth precipitated the fall of rank and reputation. At last, the emperor interposed his aid by distributing throughout the banks a hundred million sesterces, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found.” 1 Replace “emperor” with “governments and central banks”, “sesterces” with “dollars” or “euro”, “security” with “collateral”: this two thousand year old quotation could sound surprisingly familiar. Yet, even though two thousand years have passed, with many financial debacles in between, I think it is fair to say that we entered the current crisis less than ideally prepared. First, we had to improvise with an economic interpretation of the causes that led to those unprecedented market disruptions. The dramatic fall in confidence revealed a source of risk that macroeconomists had not modelled carefully and that had not even been considered relevant by most theorists of finance. Now, the concept of “systemic risk” is almost common knowledge. Second, we had thought that the financial system would act as a shock absorber. Portfolio theory had demonstrated that the dispersion of individual risks would attenuate aggregate risk. But the mispricing of risk multiplied exposures, and the assumption of similar risks by market participants increased the potential for contagion. In the event, we learned that dispersion does not necessarily mean effective diversification. | It seems to me that we are all – industrial countries as well as emerging economies – very much united in purpose: correct distorted incentives, improve very significantly the resilience of the financial system, and counteract pro-cyclical mechanisms and behaviours. We are also convinced on both sides of the Atlantic – and here in Stanford, I would say also on both sides of the Pacific Ocean – that the success of the enlarged governance of global finance and the global economy through the G20, the Financial Stability Board and the cooperative activities of the Central Banks, is key for the stability and the prosperity of the present unified global economy. Concluding remarks At the height of the crisis – when irrational exuberance had turned into excessive pessimism – I repeatedly stated that regaining confidence was of the essence. Since then, confidence in the short term has been restored, not least because of bold and courageous policy actions around the globe. Going forward, we need to strengthen longer-term confidence, and this requires policy frameworks that will help to prevent a future crisis. I started with Tacitus’ example of bold policy action. I would like to end with Cicero’s fides. There was a famous controversy between Julius Caesar and Cicero 80 years before the crisis described by Tacitus. Rome, at that time, was struggling with a debt overhang. Caesar proposed partly to remit the debt. Cicero strongly opposed such action. | 1 |
Will inflation remain under control? Will the financial system do its job? Will I keep mine? Such issues are why monetary and financial stability are fundamental pre-requisites for effective economic adjustment and sustained prosperity. Discharging the Bank’s responsibilities for these public goods demands rigorous analysis, objective judgement, and effective transparency. We will not shirk from these obligations. The Bank and its independent policy committees will continue to provide analytically based, clear-eyed assessments of the economic and financial outlooks. And we will outline the risks to these forecasts so that we and others can prepare to manage them. The near-term challenges facing the UK economy can’t be wished away. But they can be addressed. A clear plan is needed, and its measures must be implemented with resolute determination. After briefly reviewing the relationship between uncertainty and the economy, I want to review how the Bank of England’s contribution to that plan will unfold over the coming weeks. But at the outset, I want to re-emphasise that the Bank has taken all the necessary steps to prepare for these events. And we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward. 1. | To emerge from an uncertain world with confidence, people and businesses need a fixed point by which to navigate. Once identified, everyone can then play a role supporting the strategy to get us to our destination. That strategy must be grounded in the bedrock of the UK’s existing macro policy institutions and frameworks. That means fiscal policy anchored in a clear commitment to long-run sustainability and buttressed by the independent Office for Budget Responsibility. And it means respecting the frameworks for the other major arms of macroeconomic policy as they are set out in statute and conducted by the Bank of England. The Bank has clear remits and can deploy a wide range of instruments. With its goals defined by Parliament, the Bank has operational independence. Its policy strategies and communications are decided by independent, expert committees whose members are individually accountable to Parliament for their analysis and policy actions. The Bank conducts policy consistently, transparently and accountably. Its policy committees are straight with the British public about the risks and trade-offs in the pursuit of our objectives. This institutional framework is critical to reduce uncertainty and essential to promote prosperity. With this backdrop, let me now describe the concrete steps the Bank has taken to address uncertainty and how we can be expected to act in the weeks and months ahead. 3.1 Financial policy Let me begin with financial policy. | 1 |
EU-Singapore FTA (EUSFTA) Finally, as we seek to maintain an open economy and to stay relevant, Singapore will work on deepening our engagement beyond the Asia Pacific, for example, with the EU. BIS central bankers’ speeches 3 Negotiations on the EU-Singapore FTA were recently concluded. This is the first FTA which the EU has concluded with an ASEAN country. The EU-Singapore FTA can serve as a pathfinder FTA for EU’s on-going bilateral FTA negotiations with other ASEAN countries, such as Malaysia and Vietnam, and it signals the EU’s interest to engage with the region. When implemented, the EU-Singapore FTA will enhance Singapore’s attractiveness as a gateway for EU companies seeking to tap the opportunities in our region. Conclusion So ladies and gentlemen, to summarise, Singapore is pursuing a strategy of broader and deeper economic integration with major economies through multilateral agreements, such as the RCEP, TPP and EU-Singapore FTA. In addition, we are enhancing our role as a trusted and modern financial hub by expanding into new services, such as offshore Renminbi trading. These initiatives will help investors and companies based in Singapore to “open doors” and “unlock value”. Let me once again express my appreciation to Deutsche Bank for holding the annual Deutsche Bank Access Asia Conference in Singapore and bringing together thought leaders, investors and policy makers together to find ways to tap the opportunities that are being created by Asia’s economic growth. I wish you all a very fruitful conference. Thank you. 4 BIS central bankers’ speeches | Stefan Ingves: Coming stronger out of a crisis – lessons from Sweden Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Brussels Economic Forum, Brussels, 18 May 2011. * * * “If in debt, you are not free.” This expression was widely used by Göran Persson, Sweden’s former prime minister, to explain the need for the extensive fiscal consolidation process that Sweden underwent after the crisis in the 1990s.1 In 1997, a three-year nominal expenditure ceiling was introduced. This was an important step towards increasing budgetary discipline and strengthening the long-term perspective of the budget process. In addition, as part of this fiscal consolidation process, a new fiscal policy framework that included a budget surplus target of 1 per cent over the business cycle was introduced in the year 2000. With these instruments in place the debt to GDP ratio fell from 56 per cent in the year 2000 to 35 per cent today. Recent developments in many European countries remind us of Göran Persson’s words: small, open economies are vulnerable to crises of confidence when financial markets are in turmoil. They need to stand on very solid economic foundations and be supported by a credible and sound fiscal-policy framework. Sweden was lucky enough to be in this position when the recent crisis struck. This was indeed fortunate as the crisis had a major impact on the Swedish economy. GDP fell by more than 5 per cent in 2009 – the largest fall since the 1930s. | 0 |
