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Panel Remarks: The Fed and Main Street during the Coronavirus Pandemic - FEDERAL RESERVE BANK of NEW YORK SPEECH Panel Remarks: The Fed and Main Street during the Coronavirus Pandemic "Supervisory and Regulatory Action to Support the Economy and Protect Consumers" April 23, 2020 Posted April 24, 2020 Kevin Stiroh, Executive Vice President As prepared for delivery Good afternoon. Thank you for your critical work and for participating in this important forum on "The Fed and Main Street during the Coronavirus Pandemic." The COVID-19 pandemic is impacting all of us – first and foremost from a health perspective, but clearly in terms of social and economic impacts. As has been discussed extensively today, this impact has fallen heavily on low- and moderate-income and minority communities across all three dimensions. I'll speak about what the Federal Reserve is doing to support the economy and to protect consumers and small businesses through supervisory and regulatory actions. I'll note that these action are focused on supervised banks and do not address the significant challenges faced by those households and businesses outside of the traditional banking sector and served by socially responsible capital providers such as community development financial institutions (CDFIs), non-profits, foundations, and impact investors. Before proceeding, let me emphasize that I am speaking for myself and that these view do not necessarily reflect those of the Federal Reserve System or the Federal Reserve Bank of New York. | Provision of Financial Services Broadly speaking, the fundamental purpose of banking is to provide financial services such as credit provision, payments, and deposit-taking to support sustained economic growth. This is true in normal times, and is even more true in the current environment. The Fed has taken a number of actions to help the U.S. banking sector perform these critical functions through changes to supervision, regulation and the provision of liquidity. Collectively, these steps are designed to limit the potential for financial channels to amplify the initial economic shock created by the COVID-19 virus. Beginning with supervision, the federal banking agencies, in consultation with state financial regulators, are encouraging financial institutions to work with borrowers in a safe and sound manner.1 The agencies view prudent loan modification programs as positive and proactive actions that can help both borrowers and lenders. This approach is consistent with the agencies' longstanding practice of encouraging financial institutions to assist borrowers in times of natural disaster and other extreme events. The Fed has also provided information to banks on how we are adjusting our supervisory approach.2 This includes, for example, monitoring and outreach to help banks of all sizes understand current challenges and risks; a temporary reduction in exam activities, particularly for the smallest and lowest risk institutions; and additional time to resolve non-critical existing supervisory findings. These actions should help financial institutions deploy their resources as efficiently as possible and continue to support their customers and local economies in a prudent and fair manner. | 1 |
9 All speeches are available online at www.bankofengland.co.uk/speeches 9 Innovations in retail payments can transform checkout and ecommerce platforms can open new financing to SMEs. Innovation in, and greater connectivity across, wholesale payment systems have the potential to cut the costs of doing business across borders and unlock new trading opportunities. Intelligent use of big financial datasets could transform credit markets, closing the gap between financing opportunities available to small companies and those enjoyed by their larger competitors. Given their position at the heart of the financial system, central banks have a crucial role to play in supporting the development of this new finance, not least through creating the new infrastructure that it will require. 32 Monetary Policy’s Role in Managing the Transition As a former central banker, Whitaker would have recognised the importance of maintaining price stability during periods of large structural change. The appropriate setting of monetary policy will be influenced by the structural changes wrought by the Fourth Industrial Revolution, including in the labour market, by its impact on price dynamics and on the equilibrium rate of interest. To be clear, as these structural changes are real in nature, monetary policy cannot prevent them, and it would be unwise to attempt to accelerate them. For example, running the economy hotter is unlikely to be effective at increasing the rate at which workers displaced by technology can find new roles because it does not address the underlying frictions, particularly the lack of suitable skills. | Such targeting requires co-ordination between donors and must be in response to the real needs of a country. To this end we see it as imperative that there is effective follow up to the IMF’s FSAP missions to channel technical assistance to where it is most needed. It is also important for individual regulators in developed markets to contribute to capacity development elsewhere. The growing interconnectedness of the financial system means it is in our interests to do so. Sometimes bilateral links can be valuable, especially where the legal and regulatory systems are similar, in former colonies or territories perhaps. At the FSA we have a practice of receiving secondments from other regulators, which is valuable for us, and we hope for them. Perhaps more relevant for Singapore is ensuring that Emerging Markets’ concerns and experiences are heard. A thousand different voices can be lost in the clamour so it is important that objections are 6 BIS Review 25/2003 raised in an organised way, for example through regional organisations. Then the international committees themselves must ensure their consultation processes are meaningful and wide-ranging. Though this combination of adjusting committee structures, and membership, enhancing technical assistance and encouraging effective consultation we can ensure that regulatory standards are truly global and fit for purpose in countries at all stages of financial market development. Conclusion So to return, finally, to my introductory question – is the global regulatory system fit for purpose in the 21st century? | 0 |
Policy makers in Asia are well aware of the complications and costs involved in sustaining their current regimes. Many are moving toward permitting more flexibility against the dollar, and even in their effective exchange rates. Few however are comfortable with the prospect of accepting large short-term volatility and large movements over time in their effective exchange rates. They are looking for a world in which they can have more monetary policy independence, progressively more financial integration with the globe, and face less risk of large destabilizing moves in the major currencies and less vulnerability to acute pressure on their own currencies. The exchange rate system among the major currencies provides a desirable degree of flexibility in real exchange rates. Although the process of cooperation among the G-7 has not eliminated the large swings in exchange rates associated with large changes in fundamentals among the major economies, it has had some modest success in avoiding more damaging movements. This cooperative framework, characterized by a pragmatic approach to promoting greater stability in exchange markets, offers a reasonable model for cooperation among the major currencies and those of the emerging world. The challenge ahead is to help manage the transition to the monetary system that provides for more flexibility in the exchange rates of all the major economic areas, and this has to be handled with care. | In the national economies of those not yet prepared to allow more flexibility in their effective exchange rates, it creates the risk of growing distortions in the allocation of resources, conflict with domestic monetary policy objectives, and the risk of larger and more abrupt future movements in the exchange rate. These four broad forces will have substantial implications for the macroeconomic performance of the world economy over the medium term. This combination of fiscal sustainability problems, large external imbalances, and the tension in the existing exchange rate system creates the risk of unanticipated shocks to financial prices, even in a context where monetary policy credibility is strong. The probability of these shocks may be low, but it is higher than it has been, and higher than we should be comfortable with. These shocks could be large enough to lower future growth outcomes. The world’s economies have very different capacities to comfortably manage the inevitable adjustments. Without policy action commensurate with the challenges, we face some risk, it may not be high, but it is material, of a world with somewhat lower growth performance and higher volatility. Although the United States has the distinction of presiding over the more awkward combination of imbalances, it is in many ways in a better position than other countries to manage successfully through this period. Our underlying fiscal position is stronger, our debt to GDP burden lower, our demographic cliff more moderate, and our trend growth rate substantially higher than that of the other major economies. | 1 |
So does the responsibility for breaking off talks lie entirely with Greece? The decision to interrupt discussions was taken by the Greek authorities. That also surprised us, for we were coming to the end of some quite focused and fruitful exchanges. You are talking about proposals in the past tense. Does the ECB consider that the question to be put to the Greeks in the referendum is already null and void, since the assistance arrangement will no longer be relevant from the evening of 30 June? The programme will indeed formally expire on Tuesday evening. Having said that, if the response is “yes” I have no doubt that the euro area authorities will find the means, one way or another, to honour the commitments that have been made. The question is a political one. It’s the Greeks who hold the answer to that question. And if the Greeks say “no”… That would be to refuse the offer made by the other 18 members of the euro area. It would then be very difficult to revive the political dialogue. The Eurogroup clearly considered that the proposals of the three institutions had reached the limits of what was acceptable. Alexis Tsipras feels that Europe has not lived up to its commitments on debt restructuring… The debt question was indeed a priority for the Greek government. | But since 20 February the Eurogroup ministers have said that this discussion would only come in a second phase and that it was necessary first of all to decide on a credible reform programme. Greece has chosen to break off talks before the second part of the sequence. BIS central bankers’ speeches 1 Doesn’t that debt have to be restructured to make the Greek economy viable? First of all, it has been adjusted three times since 2012. Adding up the exchange and the buyback of private debt, coupled with the revision of the maturity and the interest rates on European loans, that represents more than 100% of GDP in terms of debt reduction that has been approved. The Greek debt burden represents 4% of GDP, less than in Italy or in Spain. The question is not therefore to know if restructuring the debt is necessary but whether restructuring it a fourth time would help Greece. The most important thing for the future of Greece is for it to return to growth. To achieve that, it’s necessary to remove the rigidities of the Greek economy, the tariff barriers and vested interests, all of which impede economic activity and weigh down on the purchasing power of employees, of whom much has been asked. The Greek executive has never made these questions the focal point of the talks and that has been a real disappointment from a government which everyone expected to be very committed to combating vested interests. | 1 |
2 BIS Review 25/2003 Kielland’s description of a financial crisis and the consequences were realistic. There was speculation then and there is speculation today, but in other kinds of financial instruments than at that time. The 1899 banking crisis in Kristiania was the most serious of the regional crises. The crisis was particular to Norway, following in the wake of the strong property boom and the subsequent crash in summer 1899. The next two banking crises, in 1920-1928 and 1988-1992, were far more severe than the earlier crises. There were particular reasons for each of the last three crises, but they also have much in common: 2 Asset prices rose quickly prior to crises. Each cyclical upswing had its speculation objects. Property prices and share prices for property companies rose to a very high level in the last half of the 1890s. Share prices, particularly in shipping and whaling, rose dramatically during the First World War, then fell markedly afterwards. In the 1980s, prices for dwellings and commercial property increased rapidly. Households and enterprises increased their debt more than their nominal income in the periods of expansion before the crises. High debt made them more vulnerable to loss of income or increases in real interest rates. The debt burden increased less in the 1890s and during the First World War due to a strong increase in nominal income. Under the gold standard, however, periods of growth in nominal income were normally followed by periods with a fall in nominal income. | For Norwegian households, changes in house prices will therefore probably have a greater impact on consumption than changes in equity prices. In Norway, it became more common to own equities for all income and age groups in the 1990s. This was to a large extent reversed last year as a result of the fall in equity prices. We should nevertheless not rule out the possibility that fluctuations in equity prices in the future may have stronger effects on the real economy than we have witnessed so far. Developments in various asset prices may also influence investment. High equity prices may make it easier to gain access to capital to finance the acquisition of new machinery and buildings. A rise in property prices provides scope for raising larger loans against collateral in the asset. Possibilities for increased credit may contribute to higher demand for goods and services. The process may be self-reinforcing since part of the available credit can be used to purchase dwellings and other property. Similarly, bubbles in the stock market can result in overinvestment. When equity and property prices start to fall, companies are left with too much real capital and investment declines. This may lead to or amplify an economic downturn. There may be several factors that imply that particular emphasis should not be placed on financial imbalances in the conduct of monetary policy. First, it may take a long time before imbalances are triggered. The uncertainty surrounding developments so far ahead is considerable. | 1 |
To reach that wider audience, to close those trust and understanding deficits, central banks will need new tools and techniques. A New Frontier for Central Bank Engagement Which tools and techniques? Were this simply a case of producing more, trust and understanding problems would have been long since solved. It is not. As philosopher Onora O’Neill has argued, simply adding to reporting does little for accountability and trust-building. 63 If reports are mostly unread or unreadable, smothering people in more words and numbers could even detract from trust and accountability. In one sense, this is not a new point. Claude Shannon, the grandfather of information theory, did not define information by words or digits. Instead he defined it by whether uncertainty was reduced on the part of the receiver. 64 If receivers are overwhelmed by the depth, discouraged by the density and bamboozled by the complexity, reporting can be disinformation on Shannon’s criterion. For a chunk of society, the very volume of reporting may be increasing uncertainty and impairing information, understanding and trust. Even the term “central bank communication” – a mainstay of central banking and a centrepiece of academic studies of central banks – may fail as a description of what is these days required to build trust and improve understanding. The quest to improve communications makes sense. But it has more than a hint of better sermons to the assembled congregation, enhanced education of an inattentive audience, a smoothlyswinging one-way door. Communication means mouths. | This success shows that regulation of crypto players and Page 3 sur 5 crypto assets and more broadly of payments is one course of action where a “pragmatic” or “focused” multilateralism can, and must, still deliver. To avoid further payments fragmentation, there are two imperatives: (i) let us keep coordinated. I am sometimes impressed by the growing number of international bodies which play in the “crypto-regulations” orchestra; we need a strong, single conductor, and that should be the FSB (ii) let us implement in all jurisdictions. The current moment calls less for further global reflection or ever refining of taxonomies of financial tokens, and more for decisions and the monitoring of basic, consistent and robust national regulations. II. Central banks have their own driver’s seat in innovation Digital technologies are profoundly transforming finance: from artificial intelligence, API and mobile apps for the development of open banking and of the “banking-as-a-service”, to distributed ledger technology and smart contracts. We are certain to see a significant development of tokenised and decentralised finance. In such a context, our stance at the Banque de France is both to support regulatory reforms and to play an active innovative role. The Banque de France has been using blockchain for several years now. In 2017, we were the very first central bank worldwide to implement a blockchain solution to manage, together with commercial banks, a repository of creditors. | 0 |
Let me focus in the minutes I have at my disposal on several economic issues. Our debate is so more important for it takes place at a time of some economic slowdown all over Europe and of an erosion of multilateralism, of spreading trade conflicts. The prospect of a hard Brexit is very annoying for all of us and I still very much hope that such a denouement would be avoided. Likewise, it is high time to strike a deal on the Multiannual Financial Framework so that the great challenges the Union is facing (protection of borders, cyber fare, climate change, conflicts in near and more remote neighborhoods, etc.) find proper conciliation with the need to preserve the cohesion of the Union and avoid further fragmentation. I also trust that EU leaders will find the right balance to address key institutional and policy related weaknesses of the Euro area. I mention this, for Romania, like other Non-member States, is bound by EU accession treaties to join the single currency area eventually. And hopefully, this will happen in the not too distant future. In this regard I wish to mention that two major documents on Romania’s path to the Euro area (an analytical report and a Plan of action) have been recently completed and have been subjected to the scrutiny and approval of the political parties and the Parliament. I was one of the vice-chairs of the National Commission which guided the completion of the two documents. | I should say that we are not oblivious to what it takes for accession to be a success. No matter how much one wishes to put accession on a fast lane, success hinges on having achieved a critical mass of real and structural convergence with the Euro area. The lessons of the Euro area crisis remind us starkly this reality. The more robust the Euro area turns, as a result of institutional and policy reforms, the better for us. When it comes to reforms of the Euro area, I would highlight the respect for rules and their 1/3 BIS central bankers' speeches enforcement, on one hand, and the introduction of risk-sharing schemes on the other. Among the latter I range a collective deposit insurance scheme (EDIS) which, together with a much stronger Resolution Fund (SRF) would complete the Banking Union, and the introduction of instruments that can help member states deal with asymmetric shocks. A euro area budget does make sense in this respect. Let me make a few remarks on the macroeconomic scene in Europe. The economic recovery of recent years has been heavily dependent on non-standard operations of the main central banks and very low interest rates. There are still large public and private debts, which are especially burdensome in the Euro area – and which complicate the mission of policy normalization, of unwinding special operations of the ECB. Fortunately, some countries in our region (including Romania) enjoy a much better situation in this respect. | 1 |
However, when the adjustment is over, we should not be faced with persistent inflation, and it is the chief role of monetary policy to try to ensure that inflation does not become entrenched. The Central Bank published a new macroeconomic forecast yesterday, as well as announcing the Monetary Policy Committee’s interest rate decision. The highlights are as follows: • GDP will contract by about 8½% in 2009 and by almost 2½% in 2010. • The contraction for 2009 is rather smaller than previously forecast. • Private consumption has declined less sharply so far in 2009, probably because disposable income rose more in 2008 than previously forecast, and because of pension fund payouts amounting to some 1½%of GDP in 2009. • In addition, unemployment has risen less than previously projected. • Recovery will begin in early 2010, in the sense that quarter-on-quarter GDP will begin to grow. 4 BIS Review 146/2009 • At that point, however, Icelanders will still consider the situation unfavourable, and it will keep deteriorating for a while, as unemployment and the output slack will continue growing well into the year, as will the contraction in private consumption. • As the second half of the year progresses, these factors, too, will begin to improve. • As always, these projections are uncertain, and the economic recovery could prove stronger or weaker. | Már Guðmundsson: Monetary policy objectives and developments in the Icelandic economy Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at a breakfast meeting of the Iceland Chamber of Commerce, Reykjavik, 6 November 2009. * * * In general, monetary policy is conducted under conditions of uncertainty. The future is always uncertain, of course, but so are the present and the recent past – at least, when one is assessing the state of the economy. This is axiomatic to anyone who has had to wait for national accounts figures in order to estimate current GDP growth and has then seen statistics revised repeatedly over a period of several years. Another source of uncertainty is the effect of monetary policy instruments on other interest rates, exchange rates, asset prices, demand, and inflation. Naturally, we know a great deal about the relationships in the economy, but we don’t know what the correct model of it is, and we probably never will, as economic structures change over time. Furthermore, expectations play a key role in the entire process, and while they may remain reasonably stable for a time, other periods of time will come, and expectations will become unhinged. The relationship between interest rates and exchange rates under conditions of free cross-border movement of capital is different to the relationship that exists under capital account restrictions. In general, the monetary policy transmission mechanism depends on the maturity of the financial markets. | 1 |
Chart 18: UK banks hold only a small fraction of CLOs Chart 17: Corporate gearing still well below peak but has grown recently Per cent of earnings Other corporate debt Commercial real estate debt 400 EA Banks US Banks Japanese Banks 300 US Insurers Pension funds 200 100 0 1998 02 06 10 14 18 Sources: Association of British Insurers, Bank of England, Cass Commercial Real Estate Lending survey, Deloitte, LCD, an offering of S&P Global Market Intelligence, London Stock Exchange, ONS, Preqin, Deals Business Intelligence from Refinitiv and Bank calculations. Indicative Bank staff estimate. For further detail, please see Chart F.5 in the November 2018 Financial Stability Report. UK Banks These types of investor would typically hold the riskier tranches SMAs Other investors (mainly Open‐ended international) funds Hedge funds Structured credit funds UK Insure EA Insurers Other SMAs CLO managers Sources: BarclayHedge, Bloomberg Finance L.P., FCA Alternative Investment Fund Managers Directive (AIFMD), Firm public disclosures, LCD, an offering of S&P Global Market Intelligence, Morningstar, National Association of Insurance Commissioners, Securities Industry and Financial Markets Association, Solvency II submissions, and Bank calculations. Indicative estimated holdings of CLOs by global investors. 1 square = 1% of $ billion global CLO market. For further detail, see footnotes to Chart F. 8 in the November 2018 Financial Stability Report. | There are also particular reasons why, in this case, levels of debt may have been poor indicators of cross-country risk. In the United States, for example, many mortgages were “non-recourse” – it was lenders, not borrowers, who were liable for any negative equity in the event of default. This increased both the borrower’s incentive to walk away from the loan and the 1 British banks certainly lost much less on domestic mortgage lending during the last financial crisis than they had in the early 1990s – when, as it happens, the level of debt was lower than in 2007. Most losses during the financial crisis were on banks’ overseas assets. 2 All speeches are available online at www.bankofengland.co.uk/speeches 2 lender’s subsequent loss. All else equal, this would mean the same level of debt was riskier in the US than in the other two countries. Thanks to the tax regime the opposite was true in the Netherlands. Mortgage interest was fully deductible from taxable income and interest receipts were only lightly taxed. This encouraged so-called “round-tripping”. By ramping up both sides of their financial balance sheet – funding extra deposits with higher mortgage debt – the more highly taxed households could reduce their overall tax bill without adding to financial risk, either individually or collectively. Yet it turns out that the superior predictive power of growth rates of debt, over levels, is a more general phenomenon. | 1 |
By 2020, the estimated number of millionaires in Mainland China and Hong Kong together will be 3.7 million, with an accumulated wealth of $ trillion.2 So it is beyond doubt that the expanding affluent population in China and the rest of Asia will generate ever increasing demand for private banking services for high-net-worth individuals. While it is clear that there will be increasing number of wealthy people in Asia looking for private banking services, the question we need to ask is: “Will they choose Hong Kong?”. This begs the question on what Hong Kong can offer over and above the other centres that are equally keen to gain market share as a private banking hub. In this regard, there are 1 Global Wealth report 2011, Credit Suisse Research Institute 2 Deloitte and Oxford Economics BIS central bankers’ speeches 1 several fundamental attributes that make Hong Kong exceptionally well placed to become the leading private banking hub in Asia: • Hong Kong has a robust legal framework with an independent judiciary that safeguards property rights. We have a simple, low and predictable tax system. Only profits and income derived in Hong Kong are subject to Hong Kong tax. There are no withholding tax, estate duty, and tax on capital gains, dividends, interests and so on. We have well established laws to protect the confidentiality of customer information. | In the early days, that led to a concentration of liquidity provision amongst the largest incumbent banks, eager to grow volumes and able to afford the expensive high-speed equipment required. More recently, however, some of those firms have exited or downscaled as the scope to deliver returns from traditional business models has fallen. And a number of non-bank providers have emerged, focused less on providing balance sheet capacity to the market, and more on exploiting new technology. Taken together, this has driven a renewed dispersion of market share (Chart 2). In 2009, the number one provider in Euromoney’s annual FX survey saw nearly ten times the flows of the number ten firm. Today that ratio is just two. Chart 2: Falling concentration amongst liquidity providers Source: Euromoney FX surveys. 3 https://www.globalfxc.org/global_index.htm, adjusting for duplicate entries reported to more than one national index. 5 All speeches are available online at www.bankofengland.co.uk/news/speeches 5 There’s been an even bigger revolution in trading platforms, as the share of trading routed through liquidity providers’ single dealer offerings and the traditionally dominant primary venues has fallen, and business has increasingly migrated towards multi-dealer platforms, which allow users to put multiple chosen providers into competition on a single site (Chart 3). Chart 3: Platform use as a share of spot FX turnover in the London market4 Source: London Foreign Exchange Joint Standing Committee surveys and Bank of England calculations. | 0 |
Up to September, Stock Connect captured over 65% of foreign holdings of A-shares; its Northbound daily average turnover doubled year-on-year to RMB42 billion for the first nine months of this year. In just two years’ time, Bond Connect has also quickly gained traction. It now has over 1,300 investors from 31 jurisdictions, and 61 of the top 100 global asset managers. In the first ten months of the year, it contributed to around 40% of the increase in foreign holdings of onshore bonds; its daily turnover increased 2.7 times year-on-year, and now accounts for more than 60% of the overall trading turnover by foreign investors. 10. And like other things we do, we build on the good start and keep working to make the Connect schemes more attractive to international investors. We introduced in June a new arrangement that will enable investors to obtain and hedge in CNY for the Stock Connect. For Bond Connect, we have expanded the settlement cycle, introduced DvP settlement and block trade functionality, and added an additional electronic trading platform. We continuously listen to market participants, and are exploring further enhancements such as expansion of tradable product scope under Bond Connect and launch of its Southbound leg. Huge Inflow into Mainland China’s capital markets 11. Given the much greater ease of investing in the capital markets in the Mainland of China, foreign holdings of A-shares and onshore bonds increased rapidly by 73% and 93% respectively in the past 2 years. | On top of this system, banks or similar credit institutions can create money by lending, more or less as they do today. But it is uncertain how credit institutions will behave in a more decentralised system such as this one. It also raises new questions about where the responsibility for licensing and regulation should lie, especially if the system operates independently of national borders. This poses a risk of increased instability and more frequent crisis. Norges Bank’s role Chart: Norges Bank is tasked with ensuring: Norges Bank plays a key role in the financial system. Norges Bank is responsible for keeping inflation low and stable. That secures confidence in the Norwegian krone. We are also responsible for promoting financial stability and an efficient and secure payment system. Banks settle obligations between themselves over accounts in the central bank. If necessary, we can 5/7 BIS central bankers' speeches provide banks with additional liquidity. At the same time, our role as the bankers’ bank gives us a channel into the wider economy, which we use to implement monetary policy. A change in our policy rate will pass through to banks’ lending and deposit rates. Norges Bank closely monitors developments in the banking industry and the financial system. Innovation and competition can bring better and cheaper services, but can also bring risks associated with, for example, cybercrime, data protection and financial stability. There is also the risk that some participants gain substantial market power. | 0 |
Regulators must be prepared to take early and decisive corrective actions to forestall a build-up of risks in individual banks and the banking system as a whole. BIS central bankers’ speeches 1 Further, contagion amongst banks is a fact of life. Financial systems can be severely stressed by their weakest points, even if it involves a single bank or a group of small banks. The Northern Rock episode in the UK was an example in the earlier phase of this crisis. The Spanish cajas or regional savings banks are now another. The largest Spanish banks are widely acknowledged to be well capitalised, to have lower exposure to the property sector and to have well diversified earnings internationally. But until the troubles in the cajas are resolved, even sound Spanish banks are being penalised by higher funding costs, and citizens and tax payers too are exposed. Confidence is therefore about banking systems, not just about individual banks. This is all the more why regulators have to be vigilant in spotting weaknesses and requiring corrective actions, both across a system and in individual banks. The weakest point matters. International regulatory reforms The global financial crisis has prompted a major review of international regulatory standards. We have achieved much, with the new rules developed through the Basel Committee on Banking Supervision and the Financial Stability Board – new rules on the quantity and quality of capital and liquidity and the ongoing work to strengthen cross-border supervision and resolution frameworks for global banks. | Banking liberalisation provided the spur for our local banks to raise their game and compete with some of the world’s largest banks while maintaining high prudential standards and they have done well. We had previously announced the Government’s policy of maintaining the local banks’ market share at no less than 50% of total resident deposits. This remains our position. We are committed to having strong local banks at the core of the banking system. In a very real BIS central bankers’ speeches 3 way, our three strong local banks also give Singapore the confidence to continue opening up the banking sector to foreign competition. Encouraging foreign banks to deepen their Singapore roots A diverse international presence and global connectivity must remain key strengths of Singapore’s financial centre. We host many international banks, who conduct an increasing share of their activities out of their Singapore offices. Some banks have moved their global heads of business to Singapore, or hubbed specific business lines or IT operations in Singapore. Consumers and corporate customers have benefited from the wider range of products and services, offered at competitive rates. The majority of foreign banks in Singapore operate as branches, taking advantage of the cost efficiencies arising from branching within an international bank. We continue to support the use of branches for the vast majority of banks in Singapore, which are in the wholesale and investment banking businesses. Additional measures may be appropriate for retail banks that are important to the domestic market. | 1 |
