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Our first supervisory stress test was in 2015 for general insurers and we have repeated the exercise every two years, bringing life insurers into it for the first time last year. Our experience has been that these stress testing exercises give us valuable additional insights into firms’ financial resilience, beyond those that can be obtained from the usual solvency capital requirement calculation. 4 See Rule 3.8 of the Conditions Governing Business part of the PRA Rulebook. 3 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 3 Use of a common scenario enables peer comparison to identify both genuine differences in firms’ risk profile, and potential optimism in any one firm’s modelling and assessments, thus helping firms improve their risk management. It improves our understanding of the potential aggregate, systemic impact of management actions taken rationally by individual firms. It helps us to identify any concentrations in reliance on individual reinsurers, jurisdictions, or external models, for example. It informs our supervisory approach and helps us to identify priorities if a particular scenario crystallizes (e.g. cluster of US hurricanes). The 2019 stress test again indicated general insurers’ resilience to a range of natural catastrophe risks.5 This resilience is reliant on significant levels of reinsurance, particularly from Bermuda, and we worked jointly with the Bermuda Monetary Authority, who highlighted their firms’ reliance on onward reinsurance, and in particular to the capital markets via Insurance Linked Security structures. | Solvency II review, internal models and the solvency capital requirements calculation Having mentioned the Solvency II review, I do not propose to try and cover the many topics that it encompasses. I do want to talk about one aspect which risks being overshadowed by the familiar headline topics of risk margin, regulatory reporting, and matching adjustment. That is, the overall approach to setting capital requirements, and the potential role of sector-wide stress testing in that. Under the existing implementation of Solvency II, there are many firms for which the standard formula is not appropriate, and internal models are the near-exclusive determinant of capital requirements for all or part of the business. And those models either have to be approved or, if not, rejected in their entirety, using a bottom up approach of assessing compliance with a large number of technical tests and standards. The philosophy is, in effect, that everything can be modelled, and that determining capital adequacy is essentially a technical exercise. This denies the reality: first that some risks are simply not conducive to modelling; and second that even for those that are, there will always be a chance that the model is wrong. It hinders supervisors in responding flexibly to risks not well captured by a specific model, or by modelling in general. And it has led to huge expenditure of effort by both firms and supervisors in the approval of models and model changes. | 1 |
Let me briefly recall the benefits of the “managed floating plus” strategy, as described by Goldstein: the more currency mismatch is brought under control, the less should there be fear of floating; if the exchange rate is allowed to move, the greater will there be the awareness of currency risk and the incentive to hedge against it; the less necessary it is to see the exchange rate as a target, the more likely inflation targeting will be successful and, hence, the more willing will foreign investors be to lend in local currency; the greater the availability of domestic-currency denominated instruments, the better the prospects for reducing currency mismatch. Let me add two comments: first, monetary policy alone cannot ensure current account sustainability in the long run. It also takes good fiscal and structural policies. The best monetary policy can achieve is “buying time” for these policies to be implemented, without jeopardizing its own objectives. Second, managed floating faces a composition problem on the global scale. Attempts by many countries to keep their currencies at an undervalued rate may end up in a race to the bottom – akin to the “beggar-thy-neighbor” policy of the ’30s. Multilateral or global arrangements are perceived as the best solution to such problems (Flassbeck, 2004). As changes in the exchange rate, deviating from purchasing power parity, affect international trade the same way as changes in tariffs, they should be governed by multilateral regulations. | Therefore, we must make use of all the tools available to us to bring it back to 3%, without adding unnecessary costs, of course. I want to be particularly emphatic in saying it: there are no easy solutions to this problem. Bringing inflation back to levels that do not affect the population severely, especially the most vulnerable, necessarily involves restoring the macroeconomic balances and, in this case, what is required is a reduction in the level of activity and demand. Monetary policy will continue to contribute to this necessary adjustment in an efficient and orderly manner. The coordination of macroeconomic policies is essential for this purpose, and in this sense the contribution of fiscal policy has been paramount. With yesterday's monetary policy meeting decision to raise the MPR we have brought it to a level that is near the maximum considered in this Report's central scenario. It is very high, but it is in line with the levels that inflation has reached and with the challenges we face in solving the problem. During the last few months, not only has inflation been high, but its expectations two-years ahead continue to be above the 3% target. This misalignment is a cause for concern because, as the inflationary phenomenon becomes more persistent, it makes stabilizing the price level more difficult and costly. Hence the need to move forward resolutely in order to prevent this problem from intensifying because, as we well know, it imposes great costs on the population. | 0 |
Our experiences with supervision, monetary policy, and financial market monitoring suggest that market data gathering and market oversight responsibilities must continuously inform one another. In addition, efforts to identify stresses in the system are not a matter of running a single model or focusing on a single risk. Rather, it is the assembly of many types of analysis in a systematic fashion. The Supervisory Capital Assessment Program (SCAP) for large financial institutions – popularly known as the “stress test” when it was conducted early last year – illustrates the importance of combining analysis by credit experts, forecasts and scenario design by macroeconomists, and hands-on judgments by supervisors in assessing the financial condition and potential vulnerabilities of large financial institutions. While considerable steps have been made in the wake of the financial crisis, the Federal Reserve intends to do a good deal more. The Federal Reserve also will continue to strengthen and expand its supervisory capabilities with a macro-prudential approach by drawing on its considerable data reporting, gathering, and analytical capabilities across many disciplines. In the areas in which we are collecting data through the supervisory process on measures of interlinkages and common exposures among the largest financial firms we supervise, we are developing new analytical tools that may lead us to change our information requests from supervised firms. | Under this approach, the supervisory and regulatory agencies would maintain most data collection and analysis, with some enhanced authority along the lines I have suggested. Coordination would be committed to the council, which could also have authority to establish information collection BIS Review 16/2010 19 requirements beyond those conducted by its member agencies when necessary to monitor systemic risk. This approach might achieve the benefits of the current arrangement and the proposed independent agency, while avoiding their drawbacks. The council would be directed to seek to resolve conflicts among the agencies in a way that would preserve nimbleness, and it could recommend that an agency develop new types of data, but it would leave the details of data collection and analysis to the agencies that are closest to the relevant firms and markets. And while this council of financial supervisors could act independently if needed to collect information necessary to monitor the potential buildup of systemic risk, it would benefit directly from the knowledge and experience of the financial supervisors and regulators represented on the council. The council could also have access to the data collected by all its agencies and, depending on the staffing decisions, could either coordinate or conduct systemic risk analyses. Conclusion Let me close by thanking you once again for your attention to the important topic of ensuring the availability of the information necessary to monitor emergent systemic risks and establish effective macro-prudential supervisory oversight. As you know, these tasks will not be easy. | 1 |
By placing value-based and sustainability consideration at the core of the economic recovery plan, enormous opportunities lie for Islamic finance to support sustainable solutions towards postpandemic recovery. With deeper materialisation of these principles nurtured into modern financial context, it could create a seismic change in mainstreaming value-based consideration as an anchor to any business and commercial decisions. This encourages the embedment of Shariah values in financial offerings to deliver positive outcomes. The wisdom, diligence, and inquisitive mind of Shariah scholars are thus undoubtedly the integral component within a 1/4 BIS central bankers' speeches financial system in providing impactful and practical Shariah advice amid the fast-changing business environment. More so, during the time of crisis. We see this transpiring. Through an industry-driven initiative, Islamic banking institutions in Malaysia are committed to adopt “Value-based Intermediation” (VBI) which advocates for positive and sustainable impact through the practices, offerings, and conduct of institutions. Guidance is also provided in incorporating SDG-oriented risk considerations in financing and investment decision making process, through the Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF). Similar importance has also been recognised in the takaful industry, with the recent introduction of VBI for Takaful Framework. The framework focuses on integrating VBI principles into the underwriting and investment decisions, as well as business operations of takaful and retakaful operators that will reshape and sharpen practices of the industry towards delivering economic and societal outcomes more sustainably. | Jan F Qvigstad: Understanding macroprudential regulation Introductory remarks by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at the workshop on “Understanding macroprudential regulation”, organised by Norges Bank, Oslo, 29 November 2012. * * * Dear all, It is a pleasure to welcome you to Norges Bank for this workshop on Understanding Macroprudential Regulation. The topic of the workshop is timely; Authorities in all parts of the world are now actively debating macroprudential policy. Academic research provides a necessary foundation, both for the design and the implementation of such regulations. During my years of service here at the central bank, and also some years at the Treasury, I have had my fair share of dealings with banking and financial crises in Norway. In the 1990s, Norway was hit by a severe banking crisis. Three of the four largest banks failed. Required capital injections were more than three and a half per cent of GDP. This is substantially more than the percentage share that euro area banks currently need to recapitalise. Ever since the Norwegian banking crisis in the early 1990s, our banking industry has been regulated more strictly than banks in comparable countries. For instance, bank capital definitions have been tighter, while packaging loans into complex instruments was in practice not permitted until 2007. Financial supervision has also been rather strict. | 0 |
We would anticipate some nudges or policy changes by relevant stakeholders in order to influence behavioural change in consumers. Over the recent years, concerted efforts between the private and public sectors have resulted in a number of specific financial education initiatives being implemented. For example, financial education elements are integrated into the school curriculum for Year 1, Year 4 to 6 and Secondary 1 following effective collaboration between the Ministry of Education and Bank Negara Malaysia. I am pleased that financial institutions and the private sector are also playing their roles to strengthen learning in the classroom through extra-curricular activities in their respective signature financial education programmes. Moving forward, more can be done to instil positive financial values among the 5 million school children through greater sharing of responsibility. I would also like to acknowledge FOMCA’s on-going initiatives in financial education over the years. Indeed, FOMCA has been a valuable partner in the education segment. I wish to take this opportunity to welcome FOMCA’s willingness to join hands with the FE Network to elevate financial literacy of our consumers under the national strategy. 3/4 BIS central bankers' speeches FOMCA, through its affiliates and extensive network nationwide, is well-positioned to contribute on two fronts. The following are my suggestions. Firstly, FOMCA can further expand outreach to educate and create awareness on the importance of financial literacy, particularly to the informal sectors. It is important that our financial education initiatives can be reached to the masses. | I therefore welcome further views and ideas from the audience during this conference on your aspirations to achieve financial well-being of our future Malaysia. 2/4 BIS central bankers' speeches Financial well-being is not about being rich. Rather, it is about the ability to live within means and making responsible financial decisions. The state of financial well-being of an individual is a reflection of two factors — firstly, his or her level of financial literacy, and secondly, a person’s economic background. Unfavourable personal and economic circumstances, for instance, like most of us – coming from low and middle income families living in a city, may be more dependent on external factors and are not easily changed. Financial literacy, on the other hand, resides within an individual where we have control. Given the right intervention, motivation and discipline, an individual’s level of financial literacy can be improved from within. More importantly, such interventions can also become an important element to uplift a person’s personal and economic circumstances. The reverse is also true – absence of financial literacy may reverse financial well-being. We have seen many situations where individuals with favourable circumstances, such as high income professionals, nevertheless, fall into financial problems due to poor personal financial management. On the other hand, we often hear of people with less favourable personal and economic circumstances living comfortably within their means by practicing a “prudent and modest lifestyle”. | 1 |
3 BIS Review 44/2000 Financial stability leads to a secure payment system An important component of the Riksbank’s task of promoting a secure and efficient payment system is to monitor and evaluate developments in the bank system. Since the banks have a key role in provision of banknotes and payment services to the general public, it is important that their activities function well. A prerequisite for this is that financial stability is not threatened. Unlike many other countries, the Swedish central bank does not have the role of supervisory authority. Here instead there is a special authority, Finansinspektionen (the financial supervisory authority), that bears the responsibility of supervising the individual institutions while the Riksbank focuses its supervision on detecting systemic risks. The Riksbank has decided to act with the same openness and clarity as regards the responsibility for a secure efficient payment system that characterises the monetary policy decision-making process. An important component of this strategy is the production and publication of a report on financial stability a couple of times a year. This report goes systematically through the risk factors that could lead to major imbalances being created in the financial systems so that financial stability is threatened in a broad sense. Since the Swedish bank system is concentrated in four major banks which have large exposures to one another, problems in one bank can rapidly spread to the entire bank system. | As observed earlier, credit volume has gone from around 150% to around 170% of GDP in the past few years. This is the result of an average growth of credit of nearly 4%, while nominal GDP growth has averaged slightly above 1% over the same period. For this movement to be fully reversed, credit growth would have to significantly undershoot nominal GDP growth. The critical question is: could such a reversal happen smoothly, or in other words, is a soft landing possible? International experience (Figure 3) suggests this is a significant challenge. Credit-to-GDP ratios often fall in the wake of a severe crash, with pronounced falls in property prices and large increases in credit default rates; but this is exactly what we aim to avoid. While the diagnosis cannot be totally certain until history has run its course, the lessons from the analysis are, in my mind, crystal clear. The large increase in leverage, presumably of a 10 Reinhart, C. and Rogoff, K. (2009) 11 According to SNB survey data, about 20% of new mortgages are granted for investments with a loan-to-value ratio above 80%, and 25% of newly originated mortgages are granted to lever existing mortgages. Moreover, in the case of 40% of new mortgages the imputed costs would exceed one-third of gross income at a mortgage interest rate of 5%. | 0 |
The first is how to deal with the cost and the constraint of coping with capital inflows. The second is the challenge in finding a set of tools that can help assess the potential build-up of financial vulnerabilities. And the third is how best to complement monetary policy with prudential measures to help prevent potential financial instability. On the first decision, for those under a managed float regime, lowering interest rates to reduce the relative attractiveness of the country to capital inflows may be an appropriate way to ensure price stability. But concerns of fast appreciation may not subside as exchange rates tend to behave more like asset prices than relative goods prices in practice. That means the nominal effective exchange rate can appreciate for a while in the short run, even after central banks repeatedly cut interest rates. This is an element of the well-known exchange rate disconnect puzzle. The risk is that a central bank may cut interest rate by too much, and at the same time sowing the seeds for inflation and an asset price boom down the road. An obvious important technical challenge to emerging market central banks, then, is to improve its ability to forecast inflation and output and be more precise about the range of possible natural rates of interest, which vary through time. Resisting the appreciating momentum of the exchange rate through interest rates alone may not be sufficient. A widely adopted practice that is assumed to be effective in the short run is through sterilized intervention. | The ECB should support the adjustment process in the Member States in the best manner possible, namely by providing price stability in the euro area as a whole. The ECB’s response to the crisis Let me now address the measures taken by the ECB in response to the crisis, before turning to the response by the euro area governments. During the crisis, the ECB has been confronted with unprecedented threats to monetary stability in the euro area. Broadly speaking, these have come from two sources: first, the deflationary forces stemming from the economic downturn and, second, the impairment of the transmission of its monetary policy, which reflected to the growing tensions in financial markets. The ECB had to react decisively to these challenges. First, we used our standard monetary policy measures to address the downward pressures on price stability that resulted from the sharp slowdown in economic activity in the crisis. In full consistency with our mandate, we reduced our key policy interest rate rapidly between October 2008 and May 2009, from 4.25% to 1%. In other words, we reduced our policy rate faster than any euro area country has ever done in recent history. Given that the ECB has ensured that inflation expectations in the euro area as a whole remain very solidly anchored, we have been able to maintain an accommodative monetary policy stance over the past four years. | 0 |
While consumption certainly provides a large contribution to the strong growth in GDP in coming years, strong increases in real income also make a contribution. Strong increases in the property and share prices area are also assessed, however, to contribute to the high growth figures for consumption. An important issue is whether the current monetary policy regime per se prevents the major imbalances that we saw during the 1980s being built up? During the years monetary policy could not counteract an altogether too high loan-financed increase in demand as the overheating did not seem to threaten the exchange rate target despite the large deficit in the current account and a continued deterioration in competitiveness. In retrospect, it can be noted that too much confidence was placed in the fixed exchange rate policy. It is difficult to conceive that such a high increase in demand and such a high use of resources today would not be considered to threaten the inflation target and thus be counteracted by a more stringent monetary policy. Accordingly, the debt ratio of businesses and households would not either increase in such an unrestricted way as at the end of the 1980s. The banks have also become considerably better at handling risks in their balance sheets at the same time as supervision and monitoring has been improved and adapted to the deregulated financial markets that we now have. Conclusion I have discussed the effects that rising asset prices can have on the real economy. | In the second place, the development of asset prices can lead to financial imbalances accumulating so as to threaten the stability of the financial sector and the Riksbank has a special responsibility here. Asset prices stimulate household consumption and business investment and it is probably here that asset prices are most significant for inflation target policy. Rising share prices, for instance, increase household wealth inter alia and are an indication that the economy is expected to grow strongly. Household consumption decisions are to a great extent based on expected incomes and wealth. At the same time, investment decisions by businesses are based on expectations of increased production. If households and businesses base their consumption and investment decisions on the expectations reflected in asset prices, demand will probably increase more rapidly than the actual growth of the economy. This creates an inflationary pressure in the domestic market. If the international investors also expect that productivity and the return will increase more quickly in Sweden than in the surrounding world, the exchange rate can, however, strengthen and also dampen inflation. Asset prices are also important for the assessment of stability in the financial system. It is important for instance to assess the risk for debt among businesses and households, which can be the result of rising asset prices, creating risks for suspensions of payments and ultimately for bank crises. What characterises a financial imbalance? Rising asset prices can thus contribute to financial imbalances being created in the economy. | 1 |
The Bank has been able to take on these tasks by further developing the governance structure and the organisation. If responsibility for the management of the GPFG remains with the Bank, the existing investment mandate could serve as a basis for the future development of the GPFG. Norges Bank is well equipped to continue to carry out this task. The future organisation of the GPFG should be assessed in conjunction with the future development of the investment strategy. As noted by the Commission, a number of strategic 6/8 BIS central bankers' speeches decisions can be left to the manager while at the same time expanding the investment strategy to include new unlisted asset classes. Prospective developments along these lines could suggest that the management of the GPFG should not be organised within the central bank. In addition to proposing that the management of the GPFG should be placed in a statutory entity separate from the Bank, the Commission also proposes substantial changes to the Bank’s governance structure. These changes include the establishment of a committee for monetary policy and financial stability that would be responsible for the use of instruments in these areas and would be chaired by the Governor of Norges Bank. Moreover, the Commission proposes the establishment of a board of Norges Bank solely comprising external members. The Commission proposes that this board should be responsible for central banking matters that do not fall within the remit of the committee and for operational, budgetary and administrative matters. | The main responsibility for financial stability rests with the Government, while the Ministry of Finance, the Financial Supervisory Authority of Norway and Norges Bank are responsible for the use of the various instruments delegated to them. Norges Bank is among other things lender of last resort and operates the interbank settlement system. The overriding responsibility for macroprudential policy rests with the Ministry of Finance. Norges Bank holds the view that a clearer framework for setting and using macroprudential instruments is needed in Norway. Time-varying macroprudential instruments could to advantage be delegated to an independent authority. Delegating instruments to an independent authority could facilitate implementation and enhance predictability over time. It could also ensure that the decision is taken in the interests of financial stability. Today Norges Bank draws up the decision basis for the countercyclical capital buffer and advises the Ministry of Finance on the level of the buffer. The Commission proposes that decision-making responsibility for the level of the countercyclical capital buffer be delegated to Norges Bank. Norges Bank supports this proposal. The Commission also suggests that it may be appropriate for Norges Bank to assume responsibility for other instruments to mitigate systemic risk in the financial sector. The Commission refers in particular to the residential mortgage lending regulation. This regulation also serves other purposes in addition to the mitigation of systemic risk. | 1 |
But just as a town ravaged by flooding will seek to rebuild in ways that help it withstand the next big storm, so, too, must we think about how to shore up the Treasury market so it can better endure the next big shock. Today, I’m going to touch on the notable market disruptions that have taken place over the past decade. Then, I’ll discuss the imperative of a resilient Treasury market. I’ll close by challenging all of us to come together to prepare for the future. As always, before I continue, I must give the standard Fed disclaimer that the views I express here today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. Look Back to Prepare for the Future A well-functioning U.S. Treasury market is critically important for our economy and, in fact, the entire world. It enables the safe and stable flow of capital and credit to households, businesses, and governments. It serves as a primary benchmark for pricing in other financial markets, both domestic and global. Last, but definitely not least, it’s vitally important for the effective transmission of monetary policy to the broader financial system and to the economy. Thankfully, most days—most years—the Treasury and related markets function incredibly well. But in the past decade, these markets have experienced three abrupt and notable disruptions, each of increasing severity. | 3 Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report, Inter-Agency Working Group for Treasury Market Surveillance, November 8, 2021. 4/4 BIS central bankers' speeches | 1 |
Over the last 15 years, the national agreements have largely entailed wage levels that have been very compatible with low and stable inflation and the positive development of production and employment. The collective bargaining rounds have begun in good time before the expiry of the old agreements. The sector that is exposed to international competition has normally come to an agreement first and has thus set the norm for other parts of the economy. The agreements have usually run over three years. They no longer contain flexibility clauses that lead to wages and prices chasing one another in an upward spiral. At the same time, wage formation within the national frameworks has provided scope for considerable variations between companies and individuals. The number of labour market conflicts has been lower than before. BIS Review 154/2008 3 The fact that wage formation has worked relatively well over the last 15 years has also made it possible for Sweden to maintain, or even increase, its international competitiveness since we stopped pegging the krona to the ecu in November 1992. One difference compared to previous episodes is that, since 1993, unit labour costs in Sweden have increased at the same rate as in Germany. This is an important explanation of the similar development of inflation in the two countries. The nominal exchange rate has been strikingly stable up to the point when the financial crisis worsened in September. | The investments necessary are long-term and the fixes, in many cases, will take multiple years to execute. A number of firms have sound programs in place to address these longstanding issues, but continued strong project management and tenacity are crucial. I see commitment to this basic “blocking and tackling” as essential to financial institutions continuing to be competitive – and relevant – in the digital world. And that’s the third dimension that concerns me: the competitive landscape for financial institutions in the digital world. As more and more non-financial entities are entering the financial arena, I worry that financial firms may lack the agility and ability to compete at the level that they need to – particularly with the added complexities (and likely constraints) of regulation. At the end of the day, will financial firms be able to compete in the same way – or will these largely unregulated players be the future of our financial system? 2. Culture My final topic today is culture – a complex topic that we all know it is an important one. Before I get into this in detail, I want to stress that “culture” is very different from “risk culture.” You can have a strong risk culture within your firm, but still have cultural issues. The culture I am talking about today is broader and deeper. There seems to be a general acceptance that there needs to be changes to the overall culture in the financial services industry, as well as improvements to cultures within individual firms. | 0 |
But the ECB is responsible for withdrawing the € note. We have direct responsibility for this because of course we print the banknote. The ECB’s Governing Council is currently considering very carefully the question of whether or not to withdraw the € note. We hear from the competent authorities that the € note is increasingly being used to finance terrorism and launder money. We take this warning very seriously in the Governing Council. What is your personal view? Personally I think that we now have fewer reasons for keeping the € note than we did when the euro was first introduced, because electronic payments have become much more important. We have been told that the banknote is increasingly being used for criminal activities. That’s why I believe that the € banknote will eventually be withdrawn, but it has to be done carefully. Let me emphasise that this does not mean that we should do away with cash in general. Cash is crucial in our everyday lives. So even if the € note no longer exists, people will still be able to use all of the other banknotes. Given the high importance of cash for the citizens, there is no discussion whatsoever about getting rid of it in general. Greece is under strain from the thousands of refugees who arrive on its shores each day, and it is also going through a severe crisis at the same time. Is the refugee crisis weighing on Greece’s recovery? | Do governments have to do more to protect savers from losses in the value of their assets, for instance by cutting taxes? Our advice to euro area governments is to use the savings gained from the lower cost of debt refinancing in a growth-friendly way to help their citizens. They could, for example, reduce taxes on labour, create more incentives for private investment, or reduce their deficits where required. In many euro area countries the investment climate is too unfavourable. Does the ECB need to become even more expansionary in order to prevent deflation? This depends a lot on global developments. If necessary, we stand ready to use all of the instruments at our disposal. That includes the key interest rates and the size, composition and duration of our securities purchases. We will take a decision on this in March. How will the ECB ever manage to move away again from its expansionary monetary policy? Technically speaking, it’s not hard to do. The US central bank is currently demonstrating how it’s done. What is more important is that our environment – and by that I mean government policies – should support us sufficiently in generating more growth. If this does not happen, we will have to keep rates low for a very long time. So it’s not just up to us whether the low interest rate phase can be brought to an end, it also depends on the pace of reform in euro area countries. | 1 |