LNG capacity start-ups in Australia and North America which will boost new LNG supplies amidst stagnating demand will put more pressure on LNG prices, hence further disrupting the LNG market. Due to low oil and LNG prices, the profitability of oil majors and National Oil Companies (NOCs) has been severely eroded. The impact has been pronounced. More than 300,000 oil and gas workers have been laid off globally since mid-2014; some USD 380 billion of global oil and gas projects have been deferred or cancelled; and more than USD 150 billion worth of assets have been planned for disposal or divestment. Given Malaysia’s openness and high financial and trade integration with the rest of the world, the Malaysian economy is not isolated from these developments. On the external front, lower global demand continues to weigh down on Malaysia’s export performance. Investment activities especially in the upstream oil and gas sector, contracted for the first time since the global financial crisis in 2015, after expanding by an average of 16% from 2010 to 2014. However, investment activity in the manufacturing and services sectors remained BIS central bankers’ speeches 1 resilient, and is expected to underpin investment growth moving forward. Private consumption remained relatively resilient and anchored domestic growth, especially during the first half of the year, driven by sustained income and employment levels. Going forward, domestic demand is expected to remain a key driver of economic growth in Malaysia. We should expect Malaysian economic growth to range between 4.0 to 4.5 % for 2016. | But the severity of the crisis increased dramatically following the failure of Lehman Brothers in the autumn of 2008. Confidence in the very essence of banking – as well as in individual financial institutions – was shaken to its core and the most severe banking crisis for almost a century was triggered. As we now know, this led to a deep and highly synchronised global recession. Output in virtually every corner of the world fell sharply. Global trade flows contracted by a staggering 15% in the two quarters following the failure of Lehmans. Over the same period, output at home is estimated to have fallen by 4 1/4% – the largest fall in UK GDP over a two-quarter period since quarterly records began. The speed and severity of the downturn cannot be explained solely by the tightening in credit conditions. The impact of the banking crisis was greatly amplified by the accompanying collapse in business and household confidence. Firms’ concerns about their ability to access the working capital needed to run their businesses was compounded by the bleak and uncertain prospects for demand. In response, production was slashed and business spending was severely curtailed. Stock levels were run down at an unprecedented pace, as companies met demand from existing inventories and economised on working capital. Faced with growing spare capacity there was little incentive for businesses to invest in new plant and machinery, and capital expenditure contracted by almost 20% in the first six months of 2009 alone. | 0 |
Hong Kong will shortly have a state-of-the-art facility for conducting US dollar transactions in Asian time. The benefits of this for both local business and international customers, in both trade and finance, should be considerable. I take this opportunity to thank and congratulate those who have worked hard to bring the project to its present advanced stage in so short a time, and I wish every success to all who will be involved in translating the design into reality. BIS Review 22/2000 2 | Comparing this set of conditions to that in 2010, the recent slowing of inflation has been less widespread across core goods and core services, and inflation expectations so far have declined less appreciably than they did in 2010. Thus, my best guess is that core goods prices will begin to firm in the months ahead as global demand begins to strengthen and inventories get into better alignment with sales. 1 2 CoreLogic Report Shows Home Prices Rise by 12.1 Percent Year Over Year in April. BIS central bankers’ speeches As is always the case, there is substantial uncertainty surrounding this forecast. Moreover, there is always the possibility of some unforeseen shock. Thus, we will be monitoring U.S. and global economic conditions very carefully and will adjust our views on the likely path for growth, inflation and the unemployment rate accordingly in response to new information. At its meeting last week, the FOMC decided to continue its accommodative policy stance. It reaffirmed its expectation that the current low range for the federal funds rate target will be appropriate at least as long as the unemployment rate remains above 6.5 percent, so long as inflation and inflation expectations remain well-behaved. It is important to remember that these conditions are thresholds, not triggers. The FOMC also maintained its purchases of $ billion per month in agency MBS and $ billion per month in Treasury securities, with a stated goal of promoting a substantial improvement in the labor market outlook in a context of price stability. | 0 |
Forward-looking models can be set up in ways where things go wrong for a while. In particular, by allowing agents to learn more or less gradually that the monetary authority really does mean it about achieving its target for inflation (or some other nominal variable) 12 . Everything still turns out okay eventually, but the route can be a bit bumpy. Experiments of that kind can help policymakers to think through, in a disciplined way, what might happen if inflation expectations were to become dislodged. But, so far, they do not do much to help us know what to look for in identifying whether inflation expectations are in the process of becoming dislodged. We do not know enough about how households and firms form their expectations – how much forward7 looking, how much backward-looking – to be able to model the process rigorously. That is not part of the ‘information set’ of policymakers in today’s world. What this underlines is that policymakers may well not be able to rely on their models to help them terribly much when the stakes are highest; ie when our credibility may be fragile. They are tools to help us think. But they don’t tell us the answers. Crucially, we have to make judgments about whether medium-term inflation expectations are, in fact, securely anchored. We need to resist falling into the trap of thinking that the nominal side is now, and forever, nicely looked after by some miracle of credibility. | 10 For example Australia, Canada, New Zealand. 2 BIS Review 46/2006 markets about the steady-state rate of inflation being targeted. In other words, a point target makes communication somewhat more straightforward. Of course, that is not the same as saying that we can guarantee to deliver inflation outturns consistently in line with the target over an economic cycle. Shocks, and even policy mistakes, will cause inflation to deviate from target. Explaining such deviations matters. Especially when being reappointed for a further term, MPC members are typically asked by the House of Commons’ Treasury Select Committee whether the MPC has made any big mistakes 11 . In response, we often talk about luck, diligence etc. But I think that the best test – perhaps the only important test – is whether medium-to-long-term inflation expectations have been dislodged from the target. In the UK, expectations have generally been in line with our target since the Bank was given operational independence. But as the recent slight tick up in some measures illustrates, we have to be constantly vigilant. By contrast, an uncomfortable amount of commentary – academic and in the media – proceeds as if that particular battle is won for all time; the ‘death of inflation’ school of thought. Indeed, seductively, these days ‘victory’ tends to be inscribed in to the economic models used by central banks as an input to their forecasts. | 1 |
Everyone who produces inflation forecasts knows that it is difficult to exactly assess monthly changes and there is nothing remarkable about a forecast deviation of 0.2 percentage points. A factor that contributed to the forecast error was that Statistics Sweden, when it published the new figures, also downwardly revised the inflation figures for the period January to the end of July this year. It is of course unfortunate that miscalculations are made in a variable that is of such central importance to the Riksbank and many others, but it should be pointed out that this is very rare. The revision attracted a lot of media attention and there was speculation that the Riksbank would have decided differently if this miscalculation had been known at the time the decision was made. The July figure for the CPI was then 4.4 per cent, while the revised figure is 4.1 per cent. Allow me therefore to comment briefly on this. It need hardly be said that my decision, and that of the two colleagues who also entered a reservation, to recommend an unchanged interest rate would not have been effected. Whether it would have affected the decision of the majority I cannot of course say. But it should be remembered that it is the processing and analysis of a great quantity of information that leads to the overall assessment of economic development and inflation prospects. And it is the forecast derived from this information that largely determines the interest rate decision. | As my colleague, David Miles, argued in a speech to the Home Builders Federation earlier this year5, we are presently in a transition from a precrisis world with compressed risk premia and in some cases imprudently generous loan-tovalue and loan-to-income ratios, to a more sustainable equilibrium with lower ratios. That implies a period during which first-time buyers and those hoping to move up the housing ladder save the necessary extra equity, low transactions and a fall in the share of owneroccupiers. That is pretty much what we have seen and the transition has been made harder by the squeeze in real incomes. The prospective moderation in the squeeze on real household incomes should help those saving for a deposit to get onto, or move up, the housing ladder. So, as well as supporting consumer spending, it should also help support mortgage demand. That would, no doubt, be a most welcome development to you, as well as to the households themselves. On that note, let me finish by hoping that the rest of your conference today proves most stimulating and valuable. Thank you! 3 In fact using the PAYE system would probably be the easiest way to implement such a scheme. Moreover, if the Government were actually to send out vouchers redeemable into cash it might well fall foul of the prohibition on monetary finance contained in the Lisbon Treaty. | 0 |