I envisage the FMC and the industry to further collaborate and come up with the new strategies and ideas to deepen and support the development of our onshore market. Beyond trade or real sector activities, we should look at financial investments, in particular the non-resident investors in our bond market. We have 33.7% of our Government bond market held by such investors. There are opportunities in this domain. 4/5 BIS central bankers' speeches Where are they hedging their foreign exchange exposures? What product can the industry offer for them to hedge onshore? Given these obvious opportunities, we need to develop solutions that will benefit the industry as a whole. The significant overseas investments by residents and foreign currency exposures arising from trade activities create a need for the domestic hedging market to be further deepened. In 2015, FX market transactions volume reached a staggering USD2.52 trillion, yet currency derivatives such as FX forwards and options only made up 5 and 1 percent of the total volume, respectively. Similar concerns also exist for the bond market. Both government and corporate bonds are still primarily held by residents, and we have one of the largest corporate bond markets in the region. Yet, this does not translate into the development of active hedging market activities. Credit derivatives made up less than 1 percent of ringgit derivatives volume in 2015. This prompts several questions. Are our investors able to hedge effectively or efficiently manage the exposures of their portfolios? | For the ringgit exchange rate market, the past two years have been uniquely challenging. At the end of 2014, the situation appeared rather benign. The ringgit was stable, market liquidity was good, trading activity was healthy with market volumes averaging USD11.8 billion daily while the volume for USD/MYR pair averaged USD8.3 billion in 2014. The subsequent period however, precipitated by the weakening external conditions, falling oil prices and domestic uncertainties have laid bare these notions. Volume and liquidity declined, bid-offer spreads widened and at times, there were one-way markets which exacerbated any movements. Given these developments, 2015 was a year where our actions were primarily geared towards stabilizing the markets. While this was clearly achieved, it was not without cost; a reduction in foreign exchange reserves, a markedly less liquid and volatile foreign exchange market, and a weaker currency. In the midst of this, an important observation that became increasingly evident is the continued vulnerability of our markets to the arbitrary and unpredictable devices of the offshore markets. Adverse conditions brought on by the NDF market Activities in the offshore market, in particular the ringgit non-deliverable forward (NDF) market, had brought on observable adverse impacts to the onshore market. To our disappointment, onshore players had become followers rather than leaders in determining domestic market rates. Consequently, taking the lead from the NDF market, the ringgit exchange rate has been quite volatile since last year, peaking at 23.1% for its 1-month historical volatility and is the highest among regional currencies for this year. | 1 |
Having a panel reduces the variability induced by changes in composition month to month and increases the precision of any measured changes in expectations. Before we implemented the survey, our proposal was reviewed and approved by the Bank’s senior management. Next, we issued a request for proposals and received three bids from independent survey organizations to field our survey design. In the end, we chose to work with the Demand Institute, a partnership of the Conference Board and Nielsen. The resulting Survey of Consumer Expectations is a nationally representative monthly internet-based survey. Its rotating panel consists of about 1,200 household heads. We find that the internet approach allows us a great deal of flexibility to ask new questions, and it BIS central bankers’ speeches 1 makes it considerably easier to pose probabilistic questions and to run experiments. It is also – and this is an important consideration – the most cost-effective mode of collection; at the same time, there is also some evidence of higher response accuracy to personally sensitive questions. Our sample is based on the Conference Board’s Consumer Confidence Survey sample, which is drawn from U.S. postal addresses. Respondents are compensated with a payment of $ per survey, and surveys vary in length from fifteen to thirty minutes. Our firsttime response rate is about 60 percent, and we find that respondents have somewhat greater-than-average education and income. The average response rate among repeat respondents is more than 80 percent. | Performance of the mining sector increased following higher output arising from increased capacity utilisation at various mines and investments into operations at various mines. Metal mining was the main driver of this growth, with copper and cobalt output growing by 17.4% and 49.4% to 819,159.19 mt and 8,781 mt, respectively. Construction output was driven by increased public and commercial infrastructure projects around the country, as well as continued high demand for housing. This was supported by expansion in domestic production of cement. Inflation Consistent with the favourable performance in economic growth, the country has succeeded in lowering inflation. Inflation has declined from 17.2 percent in 2003, 9.9 percent in 2009 and stood at 7.9 percent at end-2010. Inflation continued to be moderate, and stood at 9.0 percent as at June 2011. The decrease in inflation over the years can be attributed to prudent monetary policy and a relatively stable exchange rate. The increase in food supply, arising from the favourable crop harvest, has also been a key factor in moderating inflationary pressures in light of high and increasing prices of petroleum products due to high international oil prices. BIS central bankers’ speeches 1 Interest rates Interest rates have generally been on a declining trend in line with the fall in inflation and yield rates on Government securities. This trend was broken as a result of the financial crisis in 2008. | 0 |
Stretched fiscal positions have raised questions about the ability of several euro-area governments to support their banking systems. And the weak position of those same banking systems has also heightened doubts about the sovereigns’ fiscal sustainability (Chart 3). Though UK banks’ exposure to peripheral country debt is relatively modest, interlinkages with euro-area banks that are more heavily exposed have meant that UK banks have also experienced heightened funding difficulties in recent weeks. Unless those conditions improve, our banking contacts indicate that the availability of credit to the real economy may soon begin to suffer. Moreover, the heightened tensions in financial markets are likely to have raised uncertainty more generally and further depressed household and business confidence. Our regional Agents are already starting to tell us that some businesses are putting investment projects on hold as a result. In the early hours of last Thursday morning, European leaders agreed to take further steps: to address the fiscal sustainability of Greece and other periphery countries; to expand the BIS central bankers’ speeches 1 firepower of the European Financial Stability Facility; and to buttress the resilience of European banks through recapitalisation. While the major UK banks will not be required to raise capital, they would nevertheless be well advised to take advantage of any opportunity that does arise to further strengthen their capital and liquidity buffers, thereby putting themselves in a better position to withstand any further deterioration in conditions, without needing to constrain lending. | 4 Note that this only requires consumers to wish to smooth their spending over time, not that they internalise the implications for future taxes of more government borrowing (so-called “Ricardian equivalence”). | 1 |
However, from December, market expectations have approached the Riksbank’s forecasts (see Figure 4). So how can the gap between market expectations and the Riksbank’s repo rate forecasts in 2009 be explained? Some of the deviations may be explained, for example, by the possibility that statements on the lower bound of the repo rate were interpreted to mean that there were only upside risks for the repo rate, but this does not explain them all. A major part of the deviations thus remain to be explained. One possible explanation may be that money market participants have taken a more positive view of economic development. For example, they may have expected GDP growth and inflation to be higher in the future than stated in the Riksbank’s forecasts, and thus require a tighter monetary policy. However, this hypothesis is not supported by surveys of the expected economic development. These show that the money market participants expected both lower inflation and lower GDP growth in the period ahead than the Riksbank. 12 The market participants seem to have believed in a different reaction pattern from the Riksbank than that expressed in the repo-rate path. The disagreement among the members of the Executive Board may have contributed to this. At the monetary policy meetings in July, September, October and December, reservations against the published repo rate path were entered by members who considered that the repo rate path in 2010 should be slightly higher. | Finally, one principle – that has gained much attention during the current crisis – is to keep the determination of the monetary policy stance distinguished from the management of liquidity in money markets. All these principles are captured in the ECB’s monetary policy strategy. And globalisation does not fundamentally alter these principles – which give guidance, in particular, in critical times. To weaken or even abandon these principles would undermine our commitment and credibility. And, in the end, we would risk losing orientation. Our strategy has provided a consistent and coherent framework not only for internal analysis and policy decision-making but also for external communication. Using the same framework for internal and external purposes has helped the ECB to ensure that its monetary policy remains consistent, credible and effective. One key element here is that the ECB, from the outset, has been transparent about its mandate, strategy, and decisions, as well as about what monetary policy can do and, even more importantly, what it cannot do. In this sense, expectations about transparency requirements should be in line with the actual strategy followed by the central bank. Without compromising on its mandate, the ECB has demonstrated a willingness and capacity to react rapidly to exceptional circumstances. It has taken a large number of extraordinary measures to support the functioning of the money market and interbank intermediation. | 0 |
First, it sets out the evidence base on the benefits and costs of the current shareholder-centric model of companies. Second, it makes some tentative suggestions for reform which might tackle some of these costs. There are possible remedies on the table. Part of the solution to the shareholder shorttermism problem may come from mobilising and catalysing what is at present a dispersed, and too often disinterested, long-term investor base. The falling share of institutional investors in equity ownership, together with the rise of passive investment strategies, has exacerbated the trend towards “ownerless corporations”. This is a particular problem in the UK, given its relative lack of block shareholding. 55 Under the auspices of the Investment Association, an Investor Forum has been set up following the recommendations of John Kay’s review. 56 And, internationally, an initiative by asset managers called “Focussing Capital on the Long Term” is seeking some of the same objectives. 57 Ultimately, however, it is simply too soon to say whether any of these initiatives will mobilise and catalyse long-term investors sufficiently to exercise leverage over company management in ways which support long-term value creation. A second, complementary strand would be to seek to reinforce and broaden the “purpose” of companies, to better reflect their broader societal role – their role in serving stakeholders plural (employees, customers, clients) as well as shareholders. Some companies have been able to do so voluntarily by defining clearly their societal purpose and sticking with it. | Going forward, the access to financing for healthcare, education and retirement will reduce the need for high levels of precautionary savings, and thus strengthen further domestic demand in the economy. The fourth imperative relates to ongoing efforts to expand financial inclusion. Financial inclusion has been, and must continue to be, a key component of Asia’s overall strategy to achieve balanced and equitable growth. Indeed, in the advanced economies, there is a now greater focus and attention on expanding financial inclusion to support the strength of recovery. Emerging Asia has achieved remarkable progress on this front. The period of higher growth has been accompanied by lifting millions out of poverty. Asia however still remains the home of two-thirds of the world’s poor. Therefore, much still remains to be done. The imperative is to arrest the widening income disparities and in inequality through providing more households and small businesses with meaningful access to financial products and services, thus bringing them into the economic mainstream. Another is ensuring that as Asia develops, households, particularly in the lower income groups, do not become financially excluded because financial products and services become increasingly unaffordable or complex, or due to practices of financial institutions which increase barriers to access. Finally, Asia is now building on the progress that has been made in strengthening the resilience of our financial systems. Authorities in Asia are at various stages of translating the global financial reform measures into local standards. | 0 |
CONCLUSION Let me conclude. The climate crisis demands urgent collective action to drastically reduce greenhouse gas emissions. The world is probably on the cusp of the greatest economic and societal transformation since the Industrial Revolution. The coming green revolution will involve all segments of the economy and society – governments, businesses, and individuals will all need to do their part. Everyone must contribute. Every bit counts. It is in this spirit of collective action that MAS is publishing a sustainability report, to account for what we are doing together with the financial industry, and in our own right, to help remake a greener world and secure a more sustainable future. 8/9 BIS central bankers' speeches We want to be the change we want to see. 9/9 BIS central bankers' speeches | The general trend in the market has been to charge SMEs with high interest rates relative to the large scale corporate sector because of the perceived high risk they are supposed to present. Distinguished Invited Guests, my view is that this presumed high risk profile associated with SMEs can be effectively managed by banks if they make the necessary effort to understand the sector and build expertise in dealing with its unique characteristics. I trust that you will double up your effort in building the expertise necessary for your bank to be a major lender to the SME sector. The issue of interest rates is of particular concern to us at the central bank. In response to the current situation, the Bank of Zambia recently took measures aimed at facilitating the reduction in commercial banks’ lending rates with the view to increasing access to credit by private individuals and business entities. Some progress has been made in this area and we are monitoring the situation in the market to ensure that borrowers are enjoying a reduction in their effective lending rates. We do not want the reduction in the base lending rates to be cosmetic, but should be reflected in lower effective lending rates for measures taken so far to be meaningful. Furthermore, with the reduction in the corporate tax rate for banks recently announced by the Minister of Finance in his 2012 Budget, the expectation is for a further reduction in lending rates by commercial banks going forward. | 0 |
I would also like to stress here that the two points for attention I have just mentioned do not, in my view, overshadow any of the following: the many other initiatives announced in the action plan, the work to facilitate remote access and promote an interoperable digital identity, the provisions on cybersecurity, or the forthcoming discussions on artificial intelligence or data sharing in financial services - open finance after open banking. The message that I think is important today is the following: the stakes of this action plan on the financial sector are high and it will have a major impact on the innovative ecosystems of the French and European financial sectors. That is why the Banque de France and the ACPRwill be particularly attentive, in the coming weeks and months, to your feedback, suggestions and 3/4 BIS central bankers' speeches questions on this “digital finance package", which is closely in line with the rationale of the ecosystem that I have just outlined. In other words, we have the opportunity to demonstrate today that the discussions held in recent years between the Banque de France, the different players in the innovative financial ecosystem and other supervisory authorities, the relationships of trust established between us, the complementary expertise, the shared experiments and knowledge, have a concrete and tangible effect: that of further strengthening the dynamics of an ecosystem that is destined to count in the future of the European financial sector. * Thank you for your attention. 4/4 BIS central bankers' speeches | BIS Review 105/1997 -2For a currency union to function “smoothly and in a sustainable way, it is absolutely necessary that all participants agree on either a single common policy or closely coordinated policies”. All costs and benefits of the union must be shared equally. Any member acting with the “free-rider” mentality, and benefiting from the system at the expense of the others, will eventually cause the system to disintegrate. Therefore, a single common currency requires a single monetary policy with a clearly defined target, which is price stability. This basic principle of monetary policy has already been embedded in the Maastricht Treaty. And the European System of Central Banks (ESCB) has been made responsible for achieving it. In order for the ESCB to fulfil the task assigned to it, it must act in full independence from national governments or from European institutions. The ESCB Governing Council, which is composed of the Board of Management of the ESCB and the governors of the participating central banks, will not be representing respective national interests. Although there are some differences between the two systems, the ESCB is like the Federal Reserve System of the US. For the ESCB to act independently, individual national central banks must already be acting independently of their governments, because the ESCB will be built on individual national central banks. That is why the Maastricht Treaty made it obligatory for the national governments to grant independence to their central banks in the period leading to the formation of the ESCB. | 0 |
In particular, infrastructure financing is likely to be a major driver of demand for investments. The Asian Development Bank estimated that $ trillion worth of infrastructure spending is needed in the 10 years leading up to 2020 to support Asia’s growth. The demand for capital investments driven by the growth in Asia’s real economy will support the development of the region’s capital markets. As investors continue to invest in Asia, the depth, accessibility and efficiency of Asia’s capital markets will continue to improve. BIS central bankers’ speeches 1 With proper balance, the continuing inflows of funds, improvements in capital markets and growth in the real economy will create a self-reinforcing virtuous circle. 7. Along with the rise of Asia, Singapore will continue to enhance our position as a Global-Asia financial and business hub. As a well-connected international financial centre, Singapore can be the base for global players to tap into opportunities offered by a rising Asia. To do that, we will build on our strengths in areas such as trading, asset management and infrastructure financing. We will also continue to emphasise the importance of strengthening risk management, enhancing transparency, as well as build depth and diversity in the offering of financial products and services. Let me cover these areas in turn. 8. First, in the area of strengthening risk management. In the context of the capital markets, we have been building the necessary infrastructure to help market participants better manage their risks. There has been greater concern over counterparty risks since the financial crisis. | I have to say that this is not an undisputed statement, because I told this story at a general business event and someone took me to task that every member of an insurance board should be fluent in the theory of a Copula. To be clear, we do not expect Copula fluency for all. But the moral of the story is that there is not a strong consensus on how to set the expectations of Boards so that they can perform their role. We may at times have gone too far in the direction of individual technical knowledge, and by the way it was the Copula story and others that convinced me to stop interviewing people taking up standard NED positions. The PRA has close contact with many Boards, so as supervisors what do we expect of Boards? Three things stand out for me:1. we expect Boards to exercise good judgment in overseeing the running of the firm and to do so on a forward-looking basis; 2. that judgement is improved by good constructive challenge from Non-Executives. A firm’s culture should promote discussion, debate and honest challenge. | 0 |
By setting up the Fund – with investment abroad – it became possible for Norway to establish a path for the production of oil and gas that is independent of the profile for petroleum revenue spending. The alternative to a fund would have been to regulate the extraction path by putting a conservative upper limit on annual extraction. The Fund serves as a buffer between wide swings in petroleum revenues and domestic spending. The decisions on annual revenue spending can be made independently of the size of the revenues. As a result, swings in petroleum revenues do not have an automatic impact on the Norwegian economy. The existence of the Fund contributes to stabilising the NOK exchange rate, and countercyclical economic policies are more effective for a country with net foreign assets. The virtues of the fund structure are many. The authorities have established a transparent system for managing government petroleum income as all oil revenues are transferred directly into the Fund. The Norwegian parliament must adopt a resolution on any use of the return or the capital of the Fund. Oil revenues are not earmarked. There is no hidden use of revenues, or any use for special purposes. The Fund is strictly and effectively "out of bounds" to special interests. It is important that this remains a feature in the future. We now have close to fifteen years of a rapidly expanding Fund behind us, and it is becoming more likely that the fund will be a very long-term savings plan. | 1 Among other important tasks in coming years and decades, the government would need return from financial assets to provide for future pensioners. We can probably expect that productivity and real wages will continue to grow in parallel, and future pensioners would most likely want to take part in that welfare gain. This may imply that government expenditures will increase more than the overall growth in the economy, as the number of pensioners is growing fast and the demand for healthcare also will be higher. Although real wages increase, it will not be easy to raise the tax level. Thus, the government will need return from financial assets to finance the increased expenditure for pensioners. International capital markets have played a crucial role in allowing us to follow the strategy for extraction of petroleum. We drew heavily on borrowing opportunities abroad when the petroleum industry was being built up. We did the same in order to expand welfare schemes and to finance the countercyclical policy of the mid-1970s and the early 1990s. Over the last decade and a half, international capital markets have enabled us to convert national oil and gas resources into equities and bonds abroad in the Fund. The implementation of our investment strategy is dependent on free capital movements. I would like to remind the audience that only some twenty five to thirty years ago we had very rigorous capital restrictions ourselves. | 1 |
Meanwhile, the Asian region has shown strong growth performance amidst robust intra-regional trade. This will be mutually reinforcing for the region in expanding the cumulative domestic market of the region and thus contributing to the overall growth prospects of the region. While growth remains strong, there are risks on the horizon. The recent moves to raise interest rates have however aimed to adjust the economic expansion to converge to more sustainable levels. Policies in a number of the major economies have now shifted from addressing a deflationary environment to a more neutral position that is aimed at removing the inflationary bias. This is in contrast to an anti-inflationary stance which would require aggressive tightening. On the domestic front, Malaysia continues to be highly integrated with the world economy in which economic and financial developments in our major trading partners will have implications on our economy. The strengthening of our economic structure, our financial system and our macroeconomic fundamentals, particularly since the Asian crisis in 1997-1998, has raised our tolerance level for absorbing volatility, enhanced our resilience to shocks, improved the agility to adjust to change and increased our policy flexibility to mitigate any adverse external developments on our domestic economy. Going forward, the strong growth in manufacturing and services sectors will continue to sustain growth. The prospects for higher consumption spending is also positive. | For instance, leverage levels in the financial sector remain very high. The current low interest rate environment is encouraging risky high-yield strategies; activity on these high-yield markets is sustained; innovations on the ETF market are raising questions and the commodity market is being financialised. The active management of these new complex instruments is thus likely to reach its limits, as happened with CDOs. The current challenge for central banks is two-fold: we need to improve our ability to monitor risks at a system-wide level; we also need to re-establish the moral hazard that the management of the crisis suspended. On their side, banks and market participants need to ensure that they improve their risk management autonomously in order to reduce this 4 BIS central bankers’ speeches hazard, in the interests of their shareholders and depositors, but also of economic development as a whole. Thank you for your attention. BIS central bankers’ speeches 5 | 0 |
Additionally, in that period there was a strong contraction in the bank credit portfolios, which resulted from the sharp correction of the excessive debt built up by Spanish households and firms in the pre-crisis years and from banks’ loss of market share in the total financing of the economy. During those years, banks cushioned the balance sheet effect of this fall in their credit portfolios by increasing their exposure to other assets, especially through government debt purchases. As these debt securities provide lower returns than lending to households and firms, in the long run this portfolio rebalancing resulted in a fall in the average return on assets. However, when the sovereign debt crisis came to an end, the increase in value of these debt securities provided a positive, albeit short-lived, boost to profitability. This effect fades gradually once interest rates stop falling and, furthermore, in recent years banks have substantially reduced their holdings of these securities in the available-for-sale portfolio, which, since it is measured at market prices, is where these gains are recorded. On our estimates, the overall effect of these changes in asset composition – associated with the increase in non-performing loans and the decrease in the relative share of credit on balance sheets – would explain some 70% of the decline in net interest margin in the Spanish banking system between 2007 and 2018. | In addition, low interest rates and, in general, more accommodative financial conditions naturally have a positive impact on economic activity and employment and help stimulate the flow of credit, thus also driving up banks’ profitability. Indeed, this is the key rationale behind an expansionary monetary policy such as that implemented in the euro area in recent years. As an illustration of these effects, according to various ECB 12/29 studies2 and the Banco de España’s own estimates, the set of monetary policy measures adopted since mid-2014 will have an overall impact on real GDP growth in the euro area of around 2 pp in cumulative terms between 2016 and 2020. Moreover, these estimates do not include the measures agreed in September which, according to the Banco de España’s estimates, could add up to 0.4 pp in cumulative terms to euro area GDP growth by 2021. In any event, it is fair to say that there is evidence that, since the ECB’s deposit facility rate fell below zero, negative surprises in short-term interest rates have been accompanied by falls in European banks’ stock market valuations. Given the endogenous nature of the monetary policy response to projected economic developments, this response by bank share prices to monetary surprises may reflect, on the one hand, the negative impact of less favourable projections for the future macroeconomic setting and, on the other, the market view on the direct negative effect of further interest rate cuts on banks’ future profitability against a backdrop of a prolonged period of negative rates. | 1 |
These innovations effectively removed principal counterparty risk from the transactions equation. This infrastructural revolution largely went unnoticed at the time and risks going unnoticed now. Its effects can be seen by counter-factually asking what might have happened during the present crisis without it. With counterparty risk preserved, banks would have delayed payments or transactions for fear of extending uncollateralized credit to institutions of unknown credit quality. Payment systems may have suffered the same seizures felt by 3 Miller, M and Modigliani, F (1958), “The Cost of Capital, Corporation Finance and the Theory of Investment”, American Economic Review 48 (3). 4 BIS Review 85/2009 money markets during the crisis. There would have been an irreparable blockage in the plumbing. In the event, activity in most financial markets has remained strong, allowing risk to be traded and relocated. Robust payments infrastructure played a key, if largely silent, role in this positive outcome. Though neither visible nor audible, this underscores the importance of systemic oversight, and redesign, of payment and settlement infrastructures by central banks. Lesson 6: But some plumbing was missing The infrastructure of financial markets extends well beyond payment and settlement systems – for example, into the area of trading and clearing systems. Here, crisis events suggest scope for improvement. A number of markets have seized during the past 18 months, including at various times the foreign exchange swap market, the corporate bond market, structured credit markets, various derivative markets such as CDS and, perhaps most strikingly, the money market. | 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. | 0 |
– The public finances should be managed with an eye to the nature and extent of risk exposures elsewhere in the economy. – It is the precise pattern of capital flows, and the resulting composition of the resulting balance sheets, that matter to the stability of the financial system. All macro policymakers – monetary, macroprudential and fiscal – should, therefore, pay attention to the national balance sheet; and to the pattern of gross as well as net capital flows. – But, in doing so, we and our peers must avoid financial protectionism just as a previous generation learned to oppose trade protectionism. And we must not leave anyone thinking that we can eradicate economic problems. 26 The IMF’s most recent spillover report on the UK can be found at http://www.imf.org/ external/pubs/ft/scr/2011/cr11225.pdf. That report concluded: “the size and interconnectedness of the UK financial sector make it a powerful originator, transmitter, and potential dampener of global shocks. The stability and efficiency of the UK financial sector is, therefore, a global public good requiring the highest quality supervision and regulation”. 10 BIS central bankers’ speeches Conclusion Around the Western world, excess indebtedness became legion during the opening years of the last decade. US subprime mortgages, perhaps the most egregious although by no means the largest example, became the straw that shattered the camel’s back. In this metaphor, both the “straw” and the “camel” are balance sheets. | Its behavior has been atypical compared to previous episodes following a recession. This fall was especially marked in the euro area, from 2.7% in 2011 to 0.8% in December 2013. Recently, developments in the euro area have started to diverge downward from some other advanced economies such as United States and Canada. The sources and reasons for such a low inflation are complex and multiple. There are many uncertainties. Temporary and global factors may be at play in the euro area with import prices going down. I also think there are more permanent and deep forces pushing inflation down both at the euro area and global level. Besides there is still an important unused capacity – commonly labeled as “slack” -in most advanced economies, as demand has not yet caught up with its pre-recession levels and firms, as a consequence, have not recovered their pricing power. Commodity price inflation has been trending down recently. This is true both for energy and food prices. Commodity prices have a global impact and react very amply to small changes in supply and demand equilibrium. They act as amplifiers and transmitters of disinflationary pressures. Powerful headwinds – and disinflationary forces- are coming from the deleveraging process especially in the euro area, due to the importance of the banking sector and the amplitude of its balance sheet adjustment. We are working very hard to repair the bank-lending channel in the euro area. | 0 |