In fact, it cannot be ruled out that banks will step up the growth of the most profitable portfolios, which are precisely those the authorities are trying to moderate, to the detriment of the rest, in order to safeguard aggregate profitability. To achieve the objective of exclusively moderating the growth of the exhuberant portfolios, it would be necessary to act on the relative costs of financing, making these more expensive in relative terms, through the activation of a countercyclical capital buffer to be applied exclusively on those credit segments. However, the coexistence between both tools can be complex, especially if a 8/11 transition from one or several sectorial buffers to the total buffer must be made. Accordingly, its use should be confined to very specific circumstances. Another example is the use of capital instruments vs borrower-based tools. From my perspective, making all prudential supervision rely upon the amount of capital that entities need is too reductionist: the experience accumulated during the last financial crisis clearly shows how credit underwriting standards are a crucial element for the stability of the banking system. And this same evidence4 also shows that the analysis of credit standards must be multidimensional. Therefore, it is not enough to supervise and control a specific characteristic of the loan; rather, a comprehensive approach must be adopted in which the different dimensions are addressed. This would also prevent entities from eluding restrictions by adjusting some other dimension of the loan. | Let me now conclude by stressing that, in this context in which a homogenous framework and experience in the use of macroprudential tools is lacking, having 5 For international attempts to follow a cross-sectoral approach on residential mortgage underwriting see, however, the FSB Principles for Sound Residential Mortgage Underwriting Practices (April 2012), the FSB Thematic Review of Mortgage Underwriting and Origination Practices (March 2011) and the Joint Forum Review of the Differentiated Nature and Scope of Financial Regulation – Chapter 3 on Mortgage Origination – (January 2010). 10/11 adequate communication is crucial. From my point of view, this is a critical element of the whole process. Even before that, macroprudential policy-makers must be very careful to prevent the identification of risks from becoming a selffulfilling prophecy. And when deciding to activate any tool, it is necessary to convince stakeholders with arguments and evidence that, even if there are apparent short-term costs, the medium and long-term benefits are clearly greater. Obviously, this implies an in-depth ex-ante impact assessment analysis including all the different options and a general equilibrium approach, and also an ex-post impact assessment analysis to test the efficiency of the selected tools. And now, let me give the floor to our first keynote speaker, Agustín Carstens, who we all know so well. Dr. Carstens is currently General Manager of the BIS, but in the past he was governor of the Bank of Mexico, vice minister of finance also in Mexico and vice president of the IMF. | 1 |
Out of this intellectual vacuum, a new framework for regulation has been born – macroprudential regulation. This explicitly recognises the links that might tie together individual nodes in the financial system. These might arise from correlated asset exposures, the type of which has historically emerged during the upswings and downswings of the credit cycle (Aikman et al (2015)). Or they might emerge from financial exposures, on- or off-balance sheet, between intermediaries operating in the global financial web (Haldane and May (2011), Arinaminpathy, Kapadia and May (2012)). Over the past decade, a lot has been written in the area of macroprudential policy (Galati and Moessner (2013), Aikman et al (2013), Freixas et al (2015)). A sizeable number of countries are now undertaking macroprudential policy in some shape or form. Table 5 in the Annex provides a rough summary of current international macroprudential practices (for a more comprehensive overview, see Cerutti et al (2017)). By any historical metric, however, macroprudential policy remains a fledgling framework. Understandably, many of its key facets remain contentious. And the macroprudential policies put in place internationally so far are more notable for their differences than their similarities. This is providing a diverse body of case law. We discuss two key aspects of this framework: its appropriate objectives; and the choice of instruments. Objectives of Macroprudential Policy The Bank of England entered the debate on the potential role of macroprudential policy in a discussion paper published in 2009 (Bank of England (2009)). | Our coverage is comprehensive – banks, merchant banks, finance companies, insurance companies, capital market services licensees, licensed trust companies, financial advisers, insurance brokers, exempt fund managers, moneychangers, and remittance houses. Financial intermediaries are held to rigorous client due diligence requirements. They are required to verify the bona fides of their customers and assess their risk profiles. Where particular customers, business relationships, or transactions present a higher risk of money laundering or terrorism financing, enhanced customer due diligence is required. Singapore’s AML/CFT regime was evaluated three years ago by the Financial Action Task Force or FATF, the global standard setter for AML/CFT. FATF assessed that Singapore operates a strict and rigorous AML/CFT regime, centred on a comprehensive and sound legal, institutional, policy, and supervisory framework. Can we do more? Let me cite three areas. First, MAS is considering a tougher penalty regime for violations of AML/CFT. In a recent announcement, the Attorney General has stated that Singapore will seek tougher penalties for white-collar criminals. MAS is in full alignment with this. We will ensure that financial crime 4 BIS central bankers’ speeches does not pay in Singapore and that those who jeopardise Singapore’s hard-earned reputation as a financial centre of integrity face severe consequences. Second, Singapore intends to make criminal the laundering of proceeds from tax offences. This is a pre-emptive move. In February next year, FATF is expected to take a decision on this matter. | 0 |
A growth-consistent fiscal strategy entails making binding commitments now that will deliver medium-term fiscal savings rather than achieve immediate deficit reduction. Tax and pension reforms are good examples. 23. Composition matters even more. Consolidation should focus on broadening tax bases and cutting non-productive entitlement spending. Programmes that underpin future growth – for example, infrastructure, education, and worker retraining – should not be cut sharply. It is not just the macroeconomics of fiscal policy that matters but the microeconomics as well. Unwinding unconventional monetary policies 24. The unprecedented crisis of 2008/2009 evoked an unprecedented response from fiscal and monetary policy-makers around the world. This decisive response helped avert a global depression. But five years after the emergency resuscitation measures, monetary policy settings in the advanced economies are still in “crisis mode”. Interest rates are close to zero and central bank balance sheets have seen a relentless expansion. BIS central bankers’ speeches 3 25. Nearly every major central bank in the advanced world is buying non-traditional assets to resurrect its domestic economy. • The US Fed is buying mortgage-backed securities. Its balance sheet has more than tripled to $ trillion, or 19% of GDP. • The ECB has made long-tenured loans to banks through its LTRO programme and is prepared to buy sovereign bonds through its OMT programme. The Eurosystem’s balance sheet has more than doubled to € trillion, or 31% of GDP. • The Bank of Japan is buying government bonds, but has also purchased corporate bonds and real estate investment funds. | Ravi Menon: The global economy – securing a return to normalcy Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Citibank 10th Annual Asia-Pacific Investor Conference, Singapore, 30 January 2013. * * * Mr Stephen Bird, Asia Pacific CEO, Citigroup, distinguished guests, ladies and gentlemen, good morning. The long shadow of the financial crisis 1. The global economy is stuck in a hesitant and uneven recovery. In a way, we should not be surprised. The seminal work by Carmen Reinhart and Kenneth Rogoff suggests that exits from severe financial crisis take at least a decade. By this metric, we have already passed the mid-way point of the healing process. But the experience of countries emerging from the long shadow of the 2008/2009 financial crisis has been different. US: steady deleveraging plagued by fiscal uncertainty 2. The US economy has already exceeded its pre-crisis peak. This is encouraging, considering that the recent recession was the deepest the country had experienced since the Great Depression. • Fiscal and monetary stimuli have been decisive, putting the US on a stronger recovery compared with Europe. • Private sector deleveraging has proceeded steadily. Household debt has come down to 113% of disposable incomes in Q3 2012, from 134% in Q3 2007. • The biggest drag on the economy – the housing market – is turning around. House prices have been rising steadily since February 2012 and new houses are being built at a healthy pace. 3. | 1 |
12 10 11 Source: Reuters EcoWin BIS Review 56/2010 Unit labour costs compared to the euro area Percentage points 35 35 Portugal Ireland Italy Greece Spain Germany 30 25 20 15 30 25 20 15 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 -20 -20 00 02 04 06 08 10 Note. Broken line represents OECD’s forecast Source: OECD Current account deficits Percentage of GDP 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 Portugal -8 -10 Ireland -10 -12 Italy -12 Greece -14 -14 Spain -16 -16 90 92 94 96 98 Note. | But the crisis has left an important legacy: • Money and financial markets remain excessively segmented. The monetary transmission mechanism is severely impaired and credit conditions are still very different across countries and sectors. • Deleveraging in the banking sector still acts as an impediment to recovery and growth. Bank credit remains flat in the euro area as a whole, and SMEs’ financing is a major concern, especially in stressed countries, where the percentage of financially constrained but viable borrowers is estimated at 25% vs 1% in “core” countries. We are very aware that balance sheet repair is a prerequisite for credit to resume and for monetary policy to be efficient. So, we are addressing the problem as a priority. 1. We are building a safer and more robust system of financial intermediation. A major step has been the creation of a banking union that, as you all know, will delink bank and sovereign risks and ensure a harmonised and tough financial supervision. It is easy to underestimate this achievement. The idea was adopted less than two years ago. The Single Supervisory Mechanism is now up and running. There is no example in contemporary European history when so much has been achieved in so little time. 2. We have launched a tough and comprehensive AQR and subsequent stress tests that should be completed by the end of this year. | 0 |
Without finance, terrorism cannot progress. So, steps taken by countries to ensure that the funding lines to terrorism and money laundering are cut off, that terror financing transactions are interrupted or stopped, and that there is worldwide co-operation to track down persons who are suspected of being involved in terror financing in whatever way, is of vital importance. Just take a small example. If at the end of the month, you do not receive your salary, you will find it difficult to comfortably progress with your next month’s activities. In the same way, if we can stop the funds going to terrorist activities, that will put a dampener on their activities. It is very simple to understand. Therefore, not only should we deal with terrorists on a military basis, but we should disrupt their progress by cutting off and interrupting their funding lines. By doing so, we complicate their agenda. In order to do so, and to continue to do so, we have to equip ourselves. The judiciary, the law enforcement agencies, the regulators, the media, the bankers, the prosecutors, all of these groups, have to equip themselves with whatever it takes, to meet with this challenge. We have to learn from each other. We have already learnt many lessons during our own activities in this field. But, it is important that we share such knowledge and experience with others as well. | We are also particularly pleased to have with us, His Lordship the Chief Justice who has graced this occasion and by doing so has unambiguously displayed the commitment of Sri Lanka’s judiciary to this massive effort. Our effort against money laundering and terrorist financing cannot be made by one or two persons only, or by one or two agencies only. It has to be a co-ordinated and concentrated effort that needs the support of a wide range of people, both nationally and internationally. In that context, Sri Lanka’s commitment is clear to everyone, and we are particularly pleased to have you with us, the Honourable Chief Justice. My dear friends, the fight against terrorism cannot only be on the military field or battle ground. In my view, the fight has to be on four different fronts simultaneously. Although it is vitally important, one cannot defeat terrorism by a military effort only. To successfully deal with terrorism, we need a diplomatic offensive also. Diplomatically, we need to ensure that cohesive steps are taken so that, together, countries can meet this challenge. At the same time, the fight has to be on the international media front as well. Therefore, a media campaign in all parts of the world against terrorism is also very important. That is something that the world has clearly recognized today, and internationally, we see a greater coordination in the media in dealing with terrorism. The other important front in this war against terror is the stopping of financing for terrorism. | 1 |
Suhaimi Ali: Future-proofing talent for a dynamic and resilient workforce Opening remarks by Mr Suhaimi Ali, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the MyDigital and Tech Roundtable Kuala Lumpur, 17 January 2023. *** Introduction Distinguished guests, ladies and gentlemen. A very good morning and thank you to the organisers of this MyDigital and Tech Roundtable for inviting me to deliver the opening remarks We are here today to discuss issues and ideas to spur digital-ready talent and futureproof the workforce for Malaysia. I believe this conversation is timely. As leaders in our fields, I'm sure all of us agree that staying relevant amid a shifting and competitive landscape is a top challenge for today's employees and employers. The pandemic exposed deep-rooted labour market fragilities and structural inequalities. In Malaysia, as in other countries, vulnerable segments such as low-income workers, the youth, women, ethnic minorities, informal and fixed-term workers were among the hardest hit by the crisis. Some are still finding their footing. More importantly, we are facing several structural shifts that continue to reconfigure our economy, with resulting implications on the future of work. Among the key ones that may resonate with us here today are: First, the digital and sustainability revolution. Increased adoption of technologies such as AI and IoT, coupled with rising urgency on the sustainability agenda will reshape industries. This will demand new skillsets and unlock opportunities, but also create challenges for businesses and employees. Second, shifting work preferences. | 8 Beyer, R. and Smets, F. (2015), “Labour market adjustments and migration in Europe and the United States: how different?”, Economic Policy, Vol. 30, Issue 84. 9 Dolls, M., Fuest, C., Kock, J., Peichl, A., Wehrhöfer, N. and Wittneben, C. (2015), “Automatic Stabilizers in the Eurozone: Analysis of their Effectiveness at the Member State and Euro Area Level and in International Comparison”, Centre for European Economic Research, Mannheim. 10 Beyer, R. and Smets, F. (2015), op. cit. 11 For a review of the development of this literature see Mongelli, F. (2002), “New views on optimum currency area theory: what is EMU telling us?”, ECB Working Paper No. 138. 12 For a fuller explanation of financial risk-sharing within monetary unions, see ECB (2016), “Special Feature A: Financial integration and risk sharing in a monetary union”, Financial Integration in Europe, May. 13 Asdrubali et al. find that financial risk-sharing in the United States increased monotonically each decade from the 1960s to the 1990s. See Asdrubali, P., Sorensen, B. and Yosha, O., “Channels of Interstate Risk Sharing: United States 1963–1990”, The Quarterly Journal of Economics, Vol. 111, Issue 4, 1 November 1996. 14 See Hane, G. (1998), “The Banking Crises of the 1980s and Early 1990s: Summary and Implications”, in FDIC Banking Review, Vol. 11, No 1. 15 ECB calculations based on FDIC data. The term “institution” refers to a separately chartered commercial bank or savings institution. | 0 |
Here I would like to remind you that the Banco de España has opened a public consultation process on the amendment of Circular 2/2016 on supervision and solvency this very week. The aim is to develop certain aspects of the macroprudential toolkit that legislation has made 1/2 BIS central bankers' speeches available to the Banco de España. Pursuant to this legislation, the Banco de España may set limits and conditions on lending standards and other financial institution transactions, along with sectoral concentration limits. The new Circular defines the procedures for activating, deactivating and changing these measures, including the variables and parameters that the Banco de España may take into consideration to adopt a decision, the sectors that may be affected and the contractual terms or ratios that the measures may apply to. I would like to conclude by thanking the General Council of Economists for this initiative geared to young people, a group that the Banco de España considers a strategic priority in the context of the Financial Education Plan. It is a further example of how the Financial Education Plan partners, in this case the General Council of Economists, play an essential role in meeting the Plan’s objectives. We have continued to move resolutely in this direction: through partnership agreements such as those recently signed with the Ministry of Education and Vocational Training and the Ministry of Consumer Affairs; and by pressing ahead with the work avenues opened with the Ministry of Economic Affairs and Digital Transformation. | Can you explain the ECB’s assessment of how inflation is developing? Looking at incoming data, I would say that data are more or less in line with our expectations. But this has to be seen in a context where we had repeatedly overestimated future inflation rates. In the last years, we have repeatedly lengthened the horizon over which we would get back close to 2 percent. Mechanically updated projections suggest that the risk is present that we may again have to extend this horizon. And even if it’s slightly, it’s a repetition of a past pattern. And then you go into the question of credibility of monetary policy. BIS central bankers’ speeches 1 If you observe for example, that the price people are ready to pay for protection against inflation is zero, or very low, that’s not necessarily a good signal, as it suggests that they are not convinced there’ll be inflation. And that could be related to scepticism about the ability of the central bank to influence inflation even five years ahead – which would be quite serious. You cannot just reject that. Markets might be signalling that there could be some second round effects related to the fall in oil prices. Inflation expectations would then be hit at some point. Finally they could also reflect a very pessimistic view on the future, and that’s the more secular stagnation scenario where the falls of oil prices would be more the reflection of deep structural problems in the global economy. | 0 |
This means there is a fiscal honeymoon in the first year of higher prices that creates the illusion for policymakers that there is additional room in the budget to spend. It is only during the next year or two as costs adjust and indexation mechanisms start to work that the painful reckoning comes due. Caution is therefore needed when any additional fiscal support measures are designed. Ongoing research at Eesti Pank has attempted to estimate the extent to which an unexpected rise in inflation would affect fiscal balances in the euro area using data from the mid-1990s to 2021, and has found that inflation has a sizeable positive effect on the fiscal balance as a percentage of GDP7. The positive effect comes both from the expenditure side of the budget and from the revenue side. This is particularly true when there is a significant positive inflation surprise, meaning when actual inflation turns out to be higher than expected. Governments in Europe increased their spending in 2022 so they could fund energy subsidies, invest in their defence forces and provide the help needed by Ukraine. Despite this extra spending though, the fiscal picture has remained relatively benign in most countries and in the euro area overall. This also applies to Estonia, where preliminary data suggest that the fiscal deficit for 2022 will be around 1.2 per cent of GDP. This benign outcome can in large part be ascribed to the high inflation that we saw last year. | 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 But such big transitions take time. Workers generally cannot move seamlessly to new jobs in which they can be productive. The benefits of the First Industrial Revolution, which began in the latter half of the 18 th th 7 century, were not felt fully in productivity and wages until the second half of the 19 . th Indeed, at the start of the 19 century in the UK, despite a sharp pickup in productivity, wage growth stalled and the labour share fell – a period dubbed “Engels’ pause”. A Framework for Examining Technical Change and the Labour Market 8 To understand such dynamics it helps to have a common conceptual framework. The impact of technological change on employment and wages can be depicted as the sum of three major effects: destruction, productivity and creation. The destruction effect is the focus of most alarmist accounts: the replacement of labour by technology, with an associated reduction in labour demand, wages and employment. Less commonly acknowledged are the positive effects on aggregate demand of new technologies, what can be termed the productivity effect. This effect is analogous to the classic Say’s law in which supply creates its own demand. Technology makes those in work more productive, in time boosting wages and increasing the returns to those who own capital. This greater income boosts aggregate demand and leans against the destruction effect. | 0 |
9 All speeches are available online at www.bankofengland.co.uk/speeches 9 This growing understanding will be crucial if we are to be able to identify and manage risks from this sector as it grows in size and spreads geographically. Greater understanding between national macroprudential authorities and their market regulator counterparts is important. But given the international nature of these markets, and indeed the benefits they can have in diversifying risks across borders, it is increasingly only at the international level that we can really get our arms around the risks and how to mitigate them. Fragmentation This brings me to my final set of risks – the potential risks not from market-based finance but to market-based finance that could arise from fragmentation and a rolling back and national ring-fencing of the global integration that has taken place in these market. Post-crisis, not only was market-based finance important for plugging the gap that banks were leaving, it also proved important for maintaining the flow of financing between countries. Cross-border bank lending fell sharply in 2009 as banks not only stopped lending but actively retrenched. International investment in debt and equity securities was substantially more stable (Chart 4). 19 My concern is of course heavily coloured by Brexit and by the prospect that it raises of fragmentation in European financial services. | 12 All speeches are available online at www.bankofengland.co.uk/speeches 12 Chart 1: Growth of market-based finance Chart 2: Growth in open-ended fund assets worldwide and flows USD trillion 200 180 Total net assets Flow Residual (valuation) $ trillions 22 20 18 16 14 12 10 8 6 4 2 0 160 140 120 100 80 60 40 20 Equity Bond 2008 2009 2010 2011 2012 2013 2014 2015 US Euro-Area China UK 1.00 Q4 2008 Others Q2 17 Q4 2008 9.00 Q2 17 Source: FSB Global Shadow Banking Monitoring Report 2016 dataset Notes: Data are for 21 participating jurisdictions and the Euro Area, Data include insurance corporations, pension funds, other financial intermediaries and financial auxiliaries. Source: Bank of England Financial Stability Report, Nov-17 Notes: Adjusted for a break in the series due to expanded coverage in 2014 Q4 on best-endeavours basis. Including money market funds but excluding funds of funds where possible. In 2008 Q4, bond and equity funds accounted for half of all openended funds; in 2017 Q2 it was two thirds. Chart 3: Impact of a 10 basis point increase in yields on sell volume Chart 4: Gross capital inflows to advanced economies by instrument % change in sell volume Procyclical Rest of sample Taper tantrum Countercyclical Dealer banks Non-dealer Insurance banks and Companies sec. | 1 |
We risk either being blown onto the Scylla of excessive domestic exuberance or sucked down by the Charybdis of external weakness. But we remain on watch, ready to tack as conditions change. My Lord Mayor, yours is a great office with a great tradition. You – and the Lady Mayoress – have maintained that tradition this evening by entertaining us in such splendid style. And you have maintained that tradition, too, in your tireless promotion of the City of London – in its civic affairs, in its business activity, and in its engagement with our surrounding communities. In this last connection I look forward to joining with you and Howard Davies next Wednesday at the Heart of the City Carnival to celebrate, and encourage, the City's community and charitable involvement; and I hope that some of your guests this evening might care to join us at the Guildhall for that occasion. But in the meantime I thank you for your gracious hospitality and I would ask all your guests to rise and to join me in a toast to your good health. My Lords, Ladies and Gentlemen, the Toast is "The Lord Mayor and the Lady Mayoress, David and Val Howard". BIS Review 56/2001 3 | I recall that not too long ago (about 18 months or so) Stanbic Bank took the very bold step of entering the community banking sector by adding Matero Branch to the bank’s network and thereby brought superior banking services to the bottom end of the market. This was later followed by the opening of the Solwezi Branch, in what is now regarded as the new Copperbelt. Ladies and Gentlemen, what has particularly caught my attention is that Stanbic Bank expansion has gone in tandem with the introduction of ATM services to these markets via the ‘state-of-the-art’ Stanbic Auto Bank to improve service delivery to our people. This is commendable. Mr. Chairman, Ladies and Gentlemen, one of the major concerns that the Financial Sector Development Plan, and the Bank of Zambia in particular, have identified is the spectre of the unbanked public that hangs over the Zambian economy. The problem with having a greater number of our population being left out of the banking system is that it discourages the culture of saving and removes the un-banked population from the formal structure of the financial system. This ultimately leads to reduced funds being available in the economy for investment purposes. Mr Chairman Sir, The opening of Mazabuka Stanbic branch is therefore particularly significant because it will not only address the problem of catering for the un-banked population, but also tap the tremendous business growth potential that this town offers. | 0 |
Andrew G Haldane: The debt hangover Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at a Professional Dinner, Liverpool, 27 January 2010. * * * I am grateful to Marnoch Aston, Simon Brennan, John Carmichael, Geoff Coppins, Sebastiano Daros, Richard Davies, John Elliott, Simon Hall, Salina Ladha, Jack McKeown, Laura Piscitelli and Nick Vause for comments and contributions. Economists have not covered themselves in glory recently when it comes to forecasting. Tonight I want to put that right by making a prediction that is big, bold and frighteningly precise. Liverpool Football Club will finish this season third in the league. Manchester United will top the table followed by Arsenal. Having been top for most of last year, Chelsea will finish the season near the foot of the table. Newcastle United, meanwhile, will finish fourth. I know what you are thinking. Even by economists’ standards, some of those predictions sound implausible. Liverpool third? So let me explain. The season I have in mind is not the English football season; it is the financial reporting season. And the table to which I refer is not the Premiership points table; it is the league table of English football club debt 1. Rarely has securing a slot in the top four held less allure. Debt is the subject of my talk tonight. We are living through an extraordinary period for the economic and financial system. | If contingent capital became more widespread, banks’ capital ratios would be automatically stabilised over the cycle, lowering the chances of future banking crises. As several academics have argued, the same basic principles could be applied to the debt contracts issued by households, companies and even sovereigns. Take a typical mortgage contract. A rise in the value of a property relative to the loan gives the borrower equity against which they can borrow. This provides an incentive to trade-up, raising house prices and generating further equity. This amplifier operates symmetrically, as falling collateral values reduce refinancing options and drive down prices. Economists call this effect the financial accelerator. 18 It adds to cyclicality in credit provision and asset prices. US economist Robert Shiller has suggested it might be possible to devise mortgage contracts that slow, or even reverse, this financial accelerator 19. Instead of being fixed in money terms, imagine a mortgage whose value rose with house prices. So the repayment burden would rise automatically with asset prices to slow a credit boom and fall in a recession to reduce the chances of mortgage default. Mortgages would operate like a contractually pre-committed debt-equity swap between households and banks. They would automatically stabilise household loan-to-value ratios. By reducing the amplitude of the credit cycle, they ought to benefit both borrower and lender. Governments cannot issue equity. But this does not prevent them issuing debt with equitylike characteristics. | 1 |
3 Article 7(4) of the Law of Autonomy of the Banco de España, in keeping with Article 130 of the Treaty on the Functioning of the EU, which states: “When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks." 4 In practice, the personal independence of the institution’s senior officials is sought through the arrangements in respect of appointment, exercise of mandate and stand-down from the post set in place, as a general rule, beforehand. | The corporate debt market has quadrupled since end-1996 with $ 103 billion of corporate debt securities outstanding as at end-2003. Debt issuance has increased substantially from only $ 5.4 billion at end-1996 to $ 67 billion in 2003, a compounded annual growth of 43%. The profile of debt issuers has also changed. Statutory boards used to dominate, but now form only 3% of total issuance. Instead, the debt market has a stable base of large corporates and financial institutions issuing bonds well over $ 1 billion in issue size. This has increased liquidity in the secondary market. Large international issuers such as IFC, Freddie Mac, Fannie Mae and ADB, which can tap any market in the world, have chosen to raise funds in Singapore. Treasury markets have also stayed buoyant, as Singapore remains one of the established leading global FX trading centres. The creation and hedging of structured products have boosted turnover in derivative markets. Singapore now ranks 6th globally, in OTC FX and interest rate derivatives. Reforms were also introduced to deregulate the stockbroking industry. The industry has consolidated, operating more leanly on much lower commissions. The bigger local players have expanded their product range and also expanded overseas. More foreign players have entered the market. Overall, investors have benefited from lower trading costs. SGX became the first demutualised, integrated stock and derivatives exchange in the Asia-Pacific in December 1999. It is now well placed to grow its business, and respond to developments in regional capital markets. | 0 |