Svein Gjedrem: The economic situation and monetary policy in Norway Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), for Norges Bank’s regional network, arranged by Kunnskapsparken Bodø, in Sandnessjøen, 4 September 2006. Please note that the text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 16 August and Inflation Report 2/06. * * * The economic situation The cyclical upturn in the Norwegian economy continues. Corporate sector profitability is solid. Companies are borrowing and investing. Employment is rising at a fast pace, unemployment is falling and household demand is still on the increase. Capacity utilisation in the economy is rising and a growing number of enterprises are facing constraints. Statistics Norway’s business tendency survey for the second quarter is still giving positive signals regarding developments in Norwegian manufacturing. A clear majority of industrial leaders assess the general outlook for the third quarter as more positive than for the second quarter. At the same time, consumer price inflation excluding energy products remains low and is lower than the inflation target. Norges Bank seeks to set the interest rate with a view to achieving a reasonable balance between the objective of stabilising inflation at target and the objective of stabilising developments in output and employment. | Chart 9 compares the 90th, 95th, and 99th percentile with the median and shows that the main change is at the top. If we break that top percentile down further, we see a more dramatic widening. This is not just true of the City or of the UK. The average CEO in the UK earns around 100 times more than the average worker but there is an even wider gap in the US, with the average pay of CEOs over 250 times that of the average worker in 2005, having risen from around 100 times in 1995. In 1999 Eddie George likened the change in the City since Big Bang to Wimbledon. 4 The UK still prospered by providing the venue even though most of the players were foreign. Today I think the Premiership may provide an even better analogy. That is partly because foreigners now own an increasing number of the venues as well as supplying many of the players. That is a striking illustration of Britain’s openness to foreign ownership which sets it some way apart from most other countries both in Europe and America. But it is also because both the City and the Premiership have become the centres of global industries with a dramatic impact on revenues and on earnings. One of my first footballing heroes was Johnny Haynes, the David Beckham of his day as a passer of a football. | 0 |
Mr. Held would like to thank his other colleagues at the Federal Reserve who provided comments and corrections. 2 Michael Held, SOFR and the Transition from LIBOR, February 26, 2019. https://www.newyorkfed.org/newsevents/speeches/2020/hel200929 5/6 30/09/2020 The LIBOR Countdown Has Not Stopped - FEDERAL RESERVE BANK of NEW YORK 3 FCA, Impact of the coronavirus on firms' LIBOR transition plans, March 3, 2020; see also Letter from Randal Quarles to G20 Finance Ministers and Central Bank Governors 4 Libor death notice could be served this year--FCA, Risk.net, June 22, 2020. 5 FSB Statement on the Impact of Covid-19 on Global Benchmark Reform, July 1, 2020. 6 ARRC Recommended Best Practices for Completing the Transition from LIBOR. 7 For example, see Internal Systems & Processes: Transition Aid for SOFR Adoption and the Practical Implementation Checklist for SOFR Adoption. 8 Proposed Legislative Solution to Minimize Legal Uncertainty and Adverse Economic Impact Associated with LIBOR Transition. 9 Statement by Rishi Sunak, Chancellor of the Exchequer, June 23, 2020. 10 Edwin Schooling Latter, LIBOR transition-the critical tasks ahead of us in the second half of 2020, August 3, 2020. 11 Commission's proposal to amend EU rules on financial benchmarks. 12 Fact Sheet: IBOR Fallbacks. 13 ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products; ARRC Announces Further Details Regarding it Recommendation of Spread Adjustments for Cash Products. 14 ARRC Releases Request for Proposals for the Publication of Forward-Looking Term Rates. | through the adjustment of domestic prices and costs relative to external ones, and by curbing government spending and revenue shortfalls, in real terms. This is what the Spanish economy has, with great effort, been achieving since 2012. In the truly difficult circumstances of 2012, Spain avoided a bail-out that would have been very painful in many ways, and certainly from an economic and social standpoint. Spain never lost its access to the capital markets. Admittedly at very high interest rates, and with very large risk premiums, our Treasury was always able to fund itself on the markets, because the markets, while mindful of the risks involved, very quickly appreciated (I am referring to the summer of 2012) the seriousness and decisiveness of the corrective action being taken. Spain reacted as a responsible and loyal European Union and Monetary Union member. It did not attempt to shift the blame onto anyone else, even though the euro crisis, which affected us very directly, obviously did not arise exclusively, or originally, in the Spanish economy. BIS central bankers’ speeches 3 To call the correction of unsustainable imbalances (like the balance of payments deficits of 2007 and 2008, of around 10% of GDP, and the budget deficits, which ranged from 9% to 11% between 2009 and 2012) austerity, is not really a very good description of reality. Changing direction when on a path towards impossible and unsustainable situations is not “austerity” but common sense and, in a very real sense, patriotism. | 0 |
And three points on what it will mean. On the “how”, the first thing to say is that going forward, banks are being required to carry considerably more capital and liquidity. Second, as is now well known within the industry, the international authorities have agreed a blueprint for resolution regimes to manage the failure of so-called Systemically Important Financial Institutions in an orderly way. G20 Leaders have committed to legislate that regime into their domestic systems where necessary. All resolution regimes have the effect of distributing the losses of distressed financial firms – ie losses already or prospectively exceeding equity – across unsecured, uninsured creditors. That is the only place losses can go if taxpayers are to be spared. “Bailin” has focussed minds on this, but is in fact just one method, albeit a very important one, for ensuring that uninsured creditors take losses. Those “how” points are very familiar. A few comments, therefore, on possible implications – all of which, looking ahead, point towards the crucial importance of our capital markets. First, in a world of less leveraged banks, a business model of Originate and Warehouse – because that is what it became by the middle of the past decade – is unlikely to be viable. Maybe a genuine model of Originate and Distribute will emerge, with something like agencytype market making and trading. Second, holders of bank paper – especially bonds – will be living in a different world. They will have a big incentive to monitor the riskiness of banks. | Interpreted broadly, this can include relatively simple indicators, such as interest rates, interest rate spreads, and returns. They include other measures related to the value of financial or tangible assets like bonds, stocks, housing, and gold. And of course they also include more sophisticated, data-intensive estimates of risk, which we hope to discuss today. For central banks, one of the main questions that arises is whether financial market indicators are useful in setting monetary policy. And if so, which ones are most useful for central banks, and for what purpose? In general, financial market indicators are used by central banks to: (1) gauge market sentiment with regards to expected changes to policy variables; (2) identify types and sources of shocks to the economy; and (3) predict future developments in economic activity and inflation. Such predictions of longer-term inflation are also useful in checking how markets view the credibility of the authorities’ commitments to their final price target. So financial indicators can be used to double check econometric and judgmental predictions as well as flag a problem of asset price misalignment, which may need to be addressed by policy. In addition, financial market indicators have the potential to reflect developments at critical stages of the transmission process. This is due to the fact that financial markets in general adjust faster than goods markets, and their prices are timelier and less prone to measurement error. Today’s workshop will give us the chance to discuss these and many other issues. | 0 |