With some exceptions, the principle of personal independence is not applicable to the members of the Supervisory Board. Is the principle of independence under Article 130 of the Treaty applicable to the ECB in its role in EFSF/ESM financial assistance programmes for a number of euro area Member States? Another question to examine is whether the principle of independence under the Treaty is applicable to the ECB in respect of its role in ESM/EFSF financial assistance programmes for certain Member States. With the financial and sovereign debt crisis, the Commission, on behalf of the ESM and the EFSF, and in liaison with the ECB, was given a number of specific tasks relating to the assessment of risks to the financial stability of the euro area as a whole or of its Member States, the assessment of whether a Member State’s debt is sustainable, the assessment of the financing needs of the Member State concerned, the http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14] Central bank independence revisited negotiation of a memorandum of understanding (MoU) detailing the conditionality attached to financial assistance facilities of the ESM/EFSF for that Member State, and monitoring compliance with such conditionality. Where possible and appropriate, the Commission – in liaison with the ECB – was mandated to conduct these ESM/EFSF activities together with the International Monetary Fund. | In fact, these bouts of extreme instability have disrupted the potential growth trends, which in some cases have taken years to recover. On the whole, these episodes may be associated with too much financial liberalization too soon. The unique global backdrop, as well as the economic outcomes in terms of growth and volatility that I have just shared with you, presents a real dilemma and at times tension in emerging Asia. And nowhere is this tension more palpable than it is in the realm of exchange rate and capital account regimes. While benefits from trade integration are appreciated and shared by billions the world over, net benefits from international financial integration have not been so apparent in Asia and emerging economies in general. This is consistent with an observation that Asian emerging markets rely increasingly more on trade integration because it is judged to be a safer mode of risk-sharing with the world. As a result, while the pace of financial integration has far outstripped trade integration in advanced economies, it has only managed to keep pace with trade integration in emerging markets. 3 Ladies and Gentlemen, Asian economies and policymakers have come a long way in their attitude toward macroeconomic risk management since 1997. Countries have taken unilateral actions to promote economic and financial resiliency. Having appreciated the evidence that macroeconomic stability provides an environment that is conducive for sustained growth, Asian emerging markets have continued to pursue fiscal discipline and more flexible exchange rates on the whole. | 0 |
As Islamic finance transitions to its next stage of development with greater international integration, the immense benefits that will be unleashed need to be accompanied by a higher level of resilience to be well positioned to manage the new challenges that the future will bring. Our collective efforts to mobilise a higher level of global cooperation in promoting this outcome will also enhance the prospects of Islamic finance to contribute towards securing global financial stability and a greater shared economic prosperity. 4 BIS Review 70/2010 | Similar to IOER for banks, ON RRPs provide a risk-free overnight investment directly to a broad range of bank and non-bank counterparties. By reaching financial institutions that are ineligible to earn IOER, an ON RRP facility widens the universe of counterparties that should generally be unwilling to lend at rates below those available from the Fed. Such a facility could also enhance competition in money markets by offering an alternative safe investment and thus 6 Moreover, competition may be imperfect in some money markets currently, allowing spreads to persist longer than they would if markets were more competitive. For example, much money market activity is over-thecounter, potentially leading to search frictions and bargaining. Anecdotal evidence suggests that lenders typically interact directly with a relatively small number of counterparties, perhaps because a portion of the activity is derived from costly relationship lending. Finally, to limit counterparty credit risk, lenders sometimes seek to diversify their lending and apply concentration limits, which are often binding. 7 As I’ll explain, high-frequency variation in balance sheet costs could induce high-frequency changes in the pull of IOER and, in turn, the spread between the IOER and money market rates. We see this transitory dynamic around financial statement reporting dates. On these dates, balance sheet costs for some banks increase, and the fed funds rate and other money market rates fall relative to the IOER rate. | 0 |
Nevertheless, whether or not these reserves prove sufficient will depend on the weather conditions this coming winter, and on Europe’s ability to replace them as and when they are consumed. In short, the inflation pressures we had been experiencing due to the reopening of economies after the pandemic, the supply-side bottlenecks and the higher commodity prices have been exacerbated by the conflict with Russia, leading to extraordinary and persistently high rates. According to Eurostat,2 euro area annual inflation is expected to rise to 10% in September. This means that average inflation during the third quarter stood at 9.3%, a figure somewhat higher than anticipated in the ECB's last forecast exercise (9.1%).3 More importantly, euro area inflation is expected to remain above 9% during the fourth quarter. The rise in energy and food prices is the main factor behind the high levels of inflation in the region. The depreciation of the euro has also contributed to upward price pressures, particularly by increasing the price of commodity imports. Specifically, according to the flash estimate, the price increases over the past year in the energy and food components of the consumer price index stood at 37% and 11%, respectively, in September. These two components account for almost 70% of the increase in consumer prices in the euro area over the past year. Nonetheless, inflationary pressures are also spreading to the less volatile components of the consumer basket. Underlying inflation, which excludes food and energy consumer prices, is expected to hit 4.8% in September. | Any firm making large-scale use of reinsurance needs to consider their capacity to recapture that risk in the event of the failure of one of their counterparties. We note that some firms are reliant on an action to re-cede offshored risk to another reinsurer, should the original reinsurer default. This would only be possible if the reinsurance market can operate continually and without interruption. There could be myriad drivers of reinsurer counterparty default, but some of these could point to market issues, and potentially temporary market tightening or even closure. Firms should consider this risk in their counterparty assessments, and we will look to protect UK policyholders, who are ultimately dependent on the reinsurance payments being made[10]. Process improvements The three main areas of process improvements that I want to highlight, all noted in the Government’s April Consultation Document, are: The internal model application process; Page 7 Reporting; and The matching adjustment (MA) application process. On internal models, we are seeking ways to improve and streamline the application process as well as achieving a more flexible approach to the modelling of complex and emerging risks. This may allow models that are adequate but suffer from some non-fatal shortcomings to nonetheless be used whilst those shortcomings are addressed over a realistic timetable. Potentially, this approach could also make use of safeguards where appropriate. We will not allow the best, in modelling, to become the enemy of good enough. | 0 |
But monetary policy cannot solve deeper structural problems or lift growth potential of the economy. That needs to come from real progresses that increase productivity and relax supply-side constraints. Sure, demand stimulating can buy time by cushioning the economy from short-term economic shocks. But this may possibly delay necessary adjustments of the economy to longer-term challenges. For example, keeping interest rate too low for too long and keeping exchange rate undervalued, beside encouraging risk taking and storing up financial instability problems for the future, may also temper incentives for businesses to improve efficiencies, and may slow the reallocation of capital and labor to more productive uses. In the context of Thailand, one of the most important structural issues facing the Thai economy at the moment is that of the labor shortage. Through our business contact and recent surveys, the labor shortage has scored one of the top concerns by both domestic and foreign businesses operating in Thailand. Underlying causes of labor shortage include the demographic change and education and skill mismatch. Clearly, there is little monetary policy can do to solve this supply bottleneck. It can help foster macroeconomic stability conducive to business investment, but most of the efforts to address supply-side impediments still need to come from a broader and more balanced set of economic policies including fiscal, industrial, technology, and labor market policies. | The MPC therefore decided to cut the policy rate to provide as insurance to the economy in the face of greater downside risks to growth. With firmly anchored inflation expectations, the Bank of Thailand can today give weight to stabilizing economic developments when setting the interest rate. However, should the outlook for inflation, growth, or financial stability change in the future period, there will be room for maneuver to counteract such developments through monetary policy, as well as other policy tools in an appropriate mix deemed most suitable for achieving the overall macroeconomic stability. Limitations of monetary policy Let me now turn to a topic that I would like to highlight today, that is, the limits to what monetary policy can achieve. The global financial crisis has placed far greater demands on monetary policy around the world. In major economies where other macroeconomic policy tools are being impaired, monetary policy was under enormous pressure to support the economy. Central banks responded by expanding dramatically their traditional role as lenders of last resort and came up with innovative, unconventional ways to stretch beyond what monetary policy can normally do. In emerging markets, given large crisis repercussions in terms of excessive capital flows, monetary policy was at times expected to respond to external developments in dealing with global spillovers. Overall, monetary policy has been pushed into situations and actions that were previously unimaginable. Efforts by many central banks to overstretch its normal capacity may have led the public to expect too much from monetary policy. | 1 |
Three types of stress tests are conducted: Historical: Shocks are applied to the portfolio using asset price movements seen in historical stressed episodes, such as the Global Financial Crisis, 2000 dot-com bust, 1994 bond market selloff, etc. Vulnerability-based: The portfolio is subject to hypothetical scenarios which stress in turn each of the portfolio’s risk factors such as equity, interest rate, credit, inflation, and foreign exchange. Thematic: These are forward-looking stress tests and are designed by taking into account prevailing market conditions and potential risk events on the horizon. 4/7 BIS central bankers' speeches Depending on the stress test results, MAS will consider appropriate responses and portfolio adjustments when needed. The risk management framework is reviewed on a regular basis to ensure it remains fit-forpurpose. Balanced asset allocation Subject to the liquidity and risk tolerance thresholds, MAS seeks to achieve good long-term returns on the OFR through a balanced asset allocation. MAS invests the OFR in a well-diversified portfolio, probably more diversified than is the case for most central banks. The portfolio is geographically diversified across advanced and emerging market economies, with investment-grade bonds in advanced economies making up the largest share. The portfolio is diversified across asset classes – in cash, bonds and equities. The portfolio has a diversified currency mix, with about three-quarters of the OFR denominated in US Dollars, Euros, Japanese Yen and Pound Sterling, with the US Dollar forming the bulk. Each asset class in the portfolio serves a function. | Cash and nominal government bonds facilitate regular operational needs and can be quickly deployed to fulfil urgent liquidity needs under stressed conditions. Advanced economy inflation-linked bonds are less liquid than nominal bonds but provide inflation protection. Equities provide exposure to long-term growth assets with higher return potential but also with higher risk. MAS’ investment horizon is longer than that of many central banks. This has given MAS the flexibility to invest in more volatile (and longer ‘duration’) asset classes beyond fixed income, including equities. Both the risk management framework and strategic asset allocation are approved by the MAS Board of Directors and reviewed regularly. Efficient investment process MAS strives to achieve an efficient investment process, underpinned by two elements: one, judicious benchmark selection and customisation; and two, tapping on specialised external investment expertise First, benchmark selection. MAS uses asset class benchmarks to represent the investment universe and risk profile of each asset class that can be easily replicated, to evaluate its investment performance. These benchmarks could be market-capitalisation weighted or customised. For some asset classes, we have chosen to apply certain customisations to marketcapitalisation weighted benchmarks, guided by considerations of liquidity, stability, and concentration risk. 5/7 BIS central bankers' speeches One area we have applied customisation is in the fixed income asset class, where it is relatively more important to guard against concentration risk. This is because the response to credit risk is more asymmetric for fixed income than for equities. | 1 |
Third, hydrogen will be an important new hope for decarbonisation. This involves using renewable energy to split water molecules to produce both hydrogen and oxygen. The hydrogen can be burnt as a fuel emitting only water vapour or be put into a fuel cell to make electricity on demand. It can also be used as a feedstock to make more energy-dense compounds such as ammonia, which can serve as a fuel itself. Hydrogen and ammonia can be critical to the transition to a net-zero world given their potential role in decarbonising hard-to-electrify sectors, such as steel production; fuelling trucks, ships, and other heavy vehicles. All of this is technologically possible but making it economically efficient will require further innovation. In Singapore, our aim is to progressively decarbonise the power sector. We do not have the land for large solar or wind farms or fast flowing rivers for hydro-electric power. But it helps that Singapore is already less carbon-intensive in power generation than many other countries that still use coal. We are working to increase the carbon efficiency of natural gas which today accounts for 95% of electricity generation and is likely to remain the dominant energy source for some time. We are accelerating solar deployment across the island and building viable energy storage systems. Using our reservoirs, we are opening one of the world’s largest floating solar energy systems. We are using transmission lines linked to neighbouring countries to import the renewable energy they produce. Singapore has already started importing from Laos energy from hydroelectric power. | Singapore will do well to prepare for a future where CBAMs cover a significant part of world trade. CBAMs are likely to be a reality, especially if several major economies agree on a global minimum carbon price. The EU has already proposed a CBAM. A well-designed CBAM that does not raise barriers to trade, is compliant with W TO rules, and gives some relief to the poorest countries who are also small emitters, is not a bad outcome. CLEANER ENERGY The second imperative for the net zero transition is a decisive shift towards cleaner energy. According to the IPCC, to have a good chance of limiting global warming to 1.5 degrees Celsius, global consumption of coal, oil, and gas must start declining immediately and steeply. This is unlikely to happen. The growth in renewable energy has been spectacular but not sufficient to meet growing energy demand. Despite a 50-fold increase in the supply of new renewable energy in the last two decades, fossil fuels continue to account for more than 80% of global primary energy consumption. One of the reasons is that about 750 million people in the world still lack access to electricity. For them, the priority is having the lights on at an affordable price, not how much carbon dioxide is emitted in its production. Most of the people living in sub-Saharan Africa in 2020 consume no more energy per capita than the people of France and Germany did in 1860. | 1 |
Let me discuss each in 9 turn . Distributed ledger technology (DLT) (3 PoCs) DLT has in many respects been the poster-child for FinTech. Thrown into prominence by the advent of bitcoin and other cryptocurrencies, the attraction of DLT to central banks really lies in the potentially highly attractive resilience characteristics of the underlying technology. In its purest form, a DLT network operates with no centre, and every node in the network holds a full copy of the ledger. So the failure of a node has no impact on the overall resilience of the system, with transactions simply rerouting elsewhere. A single ledger could also eliminate the need for costly reconciliations between market participants, increasing efficiency and reducing operational risk. For central banks currently operating centralised payments and settlements systems with only limited redundancy and facing growing cyber and operational threats, such a model has obvious attractions. Our first DLT PoC, undertaken with PwC, proved it was possible to build a multi-node scalable DLT environment enabling the transfer of ownership of a fictitious asset. But it also demonstrated that the technology was some way from being sufficiently robust or scaleable to form the core of live central bank infrastructure such as the Bank’s Real-Time Gross Settlement (RTGS) service – a conclusion that helped inform the Bank’s plans for its RTGS renewal programme. PoCs by other central banks have reached 10 broadly similar conclusions . 9 More detailed write-ups of completed PoCs can be found at: http://www.bankofengland.co.uk/Pages/fintech/default.aspx. | And the results and key findings are published on the Bank’s web pages, and factored 7 See for instance Ian Hathaway’s Brookings study of accelerator performance at https://www.brookings.edu/research/acceleratinggrowth-startup-accelerator-programs-in-the-united-states/. 8 Framework adapted from Susan Cohen ‘What Do Accelerators Do? – Insights from Incubators and Angels’ innovations’ (Innovations, volume 8, number 3/4, MIT Press). 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 into the Bank’s future work programme. Firms we have worked with have been invited to join the Bank’s FinTech community, which meets periodically to share insights and assess developments in the sector. The Bank’s FinTech Accelerator: what have we done? The Accelerator has done quite a lot in a short time. In the 16 months since the Accelerator was established, it has completed 9 PoCs with 10 firms across three cohorts (Table 2). And we are announcing a further cohort of 4 PoCs today – the details of which I will come back to shortly. In total, some 200 firms have applied to work with us across a wide range of disciplines. The process is resource intensive for both sides. But our broader interactions with those firms, even those not successful in their application, have been of great value, allowing us to reach a much wider external audience keen to interact, collaborate, teach and learn with us. The PoCs span most aspects of central banking, but can be grouped together into four broad technologies: distributed ledgers; data storage and analysis; machine learning; and cyber security. | 1 |
However, insurers are also sensitive to the risk of prolonged low interest rates, and, together with Bernard Delas, I can only call for further moderation in the rates on life insurance contracts. As regards financial stability, we must draw all the consequences of a rejection by the British Parliament of the draft Brexit agreement. There is strong political uncertainty in Britain: we can still hope for the best, but we must actively prepare for the worst scenario, that is a “No Deal Brexit". I would like to welcome the efforts that you have made to anticipate these consequences. The Banque de France and the ACPR, in liaison with the European authorities, will by the end of March take all necessary measures in the framework of the draft law “empowering the Government to take steps to prepare for the withdrawal of the United Kingdom from the European Union”, which will be re submitted to the French Senate tomorrow. Beyond Brexit, each sector faces its own regulatory issues: Basel III and Solvency II. For banks, the key issue of the CRR/CRD package is the transposition into European law of the Basel III agreement, which was obtained after much wrangling on 7 December 2017 and properly completed with market risks on Monday in Basel. It will have to take into account European specificities – including those of French banks – while maintaining the principle of maximum harmonisation, which is essential to the deepening of the Banking Union. | 4 That means that the majority of panelist submissions each day are based solely on “expert judgment.” Although actual transactions underlying LIBOR have diminished, its use as a benchmark has become ubiquitous. The gross notional value of all financial products tied to U.S. dollar LIBOR is around $ trillion—about 10 times U.S. GDP. 5 That includes $ trillion of business loans, $ trillion of floating-rate notes and bonds, another $ trillion of securitizations, and $ trillion 1/8 BIS central bankers' speeches of consumer loans held by about four million individual retail consumers, including around $ trillion of residential mortgage loans. The remaining 95% of exposures are derivative contracts, which we learned in the financial crisis have consequences for both Wall Street and Main Street. So, every day, the payments on $ trillion of exposures are calculated based on a handful of transactions worth a few hundred million dollars at most. That’s like a very tall, very broad building built on a very narrow foundation. Imagine an upside-down pyramid. It’s not stable, and, as we will discuss shortly, it’s getting more rickety by the day. You don’t want to be standing near it when it comes down. There is, thankfully, a coordinated global effort to address LIBOR’s shortcomings. That work has focused on creating more reliable alternatives. The Financial Stability Board (FSB)6 and the International Organization of Securities Commissions (IOSCO)7 have published roadmaps for reform. Their shared principle is that benchmarks should be based on observable, arms-length transactions rather than estimates. | 0 |
A monetary policy that “leans against the wind” may contribute to greater stability in the longer term, as the purpose of trying to prevent financial imbalances from building up is that they should not cause problems with financial or macroeconomic stability at some point in the future. Most people agree that monetary policy should not have the main responsibility for preventing financial imbalances, but that this should rest on micro- and macroprudential policy and a well-designed regulatory framework. A central issue is, however, what support to prudential policy and the regulatory framework monetary policy needs to provide so that they can fulfil their tasks. 5 I do not believe it is possible to completely ignore financial stability when conducting monetary policy. Different views in research and among central banks There is on the one hand a growing research-related literature on whether central banks should “lean against the wind” – or conduct “prudential monetary policy”, as it is sometimes called and which perhaps is a more telling term. 6 There is on the other hand a more practical policy discussion. | Simon Potter: Reducing the size of the Federal Reserve's balance sheet - the benefits of moving gradually and predictably Remarks by Mr Simon M Potter, Executive Vice President of the Markets Group of the Federal Reserve Bank of New York, to the National Association of Securities Professionals, New York City, 16 November 2017. * * * Good afternoon and thank you for the kind introduction. I would also like to add my warm welcome to the New York Fed. We very much value the National Association of Securities Professionals' (NASP) efforts to promote professional excellence and encourage economic empowerment for people of color and women on Wall Street, and for our community, and are pleased to host this year’s kickoff to the NASP's 21st Annual Symposium.This year’s symposium is organized around the timely theme of “Keeping Pace when Market Dynamics Shift”. In that vein, I welcome the opportunity to discuss with you some important changes that are in train with respect to the Federal Reserve’s balance sheet, and how these may impact financial markets. As always, the views I will express today are mine alone and do not necessarily reflect those of the New York Fed or the Federal Reserve System.1 Before I discuss the Fed’s balance sheet I would like to briefly review some pilot programs we conducted over the last few years and their impact on our counterparty policy. | 0 |
This should also help to reduce pressure on the rental market, where there is evidence that from being at the lower end of cross-country rent-to-wage ratios, we have moved relatively quickly to being close to ratios found in the most expensive European cities. Besides the impact that this rise could have on our capacity to attract foreign workers, we need to consider its impact on Maltese tenants, which in turn will impact on the broader costs of doing business and, consequently, competitiveness. We believe that, going forward, if we continue to grow at the rates observed in recent years, we will need to have a much more dynamic housing market. But before discussing private provision, let us discuss social housing. Recent developments have reinforced the case for replenishing our social housing stock. However, this expansion needs to be accompanied by a change in approach. In recent years, most of Malta’s benefit system has been changed so as to create clear incentives to shift from benefit dependence to participation in the formal labour market. The only area where this is not happening yet is social housing, where the tendency remains that, once allocated, social housing tends to become a lifetime entitlement. We need to change this so that social housing schemes act to activate individuals and empower them rather than encourage passivity. Such a transition could itself be helpful in financing the expansion of social housing. | The forecasters would not have known about these subsequent revisions. Nevertheless the results were certainly better than expected. Let me give you a couple of examples. In December 2015 the Central Bank projected real GDP growth for 2017 at 3.2%. Two years after, we believe economic growth has reached 6%, or nearly double what we had originally projected. Back in December 2015 we had anticipated 2017’s unemployment rate as 5.4%. Now we know it will be closer to 4%, or a quarter less. More striking is the divergence in fiscal projections. Back in December 2015 we thought Government would close 2017 with a deficit of 1.1% of GDP. Today we believe there will be a surplus of 0.9%. Two years ago we thought our national debt-to-GDP ratio would be 64% of GDP in 2017. Now we think it will be nearly ten percentage points less than that. Page 2 of 10 Malta’s current economic performance Two weeks ago, in the concluding statement following their annual official staff visit to Malta, the IMF said that “Malta’s economic growth remains one of the strongest in Europe” and projected that this robust performance will continue on the back of rising incomes and historically-low unemployment, complemented by buoyant services exports. They also concluded that Malta will remain a surplus economy, both in terms of government finances and external transactions. This is, broadly speaking, the same assessment as that made by the European Commission in their Autumn 2017 forecasts. | 1 |
Mr Clementi comments on the systemic aspects of the Basel proposals Speech given by Mr David Clementi, Deputy Governor of the Bank of England, at a Financial Services Authority Conference, held in London on 2 December 1999. * * * Ladies and Gentlemen, I am delighted to be given this opportunity to address you today. I must first express my admiration for the pro-active and thorough way that the FSA is seeking views from the industry on these important proposals. I know that as well as this conference, their efforts have encompassed briefing sessions, circulars to banks, advisory group meetings, and a dedicated website. There will no doubt be a few focus groups springing up in due course! The Bank of England is in turn holding regular meetings with the main trade bodies, while various of the Basel Committees involved in developing the proposals have conducted surveys and received presentations from banks and others. I hope that, at the end of the process, if differences of opinion remain between the authorities and the banking industry, this will be the result of rational divergence between our different perspectives, and certainly not through any failure of communication. I intend to direct my comments to the systemic aspects of the Basel proposals. The Bank has a close interest in this subject and I will start by outlining the relationship between the design of the regulatory system and the Bank’s core purposes. | We are not sure, however, that the answer lies in making the framework less sensitive to risk, perhaps by smoothing over bad news in some form, for example by ignoring or delaying recognition of rating changes. This would involve the same dangers that I recall from the days of hidden reserves in UK banks, when the knowledge that unwelcome events could be hidden from view led occasionally to a lack of rigorous risk assessment in business decisions. In fact, part of the underlying problem of procyclicality is that risks are not recognised early enough, in time to allow lenders to exert a more gradual and beneficial discipline on borrowers. The capital framework - and, equally important, bank provisioning policies - need therefore to be as forward looking and dynamic as possible. Since ratings - whether external or internal - are influential in provisioning and will in the future be influential in capital, they in turn have to be more forward looking. This is why in the sovereign context we place particular emphasis on the importance of countries adhering to international transparency standards. No rating can be reliable without adequate information on the economic and financial situation of the country. The Basel paper does of course propose that compliance with the IMF’s Special Data Dissemination Standard is a pre-condition of a lower risk weight. | 1 |
The fundamental goals of the program are: • to eliminate inflation, • to achieve a sustainable fiscal position, • to establish a more equitable and efficient distribution of resources, • and to increase the growth potential of the economy. 1 BIS Review 9/2000 The program will accomplish these goals through a number of policy reorientations. The primary fiscal balance will shift, in the first year, from deficit to a surplus position consistent with long-term fiscal sustainability, and will remain high until the price stability has been established in the economy. To reinforce program credibility and support the fiscal stabilisation, the program’s design is front loaded, with most of the required structural measures being taken at the outset. A first priority will be to diversify the financing of the deficit. Net external financing for the public sector will increase, and this, together with the primary surplus and other measures, will make it possible to lower the level of real domestic interest rates. A strong and credible exchange rate policy, established at the beginning of the program, will break the cycle of the public’s inflationary expectations based on past experience. Both monetary policy and public sector wage policy are being subordinated to the exchange rate target. Now let me go into some details of this strategy. Action to eliminate, quickly and permanently, the high public sector deficit is among the priorities of the program. | This calls for continuously upgrading our regulatory regime. Accordingly, we in Kuwait, like our colleagues in the region, have not only refined our existing regulations to reflect the best global practices, but have also introduced a host of new measures. This journey brought its own set of challenges, and I would like to point out one in particular, to benefit from the presence of our esteemed colleagues from the BIS. Similar to other jurisdictions with dual banking system, we have a sizeable presence of Islamic banks in Kuwait. Yet we found limited relevant guidance for the application of Basel III on Islamic financial institutions, if at all. For the most challenging aspects of Basel III reforms, it has been left to the discretion of individual regulators to figure out how best to apply the proposed rules to Islamic banks. However, the use of discretion, though well intended, is bound to create differences across countries, and more so in the case of Islamic finance where the lack of consistency in Sharī`ah interpretations makes the task even harder. Consequently, we may witness diverging approaches to regulation of Islamic banks across jurisdictions, with the risk of regulatory arbitrage. Going forward, we also need to recognize that ensuring stability, of a constantly adapting banking system, cannot be left to regulation alone. Therefore, we need to strengthen our supervisory capacity, to suitably complement our revamped regulatory regimes. Only through effective supervision can we ensure that banks are truly compliant with our regulations. | 0 |