The first signs of the effects of the interest rate cuts appeared in the foreign exchange market. The interest rate differential against other countries narrowed. It became more attractive to borrow and less profitable to invest in the Norwegian krone. The movement in the krone exchange rate was reversed and it depreciated through 2003 and into 2004. However, the impact on the krone exchange rate has been considerably dampened because external interest rates have remained low. High prices for oil and gas and other export goods also contributed to an appreciation of the krone last year. The depreciation of the krone in 2003 contributed to restraining the fall in prices for imported goods. The effect occurred gradually. Companies and importers may have preferred to observe changes in the exchange rate over time before changing their selling prices. After several expensive wage settlements and a short period of a strong krone had weakened profitability in the Norwegian business sector, the depreciation of the krone contributed to curbing the decline in activity and employment. There is nevertheless uncertainty as to the magnitude of the impact of short-term exchange rate fluctuations because companies engage in currency hedging. There are different ways to hedge against currency fluctuations. Some enterprises buy intermediate goods in the same currency in which they sell their products. Other companies raise a loan in the same currency as that of the company’s assets. In addition, companies can hedge against currency swings in the forward exchange market and options market. | firms Hedge Funds 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14 Asset Managers Source: Czech and Roberts-Sklar (2017) Notes: Based on Zen database maintained by the Financial Conduct Authority (FCA) which includes transaction-level information on trading in sterling corporate bonds for all firms regulated in the UK, or branches of UK firms regulated in the EEA. Dataset covers the period between 1 September 2011 and 31 December 2016. Hashed/dashed bars indicate no statistically significant coefficient. Source: Hoggarth et. al. (2016) Notes: Quarterly gross capital inflows are divided by annual GDP and averaged over four quarters. 13 All speeches are available online at www.bankofengland.co.uk/speeches 13 References Adrian, Tobias (2017) ’Shadow Banking and Market Based Finance’ speech given in Helsinki Allard, J and Blavy, R (2011) ‘Market Phoenixes and Banking Ducks: are recoveries faster in market-based financial systems?’ IMF working paper Bank of England (2014) ‘Procyclicality and structural trends in investment allocation by insurance companies and pension funds’ discussion paper by the Bank of England and the Procyclicality working group Baranova, Y, Coen, J, Lowe, P, Noss, J and Silvestri, L (2017) ‘Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds’ Bank of England Financial Stability Paper No. | 0 |
Looking beyond short‐term volatility, the real question is whether this architecture will be conducive to the efficient and stable allocation of capital over the long run; or whether, on the contrary, it will lead to an accumulation of imbalances and recurrent bouts of instability. An optimistic view can be found in the “Bretton Woods II” theory, which posits that the pattern of international capital flows results from a mutually beneficial equilibrium between two groups of countries. On the one hand, emerging economies follow an export‐led BIS Review 127/2010 1 development strategy and seek to prevent appreciation of their real exchange rates by constant foreign exchange intervention (together with capital controls). As a consequence, they accept to accumulate increasing stocks of liquid assets denominated in dollars. On the other hand, the United States is happy to receive both reserve inflows to finance its deficits and cheap imports to fuel their demand for consumption goods. Such equilibrium is stable by virtue of the mutual benefits it brings to both groups. Moreover, the longer it lasts, the more impossible it is to change since both groups become mutually dependant through the stock of claims and debts they have reciprocally accumulated. This “financial balance of terror” is supposed to keep the system in place for a long period of time. A more recent, and pessimistic, explanation is provided by the “asset shortage” theory according to which the world has a shortage of liquid and riskless assets. | It is notable that countries, such as Korea, which had very significant amounts of reserves prior to the crisis and a flexible exchange rate regime, nevertheless felt the need to enter into currency swaps with the Federal Reserve. During the crisis, foreign exchange reserves were used as a tool for internal – as well as external – financial stability. National central banks, especially in Latin America, acted as dollar lenders of last resort to their domestic banks. This function will develop in the future and is bound to impact the demand for reserves. Financial openness and integration means that domestic banks will engage increasingly in foreign currency operations. In turn, the expansion of international balance sheets will increase the potential demand for liquidity support in the event of shocks. This trend should be accepted as a normal consequence of open capital markets and international banking, together with the predominance of a very limited number of currencies in international finance. One general lesson can be drawn from that experience. In the current environment, there is an inescapable trade‐off between financial openness, on the one hand, and the need for protection against external financial volatility, on the other. An essential question for the future is whether we can improve this trade‐off and avoid the costs and distortions associated with growing amounts of foreign exchange reserves and/or further restrictions on international capital mobility. International financial stability: what should be done? Looking at the next decade, a number of different developments in the international financial system are possible. | 1 |
Others used price-based measures, such as swing pricing and redemption fees, to ensure trading costs were borne by redeeming investors. [19] However, if applied systematically in a stress scenario, such measures could even further limit the ability of firms and other financial institutions to raise liquidity. For instance, if MMFs had broadly suspended redemptions, some insurance corporations and pension funds may have found themselves unable to meet margin calls on their derivative exposures. Widespread suspensions may also have had adverse effects on the confidence in the wider financial sector, possibly amplifying risk-off behaviour. The role of monetary policy in stabilising financial markets Forceful monetary policy action, on both sides of the Atlantic, ultimately filled the void that was left by asset managers and regulators having limited liquidity management tools to curb systemic stress. The fast rise of the non-bank sector, however, meant that traditional monetary policy tools, such as increasing the money supply to banks and accepting broader collateral, were not sufficient. A frozen money market impaired the intermediation of liquidity from banks to non-banks. [20] In such disrupted conditions, central banks face two broad options. They either provide liquidity directly to non-banks – that is, they expand their role as lender of last resort – or they purchase large quantities of illiquid assets. A priori, there are no fundamental reasons to dismiss either of the two options. | Senior Management The Federal Reserve published a proposal on corporate governance that states that senior management is responsible for the execution of strategy and day-to-day operations consistent with the firm’s stated risk appetite, ensuring safety and soundness, overseeing business lines and risk management, and ensuring compliance with internal policy, procedures, regulations and laws.8 Development of a firm’s cultural capital links directly to these core responsibilities and is evidenced by behavior throughout the firm. To address these concerns and build cultural capital, some firms have established culture and conduct committees or groups that meet regularly to review cultural indicators and assessment efforts. Providing these groups with sufficient stature, developing the proper infrastructure to support them, and defining clear roles and responsibilities are essential for success. It is critical that there is alignment between the board, senior management, and middle and lower management on issues of conduct and culture, as employees take cues from their direct managers even more than the tone from the top. The performance management framework established by senior management sets powerful incentives to influence conduct and culture within a firm.9 Financial incentives, however, are not the only drivers of culture and conduct. Employees alter their behavior based on a variety of formal and informal, intrinsic and extrinsic motivations. Intrinsic motivations could include growth opportunities, independence, power, and social factors, while extrinsic motivations could include pay, benefits, profit sharing, or other forms of awards. | 0 |
3/7 But there is more to Basel III than this: there has been a move from a framework turning on a single metric, the risk-based capital ratio, to another comprising a set of requirements that should interact in a complementary fashion. As a result, a leverage ratio has been introduced which not only limits indebtedness, but also constitutes a non-risk-based capital requirement; two liquidity ratios have been incorporated (one short-term, and another that seeks to ensure a more stable funding structure); limits on large exposures have been set in place; and, finally, macroprudential capital surcharges have been included to prevent and mitigate both the risks derived from globally systemic institutions and those associated with excessive credit growth at the aggregate level. Risk sensitivity, complexity and comparability Given all these changes and regulatory innovations, was there anything left to do? The answer is yes, since following the onset of the global financial crisis in 2008, the soundness of the Basel framework was called into question, as was – more specifically – its risk measurement methodology. Almost 30 years ago, in 1988, the Basel regulations introduced the concept of risk sensitivity, assigning greater capital consumption to those exposures deemed to be of most risk. Under Basel I, this risk measurement was very simple, such that very few asset categories (those considered to be of least risk) had weightings lower than 100%. | For example, physical risks could negatively affect consumption demand if there is an adverse climate event, while the transition could positively induce investment in climate adaptation technologies, thereby affecting aggregate supply. The NGFS is seeking to better understand how climate change can potentially affect the transmission of monetary policy. Climate change could put pressure on banks' balance sheets due to higher credit risk or an abrupt repricing of assets, and ultimately constrain central banks' ability to influence credit conditions in the economy. We need to assess how climate change may affect the neutral rate of interest. A decline in productive capacity could pull the neutral rate down, while large investment outlays for greening the economy could push rates up. The influence of monetary policy on inflation expectations may also weaken, as physical and transition risks intensify and raise underlying price pressures. The climate scenarios developed by the NGFS has allowed more robust assessments of financial stability. Given uncertainty around the severity and frequency of climate-related shocks, we need to augment traditional analysis with climate scenarios. More than 30 central banks have used or referenced the NGFS climate scenarios. The IMF has also begun to use them to assess the impact of climate change on banking sector stability risks under the Financial Sector Assessment Programme. 2/5 BIS - Central bankers' speeches The NGFS aims to make three enhancements in the next iteration of its climate scenarios. | 0 |
Next, I will describe the latest economic and financial events, projections and risks surrounding our economy, and the way in which inflation will converge to 3% over a two-year horizon. 2 BIS Review 9/2010 Macroeconomic scenario As I pointed out before, the international economy has stabilized. The change in financial conditions has reduced risk premia, recovered key financial prices and restored investment flows towards emerging economies. Risk indicators are back to the levels they were before August 2007 (figure 4). The external borrowing conditions for Chile have also improved. Premia charged to Chilean banks above external reference rates have dropped (figure 5). The dispersion of these premia is greater than before the crisis, which reveals more discrimination by the suppliers of credit and gives the right signals to potential borrowers by rewarding those with a stronger financial position. New external counterparties have also been observed in these operations. Other constraints remain, however, such as shorter terms for the loans. Finally, some Chilean firms have placed their bonds in international markets after shunning these opportunities given the tight conditions by late 2008. Global economic activity has taken a path to recovery that is, generally, in line with projections in September’s Monetary Policy Report. Third-quarter output data show an upward trend, even exceeding expectations, while Consensus forecasts for global growth show a slightly stronger recovery than foreseen earlier, 4% on average for 2010–2011. However, the Board estimates that the risks of a weaker economy are still latent (figure 6). | 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches BIS central bankers’ speeches 13 14 BIS central bankers’ speeches BIS central bankers’ speeches 15 | 0 |
Our resolve on this agenda has not changed since the crisis. On the contrary, it has served to sharpen our focus in contemplating measures to place our financial systems on a firmer foundation. This crisis has focused attention on some important issues that calls for wide ranging regulatory responses. The degree of consensus on the spectrum of recommended reforms by the international community has however been mixed. Nevertheless, on some areas there has been a clear consensus. There is agreement that the regulatory framework needs to be more responsive to risk. Equally, there is agreement on the need to materially improve risk management in financial institutions, and to strengthen the role of supervisors in the oversight of financial institutions. The need to enhance safety nets, in particular, in the liquidity support arrangements and deposit insurance, has also been widely acknowledged, as is the need for greater disclosure and transparency, particularly on off-balance sheet exposures. These have also been the areas of focus of most of the authorities in emerging Asia as we set to modernise our financial systems post the Asian financial crisis. In other areas, there has been substantial debate by the international community. The first concerns the degree of balance of regulation. This crisis has shown that market discipline needs to be complemented by regulation. The question however has centred on how far the pendulum should swing towards greater regulation. Should regulatory constraints be imposed on size, leverage and activities of financial institutions? | Before I explore issues like inflation in any greater depth, I should give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. The U.S. Economy If monetary policy represents a set of scales, on one side we have a strong U.S. economy with unemployment near a 50-year low, and on the other, a more challenging and uncertain landscape. GDP looks to grow around 2 percent this year, and unemployment has stayed at or near historically low levels, boosted by solid job growth. At the same time, the Federal Open Market Committee (FOMC) has moved to cut rates three times. What’s going on? There are three trends I’ll explore today, which all demonstrate the commonalities and the interconnectedness of the global economy. The first is the low neutral rate of interest, or r-star, the second is slowing global growth, and the third is rising geopolitical tensions. All are critically important to the long-term prospects of the U.S. economy, and each tells an important story about the conditions we’re experiencing today. Low R-star Those of you who know me won’t be surprised that I’m starting with low r-star! The neutral rate of interest—the rate that prevails when monetary policy is neither restrictive nor accommodative— has been an area of study, and a personal passion, for the past two decades. | 0 |
The end of the minimum exchange rate has major repercussions for the Swiss economy, and it was by no means an easy decision for the SNB. Yet this is not the first time that the Swiss economy has had to react to shocks and changes in the international environment, and the experience was often painful. The example of the watch industry shows that even a severe crisis can be overcome. Unfortunately, this example is not readily transferable to other export industries. Many companies currently find themselves compelled to seek cost reductions and efficiency gains. The economic outlook depends to a great extent on global economic developments. In its latest monetary policy assessment, the SNB is projecting that momentum in the global economy will pick up again. This should cushion the impact of the exchange rate shock somewhat, and allow Switzerland to return to positive growth in the second half of the year. While inflation has dropped well into negative territory, as things currently stand, a sustained price decline - or, indeed, a deflationary spiral - is not to be expected. Overall, the Swiss franc is currently significantly overvalued. Monetary policy is geared towards this challenging set of circumstances, and is guided by the SNB's willingness to take an active role in the foreign exchange market and apply negative interest rates. This twopronged approach is designed to ease the upward pressure on the Swiss franc. However, in the current climate there is, regrettably, no easy solution that would absorb all external disruptions. | In the Malaysian Islamic finance marketplace, the changes associated with the modernisation of laws facilitate the maturing of the Islamic finance industry, with the enactment of the new Act in 2013. It includes new provisions that strengthen the potential role of Islamic financial institutions as investment intermediaries for risk-sharing to effectively take place. Legal recognition of investment accounts provides differentiation from deposits, which thereby opens up the avenue for Islamic financial institutions to further explore the various modes of operationalising such investment accounts. In advancing this quest, technological advances need to be leveraged upon to develop new innovative platforms that can facilitate the implementation of investment accounts. Aimed to assist Islamic financial institutions in performing this investment intermediary function more efficiently, a multi-bank platform is currently being developed in Malaysia to effectively and efficiently match funds from potential investors with industries and ventures in the real sector. The platform would facilitate efficient mobilisation of private sector funds, both from individuals and corporates to finance targeted industries and ventures that are in need of funding. The platform would also be positioned to spur international connectivity as its outreach will also extend to international participation from foreign Islamic financial institutions and investors, through the offering of multi-currency financing options for foreign projects. | 0 |
The smooth functioning of our payment systems, in turn, depends on the safe operation of clearing infrastructure and the mitigation of liquidity risk. Finally, central banks can act as a liquidity backstop or a lender of last resort. Such action could be needed if a banking default were coupled with severe market stress. In such a scenario, a CCP would certainly hold high-quality collateral, but it may be unable to generate cash in the market in the very short time it has to manage a default. Given the systemic importance of CCPs and the scale of potential funding needs, it is essential that CCPs have sound liquidity self-insurance so that a liquidity shortage remains an extreme tail risk and the associated moral hazard is mitigated. In light of these considerations, which apply across all locations, the ECB has a clear interest in ensuring the safety and soundness of euro clearing. To this end, we need to have a clear legal competence that, importantly, should cover both EU and third-country CCPs. Proposals to differentiate between EU and third-country CCPs would not only leave considerable pockets of euro clearing without appropriate ECB oversight, they would also raise concerns about market distortions or an unlevel playing field. For example, a responsible central bank cannot extend liquidity to any entity without having a minimum level of information and control over it. | Ardian Fullani: Recent economic and monetary developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the press conference on the Monetary Policy Decision of the Bank of Albania Supervisory Council, Tirana, 31 August 2011. * * * Today, on 31 August 2011, the Supervisory Council of the Bank of Albania reviewed and approved the Monthly Monetary Policy Report. Based on the analysis of Albania’s latest economic and financial developments and following discussions on their performance outlook, the Supervisory Council of the Bank of Albania decided to leave the key interest rate unchanged at 5.25%. The Supervisory Council holds that the actual monetary conditions are appropriate for meeting the inflation target and for continuing to stimulate the economic activity. Let me now proceed with an overview of actual and expected economic developments and main issues discussed at today’s meeting of the Supervisory Council. Annual inflation in July was 3.6%, following the downward trend noted in the second quarter of the year. Consumer price performance continues to be under the pressure of rising prices in global markets, although lower than in previous months. Annual inflation was primarily formed by the contribution of processed food prices, most of which are imported. Decline of the annual inflation rate reflects the downward contribution of unprocessed foods as a result of increased supply of domestic agricultural products, a seasonal development, which in July 2011 appeared to be stronger than a year earlier. | 0 |
Growth in demand and output is expected to remain high in the near term. Unemployment may fall somewhat more quickly than has been the case over the past year. The output gap is expected to be positive in 2005. Higher demand for companies’ goods provides scope for increasing prices. Experience shows that inflation is directly influenced by the level of capacity utilisation in the Norwegian economy. Some of the rise in prices for domestically produced goods and services can be attributed to higher margins in the business sector. The effects of the interest rate decline on demand, output and employment have been pronounced. It has taken time for inflation to pick up. This partly reflects low external interest rates and high oil prices, which have moderated the impact on the krone exchange rate. Higher imports from low-cost countries, competition and improved efficiency in Norwegian production have also kept inflation at a low level. Initially, it was the fall in prices for imported consumer goods that pushed down underlying inflation. After a period, the rise in prices for domestically produced goods and services also decelerated. This was due in particular to increased competition in some goods and service markets. At the same time, wage growth slowed as a result of lower capacity utilisation in the economy. A slower rise in house rents also contributed. Inflation measured by the CPI-ATE reached its lowest level in the first months of 2004. Inflation remained at less than ½ per cent until after the summer before picking up in autumn. | For example, China’s share of footwear imports to Norway increased by 4 percentage points to 20 per cent in 2004. The share of clothing imports increased by 2 percentage points to 32 per cent. The decline in prices for clothing and footwear will probably continue in the coming years. Prices for audiovisual equipment are still falling as a result of strong international competition and high productivity growth. We assume that the effects of structural changes in these markets will gradually be exhausted towards the end of the projection period. External price impulses via consumer goods are expected to increase in pace with unit labour costs among our trading partners. The projections in Inflation Report 1/05, published on 16 March, are based on a gradual increase in the interest rate. This is in line with financial and foreign exchange market expectations. The krone exchange rate is assumed to move in line with the forward exchange rate. This implies that the krone will remain fairly stable around the current level in the years ahead. Growth in private consumption is expected to remain buoyant both this year and next, primarily reflecting low real interest rates, strong growth in real disposable income and a continued rise in house prices. In the period ahead, higher employment and wage growth will continue to fuel household demand. On the other hand, household debt has risen sharply. This implies that a normalisation of interest rates will increase household net interest expenses. After a period, growth in consumption may be fairly low. | 1 |
The Basel Committee is therefore working intensively on completing the current reform work by the end of the year 1. 1 However, it is still not clear when the review of the exposures to governments and public bodies will be complete. 3 [5] Critics have expressed fears that the reforms I am talking about now will lead to minimum capital for certain banks increasing radically, which in turn risks resulting in a real economic decline. Here I would like to point out that the Basel Committee’s ongoing reform work does not aim to significantly increase the total global capital requirements. Instead, it concerns ensuring that all banks around the world have adequate resilience to manage financial crises and that risks are covered by capital in a uniform way in all banks and all countries. One result of this exercise is that banks that currently have very low risk weights will probably face higher capital requirements, while banks with very high risk weights may face lower capital requirements. Designing a uniform global regulatory framework is not an easy task, particularly as banking systems differ from country to country, but also because we are living in a changing world. The Basel Committee's work is therefore largely a question of finding compromises that all member countries can support and which will stand the test of time. Naturally, the Basel committee is also evaluating very carefully the effects of the proposals now under negotiation. This applies to the effects on the banks as well as on society. | Excessive debt is namely a common denominator in most financial crises. Even before the crisis, a number of banks expanded their operations substantially with the aid of debt financing. When the markets became shaky it turned out that many banks lacked sufficient capital to cover their losses. The idea of the leverage ratio requirement is that it should be a relatively simple and transparent supplementary capital requirement that sets an upper limit as to how much leverage the banks can take on. Basel II created too much freedom for the banks, with well-known results. We need to put this right. We will therefore now have a system with many different types of constraints. Government exposures are also risky Another question discussed by the Basel Committee is if and how the banks should maintain capital to cover their exposures to governments and other public bodies. Today it is in practice possible for the financial supervisory authorities to completely exempt such exposures from the capital adequacy requirement. We know from experience, however, that the banks’ exposure to governments is not risk free. The Basel Committee has therefore decided to review whether and how the regulations need to be changed. Almost 10 years on from the crisis – time to complete reforms The international regulatory work has been in progress since the global financial crisis broke out in 2007. It is important to many parties, not least banks, investors and policy-makers, to clarify how the global regulatory framework for banks will function. | 1 |
So the bank has to have enough debt that can be bailed in to restore its capital so it can continue to operate as an authorised firm while it is being resolved. Smaller banks can be more easily separated into the parts that provide critical economic services and that can be sold and those that do not and can go into insolvency. Only the critical parts would be recapitalised in resolution. They need less bail-in debt. The very smallest institutions do not need to be kept in operation. Their abrupt cessation of activity should not generate contagion or damage the economy. Insolvency rather than resolution is the proportionate strategy here. They do not need bail in debt. Gradualism The second key principle is gradualism. The Bank is proposing to allow the full four-year transition period for banks to meet their MREL requirements. This will allow the market for MREL-eligible debt to develop and allow banks to smooth out their debt issuance, minimising issuance and interest costs. Clarity The third is clarity. Banks and their creditors need to have clarity – clarity in relation to the requirements of the new regime and clarity as to their liability if things go wrong. So we need to avoid uncertainty and get on and implement the EU requirements that came into force at the beginning of this year. Bank creditors need to know where they stand if things go wrong. | The realisation is setting in that bank creditors are at risk if the bank gets into trouble. There certainly appears to have been a jump in awareness at the beginning of this year. The average spread for senior debt issued by European G-SIBs increased by over 25% within little more than a week. In part, this is a result of the entry into force of the BRRD, and in the UK the Bank’s consultation paper on the setting of MREL.12 But it has almost certainly been reinforced by other events that have brought the issue into sharper relief. As a result, perhaps not surprisingly, there have been calls to amend the regime before it has even been implemented, on the grounds that it will raise costs for banks and make them less able to lend to the real economy and that it is politically impossible to bail in bank creditors. There are clearly some very important and difficult transitional issues here. And no major shift in preventative regulation is ever universally welcome. But, it is, however, possible to view this greater awareness of the new regime in a more positive light. I have mentioned already evidence that expectations of taxpayer bailouts have diminished. | 1 |
They influence the effectiveness of the bank’s internal governance, the soundness of its risk management, and therefore the very sustainability of its business. But structure and design are not the only elements that determine how robust a bank’s governance framework is. The behavioural patterns exhibited by management and staff, as well as the drivers that underpin that behaviour, are no less important. A bank can have all the risk controls in place, avail itself of the most advanced tools to manage risks, and rely on data of the highest quality, but still become mired in a scandal it has brought upon itself, which badly affects its reputation owing to weaknesses in its internal culture. It is one thing that someone decides to take on too much risk, to put the immediate interests of the bank before its longer-term interests, or even to break the law. It is another thing if such unwarranted behaviour is not adequately addressed. If such acts have no apparent consequence, that will be noticed by a colleague. And then by another, and then by ever more colleagues. And soon enough, a new group norm is established. Misguided decisions are often rooted in each person’s values and beliefs, as well as their perception of what behaviour is valued within the structure around them. The overriding behaviour and culture within an organisation are thus the product of both individual behaviour and the underlying culture that acts as a breeding ground for that behaviour. | Research has shown that consumer decisions may not always be made based on sound advice and knowledge, but are at times made on impulsive intuition. The key challenge lies in determining how behavioural factors and other factors such as socio-economic and cultural backgrounds, life events and skill levels influence rational decision-making. The wide variation in information needs that arise from differences in prior experience, language and cultural background, current financial situation, and competing demands for consumers' time all pose challenges in the development and delivery of relevant information to consumers. In particular, the most effective means of engaging consumers that have a low level of interest in financial planning needs to be determined. In relation to this, financial service providers need to provide consumers with information that accurately represents the features, risks and returns associated with their products and services and demonstrate integrity and good faith by offering products and services that are appropriate to the customers' financial needs and circumstances. The issue is how a consistent and comprehensive disclosure regime could be established, with the flexibility to apply differentiated rules in response to different situations and circumstances. Finally, disclosure as a consumer protection tool will only serve its purpose if consumers are able to understand the information provided. The challenge is to get the right balance between providing sufficient information to consumers to make informed choices, with the information being clear, concise and effective. The increase in the number of delivery channels has not resulted in an equitable expansion in the access to financial services. | 0 |
The Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) provides the go-to framework for companies to disclose key climate-related information.9 This initiative has significant backing, with over a thousand companies showing their support.10 But support alone is not enough, we need action. And the quantity and quality of climate disclosures is not yet good enough. Climate change is a risk we see looking forwards not backwards. Companies with the exact same current carbon footprint today could have very different strategies for the future – one might have a clear path to net-zero, another could be gambling on new technology or policy inaction, and a third might just not have thought about it yet. So to be decision-useful, disclosure has to move from the static to the strategic. To be forward looking. Using scenario analysis to help us better understand the impact of different climate pathways. That naturally raises the question as to whether disclosure should be mandatory. Given the scale of the change required, we think that does need to happen, and soon. And so we, together with other regulators, are exploring a possible pathway to mandatory through the Government-led taskforce on climate disclosure.11 But you do not need to wait to be forced to disclose. You can choose to act now. | The first three relate to macroeconomic imbalances that could cause a further widening of the current account deficit, higher external debt and a depreciation of the króna. Vulnerability on these counts is no less than a year ago, and higher global interest rates and premia could have widespread repercussions. On the other hand, much of the uncertainty about the banks’ access to financing has been dispelled and they have built up ample liquid reserves. Under such conditions, the focus shifts to asset quality. The second table highlights factors that contribute to financial system resilience. The most noteworthy development is the banks’ stronger position in the form of ample liquidity and capital adequacy ratios which are very acceptable and historically high. On the whole, the Central Bank’s finding is that the financial system is broadly sound. It is equipped to withstand shocks to the economy and financial markets, to mediate credit and payments, and to redistribute risks appropriately. In other words, it is capable of performing its function in an orderly and efficient way. Iceland’s banking system meets the demands made of it and performs well on stress tests conducted by the Central Bank and FME. BIS Review 41/2007 3 Table 1 Main vulnerabilities Risk Explanation Exchange rate developments Macroeconomic imbalances are pronounced. The current account deficit poses the risk of a depreciation of the króna. Shifts in carry trades and other exposures could catalyse a sudden turnaround. The FX market relies on three market makers and is still relatively thin. | 0 |
Moreover, green finance remains a relatively small segment of the market. For Europe to unleash its full potential for financing the green transition, it will need to redouble its efforts to mobilise capital market funding. In particular, equity funding has been shown to be important for incentivising green innovation and supporting the reallocation of resources to greener activities. [8] Yet further growth in green finance is likely to be constrained by the same shortcomings that hinder integration in EU financial markets more generally. So progress towards a genuine capital markets union is vital. [9] Climate risks do not stop at national borders. The capital markets architecture in the EU needs to recognise that and adapt accordingly. Products with official EU seals, such as the forthcoming EU green bond standard, will need proper monitoring to ensure compliance and build trust. Further efforts are required to harmonise the tax treatment of capital market assets, to better align the efficiency of national insolvency frameworks and to ensure similar levels of investor protection across countries. Conclusion Let me conclude. Strengthening financial integration within the European Union is vital to protect our economy from shocks and financial instability. The risks posed by climate change make action more urgent. But they also provide an opportunity. Putting in place the necessary architecture for a full capital markets union can help promote green finance – an area where the EU is already a leader. This will not only benefit us, it will also benefit generations to come. 1. | Andres Lipstok: Estonia’s economic environment and central bank activities Speech by Mr Andres Lipstok, Governor of the Bank of Estonia (Eesti Pank), at the the presentation of Bank of Estonia’s 2008 Annual Report to the Riigikogu, Tallinn, 11 June 2009. * * * Dear Riigikogu, Thank you for the possibility to present you Eesti Pank's 2008 Annual Report. I am going to start with a brief retrospect of the Estonian economic environment and then address issues concerning the activities of Eesti Pank. The Estonian economic environment in 2008 and 2009 2008 was an exceptional year in the world economy. Developed economies have not faced the risk that banking and financial markets could collapse and the global financial system stop functioning since the beginning 1930s. But the financial crisis, which was caused by previous years' incorrect decisions, made this a very likely scenario. In the final months of the past year major banks were too afraid to lend money to each other and trading with privatesector bonds nearly ceased. Loss of confidence in financial markets, loan losses amounting to 3-4 billion dollars and a sharp decline in crediting the private sector had an immediate impact on global trade, investment and economic growth. Global trade contracted 17% in the fourth quarter of 2008 and at the beginning of this year. Major central banks and governments have taken unprecedented steps to alleviate the economic situation. | 0 |
We are now getting close to the end of that reservoir of spare labour supply. It is very difficult to say how close; measuring spare capacity in the economy with great precision – to single decimal points – is not really possible. But for the economy to grow robustly and sustainably over the next few years’ productivity growth will need to begin to pick up. This does not need to happen overnight. But it does need to happen. The MPC’s economic forecast I am pleased to be able to say that this is the central scenario in the MPC’s latest forecast. Our forecast is for the economy to grow robustly at around 2.5% a year over the next three years. That is a bit slower than the average annual growth rate of nearly 3% in the seven years before the crisis. But it’s a great deal better than the roughly 0.5% annual average over the seven years that followed. In our forecast, growth continues to be driven by private domestic demand – essentially, household consumption and business investment, both of these have been growing strongly since the middle of 2013. Of course, given our history any forecast of sustained robust consumption growth in the UK automatically raises eyebrows; the suspicion of a debt fuelled spending boom is never far away. But our forecast of strong consumption growth over the next three years does not depend on an increase in household debt. | Jon Cunliffe: Pay and productivity – the next phase Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at the Automative Fellowship International dinner, Luton, 22 June 2015. * * * Between 2000 and 2007, the average worker in the UK automotive manufacturing industry produced 7.7 vehicles a year. Over the past seven years he/she averaged 9.8 vehicles a year. Productivity – output per worker – in car manufacturing has increased by 30% since the onset of the great financial crisis. Britain has become the fourth-biggest vehicle maker in the EU and is more efficient than bigger producers such as Germany and France. It has not all been plain sailing. In the recession, productivity in the car industry fell as firms cut back production and held on to workers. But productivity in the industry recovered quickly. If productivity in the UK economy as a whole had grown in the same way as in the car industry, and employment generally had grown as it did, the economy would now be 30% or £ trillion larger than it is today. Annual GDP per person would be about £ higher than it is. Unfortunately productivity in the UK has not followed the lead of the car industry. Indeed, the opposite is true. In 2014 labour productivity in the UK was actually slightly lower than its 2007 level. In the seven years between 2000 and 2007 labour productivity grew at an average annual rate of about 2% a year. | 1 |
Access to financial services has been given separate priority status because it is vital for Russia. Special attention will be paid to the uniform development of access to services in different territories, cities and towns and reducing disparity. I would also like note it is unacceptable that some people lack access to financial services owing to disability. Unfortunately, such examples still occur. To conclude, I would like to summarise the overall focus of the measures that we plan to take in various areas in the coming years. How will our work differ from that in previous years? I started my speech by saying the Russian economy is entering a new cycle and the Central Bank’s approaches to work should rise to meet these new conditions. Our work will be consistent, we will continue to resolve the problems we have already identified, where progress has been made. However, we also need to think about a new stage in the Bank of Russia’s operation. In recent years, we worked on solving a number of entrenched problems and were partially successful in eliminating the consequences of external shocks. For example, we removed weak and unscrupulous players from the financial market, completed building the necessary elements of the national infrastructure of the financial market, and transitioned to inflation targeting. Now that the economy and the financial system have become stable, we have more opportunities to focus on development issues. We will prioritise competition issues, new technologies, financial accessibility, developing long-term money instruments and the capital market. | We are working together with law enforcement agencies and are now focusing on public awareness. About a month ago, we launched a joint project with Yandex – the microfinance organisations on our register are marked with a special symbol in the search results so that it is easier to understand whether a given microfinance institution is legal or not. Moreover, this year saw Mir cards issued on a large scale. In Russia, they are accepted by all payment terminals and ATMs. The issue is proceeding at a good pace: over 10.6 million cards have already been issued. In the last month and a half alone, over 2 million cards were issued. Mir is a competitive system and offers all the services on the domestic market that the public are used to after using international payment systems. Our strategic objective in the coming years is ensuring Mir cards are accepted internationally, firstly within the Eurasian Economic Union. We are making progress in this area with our partners in the Eurasian Economic Union. Last week, the first cross-border transactions using Mir cards were carried out with Armenia’s ArCa payment system. This is the first project we have undertaken to organise equal intersystem interaction. (I believe the citizens of the two countries will benefit from new financial opportunities. I would like to express my gratitude to the Central Bank of Armenia and the management team of the ArCa payment system for their incredibly effective collaboration and promotion of this project). | 1 |
Although current demand conditions contain the second round effects of the supply shocks, the exact pace of disinflation would still depend on the extent new inflation targets serve as a strong reference for economic agents. Having this in mind, the CBT will continue to focus on enhancing the credibility of the new inflation targets. In this context, developments in the general pricing behavior and the underlying inflation trends will be monitored closely. International financial markets remain fragile and the credit conditions continue to tighten up. The eventual impact of the financial turmoil on the global economic activity is yet to be seen. Moreover, rising commodity prices continue to exert pressure on global inflation. These uncertainties have been dampening the risk appetite and thus slowing down the capital flows to emerging markets, leaving these economies susceptible to shifts in the market sentiment. Domestic uncertainties have exacerbated these effects, as manifested by the significant rise in the sovereign credit risk of Turkey in the first half of the year, compared to the average risk premium of emerging economies. The CBT will not display a sharp reaction to temporary fluctuations in the financial markets, unless there is a threat to the medium-term disinflation trend and/or a significant worsening in the general pricing behavior. Finally, I would like to state that our medium-term projections do not foresee any significant effect to be brought about by the increases in indirect taxes or administered price adjustments, except those required by the automatic pricing mechanisms. | 8 BIS Review 100/2008 Figure 10: Output Gap 8 6 4 2 0 -2 -4 -6 -8 08Q1 07Q3 07Q1 06Q3 06Q1 05Q3 05Q1 04Q3 04Q1 03Q3 03Q1 02Q3 02Q1 01Q3 01Q1 00Q3 00Q1 -10 Source: CBT. Dear Guests, After the significant weakening of the Turkish lira in the first four months of 2008 (Figure 11), exchange rates have reversed direction in the past two months, easing to some extent potential pressures on tradable inflation resulting from the exchange rate pass-through. In the April Inflation Report and the Open Letter, the first round impact of the recent depreciation was estimated to be close to 2-percentage points for the end-2008 headline inflation. The recent rebound in currency has led to a downward revision in the estimated pass-through. We now anticipate a cumulative exchange pass-through of around 1.2 percent points for 2008, most of which has already been materialized between March-May period. Figure 11: Risk Premium and Nominal Exchange Rates 450 2 YTL/Currency Basket (0.5 Euro+0.5 US Dollar) 1,9 400 EMBI+Turkey (right axis) 350 1,8 300 1,7 250 1,6 200 1,5 150 07.08 05.08 03.08 01.08 11.07 09.07 07.07 0 05.07 1,2 03.07 50 01.07 100 1,3 11.06 1,4 Source: CBT. | 1 |
When countries experience hyperinflation, domestic prices of goods and services will rise every minute. In such a situation, no one will 1 I would like to note that the views expressed in this oration are my own as an economist and do not necessarily reflect the views of the Central Bank of Sri Lanka. I also would like to acknowledge the technical support received in preparing the oration from Dr Chandranath Amarasekara and his team at the Economic Research Department of the Central Bank of Sri Lanka. 1 want to hold the local currency, and people will rush straight from the bank to the shops to buy goods, fearing that their currency holding will lose value along the way. In fact, the banking system itself will collapse. As people lose faith in local currency, the barter system, or the exchange of goods for goods or services will become the norm, making transactions significantly more difficult. Hyperinflation will also cause adverse redistributive effects, destroying real value of middle class savings in local currency and real incomes of fixed income earners such as workers and pensioners. One can read horror stories of hyperinflation in Germany and Australia in the 1920s, and more recently in several Latin American countries and also in countries like Zimbabwe. The episode of hyperinflation in the inter-war Germany is said to have facilitated the rise of Hitler and the global destruction that followed. | 3/3 BIS - Central bankers' speeches | 0 |
For anyone interested, the details of these reports are available on the website of the BIS. Before turning to capital adequacy issues, I would like to highlight some key elements from two recent papers on sound practice. In July, the Basel Committee issued for comment a report on the management of credit risk. This is a particularly important topic since the major cause of serious banking problems continues to be directly related to poor practices regarding credit risk management. A key focus of the report is on the need for banking organizations to develop an overall business strategy for credit risk that incorporates the tolerance for risk and the level of profitability the bank expects to achieve from incurring various credit risks. A strategic approach to credit risk provides a coherent framework for practices in such areas as credit-granting criteria, credit limits, and credit risk monitoring. The Basel Committee issued a second paper in September that addresses the subject of corporate governance in banking organizations. As you know, corporate governance, especially the role of boards of directors, is of particular interest in this country. More intense competition, rapid change, and increased complexity in many business activities mean that responsible and independent oversight by boards of directors plays a more crucial role in ensuring that the firm’s business strategy is sound and its leadership effective. I am convinced that the need for strong corporate governance is equally great in emerging market countries, where banks and other financial institutions face comparable pressures. | Norman T L Chan: A fascinating train journey Speech by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at the CUHK (The Chinese University of Hong Kong) Business School Master Degree Graduation Ceremony 2015, Hong Kong, 21 November 2015. * * * Professor Michael Hui, Professor Kalok Chan, parents, graduates, ladies and gentlemen: 1. It is a great honour to be invited to attend today’s graduation ceremony. It is also a great pleasure to be back to CUHK, where I spent the most beautiful part of my life as a student. There were so many fond memories and I cannot tell you how much I have missed my campus life even though I have graduated for nearly 40 years. 2. My fellow graduates, today is a memorable and joyful occasion not only for you, but also for your parents, your family, your loved ones and your friends. You have all worked very hard and gone through many rounds of examinations and challenges before you can be here today on this occasion. You must feel very proud and wish to tell everybody that “I have made it”. My heartfelt congratulations to you all: you have made it. You have received a master degree that provides you with the knowledge and skills that are badly needed and sought after in the modern era of business and finance. | 0 |
A counterfactual exercise undertaken by ECB staff shows that growth and inflation would have been notably lower in the absence of our non-standard measures (see Chart 8 and Chart 9).12 12 / 19 BIS central bankers' speeches 13 / 19 BIS central bankers' speeches That said, as the Governing Council has emphasised many times, in order to reap the full benefits from our monetary policy measures, it is important that other policy areas make a more decisive contribution. In particular, growth-enhancing and vulnerability-reducing measures would combine to improve confidence in the long-term potential of the euro area economy, which is a central factor in determining assessments of steady-state real interest rates. Moreover, the aggregate cyclical stance of fiscal policy plays an important role in determining the amplitude and duration of economic fluctuations. As noted by President Draghi in his Sintra speech, a cyclicallyappropriate aggregate fiscal stance may be more easily achieved through a well-designed central fiscal capacity. Let me now turn to the importance of effective communication in maintaining focus on the inflation objective, especially during phases of extended deviations. Central bank communication The Treaty on the Functioning of the European Union establishes price stability as the primary objective of the ECB. The ECB strategy makes the primary objective of price stability operational through the medium-term orientation of monetary policy. This medium-term orientation provides the necessary flexibility to combat excessive volatility in output and inflation in responding to shocks. | Overall, the transmission of our suite of measures to the financial system has been very effective. This is in no small part due to the strong complementarities between instruments, which ensure that all segments of the yield curve are influenced, thereby easing financial conditions more broadly (see Chart 7). Let me give two examples to illustrate the role played by complementarities in our policy design. First, the negative interest rate policy has supported the portfolio rebalancing channel of the APP 10 11 / 19 BIS central bankers' speeches by encouraging banks to lend to the broad economy instead of holding onto liquidity. 10At the same time, the extra liquidity from the APP has dampened volatility at the short end of the curve. Second, the APP and its reinvestments have supported our enhanced forward guidance via the signalling channel.11 Asset purchases provide a strong signal that policy rates will remain low for an extended period of time. This effect is reinforced by the sequencing of our instruments, which is embedded in the structure of our forward guidance. At the same time, our forward guidance on rates reinforces the APP and reinvestments, since it anchors the short end of the risk-free curve and thereby ensures that the stimulus from the APP and the reinvestments is not offset. The improved financing conditions have made a considerable contribution to the macroeconomic performance of the euro area. | 1 |
The capital adequacy frameworks also made it cheaper in many areas for the banks to expand off their balance sheets. After the event, we can also note that the regulatory frameworks focused too little on liquidity risks. Many of these gaps in the frameworks are now being closed. However, the eternal problem is of course that the markets are always faster at finding new ways of circumventing the regulations than the authorities are at closing the gaps. Perhaps a more fundamental problem was that there was too weak a link between financial supervision and macro factors and other factors that affect the risk of shocks in the financial system as a whole. There was quite simply too much focus on individual companies and too little focus on broader development trends. Nor did the supervisory arrangements adequately reflect the increased internationalisation of the financial sector. In recent decades, the financial markets have become increasingly interlinked and very large sums change hands around the world every day. Large, complex banks and other financial institutions now conduct extensive operations in several countries. At the same time, supervision was mainly conducted on the basis of national mandates and focused on companies within individual, national jurisdictions. Supervision thus lacked the oversight required. Many factors interacted A number of interacting factors thus lay behind the situation that arose. | The inter-connectedness of global financial markets and capital flows has been amply demonstrated. The resilience and current strong economic growth in Asia have therefore to battle against the strong headwinds and challenges from the global financial landscape. The sub-prime-triggered credit turbulence has, undoubtedly, created a lot of uncertainty. The adverse impact of the potential slowdown in the US economy is likely to be felt in Asia as the region’s economies are generally export-oriented. Large and volatile capital flows into the region have also placed pressures on exchange rates. This has posed risks of inflationary pressures, intensified by the recent high oil and food prices, spilling over into the Asian bond markets. Hence, it is crucial for regulators in the region to remain vigilant and to continue to control the risks that accompany the surging capital inflows while managing the currency and monetary conditions. Nonetheless, amidst this financial market turmoil, Asia’s resilience has thus far demonstrated its ability to weather the turbulence. Apart from Asia’s relatively limited exposure to sub-prime mortgages and related collateralized debt obligations (CDOs), the region’s strong economic growth and large liquidity pool, stimulated by the significant momentum coming from the domestic demand of China and India, and increasingly ASEAN, have cushioned the blow. Some may suggest that 2008 will be a difficult year for the credit markets and investors, especially those with weak credit profiles or the highly leveraged ones, may even divert exposures from equity and currency markets. However, the Asian bond market prospects, in my opinion, are not without bright spots. | 0 |
The key to high-performance economy inevitably lies in supply-side policies that raise the economy’s potential growth. BIS Review 98/2008 5 The fact that supply-side policies take time should urge the government to hasten such policies. However much conflict of interest between a fixed-term government and long-term policies may be, it is important to realize that raising productivity, and hence the economy’s potential output, is ultimately the key to raise economic performance without provoking subsequent instability. As mentioned earlier, Thailand needs to be more resilient to oil shocks. For example, it is now a good opportunity to shape up our logistic system. Much integration needs to be done to coordinate the use of rail, road, river, and air transportation. Ladies and Gentlemen, My main message for you this evening is that the key for a successful economy is to preserve competitiveness and to grow at the potential rate as well as raising the potential output. This is to ensure both the performance and the sustainability of an economy. Many central banks are doing this through inflation targeting. At present, the risk of political uncertainty not only lies in terms of consumers and businesses’ confidence, but also in the efficiency of the government to pursue policies that raise productivity. As negative supply shocks persist, the better the job done by the government to enhance productivity, that is, to secure our potential output, the lesser the cost of economic stabilization. Thank you very much for your attention. 6 BIS Review 98/2008 | One such test – motivated by the risk scenarios identified in the process of monetary tapering in the U.S. – shows little exposure of the banking system to a sharp increase in the interest rates of long-term securities. Meanwhile, households’ aggregate borrowing and financial burden indicators show a marginal decline, although with some changes in the composition of the debt. The share of bank debt has increased compared with other credit providers, while total corporate debt is stable as a ratio to GDP and the financial indicators of companies reporting to the Superintendence of Securities and Insurance (SVS) are also fairly stable. Capital inflows to Chile continue to be dominated by FDI while aggregate solvency and liquidity figures are also stable. In this way, our general analysis of the domestic financial system yields that it is on a good standing to deal with the risk scenarios described, and we see no incubation of systemic risks at the local level. This explains, in part, why the recent volatility episode in foreign financial markets had lesser effects on the Chilean financial system than in other emerging economies, where risks did incubate over the past few years. However, to maintain this resilience the different players making up the financial system must take the necessary decisions and safeguards, especially considering the dynamism of the financial sector. One first firewall, perhaps the most important one, is the one related to corporate stockholders, who should establish and implement clear policies aimed at restricting their operating risks via corporate governance, boards and management. | 0 |
Any loans they granted would have to be financed through savings deposits, debt certificates or equity. Proponents of this initiative believe that the introduction of sovereign money would create safer money, a more stable financial system and higher revenue from the note-issuing privilege (or ‘seigniorage’) for the general public. Opponents, however, claim that the measures demanded in the initiative are both inappropriate and ineffective for achieving these goals. The Federal Council and parliament have recommended the electorate reject the initiative, and have not offered a counterproposal. The SNB shares the Federal Council’s view. I would like to confine my remarks today to the possible consequences for lending and monetary policy of a switch to a sovereign money system. With respect to lending and the financial system, I regard the following three points as key: First, the switch to sovereign money would be a move away from the historical distribution of responsibilities between the central bank and commercial banks. In this tried-and-tested, twotier system, commercial banks compete with one another to supply households and companies with credit and liquidity, while the central bank acts as the bankers’ bank and conducts monetary policy. With the introduction of sovereign money, the SNB would be landed with a difficult role in lending. The initiative calls for the SNB to guarantee the supply of credit to the economy by financial services providers. In order to carry out this additional mandate, the SNB could provide banks with credit, probably against securitised loans. | The Federal Council, parliament and the SNB have all come out in opposition, but the final decision rests with Swiss electorate, who will vote in a referendum on the matter later this year. As an alternative to the concept of sovereign money, some academics have launched the idea of making digital central bank money accessible to all. This means that sight deposit accounts with the SNB would no longer remain the sole preserve of banks and a few other financial market participants. The aim of this proposal is thus to broaden the public’s access to central 1 Accounts of the current situation published by the Bank of England and the Deutsche Bundesbank found considerable resonance in the media and the economic blogosphere. Cf. M. McLeay, A. Radia and R. Thomas (2014), Money Creation in the Modern Economy, Bank of England, Quarterly Bulletin, Q1, pp. 14–27; Deutsche Bundesbank (2017), Die Rolle von Banken, Nichtbanken und Zentralbank im Geldschöpfungsprozess, Monatsbericht, April, pp. 15–36. Page 2/12 bank money, without prohibiting banks from creating deposits through lending. However, as I will show, this too leaves a number of questions unanswered. We therefore take a critical stance on this proposal. Let me now turn to the basics of money creation in our present-day financial system. Money creation in today’s financial system Types of money When speaking about money, we need to distinguish between various types of money. | 1 |
In this regard, we would like to note that: If the external scenario should worsen significantly, many EMEs with flexible exchange rates and inflation-targeting regimes would have scope to adjust monetary policy, thanks to a timely process of raising interest rates to contain overheating risks. Going forward, these economies will be able to react flexibly to changing global circumstances in a context of anchored inflationary expectations. Other EMEs have limited room for maneuver, as their economies have expanded beyond their potential output, with widening fiscal and external deficits, and thus today face the risk that external shocks might unhinge inflationary expectations and force pro-cyclical monetary and fiscal policy adjustments. A third group of EMEs has maintained structurally high national saving rates throughout the expansion phase of the global cycle and might be subject to a natural deceleration as the global economy cools down. In these cases, undertaking reforms to boost domestic demand would help sustain both medium-term global rebalancing and short-term policy accommodation. Economies that are being affected by high commodity prices, particularly LowIncome Countries (LICs), should strive to develop targeted policies to the most vulnerable groups through efficient cash transfers, instead of across-the-board subsidies. The international community should strive to support these efforts through similar measures, as demand subsidies or export constraints in non-LIC economies exacerbate commodity price pressures. Policy advice by the Fund should be tailored to these different groups of economies. | The crisis has opened a political window for tighter regulation of the financial system, but it is uncertain how long the window will remain open. 4 163/2009 | 0 |