This should help support a proportional approach to regulation, as part of the Future Regulatory Framework proposals set out by the Treasury.18 This new framework would make it easier for our regulation to adapt to innovation, and deliver a more tailored regime for firms, responding dynamically to new challenges. We are also looking forward to working with the FCA as their Scalebox develops. We continue to work closely more generally with them on the supervisory approach to new and growing dual-regulated firms. 14 https://www.bankofengland.co.uk/prudential-regulation/publication/2019/outsourcing-and-third-party-risk-management https://www.bankofengland.co.uk/speech/2020/sarah-breeden-climbing-mountains-safely 16 https://www.bankofengland.co.uk/prudential-regulation/publication/2020/new-and-growing-banks 17 https://www.bankofengland.co.uk/speech/2020/sam-woods-city-banquet 18 https://www.gov.uk/government/consultations/future-regulatory-framework-frf-review-consultation 15 6 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 6 Cross-authority and international collaboration The Bank is just one of many institutions with a role to play in the evolving fintech landscape. And we regularly work with other public authorities as we fulfil our role, including the FCA, the Treasury, and Payments and Competition authorities. A number of institutions have put out proposals and consultations on how the UK’s regulatory framework should adapt to support financial innovation. The Payments Landscape Review, led by the Treasury, has gathered evidence across the breadth of the payments sector to understand the rapid technological developments and what that might mean for regulation. 19 The Treasury has also launched a consultation on the regulation of stablecoins,20 and the FPC has set out its expectations for stablecoin-based payment chains.21 And Parliament has launched an inquiry into the Future of Finance in the UK. | For example, some banks are increasingly using AI techniques, such as Natural Language Processing, to identify contractual obligations where Libor is involved. We ourselves have recently deployed an AI tool that can support PRA supervisory judgement with efficient analysis and extraction of unstructured firm intelligence. 8 https://www.bankofengland.co.uk/speech/2021/april/gareth-ramsay-webinar-hosted-by-the-edm-council https://www.bankofengland.co.uk/paper/2020/open-data-for-sme-finance 10 https://www.bankofengland.co.uk/news/2021/february/data-collection-transformation-plan 11 https://www.gov.uk/government/publications/cdei-ai-barometer 12 https://www.bankofengland.co.uk/quarterly-bulletin/2020/2020-q4/the-impact-of-covid-on-machine-learning-and-data-science-in-ukbanking 9 4 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 4 But the rapid pace of adoption also means this is a pivotal moment for the UK to consider how best to support firms’ safe adoption of AI and what that means for the relevant regulatory frameworks. To inform our decisions about regulatory frameworks we’ve been engaging with fintech firms, other financial services firms and authorities, in particular through the AI Public-Private Forum (AIPPF). This year-long initiative, cochaired with the FCA, brings together a diverse group of experts to discuss the key issues related to data, model risk management and governance.13 This includes examining how existing policy frameworks affect and encompass AI, and what the appropriate level of any future potential policy should be. So far, the AIPPF has explored the key data-related issues, such as: 1. the use of ‘alternative data’; 2. how to adapt existing data quality standards to an AI context; 3. fair and equal access to third party data (including pricing); 4. ways to address bias and the challenges of operationalising ethical principles; and 5. approaches to data and AI governance. | 1 |
The Riksbank discusses a number of possible measures in its latest Financial Stability Report. Firstly, the Riksbank tries to influence developments by communicating our views on what is happening publicly and in the form of a dialogue with the banks. The Financial Stability Report plays a central role in this context. The Riksbank can in certain situations provide a more comprehensive picture of the risks than the individual market players, as the latter attaches greater importance to evaluating developments in their own portfolios. If the Riksbank believes that an unhealthy build-up of risk is occurring and our assessment has not had the intended influence on the individual market players, there are other measures that the Riksbank can take. In extreme cases, quantitative regulations may be introduced, such as raised required capital adequacy ratios or a reserve requirement. Nor can an increase in the repo rate be ruled out if financial stability is threatened. However, these are more far-reaching measures and would only be used if the build-up of risk was assessed to constitute an acute problem. The assessment of the situation made by the Riksbank and other authorities will always be marred by a large measure of uncertainty, as it is extremely difficult to evaluate how serious the build-up of risk actually is. If drastic measures are to be taken, the assessment must be based on a strong foundation. The development we can see today is, as I mentioned earlier, far from requiring any intervention. | Gent Sejko: The need to reinforce understanding of economic developments and their relation to policy Welcome remarks by Mr Gent Sejko, Governor of the Bank of Albania, at the 12th SEE Economic Research Workshop, Tirana, 6 December 2018. * * * Ladies and Gentlemen! It is a great pleasure for me to welcome all of you today to our 12th research workshop. I would like to express my sincere gratitude to our guests from academia and central banks who for 12 years have made this workshop one of the best and well-recognized economic and financial research events in Albania and in the region. Let me also thank all of our distinguished chairs, speakers and discussants for their engagement here today. The papers that will be presented and discussed during these 2 days will cover a wide range of economic and financial issues that concern central banks. The topics on monetary policy, financial stability, risk and novel methodologies are all very relevant to the daily activity of central banks and as such are very important to us. The Bank of Albania is involved in decision- making on all these issues and we provide our active support to it through our research. Along with the papers that are going to be presented today in the panels, we have also decided to include and present in the poster presentations, tomorrow, some of our ongoing projects. | 0 |
In light of this, claims that the Riksbank is to blame for the loss of tens of thousands of jobs are rather questionable. Neither have our critics, despite requests, presented any convincing estimates to support this view. I think it’s a poor show on the part of government officials, trade union economists and trade union leaders to accuse the Riksbank of bringing unemployment upon tens of thousands of people. An interesting addition in this regard is that the most recent periods when inflation has been below target, at the end of the 1990s and the beginning of this decade, have been marked by unexpectedly high productivity and unexpectedly low imported inflation (which few forecasters had anticipated). So it’s not the case that the low inflation is a result of the Riksbank actively tightening monetary policy and dampening demand. On the contrary, these have been situations in which interest rates have been low. In spite of that, inflation has been weak owing to positive supply shocks. The impact of these shocks on employment differs from the effect produced by excessively tight monetary policy. Too low inflation due to high productivity growth and cheap intermediate goods stimulates growth, demand and employment. Consequently, the price of missing the inflation target has likely been lower in terms of BIS Review 65/2004 3 growth and employment than if the cause had been a sharp monetary tightening that had caused demand to drop and inflation to fall. | What the Riksbank can do, in a complex world, is to influence resource utilisation and economic activity so that inflationary tendencies are kept fairly well in check, at the same time as a host of other factors affect employment in parallel and interact with the monetary policy effects. In this work we try to avoid unnecessary fluctuations in output and employment, but we are not able to fine-tune the economy exactly. The fact that the Riksbank’s power to influence employment is both short-term and relatively limited is not inconsistent with our ability to keep inflation in check. The latter is normally achieved by affecting inflation expectations. As long as our monetary policy is credible, it is enough to make small interest rate adjustments to keep inflation close to target. In this way, the Riksbank sends out a signal that it is keeping a close eye on inflationary tendencies and everyone knows that stronger measures await if inflation expectations take off in either direction. So, there is no simple relationship between monetary policy and employment. Nevertheless, for the sake of argument, let’s go along with our critics and assume that such a relationship exists. In that case, estimates merely show that even if the repo rate had been a full percentage point too high for a whole year, the effect on today’s employment situation would at most have been a few thousand jobs, and not the tens of thousands claimed by the Riksbank’s critics. | 1 |
I have, however, for the reasons I mentioned earlier in my speech, been somewhat more pessimistic than the majority of the Executive Board as regards inflation assessments at the forecast horizon. Fluctuations of consumer prices a few tenths of a percent up and down around the target in an economy with a strongly accepted price stability regime are per se less important than the mode of functioning of the economy. I am more concerned about what can happen with inflation and growth after the forecast period if demand increases at the rate we have anticipated. The simple rule that says that monetary policy shall only react if the target for inflation is not met during the forecast period is a good help when conducting monetary policy. However, it is not reasonable to mechanically apply this rule in every situation. The consequences that the economic development can have for macroeconomic stability and inflation beyond the forecast horizon must also be weighed in. The risk for financial imbalances now being built up when indebtedness is increasing and of inflationary pressure accumulating at the same time must in my view therefore be taken into account in the monetary policy decisions. A development that I described earlier can be the consequence if the expansion of demand and credit continue to increase at a high rate. The quantity of money and lending, especially to households, are for instance increasing at present at a rate which is probably not sustainable in the long term. | In the most recently published inflation assessments, it was assumed that the price stability target was not threatened during the forecast period despite the growth of demand being so strong that use of capacity was under strain at the end of the period. The majority view of the Executive Board was therefore that there was no reason to increase the repo rate. This assessment was based on free resources in the initial situation, good productivity growth, low price increases on certain recently deregulated areas, low import prices and finally low inflation expectations. It is not per se strange that GDP can increase as much as 3-4% for a couple of years without inflation sharply accelerating, if the use of resources is low initially. If the pattern from previous cyclical upswings was to be repeated, price pressure should now increase. However, it has proven difficult to identify any exact and very stable correlation. As I mentioned earlier great changes have taken place in the Swedish economy. While there are still considerable deficiencies in competition in many areas, it is nevertheless not probable that inflation will accelerate strongly in the next few years. An important reason for this is that the price stability target has now BIS Review 48/2000 4 obtained such strong support that inflation expectations are not increasing despite a cyclical upswing that is stronger than for a very long time. | 1 |