The question is why we didn’t see the problems in the Stability and Growth Pact from the beginning? Perhaps because we were fortunate to have something that could work as a temporary replacement for rules: clear objectives, strong leadership and the market as a quickly reacting judge. Most countries wanted to meet the convergence criteria and thereby join the euro area. Germany led the way, both in terms of its economic size and its example of fiscal discipline. Now the objective of joining the euro has been achieved for many countries, and, in addition, Germany has lost its leading role and the markets react less to fiscal laxity. Instead of national leadership towards clear objectives we have seen the opposite – the political exploitation of the gap between the national and European level. The requirements of the Pact are blamed on heartless “accountants in Brussels”, and when a majority within the countries puts narrow national political interests first the agreed rules become moot – “peer pressure” becomes ”peer protection”. Incorrect facts have been more or less deliberately sent to the Commission ahead of sensitive elections. A study by Barclays Capital shows that during the years 2000-2003 growth projections were overestimated by 1.5 percentage points on average each year by the euro area countries, leading to fiscal balances turning out worse than expected on average by about 1% of GDP per year. | The problems are tackled by strengthening Eurostat and allowing it to make methodological visits in the member states, to discuss budget issues. A new high level group with a mandate to advise Eurostat will be established. As Eurostat monitors the member states’ compliance with the agreed practice, the high level group also, indirectly, advises the member states. My view is that all the reforms in this area of the Stability and Growth Pact go in the right direction since they encourage fiscal prudence. However, given the complicated process and the short time since the Pact was changed, it is too early to determine whether the changes have been a complete success. Changes in the preventive arm Changes in the preventive arm have been made in the area of medium term objectives (MTO) for the budget balance. Member states are divided into groups depending on their debt level. Stricter MTOs are required for countries with higher debt. The MTOs for the euro area and the ERM2 countries range from a deficit of 1% of GDP to balance or surplus depending on the debt level. The countries that have not achieved their MTOs are supposed to follow an adjustment path to the objectives. The path requires more consolidation in good times. For the euro area and ERM2 states, the adjustment requirement is a yearly improvement of the cyclically adjusted deficit net of one off effects by 0.5% of GDP. | 1 |
So it is very helpful that the EMI Council decided with our encouragement in September to ‘welcome and support’ harmonised market conventions on the basis proposed by the market associations. We also welcome the EMI Council’s decision in September to prepare for the computation by the ESCB of an effective overnight reference rate for the euro area. There remains however a good deal to be done everywhere -- in co-ordinating price sources, for example, as methods of redenomination. But in all of these respects London is well up with the game. Conclusion Mr. Chairman, it is sometimes suggested that a perceived threat to its activity if we were “out” will cause the City to press for early UK membership of EMU, and that this will be an important factor in the Government’s decision. I am bound to say that I see very little sign of this. Certainly there are those in the City who advocate our early participation, but there are equally those who are more hesitant -- just as opinions are divided elsewhere within the country. But for the most part, my impression is that City attitudes to EMU, whether for or against, reflect a broader assessment of the respective pros and cons for the country as a whole rather than strong views about the implications for the City in particular. On the whole I find that City opinion is relatively optimistic about its future prospects, “in” or “out”. | In the UK, the real-time gross settlement system which came into operation in the spring of last year is being developed so that it will operate in euro. If the UK joins, the UK sterling system will effectively become a euro system. And, in case the UK is “out”, a parallel euro system is under construction to sit alongside the sterling system: it will enable the members of CHAPS to process euro payments as a foreign currency within the UK and across borders within the EU, through its link to the pan-European RTGS system -- TARGET -- which is being developed. The idea behind TARGET is to link together in euro the national RTGS systems of EU Member States so that large-value payments can be made or received between Member States throughout the EU area, with finality in real time, in exactly the same way as they can at present be made and received within Member States with national RTGS systems denominated in their own national currencies. One of the main purposes of TARGET is to support closer European economic and financial integration by reducing the risks in pan-European payments -- just as national RTGS systems reduce the risk in national payment systems. The other main purpose of TARGET is to integrate the euro money market so as to ensure that the same short term euro interest rate -- determined by the single monetary policy of the ECB -- prevails throughout the euro area. TARGET is a project which we strongly support. | 1 |
Payments are vital to any real economy and in total nearly 40 billion payments were made in the UK in 2018.4 They are also at the heart of the financial system. This makes London the perfect location for a payments conference, which is focused on “thriving in a hyper-connected world”. Payments are innovating, fast. From the infrastructure and the messages that support each transaction, to new players entering the market and consumers seeking new ways to pay for goods and services. Future of Finance, Future of Payments While the core mission for the Bank of England is maintaining monetary and financial stability, we also seek to enable innovation and empower competition in the financial system. To support our forward looking and dynamic approach we recently commissioned and responded to the Future of Finance report.5 It considered how financial services might evolve over the next decade, and what this could mean for each of us: for users, the system and the Bank itself. The report highlighted that a new economy and new demographics demand a new financial system. This system must be resilient, fair and dynamic. We have prioritised five areas of work: we are enhancing the payments system for the digital age; we will champion a platform to boost access to finance for small businesses; we will support the transition to a carbon-neutral economy; we will develop a world-class regtech and data strategy; and we will facilitate firms’ use of technology. | At the forefront are the regulatory requirements on banks’ equity capital and liquidity through laws and ordinances by the federal government and FINMA. Moreover, in Switzerland, the self-regulation rules for banks also constitute an important element. Thus, the relevant legal requirements are supplemented by rules and guidelines set by the Swiss Bankers Association, which FINMA can also recognise as a minimum standard. 8 This instrument has been applied several times over the past few years in relation to the mortgage and real estate markets. 8 Cf. finma.ch/en/documentation/self-regulation/ (consulted on 30 August 2021). Page 6/12 At international level, the SNB participates in various committees and working groups, such as the Basel Committee on Banking Supervision. The recommendations and agreements of these bodies in turn have a major influence on our national legislation. One example of this is the CCyB. It was devised at international level and introduced in Switzerland in 2012 by means of a Federal Council ordinance. The CCyB is a key instrument for counteracting imbalances on the mortgage and real estate markets. When activated, banks are obliged to temporarily increase their equity capital beyond the levels imposed by existing capital requirements, depending on the magnitude of the vulnerabilities. The CCyB is designed to strengthen the resilience of the banking sector against the risks of excessive credit growth and also to counter any unsustainable credit growth. The capital buffer in Switzerland has so far been targeted at mortgage loans granted for residential real estate. | 0 |
First, it is not always easy to take the other side. There may be constraints on the ability to short the asset in question. Such limits on the ability to short sell can arise for many reasons. For some assets, short selling in size might simply not be possible because the markets are not sufficiently developed. Also, even if there were instruments that can be used to go short, it may not be an easy trade to undertake. For example, if a bubble builds up over many years and market participants’ compensation is based on year-to-year performance, there may be disincentives to take the short side. Compensation schemes and other practices that skew incentives may create a bias to simply “trade with the market.” Second, bubbles may simply emerge from the way market participants process information and trade. Experimental work done by behavioral economists has shown that people often trade in ways that generate price bubbles. In many carefully controlled experiments in which the intrinsic value of the asset could be determined with certainty, participants still bid prices up far above fundamental valuations, with the bubbles being followed by sharp declines in prices. BIS Review 43/2010 1 Let me give you an example of one of the seminal studies of this type. In this experiment, all investors start with an identical asset that pays the same dividend generated from a known probability distribution at the end of each trading period. | Such doubts can ultimately lead to an expectation of higher inflation and therefore complicate monetary policy. Seen from the perspective of regulatory policy, demands for the SNB to directly finance government tasks are therefore to be clearly rejected. The SNB’s monetary policy must not be driven by profit or loss. These are just by-products of our monetary policy. Our mandate is to conduct a monetary policy that ensures price stability in the medium and long term while taking due account of economic developments. Price stability is the most important contribution the SNB can make to our country. The SNB will therefore continue to advocate a framework for monetary policy based on the principles of regulatory policy. Page 4/5 The challenge of ensuring price stability Ladies and gentlemen, the current global situation highlights the importance of central banks’ focus on price stability. The monetary policy environment has changed considerably due to the pandemic and the war in Ukraine. After years of expansionary monetary policy aimed at preventing inflation from falling too low, the central banks of many countries are today faced with the challenge of fighting inflation that is too high. I will therefore close by saying a few words about the SNB’s current monetary policy. Inflation in Switzerland is lower than abroad. However, in this country, too, it has still increased much more than was generally expected. At 3.5%, it is at its highest level since the 1990s. | 0 |
But it is only a short term solution that will quickly exhaust the effects, because devaluation will bring high inflation and in the end only the nominal exchange rate is changed, and the real exchange rate will remain the same. And then again demands for a new devaluation. Look at the history of the European Monetary Union. What was the exchange rate policy of Greece, Italy, Spain, before the introduction of the ECU (the predecessor of the Euro). Instead of structural reforms, they constantly corrected their weaknesses with a devaluation of the exchange rate. When they entered the Euro area it was no longer possible and it has led to what we see today. They require internal devaluation of about 30 percent to restore lost competitiveness. By contrast, countries such as Austria, the Netherlands (Denmark, which still has its own currency) have always led policy of a fixed exchange rate pegged to the German Mark. To be competitive, they had to increase their 4 BIS central bankers’ speeches efficiency with structural measures. Therefore these countries have no problems with competitiveness today. In a recent interview you gave for Banks and Businesses you recommended that the competitiveness of the Macedonian economy must be improved through complex reforms and dedicated work that includes everybody. Do you see such progress? Yes, I see such progress. The ranking of Doing Business, of the World Economic Forum, is a benchmark for what has been done in the area of ? ?improving the conditions for higher economic growth. | The risks of a setback in economic activity should not be underestimated either. As we Executive Board members pointed out, we are always prepared to make monetary policy even more expansionary if we assess that the upturn in inflation is threatened. But even if the focus of the debate in Sweden is now of necessity on current monetary policy, we must not lose sight of the longer perspective. There is a lively international debate on whether, and if so how, inflation targeting should be changed in the wake of the financial crisis and the ensuing period of a long-drawn out economic recession, very low inflation and very expansionary monetary policy. What do the past eight years mean for the functioning of the economy and for monetary policy? Will we return to the way things looked before the financial crisis? It is important that we also take time in the Swedish debate to focus on these fundamental issues so that the discussions of our own monetary policy framework remain well-informed and productive. This is important not least for the external evaluation of monetary policy in Sweden now being carried out on behalf of the Riksdag Committee on Finance. There are many interesting question that are worth raising. One example that is of immediate interest in the Swedish debate is the question of whether monetary policy should have an explicit target for employment in addition to the target for inflation. This is one question that will be taken up in the external evaluation. | 0 |
In fact, investment in technology, in which process savings banks have played a notable part, is an additional and important mechanism for attaining greater efficiency. This is because technological development allows processes to be undertaken more easily, simultaneously eliminating certain timeand labour-intensive tasks so that operating cost cuts are achieved. In addition the capacity to process massive amounts of data efficiently in real time allows for better risk management and also for services better tailored to client needs. In line with the foregoing, appropriate human resources management will also be conducive to achieving greater efficiency. The importance of the role of human capital is beyond all doubt, and all the more so in the sector we are discussing today. BIS Review 31/2003 3 Business risk In terms of not changing the risk profile while trying to gain efficiency, business and operational risks deserve some attention. I have signalled before some of the specific features associated with savings banks. Ensuring the objective of efficiency also involves moderation to some extent in those activities and risks furthest removed from their nature and character. A latent danger arising when cutting costs to improve efficiency, is an increase in the level of operational risk. As I mentioned, efficiency improvements may only be understood as such when the risk profile remains unchanged. As you know, operational risk is increasingly under the scrutiny not only of supervisors but also of institutions. | Most economists see this shock as disinflationary and expect it to remain so in the next phase as demand around the world recovers more slowly than supply. The IMF forecasts inflation rates of 0.2% and 1.0% in 2020 and 2021 for the euro area. The European Commission forecasts are roughly the same. Let me remind you that our inflation objective of “below but close to 2%” is both symmetric and mid- Page 10 sur 10 term: it should not be a ceiling, nor completely ignore past inflation developments. As I said, I fiercely stick to our monetary independence – and oppose fiscal dominance –, and to our mandate focused on price stability. But in the present context, this mandate does not prevent action: in the very name of our mandate, we will probably have to do more, and maintain low interest rates and abundant liquidity for longer. Nor does independence prevent cooperation. On the contrary, the stronger the Economic Union – including its budgetary and financial components – the more effective monetary action will be. Take the example of the Federal Reserve in the United States which can count on a strong fiscal and monetary policy-mix. *** Over the past 20 years, the euro area has essentially forged ahead through crises. Today it is facing another moment of truth. As a golden thread, famously illustrated by Mario Draghi’s “Whatever it takes” in 2012, stands the unlimited commitment of the ECB to the euro. | 0 |
But the refugee crisis means that we’re also facing a new challenge right now. Is this going to affect economic developments? It is a huge challenge, not only in Germany, but for Europe as a whole. But the refugee crisis is also a great opportunity for Europe if the refugees can be successfully integrated into the labour market. The more Europe stands together in the refugee crisis, the greater is the likelihood that it can be overcome. As a European citizen, I believe that we are now at a historic moment when the EU must demonstrate that it is able to reach a European solution. 2 BIS central bankers’ speeches Is that realistic? Europe has already overcome similar situations, for example during the debt crisis. In this case, given that we are talking about millions of people who are fleeing to Europe, I personally believe that the EU has a moral obligation to find a joint European solution. The European project is not first and foremost a financial project. Europe always was, and will continue to be, about bringing people together, not about dividing them. The euro area countries cannot even agree on whether or not there should be a common limit on payments in cash. What would you advocate? This is a matter for the EU finance ministers to decide on, not the ECB. There are countries in Europe where cash is very important, and there are others where cash plays a lesser role. | Regardless of the specific details, the key is that differences across individuals can be important for understanding how the economy works, even in the aggregate. For all these reasons, the Research group at the New York Fed is committed to continue our work on heterogeneity, across several dimensions of what we do. We are always looking for ways to expand and deepen our knowledge, to enhance the data that is available to our economists and others to do deep, sophisticated research on these topics, and, critically, to publish the work so that we are adding to the store of knowledge both among academic researchers and among policymakers. We are well-placed to understand what the important questions are, to generate the data needed to answer them and to speak to diverse audiences about the results. This webinar and blog series are important parts of our strategy for communicating about our work and for advancing thought about the critical role that heterogeneity plays in our economy. Thank you. 2/2 BIS central bankers' speeches | 0 |
[7] 75% of people in 16 major countries expect their government to make environmental protection a priority when planning the postCOVID-19 recovery. See Ipsos press release (published on 5 June 2020) about the results of a survey conducted between 21 and 24 May 2020 on the Global Advisor online platform. [8] Giuzio, M. et al. (2019), “Climate change and financial stability”, Financial Stability Review, ECB, May. [9] European Commission (2020), “ Identifying Europe's recovery needs”, Commission Staff Working Document, 27 May. [10] Through our ECB Listens portal, we are inviting euro area citizens, organisations and relevant stakeholders to contribute ideas and comments on the way we conduct monetary policy. European Central Bank Directorate General Communications Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany Tel. : +49 69 1344 7455, email: [email protected] Website: www.ecb.europa.eu Reproduction is permitted provided that the source is acknowledged. Media contacts Copyright 2020, European Central Bank | In view of the prevailing dynamic and often volatile financial environment, this development is important to meet the differentiated demands of investors for a broader range of financial products at more competitive prices and through more efficient and convenient channels. The listing of the Exchange Traded Fund on Bursa Malaysia will also raise awareness and generate interest of domestic and international investors in our bond market, thus contributing towards the development of a deeper and broader bond market in Malaysia. The launch of the Malaysian Bond Exchange Traded Fund would not have been possible without the close cooperation and support of many parties. In particular, I would like to thank the Securities Commission, Bursa Malaysia, the Association of Stock Broking Companies in Malaysia, AmInvest, the fund manager and the market makers for their contributions and commitment in working with the Central Bank to make the listing of the ABF Malaysian Bond Index Fund a reality. The remarkable and strong partnership between the regulators and the industry has been important in resolving significant regulatory as well as operational challenges in order to make the listing of the ABF Malaysian Bond Index Fund possible. Indeed, it represents a strategic cooperation that contributes to improve the overall growth of the financial market. 1/2 I would also like to thank AmMerchant Bank, CIMB and Maybank for their participation as the participating dealers. I also wish AmInvest, the fund manager, every success in managing and promoting the Fund. 2/2 | 0 |
Javier Aríztegui: The financial crisis and the restructuring of the Spanish banking system Speech by Mr Javier Aríztegui, Deputy Governor of the Bank of Spain, at the APIE (the Spanish Association of Economics Journalists) – UIMP (Menéndez Pelayo University) Course, Santander, 17 June 2011. * * * Let me begin by thanking the APIE (the Spanish Association of Economics Journalists) and the Menéndez Pelayo University for inviting me to deliver the closing address at this seminar, which has discussed matters of great interest for our economy and financial system. This is the third year I have come to Santander for this session, and the second year running that I will be briefly reflecting on the financial crisis and the restructuring of the banking system. That I should be here again is no strange occurrence. Indeed, it was foreseen by the organisers since we are experiencing the deepest and most extensive crisis in recent decades, and we face a far-reaching restructuring and reform of savings banks. But my address today is from a different perspective than that of my last visit. In June 2010 the Royal Decree-Law that created the Fund for the Orderly Restructuring of the Banking Sector (FROB by its acronym) had been in force for a year. One of its aims was to boost integration processes to create sounder and more efficient institutions. | Safe and efficient clearing and settlement have been in demand as banks’ trust in each other has weakened. In Norway, our systems have had to handle major problems in two Icelandic banks operating in our country. These problems have been handled smoothly. Times of crisis can also be a turning point, providing the opportunity for change. During the Norwegian banking crisis in the late 1980s and early 1990s, Norges Bank and other public authorities put pressure on banks to increase their income from bank charges, including payment services. I believe that as banks have to focus even more on running a costefficient business, the incentives for developing the payment system further will be strong in times to come. For this conference we have received a large number of high-quality papers. I know that the selected conference speakers represent some of the best researchers in this field. We are especially pleased to have as keynote speakers two of the leading scholars in the economics of payments systems: David Humphrey from Florida State University and Jean-Charles Rochet from Toulouse School of Economics. Let me also extend my thanks to the three other members of the programme committee: Gabriela Guibourg from Sveriges Riksbank, Eirik Gaard Kristiansen from the Norwegian School of Economics and Business Administration, and Bent Vale from Norges Bank. As I mentioned earlier, I visit Nice in the South of France quite often. And from my direct observations, I notice that France has developed very fancy methods of processing cheques. | 0 |
As Mervyn King, the Governor of the Bank of England, stated explicitly to the point2: “..that’s what we have to do with every variable that we look at, work out why it’s growing faster or slower than it was before and not to use some rather mindless regression.…The secret of good policy is to try and think trough what are the economics of the shocks hitting the economy at present. That in a nutshell is my philosophy of how you should do policy. Don’t rely on regressions from the past.” Having discussed the role of monetary policy and rather complex economic models, I will move on to the final theme which may seem more prosaic, notably measuring current inflation. In general, the production level of economic statistics is probably very high in Norway, as shown in international comparisons by the IMF among others. It would also seem that it is very cost-effective. Improvements are frequently made to the methodology and the compilation of CPI statistics. In August this year, the indices for electricity, books and air travel were revised. Last year, Statistics Norway changed the method for the treatment of rents in the housing market, and the previous year the food index was revised. A general view is that changes in statistics production should be well documented and should place particular emphasis on identifying the effects such changes might have on measured inflation. | While European labor markets are not – and will never be – as integrated as in the United States, goods, services, and capital markets are now fully unified, in many regards to a greater extent than in any other countries. Our studies show that business cycles tend to be more and more synchronized with time, an evolution which allows for greater efficiency and sustainability for a common monetary policy. This shows that monetary union is a self sustaining process: convergence can be a result, as much as a condition of economic integration. This has been termed the "endogeneity of optimum currency area" effects. Enlargement of the euro area As I said before, in contrast with some gloomy predictions made ten years ago, the euro is a success story. Far from being a closed Club, the Euro area is open and has a true calling for covering all the EU members, in so far as they fulfil the convergence criteria. Indeed, adopting the Euro can be seen as a legal obligation for all EU members once they have fulfilled the Maastricht convergence criteria. Monetary union is an on-going process. Starting in 1999 with 11 members, the Euro area has regularly expended. On 1 January 2001, Greece joined the Euro area. More recently, on 1 January 2007, Slovenia was the first of the 10 New Members 2 BIS Review 43/2007 States entered into the EU in 2004 to adopt the Euro; this brought the current number of members of the Euro area to 13. | 0 |
Michael C Bonello: EU membership - the challenge of change Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the conference “EU Accession, One Year On - Quo Vadis Malta?”, organised by the Malta Business Bureau, St Julians, 6 May 2005. * * * When I argued the economic case for Malta’s accession to the EU in November 2002 I described membership as a concrete, long-term response to the challenge of developing a modern economy with the capacity to generate wealth in a sustainable manner. The experience of countries like Ireland, Portugal, Spain and Greece showed that the EU had indeed proved to be a most effective mechanism for this purpose. A year after Malta’s accession it is clear that membership has indeed opened up new opportunities. The economy now enjoys wider access to export markets, increased competition at home and a greater availability of financial resources under EU funding programmes. While it is too soon to draw definitive conclusions, it has become equally evident, however, that the successful exploitation of the Single Market will depend on our ability to adjust both institutional structures and operating practices to this novel environment and to implement effective competitiveness-enhancing reforms. The intensification of competition in world markets and the growing diversion of both consumption demand and investment to lower-cost countries adds urgency to this challenge. | These developments cannot fail to have an impact on the Maltese economy given its small size and openness and its position as a price taker in international trade. While exporters are experiencing acute competitive pressures, the magnitude of this challenge from abroad, and the threat it represents for employment levels, has not, however, been adequately reflected in the results of the high-level social dialogue taking place in the country. It is in part for this reason that Malta appears less prepared than its competitors to face international competition. Against this background I shall review some of the more important changes brought about by EU membership and the attendant opportunities for Malta. Subsequently, I shall analyse the current economic performance in terms of the country’s ability to adjust to, and capitalise on, the new operating environment. Finally, I shall outline some policy orientations that could be useful in facing up to this challenge. The consequences of EU membership The main consequences of EU accession for Malta can be broadly categorised under five headings. | 1 |
One argument is that it is good to have some margin as there is a risk that CPI overestimates inflation. For instance, it is difficult to exactly measure price increases as a result of better quality, which is thus not inflation. Another argument is that it is often difficult in practice to implement nominal reductions in prices and BIS Review 8/2006 3 particularly wages. Some measure of inflation may therefore simplify necessary adjustments in relative wages and prices. At the same time, there have seldom or never been attempts to stabilise inflation at a level much higher than 2 per cent. This may be because this does not sufficiently anchor inflation expectations. Experiences from Sweden and other countries indicate that low, stable inflation is an important condition for favourable economic growth and that the work on maintaining low, stable inflation is made easier if the central bank can act independently. This is why the Riksbank, like many other central banks, has been given greater independence and an inflation target. If the central bank is not allowed to independently formulate monetary policy there may be political pressure to conduct monetary policy that aims to achieve other objectives. How does the Riksbank influence inflation? The tool the Riksbank has at its disposal for steering inflation is the repo rate. This is the interest rate the banks pay to borrow money from us. The objective of changes in the repo rate is to influence demand in the economy and thereby price developments. | It is surprising that this issue is still outstanding, despite the fact that it is more than ten years since the bank crisis occurred and despite a draft bill being taken up for consultation five years ago. We play a central role in the monitoring work and concentrate our task to assessing how the financial system functions and what risks might arise. Our Financial Stability Report is very important here. The aim of this report is to identify potential risks and to influence market operators with good analyses. The third part of the stability work – crisis management – arises because the central government might need to take action to avoid a crisis that threatened the stability of the system. In order to manage a crisis, the central government must be able to assess what consequences will arise if an institution suffering problems should become bankrupt. If these consequences are judged to be serious, the central government must also be able to take measures to alleviate the effects. In extreme cases the central bank can act as “lender of last resort” (provide emergency liquidity assistance, ELA) if this is necessary to prevent the bank system from collapsing. A lot has happened with regard to stability work since 1997 and the work changes continuously as the world around us changes. For instance, the increase in the banks’ operations abroad means that foreign borrowers also need to be analysed to a greater extent. In addition, the stability work must follow the increasing integration of the financial markets. | 1 |