In this regard, every central bank all around the world is concentrating on developing new tools and stress tests for assessing financial stability. They are reorganizing themselves in order to directly and effectively monitor financial stability and to develop new analysis techniques regardless of whether a central bank is also the supervisory authority or not. Financial stability from the Turkish perspective… If we consider the last two decades of the Turkish economy, we can say that Turkey learned its lesson very well by actually going through several crises and economic downturns. Thus, we now are aware of how important it is to have a sound financial system, which is resilient to potential shocks. The distortions in the banking sector and weak institutional structure of the financial system led to important systemic risks in the Turkish economy making it impossible for the economy to survive without financial sector reforms taking place. Therefore, the restructuring program for the financial sector was launched with the goal of eliminating the distortions in the financial sector, improving its intermediary function and thus enhancing its competitiveness by international standards. Banking Regulation and Supervision Agency has become operational as a separate body to improve the banking supervision. The Banks Act was amended to bring the supervision standards in line with the EU directives and international best practices. Moreover, the Central Bank Law has been amended and instrumental independence of the Central Bank was provided and the primary goal of the Bank was determined to be maintaining the price stability. | I am sure you will all agree with me when I say, in today’s integrated markets when any country catches a cold there will be many others sneezing. In such an environment we are now increasingly aware of contagion risk. Financial security and financial stability… Within this framework, I would like to emphasize the close linkage between financial security and financial stability. In my opinion, financial security can be enhanced by the existence of a smoothly operating infrastructure. This actually is a comprehensive concept and includes the payment system, the technological infrastructure, as well as the regulatory and supervisory framework. Overseeing the payments system is an essential duty of the central banks. In this respect, a basic continuing responsibility of any central bank is to assure stable and smoothly functioning payment 2 BIS Review 76/2007 systems. Linked to this is the lender of last resort function of the central banks. Emergency liquidity assistance, perhaps the most traditional function for dealing with financial instability, is a way out provided by central banks. Central banks can have a calming influence on markets in case of a market disruption simply by standing ready to provide liquidity assistance if necessary. It includes both the provision of liquidity to the financial system as a whole through market operations, as well as emergency lending to individual banks. Altogether these two important functions facilitate the security in the system. Technological infrastructure is another component to secure financial operations. | 1 |
For instance, effective supervision and stress testing could inform the decision to release the CCoB with an ex-ante assessment of the banking system ability to absorb potential future losses without breaching minima – a number of authorities did and published such tests in the midst of the pandemic. We would also need to ensure that an effective capital conservation mechanism is in place. This would prevent the released capital from being distributed inappropriately and ensure that firms would be able to rebuild the buffer in the future. The current tool, known in the UK as Maximum Distributable Amounts (MDAs), cannot serve this function because it does not apply to the portion of released capital. MDAs restrict dividends, AT1 coupons and bonuses when non-releasable buffers are used and appear to have two effects – one intended and one unintended. The intended effect is to prevent banks distributing away capital that could be otherwise used to build capacity to absorb losses and support lending. This is exactly what some global banks did in the early stages of the subprime crisis, which left them weakly capitalised when the Lehman shock hit the system later on. But MDAs can also have an unintended effect – they can disincentivise banks from using their regulatory buffers, for fear of market stigma, pushing them to cut lending and hurting the economy and therefore ultimately themselves. Page 5 A recent study co-authored by colleagues in the Bank of England sheds light on both these effects. | Less than 150 thousand private dwellings, on average, were built in the UK between 2005 and 2014 – compared to estimates that 200-250 thousand that would be needed to keep up with growing demand (Barker 2004). 7 The FCA carried out its Mortgage Market Review over 2011 to 2012. The recommendations were implemented in early 2014 and required lenders to test the affordability of new loans. The test was not prescribed by the FCA but rather for each lender to implement their own. 8 In 2017 the FPC clarified that the 3pp stress should apply to the reversion rate at the moment of origination. 5 5 All speeches are available online at www.bankofengland.co.uk/news/speeches 5 The stress test on the major banks then in train indicated that they had sufficient capital to absorb very major losses from their mortgage portfolios.9 The risks did not seem to lie primarily on the lender side. And the experience in the UK, with full recourse mortgages was that households would do everything possible to pay their mortgages, cutting consumption to do so.10 But even though, as a result, mortgage defaults were relatively low in the crisis, high mortgage debt did appear to have had an impact more generally. Evidence from the crisis supported the view that more debt is associated with deeper downturns. | 0 |
At the start of 2018, when the economy was growing well above trend and interest rates still were still quite low, gradually raising rates was the obvious and necessary choice. Twelve months later, the tailwinds have lost their gust, interest rates are closer to normal levels, and inflation is tame. The approach we need is one of prudence, patience, and good judgment. The motto of “data dependence” is more relevant than ever. If growth continues to come in well above sustainable levels, somewhat higher interest rates may well be called for at some point. However, if conditions turn out to be less robust, then I will adjust my policy views accordingly. I assure you that I have my eyes wide open and my ear to the ground when it comes to thinking about how the economic outlook will unfold in the year ahead, and as ever I’ll be guided by the data in all its forms. The Balance Sheet Aside from my views on interest rates, the other issue I get asked about is the normalization of the balance sheet. When we first announced our plans in June 2017, I was poised to expound on them in great detail.4 But when I raised the topic I was sorely disappointed to be met with glazed eyes and general indifference. Sadly, nobody seemed to care! Now that’s changed, and I’m getting more interest on this topic. It’s important to remember why the Fed took unconventional monetary policy actions in the first place. | The key distinction is that, whereas the speculator takes a view based on the price which he observes in the market and acts upon it, the manipulator uses his resources and the advantage of a dominant market position to try to influence the price - in other words, he is a potential price setter rather than a price taker. Particularly in small markets where relatively small deals may be able to move prices significantly, we need to be alert to this potential problem, which may, if unattended, seriously undermine one's vision of competitive, efficient markets. Information The prices at which derivatives trade contain information which may usefully supplement other market data available to central banks as a means of monitoring expectations and sentiment. Let me give just two examples. First, in the foreign exchange market, whereas the forward rate may provide a point estimate of the expected future rate, data on option prices for different strike prices can provide a probability distribution for the future rate. This additional information, available only as a byproduct of derivatives trading, may be of interest to market analysts, including the monetary authorities. Within the HKMA we have conducted some research into this, which we are in the process of discussing with academics and other technicians. Second, with exchange traded products, where levels of activity are clearly visible, sudden surges or collapses in turnover may hint at shifts in sentiment for one reason or another. | 0 |
Brief description of the exercise Before turning to the results, allow me briefly to recall the nature of the exercise. As you know, the Comprehensive Assessment comprised two components: an asset quality review and a stress test. Assessing asset quality involved a detailed review of bank balance sheets to determine, among other things, whether the classification of financial instruments, provisioning levels and the valuations of specific assets are appropriate. The process, conducted in a decentralised fashion, was very complex. It required the support of leading audit firms, and was subject to stringent quality assurance, where the national supervisory authorities – in our case the Banco de España – played a very important role. As a result of this part of the exercise, adjustments were made to the level of CET1 (i.e. maximum quality) capital, as defined under the Basel III Accord, which were taken into account to determine the starting point of the stress tests. The second key element of the Comprehensive Assessment was the stress test. This is an exercise that seeks to evaluate the resilience of banks in hypothetical scenarios. The stress test is an exercise basically prepared by the banks themselves, using the socalled bottom-up approach and applying the methodology of the European Banking Authority. The test was subject to strict quality assurance by the ECB and the national supervisory authorities. | The exercise assesses the foreseeable position of banks in two scenarios: one, a baseline or more likely scenario (a macroeconomic scenario approved by the European Commission); the second, an adverse – and severe but not impossible – BIS central bankers’ speeches 1 scenario (set by the European Systemic Risk Board), in the period 2014–2016. The consolidated balance sheets at year-end 2013 were taken as the starting point for the exercise. 3. Scope of the exercise The comprehensive assessment examined 130 banks from 19 countries. The main data from the exercise as follows: – The assets reviewed account for 81.6% of the total assets of banks supervised by the Single Supervisory Mechanism. The remaining assets, somewhat more than 18.4%, are assets of banks supervised indirectly by the Single Supervisory Mechanism. – 15 Spanish banks were examined, accounting for 90% of the assets of Spanish deposit-taking institutions. – Along with teams from all the supervisory authorities, including naturally the Banco de España, consultancies, appraisers, audit firms and, evidently, the banks themselves under examination all participated. – More than 6,000 experts, 600 of whom in Spain, were involved at the European level. – For Spain, the cost of the exercise was € million in total, of which € million correspond to the consultancy, Oliver Wyman, and € million to the audit firms and consultancies. | 1 |
Whether such divergences create problems for the performance and functioning of a monetary union depends on their causes, size and persistence. What are the facts about the relative macroeconomic performances of euro area member countries? And what is the diagnosis about the causal factors and the underlying processes that explain them? I would like to point out two interesting facts that are contrary to popular perceptions. The first is that during the first six years since the creation of the euro, the growth and inflation differentials observed between member countries have not been greater than those recorded in the 25 years before the establishment of EMU. On the contrary, according to some measures, the dispersion in growth rates has recently reached a historically low level. The second fact is that both growth and inflation differentials in the euro area since the introduction of the euro have been broadly of the same order of magnitude as the corresponding differentials observed across regions and metropolitan areas in the United States. These facts would seem to suggest that, at least on the basis of size, the heterogeneity 2 BIS Review 46/2005 observed in the macroeconomic performance of euro area member countries is not exceptional and thus need not be a cause of alarm. Nevertheless, there are certain other developments that suggest caution and point to the need for a deeper and more comprehensive analysis. One such development relates to the significant and persistent divergences in measures of competitiveness between member countries. | On the one hand, further integration of labour, product and capital markets can be expected to reduce economic heterogeneity within the euro area. On the other hand, some degree of heterogeneity can be expected to remain and, indeed, it can be considered a natural feature of any monetary union. These propositions raise several important questions, for example: • What kind of convergence processes has EMU set in motion? • To what extent has EMU-induced convergence moderated economic heterogeneity within the euro area? • What are the causes and consequences of sometimes sizeable and in some cases persistent inflation and output growth divergences across different euro area countries, in a macroeconomic environment shaped by the ECB’s monetary policy, which aims to preserve price stability for the euro area as a whole? These questions, which will be addressed in this workshop, relate to diverse but interrelated issues, such as trade integration, business cycle synchronisation, financial integration, structural reforms in product and labour markets, as well as inflation persistence and inflation differentials. I believe that the quality of the papers to be presented and the impressive group of discussants, chairpersons and panellists will contribute to fruitful debates. Looking at the titles of the various sessions of the workshop, I would like to share some thoughts with you on three specific topics. The first relates to the consequences of market integration for trade. The second, “closer to home” for a central banker, concerns inflation and output divergences across euro area countries and their implications for policy. | 1 |
Further, based again on standard analysis, the assignment of instruments to objectives ought to be based on the principle of comparative efficiency. Monetary policy is the natural instrument for pursuing price stability. Using again the prisma of Deng Xiaoping, the success of central banks in stabilizing inflation since 1995 strongly supports this view. Macroprudential policies – defined as a set of policies aimed at limiting both excessive credit growth and the build-up of systemic risk within the financial system – will have to take care of preserving financial stability. From here onwards, however, things become less clear-cut, and sometimes positively complex. First, the two objectives are qualitatively different. On the one hand, price stability is very easy to define and to measure in terms of a specific price index. As a result, monetary policy is comparatively easy to communicate, and its performance can be assessed in a relatively straightforward way. Financial stability, on the other hand, is significantly fuzzier, as it deals with preventing the accumulation of systemic risks, the build-up of asset price persistent misalignments, that some call bubbles, etc.. As a result, it cannot be defined in a straightforward fashion, with reference to, in the extreme case, a single indicator, and ought therefore to be communicated and assessed in a more complex way. Second, and crucial, is the unchartered interaction between the two policies. On the one hand, recent thinking has stressed how monetary policy can contribute to sowing the seeds of future financial instability. | Christian Noyer: Monetary policy and macroprudential policy Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the conference on “The future of Monetary Policy”, Rome, 1 October 2010. * * * Ladies and Gentlemen, It is a great pleasure for me to be here today at this joint Banca d’Italia, Einaudi Institute and Banque de France conference, which has provided a lot of stimulating ideas on the future of monetary policy frameworks. In my intervention, I will start with some reflections on the relationship between the objectives of price stability and financial stability, and I will then proceed to discuss several issues concerning the joint implementation of, and the interaction between, monetary and macroprudential policies. I. General considerations on the relationship between financial stability and price stability Both the experience of the last decades and, looking much further back, economic history provides a useful perspective on the relationship between price and financial stability: first, price stability is not a sufficient condition for financial stability but second is necessary; third, a key reason why the authorities in charge of monetary policy have a stake in maintaining financial stability is that financial instability may give rise to “tail risks” to price stability. Let me elaborate on these two issues in turn. A. | 1 |
At this point, two factors come into the foreground: The most important and principal factor to be underlined in both an economic and social aspect is chronic inflation and the uncertainty that its presence has caused in Turkey for thirty years. This period has seriously damaged the economy. For instance, money and capital markets have failed to develop, long-term financial resources have remained limited and it was not possible to develop markets, which occupy a significant share in the capital markets of developed countries, namely those for the provision of housing financing. Moreover, our economy has failed to achieve sound integration with international markets and a short-term vision has prevailed in all fields, including the social arena. Furthermore, chronic inflation triggered volatility in basic economic indicators, including growth and employment, as well as in variables such as exchange rates and interest rates. The excessive volatility in economic fundamentals resulted in a continuous increase in uncertainty and crises. Thus, after each economic crisis, uncertainty jumped to a higher level. Uncertainty and volatility caused a vicious circle and made risk management almost impossible. Dear Guests, At this point, let me elaborate on the concepts of uncertainty and risk, which have a key role in the development of derivatives markets and are of great significance for both policy practitioners and the economic agents acting as decision-makers. Although the word “risk” refers to both its literal meaning and uncertainty in daily use, in fact these two concepts differ from each other as to their effects on economic agents and events1. | Not only its monetary policy, and not only in Germany. We will keep explaining to our critics in Germany – and also to German savers – that their country is one of the main beneficiaries of the euro. A stronger euro area, with inflation of below but close to 2%, would be good for Germany. As for the debate we may have from time to time with some academics in Germany, I would say there is a certain irony in them taking us to task because we are focusing on our inflation target, since it is at Germany’s insistence that the ECB was given that mandate – and that mandate only – in the euro’s founding treaties, and in my view rightly so. 2 BIS central bankers’ speeches Did the euro’s jump after your announcement on March 10 disappoint you? It doesn’t help your return-to-inflation goal… The ECB, as you know, doesn’t have a foreign exchange target. What I saw is that financial markets in general understood what we did, which is more important than the instant reaction of forex operators. The dollar/euro exchange rate is mostly driven by different monetary policies in the United States and Europe. What would be more worrisome for us would be a further decline of emerging countries’ currencies, and increased volatility of the pound sterling due to the EU referendum debate in the United Kingdom. Does the ECB have a plan for a possible “Brexit”? | 0 |
In an Appendix to this Report, we forecast that the negative net worth of the Bank will go from 2% to 3.8% of GDP between 2011 and 2013. Such deterioration is explained by the composition of our assets and liabilities. In the current circumstances, expanding our reserves would further worsen our financial position. Although the Bank’s negative net worth has not been an impediment for monetary policy conduct, taking actions that increase such negative value is a cost to be paid by all Chilean citizens. Having said all this about the convenience or not of a forex intervention, undoubtedly the best way for our exporting sector to boost competitiveness in the world markets is through constant improvement of processes, both by investing in technology and developing their human capital. Likewise, it is important to be constantly on the lookout for new markets of BIS central bankers’ speeches 3 destination and product innovation, to ensure better conditions for their businesses. In any case, there are also internal issues that must be resolved to back our producers’ competitiveness, including any measures that disentangle administrative processes when creating and maintaining a firm and especially, establishing a policy that aims at developing a balanced energy matrix that can reduce energy costs. As we have said before, the cost of electric power in Chile, which is an important input of productive activity, is higher than the OECD member countries’ average. Let me now describe the macroeconomic scenario contained in our Monetary Policy Report. | The growth forecast for 2012 we are presenting in this Report, details of which I will be sharing with you in a few moments, runs higher than what we presented before the Finance Commission of this Senate last June. A number of factors have contributed to this growth, including increased personal income resulting from labor market strength, an expansion of credit to firms and households, as well as the impulse from investment in mining and complementary projects associated to the high copper price. Consumer and business confidence has risen or remained in optimistic levels. Another contributor was the drop in inflation in recent months, reflecting the prices of perishable foodstuffs and fuels. The latter, however, has tended to revert in the past few weeks. However, the macroeconomic scenario entails significant risks and, to some extent, opposing ones, that drive monetary policy to face a difficult dilemma. On one hand, the effects of the frail international conditions on world growth and external financial conditions should help to reduce the strength of the Chilean economy. In addition, there is the possibility of a further deterioration of the external scenario, with more acute consequences on our economy. On the other hand, the recent intensification in installed capacity utilization, as well as the widening of the current account deficit, reflect the persistence of a degree of dynamism of domestic demand that also entails medium term risks for inflation and the vulnerability of the country’s external accounts. | 1 |
Moreover, the report also incorporates a study that examines recent developments in foreign exchange and derivatives markets by relating them to monetary policy decisions. Two boxes also clarify the new policy approach we are currently implementing. The former discusses the place of the reserve requirements in the monetary policy and its channels to influence economy, while the latter discusses the relationship between price stability and financial stability within the context of the inflationtargeting regime. Lastly, the sources of our revisions of inflation forecasts during 2010 are explained in a study that we designed within the context of our liability of accountability. Before moving on to the Central Bank’s assessments of inflation outlook and economic activity, which I will cover in detail shortly, I would like to summarize the current global conditions that continue to be determinant of the domestic economic outlook. The world economy continued to recover gradually in the final quarter of 2010, while downside risks remained a major concern for advanced economies. Financial institutions, firms and households in advanced economies are still undergoing the process of balancesheet repair, limiting the contribution of private consumption and investment to the economic recovery. On the other hand, the relatively less affected emerging economies are recovering steadily amid robust domestic demand (Figure 1). BIS central bankers’ speeches 1 This growth discrepancy between advanced and emerging economies and its implications for the Turkish economy became the key determinants for the Central Bank of Turkey’s (CBRT) monetary policy strategy in the fourth quarter. | And here I must say that I do not feel comfortable with the recent developments in financial markets. The surge in asset prices in many countries, the absence of volatility in many markets and the low level of credit spreads show that today's investors have an unprecedented confidence in the future and a strong appetite for all types of risks. For sure, economic fundamentals have improved in industrialised and in emerging countries. It is, however, hard to believe that the world economy has now entered a phase of lasting and accelerating prosperity. We must remain alert. No major financial crisis has shaken the world in recent years in spite of the Iraq war, rising oil prices, major natural disasters, various terrorist attacks and permanent rumours of new terrorist attacks. The resilience that financial sectors have shown may cause us to forget that crises are still a possibility. Thus, the major challenge for international business today is, to my mind, to keep a weather eye open even when the waters appear calm. 4 BIS Review 120/2006 | 0 |
Tomorrow, I will address the Buffalo-Niagara Partnership at their Movers & Shakers Breakfast, speak with staff of the Empire Justice Center, meet with Lt. Governor Bob Duffy, convene a meeting of our Upstate Advisory Board, whose members are major leaders in the upstate economy, and visit the Roswell Park Cancer Institute to learn about their role in economic development in western New York and in the broader world arena. My colleagues and I at the New York Fed continually track conditions in our District, and we have created a number of tools for that purpose. For example, my staff produces monthly indexes of economic activity for New York City, the state of New York and New Jersey. These indexes are essentially measures of local output – similar to gross domestic product, or GDP, at the national level. The measures provide a more complete gauge of activity than the employment report, which is another important metric at the state and regional levels. We have also constructed a consumer credit panel to track local household credit conditions at the county and even the zip code level, including the amount and type of personal debt and whether payments are being made in a timely way. In addition, we conduct a periodic poll about the credit needs of small businesses in the region, which are an important source of new jobs. We are just launching our latest poll that also includes questions about the skill needs of small businesses and whether the right kinds of skilled labor are available. | This stability is underscored by our latest quarterly consumer credit panel data, which shows that total household debt burdens have remained relatively low by national standards and that mortgage delinquency rates are lower in the Syracuse region than in other parts of the state and nation. However, while the national recovery has started to gain some momentum in recent months, job growth in Syracuse has remained somewhat weak. To date, the region has regained only about a third of the roughly 13,000 jobs that were lost during the downturn. So the recovery has been disappointing thus far. Despite the weak overall job growth, the region continues to undergo substantial economic restructuring. And, in fact, many parts of the economy are growing. Most prominently, the business services sector has added about 2,000 jobs since the recession ended, and the leisure and hospitality sector has also expanded. As a result of the economic restructuring in Syracuse, health and education are now among the most important industries in the region, employing roughly a fifth of all workers. While the “eds and meds” sector experienced some job losses last year, it is generally less susceptible to downturns than other sectors of the economy, and expanded before, during and after the Great Recession. No doubt, the area’s many local colleges and universities play an important role in this regard. Syracuse’s colleges and universities deserve special attention because they are important regional assets that can help Syracuse continue to actively participate in the knowledge economy. | 1 |
Their numbers of company collaborations, at around 600 each year, is more limited, especially to smaller companies. The Catapult Centres have created a new innovation engine for the UK. This is great news. The less good news is that this engine has fewer cylinders than its Germany counterpart. Indeed, it serves more as an innovation than a diffusion engine, leaving largely untouched the long tail of UK companies. Nor does the UK have the equivalent of the Steinbeis system for recycling technical expertise and know-how between companies, which could help de-segment the skills-stratified UK labour market. The financial infrastructure supporting companies is also different in the UK. 48 New, upper tail UK companies do brilliantly at attracting venture capital finance. And the UK has a large and liquid corporate bond market, totalling around £ billion for investment grade securities, which allows larger and betterestablished companies to raise money at long maturities in capital markets. 49 Where the UK financial system looks weaker is when serving smaller and less well-established companies, the type of which are more likely to occupy the lower tail. Most are not of sufficient scale or standing to attract capital market financing. For them, banks are a more natural source of financing. But options for bank financing appear to be more limited, certainly than in Germany with its three-tier structure. Lending to the corporate sector by UK banks, at 6% of their assets, is around one third of the equivalent by German banks (Table 6). | 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 |
Thank you very much for your attention. 8 | For this reason, the commission found difficult in making a selection as all topics were coherent, interesting and properly addressed. Nevertheless, we succeeded to identify carefully those minor variations and distinguished nuances which make the difference to the winning theses amid all the presented works. Eventually, we have come to a decision on the “Governor’s Award for the Best Diploma Theses” for 2021. Though, I would like together with the winners to thank and congratulate all the participants in this contest for their engagement, ideas, the applied methods and findings based on the appropriate methodologies. I wish this passion and devotion is part of your commitment as you advance in your careers. Let us now present the winning contestants. Thank you and happy holidays! 2/2 BIS central bankers' speeches | 0 |
For Treasury securities, when the caps are fully phased in, they will generally only be binding during the middle month of each quarter, when there is typically a spike in maturing Treasuries in the Fed’s portfolio. For agency MBS, as long as long-term interest rates are steady or rising, we expect that the fully-phased-in caps will not be binding. However, if long-term interest rates were to fall sharply—provoking a surge in refinancing and mortgage repayments—the caps would likely bind, limiting the amount of agency MBS that would have to be absorbed by the private market. As currently anticipated, once we start the balance sheet normalization program, we expect it to continue in the background until the FOMC judges that the Fed’s securities holdings are no larger than necessary to implement monetary policy efficiently and effectively. Adjustments to the target range of the federal funds rate will remain the primary tool of monetary policy. However, if economic circumstances were to change during the normalization process in a way that would warrant a sizable reduction in the target range for the federal funds rate, the FOMC would be prepared to resume reinvestment. The program has been designed to be implemented gradually and predictably so that market participants and the U.S. Treasury can anticipate when and at what pace the portfolio is likely to run off over the course of normalization. This should keep expectations more stable and reduce the risk that a sharp shift in expectations could generate undesirably large movements in interest rates and asset prices. | This judgment is supported by the fact that financial conditions have eased, rather than tightened, even as the Fed has raised its short-term interest rate target range by 75 basis points since last December. For example, equity prices have risen, credit spreads have narrowed modestly, longer-term interest rates have declined, and the dollar has weakened. On balance, these movements have been large relative to the upward drift in short-term interest rates. The easing in financial conditions is important because monetary policy does not directly influence the trajectory of economic growth and inflation. Instead, as I have noted in previous remarks, shortterm interest rate changes are an important factor that affects broad financial market conditions.2 Financial conditions, in turn, influence the demand for goods and services by households and businesses. But, if financial conditions ease even as we are removing monetary policy accommodation, this may have implications for further policy adjustments. All else equal, an easing of financial conditions may warrant a somewhat steeper policy rate path. Conversely, if financial conditions were to tighten unduly, then this might necessitate a shallower rate path to temper that tightening. To be clear, this does not mean that the Fed should mechanically target a particular set of financial conditions. That is because the set of financial conditions appropriate to achieving the Fed’s statutory objectives of maximum employment and price stability will evolve over time as the economic outlook changes. Financial conditions are just a means to an end—the achievement of the Fed’s employment and inflation objectives. | 1 |