Today there are a number of positive signs: bond market activity is reasonably buoyant, yields of peripheral countries have declined slightly and stock markets have picked up. However, two major weaknesses persist: – Financial markets are highly fragmented within the euro area and sovereign yield spreads remain substantial; – Growth is weak and, here too, there are major disparities within the euro area. In the second quarter, growth stood at -0.2% for the area, after stagnating in the first quarter. Germany posted the highest growth, at 0.3%, and Portugal the weakest, at –1.2%. We are still expecting growth to recover very gradually next year. Before discussing how to address these problems, we have to correctly analyse the causes. In my opinion, three mutually reinforcing causes gave rise to the euro area crisis. 1. The main origin of the crisis lies in the lack of fiscal discipline on the part of most Member States. While these countries had had to make considerable consolidation efforts to fulfil the convergence criteria and to be allowed to join the euro, almost all of them became more lax as soon as they entered. In the first ten years of EMU, they ran up deficits and debts, including during times of growth. As a result in 2008, when the crisis started, these countries had no more fiscal room and their public finances deteriorated substantially. | Member States’ individual discipline has therefore been too weak, and collective discipline, which was nonetheless provided for in the Stability and Growth Pact, was not applied in practice. I would like to recall the spirit of this Pact. It was designed to be the fiscal pillar of monetary union. It was based on a peer-review mechanism. But, on the one hand, it was deliberately misinterpreted: whereas countries were required to maintain a fiscal balance over the cycle, without BIS central bankers’ speeches 1 breaching the 3% of GDP reference value for the annual public deficit, they interpreted this to mean: “we can constantly run a 3% deficit”. And, on the other hand, the Pact was not respected, as sanctions were not imposed on Member States that breached these rules (including France and Germany around 2002). 2. The second cause of this crisis lies in the competitiveness gaps that had widened for a long time before the crisis. The economic rationale is easy to understand: when joining a currency area whose goal is to achieve an inflation rate of just below 2%, changes in unit production costs must be in line with this central bank objective, modulo the productivity gains. In all countries that did not abide by this calculation and this discipline, year after year, there was a loss of competitiveness that ultimately proved very significant. As regards these budgetary slippages and competitiveness losses, I hasten to add that markets did not play their role. | 1 |
Muhammad bin Ibrahim: Towards resilience - are we on the right path? Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Malaysian Insurance Summit (MIS) 2017 "Towards Resilience: Are We on the Right Path? ", Kuala Lumpur, 30 October 2017. * * * Nearly 30 years ago, the Governor of Bank Negara Malaysia highlighted several challenges facing the insurance industry in Malaysia at the “Malaysian Insurance Industry Seminar” organised by the Malaysian Insurance Institute (MII). He made four observations in his speech: Insurance companies accounted for only 3% of the assets of the Malaysian financial system. Only 1 in 10 Malaysians had a life insurance policy. Foreign insurers were at best, agents for their head offices. There was no urgency to develop local underwriting and management expertise. Due to lack of local technical expertise, the sector was significantly dependent on the international reinsurance market. This in turn curtailed the development of local expertise, perpetuating a vicious cycle. A “Stock-take” on the Insurance and Takaful Industry’s achievements and shortcomings In the decades since, the Bank has implemented major reforms to strengthen market participation, improve transparency and professionalism in sales practices, and encourage the development of domestic underwriting capacity to optimise retention of reinsurance and specialised risks. In 2009, foreign equity participation in the sector was liberalised further. After almost three decades of BNM taking over the task of regulating the insurance industry, it is worth for us to do a brief stock take. | This demographic structure thus not only contributes to enhance the potential of the economy but combined with rising incomes and improved standards of living, has resulted in increases in consumption spending. This resultant BIS Review 64/2004 1 increase in purchasing power has strengthened domestic demand, making it an important driver of growth in the Asian economies. Indeed, these trends have strengthened the sustainability of consumption-based growth. As part of this process, women have become an important consumer target group with enhanced purchasing power. In fact, in several of the Asian economies, women are emerging as a key target market. This greater capacity for earning, spending, saving and investing requires ability for financial management, and hence the urgency for greater financial literacy. While financial literacy is important, regardless of economic status, it becomes even more important for those that are less privileged. For those that have less to manage, it becomes more vital to manage the finances even more effectively. It is also those that have been under-served by the financial system that need to be more aware of the financial services that they should be able to access, and the benefits that can be drawn from the various options available. They too have the same need for maximising the benefits from their limited resources, and to achieving financial and economic security. Strengthening their financial position becomes even more important for this target group. | 0 |
12 All speeches are available online at www.bankofengland.co.uk/speeches 12 present because households face double jeopardy – risks to their lives and their livelihoods. Elsewhere, I have called this dread risk.14 At present, dread is double-barrelled. Yet this is not the only path possible for the economy. The willingness of companies to take back furloughed workers will depend importantly on their expectations about future demand for their goods and services. The stronger those expectations, the lower the likelihood of job losses. Firms will not make workers redundant if they need to rehire them, at a cost, soon afterwards. This lowers unemployment risk, raises household incomes, confidence and spending and thereby boosts firm revenues and employment, in a virtuous cycle. Back in the 1950s John Hicks called this dynamic a “super-multiplier” – “super” because the cumulative effects are amplified when emerging from recession.15 There is survey evidence to support this dynamic. The British Chambers of Commerce’s (BCC) weekly survey suggests firms’ demand and employment intentions have moved upwards in lockstep since April (Chart 11). Indeed, employment was close to balance by mid-May. Surveys of employment intentions and vacancies have also recently recovered from low levels. Chart 11: BCC survey Balance 60 Composite output 40 20 0 Reported employment -20 -40 -60 -80 -100 2007 2009 2011 2013 2015 2017 2019 Sources: BCC and Bank calculations. Notes: Chart shows BCC Quarterly Survey and dashed lines show more recent weekly survey after Covid-19 crisis began. | There is a negative correlation, suggesting it might be difficult for the sectors which absorbed most workers pre-Covid to repeat this feat post-Covid. 15 All speeches are available online at www.bankofengland.co.uk/speeches 15 Chart 14: Falls in output by sector against post-GFC employment growth Covid-19 sectoral output hits, % 40 20 Contribution to post-GFC employment growth, pp 0 -20 -40 -60 Accommodation & food -80 -100 -1 0 1 2 3 Sources: ONS and Bank calculations. Notes: Sectoral output hits on y-axis are from Chart 2. Numbers on x-axis are the percentage point contribution of each sector to total growth in UK employment from its post-global financial crisis trough to end-2019. Other, structural, factors may further complicate the labour market picture. The Covid crisis has shifted relative prices in ways which could encourage companies to invest in machines rather than people during the recovery. The price of capital goods has fallen while the price of labour has increased because of the need for Covid-secure premises and practices. This shift in the relative price of capital versus labour will provide a headwind to the re-absorption of workers. A second structural headwind concerns the skills mix of those losing their jobs. Research suggests this is likely to be skewed towards those with fewest skills and least experience, especially the young. The Resolution Foundation estimates that high unemployment will result in a 13% lower probability of a new graduate being in employment three years after completing education. | 1 |