Banks and governments were being forced to pay even higher interest rates. And credit and economic growth were then falling further, leading to rising unemployment and reduced consumption and investment. This situation posed serious risks not only for the countries concerned, but for the whole euro area. It was hindering the overall economic recovery. It was even damaging the single market, as healthy companies were being curtailed in financing solely because of their location. If this situation had been left unaddressed, it could have created a risk of deflation and threatened the ECB’s ability to ensure price stability. That is why we decided that action was essential. Understanding the ECB’s response How did the ECB respond to this situation? In our analysis, a key reason why our low interest rates were not being passed on was that, earlier this year, some investors had become influenced by imagined scenarios of disaster. They were therefore charging very high interest rates to governments and private borrowers in countries they perceived to be most vulnerable. These interest rates went beyond levels warranted by economic fundamentals and justifiable risk premia. Interest rates do not have to be identical across the euro area. But it is unacceptable if the reason for large differences is the fragmentation of capital markets caused by fears of a euro area break-up. It was clear to us that governments could not address these break-up fears alone. | In other words, ECB actions that support market confidence are of benefit not only to countries in difficulty, but also to the euro area as a whole. Our measures ensure the proper transmission of monetary policy, which means neither excessively high interest rates nor excessively low interest rates. The measures enable the ECB to continue to maintain price stability for the benefit of all citizens of the euro area. The announcement on OMTs has already triggered positive effects. Sentiment in financial markets has improved significantly. Excessive government bond spreads have gone down, a number of banks in stressed countries have been able to regain access to markets and Target2 balances have broadly stabilised. The way forward Let me draw to a close. Actions by the ECB can build confidence in the euro area in the near term. But only actions by governments can secure confidence in the euro area over the longer term. In particular, governments need to work together to establish a stronger institutional structure for the euro area. 4 BIS central bankers’ speeches This process began in June this year with what has been called the “Four Presidents’ Report”. That report – of which I am a co-author – identified four key pillars on which a stable and prosperous monetary union should be built. These pillars are financial union, fiscal union, economic union and political union. In the near term, the most important pillar is financial union. | 1 |
Finally is the need to ensure the security and integrity of the payment system which requires the supporting regulatory and legal framework to be in place. The Payment Systems Act, the E-money Guideline issued by Bank Negara Malaysia and the Exchange Control Act rules for cross-border remittances serve as the main regulation in this area. In addition to e-payment channels and e-money as a mode for pursuing the financial inclusion agenda, there holds much promise in the usage of agents or non-bank intermediaries to extend the outreach of financial services to the underserved in the Asian region. In Malaysia, we have facilitated the utilisation of post offices as a delivery channel for banks to provide simple banking services, including opening of accounts, cheque and cash deposits, cash withdrawals, funds transfers and remittances, and loan repayments. By engaging the services of post offices, the banks are able to leverage on the wide dispersion of post office branches in non-urban areas as well as the communities' familiarity and trust associated with services offered by post offices. Malaysia's approach in the regulatory framework for such arrangements places the responsibility the banks to put in place the necessary safeguards and controls. Such controls include requirements to set transaction limits, establish sound reporting and monitoring mechanisms, and conduct periodic assessments towards ensuring that the integrity and quality of financial services provided is maintained at all times. In addition, substantive consumer education and protection measures have been implemented, which would also be applicable broadly to branchless banking related issues. | Third, the euro area has a balanced current account. As such, the euro area does not contribute to global imbalances, one of the main challenges facing the global economy and the world community. It is worth stressing that the euro area is the relevant dimension to consider for a vast single currency and economic area with a common exchange rate and monetary policy. And there, the numbers are clear: the euro area current account balance averaged less than 0.1% of GDP over 2005–2007 before the global crisis broke out, according to IMF figures. Moreover, the euro area current account is still projected by the Fund to be broadly balanced this year and the next up to 2015. The picture is very different in other parts of the world. A concern is that after some partial reduction induced by the crisis, global imbalances are starting to widen again. This raises challenges for international monetary and financial cooperation. The euro area has a significant stake in effective global re-balancing, notably through sounder domestic policies worldwide which, in turn, would contribute to global external stability. The global economy has a lot of homework to do if it is to address these challenges. People of goodwill, inspired by the desire to keep the global economy “open, market-based, just and protective” will surely be needed to that end. Credit should therefore be given to initiatives such as the Global Economy Prize to encourage them to press ahead in that direction. 2 BIS central bankers’ speeches | 0 |
For example, as the recession has pushed up the unemployment rate, the demand for office building space has declined; as the recession has led to a reduction in discretionary travel, hotel occupancy rates and room prices have declined; and as retail sales have weakened, this has reduced the demand for prime retail property space. The decline in commercial real estate valuations has created a significant amount of “rollover risk” when commercial real estate loans and mortgages mature and need to be refinanced. The slump in valuations pushes up loan-to-value ratios. This makes lenders wary about extending new credit, even in the case when these loans are performing on a cash flow basis. This means that more pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures. 2 BIS Review 122/2009 For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession – making many less creditworthy. Second, some sources of funding for small businesses – credit card borrowing and home equity loans – have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. They are too small to borrow in the capital markets and the Small Business Administration programs are not large enough to accommodate more than a small fraction of the demand from this sector. | For those without a university qualification, the probability of being in work three years from now might be 27-37% lower.16 During jobs recessions, many workers choose to move down the skills spectrum to regain a foothold on the jobs ladder.17 But if many displaced workers have low levels of skill and experience, the option of moving down the skills spectrum may not be available or may at least have lower value. Skilling or re-skilling will then be needed. This adds to the time it takes workers to re-enter the jobs market, prolonging high unemployment. 16 17 Henahan (2020). Haldane (2019), Moscarini and Postel-Vinay (2016) and Moscarini and Postel-Vinay (2018). 16 All speeches are available online at www.bankofengland.co.uk/speeches 16 The possibility of labour market mismatches, whether by sector or skill, increases the chances of high unemployment proving persistent, with scarring effects on the economy’s supply potential. Put differently, labour market mismatches raise the economy’s NAIRU – the level of unemployment at which supply bottlenecks and wage pressures re-emerge. The higher the NAIRU, the smaller the degree of slack in the economy. Historically, pandemics have not tended to have a persistent upward impact on prices.18 But a higher NAIRU would be one reason to be cautious before jumping to that conclusion. A second is that the policy response to the Covid crisis, both monetary and fiscal, has been significantly more expansionary than any previous pandemic. | 0 |
On the contrary – low inflation is necessary for a favourable development of production and employment. Sweden is a clear example of this. 9/10 BIS - Central bankers' speeches Thank you! 10/10 BIS - Central bankers' speeches | 04.11.2020 Statistical Production and Economic Policymaking: A View from a Central Bank 2020 International Conference of Statistics for Society - INE Pablo Hernández de Cos Governor General considerations Let me first congratulate the Instituto Nacional de Estadística on this anniversary. Since its creation in the very difficult times after the Spanish civil war, INE has continuously grown in stature. Today, it boasts the highest standards in terms of professionalism and credibility. We live in a society overcrowded with data. Every decision we take and every transaction or movement we make are reflected in some or another database. But this per se has not necessarily increased our real information or our knowledge. Many of those data are not structured, lack a precise definition or do not follow a specific methodology. This is why statistics and, in particular, official statistics are so important, as they transform data into real information. And we need this to make sound decisions. Policymaking thus heavily relies on timely, exhaustive and detailed information provided by official statistics. Unsurprisingly, statistical production plays a prominent role in central banks. Several factors are at play here, such as a long-standing tradition in producing and analysing monetary and financial information, staff who are highly experienced in these tasks and good “raw materials”, in part benefitting from the key role of the central bank as the banking regulator and supervisor. I should stress that the autonomy of central banks has also greatly helped enhance the credibility of their statistical output. | 0 |
According to Dr S Arsaratnam 4 , both the Sinhala kings and the Dutch used Arabic traders to export elephants, gems, areca nuts and spices, and import rice, textiles and other requirements in the 16th to early 18th centuries. The British period that followed the Dutch rule is marked by a continuation of the open-economy policy pursued by ancient Sinhala kings. During this period, the country continued to rely on foreign trade for wealth creation and maintaining high standards of living. Hence, the reliance on services, especially commercial services, for wealth creation was not a new policy paradigm for Sri Lanka. Around the time Sri Lanka gained independence from the British rule, the country’s GDP was distributed in the proportion of 46 percent for agriculture, 20 percent for industry and the balance 34 percent for services. The high share of both agriculture and industry amounting to about a two-third of GDP indicated the prevalence of a limit for their continued growth devoid of a vibrant and efficient services sector. This anomaly was to be gradually, and in a slow pace, corrected in the subsequent five decades. In 1960, a slight improvement in the respective shares was observed with agriculture falling to 38 percent and services rising to 45 percent. The period since then recorded a virtual stagnation of services till early 1980s when the country moved to an open economy regime. | 9 The World Is Flat, Penguin Books, 2006 10 For a detailed exposition, see Gurcharan Das, India Unbound, Penguin Books, 2002 11 The personal experience of the author has been that university students normally tend to give priority to paid professional courses over tuition fee-free university courses. In the third and fourth years, only about a one tenth of registered students attend classes, though public money is spent on all of them. BIS Review 4/2007 7 A further benefit which Sri Lanka could gain by promoting a global market based services sector is the possibility of narrowing the current account deficit of the balance of payments through enhanced service income. Historically, Sri Lanka is having an ever ballooning deficit in the merchandise account. With high international oil prices and rising intermediate and investment goods imports, this deficit has risen to a very high and unsustainable level of about 13 percent of GDP by 2006. Countries with such large trade deficits should perforce attempt to generate an equivalent surplus in the services account so as to finance the same. However, the surplus being generated by Sri Lanka in its services account has not been sufficient to fully off-set the trade deficit. As a result, Sri Lanka normally runs a current account deficit of 5-6 percent of GDP which has to be financed through capital flows. This level of a current account deficit, occurring year after year, is not sustainable. | 1 |
The best way to do this is to craft a plan that starts small in terms of its near-term impact, then grows very substantially over time as the economy grows healthier. Of course this requires that the longer-term consolidation is truly credible. It is also important that any plan have broad bipartisan support so that that households and businesses understand that it will in fact be carried out. We saw in the summer of 2011 when the debt ceiling limit was in play that a failure to come to grips with our nation’s economic challenges and responsibilities can have a large effect on U.S. household and business confidence. We do not want to repeat this experience at the start of 2013. Moreover, what happens will influence how we are perceived abroad. When I meet with economic leaders across the globe they do not doubt the underlying strength and dynamism of the U.S. economy, or the entrepreneurialism and inventiveness of our people. Nor do they doubt that we have the resources and capability to overcome the challenges we face. But they do wonder whether our political system is capable of putting the national interest above partisan interests and making the tough choices needed to address these challenges. If a credible bipartisan agreement is reached, it will strengthen global confidence in the U.S. and underscore to the world that our country remains a great place to do business and invest in. | Inflationary pressure stability is clearly illustrated by low rates of core inflation of non-tradable goods one during this period, being reflected also in checked expectations of economic agents of the market. Meanwhile, after a long non-inflationary period and confirming Bank of Albania forecasts, the annual change of consumer prices revealed a slightly increasing tendency over the second quarter of 2009. The annual inflation marked 2.3 percent in June, reflecting a more complete pass-through of exchange rate deprecation effect on consumer goods prices. The Bank of Albania estimates that this factor may play a higher role in the future for determining these prices, comprising premises for short-term and medium-term shocks on price level. In the face of these developments, the Albanian economy continued to be featured by low public and private savings rates even during the first half of 2009, associated with further enlargement of current account deficit and upward pressures on exchange rate performance. Simultaneous reduction of exports and imports, respectively by 19.6 and 6.3 percent on annual level, made the trade deficit contract by 1.3 percent during first five months of the year. However, reduction of emigrants’ remittances by about 8 percent during the first quarter and the service account deterioration, made the current account deficit record an annual growth of 5 percentage points of GDP during this quarter. Though this deficit goes for financing, to a large extent, the capital and intermediate goods of import, its sustainability deserves a greater attention. | 0 |
A large-scale downgrading of this debt, to below investment-grade status, would entail considerable potential losses for the financial system of the European Union (EU) as a whole, a significant part of which would correspond to indirect losses attributable to the forced selling mentioned above. The role of rating agencies in this process is fundamental. When making their assessments, these institutions need to take into account the long-term outlook for the corporation concerned and avoid excessively pro-cyclical behaviour. Indeed, this time round, rating agencies appear to have been more cautious than in the global financial crisis and, to date, phenomena comparable to those seen in the past have not occurred. In any event, the results of this exercise serve to show the systemic importance of this vulnerability and the need to be prepared to provide a sufficient, internationally coordinated response, depending on how the pandemic develops at international level. The impact on general government A system-wide scenario analysis of large-scale corporate bond downgrades, ESRB Technical Note, 23 July 2020. 10 15 During the current crisis, the activation of automatic fiscal stabilisers associated with lower tax receipts and increased cyclical expenditure (for instance, on unemployment benefit), along with the effect of the discretionary measures adopted by the authorities to mitigate the impact of the crisis, is leading to very significant increases in budget deficits and public debt in all countries. Initially, there were also tensions in European public debt markets, which led to a sharp rise in sovereign spreads. | 01.09.2020 The impact of the COVID-19 crisis on financial stability Closing address to the seminar “The financial system in the COVID-19 crisis. Challenges and commitments”, Universidad Internacional Menéndez Pelayo, organised by the Spanish Financial Press Association Pablo Hernández de Cos Governor Good afternoon ladies and gentlemen. It is an honour and a pleasure to participate once again in this summer course organised by the Spanish Financial Press Association. It is clear that the scope of the pandemic and its impact on the world economy are very extensive. Following a 5.2% decrease in Q1, with respect to the previous quarter, Spanish GDP fell by 18.5% in Q2, when the restrictions linked to the state of alert were at their height. These declines represent the greatest contraction in economic activity in our recent history. An improving path has been seen during Q2 and Q3. However, this recovery is incomplete, and uneven across sectors and agents. It is also subject to a high level of uncertainty owing to the doubts as to the course of the pandemic itself, as shown by the fresh outbreaks. It therefore seems clear that some of the pandemic's effects will be long-lasting. | 1 |
Another instance I would like to briefly refer to relates to the assertion of several colleagues from credit institutions, who claim that the NBR performed some sort of a trick in October 2008, making the liquidity in the banking system vanish. In other words, in its attempt to sanction those having orchestrated the speculative attack on the domestic currency, the central bank actually hit domestic credit institutions. Understanding the channels whereby RON-denominated liquidity moves about in the system is, indeed, quite complex and hence likely to easily generate confusion and twist the true meanings of words and actions. In fact, one cannot speak of a liquidity crunch as long as banks have complied with the 20 percent level of reserve requirements in both October and November (according to preliminary data). At most, relative decreases might occur temporarily relative primarily to corporate tax payments to the government budget. But even in such situations the NBR provides a lending facility, allowing immediate access to all banks capable of setting up the required collateral. The fact that some banks have not taken due care to set up a stock of government securities in a timely manner only means that the management of these credit institutions has decided 2 BIS Review 161/2008 to take chances for higher profit and increased market share. However, it is often the case that taking chances does not necessarily bring profit alone. The role of specialised media in grasping the actual dimensions of the phenomena under review is equally important. | The levels of growth, employment and prices for real and financial assets could not be maintained. Partly for these reasons, Sweden experienced a profound crisis. Had the adjustment been made earlier and resulted in stability, perhaps the crisis would have been less painful. In recent years, however, the process of adjustment in Sweden has come a long way. The economy is in the process of adjusting to the conditions that apply in a low inflation regime. This is being accompanied by an appreciable improvement in government finance, not least as a result of the extensive consolidation programme. From a two-digit level just a few years ago, for 1996 it seems that the government deficit has been reduced to between 3 and 3.5 per cent of GDP. Moreover, the improvement is expected to continue. That the consolidation of government finance proceeds successfully to the goal of balance in 1998 is of the utmost importance in that this lays a foundation for balanced, sustainable growth. With the new, globalised capital market, the need for discipline in economic policy soon makes itself felt, particularly for a country that has had a difficult period of deficits and has therefore become more dependent on domestic and foreign creditors. After all the experiences earlier in the 1990s, this is widely understood in Sweden. The resolution with which the consolidation is being achieved has been questioned from time to time. | 0 |
Jean-Claude Trichet: Testimony before the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, at the European Parliament, Brussels, 14 September 2005. * * * Madame la présidente, Mesdames et Messieurs les membres de la Commission économique et monétaire, j’ai l’honneur de paraître devant votre Commission aujourd’hui dans le cadre de notre dialogue régulier. À cette occasion, je voudrais rendre hommage à Wim Duisenberg, qui est décédé à la fin du mois de juillet. Le premier président de la Banque centrale européenne a apporté une contribution considérable à la construction européenne. Il a joué un rôle décisif dans la mise en place des institutions monétaires en Europe, dans le lancement réussi de la nouvelle monnaie, dans l’affirmation de la crédibilité de notre monnaie unique – l’euro – et dans l’instauration de la confiance placée en elle. Nous le regrettons profondément. Je commencerai mon intervention aujourd’hui par une évaluation de la situation économique et monétaire actuelle. Ich möchte außerdem zu aktuellen Themen der Fiskalpolitik und zu den Fortschritten im Bereich der Strukturreformen Stellung nehmen. Abschließend möchte ich die Position der EZB zu den Folgeaktivitäten hinsichtlich des EU-Aktionsplans für Finanzdienstleistungen erläutern. Economic and monetary issues At the time of my last appearance before the European Parliament in July the underlying trend in real economic growth in the euro area remained modest. | More fundamentally, the main risks to the inflation outlook stem from potential second-round effects in wage and price-setting behaviour triggered by ongoing oil price rises. In this respect, it is essential that the social partners continue to meet their responsibilities. Against this background, we will continue to monitor inflation expectations very closely. Particular vigilance is required in order to ensure that longer-term inflation expectations remain well-anchored in the euro area. Turning to the monetary analysis, money and credit have continued to grow robustly in the euro area over the last few months, mainly driven by the prevailing low level of interest rates. In particular, the growth of mortgage borrowing remains very strong. In this context, price dynamics in housing markets need to be monitored closely. The liquidity situation in the euro area remains ample by all plausible measures, indicating risks to price stability over medium to longer horizons. In conclusion, oil price developments have again led to upward revisions of inflation projections for the year ahead. At the same time, medium-term domestic inflationary pressures still remain contained, while the balance of risks to the baseline inflation scenario is tilted to the upside. Cross-checking the economic analysis with the monetary analysis confirms the need for particular vigilance in order to keep medium-term inflation expectations firmly anchored at levels consistent with price stability. By achieving this, monetary policy is making a significant contribution towards economic growth and job creation in the euro area. | 1 |
We pray to the almighty Allah that the Kingdom’s citizens will have many returns of this dear and national occasion and that the Custodian of the Two Holy Mosques, HRH the Crown Prince and the Second Deputy Prime Minister will be in good health. May the Kingdom continue to enjoy security and stability, so that the development march will continue under our wise leadership. 2 BIS central bankers’ speeches | The Banks also house and manage staff that supervise and regulate banks in the districts (under policy guidance from the Board of Governors), and perform other services, the most widely observed and commented upon of which is the operating of the BIS central bankers’ speeches 1 open-market operations conducted by the Federal Reserve Bank of New York on behalf of all 12 Banks at the instruction of the FOMC. All 12 Bank presidents serve on the FOMC together with the seven members of the Board of Governors. This is where monetary policy for the United States is determined by collective decision. The operating procedure of the FOMC is for each of the governors to have a vote on policy; the bankers rotate their votes, with the New York Fed having a constant vote. However, all 19 members – the seven governors and the 12 bankers – participate fully in every FOMC meeting and actively contribute to policy discussions. The FOMC has traditionally decided the federal funds rate, the overnight rate for interbank lending that anchors the yield curve. In recent years, in reaction to the Financial Panic of 2008 and 2009 and its aftermath, the FOMC has instructed the New York desk to buy mortgage-backed securities and Treasury notes and bonds – eschewing Treasury bills. Presently, the Fed holds more than $ billion in mortgage-backed securities (MBS) and over $ trillion in Treasuries. This expansion of our portfolio and extension of maturities held therein is known as “quantitative easing”, or QE. | 0 |
The position is complicated in the euro-zone by a reviving political debate about just how much of the unemployment reflects supply-side weaknesses requiring structural reforms, and how much it reflects inadequate overall demand. The outcome of that debate will be crucial to the future evolution of the euro-zone. But in the immediate situation there was no reason to suppose that continued growth of demand and output was inconsistent with effective price stability in the zone as a whole. So much for our different starting points. But over the past year, the world – and I mean the world – has changed quite dramatically for both of us in that we have both been affected by the international economic slowdown. This started, in fact, with the financial disturbances in Asia in the latter half of 1997, but even as late as the beginning of last summer it seemed as if it might have only limited impact on the overall world economy. The IMF, for example, was still then projecting 3–3¾% world growth in 1998 and 1999 respectively – which was certainly a setback compared with their forecast of over 4% just six months before – but it was hardly catastrophic. Since last summer it has become increasingly clear that things are likely to be significantly worse than that. | We’ve already seen a small example of this. The big jump in US lumber prices through the winter (Chart 9 again) encouraged greater supply which in turn led to a 11 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 11 significant correction in prices. Lumber prices are now two-thirds below their peak in May, implying that annual inflation rates are likely to be negative next spring. In the data, many non-oil commodity prices seem to exhibit the same “mean-reverting” tendency9. Chart 14: Areas of consumption hit hardest last year have grown more strongly in the recovery Sources: Barclaycard and Bank calculations. Data weighted by pre-Covid consumption share. 2y growth from March 2021 and 1y growth before that due to Covid base effects. This is perhaps an extreme example. It’s rare that increasing supply is as straightforward as chopping down another tree and cutting it up (and even lumber production isn’t as simple as that). Producing a micro-controller for a car, for example, is a much more complicated process and it takes significantly longer for supply to respond. Many analysts have said they expect the chip shortage to persist into next year. Even here, however, many also believe that we may already have passed the period of maximum strain. | 0 |
DLT 14 30.3.2023 Swiss Payments Vision – an ecosystem for future-proof payments | Money Market Event | Andréa M. Maechler / Thomas Moser | © Swiss National Bank Thank you for your attention. © Swiss National Bank | European Central Bank: Press conference – introductory statement Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank and Mr Lucas Papademos, Vice-President of the European Central Bank, Frankfurt am Main, 4 September 2008. * * * Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by Commissioner Almunia. On the basis of our regular economic and monetary analyses, at today’s meeting we decided to leave the key ECB interest rates unchanged. The information that has become available since the last meeting has confirmed that annual inflation rates are likely to remain well above levels consistent with price stability for a protracted period of time and that upside risks to price stability over the medium term prevail. While the growth of broad money and credit aggregates is now showing some signs of moderation, the still strong underlying pace of monetary expansion points to continued upside risks to price stability over the medium term. The latest economic data also confirm the weakening of real GDP growth in mid-2008. This reflects partly an expected technical reaction to the strong growth seen in the first quarter as well as dampening effects from global and domestic factors, including direct and indirect effects from high commodity prices. In this environment, it remains imperative to avoid broad-based second-round effects in price and wage-setting. | 0 |
If companies are relying on CCS to achieve net zero carbon emissions, investors will want to assess how they plan to get there – and who they expect to pay for it. 26 The IPCC estimates that additional investment of $ 190-900bn is required annually in the energy sector alone if the rise in average global temperature is to be capped at 2C. www.ipcc.ch/report/ar5/ Mercer estimates that additional cumulative investment in efficiency improvements, renewable energy, biofuels and nuclear, and carbon capture and storage could be in the range of $ by 2030. www.mercer.com/insights/point/2014/climate-change-scenarios-implications-for-strategic-asset-allocation.html 8 BIS central bankers’ speeches of attempting to use such changes in prudential rules – designed to protect financial stability – for other ends. More properly our role can be in developing the frameworks that help the market itself to adjust efficiently. Any efficient market reaction to climate change risks as well as the technologies and policies to address them must be founded on transparency of information. A “market” in the transition to a 2 degree world can be built. It has the potential to pull forward adjustment – but only if information is available and crucially if the policy responses of governments and the technological breakthroughs of the private sector are credible. That is why, following our discussions at the FSB last week, we are considering recommending to the G20 summit that more be done to develop consistent, comparable, reliable and clear disclosure around the carbon intensity of different assets. | While a given physical manifestation of climate change – a flood or storm – may not directly affect a corporate bond’s value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment. Take, for example, the IPCC’s estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above pre-industrial levels. That budget amounts to between 1/5th and 1/3rd world’s proven reserves of oil, gas and coal. 24 20 See AM Best – Special Report: Asbestos Losses Fueled by Rising Number of Lung Cancer Cases (2013) www.ambest.com/ambv/bestnews/presscontent.aspx?altsrc=0&refnum=20451. 21 See Roe v Arch Coal Inc et al, Case: 4:15-cv-00910-NAB, United States District Court, Eastern District of Missouri, 9 June 2015 and Lynn v Peabody Energy Corporation et al, Case: 4:15-cv-00916-AGF, United States District Court, Eastern District of Missouri, 11 June 2015. Note that as at 1 September 2015 the defences to these claims were yet to be filed. 22 Loss and damage refers to impact of climate change not mitigated by reductions in emissions. The UNFCCC Warsaw agreement in 2013 discussed support for measures to address loss and damage. See http://unfccc.int/resource/docs/2013/cop19/eng/10a01.pdf. 23 The largest UK insurers hold or manage in excess of £ of CRE and infrastructure assets, and have committed to further such investments in future. For instance, six major insurers pledged to invest £ into UK domestic infrastructure in 2013 as part of the Government’s national infrastructure plan (see http://www.ft.com/cms/s/0/1f74e176-5c41-11e3-b4f3-00144feabdc0.html). | 1 |