Both commercial property prices and housing prices have risen substantially for many years and although we have been able to see that the rates of increase have slowed down slightly in recent months, they are still high. I believe that property prices may well continue rising at a fairly high rate over the coming period. But in the slightly longer term such a rapid increase is not sustainable. Why is the Riksbank interested in the property market? The fact that the Riksbank is interested in what is happening in the property market is based on the tasks we have been given by the Swedish Parliament. One is that we shall ensure that inflation is kept at a reasonable level, more precisely at two per cent a year. The other is that we shall safeguard the stability of the financial system. The way the property market develops can have significance for both of these tasks. Property often functions as collateral for the loans the banks grant to households and companies. If the properties are not reasonably valued; if prices have been pushed up through exaggerated optimism or speculation, there is a risk of a heavy price fall. During the crisis of the 1990s it was falling property prices, particularly office premises, that were the cause of major losses for the Swedish banks. Developments in the property market can also affect activity in the real economy. For instance, rising house prices reduce households’ loans in relation to the value of their assets. | Around half of these loans are at variable interest rates and can thereby be initially affected by higher interest rates, and it is households with these loans who have experienced problems in paying them. Most US households still have a good ability to pay. At the same time, the financial institutions have, on the whole, strong balance sheets. This means that even a relatively large deterioration in credit quality in this sector would only lead to limited losses for the mortgage market as a whole. On the other hand, it is not impossible that developments may affect the US households’ consumption. Are there risks with subprime loans in Sweden? Can we expect to see a similar development in Sweden? No, I do not see any risk at present that we will experience this type of development in the Swedish mortgage market. In Sweden, loans to the subprime sector comprise an extremely small percentage of the total number of mortgages, no more than 0.5 per cent. The percentage is much lower in Sweden than in the United States. This is largely because our mortgage market and the US mortgage market are very different. In Sweden, lenders focus primarily on the borrower’s ability to repay. We also have greater access to information on borrowers’ incomes and assets, which makes it easier to assess credit risks. The Swedish and US mortgage institutions also have different methods of financing their lending. | 1 |
Erdem Başçi: Recent economic and financial developments in Turkey Speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at the press conference for the presentation of the July 2015 Inflation Report, Ankara, 30 July 2015. * * * Accompanying charts can be found at the end of the speech. Distinguished Guests, Welcome to the briefing held to convey the main messages of the Inflation Report of July 2015. The report typically summarizes the economic outlook underlying monetary policy decisions, shares our evaluations on macroeconomic developments and presents our medium-term inflation forecasts, which were revised in view of the developments in the last quarter, along with our monetary policy stance. In addition to the main text, the report includes six boxes entailing interesting and up-to-date analyses on various topics. These boxes in the Report look into the information content of credit in explaining inflation, scrutinize the taxation in the Turkish tobacco products market, analyze the export-inflation relationship in food products, examine the use of survey data in short-term GDP forecasts, elaborate on the effect of oil prices on exports, and present information on the government spending multiplier. The titles of the boxes are shown on the slide. All of these analyses shed light on noteworthy issues in the Turkish economy. I strongly recommend that you read these boxes, which will soon be published on our website. I would like to commence my speech by reviewing the global economic outlook, given its undeniable influence on our policies. | Global financial markets remained volatile in the second quarter of 2015, which was attributed to the continued divergence among global monetary policies, the uncertainty surrounding the Federal Reserve (Fed)’s normalization plans and developments regarding the Greek debt crisis. In this period, the volatility in long-term rates reached quite high levels, especially across advanced economies (Chart 1), which also affected emerging-market rates. Thus, portfolio flows to emerging-markets weakened (Chart 2). The global economic slowdown of 2014 continued into the first quarter of 2015 largely due to emerging economies. Despite signs of economic recovery in Europe, geopolitical tensions continued to restrain Turkey’s external demand. The volatility across global markets had implications for the Turkish economy as well, causing fluctuations in financial indicators amid domestic uncertainty. In this period of heightened volatility in long-term interest rates of advanced countries and added interest-rate sensitivity in emerging economies, the interest-rate corridor and the tight liquidity policy we have been implementing played a major role in shielding the economy against global shocks. Moreover, our structural and cyclical measures supporting FX liquidity, core liabilities and long-term borrowing strengthened the economy’s resilience. 1. Monetary policy and financial conditions In view of the uncertainty over global markets and the volatility in food and energy prices, we maintained a cautious monetary stance in the second quarter of 2015. In this period, we kept interest rates unchanged, but continued with the tight liquidity policy to contain risks to core inflation and inflation expectations. | 1 |
These very solid foundations will help Hong Kong cope with the challenge of a possible rise in non-performing financial assets and losses in the financial markets. They also supply the conditions for moving beyond crisis towards opportunity, and for exploring what seems set to become one of the strongest and more interesting of growth engines in markets in this region and beyond: Islamic finance. Like most other asset classes, the growth of Islamic finance decelerated last year as a result of the global credit crunch and unfavourable economic conditions. New sukuk issuance retreated to $ billion last year, down from a high of $ billion in 2007. 1 And without a doubt, there will continue to be great challenges in the coming year. Market participants are reportedly expecting a slowdown in annual growth in global Islamic banking assets to 10-15% in 2009, compared with a growth of 20-30% last year. 2 Even so, a growth rate of 10-15% is robust by any standard, and especially so when set against the strong shrinkage in other areas of finance. There remains a healthy stock of sukuk issuance in the pipeline for this year, thus providing a good market to tap: one report conservatively estimates planned or announced sukuk for 2009 as being in excess of $ billion. 3 As a new asset class, Islamic finance practices banking and investments in compliance with the principles of Islamic Shariah law, which prohibits excessive leverage, risk-taking and uncertainty, and promotes ethical practices. | Zeti Akhtar Aziz: Knowing Nusantara – money that made the region Opening speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the launch of “Knowing Nusantara: Money That Made the Region”, Bank Negara Malaysia Museum and Art Gallery, Sasana Kijang, Kuala Lumpur, 26 August 2014. * * * The Numismatic heritage of the Malay Archipelago is as rich as the region itself. There were few other regions that had such a level of trade that has existed in this part of Southeast Asia. Every type of seafarer had been here over the centuries, bringing with them a wide range of currencies. From Chinese copper cash to South American “pieces of eight”, Nusantara has been a magnet for money of all shapes, sizes and materials. When these are combined with the indigenous currency minted in the Archipelago, the legacy is immense. “Knowing Nusantara: Money that Made the Region” explores the coins and banknotes that have circulated in the Malay Archipelago, telling a story that goes back 2,000 years and that continues to evolve. By telling this story, the objective is to create a deeper understanding of the region. The history of the archipelago is largely about contact and the interconnectivity that existed in the region even during that period. Movement between islands and the mainland are mirrored by the encounters between the indigenous and foreign peoples. | 0 |
Policymakers now had the capacity to expand the size of the Fed’s liquidity facilities and other programs without the threat of compromising the control of monetary policy. This new tool immediately proved enormously helpful. The Fed was able to respond to the deterioration of conditions in the fall of 2008 by sharply increasing the size of its Term Auction Facility program and removing the limits on the size of many of the foreign exchange swap programs. These programs, along with the increased use of the Fed’s standing liquidity facilities and the start-up of the Commercial Paper Funding Facility in late October, led to a sharp growth in the Federal Reserve’s balance sheet beginning in late September. The third phase is marked by the launch of the Fed’s purchase programs, starting with the agency debt program that began in December 2008 and extends through to the present. During this phase, the Fed’s overall balance sheet has actually declined slightly. The demand for the Fed’s special liquidity programs has diminished more quickly than the purchase programs have been ramped up. Although this shrinkage was not anticipated or targeted, it is a welcome indication that there has been improvement in the functioning of the short-term funding markets. 1 As market function has improved and credit spreads have narrowed, many of the Fed’s liquidity facilities have become less attractive and there has been a corresponding decline in usage. | During this stage, the Fed’s monetary policy implementation regime worked in such a way that control over the size of its balance sheet, and more specifically over the level of excess reserves, was essential to ensure that the Open Market Desk could control the fed funds rate in a manner consistent with the FOMC’s monetary policy objectives. Had the Fed’s special liquidity facilities grown sufficiently large during that period, raising the level of the excess reserves in the banking system, the fed funds rate would likely have fallen far below the FOMC’s target rate. To keep the fed funds rate around the target, the only sure-fire option was to avoid a significant expansion in the balance sheet by funding the expansion of nontraditional assets, such as TAF loans, FX swaps, and PDCF loans with similarly sized liquidations of the Federal Reserve’s portfolio of Treasury securities. Thus, over the period from August 2007 up through the time of the Lehman Brothers failure in September 2008, the total size of the Fed’s balance sheet and the level of excess reserves in the banking system changed very little. The second stage began in October 2008 when the Federal Reserve gained the authority to pay interest on reserves, including excess reserves. The addition of interest on reserves to the Fed’s toolkit effectively broke the link between the size of the Fed’s balance sheet and the stance of monetary policy. | 1 |
For example, the National Payments Systems Act was enacted in June 2007, while Access Bank, the fourth largest bank in Nigeria is expected to open a branch in the country by July 2008, raising the number of commercial banks to 14. 2.6 Capital market developments The Lusaka stock exchange performed remarkably well, market capitalisation increased by 45.0% to K18,872.9 billion compared to the increase of 13.9% in 2006. The Lusaka All Shares index almost doubled, rising by 92.9% to close the year at 3,533.52 points compared to an increase of 47.7% in the previous year. This robust performance was a reflection of strong macroeconomic fundamentals in the economy and positive investor expectations in the growth and earnings prospects for both listed and quoted companies. Government introduced 7, 10 and 15-year bonds to help deepen the financial markets in 2007. Foreign investments in Government securities rose to K830.5 billion as at December 2007 from K539.8 billion recorded end-December 2005, an indication of the rising confidence in the economy. 2.7 Fiscal developments On the fiscal front the Government is expected to limit domestic borrowing to 1.2 percent of GDP in 2008. By reducing levels of government borrowing and enforcing prudent budget execution, this should result in greater mobilisation of domestic resources and effective coordination with the monetary authorities. Zambia has articulated its long-term development objectives in the National Long Term Vision 2030, which is aimed at raising Zambia to a middle income status by 2030. | The exact timing of the relaxation of restrictions is unclear, but once it occurs we could find that this has an impact on this supply source, with potential consequences for monetary policy. Another unknown is the impact on demand in the UK economy. It seems pretty clear that migrant workers will spend at least a proportion of what they earn here, even if many will also repatriate savings to their home countries. The second dimension is bigger picture and less direct. Indeed some may not categorise it in terms of the labour market as such as it has an impact in a number of ways. But I like to think of it in labour market terms. I am talking about the entry of the new Asian economies, and in particular China and India into the world economy, and the ability of countries such as the UK to benefit from the much cheaper wages paid in those countries by sourcing the production of both goods, and increasingly services, to such countries. There is nothing new about the process, based as it is on the age old law of comparative advantage. But what is new is the sheer size of those economies, containing as they do over three times the number of people in the EU and USA combined on the one hand, and the willingness and ability of management of firms in the UK to benefit from them. | 0 |
Exchanges The Singapore Exchange and the Singapore Mercantile Exchange operate the systemicallyimportant securities and futures markets in Singapore. They constitute critical infrastructure that must function properly to preserve stability and efficiency. Our laws require the exchanges to maintain sufficient financial, human and system resources, have frameworks and processes to manage their risks, and to regulate and supervise their participants. OTC derivatives The OTC derivatives space has traditionally been the preserve of sophisticated financial institutions which are well placed to assess and negotiate trades among themselves. These financial institutions are regulated by MAS and the risks associated with their OTC derivatives positions are taken into account under the respective regulatory frameworks for these institutions. OTC derivatives, unlike their more standardised counterparts on futures markets, enable customised hedging of risks. Properly employed, they confer significant benefits to the financial intermediation process and hence the wider economy. For example, interest rate swaps enable companies to convert floating rate loans to fixed-rate loans. Companies with large capital investments over a long horizon, such as airlines, shipping companies and infrastructure builders, rely on interest rate hedging tools to manage their financial risks. But with the rapid growth of OTC derivatives globally, weaknesses in the market structure can contribute to a build-up of systemic risk. We saw this during the global financial crisis. The interconnectedness of OTC derivatives market participants and the limited transparency on counterparty risks can trigger rapid contagion. Under stressed market conditions, this can potentially threaten the stability of the financial system. | Most of these cases came to light when the auditors were unable to confirm the companies’ cash and account receivables. The counters were suspended pending investigations by special auditors, and investors had to bear the losses. I still get 2 BIS central bankers’ speeches letters from investors who had lost money in these shares. I can understand their frustrations. Many have asked MAS to do more to bring the full force of our law to bear on the wrongdoers. Let me state the position categorically: MAS will leave no stone unturned to take rigorous action against those who break our laws. But there are real challenges when the fraud is perpetrated by parties outside our jurisdiction. Cross-border investigations and enforcement are intrinsically difficult. Singapore is not alone in facing challenges with international listings. Co-operation among securities regulators and enforcement agencies in different jurisdictions is therefore critical. We cannot eliminate fraud. But we can and must ensure that companies that are brought to the market are of good quality. SGX must be rigorous in evaluating the suitability of listing applicants before admitting them. Other stakeholders must play their part too. First, directors of the company seeking a listing must exercise adequate oversight of internal controls and ensure the veracity of information disclosed. Second, IPO advisers have a legal and professional responsibility to conduct proper due diligence when bringing companies public. | 1 |
Namely, the final report on the Needs Analysis Programme for the National Bank of the Republic of Macedonia contained 138 recommendations addressing the gaps in terms of the EU benchmarks established in 11 areas of central banking. It is my pleasure to point out that some of them have already been implemented, and some of them have been incorporated in the Strategic Plan of the NBRM, that is in the National Bank’s Plan of Activities for this year. However, the overall implementation of the recommendations will require additional technical assistance in terms of experience and knowledge of the ECB and the national central banks of the EU. Therefore, the inclusion of the NBRM in this regional project, which aims to facilitate the preparations for the implementation of the recommendations we received in the report on the Needs Analysis Programme for the NBRM, by establishing a Plan for their implementation, is very important. It will be the basis for the preparation and the implementation of a subsequent project, as well as the basis for further planning and promotion of the bilateral cooperation with the central banks with which the NBRM already has a traditional cooperation, but also for the establishing of a cooperation with other European central banks. The implementation of these and similar projects by the ECB and the EU in recent years, unequivocally confirms their continued determination, commitment and dedication to assist the central banks of the Western Balkan countries on their way to joining the ESCB, and later the Euro system. | On the other hand, the realization of such projects enables strengthening of the cooperation between the central banks of the region and the central banks of the EU, which is inevitable in the process of integrating the entire region in the EU. Let me finally thank the ECB and the EU for enabling the NBRM to participate in this project. I wish success for all the institutions involved in the project in anticipation of even greater cooperation and I thank our hosts for organizing this event. BIS central bankers’ speeches 1 | 1 |
Eva Srejber: The transmission mechanism Speech by Ms Eva Srejber, Second Deputy Governor of the Sveriges Riksbank, at Umeå University, Umeå, 15 May 2001. * * * The Riksbank has a statutory duty to maintain price stability. However, it has the power to decide how to operationalise monetary policy and the monetary policy strategy that is to guide the monetary policy decisions. In the annual assessments of the performance of the Riksbank made by the Riksdag Finance Committee, both the objective and the strategy adopted have won acceptance. Monetary policy is governed by an inflation target expressed as the annual rate measured by CPI is to be limited to 2 per cent with a tolerance interval of ± 1 percentage point. However, the decision to define price stability as a reduction in the value of the krona by two per cent per year in relation to the basket of goods and services consumed by Swedish households is by no means self-evident. In principle, another rate of price increases, other weighted combinations of goods and services, financial assets or currencies could serve as the anchor in relation to which the value of the krona is to be kept stable. When the inflation target was adopted in 1993, conditions did not favour a return to any form of fixed exchange rate. | In my remarks of a year ago, I mentioned that we are at a period of historic transition with regard to the development of the offshore RMB market. Looking at the development of the Eurodollar and offshore RMB markets side-by-side, as we just did, gives us a unique perspective on how things might play out in the long run. Indeed, as the offshore RMB market reaches maturity, there will no doubt be volumes of literature written by financial historians that compare the birth and development of these two markets. While developments so far have been encouraging, we are still at the initial phase of RMB offshore market development. The policy headroom to develop RMB business is already present, and we at the HKMA will continue to provide a safe and efficient financial infrastructure for the conduct of RMB offshore activities. But the most important of all, I would encourage businesses and financial institutions to make full use of such opportunities already available and promote the development of a wide range of RMB services and financial products. Forums like this one help us prepare for the future by examining what has transpired, making comparisons and exploring business opportunities and collaborative initiatives. I am eager to work together with all of you in shaping what is to come. Thank you. 4 BIS central bankers’ speeches | 0 |
If so, that could herald the beginning of the end of the protracted post-crisis super-cycle of weak investment. At a regional level, the global recovery appears to have a broad base across the world. Most regions of the world have seen growth upgrades over the past six months. Currently, countries representing around 80% 12 All speeches are available online at www.bankofengland.co.uk/speeches 12 of global output are expected to be growing above-trend, meaning the global output gap is shrinking. The simultaneity of that uptick in regional growth should give it greater momentum, given the increased importance these days of cross-border spillovers, in trade and finance, and integrated global supply chains. A second reason for greater resilience in world growth since the start of the year is reduced political and policy uncertainty. For anyone who has lived through the UK’s political undulations of the past few weeks, or who is consuming a daily diet of world news, blogs and tweets, that may sound like an odd statement. But, viewed in the round, political and policy risks in a number of countries have eased significantly since the start of the year. At the start of the year, there was widespread media and market concern about changes to economic, trade and foreign policy in the US. By and large, the worst of these fears have failed to materialise. At the start of the year, there were fears of a populist surge through Europe. | Third, to increase our prudence towards the financial system stability, we adopted new techniques for a more comprehensive systemic risk assessment, enriched stress test exercises with the “bottom up” approach and improved models for the indirect credit risk assessment. The twinning project concentrated most of its resources on supervision and financial stability. In addition to constant motivation for improving the regulatory framework, supervision activities and risk administration, this priority becomes even more necessary given added challenges related to specific developments over the past years. The Bank of Albania has undertaken a number of actions to face and overcome these challenges. For the fourth consecutive year, the Albanian economy has been under the influence of the global economic and financial crisis. Its latest stage, the sovereign debt crisis and its interrelation with the balance sheets of the financial system have placed us on the frontline. Our two main trading and financial partner countries, Greece and Italy, have been severely hit by the crisis. Against this unfavourable landscape, the Albanian economy has grown and has maintained its financial soundness. Private agents have an overall sound financial position, relatively low debt levels and positive savings rates. In contrast to other countries in the region, the Albanian financial system has continued to lend to the economy, although at slower pace and somewhat tighter terms. Building on an appropriate and flexible regulatory framework, this response has been determinant to encourage the restructuring of the economy and guide it towards profitable sectors. | 0 |
I shall confine myself largely to what is happening in Europe. The increasing globalisation of financial markets is one pressure for change across the world. But in western Europe, the Maastricht Treaty and the preparations for Economic and Monetary Union are requiring central banks to review their statutes and to align their operating procedures. But I also want to talk about the central banks of Eastern Europe. They are feeling similar pressures several hope that their countries will accede to the European Union within five years or so - but their origins are very different. In 1989 most of the state banks of central and eastern Europe had little understanding of the rôle of a central bank in a market economy. Since then they have had rapidly to acquire the knowledge and skills needed to tackle acute inflationary pressures while many of their leading banks were effectively bankrupt. At the Bank of England, we have been actively involved in helping them by drawing on our own experience as central bankers, adapting the lessons we have ourselves learned over the years to the unique circumstances of the transition economies. Much of this effort has been channelled through our Centre for Central Banking Studies which we established in 1990 to provide technical assistance and training to other central banks. | There is clearly the expected positive relationship with population, but the ratio varies hugely: a central bank on the highest of the three parallel lines has ten times the staff per million population as one on the lowest line. The extent of this dispersion is more apparent in Figure 5 which shows the number of staff per million population for the large countries. With only around 3,500 people - down by more than 50% over the last twenty years and still falling fast - the Bank of England itself is one of the most modestly staffed in relation to its population. In contrast to the significant results found by Fry et al. from their sample of developing countries, regression analysis on the industrial country data shows only weak evidence of small economies of scale. Nor did other variables tested on industrial countries yield any significant results. As for the transition economies, their staff numbers generally conform to those in industrial countries with similar populations. The exception is the Bank of Russia, whose staff looks abnormally large. Some of these central banks are still growing as they seek to carry out their new functions; but one or two, like the National Bank of Hungary, are already reviewing what they are doing and how they do it, and are slimming down. By the end of this year, they expect to have 40% fewer staff than two years ago. | 1 |
Table 1 shows peak levels of the primary fiscal deficit in the UK during the global financial and Covid crises. The degree of fiscal support has plainly been materially larger – more than twice as large. And relative to the size of the economy’s output gap, which is smaller than at the time of the global financial crisis, this degree of fiscal support has been larger still and multiplies of the output gap. Table 1: Peak Fiscal Deficits in the Global Financial and Covid Crises Peak primary balance (a) Peak output gap (b) Global Financial Crisis -8.3 -4.2 Covid Pandemic -18.0 -3.1 Source: OBR and Bank of England Note: (a) % of GDP. (b) % of potential GDP. Fiscal numbers for pandemic are based on OBR November 2020 forecast for FY 2019-20. The appropriate degree of fiscal support to close the output gap has recently been a source of debate in the United States. 21 There, the fiscal response is prospectively larger than in the UK, and the output gap smaller, meaning the upside risks to demand and inflationary are likely to be larger. 21 For example, see Olivier Blanchard here. 21 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 21 (e) Psychological Scarring A final potential difference from the past concerns the degree of psychological scarring of risk appetite among household and companies as a result of crisis. | On the one hand, the hit to capital could be larger if firms’ risk appetite remains subdued or if the debts accumulated during the crisis act as a drag on investment. For example, in the UK Office for Budget Responsibility’s (OBR) downside scenario, scarring reduces output by as much as 6%. 20 Baldwin and Freeman (2020). 20 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 20 On the other hand, it is possible investment and the capital stock rebounds faster than in a typical recession – for example, if there is catch-up investment or if firms seize the opportunity created by the Covid crisis to improvement their digital estates and digital skills. This would reduce, but not eliminate, any scarring. The balance of these effects on investment is something I will discuss in a future lecture. (d) Fiscal Policy After the global financial crisis, the major tool of macro-economic demand management was monetary policy, which was loosened significantly in most countries. By contrast, fiscal policy in most countries was loosened only modestly and in some, including the UK, was tightened. This fiscal response added to the burden placed on monetary policy. The fiscal policy response to the Covid crisis has been very different. Although monetary policy has once again been loosened, fiscal policy has played the frontline role in stabilising the economy. Both the fiscal/monetary mix, and the scale of the all-in supporting policy response, has as a result far exceeded that following the global financial crisis. | 1 |
This lesson had been sorely learned from the Great Depression. The magnitude of the shocks hitting the world economy over the past year or so – as measured for example by the initial contraction in global industrial production – appears comparable with the Great Depression of the 1930s. 1 But, in the Great Depression, global industrial output declined fairly continuously for three full years. In contrast, global industrial output on this occasion seems to have broadly stabilised in a little over a year. There are many differences between now and the 1930s. However, I have little doubt that one of the key factors contributing to the quicker stabilisation of activity this time around has been the speed and decisiveness with which policy throughout the world responded to the twin threats of a failing banking system and falling confidence. At home, the Monetary Policy Committee cut interest rates from 5% to 0.5% in just six months. And with interest rates close to their lower bound, the Committee in March of this year voted to start a programme of asset purchases financed by the issuance of central bank reserves, otherwise known as “quantitative easing”. These extraordinary actions were intended to reduce the risk of inflation falling below the 2% inflation target that the Bank of England is mandated to meet. They do so in a number of ways. The reduction in Bank Rate by lowering interest payments on loans has improved many companies’ cash flows at a time when turnover is weak and working capital is scarce. | Caleb M Fundanga: Improving financial inclusion in Zambia Remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Celpay Mobile Banking Conference, Lusaka, 16-17 September 2009. * * * The Chairman of the Board, Celpay Zambia, Dr Jacob Mwanza; The Chief executive Officer, Celpay International, Mr L. Muchenje; Chief Executive Officers and Representatives of Banks and Financial Institutions present; Distinguished Invited Guests and Resource Persons; Members of the Press; Ladies and Gentlemen I wish to express my gratitude to Celpay Zambia Limited and in particular to Dr Jacob Mwanza, the Chairman of the Board, for inviting me to speak at this important conference. I am informed that the conference aims to pave the way for the future of mobile banking in the quest to improve financial inclusion in our country. Mr Chairman, the need to promote wider access to financial services through innovative products by financial institutions and other market players cannot be overemphasized. Financial services are a critical tool to ensure that entrepreneurs step onto the economic growth ladder and create a brighter future by tapping their own creativity in income generating activities. The provision of financial services to the majority of our people especially the small and micro entrepreneurs who are financially excluded is a key element in alleviating poverty in the country. Improved access to financial services enables availability of funds for investment in income generating activities that ensure that the public lay a foundation for better standards of living. | 0 |