It is true, as I indicated earlier, that in recent years most European bank income statements have reflected sluggish growth. This is largely a result of cyclical factors such as persistent macroeconomic weakness (despite the recent improvement), subdued credit demand amidst deleveraging by households and firms alike and low interest rates which exert considerable pressure on financial margins. Nevertheless, there would also appear to be structural factors that could keep banks’ returns on capital permanently below their pre-crisis levels. In particular, it is reasonable to assume that stricter prudential regulations will moderate banks’ profits, if for no other reason than the higher regulatory cost they impose on high-risk exposures which are usually also those that generate higher expected returns. More generally, as I mentioned earlier, one of the aims of the new legislation is to increase the participation of banks’ shareholders and creditors in the absorption of losses in the event of bank failure. This means reducing to a minimum the idea of an implicit state guarantee for banks’ liabilities, which will naturally have an impact on the industry’s financing costs and, therefore, on bank profitability. In addition, it should also be noted that medium-term trends in advanced economies – characterised by the need for deleveraging, moderate productivity growth and population ageing – exert downward pressure on potential growth and prompt excessive structural saving which will tend to keep interest rates low. As a result, we may see marked changes in the banking business. | Participation in the monetary union also entailed a change in the relationship between Treasury and central bank so as to incorporate the prohibition of monetary financing of government deficits. Central bank independence was granted with a large degree of legal protection and, as a matter of fact, no country in the European Union can change it at its own discretion. Of course, the independence of the central bank does not mean arbitrariness, as it is well counterbalanced by high transparency and accountability requirements and practices. Granting independence to the Banco de España some years before the introduction of the euro as a common currency reflected Spain’s strong ambition to become a founding member of the European Economic and Monetary Union. It was also the result of a firm political conviction as to the benefits of price stability and the advisability of delegating the pursuit of this goal to an independent central bank. Price stability requires a medium-term orientation and the independence of the monetary authority creates credibility by helping to keep inflation expectations anchored while avoiding time inconsistency problems.1 These reasons were particularly compelling for the Spanish economy in light of the previous experience of relatively high inflation. 1 The main argument to preserve central bank independence is that it avoids the so-called time inconsistency problem. When the monetary authority is not independent, it may consider other, shorter-term legitimate objectives, and may use monetary policy to repeatedly boost aggregate demand above what would be consistent with its inflation objective. | 0 |
In particular, the systemic risk concentration in a small number of global financial institutions is further increased and an increasing number of foreign jurisdictions are exposed to risks arising from the potential default of those banks. This aggravates the risk that these financial institutions may act as contagion channels for financial disturbances and may become or be perceived to be “too big to fail”. In addition, as several countries outside the European Union and the United States have observed, an unfair cross-border distribution of the costs for central clearing could arise. Finally, corporate governance arrangements of central counterparties may not be sufficiently reflective of the interests of all stakeholders, particularly as regards indirect clearing members. I am aware that several measures to control these risks are underway. Rules for central counterparties have been strengthened to ensure that they limit access restrictions to what is really necessary in order to manage the incurred risks and to ensure the central counterparties’ orderly default management processes. Similar governance rules now explicitly require central counterparties to adequately take into account the interests of clients and not only those of their direct members. Similarly, arrangements for the segregation and portability of client positions and collateral are being made. However, we will need to monitor very closely how these new requirements will work in practice, given the strong interest of global dealers in preserving their dominant position in the market. | In the area of clearing we need to monitor the impact of mandatory clearing not only on central counterparties, in terms of capacity and risk management, but the focus should also be on whether an increase in indirect clearing changes the risk profile of the direct clearing members. 6 BIS central bankers’ speeches The reform will also have an impact on collateral needs, and we will hear more on this in tomorrow’s academic session on the topic. However, authorities should monitor the availability of high quality collateral and related collateral management services. New risks that appear as a result of innovation, such as those relating to collateral transformation, need to be analysed and addressed. We should not wait for the next crisis to happen but need to be constantly vigilant. Though substantial progress has been made, it is also true that only just over half of the FSB jurisdictions have implemented the reform agenda so far. Although these include the jurisdictions of the most important OTC derivatives markets, we need to be vigilant in order to avoid regulatory arbitrage – that is to say, business moving from jurisdictions that stick to the agreed agenda to others that lag behind. Little over two weeks ago, the BIS published its macroeconomic impact assessment of OTC derivatives regulatory reforms. The results are promising. | 1 |
Elsewhere, the new framework for the prevention and correction of domestic and external macroeconomic imbalances has also been designed. This so-called Excessive Imbalance Procedure uses an early-warning mechanism based on a broad set of indicators which, together with timely economic analysis, should help detect sufficiently in advance those situations of vulnerability that may endanger financial stability in the euro area and give form to the measures needed to correct them. Progress in designing a permanent crisis-management mechanism has been considerable but clearly insufficient. First, temporarily, the European Financial Stability Facility was introduced, and later, now on a permanent basis, the European Stability Mechanism was set up, which it is assumed should start operating next July. The complexities involved in the design of these devices are evident, since they must combine strength and flexibility to provide financial assistance to ailing countries, while ensuring that incentives are maintained to pursue the ambitious fiscal consolidation and structural reform programmes needed for laying the foundations for sustained growth in the medium term. 4 BIS central bankers’ speeches But exiting the crisis will not be possible unless a stronger European governance framework is accompanied by a far-reaching revision of national economic policies, enabling them to be fully adapted to the conditions under which a monetary union can operate. It is imperative that the authorities and economic agents should fully assume the consequences derived from sharing a single monetary policy. The soundness of public finances and the flexibility of economic structures are vital requirements in this framework. | This led to the third exacerbating factor: Instead of helping the situation, off-balance sheet investment vehicles established by the banks made it far worse. Suddenly, these investment companies could no longer refinance themselves in the market and the banks were therefore forced to inject their own liquidity. Initially, the liquidity bottleneck manifested itself in the US dollar money market, above all. On the one hand, this was due to the fact that sub-prime losses and refinancing needs mainly affected US dollar positions. On the other, it was because liquidity hoarding also occurred chiefly in US dollars. US dollar liquidity was particularly tight for European banks. Thus BIS Review 150/2007 1 tensions spread rapidly from the dollar money market to the euro money market, but also to the Swiss franc money market. The extent of the upheaval on these three money markets can be seen in graph 1 which shows the path of risk premiums, using three-month funds as an example. Before the crisis, these risk premiums were almost negligible. They now amount to between 50 and 100 basis points, depending on the currency. The graph also shows that, so far, the crisis has moved forward in two waves. After normalising to some extent in October, the situation became increasingly tense from mid-November onwards, after more bank losses had been reported. Stabilisation by central banks The turbulence on the money market is challenging central banks. | 0 |