Last year’s rapid disinflation was not least the result of the substantial appreciation of the króna, which in turn can be attributed to better external balance, lower inflation expectations as the year wore on, greater confidence in stability, and expectations that large-scale investment projects would go ahead. Disinflation last year can also be attributed to a considerable weakness in domestic demand. National expenditure BIS Review 18/2003 1 contracted by 2½%. The decline in fixed capital formation was particularly pronounced, but private consumption also contracted. In spite of the contraction in national expenditure, however, GDP declined by only ½%. This was due to favourable foreign trade developments, with a contraction in imports and expanding exports. The sudden turnaround in Iceland’s current account from 2000 to 2002 is almost unparalleled among the developed countries. In 2002 there was a 1.8 b.kr. surplus on the current account, or 0.2% of estimated GDP. In 2000 the deficit amounted to more than 10% of GDP, as I mentioned earlier. This shows the great adaptability of the Icelandic economy, which to a large extent can be attributed to the wide range of reforms that have been made to the structure of economy in recent years, including changes in the monetary framework. Now I shall turn to last year’s inflation developments in more detail. In 2001 inflation climbed rapidly, from 5.6% at the beginning of the year to a peak of 9.4% in January 2002. Last year, inflation slowed down steadily and dropped to 1.4% in January 2003. | In particular it pinpointed the need to inform participants about systemic risk and establish risk management and settlement guarantees in the systems, set clear rules on their activities, draw up a contingency plan and increase system transparency. A great deal of work needed to be done and the Central Bank, in collaboration with financial institutions, has firmly underlined that Iceland’s systems should be brought up to international standards. Initially it was decided that the main emphasis would be on developing a netting system for payments below the limits set for the real-time gross settlement system. It was also decided that once work on that system was well under way, further development of the real-time gross settlement system would be addressed. Another necessary issue to consider was the securities settlement system, following the payment system reforms. Operation of the netting system is in the hands of Fjölgreiðslumiðlun hf., which is jointly owned by the commercial banks, payment card companies and the Central Bank. The system handles netting of BIS Review 18/2003 3 accumulated payment orders lower than 25 m.kr. Work has been in progress on a thorough upgrading of the system and has now largely been completed. Towards the end of 2002 a plan was drawn up for the collateral security amounts in the system and participants made this available to the Central Bank on January 1 this year. Operation of the Central Bank’s RTGS system started in 2000. It handles final settlement of individual payment orders of 25 m.kr. | 1 |
First, the likelihood of a bank failure as a result of problems in Singapore is small as our banking system is sound and closely supervised, even though it is possible that problems elsewhere will affect a bank’s operations in Singapore. Second, even if a bank were to fail here, it should still have substantial assets to meet its liabilities to depositors. Under the law non-bank depositors enjoy priority in being paid, ahead of other unsecured creditors. This makes it more likely that the failed institution will have sufficient assets to pay out to depositors. Hence, for the guarantee to be called, two things have to happen: a bank has to fail, and at the same time its assets must be worth so little that there is not even enough to repay its depositors. Even then the draw on the guarantee should only be for the shortfall, which should be a fraction of the deposits outstanding. Hence we have calculated that the $ billion backing is an amount that will be ample to meet any eventuality except the most remote. $ billion does not in any way reflect an estimate of the likely draw over the two years of the guarantee. On the contrary, we expect the actual draw to be small or if we are fortunate even zero. Instead, the $ billion reflects the Government’s confidence in the banking system, and its intention to give all depositors that same confidence. | Thus the technological advances of the last 25 years – especially the internet – have not significantly diminished the demand for cash. People still appreciate cash as a store of value and a means of payment. It is visible and tangible, which makes it especially valuable when there is uncertainty about the stability of banks. In addition, interest rates have been very low for some time now, and therefore the opportunity costs of holding cash are also low. However, the significance of cash as a payment instrument, too, remains unimpaired. In this regard, two essential characteristics stand out: As legal tender, cash is widely accepted and extremely reliable to use. Nevertheless, technology is constantly moving forward in terms of new forms of electronic payment as well as in the area of digital forms of money. What is more, the share of the population which grew up without bank cards, the internet and mobile telephones is continually shrinking. Is Switzerland therefore becoming a cashless society? Even if the importance of cash does decline over time, it is unlikely that it will be completely replaced. Its specific advantages suggest, rather, that it will continue to be used as a store of value and a means of payment. With well-established, flexible processes in banknote production and handling, the SNB contributes to ensuring that cash continues to meet the public’s requirements at all times. BIS central bankers’ speeches 1 | 0 |
The list of positive effects of free trade is long: the division of labour and specialisation allows countries to produce what they are best at relative to their trading partners and import the rest; 2 unrestricted access to foreign markets facilitates more cost-effective production given the larger sales volumes; the availability of a broad array of foreign products increases choice for consumers with regard to end products and for producers with regard to primary and intermediate products; increased competition from foreign rivals promotes efficiency and innovation; the open exchange of goods and services also leads to the spread of knowledge and new technologies, and in so doing contributes to progress and growth as well. As a small open economy, Switzerland is well aware of the benefits of the freest possible trade in goods and services with the rest of the 1 2 Cf. Sachs and Warner (1995) as well as Frankel and Romer (1999), for example. Cf. Ricardo (1817). Page 2/9 world. Chart 2 clearly illustrates the extent to which our country is integrated in the international trading system. Switzerland profits tremendously from its openness. If the advantages of free trade are so strikingly obvious, then why is there any resistance at all? The answer is relatively simple: because not everyone is profiting from it to the same extent. Although all countries that engage in free trade benefit overall from the unrestricted exchange of goods and services, this is not necessarily the case for every household and every company. | Carney, Mark (2018), From protectionism to prosperity, speech given at the Northern Powerhouse Business Summit, Gateshead, 5 July. Carstens, Agustín (2018), Global market structures and the high price of protectionism, speech given at the Federal Reserve Bank of Kansas City’s 42nd Economic Policy Symposium, Jackson Hole, Wyoming, 25 August. Frankel, Jeffrey and David Romer (1999), Does trade cause growth?, American Economic Review, 89 (3), pp. 379–399. International Monetary Fund (2006), World Economic Outlook, April. International Monetary Fund (July 2018), G-20 Surveillance Note, G-20 Finance Ministers and Central Bank Governors’ Meetings, Buenos Aires, Argentina, 21/22 July. International Monetary Fund (October 2018), World Economic Outlook, October. OECD (2016), OECD Economic Outlook, Volume 2016, Issue 2. Ricardo, David (1817), On the principles of political economy and taxation, London: John Murray. Sachs, Jeffrey and Andrew Warner (1995), Economic reform and the process of global integration, Brookings Papers on Economic Activity, 1995 (1), pp. 1–118. World Trade Organization (2017), World Trade Report. | 1 |
Instead it is technological and organisational advances, together with innovations, that have largely been the driving forces behind productivity. During the 1990s a number of markets in Sweden were opened up to competition. This included the markets for electricity, telecommunications, post and a large part of the transport sector. At the same time, there was a general reinforcement of the competition policy through the establishment of the Swedish Competition Authority and the introduction in Sweden of a new, stricter law on competition. When competition stiffens, companies are forced to become more efficient and cost-conscious, which leads to an increase in productivity. Studies by the OECD indicate a clear relationship between deregulation of product markets and productivity growth. 3 This factor has probably been significant for the relatively rapid increase in productivity during the past 10-15 years. One important aspect in today’s globalised knowledge-based society is that competition promotes innovation and thereby productivity. 4 To avoid being driven out of the market companies are forced to constantly improve existing products and processes and also to develop new ones. Sweden is at the forefront in Europe and pointed out as an innovation leader alongside Denmark and Finland, for instance. 5 Another explanation for the growth in productivity in Sweden, as in many other countries, has been that the percentage of highly educated persons in the labour force has shown an increase trend, partly as a result of technological developments. | The significance of IT is visible in two ways; in production and use. If we look at the production of IT, we can observe that the telecom industry's share of total industry is relatively large in Sweden compared with many other countries. This means that the rapid development in productivity that has occurred in the telecom sector has contributed to pushing up productivity growth in the business sector as a whole. If we instead look at use of IT, Sweden has a relatively large share of IT capital in the total capital stock, compared with other countries. Sweden is in this respect more like the United States than continental Europe. The use of IT means that one can simplify and automate the work so that those who work can carry out more tasks in a shorter time, that is, productivity increases. The financial sector is very skilled at making use of IT to increase productivity. Its customers currently carry out many simple tasks from home in front of their computers instead of going to a bank office. During the second half of the 1990s, major investments were made in IT capital. These investments accounted for approximately half of the growth in productivity during the period 1996-2000 (see Figure 4). The investment upturn was broken in connection with the IT bubble bursting at the beginning of the 2000s. After that the contribution from IT capital to productivity growth has declined substantially. | 1 |
But until we figure it out, it’s going to be a very rough ride.” The task at hand for everybody is to figure this out, urgently, even though you might not yet have a fire in your backyard. BIS Review 85/1998 | One point of interest is that the railway construction also gave Gothenburgers the decisive influence in determining the time in the 19th century. It was the railways that ensured that the whole of Sweden followed the same time. Prior to the railways, time was determined by the sun. It was 12 noon when the sun stood at its highest point in the sky, regardless of which part of the country one was in. This meant that there was a time difference of 52 minutes between the most eastern and western parts of Sweden. When the western trunk line between Stockholm and Gothenburg was complete, it was necessary to have the same time so that the timetables would work, and Gothenburg time became the standard. This period of liberalisation and internationalisation of the world economy was abruptly broken off by the outbreak of war in 1914 and was replaced by national isolation. Although Sweden was largely an open economy during parts of the interwar period, it was not until after the Second World War that this isolation was broken at a global level. For the past couple of decades we have been in a clear period of internationalisation and financial integration. Same driving forces now as then Today, information technology and communications technology have replaced the railways as symbols for economic progress, but the driving forces are basically the same now as they were then and the interaction between the financial markets and other parts of the economy plays the same important role. | 0 |
Gertrude Tumpel-Gugerell: Financial integration and stability – efficiency gains vs pitfalls Keynote address by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European Central Bank, at the conference “Heterogeneous Nations and Globalized Financial Markets: New Challenges for Central Banks”, organised by the National Bank of Poland, Warsaw, 11 June 2010. * * * Ladies and Gentlemen 1 , It is a pleasure for me to speak at this conference today here in Warsaw. Heterogeneous nations and globalized financial markets – the title of this conference – are an old phenomenon. In fact, in the late medieval ages of the 14th to the 16th century, the Kingdom of Poland, the Holy Roman Empire and the Hanseatic area have formed a well financially integrated area contributing to more specialization in trade and hence to economic growth at that time. In fact, despite the existence of many currencies, money was easy to transport and so financial integration was rather more advanced than the integration of markets for goods. The Kingdom of Poland was playing a particular role for the financial integration at that time as a key provider of silver from its silver mines for the coin production, also for the neighbouring regions. 2 In today’s modern economies, we think of financial integration having mainly two positive impacts. First, to improve the allocative efficiency of capital, and second, to help the diversification of risks. | Investors, on the other hand, were attracted by the relatively higher return in times of low investment rate levels and by the sense of security provided – among other things – by the assessment of rating agencies. The ultimate outcome was that instead of dispersing risks associated with bank lending, securitisation had the opposite effect of concentrating them in the banking system, with harmful consequences for financial stability. The size of the financial sector is another aspect which deserves close scrutiny. When the financial system grows too large it may eventually lead to a misallocation of resources. Of course, it has to be acknowledged that developed credit markets are important for business start-ups. However, while finance is a crucial element for the Schumpeterian process of creative destruction, the recent financial crisis has also highlighted the role that large financial markets play in downside risk. A growing number of academics and opinion makers are questioning the theory that the effect of financial markets on growth is always positive and increasing. The relationship may well be non-linear: when of reasonable size, financial markets do help allocating resources efficiently and promote economic growth. However, as they grow larger, it may well be that financial markets may exert a decreasing marginal contribution to growth. In extreme cases, as the size of financial systems exceeds some threshold, their effect on growth could even turn negative. | 1 |
Not only is the world more complex, but we need to devote real thought as to how best to operate and organise ourselves so as to contain risks. Defining the resources you need, and how to deploy them is challenging in itself. My prediction is that as the system’s complexity increases we will all find ourselves asking the same questions: BIS Review 36/2005 7 Just what should we do? Why? And what effect will it have? 8 BIS Review 36/2005 | • In recognition of such trends, the Singapore Exchange (“SGX”) has introduced a “comply or explain” regime for sustainability reporting in 2017, where listed companies are required to disclose and explain their sustainability practices. • ASEAN governments have also imposed regulatory drivers, to assist companies with identifying gaps and areas for improvements in their sustainability eworts [7] . For example, in the mining and minerals sectors, companies are subject to commonly-agreed-upon regional guidelines for assessing and reporting on the awected environment. 15 Đ Đ We are heartened that the WFE has taken the lead in advancing the sustainability agenda in two particular areas: • First, the integration of sustainability with commodity derivatives. The WFE has published a white paper that explores how commodity derivatives exchanges could create new mitigation or investment tools that respond to environmental challenges, and incorporate sustainability elements into existing contracts; Đ • Second, the adoption of sustainable practices and principles. The WFE has partnered the United Nations Sustainable Stock Exchanges to set out a blueprint to support exchanges in embedding sustainability in their operations. 16 Đ Đ Overall, these eworts will drive wider discussions on sustainability as well as provide guidelines on how WFE members could adopt relevant sustainable practices and principles in their strategies for growth and operations. | 0 |
The biggest risks are a global economic downturn, a Page 2/4 Zurich, 22 September 2022 Thomas Jordan News conference worsening of the gas shortage in Europe and a power shortage in Switzerland. Furthermore, a resurgence of the coronavirus pandemic cannot be ruled out. Monetary policy tightening Ladies and gentlemen, allow me to return to our monetary policy. I would like to explain today’s decision. Last quarter, our conditional inflation forecast indicated that, without a further tightening of monetary policy, inflation would be above the range consistent with price stability at the end of the forecast horizon. This meant that further interest rate increases might be needed to stabilise inflation in the range consistent with price stability over the medium term. This has turned out to be the case. While Switzerland’s inflation rate of 3.5% is low by international comparison, it is significantly above the 0% to 2% range we equate with price stability. There are also growing signs that higher prices are increasingly spreading to goods and services that are not directly affected by the war in Ukraine or the consequences of the pandemic. Information from our delegates for regional economic relations suggests that companies can more easily transfer higher costs to their sales prices. In addition, energy prices have continued to rise overall and are increasing inflationary pressure in many sectors. This heightens the risk of second-round effects. We have therefore concluded that a significant increase in the SNB policy rate is appropriate. | My colleague Andréa Maechler will describe the adjustments to monetary policy implementation in more detail later. Page 1/4 Zurich, 22 September 2022 Thomas Jordan News conference Inflation forecast Let me now turn to inflation developments. Inflation rose to 3.5% in August and is likely to remain at an elevated level for the time being. The latest rise in inflation is principally due to higher prices for goods, especially energy and food. Our new conditional inflation forecast is based on the assumption that the SNB policy rate is 0.5% over the entire forecast horizon (cf. chart 1). Up to mid-2024, the forecast is above that of June. After that, it is lower due to the now tighter monetary policy. At the end of the forecast horizon, inflation stands at 2%. The new forecast puts average annual inflation at 3% for 2022, 2.4% for 2023 and 1.7% for 2024 (cf. table 1). Without today’s SNB policy rate increase, the inflation forecast would be significantly higher. Global economic outlook I will now move on to the economic outlook. Global economic growth has slowed considerably in recent months. At the same time, inflation in many countries is markedly above targets. In response, numerous central banks have further tightened their monetary policy. In our baseline scenario, we expect this challenging situation to persist for now. Global economic growth is thus likely to remain weak in the coming quarters. | 1 |
In the same way, the remuneration of fixed rate debt securities such as bonds only includes expected inflation and is thus vulnerable to any unexpected change in inflation. It has been empirically established that, as intuition suggests, the volatility of inflation increases as it rises, which implies that risk premia are generally not in line with the real level of inflation. I should add that inflation creates a well known fiscal bias when flows of interest to creditors include an inflation premium to cover the depreciation in the value of financial capital during a period of inflation, and this premium, which is not real income, is charged. 1 BIS Review 6/2000 In fact, in a situation where inflation rises unexpectedly a transfer of wealth occurs from the creditors to the debtors. This interferes with the optimal allocation of savings (I shall return to this issue) when the transfers of wealth do not correspond to the provision of a service or a real economic cost, but have all the characteristics of a “windfall profit” or an exceptional loss. It can also result in a reduction in the amount of savings in two ways: by discouraging agents’ propensity to save amounts subject to the monetary hazard; and (because of the bias resulting from the depreciation in the nominal value of debt and the fiscal distortion to which I referred) by transferring inflationary income from the private to the public sector, which has a lower saving ratio. | Commodity prices remain high by historic standards, consistently with the strength of emerging economies, some specific supply-side elements and the depreciation of the dollar. Worth noting are the recent sharp increases in the international prices of some foodstuffs and the copper price peaking at $ per pound (figure 4). The baseline scenario in the IPoM we are presenting today assumes that some of these factors will persist over the projection scenario. In the case of copper, even if it will not be as high as today, it will exceed September’s projections, at $ and $ per pound in 2011 and 2012, respectively. The price outlook for WTI oil is also revised up from September, to $ per barrel in the two years. The baseline scenario for the international economy is good, albeit with important associated risks. We expect an average growth rate of 4.2% for the world economy over the next two years, fairly high by historic standards, but around 0.3 percentage points below the market consensus forecast. This differential is based on the effects of the financial turbulences in Europe, tighter fiscal adjustment plans in the region and the absence of a vigorous recovery of demand in developed economies. In addition, because of the inflationary pressures present in some emerging economies, it is obvious they cannot continue to grow at the same pace they did this year (table 1). | 0 |
On the contrary, we must convince the rest of the world that we have not refrained from adopting the euro so as to be able to devalue the krona if the going gets tough. The long-term positive effects of joining the monetary union should not be played down just because they are difficult to measure. The participating countries and markets are drawing closer to each other. This probably affects competition, investment flows and prices to a greater extent than traditional models are able to show. I believe that the costs of staying outside are particularly great at present and in the coming years, for instance as EMU generates far-reaching structural changes in the business sector. To this should be added the political arguments. Sweden has already lost influence in the area I am best able to assess, economic policy. This is particularly serious today as the global financial map is being redrawn and we need to assert our position as a small country in Europe. Others are better placed to pronounce on other areas but it seems logical that our positions there are also being weakened because we are not seen as a fully-fledged participant in EU cooperation. 5 BIS Review 92/1999 Finally it is a matter of weighing all these arguments against each other. The assessments involved, economic as well as political, are naturally difficult. | A recovery plan for maintaining a going concern. And a resolution plan for firms that, however regrettably, need to be laid to rest. The objective in each case is to maintain the financial system’s provision of essential services to the economy. Firms themselves need to play a leading role in drawing up “recovery plans”. At least two components are needed, roughly corresponding to liquidity and capital. First, a contingency funding plan (CFP). Too few banks of any size seem to have had one in any serious way. There was, for example, too little focus on the effects of ratings downgrades on collateral calls and on the availability of lines of credit. And too little attention was paid to core liquidity holdings: a treasury portfolio comprising the FRNs issued by other banks does not leave a distressed bank with many options in the face of system-wide stress. Banks need to know exactly what assets they hold in which securities-depository systems; how long it would take to deploy them; and which are eligible in which central banks’ routine facilities. Too few banks had that information readily to hand. Maybe they do now. They should. The FSA has very kindly agreed to share with the Bank of England the CFPs of banks (and building societies) where relevant to our functions. As well as helping us to discharge our financial stability responsibilities more broadly, this will be useful in making sense of requests to draw from our Discount Window Facility. | 0 |
A lower policy rate may thus have less effect on lending rates than normal, weakening the impact of monetary policy. Over the past year, inflation among many of Norway’s trading partners has approached zero. For many years monetary policy was aimed at preventing high inflation, while it must now seek to avoid inflation that is too low. Central banks are in new territory. A period of low inflation is not necessarily a problem as long as confidence in the inflation target remains firm. But when the room for further policy rate cuts is close to being exhausted, steadily falling inflation could lead to a dangerous downward spiral. For every notch that expected future inflation falls, real interest rates rise. This has a contractionary effect on the economy. In recent years, concerns about falling inflation expectations have prompted central banks to cut policy rates further and to deploy unconventional measures. It has been argued that these monetary policy measures are necessary to avoid a further fall in inflation as a result of a stronger exchange rate. Interest rate cuts that lead to a currency depreciation push up inflation. But countries cannot all weaken their currencies at the same time. If many countries cut interest rates to boost inflation via a weaker currency, the benefit may not materialise, while interest rates remain too low with respect to other considerations. 14 BIS central bankers’ speeches The financial crisis created unusually strong headwinds in the global economy. | It would be naive to think that we can be right all the time. Nobody can be. We can only be less wrong. But more importantly, public support should not be built merely upon faith in an esoteric and aloof BIS Review 87/1998 -3- HKMA being professional and acting in the best interest of Hong Kong. Whatever reputation the HKMA has been able to achieve, domestically and internationally, such support could never be sustained for long. We do run a system that, at times, inflicts considerable pain on the community. Many of the decisions taken by the HKMA are unpopular. The pain and the unpopular decisions may become too severe to bear just on the foundation of faith, particularly in the peculiar political setup of Hong Kong. 11. An essential part in the management of the political process concerning monetary issues, therefore, is to promote a better general understanding on those issues. This is not easy. Not only are those issues technical, but they are also changing all the time with the rapid changes in the global financial scene. Financial liberalization and the globalization of financial markets, encouraged by the advance of telecommunications and information technology, have drastically changed the behaviour of money. On top of all this, we have the complication that Hong Kong’s monetary system has really only started to take shape in the past ten years or so, as monetary reform measures were introduced to modernize it so it could cope with the demands and expectations of modern finance. | 0 |
This was the path that most observers counted on last spring. It was, however, questioned by others, particularly outside the United States. In general, they foresaw a more protracted, U-shaped recovery. Time would be needed for the adjustment of the over- 2 BIS Review 86/2001 investments that excessive optimism had generated. There is a lag before measures of economic policy have tangible effects. In some quarters, finally, there is an even more pessimistic scenario, an L. This envisages that growth in the U.S. economy comes more or less to a halt as the imbalances undergo a painful correction and measures of economic policy have little effect. In my discussion with you last spring I believe I likened my version to a banana. This was because the Riksbank believed that in many respects the cyclical path would follow the normal pattern. An expansionary phase is usually followed by a period of slacker activity. The longer the upward trend has lasted, the more likely it is to take a pause. That made it difficult to believe in the V-shaped scenario that the financial markets were mainly counting on at that time. The path has been accentuated by the recoil from the excessive optimism that had attended the technological breakthrough and given rise to the notion of a new economy. With rising demand, the supply side of the American economy had been expanded on the basis of expectations that simply were not realistic. | Mario Draghi: ECB press conference - introductory statement Introductory statement by Mr Mario Draghi, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 25 October 2018. * * * Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis. Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Regarding non-standard monetary policy measures, we will continue to make net purchases under the asset purchase programme (APP) at the new monthly pace of € billion until the end of December 2018. We anticipate that, subject to incoming data confirming our medium-term inflation outlook, we will then end net purchases. We intend to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of our net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. | 0 |
Durmuş Yilmaz: Press conference for the presentation of the Inflation Report Press conference by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the presentation of the Inflation Report, Ankara, 29 April 2010. * * * Distinguished Guests and Members of the Press, Welcome to the press conference held to convey the main messages of the April 2010 Inflation Report, one of the most important communication tools of the inflation-targeting regime of the Central Bank. The report typically summarizes the economic framework addressed in monetary policy decisions, elaborates global and domestic macroeconomic developments and presents the medium-term inflation forecasts, which have been revised in view of previous quarter developments, along with the monetary policy stance. Before moving on to the Central Bank’s assessments on the inflation outlook and economic activity, which I will share with you in detail shortly, I would like to summarize the current global conditions. The recovery in global economic activity and the normalization of the international financial system have continued during the first quarter of 2010 (Figure 1). However, distressing levels of government debt, lingering problems across credit markets, and high levels of unemployment rates, all suggest that completely resolving problems across developed economies is not likely over the near term (Figure 2). Although the recovery across developing economies seems to be stronger, ongoing problems across developed economies – with their prominent role in global trade – still create downside risks for developing economies. | In this regard, while the Gross Domestic Product increased by 6 percent on an annual basis in the last quarter of 2009, it decreased by 4.7 percent across the year (Figure 23). Seasonally adjusted data indicate continuance of the recovery process in national income as of the second quarter of 2009 (Figure 24). Data regarding the first quarter of 2010 indicate that the rebound in Domestic Demand is gradually becoming stable and broad-based. The influence of policy rate cuts besides the hikes in public expenditures are getting more pronounced and a relatively more robust activity in sectors sensitive to domestic demand is being witnessed. In this respect, the analysis of the recovery process in industrial production indicates that besides the sectors stimulated by fiscal incentives and their intermediate input suppliers as well as the nondurable goods sector and sectors with strong links to the construction sector have been on the rebound (Figure 25). There is no significant improvement in external demand. The global growth outlook continues to dampen economic activity, particularly in sectors that are relatively more sensitive to foreign demand. Following the recent crisis, manufacturing firms that mostly serve external markets have been operating at lower capacity than local market oriented firms (Figure 26). Thus, in line with our previous forecasts, domestic demand has remained more robust than foreign demand. Yet, aggregate demand uncertainty continues to be a major concern, as inventory buildups have remained limited. | 1 |