23.07.2020 Challenges for the Spanish economy in the face of the impact of the pandemic Webinar Economy, work and society in Spain. The impact of COVID-19. Spanish Economic and Social Council (CES) Pablo Hernández de Cos Governor Honourable Minister for Labour and Social Economy, Chair of the Spanish Economic and Social Council, ladies and gentlemen, Good morning. It is a pleasure to be able to participate today in this presentation of the Annual Report of the Economic and Social Council (CES). As earlier highlighted, its content goes beyond the 2019 timeframe of events and delves into the challenges that the COVID19 pandemic entails for the economy, for social cohesion and for the labour market in Spain. In this respect, the CES and the Banco de España have concurred in recent weeks that our respective studies and annual reports should strive to be useful instruments that help society face these challenging times. An incipient, incomplete, uncertain and uneven recovery The COVID-19 pandemic has exacted a very high price in terms of human lives as well as deep-seated disruption to society and the economy. As a result, the dynamics marking the global and Spanish economic environment in late 2019 and early 2020 have been abruptly altered. Specifically, the pandemic and the lockdown measures to combat it have affected all economies most adversely. | And along with income-sustaining measures (such as the minimum living income), they will help reduce inequality in Spain. Inequality levels, which were higher at the onset of this crisis than at the start of the previous one, will probably rise further in the coming quarters, given that this crisis is affecting groups with relatively low incomes to a greater extent. Nor can we forget the need to address ongoing population ageing which, among other aspects, will most appreciably influence the behaviour of the labour market, growth dynamics and the main fiscal magnitudes in the coming decades. It is also a first-order challenge for our pension system. And, of course, the Spanish economy must be nimble and proactive so as to harness the new opportunities that arise from combating climate change and from the transition to a more sustainable economy, from the changes in the globalisation model and from the foreseeable acceleration in the digitalisation of the economy. The prompt design of a medium-term fiscal consolidation programme for gradual implementation once the crisis is behind us After the pandemic, the Spanish economy will post the highest levels of public debt in many decades, partly as a result of the necessary fiscal expansion in the short term. Accordingly, it is also necessary to design a plan to restore health to the public finances in the medium term, the application of which, in any event, will have to be postponed until the recovery is firmly rooted. | 1 |
On the latest Banco de España estimates, GDP growth should be slightly over 3% this year and somewhat below that figure in 2016, meaning that growth in our economy will continue to outpace the euro area average. In terms of composition, national demand has continued to expand strongly. After several years of containment in household spending plans, the favourable course of their disposable income coupled with brighter job prospects and readier access to credit have been conducive to the growth of consumption. Real estate market indicators show a recovery in the sector which, while moderate and uneven across market segments and regions, is also contributing to rekindling household spending. The buoyancy of final demand and the progressive normalisation of financial conditions have continued exerting a positive effect on business investment. The firming of the recovery in the euro area economy has helped compensate for the recent loss of momentum in some non-Community markets, meaning that exports maintain high growth rates. Ongoing contributing factors are the gains in competitiveness in our economy, which reflect the containment of costs in recent years by Spanish firms and, more recently, the depreciation of the euro. Nonetheless, imports have responded forcefully to the pick-up in domestic spending (we should remember that gains and losses in competitiveness are felt abroad but also at home, in respect of imports), which has led, in net terms, to external demand generally not contributing to the increase in activity. | Those basing their arguments on past experiences in emerging economies fail to take into consideration the many differences in the case at hand: Greece is an advanced economy sharing a single currency with 16 other democracies which has signed up to a common set of rules, institutions and overriding objectives, notably macroeconomic and financial stability, together with the other countries of the European Union. Greece’s euro membership rules out debt-devaluation spirals and ensures price stability in the medium term. Its economy is highly integrated – via a number of channels, such as trade and financial flows – with other advanced economies both in Europe and around the world that can potentially act as contagion mechanisms. Greater economic integration has been accompanied by an increasing degree of institutional cooperation. At the same time, the country’s economy is affected by a number of structural weaknesses and rigidities that have resulted in the persistent accumulation of public and private sector imbalances. The thorough implementation of the comprehensive programme of structural reforms and fiscal consolidation negotiated with the international authorities is the only way forward which is fully consistent with the long-term interests of the people of Greece. To paraphrase the title of a study by IMF staff, 3 the debate on debt restructuring in a euro area country is unnecessary, undesirable and unhelpful. | 0 |
But, very occasionally, a constitutional reform occurs which leads to a new piece of machinery. That was the case with the MPC. The Committee itself has an interesting and unusual structure: five executive members of the Bank and four external non-executive members, all chosen for their expertise on monetary policy and not as representatives of different interest groups. You may wonder whether the nine members of the MPC have any historical antecedents. If you look carefully you can see them in one of our few remaining great Jacobean houses - Aston Hall in Birmingham. In the Great Dining Room there is a frieze, a marvellous example of early seventeenth century plasterwork, showing a set of nine warriors. These are known as the “nine worthies”, described as “high-relief figures in their own niches separated by scrolling”, a pretty good description of the MPC. The Nine Worthies of Chivalry as they are known, comprise three groups: three honest heathens, three Old Testament heroes and three champions of Christendom. It is interesting to speculate into which of these groups various members of the MPC fall, but I will leave that to you. But, wait a moment, there are two additional figures in the frieze. One is Perseus - presumably the minute taker. The other is described as a “so-far unidentified figure, certainly a later pastiche”. This must be the Treasury representative. Sadly, the debates among the nine worthies, presumably recorded in the minutes and reported to Sir Thomas Holte who commissioned the frieze, are lost to posterity. | On the Committee itself various suggestions have been made: to extend the terms of appointment of members of the MPC, to make those longer terms non-renewable, and to appoint people with more diverse backgrounds. By far the most fundamental of these suggestions is the proposal to appoint representatives of different industries or regions to the Committee, as opposed to monetary policy experts. That would change the nature of the debate and undermine the mutual confidence of members of the Committee in each other if it were felt that some were representing a specific interest group. With experience of the MPC, I think that this argument has come to be accepted. The proposal that the minutes of MPC meetings should include more description of individual views I discussed earlier. The Committee has been opposed to such a change for the reasons I gave. In its early days the Committee was sensitive to the view that the minutes, then published six weeks after the meeting, should be published earlier, and it shortened that lag to 13 days in October 1998. The forecast process has attracted much attention, and was discussed at length in the Kohn Report. Presenting the forecast in terms of a fan chart, in order to highlight the balance of risks to the outlook, has proved successful. But it has proved more difficult to explain the role of a projection conditioned on the assumption of constant official interest rates. | 1 |
But it would be unwise to simply assume the market will bottom out at these levels for three reasons. First, expectations of house price declines can easily be self-fulfilling. The feared loss in value can overwhelm the benefit of low mortgage rates, leading would-be buyers to sit out the market. Second, with home construction at minimal levels, housing supply cannot decline in response to weak demand. Home prices thus are very sensitive to shifts in demand and credit supply. If access to mortgage credit for home purchases is unduly restricted, the market-clearing price for housing will be lower than it would be if access to mortgage credit was less constrained. Third, in contrast to the efficient mechanisms in place in the commercial property market to work-out troubled debt, the infrastructure of the residential mortgage market is wholly 6 BIS central bankers’ speeches inadequate to deal with a systemic shock to the housing market. Left alone, this flawed structure will destroy much more value in housing than is necessary. In a recent speech I called for a comprehensive approach to housing policy. | BIS central bankers’ speeches 3 To understand our prospects a bit better, we need to look at the likely behaviors of business and household sectors separately. Circumstances for the business sector are mixed with larger corporations generally in much better shape than smaller businesses. Many large corporations entered the recession with healthy balance sheets. While leverage1 did increase sharply in the recession, it has subsequently come back down to levels similar to the 1990s. Record profit margins have enabled large corporations to build substantial buffers of highly liquid assets. Large businesses are cautious because of concerns about the sustainability of growth and demand, political dysfunction, the health of the financial system and their ability to retain their access to credit throughout the business cycle. For smaller firms, the situation is generally more difficult. Because this sector has a higher exposure to real estate, falling real estate values pushed up leverage for this group and it remains well above previous historical highs. Although small businesses identify weak demand as their major problem, the availability of credit is also an issue. An improvement in their ability to obtain credit would seem to require some stabilization of real estate prices and a substantial increase in demand for their products and services. Turning now to the household sector, Chart 4 shows that a combination of the fall in interest rates, paying down of debt and debt write-offs has substantially lowered the share of income required for households to service their debt. | 1 |
While regional capital markets have generally experienced strong growth since the financial crisis, our potential is limited because by international standards the regional equity and bond markets are small and fragmented. We made some headway four years ago with the Chiang Mai Initiative (CMI), which saw the expansion of existing multilateral currency swap arrangements to include all 10 ASEAN members, as well as the conclusion of 16 bilateral swap arrangements, totalling $ in combined facility. When the CMI was launched in May 2001, it was agreed that Finance Ministers should review the Initiative 3 years 2 BIS Review 20/2004 after implementation. So it would be timely this year, for ASEAN Finance Ministers together with our “Plus-3” counterparts to consider what and how the review of the CMI could be done. We should also explore further avenues of cooperation. For example, we may develop greater linkages between stock exchanges in the region, or harmonise standards and conventions so as to make it easier for investors to operate across the capital markets in the region. In such initiatives, we do not have to wait for all ASEAN members to be ready. Once two or more ASEAN members are ready to make the move, they can work together as pathfinders for the whole region. Conclusion Globalisation has presented many challenges to ASEAN, but it has also created many opportunities. Integrating our economies requires hard work, political will and often, tough decisions. | The real point is whether, given the bank’s particular circumstances, the risk management practices they adopt are adequate. And that, primarily, is a matter for the bank’s management to determine, although we will of course, given our statutory responsibilities, also have an interest in this. I stress these points for three particular reasons. First, because I don’t want anyone to think that we are against banks taking risk. We’re not. That’s the business they’re in. We simply want to make sure they recognise and manage the risk effectively. Second, because I want to make clear that we are not hell bent on driving banks to invest in unnecessarily sophisticated risk management systems. What’s appropriate will clearly vary from bank to bank, depending on the nature and scale of their business and the risks they run. Third, because I want to be perfectly clear that Basel II is not some underhand means of making life difficult for smaller banks by raising the hurdle too high in terms of what they need to spend on risk management and on regulatory compliance. Indeed, on the contrary, the whole thing is carefully designed so as to accommodate banks of all shapes and sizes. So, how will Basel II change banking in Hong Kong? The answer, I would suggest, is that we won’t see any dramatic changes overnight, but we will over time see some re-focusing of how the risks within banks are addressed, both by banks themselves and by the supervisors. | 0 |
The main themes from that exercise were outlined in the BSB’s first Annual Review published earlier this year. 35 Following several episodes of misconduct in wholesale capital markets, the Fair and Effective Markets Review (FEMR) was launched in 2014 to assess their functioning, overseen by the Bank, HM Treasury and the FCA. It reported last year, making a number of recommendations including the establishment of a FICC Markets Standards Board (FMSB). 36 The FMSB came together last year with a remit to provide guidance on appropriate standards of conduct in wholesale markets. Encouragingly, most of the major players in wholesale markets have joined the FMSB. Regulators will use these standards to inform their judgements under the expanded Senior Managers Regime. At an international level, the Financial Stability Board (FSB) agreed in early 2015 a work-plan to reduce misconduct risk, including in the area of key market benchmarks. 37 Following a recommendation in FEMR, work is underway to develop a global code of conduct in the foreign exchange market. Also in 2015, the G30 issued a report on Banking Culture and 34 For further details see http://www.fca.org.uk/consumers/financial-services-products/insurance/paymentprotection-insurance/refunds. 35 See BSB (2016). 36 See FEMR (2015). FICC here refers to Fixed Income, Currency and Commodity markets. 37 FSB (2015). 8 BIS central bankers’ speeches Conduct. 38 And in the same year, the New City Agenda published its assessment of progress towards improving culture among UK banks. 39 This is good progress. | That means they are unlikely to be accessible to the vast majority of the general public. It is communication among the financial elite in the language of the financial elite. Perhaps that is no more than confirmation of what we already knew. Nonetheless, it means these communications are, by themselves, unlikely to have helped build, or rebuild, generalised trust in banking. It also begs the question of what more could be done to make banking more accessible to the wider public to help build trust. One option might be for the banking industry to conduct events similar in spirit to the Open Forum – events which seek to engage with, and take messages from, the general public. These might be one means of accreting personalised trust with customers – “Trust Town Halls”. To be successful, these would need to be repeated rather than one-off events, as personalised trust arises from repeat interactions. Another idea is to consider whether there was scope for something akin to an annual report for customers, rather than investors. This might be (considerably) shorter in length, (considerably) simpler in language and (considerably) easier to digest in a 5 minute sitting. It would be part of banks’ contract, social rather than legal, with their customers. A third idea 60 Shannon (1948). 61 DuBay (2004). 62 These include the Coleman−Liau, ARI, SMOG, Gunning fog, Flesch−Kincaid and Coleman correct completion measures. | 1 |
12 Indeed, even when purchases of additional longer-term securities cease, the enlarged balance sheet will provide substantial ongoing stimulus. It is important to recognize that the Fed could remain in this posture with policy “on hold” for a significant period. BIS central bankers’ speeches 9 | More particularly, we anticipate an increase of up to 90% of the total volume expected by the time all participating central securities depositories (CSDs) connect to the platform. The next migration wave will also lead to an increase in the use of links between T2S markets that facilitate cross-border transactions. T2S has significantly contributed to the integration of post-trade processes across all participating markets. This has been achieved by the gradual implementation of the single rulebook, i.e. standards, rules and procedures, in the T2S market. Harmonisation measures necessary for ensuring efficient and safe cross-CSD settlement in T2S are fairly advanced. Monitoring has shown that, by the time they migrate to T2S, market communities are close to achieving full compliance with the T2S standards. Nevertheless, some gaps in compliance remain, for example in the area of corporate actions. These are complex business processes for asset servicing, which involve rules and procedures developed by a range of different actors. The newly established Advisory Group on Market Infrastructure for Securities and Collateral (AMI SeCo) will address these gaps in compliance, among others. This advisory group will also look at ways in which the existing methodology could be used as a blueprint for building a methodology to harmonise collateral management.1 In addition, the T2S harmonisation agenda has identified a number of regulatory and legal barriers to post-trade harmonisation that fall under the regulatory agenda. These relate, among others, to issues such as conflict of law and withholding tax procedures, which are expected to be tackled this year. | 0 |
The objective therefore is not solely to bring down inflation that is currently above target due to external pressures that are waning, but to ensure that inflation is neither above nor below target when those pressures have passed through of the economy. 6 UK GDP surpassed its 2018 Q1 peak in 2013 Q2. In the US, productivity growth initially appeared to be bouncing back after the crisis but from 2011 fell and failed to pick back up to precrisis growth rates. 8 Cunliffe (2016) 7 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 The key question, therefore, is how much inflation is domestic economic pressures likely to generate over the next couple of years. Let me turn to that now. We do not yet have all the evidence. But the significant drop in activity in the UK in the first quarter of this year looks to have been largely an aberration, driven by poor weather. Retail sales – which declined in the first quarter of the year – have bounced back. GDP in the three months to May – the ONS’s first of its new monthly GDP releases – grew at 0.2%, with services growing at 0.4%, indicating a recovery over April. The soft data currently available also suggest that the economy recovered its end 2017 growth path in the second quarter of the year with the composite PMI for output back to its highest level since December albeit with somewhat different composition. | If this is confirmed, as I think probable, the overall picture is of an economy expanding around or a little above its potential rate of growth. The combination of lower rates of productivity and labour force growth mean that potential is growing at around 1.5% about a percentage point below its pre-crisis rate. 9 Trying to make very precise forecasts of the output gap is a fool’s errand but the balance of evidence is there appears to be little slack left in the labour market and little spare capacity in firms. Unemployment is at 4.2% – pretty much the MPC’s revised estimate of the natural rate. Underemployment is low. 10 Non-price measures – for example, surveys of recruitment difficulties and measures of churn in the labour market – have been signalling increasing labour market tightness for a number of years. 11 Whole economy regular pay growth reached 2.5% in December and has stayed above that level through the first few months of 2018 though there has been a slight slowing in the latest – April – data (from 2.9% in March to 2.8% in April). The higher frequency measure of pay growth, 3 month on 3 month growth, has been above 2.5% for 11 months between last May and March this year – the longest run of such consistent wage growth since the crisis (Chart 7). | 1 |
So how will the FLS help? Let’s be clear on one thing. It is up to the banks whom they lend to. If a firm goes under, or simply can’t repay its loan, that bank loses money: under the FLS the credit risk stays with the banks. And it is not our intention that banks put themselves at risk by making imprudent loans. Although there are many good quality businesses seeking extra credit, not every one is as good a credit risk as they might make out to their local journalist or MP, so we need to be wary of judgement by anecdote. But the FLS will put the pressure on banks to lend where they profitably can. That may “turn the conversation around” as banks do more to seek out lending opportunities rather than businesses or home buyers struggling to find accommodating banks. If demand for credit turns out to be weak then that will add to the competitive pressures on the supply of credit. In summary, I am confident that the FLS will help the supply of credit. Before its introduction, it was more likely than not that the stock of credit would contract further over the next 18 months. Perhaps it still may. But any return to positive credit growth would be a better outcome than we could have previously hoped for. But I want to underline one thing about the expected outcome: I expect banks’ usage of the scheme to exceed their lending growth. | BIS central bankers’ speeches 7 The FLS has been implemented in large part because of the developments in financial markets I have described: an example of the important and powerful linkages between the real economy and the financial sector. The continued uncertainties about the future of the Eurozone and about the European banking system meant that during the past two years bank funding markets have had periodic bouts of closure. And when open, spreads of bank debt over risk-free rates have remained elevated. A number of large UK banks still rely on wholesale markets for funding at the margin and higher wholesale funding costs have spilled over into other funding markets – driving up retail deposit rates for example. Prior to the announcement of the FLS, banks were passing on their elevated funding costs to their lending rates. Over the 12 months to mid-2012, we saw lending rates to businesses and for mortgages rising (Chart 5). Furthermore, the Bank of England’s 2012 Q2 Credit Conditions Survey of UK banks suggested that household secured and corporate lending rates were expected to rise further. Chart 5 Chart 6 Change in bank funding and mortgage rates between 31 July 2011 and 31 May 2012 Annual lending growth to households and companies(a) Per cent 16 14 12 10 8 6 4 2 0 -2 2004 2006 2008 2010 2012 (a) Based on scheme definition. | 1 |
the overnight interest rate (of which a euro area average, the EONIA, is computed and published every day by the ECB), is influenced by expectations of the cost of Eurosystem credit – the so-called MRO rate – at the next weekly monetary policy operation. A short-term inter-temporal arbitrage calculus anchors the overnight interest rate applied on the credit transaction between banks that need liquidity and banks that have a liquidity surplus. 3 The second dimension of the inter-temporal calculus has a longer horizon and a wider scope of application across asset classes. Banks can borrow short in the money market or from the Eurosystem and decide to engage in term lending to other banks or to their customers. Bank customers, in turn, can use bank liquidity to finance consumption or the acquisition of capital. It is important to note that all of these money transactions in the broader economy involve traders weighing the costs of their borrowing against the return opportunities on their asset acquisition at different points in time, where the horizon is typically longer than a week. But, again, as banks borrowing from the Eurosystem are the source of this liquidity propagation pattern, and banks’ financial calculus is based on their anticipations of the interest rate settings by the Eurosystem in the future, such anticipations anchor the pricing of credit in the broader economy. We call this “the interest rate channel” of monetary policy decisions. | In a financial crisis of these proportions, “outside money” – an asset that is not a liability for anybody else than a central bank – becomes the sole trustworthy store of value. 4 Only a central bank, the monopoly provider of outside money, can respond to the scrambles for liquidity. The ECB injected its funding capacity into a market vacuum left wide open by bank retrenchment, dealer defaults and investor panic. In these conditions, inter-temporal financial arbitrage – of the type I described above – becomes impaired. The power of banks and dealers to engage in or finance inter-temporal trades of liquidity balances is degraded. So the main conduit of monetary policy – which depends on those trades – is lost. The ECB had to open a new channel, the “liquidity channel”, to get round the roadblocks facing the interest rate channel (see slide 4). More precisely, the ECB acted in two dimensions. It sought to alleviate the difficulties experienced by banks in getting liquidity from the interbank market, which was putting pressure on the assets side of banks’ balance sheets and increasing the risks of hindering credit supply. At the same time, it sought to restore the normal pass-through from short-term money market (lending) rates to other market and bank interest rates. | 1 |
29.10.2019 The Spanish economy: outlook and challenges Third Economic-Insurance Meeting: “Economic future and insurance industry trends” Pablo Hernández de Cos Governor Ladies and gentlemen, good morning. I should like to start by thanking the president of the Lawyers’ Mutual Society, Enrique Sanz, for his kind invitation to deliver the closing address to this third economic-insurance meeting. It is an honour and a pleasure to participate in this event and to share with you some reflections on the economic outlook for the immediate future and, especially, on the main medium and long-term challenges facing the Spanish economy. The degree of vulnerability of the Spanish economy to possible shocks and, ultimately, the well-being of the Spanish people will largely depend on how the economy’s main structural problems are addressed. The economic situation The global economic expansion in weakening against the background of the downturn in international trade… The international economic environment in which the Spanish economy operates has become more unfavourable over the past year, with a slowdown in growth and, in particular, in international trade. Global GDP growth continued to moderate, to a rate of 2.8% year-onyear in the second quarter of 2018, down more than one percentage point (pp) from a year earlier. In addition, growth projections have been revised downwards in most economies in recent quarters. Indeed, global GDP growth is projected this year to be at its lowest level since the international financial crisis. | As you know, the Governing Board adopted the expert group's conclusions and indicated to the Federal Council that, based on the profit figure following revaluation, an amount corresponding to half the gold holdings could be earmarked for purposes other than monetary policy. The possible uses for the sales proceeds have been the subject of much political debate. None of the proposed solutions have succeeded in attracting a consensus among the population or in the Federal Parliament. On 16 December, the parliamentary debate was concluded without an agreement being reached. Thus, a sum of CHF 21.1 billion, corresponding to the proceeds of the gold sales, has been included in the usual profit distribution procedure. Some people fear that, following this transfer, the National Bank will no longer have sufficient currency reserves. I have a word of reassurance for them. This issue has been examined in depth and has been discussed by our Bank Council. Our currency reserves total CHF 60 billion – an amount which may be considered appropriate by comparison with other industrialised countries. BIS Review 30/2005 3 But nor are these reserves excessive. Furthermore, it is important that the currency reserves evolve over time, in tandem with the size of our economy. This is why, in accordance with Article 99 of the Constitution and Article 30 of the National Bank Act, the SNB has adopted a provisioning policy that provides for gradual growth in its currency reserves. | 0 |
This familiarity can facilitate crossborder cooperation and coordination in the event of a failure of a systemically important institution, and stem competing insolvency proceedings in multiple jurisdictions and the ringfencing of assets. This last point shouldn’t be discounted. It’s worth remembering that after Lehman Brothers’ parent company initially filed for bankruptcy in the US, many foreign proceedings were initiated for Lehman affiliates around the world. It took over six months to establish a cross-border protocol among the representatives of the more significant Lehman Brothers affiliates. The protocol was meant to improve communication and cooperation among the representatives as well as minimize costs and maximize recoveries for creditors. In the case of one of the most significant Lehman Brothers affiliates, Lehman Brothers International Europe located in the UK, no agreement was ever reached. OLA also provides for backstop liquidity through the OLF, a feature not available in the ordinary bankruptcy process. During the financial crisis, lender of last resort liquidity from the Fed was critical to promoting faith in the financial sector. So, too, will backstop liquidity be important for restoring faith in a recapitalized institution in resolution under OLA and preventing a run. The bankruptcy process also offers many positives. The US Bankruptcy Code is admired around the world and has been the model for similar regimes in other countries. The court-administered nature of bankruptcy provides transparency and predictability to parties and provides stakeholders with a meaningful opportunity to be heard. | However, as many have noted, the current bankruptcy laws were not designed to resolve systemically important financial institutions. Although firms have worked within the existing bankruptcy framework for purposes of resolution planning, revisions to bankruptcy law could be a means of facilitating the orderly bankruptcy resolution of a major financial institution. However, the devil is, of course, in the details. The bills that passed the House earlier this year include many helpful changes regarding current bankruptcy law. They may help facilitate the resolution strategies of most of the systemically important financial institutions. Notably, however, these proposals do not include a credible source of backstop liquidity. Congress recognized the importance of such a facility in the OLF. Any bankruptcy regime without one may lack the scale and speed needed to bolster market confidence and may not be as effective in preventing contagion, particularly with respect to a systemically important firm. Conclusion In conclusion, I believe the legislative and regulatory reforms to the financial system over the last 10 years have made the system more flexible and resilient. At the same time, it is entirely appropriate to revisit these reforms now and assess their efficacy. In doing so, though, let’s keep my aphorisms in mind and not risk history repeating itself. I say this because the American public 5/6 BIS central bankers' speeches does not deserve to have history repeated. Improved resilience should permit financial institutions to weather another shock and, if needed, fail under the Bankruptcy Code as contemplated by the living will process. | 1 |