Those data and risks have, in my view, altered materially over the past nine months or so, for a number of reasons. First, the world outlook is materially brighter than it has been for some time, perhaps at any time since the global financial crisis. This year’s Spring Meetings of the IMF saw the first upgrade of world growth forecasts for six years. As forecast errors tend to be serially correlated – forecasters’ models tend to smooth out the bumps and miss turning points - it is possible further upgrades to world growth could lie ahead. One reason to believe stronger world growth may prove resilient is that it appears to have a broader base than in the recent past, both compositionally and regionally. At a compositional level, there are early-stage signs that global growth may be rebalancing away from consumption and towards investment. Since the crisis, global business investment has been structurally weak, growing around 2 percentage points below its pre-crisis average. Meanwhile, growth in world trade has undershot world growth for the past 2 years, after a 5-year period in which the opposite was true. There are now signs those patterns are reversing. Investment in the US, the euro area and China appears to be picking up. So too is world trade. Global supply chains appear to be widening and deepening, with global trade and capital goods orders rising (Chart 13). It is possible greater optimism about world demand may be encouraging businesses to put their fortress balance sheets to work. | If we take trends in self-employment, temporary and zero-hours contract workers since 2000, we would expect these to have collectively directly subtracted from wages by around 0.6 per cent, or around 4 basis points from annual wage growth. 18 Again, although these estimates are modest they probably understate the true effect, given they ignore any behavioural effects of these trends. Wages are not the only way in which these shifts in the nature of work may have affected labour market behaviour. As with unionisation, these shifts may also have widened the dispersion of wage rates within a given sector or occupation, with less collective-bargaining and more localised rates of pay. Vacancies data lend some support to this hypothesis. Charts 9 and 10 plot the distribution of offered wage rates in different occupations, comparing job vacancies containing the terms “self-employment” and “flexible hours” with those that do not. These vacancies data probably capture a particular segment of the self-employed and flexible working population, who differentiate their pay by more than the typical self-employed worker. Indeed, the ‘self-employed’ vacancies here are advertised by firms who invite applicants to become self-employed before hiring them. Nonetheless, these “violin” plots of offered wage distributions play an interesting tune. The distribution of offered wage rates is far wider for vacancies associated with self-employment and flexible hours than those without, within a given occupation. There is far less evidence of a “going-rate” for jobs associated with the self-employed and flexible working. This sounds intuitively plausible. | 1 |
Michael C Bonello: Population ageing - a major challenge for policymakers Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the opening session of two workshops on pension reform, organised in Floriana, Malta, by the World Bank Institute, 9 June 2003. * * * I should first of all like to thank the World Bank Institute for choosing Malta as the venue for this Workshop and to welcome you all to our country. Your presence here continues a centuries-old tradition whereby Malta exploits its location at the centre of the Mediterranean and its reputation for hospitality to bring people and ideas together. Malta is currently undergoing a rapid transformation in a bid to seize the opportunities arising from accession to the European Union and from the further consolidation of its trading relationship with its Southern and Eastern neighbours. The economy, albeit small, has a number of vibrant sectors ranging from high-tech manufacturing to world-class conference tourism. As in the case with many other countries, however, the long-term prospects for economic development in Malta will be inevitably affected by the impact of population ageing. Given that the population support ratio, defined as the number of persons of working age to those of pension age, is expected to halve over the next 25 years to just over 2, this impact is likely to be significant. The global and regional dimensions of population ageing Malta is by no means an exception in this regard. | This will no doubt involve making difficult choices, some of which may have painful consequences in the short run, but which are essential for sustained economic development. The economic consequences of population ageing This is the case because population ageing is expected to have wide-ranging and long-lasting economic effects, involving not just government revenue and expenditure but also national saving and investment ratios as well as the labour market. The main issue that comes to mind when mentioning population ageing is its impact on government finances. Most countries, including Malta, presently operate pay-as-you-go pension systems. The ageing phenomenon undermines the financial viability of pay-as-you go systems by reducing the number of contributors relative to beneficiaries. Ageing also entails increased government expenditure on health, and especially on the care of the elderly. The challenge to public finances is even greater if, as is the case in Malta, the budget is already in deficit. Changes in the age distribution of the population are also likely to affect a country’s private consumption and saving patterns. The ‘life-cycle hypothesis’ suggests that individuals tend to even out consumption outlays over their lifetime, such that a person saves during the working years in order to BIS Review 29/2003 1 finance consumption during retirement. A rising trend in the proportion of elderly people, therefore, tends to be accompanied by a decline in the national saving ratio. | 1 |
But one has to remember that there was no obvious alternative. Inflation targeting was new and untried and not many people were even aware of its existence. Moreover, it was far from obvious that it would succeed where the fixed exchange-rate policy had failed – in establishing an anchor for price setting and wage formation. We now know that it did succeed and moreover that it did so fairly quickly. If I were to choose what I think is the most important contribution of inflation targeting, and indeed its overall main merit, it would be this – that is provides a nominal anchor for the economy.2 It is quite 2 The same conclusion is drawn by Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin and Adam S. Posen (1999), Inflation Targeting – Lessons from the International Experience, Princeton University Press. 2 BIS central bankers’ speeches clear from a Swedish point of view that inflation targeting has helped “to put the house in order” by providing such an anchor, and it is probably an important explanation as to why the Swedish economy has developed so well since the crisis in the 1990s. Has the Riksbank systematically set the repo rate too high? But, as I noted, inflation targeting has nevertheless been criticised, particularly in recent years, so let me now move on to this criticism. One criticism is that the Riksbank has an inbuilt tendency to set the repo rate too high. | This may be a question of paying attention to economic developments in the longer term, beyond the forecast horizon, or risks that are difficult to quantify relating to the financial parts of the economy. The fact is that one of the main aims of having an Executive Board is that its members should have slightly different views on things. When the Executive Board was established in 1999 the more or less explicit aim was that it would consist of people with different backgrounds, experience and knowledge. The idea behind this “diversification” is that committees tend to make better decisions than individual policymakers, as a committee can “pool” its experience and knowledge.19 And in order to have something to “pool”, the people on the committee should of course not be too alike. I believe that everyone who has ever been a member of the Executive Board of the Riksbank agrees with the general wording that the Riksbank should stabilise inflation around 2 per cent and at the same time help to stabilise the real economy. This is also the essence of the Sveriges Riksbank Act and its preparatory works. However, this does not mean that actual monetary policy can be linked to the theoretical description in a simple and very strict way. My impression is that among both the present and former members of the Executive board there is a lot of scepticism towards far-reaching and strict parallels between theory and practice. | 1 |