Percent 4 Norges Bank Economic perspectives 15 february 2018 10 Wage growth (l.h.s) Unemployment (r.h.s.) 9 3 8 2 7 1 6 0 5 2003 2005 2007 2009 2011 2013 2015 2017 1) Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Portugal, Spain, South Korea, Sweden, Switzerland, the UK and the US. Unweighted average. Sources: Thomson Reuters and Norges Bank Expansionary monetary policy in many countries Never before have global interest rates been as low as today over such a long period (Chart 10). The interest rate level was moving down long before the 2008 crisis. What lies behind this is a prolonged decline in long-term real interest rates owing to structural changes. Low productivity growth and weaker labour force growth have diminished the growth capacity of advanced economies and dampened the willingness to invest. At the same time, groups and countries with a high saving rate account for a larger share of income growth, partly owing to demographic changes and wider income gaps. Both lower investment and higher saving have contributed to depressing real long-term interest rates. Chart 10 Global real interest rates. Yield on 10−year government bonds adjusted 1) for inflation. 14 OECD countries. | The result is lower activity and lower welfare. Norges Bank Economic perspectives 15 february 2018 In the distant past, the central bank was to safeguard the value of the country’s monetary unit in terms of a precious metal. This was later replaced by fixed rate regimes. Various forms of fixed exchange rate regimes are still in use in many countries. However, since 1990 an increasing number of countries have chosen to link monetary stability to a numerical inflation target. Since the financial crisis, all of these countries have maintained their inflation targeting regimes. This reflects their overall positive experience with this framework. It did not get in the way of a powerful response to the financial crisis. With a floating exchange rate and a credible inflation anchor, monetary policy could be geared to stabilising the economy. In Norway too, inflation targeting has functioned well. Inflation has remained low and stable since it came down in the early 1990s (Chart 13). We can now look back on a quarter century of stable prices. At the same time, employment variability has been lower since 2001 than in previous periods despite the shocks to the Norwegian economy. 1) Chart 13 Inflation in Norway. Four−quarter change. | 1 |
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. | The Rt Hon Sir Edward George GBE: Central bank independence Speech by The Rt Hon Sir Edward George GBE, Governor of the Bank of England, to the SEANZA Governors’ Symposium in Colombo, Sri Lanka, on 26 August 2000. * * * Governor Jayawardena, fellow central bankers, I am honoured, personally and on behalf of the Bank of England to participate in your celebrations. On behalf of the Bank of England, and, I am sure, of all your guests here this morning, I congratulate you, Mr Governor, on the great contribution that the Central Bank of Sri Lanka has made to the development of your beautiful country in your first fifty years and I wish you continuing success in your task in the years to come. You invite me to speak about Central Bank Independence, which of course I am happy to do - although I should perhaps make clear at the outset that it is a concept which I find somewhat elusive. Like so many other debates, the debate about central bank independence often seems to become unduly polarised. At one extreme it seems that some of those who resist central bank independence as undemocratic - or even some central bankers who favour it - assume that it involves an elite body of individuals, who, once appointed are, by virtue of statute, beyond political influence, with extensive but only generally-defined powers to affect the financial environment - and hence the lives of individuals and businesses throughout their currency area. | 0 |
The ECB will not be forced to step in for a lack of policy implementation. Third, OMTs will not create excessive risks for euro area taxpayers. Such risks would only materialise if a country were to run unsound policies. This is explicitly prevented by the ESM programme. And we have been very clear that each time a programme starts being reviewed, we will routinely suspend operations and resume them only if the review has been concluded positively. This will ensure that the ECB intervenes only in countries where the economy and public finances are on a sustainable path. Fourth, OMTs will not lead to inflation. We have designed our operations so that their effect on monetary conditions will be neutral. For every euro we inject, we will withdraw a euro. In our assessment, the greater risk to price stability is currently falling prices in some euro area countries. In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it. Moreover, we see no signs that our announcement has affected inflation expectations. They continue to be firmly anchored. This is testament to our track record on price stability over the last decade and our credible commitment to maintaining price stability. The citizens of the euro area can be confident that we will remain permanently alert to risks to price stability. | Second, financial instability can impair the linkage between monetary policy and financial conditions. The central bank may move to a much more accommodative monetary policy stance, but this may not lead to much improvement in financial conditions. We see this clearly in spreads and risk premia during periods of financial stress. Depletion of capital in the banking system or the interaction of frictions and market failures may also lead to constraints on the availability of credit following a financial shock. As a recent U.S. example of the second issue, households with lower FICO scores have had difficulties in refinancing 1 Krishna Guha, Marc Saidenberg and others on my staff contributed to these remarks. 2 As always, what I have to say here today reflects my own views and not necessarily those of the FOMC or the Federal Reserve System. BIS central bankers’ speeches 1 their mortgages or in obtaining new mortgages to purchase a home. This stems from worries by lenders about put back risk – that such mortgages might be put back to them by Fannie Mae or Freddie Mac should the mortgages become nonperforming. For any given reduction in mortgage rates relative to normal levels, this reduces the support for the housing sector and consumption. Thus, another lesson of the crisis is that monetary policymakers need to be more attuned to how the condition of the financial system influences how monetary policy changes affect financial conditions. Third, the linkage between financial conditions and aggregate demand may also be impaired. | 0 |
He succeeded, proof of which is that the department now has the Pentti J.K. Kouri Career Development Associate Professor of Economics. Today, rather than attempting to elaborate on Kouri’s contribution, I think this is a good opportunity to address some issues on the state of macroeconomics and policymaking, which is the purpose of the conference, and are two aspects to which Rudi and Pentti contributed a lot. If they were here with us today, their deep insights and provocative ideas, regardless of whether we agreed with them or not, would certainly make us think. Changes in the world economy, macroeconomics, and policymaking More than 30 years after Kouri’s influential work, the world has changed dramatically, and so have economic theory and policymaking, especially in emerging market economies. There is a growing role of markets in the determination of prices, in particular interest rates and exchange rates. There is much greater trade and financial integration, which is a source of greater interdependence cross economies, but is also a source of much greater opportunities for developing countries. Finally, financial markets are much more sophisticated, which is also a source of vulnerabilities and opportunities. There has been also a profound evolution of macroeconomics. Developments, such as rational expectations and dynamic inconsistency, changed the views on what macroeconomic policies could achieve. They were also the basis for the discussion of rules versus discretion, and the general preference for the conduct of policies under flexible rules, or constrained discretion. | 1 On models and theory Macroeconomics has increasingly moved towards models more rigorously specified, with sound micro-foundations, with all general equilibrium interactions, and explicit informational constraints. However, there will always be tensions between rigor, realism and flexibility. There are many tradeoffs. The costs of these tradeoffs are often subtle. The tendency to base models on ever more rigorous grounds, although a logical trend, has undesired effects. The incentives for younger academics – the very ones who are supposed to push the borders of knowledge, and who must publish or perish – limit their capabilities for innovation. The required rigor ends up necessarily threatening realism. Nobody expects a model to explain all the complexities of the real world, but the problem is that it can overlook elements that are crucial to understanding and preventing economic disasters like the one we faced some years ago. It 1 2 For further discussion on these issues, see De Gregorio (2009). BIS Review 84/2010 may be more rewarding from an academic standpoint to write an equilibrium model explaining some particular phenomenon, than trying to formulate a model that properly represents all the distortions of said phenomenon. It is harder and less rewarding for an academic to formulate distortions – of which the real world has plenty – than to use elegant general equilibrium competitive models to explain important stylized facts with a minimum number of new ingredients. Only a handful of academics are able to think rigorously out of the box, and Kouri was one of them. | 1 |
Measuring these broader risks is harder today because the classic array of historical stress events drawn from the past 25 years of financial crises are probably even less valuable than they were as an illustration of how market dynamics might unfold today in response to similar changes in asset prices and credit losses. Those past crises would likely cause less damage today, if they were to recur, because of the many changes in the structure of our financial system - namely, the greater dispersion of credit and market risk, the improvements in risk management, the size of the capital cushions, and the improvements in many parts of the payment and settlement infrastructure. But most crises come from the unanticipated. Assessing a firm’s exposure to risk in the tail of the distribution requires, among other things, an evaluation of the impact of the failure of a major counterparty and the impact that failure might have on other counterparties and on market prices. It requires, for the largest institutions, an understanding of the constraints the firm may face in its ability to adjust positions or hedge against further losses without amplifying the shock. And it requires anticipating potentially adverse effects on market liquidity, as other market participants react to actual and anticipated losses. In the financial system we have today, with less risk concentrated in banks, the probability of systemic financial crises may be lower than in traditional bank-centered financial systems. | Notably, some studies have shown that the ratio of Asian exports for final consumption within Asia has risen, though varying among individual countries. For example, approximately 70 percent of Indonesian exports to China are for final consumption in China. Such ratios for Singapore and Korea are 50 and 40 percent, respectively. That said, it is wise not to jump quickly to conclusion because Asian economies and trade remain critically linked to the G3 economies. While this negative spillover from advanced economies to Asian economies could be partially cushioned on the trade side, I have greater concern on the potential spillover through volatility in international capital flow and financial market movements. In addition to the risk aversion in time of market stress, emerging market economies have tried to live with spillover from exceptionally easy monetary policy in advanced countries. Such practices have created excess global liquidity leading to volatile capital flows into emerging market countries BIS central bankers’ speeches 1 including Thailand. Moreover, excess global liquidity has been an important factor behind the rapid rise in oil and other commodity prices. Unless the advanced economies manage to get themselves out of sluggish growth path, all of us have to be vigilant and cannot rule out the possibility that the US may need to find creative policy actions to stimulate its economy. | 0 |
Since 1995 Swedish house prices have risen by more than 150 per cent; the corresponding figure in the United States is around 115 per cent. At the same as house prices have soared, inflation in Sweden has been moderate and consumer prices have only risen by 14 per cent since 1995 (see figure 2). There are several factors behind the upturn in Swedish house prices; Swedish households’ real incomes have grown, their financial wealth has increased and in addition real interest rates have been low. Although more housing has been built, it has not been enough to meet the demand. The percentage of Swedish municipalities reporting a shortage of housing doubled to 42 per cent between 2002 and 2007 according to statistics from the National Board of Housing, Building and Planning. More than half, or 60 per cent, of the population now live in municipalities with housing shortages. Households’ debt ratio, that is their debts in relation to their disposable income, has risen rapidly in recent years and is now around 150 per cent. It is difficult to compare the current debt ratio with earlier periods, as these have been marked by the conditions prevailing at the time. For example, the debt ratio that preceded the credit boom at the end of the 1980s was marked by the regulated credit market and did not reflect either households' willingness or ability to bear debt. The period after this was affected by the economic crisis and institutional changes with an ensuing rapid credit crunch. | In addition, there is uncertainty over how monetary policy affects asset prices. The Riksbank conducts what is known as flexible inflation targeting. The objective is that the annual change in the consumer price index (CPI) shall be 2 per cent, but we also attach some importance to attaining a balance in production and employment. Asset price movements are normally included within the scope of flexible inflation targeting. We include changes in asset prices and other financial variables in the balance when we make our forecasts. However, the Riksbank has no target for property prices. 1 2 IMF World Economic Outlook, April 2003. BIS Review 60/2008 The Riksbank’s view is close to the reasoning that changes in asset prices should only be allowed to affect monetary policy to the extent that they affect our forecasts. But such a view is based on the forecasting models used being able to include the full effect of house prices on total demand in the economy. This is not the case for the Riksbank or other central banks; there are no forecasting tools that can entirely capture the effects of changes in property prices. The forecasts therefore have to be supplemented with qualitative assessments. How has the Riksbank’s stance affected monetary policy in practice? When the Riksbank raised the repo rate in January 2006 borrowing and house prices had a more pronounced effect on the decision. | 1 |
Gazi Erçel: Focus on inflation targeting Opening remarks by Mr Gazi Erçel, Governor of the Central Bank of the Republic of Turkey, made at the Conference on Inflation Targeting which was organized by the Central Bank of the Republic of Turkey in Ankara on 19 October 2000. * * * I am very honored to present the opening remarks at this conference on Inflation Targeting (IT) Framework. First I would like to extend our appreciation to the lecturers of the Conference who came a long way geographically, and considering the state of the economy they reach. The issues that are going to be addressed will be of great interest, particularly for developing and dis-inflating countries. The attendance of so many speakers from the Central Banks and international institutions is particularly motivating. This Conference will review the country experiences on inflation targeting, particularly touching on the best ways to design policy objectives, responses, and implementation issues. Some papers will consider not only inflation targeting framework, but also the case of economies during the shift to low inflation. Let me begin my remarks by focusing on a framework that has been widely validated among academics and policymakers during the last 10 years. Inflation targeting is an innovative approach to monetary policy being applied by a growing number of central banks of not only industrial but also emerging market countries of the world. Now, more than ever, businesses are operating in a rapidly changing world. Even the marginal uncertainties have become important. | The current inflation rate does not therefore provide sufficient information to determine the level at which interest rates should be set now. Our analyses indicate that a substantial share of the effects of an interest rate change will occur within two years. Two years is thus a reasonable time horizon for achieving the inflation target of 2½ per cent. Using this time horizon, we avoid substantial variations in output and employment. A shorter horizon than two years would result in wider swings in production. Credit developments and developments in equity and property prices influence inflation. With an inflation targeting regime, we take these variables into account to a certain extent when setting interest rates. Equities and dwellings account for a substantial share of household wealth. Higher equity and house prices increase the value of this wealth. The increase in wealth can relatively rapidly result in rising consumption. Several studies indicate that an increase in the value of housing wealth is more likely to lead to higher consumption than a corresponding increase in the value of equity wealth. Higher prices for commercial buildings may be passed on in the form of higher prices for goods and services. Developments in asset prices can thus affect inflation more directly. In Norway, a high proportion of households own their own dwelling. Even when we include securities funds and some insurance claims, Norwegian households’ housing wealth is far higher than their equity wealth. | 0 |
However, it is hard to imagine the opposite situation of a central bank fully engaged in the management of expectations without trust from the public.1 This also applies to communication. We can discuss alternative strategies to make sure that the message issued by a central bank is adequately understood and internalized. However, there is little that a good communication strategy can do if the public does not trust the central bank.2 1 Christelis et al. (2016) have formally explored this for the Europe using micro data, finding that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation, even after controlling for people’s knowledge about the objectives of the ECB. Similarly, Mellina and Schmidt (2018) find that having greater trust increases the probability of expecting unchanged prices and decreases the likelihood of expecting either slightly or sharply rising prices over the medium term. 2 Through behavioral insights, Bholat et al. (2018) show that public’s trust in the Bank of England can be further improved by enhancing the communication with the public, particularly at times when trust in public institutions has fallen and responsibilities delegated to central banks have increased. Page 3 of 8 Central Bank of Chile July 2019 Approaching institutional credibility from stakeholders’ trust has a number of conceptual and operational advantages. First, there is a large body of research assessing its value: trust is at the heart of societies and a major component of social capital. | However, according to the law, the Riksbank shall also support the objectives of general economic policy without setting aside the inflation target, in order to maintain sustainable growth and high employment. As the Swedish economy is approaching balance in many respects and the long-term inflation expectations accord with the target, the conditions for carrying out monetary policy are more favourable in many ways than before. This does not prevent there being many components of uncertainty now as well. Major structural changes are taking place in the world economy to some extent driven on by information technology. Deregulation, EU membership, and stiffer competition are other factors that can be assumed to have an effect on the economy’s mode of functioning, although it is difficult to say how and over what period. I am planning to take up some factors here in the risk scenario that must be taken into consideration in the ongoing evaluation of monetary policy. One issue concerns the extent to which we, inter alia as a consequence of the development of information technology, will see a higher productivity growth than we had expected and which, all other things being equal, would create scope for higher demand without threatening the inflation target. Another way of putting this question is whether we can expect to be on our way into something that is called “the new economy” in debate. | 0 |
Inflation and inflation risks Inflation developed in line with expectations during the first quarter of this year. Our March forecast was 2.4%, whereas actual inflation was 2.5%. Nonetheless – as you can see from the charts – we are forecasting higher and more persistent inflation for the rest of the year. However, it should drop back below the 2% level from the beginning of next year, although there are significant risks attached to this relatively favourable forecast. A more pronounced price surge would clearly be a concern should there be a further increase in the prices of energy and food. In addition, it is possible that movements in the Swiss franc will not contribute to easing upward pressure on import prices. Having said that, we should also not underestimate the potential for movements in the prices of raw materials to reverse, and inflation pressures to abate in the event of a pronounced global economic slowdown, especially as we do not yet know the consequences of the financial market turbulence. Today’s monetary policy decision reflects our assessment of these different risks. Monetary policy decision Inflation has exceeded the 2% mark since December 2007. However, in our view this situation is temporary and the expected slowdown in the economy should have a moderating effect. We are expecting that inflation will already move back below the 2% level in 2009. | First, the Swiss franc has depreciated by 3% against our 26 most important trading partners, thereby partially offsetting the appreciation that occurred at the beginning of the year. This softening is having a direct impact on inflation, by increasing the prices of imports. To give an example, the impact of oil prices on inflation has been amplified, with the price of a barrel of Brent crude rising 18% by mid-May in terms of Swiss francs, but only 13% in terms of US 2 BIS Review 80/2008 dollars. In the longer term, the weakening in the Swiss franc is indirectly contributing to the increase in prices by stimulating demand. Second, real short-term interest rates have dropped. There has been a rise in expected inflation for the near future and this means – for given nominal interest rates – lower real expected yields for short maturities. An analysis of monetary conditions in terms of volumes leads to similar conclusions. Let us begin with money, which is the best indicator to use if a broad-brush and long-term outlook for the economy and inflation is required. The M1 and M2 monetary aggregates, which were declining until not long ago, have been practically stable for some months. As for M3, it is continuing to exhibit moderate growth. The sub-prime crisis has confirmed the importance of mortgage loans as an indicator of the degree of relaxation of monetary policy. The reason for this is simple. | 1 |
Let me now highlight some challenges to be globally faced by banks and supervisors in implementation of Basel III: Firstly, Base III has substantially raised the quality, quantity and international consistency of capital and liquidity. The new rules are aimed at strengthening of capital and risk management in banks. This may require banks to inject high quality fresh capital, preserve existing capital by limiting the payout of dividends and bonuses, realize efficiency gains, and mobilize liquidity from new sources in certain jurisdictions to meet additional capital and liquidity requirements. This would be a major challenge for some internationally active banks, particularly under present market conditions; Secondly, internationally active banks facing major capital shortfalls will have to revisit their business strategies on global presence and expansion plans. They might be required to take some tough decisions on exiting from certain locations or considering merger and consolidation of their affiliates and subsidiaries; Thirdly, implementation of Basel III will require banks to assess their existing capacity on estimation of additional capital and liquidity requirements. This may also require some banks to make additional investment in systems and procedures to build-up their capacity; Fourthly, new capital and liquidity rules are conceptually and technically very demanding. | This will require banks and supervisors to undergo extensive trainings to learn these new concepts and techniques; 2 BIS central bankers’ speeches Fifthly, given the scarce availability of qualified human resources, banks and supervisors will face the challenge of attracting and retaining staff with appropriate skill sets; Sixthly, meeting the additional regulatory requirements relating to Basel III implementation will require banks to reassess their existing regulatory reporting and compliance structure to ensure its adequacy. This is important given the extended transitional timeline for implementation, during which some banks are required to participate in quantitative impact studies while others will have to prepare for full implementation within specified timeline. We also have to keep in mind that new rules are still evolving in certain areas based on the results of quantitative impact studies and thus may require further adjustments in the current regulatory requirements; Lastly, and the most important step to be taken by banks, is adopting the robust governance structure that best suits their business model and risk profile. The Board of Directors should have a clear understanding of their role in corporate governance and be able to exercise sound and objective judgment about the affairs of the bank. The senior management should ensure that the bank’s activities are consistent with the business strategy, risk tolerance/appetite and policies approved by the board. This is the cornerstone on which any effective risk management framework, sound incentive structure and robust governance arrangements must be built. | 1 |
Since the start of 2013, inflation had drifted consistently away from the ECB’s target rate of below but close to 2% over the medium term, reaching levels below 1%. Without counteracting measures, this low inflation could have turned into a deflationary spiral which would have deepened our economies’ woes 1/5 BIS central bankers' speeches considerably. It was against this macroeconomic background that the ECB took decisive policy action to maintain price stability in the euro area as a whole, in line with its mandate. In normal times, when inflation is above target, central banks raise the key interest rates to rein it in. When inflation is below target, they lower the key interest rates to stimulate economic activity and induce an increase in inflation. However, at the start of 2014, the deposit facility rate had already been brought to zero. At the same time, financial fragmentation in the euro area was hampering the transmission of our policy, as our monetary policy impulses were not evenly transmitted across countries or adequately along the yield curve. So in order to provide additional monetary accommodation and to support the recovery in credit, the ECB used a range of nonstandard measures to meet its inflation objective. These include a negative deposit facility rate, targeted longer-term refinancing operations, forward guidance and asset purchases. Net asset purchases currently amount to € billion per month, and are intended to run until the end of December 2017, or beyond, if necessary. | Ladies and Gentlemen, with these few remarks I hereby declare this workshop officially open. I thank you for your attention. 2 BIS Review 51/2010 | 0 |
I would also like to take the opportunity to express Norges Bank’s views on how the Fund’s strategy can be further developed. The Fund’s investment performance, which receives a great deal of attention, is primarily determined by the allocation of assets across different classes such as equities and bonds. Asset allocation is an important component of the Fund’s strategy. Chart: Timeline for managing Norway’s petroleum wealth After Norway discovered oil in the North Sea in 1969, it became clear early on that this would be a source of substantial wealth. The revenue would transform Norwegian society 3 . In 1983, the Committee on the Future of Petroleum Activity 4 – chaired by Hermod Skånland who was appointed central bank governor in 1985 – launched the idea of an oil fund. The proposal was to set up an equalisation fund. According to the Committee, government oil revenues would be transferred to the fund. Each year, an average of the past years’ oil revenues would be transferred to the central government budget and spent on a par with other revenues. 1 Jeffrey Sachs and Andrew Warner (1995): “Natural Resource Abundance and Economic Growth”, NBER Working Paper 5398. 2 Halvor Mehlum, Karl O. Moene and Ragnar Torvik (2006): “Institutions and the resource curse”, The Economic Journal 116, pp. 1–20. 3 See for example Report no. 25 (1973–74) to the Storting: “Petroleumsvirksomhetens plass i det norske samfunn” [The role of petroleum activity in Norwegian society]. 4 NOU (Official Norwegian Report) 1983:27 “Petroleumsvirksomhetens framtid. | We have also pointed to possible improvements to the investment guidelines for the Fund. The fixed income portfolio has a number of weaknesses. We have learned that we should not necessarily invest most in those companies and states that are the most eager borrowers. Large borrowers thus have a high weight in the portfolios. Our assessment is that the fixed income portfolio should instead be weighted based on the income that is to service the debt. The GDP-weighted alternative is the most relevant alternative for government debt. Both the equity and fixed income portfolios are constructed using regional weights. Today’s distribution was partly determined using Norwegian import weights from the mid-1990s. It should be considered whether the regional weights should no longer be used so that the Fund’s holdings across all companies and recognised markets are of equal size. If regional weighting is discontinued, the share of the Fund’s European equity and bond holdings will be 13 See “Norges Banks aktive forvaltning av Statens pensjonsfond utland” [Norges bank’s active management of the Government Pension Fund Global], letter to the Ministry of Finance of 23 December 2010. 14 “Utvikling av investeringsstrategien til Statens pensjonsfondutland” [Development of the investment strategy for the Government Pension Fund Global], Norges Bank’s letter to the Ministry of Finance of 6 July 2010. 6 BIS Review 145/2010 reduced. Investments in the Americas and Asia will then increase. With such a revision, the stability of economic and political systems must also be assessed. | 1 |
Going forward, IBF will continue to take a proactive role in promoting best practices and thought leadership in talent management strategies. On thought leadership, I am delighted to warmly welcome our keynote presentation speaker Professor Ronald Collard for this year’s Annual Conference. Professor Collard will speak on the topic of “Talent Strategies for Sustained Profitable Growth”. I believe you will learn much from Professor Collard’s extensive experience and expertise in the area of talent strategies. I also wish to thank the panelists, David, Richard, Robert and Mark for their participation, and look forward to a lively discussion later. 2 BIS Review 81/2008 As IBF management is quite confident that Professor Collard and our panel of speakers will whet your appetite for more learning, I am pleased to announce that we will be holding the Beacon Series for HR Professionals in October and the Distinguished Speaker Series for business leaders in November. The year ahead will be exciting. Many of you have contributed to IBF in various ways. I wish to thank my fellow Council members, the FICS Steering Committee, the FICS Working Group members, and FICPs for your contribution to promoting the FICS framework. | See Section 13(3) of the Federal Reserve Act (12 USC 343) and Regulation A (12 CFR 201.4(d)). BIS central bankers’ speeches 5 In the U.S., given the restrictions on central bank lending, if a securities firm were to lose access to funding the remaining options available would be finding a means of replenishing the firm’s capital, selling assets, or selling all or part of the securities firm’s operations. While this might be manageable in the case of a firm-specific idiosyncratic shock, it might prove more difficult if a common shock was broadly hitting the securities industry. In this circumstance, the failure of one firm could increase the stress on other firms that were facing similar difficulties. If all of the requirements for Section 13(3) are met, the central bank could provide liquidity support. However, since this is not a certainty, it is worth considering possible alternatives. Now that all major securities firms in the U.S. are part of bank holding companies and are subject to enhanced prudential standards as well as capital and liquidity stress tests, providing these firms with access to the Discount Window might be worth exploring. To me, this is a more reasonable proposition now than it was prior to the crisis when the major dealers weren’t subject to those safeguards. | 0 |
Some countries are experiencing only a temporary surge in inflation and might just wait out until it ends. Contrastingly, other economies, including Russia, are facing a rise in inflation expectations. Therefore, no response from central banks could undoubtedly exacerbate the inflationary spiral, while the effect of accommodative policies on growth has been mostly exhausted already. Concerns about inflation are aggravated by worries about a faster tightening of global financial conditions. Largest economies’ central banks are now close to the limit in their ultraaccommodative policies pursued for multiple years. If the surge in inflation is not temporary and persists, central banks will be forced to respond. If they tighten their policies, this will cause capital outflows from emerging markets. Rising volatility will certainly affect the economy. Changes in the labour market also speed up inflation. Moreover, this does not seem to be a temporary factor. As the development of digital services, remote work, and online trade has accelerated, the demand for some professions is declining, while the demand for others is growing. Therefore, unemployment that has risen during the crisis period might be structural in nature: staff shortages in some sectors might be coupled with higher unemployment rates in other industries. This might induce proinflationary pressure, even if unemployment stays close to prepandemic rates. What does this mean for our monetary policy? 1/7 BIS central bankers' speeches Firstly, Russia is one of the countries where the economy is bouncing back fast and has almost reached its pre-crisis level. | It will require large investment and the development of new green technologies which are more expensive. Moreover, regulation, including tax measures, implemented by various countries will impact the value of Russian exports. The global transition to the green economy might reduce the export potential of a part of Russian enterprises, while expanding the potential of others. In this regard, it is critical not to miss the moment of a turnaround in the economy and, accordingly, the financial sector as well. Besides challenges to future growth, we now need to consider financial stability risks especially closely as they have intensified during the pandemic. As we know, there are many countries and companies that have accumulated enormous debts. It was not that hard to service them when interest rates were low. However, an increase in interest rates might alter the situation dramatically. A number of countries and the global economy in general might face new financial problems, a wave of bankruptcies, and rising market volatility. We are not able to influence these processes, yet we are capable of mitigating their implications for the Russian economy and can reduce its sensitivity to possible global upheavals. To this end, it is vital to avoid the accumulation of internal mismatches and prevent any bubbles in the market. Currently, we are especially closely monitoring retail and mortgage lending in the banking sector. According to our estimate, growth in mortgage lending might exceed 20% as of the end of the year. | 1 |
The economy is more or less at full employment, consumption has rebounded, and household income growth has recovered to near pre-crisis rates. The problem with the US recovery, at least from the perspective of Singapore and the region, is not its pace of growth but its composition. US GDP growth is not generating as much trade as previously, with persistent weaknesses in business investment, including in IT. This has implications for export growth in Asia and in Singapore. US consumption generates only around two-thirds the import demand that US investment does. So for Asia and Singapore, we need to see a recovery in US investment. BIS central bankers’ speeches 1 China’s growth should slow but we do not expect a “hard landing”. The official target of 6.5% is quite attainable on the back of fiscal stimulus and continued credit expansion. In fact, the risk is not of too low a growth rate but a growth rate that is achieved by adding to the underlying vulnerabilities in the Chinese economy: high and rising levels of corporate debt, industrial over-capacity and deteriorating asset quality in the banking system. Changes in the composition of China’s growth will continue to have an impact on Asia and Singapore. The rebalancing of demand away from investment and towards consumption has weighed on the region’s exports of commodities and capital goods. But over time, there are opportunities for countries which re-orientate the structure of their exports to tap on China’s burgeoning demand for consumer goods and services. | Macroprudential policy – car loans and property loans While monetary policy is focused on overall price stability, macroprudential policies target specific areas to promote economic and financial stability. The two key macroprudential measures taken in recent years relate to the property market and car market. In the property market, MAS has implemented prudential limits on loan-to-value, loan tenure, and debt service ratios while the Ministry of Finance has implemented stamp duties on buyers and sellers. This collection of measures is the so-called property cooling measures. In the car market, MAS has implemented limits on loan-to-value and loan tenure. MAS eased the limits on car financing in May this year. But it is not time yet to ease the property cooling measures. The considerations and circumstances in the two markets are quite different. The restrictions on car financing were imposed in 2013 – at a stringent level – primarily to restrain the strong demand for cars and COEs, and consequential pressures on inflation. The objective of curbing inflationary pressures has been achieved. The contribution of private road transport (excluding petrol) to headline inflation has eased from +1.3% points in 2011– 2012 to –0.5% point in the first quarter of this year 2016. MAS therefore reset the car loan restrictions in May this year at a level that would continue to promote financial prudence and support the move towards a car-lite society over the long term. | 1 |
Furthermore, market participants would hardly regard monetary policy decisions as credible, should these decisions involve a substantial expansion of the balance sheet, which in turn would impair the effect of monetary policy. It is unlikely that decisions such as the introduction of the minimum exchange rate or the stabilisation of UBS would have been made in the same way given these circumstances. This constraint on the capacity to act would not be in Switzerland’s interest. Gold is nevertheless an important component of the SNB’s assets. However, this is not because gold guarantees price stability. In today’s monetary system, there is no direct connection between the proportion of gold on the SNB’s balance sheet and price stability. This is also evidenced by the fact that the objective of price stability has been better achieved in recent years, even though the proportion of gold on our balance sheet was smaller, than at times when gold accounted for a much larger share. A high proportion of gold on the balance sheet is no guarantee for price stability. There is another reason why gold is useful for the SNB and Switzerland. As part of a good diversification of currency reserves, a certain proportion of gold can help reduce the balance sheet risk. We have therefore never ruled out the possibility of future gold purchases. At the same time, however, gold is also one of the most volatile and thus riskiest investments. A high proportion of gold would increase the SNB’s balance sheet risk. | In our baseline scenario for the global economy, we expect growth in the coming quarters to remain in line with potential. In the advanced economies, expansionary monetary policy is lending support, as is fiscal policy in some countries. Inflationary pressure is likely to remain moderate. The risks to this baseline scenario for the global economy are still to the downside. However, they are more pronounced than at our previous monetary policy assessment. Chief among them are political uncertainty and trade tensions, which could lead to renewed turbulence on the financial markets and a further dampening of economic sentiment. Swiss economic outlook I shall now turn to the economic outlook for Switzerland. The Swiss economy also gathered momentum at the beginning of the year. According to the initial estimate, GDP grew by 2.3% in the first quarter. Growth was broad-based across the different sectors of the economy. Labour market developments were also positive. Employment figures continued to rise, and the unemployment rate remained stable at a low level. Production capacity in Switzerland was well utilised overall. As regards the developments in the second quarter and the months thereafter, the surveys and leading indicators are currently presenting a mixed picture. All in all, however, they point towards momentum remaining favourable. Even in manufacturing, which is likely to be affected most directly by weaker industrial activity, expectations are that the business situation will continue to improve. Companies’ plans regarding capital spending and recruitment also remain positive, which offers further grounds for confidence. | 0 |
The added pressure of the economic environment on bank profitability is the second element of the balance of risks that I would like to highlight. Once again, this is not something specific to the Spanish financial system. Indeed, Spanish banks’ profitability is higher than the European average, but it remains below the cost of capital. Maintaining appropriate profitability is crucial, among other factors, if banks are to generate capital organically and, in this way, reinforce their solvency levels. Spanish bank profits in the first half of the year, down by 11.5% in year-on-year terms, are a sign of the growing likelihood of this risk materialising. Contributing to this decline have been the reduction in gains on financial operations and, to a lesser extent, the increase in operating expenses, although a portion of this was due to extraordinary expenditure associated with the restructuring of certain banks. In addition, the ongoing reduction in impairment losses that began in 2012 is showing some signs of exhaustion. Indeed, in terms of their year-on-year rate, impairment losses increased for the first time since 2012, posting a rise of 3.9%. And we should not forget that, at present, the NPL ratio is still significantly above that recorded before the financial crisis. Specifically, in terms of lending to the resident private sector, in business in Spain, the NPL ratio stood at 5.3% in June 2019, 8.7 pp down from the December 2013 high. Foreclosed assets evidenced a further decline, standing below € billion in June 2019. | 14.10.2019 Financial stability situation in Spain X Financial Sector Meeting/Expansión-KPMG Pablo Hernández de Cos Governor Good morning ladies and gentlemen. Let me first thank the organisers for inviting me to participate in this tenth edition of the Financial Sector Meeting. On this occasion my address will focus on the Banco de España’s assessment of the main factors of risk to financial stability at present, the potential impact on deposit institutions and the tools available to the Banco de España and the other authorities to mitigate such risk. Assessment of the balance of risks to financial stability The balance of risks to the Spanish financial system’s stability has worsened somewhat in the past six months. This has been due in particular to the downward revision of the global economic outlook. Indeed, global GDP growth continued to ease, to a year-on-year rate of 2.8% in 2019 Q2, more than 0.5 pp lower than a year earlier. This slowdown is particularly affecting some emerging economies and Europe. Moreover, growth projections have been revised downwards in recent quarters in most economies. In fact, the increase in global GDP this year is expected to be the lowest since the international financial crisis. This downturn in activity has likewise affected the Spanish economy. As a result, the Banco de España revised its growth projections for our economy down last September, to 2% in 2019, 1.7% in 2020 and 1.6% in 2019. | 1 |
But I will dwell on one particular point: what makes life difficult for these funds is not so much the fall in bond yields per se but one that isn’t accompanied by a fall in yields (rise in prices) on other, riskier securities they hold as assets. That’s precisely what has happened in recent years: on days that long-term real interest rates have fallen, equity prices have declined. More often than not, in other words, the yields on gilts and equities have gone in opposite directions and, over time, the gap between those yields has widened considerably. Since an independent easing of monetary policy tends at the margin to depress yields (raise prices) of all assets – and that’s precisely what you observe if you focus specifically on those episodes – it’s hard to believe that policy shocks are the main reason for the divergence between bonds and equities that underlies 2 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 2 the rise in pension deficits. More likely candidates are growing pessimism about future economic growth, across the world, and the perception that risks around that lower central path are skewed to the downside. This is part of the wider point that, in large part, central banks have been accommodating a long, drawn-out decline in the neutral real rate of interest. The decline in policy rates is a symptom not a cause of the forces shaping the global economy. | The MPC is, and must remain, watchful for any sign that higher deficits are pushing up funding costs for companies exposed to them or in any other way inhibiting corporate investment. Nor do I want to pretend that monetary policy has no bearing on these deficits. But it’s important to get any such effects in context and, in this respect, I do want to make one particular point. What really matters here is not, in and of itself, the drop in the yield on bonds (i.e. the rise in their price), but one that’s not been matched by a similar appreciation in pension funds’ assets, equities in particular. However, an independent easing in monetary policy tends to push up the prices of all assets, equities as well as bonds. So it seems an unlikely candidate for the divergence that has been the key problem for DB schemes. Let me explain this a little further. Though their liabilities are discounted purely by the yield on bonds, pension funds tend to hold a broader-based set of assets. In particular, they hold significant quantities of equities. In general, that may well be a reasonable strategy. As the riskier asset, equities have tended historically to outperform bonds. The extent of the outperformance, the so-called “equity risk premium”, is 7 (a) Taken from King and Low (2014). Shows the average 10-year yield of inflation-linked bonds in the G7 countries (excluding Italy) over the period 1985-2013. Between 1985 and 1992 only data for the UK are available. | 1 |
Both series are deflated using the Consumer Price Index from ‘A millennium of macroeconomic data’. Latest data point is for April 2022, based on daily prices to 26 April. Data are not seasonally adjusted. Labour market and business sentiment Momentum in the labour market continues to be both strong, and stronger than previously expected. Vacancies are at historical highs. Redundancies are at historical lows. The MPC forecasts the unemployment rate will fall to 3.6% in Q2 – the lowest level seen for almost fifty years, in part because participation in the labour force has failed to recover from pandemicrelated declines. [9] Bank staff estimates of underlying wage growth continue to strengthen, and Page 8 are already running at rates above those normally deemed consistent with the inflation target. [10] In its February forecast, the MPC embodied stronger wage growth in its baseline to reflect the likelihood that pay settlements would embody some catch-up for the higher than expected inflation outturns at the turn of the year. On the back of the Bank’s Agents’ reports from corporate contacts, further second round effects were included in the May projection. Chart 5: Unemployment continues to fall but inactivity remains higher than prepandemic(a) Sources: ONS and Bank calculations. (a) Data from the LFS. Employment includes employees and self-employed. Changes do not sum to 0 as the population is estimated to have increased during the period. | It is not easy, therefore, to reconcile the revised earnings data with other information on the labour market. And these data really matter for the MPC’s assessment of the UK economy. I can promise you that the Bank, the Treasury and the Office for National Statistics will, as a matter of urgency, be working together to try to understand what is happening to earnings. Decisions on interest rates must take into account not only those factors which I have highlighted this morning - the international economy, the possibility of a credit crunch and uncertainty about the trend in earnings growth - but also a wide range of other information relevant to the outlook for inflation, including the behaviour of the monetary aggregates, which are still growing quite rapidly, and the fall in sterling’s effective exchange rate. Over the next two weeks more important data will become available, including the first estimate of GDP growth in the third quarter, a CBI Industrial Trends Survey and the monthly report from our regional Agents. At our next meeting on 4 and 5 November, the MPC will take into account all of this information, and occasions like today are part of the process by which we obtain more information and exchange views with those most directly affected by our decisions. BIS Review 86/1998 | 0 |
Good hedging, indeed! I will not review all the themes addressed in the book, but would like to touch on a few key issues that can help us get a better understanding of what has happened over the last ten years and how the euro is likely to develop over the next ten. David Marsh is cautious when assessing the euro’s first ten years. In his introduction, he even sounds Solomonic, suggesting that: “It’s too early to say”. There is nothing wrong with such skepticism, and it’s always better to be prudent. Such prudence nevertheless reminds me of the answer that Chinese Premier Zhou Enlai gave in the mid 1970’s to a question about the impact of the French revolution of 1789. He too remarked: “It’s too early to say”. Today, I would like to start by presenting some facts about the last ten years. Then I’ll consider the main hidden message of the book, which is that monetary union is a political union. Finally, I will try to give my own perspective on the next ten years. Facts of the last decade Any assessment of the first ten years of the euro should consider what the objectives were at the start of Monetary Union. In particular, we should avoid attributing to the euro merits or demerits it should not have or never aspired to. Let me consider some of the objectives of the euro and the expectations it gave rise to. | Making assessments on the basis of long averages means that adjustments are made to take account of cyclical and temporary shocks. However, this might lead us astray. It would be incorrect to claim that the strong employment results achieved over the last ten years are exclusively due to the euro. The improvement is more likely to stem from the structural reforms implemented in the Member States over the years. A third objective of the euro was to move forward the integration of the financial markets. The results in this field are positive, but also uneven, depending on the market segment. Integration is more advanced in the areas close to the single monetary policy, but it also depends on the degree of integration of the underlying market infrastructure. The euro area money market, the segment closest to the single monetary policy, reached a stage of “near perfect” integration almost immediately after the introduction of the euro. The malfunctioning of recent months is common to all currencies. On the other hand, short-term debt securities (i.e. commercial paper and certificates of deposit) have remained much more fragmented. Financial integration has been fastest in the government bond market, where yields have converged and are increasingly driven by common factors, although local factors and perceived differences in credit risk continue to play a role. Likewise, the corporate bond segment is also more integrated as the various markets have merged into a single, yet diversified euro market. | 1 |
BIS central bankers’ speeches 3 Chart 4 The combination of large deficits and growing demographic problems is particularly challenging, as is the case for southern European countries, where fertility rates are well below the replacement rate and lower than the average for advanced countries. The demographic challenge will be even greater ahead. In some of the countries the number of pensioners will be close to the number of economically active. The basis for economic growth is thus weakened. The burden of rising debt and pension payments will be heavier. It takes a long time to reverse demographic trends. Financial incentives can be effective. Norway, with favourable support schemes for families with children, has a relatively high birth rate. In other European countries, there is a risk that these hard times will exacerbate the demographic challenge. Unemployment, in particular among youth, has risen sharply and many people have a dark view of the future. The events of recent years have brought fresh experience and reminded us of several historical lessons. Economic policy must be sustainable. Governments must save during upturns in order to weather downturns. At the same time, there are limits to what economic policy can accomplish if the economic foundations are being eroded. A competitive business sector is crucial to maintaining growth and welfare. This also applies to Norway. The financial crisis was a reminder of how risk can be mis-assessed. | Table 1 The fiscal rule was drawn up in 2001. Today, the situation is different. In 2001, a real return on the Fund of 4 percent, or a little higher, based on the then prevailing distribution between equities and bonds, was a reasonable assumption. Today, calculations yield a lower figure for expected real return. 1 The real return on bonds in the Fund’s portfolio can now be estimated at 1 percent. With a normal risk premium on equities, the real return on the whole Fund can be quantified at 3 percent. There is a possibility that the real return will be higher, but it may also be lower. If we spend more than the annual return on the Fund, we will be eating into the savings portion. The conclusion is that a more robust approach would now be to base fiscal policy on an annual expected real return on the Fund of 3 percent. Such an adjustment would underpin the main principles that were behind the establishment of the fiscal rule – stability and sustainability. 1 8 See Norges Bank Staff Memo 6/2012. BIS central bankers’ speeches Chart 8 In 2011 the structural non-oil budget deficit was about 3 percent, which is close to such a new path. Adapting petroleum revenue spending to a lower expected return should not therefore be particularly demanding. If we wait, a necessary policy adjustment later could be far more painful. | 1 |
These two risks could easily occur in tandem, however. According to a new working paper by two Central Bank staff members, growth in private property rentals to tourists via Airbnb has increased real house prices by 2% per year in the past three years; furthermore, it explains about 15% of the rise in real prices 4 over this period.2 A contraction in tourism could therefore exacerbate a drop in house prices stemming from other causes. The impact on the banking system would then be greater. It is nevertheless unlikely that they would be unable to withstand such a turn of events, but they would probably need to use the capital buffers that are designed to cushion against such shocks. That gives rise to the question of how high the banks’ capital ratios should be. Their combined capital, including subordinated loans, was equivalent to 25% of the risk-weighted asset base of the three systemically important banks at the end of 2017, and their so-called gearing ratio was just under 17%. The gearing ratio measures net equity relative to total assets without risk adjustment. Approved dividend payments will lower the capital ratio to 23½% and the gearing ratio to just under 16%. These figures can be expected to fall even further during the year, owing to dividend payments and changes in the composition of capital. The ratios are certainly comfortably above the Financial Supervisory Authority’s capital adequacy requirements, which are close to 20% for the three commercial banks. | The longer long-term inflation expectations are anchored to the target, the greater that scope will be. One of the main tasks of monetary policy, of course, is to foster such an outcome. However, if other decisions that affect domestic cost levels and demand pull in another direction, such a tug-of-war could result in a further rise in the real exchange rate and could adversely affect employment levels. Honoured guests: Although nearly all of the capital controls were lifted in March 2017, a few restrictions on capital transfers remain: on the one hand, restrictions on offshore krónur, and on the other, restrictions on speculative derivatives transactions involving the króna and other transactions that could undermine the efficacy of the SRR. In order to be released from the current exemptions provided for in international agreements on free movement of capital, vis-à-vis both the EEA and the OECD, we must lift these restrictions, and it is appropriate that we aim to do so as soon as possible. The Central Bank is of the view that the economic preconditions are in place to take the final step towards full capital account liberalisation. This also applies to the stock of offshore krónur, which now equals about 3½% of GDP, 2 down from 40% in late 2008, when the capital controls were first imposed. But this cannot be done without statutory amendment. The Bank does not consider it appropriate yet to begin lowering the SRR. | 1 |
Let me end with the short version of the main points: 1: I don't believe we face a systemic banking crisis; 2: We must ensure that financial stability continues to mean that monetary policy takes into account financial conditions but does not have to aim off for instability; 3: This requires robust structures for financial stability policymaking; 5/6 BIS - Central bankers' speeches 4: Central bank balance sheets will remain larger than pre-crisis for financial stability reasons; 5: We don't know yet where central bank balance sheet reduction will need to stop in terms of the necessary level of reserves; 6: This will in part depend on the desired future size and make-up of banks' liquidity buffers; 7: Stable coins will need to have the characteristics of, and be regulated as, inside money; 8: The key question on retail digital money is can we envisage a demand for it, but we should guard against failure of imagination; and be able to accommodate it within the regulatory framework; 9: If retail digital money is part of the future, it would be better not to disturb the need to have both inside and outside money – so we cannot rule out a need for CBDC; 10: We will need to revisit the protection of inside money in the form of deposits, especially in smaller banks; 11: Stress testing the financial system is crucial, but stress tests will not always deal with Black Swans – that's why resolution and other policy intervention tools must be in place; 12: Non-Bank Financial Intermediation is a very large and heterogeneous landscape – it presents surveillance challenges of both breadth and depth; 13: NBFI leverage and inter-connectivity can be hard to map; 14: NBFI issues are often inherently cross-border in nature. | In our case monetary policy set by the MPC should be able to respond to the macro implications of any dislocation to credit markets to the extent that they influence the outlook for inflation and thus deviations of inflation from target, just as the MPC conditions its policy decisions on asset price and balance sheet developments on all other occasions. That's natural. But, what we have not done – and should not do – is in any sense aim off our preferred setting of monetary policy because of financial instability. That has not happened. That outcome depends on having institutional structures governing decisions on monetary policy and financial stability. Internationally the picture remains more mixed on the latter. Let me next move on to the first stage of what I will call developments in money. Many central banks, the Bank of England included, are now implementing Quantitative Tightening (QT), the reversal of the Quantitative Easing (QE) we had previously used. QE has worked through its effects on interest rates and asset prices more generally. Those effects are temporary and their size is state contingent, being larger in times of crisis and market upheaval. We can think of QT likewise, except that we are deliberately implementing it gradually, and not in stressed times. It is not an active tool of monetary policy, but any effects it does have will be captured in the normal way of monetary policy setting, through realised financial conditions. | 1 |
In this regard, the Budget for 2010 provides several incentives that are conducive to a stronger productivity performance, particularly concerning SMEs and research and development. Beyond capital deepening, improved prospects for productivity growth also require a heightened awareness that inefficient work practices, including over manning, slow down output growth and threaten the sustainability of employment and income levels. The concept of value for money that is increasingly determining consumer behaviour should be given equal importance in the workplace. There also exists potential for creating a more congenial business climate to reinforce Malta Enterprise’s investment promotion strategy. In a recent survey of corporations, a reduction in bureaucracy topped the list of measures that were considered necessary to further enhance Malta’s attractiveness as a location for foreign direct investment. 3 Education policies, too, can play a role by strengthening the country’s human capital, particularly by promoting greater synergies between educational institutions and industry. In assessing the role of productivity, it is well to reflect on the words of the Nobel laureate Paul Krugman, who said “productivity is not everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”. 4 … and sound public finances The third policy priority is to achieve sustainable public finances. The process of fiscal consolidation must resume in earnest once the recovery materialises. | Ardian Fullani: Brief overview of key topics and the appropriate macroeconomic policy response Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the joint press conference of the International Monetary Fund (IMF) mission with the Ministry of Finance and the Bank of Albania, Tirana, 3 November 2010. * * * Dear Mr. Minister, Dear Mr. Bell, Dear media representatives, It is a pleasure for me to appear before you today following a week of intensive and fruitful discussions to present the Bank of Albania’s position. Allow me first to underline that the meetings held broadly confirmed the conclusions provided in our last monetary policy report and the Bank of Albania’s outlook regarding its future performance. In what follows I will provide a brief overview of our opinions, dwelling upon the key topics of discussion: current and expected economic developments; risks and related concerns, and; the appropriate macroeconomic policy response. The Albanian economy had a positive performance in the first nine months of 2010, expressed in positive growth rates and improved key parameters of macroeconomic stability. In turn, the recovery has been reflected in contained and downward inflation rates, improved current account deficit, lower budget deficit and relative sustainability of public debt figures. These developments contributed to fully restoring confidence in the banking system, lowering the interest rates and the risk premiums, enhancing the exchange rate sustainability and improving the liquidity and financial sector’s balance sheet indicators. | 0 |
Following the dramatic 1990s in the USA (and Sweden), with soaring prices on shares and property, many people began to think that perhaps the central banks should keep an eye on asset prices and react to these, even if there were no sign of rising inflation. Overrated share prices and/or property prices lead sooner or later to an adjustment in asset prices. If this adjustment is dramatic, the effect could be an economic downturn, with rising unemployment and a slowdown in prices. The extreme valuing of certain shares in the IT and telecom sectors on the 2 BIS Review 39/2001 American stock exchange, Nasdaq, should perhaps have warranted more stringent monetary policy a few years ago, according to the international debate on monetary policy. One argument put forward as to why the central banks should not merely look to forecasts regarding consumer prices when making decisions on monetary policy, but should also monitor the development of asset prices, is that ownership of shares is much more widespread now. Thus, changes in asset prices probably have much greater significance for household expenditure now than they did before. Deregulation, liberalisation and globalisation have increased the importance of the capital markets for economic developments and made them more volatile. Assets with market prices now comprise a much greater share of households' balance sheets than before. This is thus claimed to be a good reason for monetary policy to take into account developments in asset prices. | That, in sum, is what Basel II is all about. I believe that the incentives for better risk management that are built into the new capital framework, and the flexibility to adapt the framework to local needs, will ensure its validity. I also believe it marks a major step forward in the right direction, and that it will contribute to a more resilient and stable banking system that is capable of promoting sustainable economic growth. The Committee recently announced its intention to verify that Basel II meets our long-stated objective of maintaining the overall level of capital in the banking system while keeping incentives to adopt the most advanced and risk-sensitive approaches. As a result we intend to conduct a fifth Quantitative Impact Study, or QIS 5, in the last quarter of this year. It is important to understand sooner rather than later what the impact of the framework will be. The Basel Committee will continue its work based on the existing timetable, and supervisors and bankers planning to implement Basel II should continue their preparations accordingly. Banking supervision and financial stability Let me turn now to my second topic, which is the link between effective banking supervision and financial stability. I’m sure we can all agree that a stable banking system is critical to the long-term growth of an economy. But discussing financial stability issues is always a challenge because we don’t have a framework for financial stability as comprehensive as in the case of price stability. | 0 |
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