The DBU-ACU divide served us well for decades, but has been losing its relevance. There are a number of reasons for this development. First, since 2004, our developmental incentives have no longer been based on the domestic vs offshore distinction. Second, the divide between domestic and offshore banking has in practice become increasingly porous. 19. Third, and most importantly, there have been major global regulatory developments in the last five years, that have resulted in banks’ offshore activities being subject to rules that are broadly similar to those governing the domestic banking business in Singapore. 2 BIS central bankers’ speeches • New global rules have increased the amount and quality of capital as well as the liquidity buffers that banks need to hold • Global regulators have also agreed on a common framework to control large exposures to a single counterparty 20. These global regulatory reforms have put all banks on a sounder footing. It has also reduced the relevance of MAS rules that distinguish between offshore and domestic banking activities of foreign banks, since home regulators will now be requiring their banks to meet enhanced standards on a group-wide basis. 21. Post-global financial crisis, we have also seen a strengthening of co-ordination among home and host regulators. MAS is an active member of the global Crisis Management Groups of regulators of foreign banks with significant operations in Singapore. This aims to enhance regulators’ preparedness and coordination in crisis management. 22. | At the end of discussions, the Supervisory Council decided to keep the key interest rate unchanged, at 2.75%. This policy will help provide the requisites for complying with the inflation target and is consistent with our projections for inflation rates returning within the target band in the medium term. In this context, I avail myself of this opportunity to underline that the Bank of Albania expects a better response by the banking system with regard to lending. This response should take into account, among others, the positive prospective of economic development in Albania and the stimulating policies applied by the Bank of Albania. Based on the available information, the Bank of Albania deems that expected economic and financial development requires maintaining the easing monetary policy stance in the quarters ahead. 2 BIS central bankers’ speeches | 0 |
Charles L Evans: Patience is a virtue when normalizing monetary policy Speech by Mr Charles L Evans, President of the Federal Reserve Bank of Chicago, at the Peterson Institute’s Conference on Labor Market Slack, Washington DC, 24 September 2014. * * * Thank you. I would like to thank the Peterson Institute and Adam Posen for organizing this conference focusing on labor market issues. The functioning of the labor market is always of great interest to both academics and policymakers. But today, with the collapse of labor demand during the Great Recession and ongoing structural changes, judging the health and future of labor markets is both especially challenging and important. The work presented at this conference and others like it offers an opportunity to integrate the most recent research with the thinking of policymakers. In keeping with this theme, I will first offer my views on the labor market and how the issues raised here influence my thinking on monetary policy, and I will then discuss my more general strategy for considering when and how we should begin to normalize monetary policy. Before I begin, let me note that the views I express are my own and do not necessarily represent those of my colleagues on the Federal Open Market Committee (FOMC) or within the Federal Reserve System. Introduction and summary Five long years have passed since the trough of the Great Recession, in mid-2009. Late that year the unemployment rate stood at an astonishing 10.0 percent. | With the economy undershooting both our employment and inflation goals, monetary policy does not presently face a conflict in goals; actions that support employment growth also help move inflation up toward our target. Yet, as I look to the future and assess risks, I foresee a time when a policy dilemma might emerge: Namely, we could find ourselves in a situation in which the progress or risks to one of our goals dictate a tightening of policy while the achievement of the other goal calls for maintaining strong accommodation. BIS central bankers’ speeches 1 So what happens when a conflict emerges? In such cases, the FOMC has said that it will follow a “balanced approach” to achieving its policy goals. I will elaborate at length on this later, but let me summarize how I think we should operationalize this approach today. We should keep our focus on our policy goals and should be highly attuned to both the likelihood and the costs of missing those goals. To me, the risks imposed on an economy forced to operate at the zero lower bound on policy rates are paramount. Accordingly, before the Fed raises rates we should have a great deal of confidence that we won’t be forced to backtrack on our moves and face another painful period at the ZLB. | 1 |
21 In other words, monetary policy decision-making is surrounded by various different types of uncertainty. At the Riksbank we grapple with issues such as: Which shocks are currently the driving force behind the business cycle? Which forecasting model gives the best forecasts? How large is the effect of a change in the interest rate on inflation? What characterises well-balanced monetary policy? How should the risk of low inflation be balanced against increased risks for financial instability? Is the data correct? Should special attention be given to really negative scenarios? Figure 13. The Riksbank's forecasts on labour force participation and GDP growth (a) Labour force participation (B) GDP growth Note. Thousands of persons, aged 15-74 and annual percentage change. The figure shows the Riksbank’s forecasts for labour force participation and GDP growth 2013–2019 (February). Sources: Statistics Sweden and the Riksbank There has been greater interest in how to take into account uncertainty in the monetary policy decision-making process since the financial crisis. This has often been about finding a structured way to take into account the uncertainty in the monetary policy decision. Unfortunately, I must say that the answer to this question is not exactly easy and that it can probably be best summarised as “it depends”. In practice, there are three approaches a policymaker can take with regard to uncertainty. He or she can act more forcefully, more cautiously or as if the uncertainty did not exist. | In order to further enhance banks’ risk management in property mortgage lending and to strengthen borrowers’ resilience to withstand future interest rate hikes, the HKMA has just issued a set of guidelines to banks, requiring them to adopt an increase of 300 bps instead of 200 bps of interest rate when stress-testing the repayment ability of mortgage applicants. This measure is applicable to all types of mortgages, including residential as well as commercial and industrial property mortgages. The risk of overheating in the commercial and industrial property market also continues to rise. Our experience shows that the quality of commercial and industrial property mortgages will deteriorate more significantly than that of residential property mortgages during market downturns. In view of these circumstances, our guidelines have also required banks to lower the maximum LTV ratio of mortgage loans for commercial and industrial properties, whether or not for self-use, by 10 percentage points from the existing applicable levels. For example, for mortgage applicants with income mainly derived from Hong Kong, the maximum LTV ratio will be lowered from 50% to 40%. If the applicant’s income is mainly derived from outside Hong Kong, the maximum LTV ratio will be lowered from the current 40% to 30%. The HKMA has also required banks to standardise the maximum LTV ratio of mortgage loans for all standalone carpark spaces at 40% and the maximum loan tenor at 15 years. | 0 |
As regards Swiss bank regulations, it is primarily the risks emanating from developments in the real estate and mortgage markets which are presently the focus of public interest. However, the most decisive factor for the long-term importance of the Swiss banking centre is the alleviation of the TBTF issue. Only if this can be done, will it be possible to provide a home to international banks in Switzerland in the long term. Thus, regulatory efforts to contain the TBTF issue convincingly in Switzerland are extremely important. With the Swiss TBTF legislation, which is currently being implemented, we are making good progress in this respect. The package of legislation rests on two pillars. First, systemically important banks are subject to significantly higher capital and liquidity requirements with a progressive component. Second, arrangements must be made to ensure that systemically important banks are resolvable in a crisis, so that it is not necessary to resort to public funds. If these measures are implemented in full, incentives to take on excessive risk will be substantially reduced. This will diminish the likelihood of a crisis, as well as the costs to the taxpayer, should a crisis nevertheless occur. At the same time, the measures help to strengthen domestic competition, because they reduce the implicit subsidies to the TBTF banks. However, we have not yet achieved our objective. | And its calibration is subject to uncertainty which, combined with its size and the quantity and importance of the services that it underpins – retirement income and long-term investments – mean that we have to maintain a very high confidence that its calibration is suitably prudent. 4/5 BIS central bankers' speeches The increasing role played by illiquid assets – whilst wholly consistent with the advantage that insurers have as investors in this space – is a growing source of uncertainty and makes it essential that the calibration be set at a level appropriate to the assets that firms actually hold. I am sympathetic to calls to look again at breadth of eligibility and process improvements for the MA to remove barriers to investment – in infrastructure for example. But we should be cautious about calls for the MA to be made any more generous, both for prudential reasons and because the very existence and current level of the MA may already crowd out investment by insurers in anything that is not eligible. Another important area is the role of internal models in the regime. My colleague Charlotte Gerken has spoken recently about our concerns over excessive reliance on internal models and some potential responses to it. | 0 |
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