Because within the EU we can enter into more or less binding commitments under the terms of rules and legislation that comes out of the process here in Brussels, without infringing on national sovereignty. The fourth point I would make is that the EU, as well as leading the way in addressing that problem regionally, must take a very close interest in the arrangements for global resolution, because pretty well every single one of Europe’s largest financial institutions operates on a global scale and, furthermore, the largest global institutions headquartered outside the EU all have sizable and complex businesses within the EU. In the run up to the G20 meeting of Finance Ministers and Governors in October and then the Leaders summit in November, our community and the political community will have to think about the extent to which sovereignty in this area could be pooled or whether, instead, to come up with a middle road which at least removes obstacles to co-operation. I suspect it is unrealistic at this stage of global financial development and co-operation for there to be a multilateral binding treaty that would put a single country in the sole and unqualified lead in the resolution of a global financial institution. But that doesn’t mean that there is nothing useful to do. We could do things along the following lines. First of all, in our national and EU legislation, we could all remove impediments for one country to co-operate with other countries in the event of a resolution. | The will to pursue a given business activity and succeed is critical if promising ideas are ultimately to evolve into marketable products or processes. Switzerland cannot be truly ambitious without ambitious entrepreneurs, and surveys suggest that the country still has room for improvement here. Against this backdrop, steps should be taken to cultivate innovative drive and entrepreneurial thinking early on, for instance by encouraging high school students to do projects in which they found their own small companies. Various universities already run programmes designed to assist young researchers in bringing innovative products and services to market. Private initiatives also play a significant role in nurturing entrepreneurship in Switzerland, helping young people learn how to transform an idea into an innovation and operate a business. 1/1 BIS central bankers' speeches | 0 |
It will probably be necessary to scale it back in increments as demand pressures in the domestic economy recede and growth in trading partner countries gathers more momentum. Current forecasts indicate that this will happen, as can be seen at the right in the chart. Long-term interest rates will reflect this, and the longterm interest rate differential will narrow. Chart 6 Another important factor is that it is unclear what benefit the investments affected by the capital flow management measure have for Iceland at present. The Treasury’s borrowing need is limited in historical context, and strictly speaking, the Treasury does not need the funds generated by the bonds in question. If the special reserve requirement were not in effect, the Central Bank would probably have to hold larger foreign exchange reserves so as to mitigate the risk associated with carry trade-related inflows and the potential for sudden outflows. This would be quite costly, as the global market returns on the reserves are unusually low at present. At the same time, foreign investors can expect attractive returns on Icelandic Treasury bonds, and the more stable the króna, the greater the risk-adjusted interest rate differential. In order to reduce 7 that differential, the Central Bank would therefore need to allow increased exchange rate fluctuations, which would also exacerbate the risk faced by residents. Under current conditions, it can even be argued that for the Icelandic economy, the net benefit from such inflows is negative. | Whether it is the volume of foreign exchange reserves or the growth of foreign exchange turnover or the amount of savings that needs to be mobilised for promoting economic growth and development, Asia is likely to occupy top position in the world, if it is not already there. The prospects of a strong relative shift of financial market liquidity into Asia are clear, so is the need for upgrading professionalism in finance, hopefully at a pace that is commensurate with its increasing importance in global finance. It is therefore absolutely right for the first regional office of ACI to be established in Asia and, if I may add, for it to be established in Hong Kong, as the truly international financial centre in the region. On the choice of Hong Kong, we are of course grateful and feel honoured, and I as Chief Executive of the Hong Kong Monetary Authority and as Honorary President of the Treasury Markets Association offer the full support of the two organisations to the activities of ACI and ACI Asia. Thank you. BIS Review 90/2008 1 | 0 |
Available indicators suggest that there has been a gradual recovery since mid-2015, which continued in the second half of 2016. A key factor here is improved business and household sentiment in the euro area and other advanced economies, which in turn creates a more favourable environment for the Swiss export industry. Overall, the signals from the economic indicators are consistent with our previous GDP growth forecast of around 1.5% for 2016 as a whole. Developments on the labour market support this view. Employment statistics show that the number of jobs in Switzerland grew in the third quarter, too. Up until November, the seasonally adjusted unemployment rate for this year was stable at 3.3%. The outlook for the coming year is cautiously optimistic. Over the course of 2017, export demand looks set to gradually strengthen further. For the export industry, this will mean better capacity utilisation and less pressure on margins. We are also expecting a gradual recovery on the labour market. Various surveys confirm this assessment. Together with our continued expansionary monetary policy, labour market developments should boost domestic demand. Private consumption, too, is likely to once again make a greater contribution to economic growth. Overall, as for 2016, the SNB expects GDP growth for 2017 to be roughly 1.5%. However, the Swiss economy will also face some major challenges in the coming year. Structural change continues to affect several important industries. Retailing is having to contend with changes both to distribution channels and the spending habits of households. | Students spend about one to two days in class, and three to four days at work each week for a period of one or two years. Now in its fourth year, the programme has taken in 37 students. This includes 22 who have graduated from the programme, of which 9 students have successfully secured a job offer at the bank before graduation. The WSDeg programme is a win-win proposition. The students get an early taste of what the industry is like which can help them make better informed career decisions. For the firms, internships are an effective talent attraction tool – employers can tell a lot more about the suitability of prospective employees through a short internship on the job compared to any number of interviews and tests. We need to dramatically scale up such programmes. https://www.mas.gov.sg/news/speeches/2020/gearing-up-for-new-and-evolving-jobs-in-financial-services 14/18 04/12/2020 "Gearing up for New and Evolving Jobs in Financial Services" - Remarks by Mr Ravi Menon, Managing Director, Monetary Authorit… MAS will introduce a new Work-Study Support Programme to co-fund the internship stipend of students who are trainees at financial institutions under WSDeg programme. Funding will be at 80% of the monthly stipend, capped at $ per trainee. MAS has been working with the private banking industry for an indicative commitment of about 200 trainees over the next 3 years. We plan to expand our efforts in other growth areas too, such as asset management. | 0 |
The SSM Regulation conferred on the ECB a large part of the prudential supervision competences that had hitherto been the remit of the NCAs.6 However, a distinction has been drawn between what are known as “significant institutions”,7 which are supervised directly by the ECB (currently 113 institutions representing nearly 82% of total banking assets in the participating countries), and “less significant institutions”, which will continue to be supervised directly by the NCAs and indirectly by the ECB, with the main aim of ensuring they are treated consistently across the area. The tasks of granting authorisation to credit institutions (and, when appropriate, the withdrawal thereof) and of assessing proposals to acquire qualifying holdings are conferred on the ECB irrespective of whether the institutions are significant or not (“common procedures”). In any case, the ECB is ultimately responsible for the supervision of all credit institutions of participating countries, and may adopt regulations or issue guidelines or general instructions to ensure consistent supervision across the SSM. It may also assume the direct supervision of less significant institutions whenever it deems necessary to ensure consistent supervision. 5 In October 2020, the supervisors of Bulgaria and Croatia — countries that have not yet adopted the euro — began “close cooperation” with the ECB. This is the mechanism envisaged for countries outside the euro area to join the SSM. | A long term of office may also be advantageous from the standpoint of accumulation of experience, and may determine the capacity of influence in the different international fora in which the senior officials of supervisory bodies take part. In this respect, the term of office of the Governor (and of the Deputy Governor and Council Members) of the Banco de España – currently six years, nonrenewable in the case of the Governor and the Deputy Governor – although longer than a Parliamentary term, is relatively short by international standards (see Annex 4).8 A good benchmark for the future could be the term of office of the members of the ECB’s Executive Board which is set at eight years and is non-renewable (as is the case at the Bank of England). The explicit prohibition of renewable terms of office is, in my opinion, a key element that should be preserved. While few of our central bank peers share this characteristic, non-renewable terms of office are warranted because they nullify the incentives for the incumbents in the highest positions of authority at those institutions to ingratiate themselves with those who decide on their possible re-election. In the case of the Banco de España, as I have mentioned already, the Governor and the Deputy Governor have non-renewable terms, but the members of the Governing Council do not, since their term is renewable once. Non-renewable terms could therefore also be considered for members of the Governing Council. | 1 |
Ivan Iskrov: Financial progress and prospects Speech by Mr Ivan Iskrov, Governor of the Bulgarian National Bank, at the Sixth Business Roundtable with the Government of Bulgaria, Sofia, 21 March 2006. * * * Dear Minister Oresharski, Ladies and gentlemen, It is a pleasure for me to participate together with the Minister of Finance in this panel event dedicated to the financial development and prospects of this country’s economy. Based on the statutory division of labour between the Central Bank Governor and the Finance Minister on the one hand, and between the Central Bank and the Government on the other, in my speech I will deal mainly with the issues relating to the country’s external position, the development of bank lending and inflation, and the impact these variables have on the BNB’s policy. I would like to immediately underscore that these issues cannot be discussed, outside the context of economic growth prospects, the accession of our country to the EU, and the trends of development in world economy. For better understanding of Bulgarian economy in the recent years, several global trends influencing significantly the development of our economy should be highlighted. Firstly, the dominance of the principle of free trade and the liberalization of capital movement, combined with the investors’ increasing propensity to hold assets issued by third country residents, brought about the on-going growth of international trade and exchange of capital. | Mr George talks about monetary policy in the United Kingdom: The Economic Prospect Text of the Chancellor’s Lecture delivered by the Governor of the Bank of England, Mr E A J George, at Hertfordshire University on 18/02/99. As you would expect of a central banker I will talk about monetary policy – under the title of “The Economic Prospect”. I will begin by explaining what it is that we are trying to do through monetary policy; then I’ll describe how we’ve been doing, where we are now, and where we might be headed. What we are trying to do So let me begin with what it is that we are trying to do. In one sense that’s very easy to explain these days. The previous Conservative Government had already in 1992 defined the objective of monetary policy in terms of a target rate for retail price inflation. The new Labour Government, immediately on assuming office, similarly defined the objective in terms of an inflation target, but went an important step further. As soon as Gordon Brown became Chancellor of the Exchequer, in May 1997, he announced that he would no longer exercise his powers to set short-term interest rates, which is the heart of monetary policy, but instead he would set the inflation target, and delegate the achievement of that target to a new Monetary Policy Committee to be established in the Bank of England. | 0 |
As a consequence, the euro is becoming extremely attractive, as a vehicle, a transaction, an investment and a reserve currency. As you may know, as central bankers, we remain neutral as far as the internationalisation of the euro is concerned. We are neither encouraging, nor discouraging the process. But, as a citizen, I cannot help and feel proud of having one the two main currencies in the world. Long term prospects Looking into the future, I would like to try and answer four questions: is monetary integration sustainable in the long run? What are the prospects for the enlargement of the euro area? Can the euro serve as a model for other regions in the world? And finally, is monetary union going to lead to further political integration in Europe? Solidity of the euro area I am aware that there still is, on this side of the Atlantic, a lot of skepticism about the future for the euro. Four years ago, one of your leading academics, (Martin Feldstein) wrote a piece in Foreign Affairs arguing that monetary union would reignite conflicts and war in Europe. This is, of course, the extreme form of a basic argument: that there are too many divergences between European states for them to withstand the pressures of monetary unification. Put in simple economic terms, it boils down to the argument that the euro is not an optimum currency area. In my view, this is less and less true. | Researchers have documented and studied how asset valuations seem to move far more on news that affects risk premiums than on news on future cash flows. This was vividly illustrated by the market turbulence of 2008–2009, as well as the last few weeks. In their investigation of why risk premiums vary so much, researchers have moved far beyond the simplest models of introductory finance classes. Theoretical progress, data availability and computational advances have made it possible to study the implications of potentially important features: investors are different and not necessarily fully informed or rational; markets are incomplete and have frictions; returns might have fat tails and face sudden disasters; and government regulations are important. Models of investor heterogeneity, non-tradable, non-financial risk, market frictions and timevarying uncertainty go a long way in accounting for variations in market risk premiums. This has profound implications for portfolio theory and practical portfolio strategies. Modern portfolio theory builds on differences in defining characteristics between investors. Investors with distinctly different non-tradable, non-financial risk, who are affected differently by market frictions and regulations, should hold different portfolios. In the NBIM Strategy Plan for 2011–2013, we stated that we will implement an investment strategy built on the Fund’s defining characteristics – with strategies that are long-term oriented, scalable, and focused on underlying value. This sentence covers a wide range of interesting questions. All the speakers today will, in fact, offer perspectives on the challenges outlined here. | 0 |
A third and more general reason why inflation has been high in the Baltic countries was that the economic impact of the pandemic was more limited in our region and the pandemic was followed by a very strong and swift recovery. Expansionary fiscal and monetary policies combined with strong domestic demand pressures therefore contributed to an increase in inflation. On top of this was a change in the Estonian pension system in the autumn of 2021 that allowed individuals to start withdrawing their 2/8 BIS - Central bankers' speeches pension savings before they reached retirement age. Some of this money was used to fund private consumption, which further increased inflationary pressures. The substantial dispersion of inflation rates between the countries of the euro area poses the question of how harmful these differences are in a monetary union. Obviously there will always be differences between the structures of our economies, and so there will always be some differences between the inflation rates in different countries. Such differences have been around since the euro was first introduced, though for most of the time they have been minor. Large differences in inflation rates could however lead to problems with the smooth functioning of a common currency area. An obvious problem is that a common monetary policy allowing nominal interest rates to be similar in all of the euro area countries will lead to differences in real interest rates if there are differences in inflation. | This amounts to 4.5 per cent of GDP for 2021, a sizeable amount of extraordinary spending indeed. Some countries have raised additional revenues to cover this by introducing windfall taxes on energy companies5. One positive side effect of higher inflation is that it reduces the ratio of government debt to GDP because nominal GDP grows fast. This good news has been offset though by the sharp rise in interest rates over the past year, and the most likely net effect is that interest payments on government debt will be higher in the years to come6. Inflation affects the fiscal balance through both revenues and spending and there are both positive and negative effects. Higher inflation may bring in more tax revenue relative to GDP if the brackets in the income tax system are left unchanged, but less revenue relative to GDP for excise taxes that are fixed in nominal terms. Spending may decline in relation to GDP if pensions and public sector wages adjust slowly, while discretionary support measures of the type we have seen applied in all the EU countries over the past year increase public spending. It is worth noting how high inflation can affect public finances in surprising and contradictory ways. During the first year of rising prices, the budget balance very often improves. The higher prices first make the tax base larger and there are higher revenues from consumption taxes, while at the same time there can be a long lag before many costs adjust. | 1 |
Of course, persistently strong demand for financial assets – crudely, rising prices – created an illusion of liquidity but, beyond that, the willingness and terms on which “market-makers” underpinned liquidity depended on their access to credit to finance inventory. And the ultimate private sector providers of such credit are commercial banks. One big question, therefore, is how far we could get in dampening the credit cycle by focusing on the provision of liquidity, and so leverage, by banks to other financial firms. That goes to whether hedge funds and other vehicles need to be brought within the net. Frankly, it is hard to know whether, internationally, the regulatory community tried and failed to control the leverage available to the non-bank financial sector; or whether it was not really attempted taking into account system-wide conditions. Either way, more information from non-banks would probably be needed to make such a policy workable. But a second question, perhaps the biggest, is whether “dampening the credit cycle” should be the goal at all; or, alternatively, whether it is a realistic goal. A very slightly more modest – but, in truth, still demanding – objective might be to concentrate on making banks themselves more resilient to economic or market shocks, so that it is less likely that they expose banking system fragility that amplifies an economic downturn. A third big question is about instruments. Lots of candidates are canvassed. Dynamic provisioning under which banks would, in the manner of previous generations, set aside general provisions as loan books grew. | Capital requirements that increased with the rate of BIS Review 39/2009 5 growth of balance sheets, or some measure of incipient stress. Variable margin requirements on the terms of credit provided to financial, or even real-economy, borrowers. A fourth big question is whether the chosen instrument(s), whatever it is, could be operated by rules or would require an element of top-down judgment. On that, I am inclined to the view that our community is unlikely to be able to write down a suitably robust rule. I have two reasons for that. One draws a parallel with monetary policy. The history of monetary policy, not least in this country, is littered with failed attempts to design an optimal rule, giving way to efforts to constrain the discretion of policymakers making judgments. I cannot see why we would be any better at developing rules for financial stability. As the structure of the financial system evolved, we would need to adapt the rule and would probably fail to spot the need to do so. But there is also something about the nature of financial stability problems that makes “rules” implausible to me. In the upswing of the credit cycle, there is often a collective-action problem. Even though individual banks may perceive risk as underpriced, not knowing for sure whether or when the party will end they hesitate to step off the rollercoaster for fear of damaging their business franchise. | 1 |
They signed up to a package, a clear set of rules, including a Pact. This is a contract not just among governments but a contract with every single citizen of the euro area. It is on the basis of this contract that they have accepted the loss of their monetary sovereignty. And it is on this contract that the confidence in our new currency, not just of European citizens, but also of markets and of those on the outside looking in, is based. If you break this contract, this confidence will be lost. I acknowledge that these are not easy times, that conditions are adverse. But the difficulties that some of you now face were not entirely unforeseen. Not unforeseen when the Pact was signed. Not unforeseen when the conditions were more favourable. You were warned. The rules were not designed just for the good times, but also for the bad. The difficulties that some of you now face do not provide grounds for tinkering with the rules. They call for their implementation. The rules are there to help not to hinder efforts to put the house in order. They should be allowed to do what they were designed for. Otherwise I fear the Pact will unravel, the contract with the people will be broken. Without the right foundations, you cannot build a stable house. I hear some of you say that the house needs more than stability. It also needs growth. Of course you are right. Stability and growth go hand in hand. | However, not all incumbent banks are able to fully bridge the technology gap, particularly for newer services; d. This results in migration towards digitally-focused challenger banks such as Atom, Fidor and Monzo that will provide similar services of traditional banks, but utilise technology to deliver faster and cheaper services that better meet the needs of customers; and e. The implication of this is that the landscape of finance will remain largely filed by banks, but a new breed of purely digital banks will gain in significance. The names that we immediately think of for financial services will change from the current banks that we are so familiar with. The fourth scenario is what I call ‘the Tech take-over’ a. Like scenario one, this is a more extreme and less probable scenario, but still one that is worth a thought. In this scenario, technology adoption by incumbent banks is low, with a high level of fragmentation among finance providers; b. However, in contrast to scenario three, technology firms enter as the new preferred provider, successfully capturing the loyalty of consumers due to superior ability in using data to deliver customer-centric solutions; c. Financial services will thus be offered via a wide range of providers such as social networks (e.g. Facebook, Wechat) and e-commerce platforms (e.g. Amazon, Alibaba); and d. Growing comfort with the ability of technology to ensure secured transactions also gives rise to the popularity of peer-to-peer financial services. | 0 |
Internationally, a number of empirical studies have been conducted on the effectiveness of exchange market interventions. The studies of interventions in the 1990s find that they were more effective than 5 studies conducted in the 1980s. This may be due to shifts in monetary policy regimes and greater emphasis on transparency. It is probably easier to win credibility when market participants know that interventions are anchored in stabilisation policy considerations rather than a short-term exchange rate objective. However, this presupposes market confidence in the ability of economic policy in general and monetary policy in particular to deliver nominal stability. It is first and foremost the signal effects of interventions that have been found to be effective and particularly when interventions are made publicly known and justified by the central bank. 4 Lars E. O. Svensson. ”Independent Review of the Operation of Monetary Policy: Report to the Minister of Finance”, February 2001. 5 L. Sarno and M.P. Taylor. ”Official Intervention in the Foreign Exchange Market: Is it Effective, and if so, How does it Work”, Discussion Paper No. 2690, February 2001, Center for Economic Policy Research. BIS Review 74/2001 7 For Norges Bank, it may be appropriate in special situations to intervene to a limited extent to stabilise inflation, should the krone move to a level that we do not consider reasonable on the basis of fundamentals, and if this could contribute to stabilising inflation. However, Norges Bank will not act in a way that prompts unilateral bets against the krone. | A clear parliamentary majority supports the Government long-term strategy for the use of petroleum revenues. At the same time, the Government stresses, with the support of the Storting, that fiscal policy must also be used to stabilise economic developments. The annual budget resolutions will provide an indication of the emphasis placed on this consideration. BIS Review 74/2001 1 The Government was also of the view that there was a need for a clearer anchoring of monetary policy to underpin economic stability. Norges Bank was thus given an operational monetary policy target, which means that the Bank is to use instruments to maintain low and stable inflation. The inflation target is set at 2½ per cent. The inflation target is linked to the annual rate of increase in consumer prices. The monetary policy regulation explicitly refers to factors that the Bank shall in general not take into account, such as the direct effects on consumer prices resulting from changes in interest rates, taxes and excise duties. The regulation further stipulates that Norges Bank shall regularly publish the assessments that form the basis for the implementation of monetary policy. Report no. 29 2001 "Guidelines for economic policy" also states: "Consumer price inflation is expected to remain within an interval of +/-1 percentage point around the target " This must not be misconstrued to mean that the inflation target is an interval. Norges Bank aims at an inflation rate of 2½ per cent two years ahead. | 1 |
The day prior to the decision the implied forward rates indicated that market agents had prices a level for the repo rate of 4.0 per cent during the first quarter of 2008, that is, around the same as the main scenario later published by the Riksbank. In the longer term the Riksbank’s main scenario and implied forward rates differed. With effect from the middle of 2008 onwards, implied forward rates were above the new interest rate path published by the Riksbank. The market information the commercial banks sent to their customers showed a similar picture. One can not, therefore, say that the Riksbank’s June forecast on the whole contained abnormally large interest rate increases. Why were the market reactions so strong? Both the market information and pricing in the market thus indicated that analysts if anything were counting on a higher repo rate in the longer term than the forecast later published by the Riksbank. Nevertheless, the yield curve for implied forward rates rose by around 15 points over the entire period following the interest rate announcement on 20 June (see Figure 10). Why were the market reactions so strong? Firstly, international interest rates rose that day, which probably reinforced the rise in Sweden. Secondly, there are many signs that market agents had expected the Riksbank to publish an interest rate path that was lower than the path it actually published. | These include the rise of non-bank financial intermediation, and the deep pockets of opacity and interconnections with the banking system – as we have seen in cases such as Archegos, Evergrande, Greensill and Huarong. In addition, medium-term structural trends such as the ongoing digitalisation of finance and increasing climate-related financial risks are so cross-sectoral and global in nature that they can only be effectively addressed through greater cooperation across sectors and across jurisdictions. 2/3 BIS - Central bankers' speeches My third point is that cooperation can, and should, take different forms. While regulation – most notably the Basel framework – is perhaps the most visible product of global cooperation, there are a number of other, equally important, dimensions. Supervisory principles and guidelines, while often high-level in nature, are a powerful tool to help raise the bar when it comes to the quality and effectiveness of risk management practices and supervision, and to help provide a common global baseline. Supervisory cooperation, including through the sharing of supervisory intelligence and best practices, is a vital channel for authorities to assist and learn from one another. Indeed, merely having a continuous and ongoing channel of communication among authorities is perhaps one of the most important levers available to us. Equally, cooperation should be multi-faceted in scope, and should encompass both microprudential and macroprudential financial stability dimensions. | 0 |
We intend to retain the current interest rate level for now and will monitor its effects closely. With respect to setting interest rates and supplying the money market with liquidity, the SNB’s monetary policy decisions have been very bold by international standards. All things considered, the Swiss franc nevertheless remains significantly overvalued. Were Switzerland not to have negative interest rates, and hence have a narrower interest rate differential with other countries, demand for Swiss francs would be even greater and our currency would be even stronger today. We are aware that the current exchange rate situation is extremely difficult for exporters, tourism and industries that are particularly exposed to competition from abroad. While we recognise the scale of the challenges facing the affected companies, it is worth remembering that in the current climate there is, regrettably, no easy solution that would absorb all external disruptions. We must accept these challenging economic conditions for the time being. That said, we are convinced that, under the circumstances, the SNB’s current choice of monetary policy will best serve Switzerland’s overall interests in the long term. Ladies and gentlemen, thank you for your attention. It is now my pleasure to give the floor to Jean-Pierre Danthine, who will present our Financial Stability Report. BIS central bankers’ speeches 3 | Community banks often use a unique “relationship-based” approach that, for example, leverages personal knowledge of their customers’ creditworthiness and local business conditions to customize lending decisions and meet demand for credit and other financial services. This allows both consumers and small 1/6 BIS central bankers' speeches businesses to contribute to economic activity. Community banks also provide important financial services to key – often underserved – sectors of the economy. For example, a study from a few years ago found that almost one out of five U.S. counties has no other physical banking offices except those operated by community banks.1 As a second example, in the typical county in the Second District (excluding Puerto Rico and the Virgin Islands), community banks account for about half of all banking deposits. It is the ability of smaller institutions to leverage “soft information” in important ways and reach underserved sectors that gives community banks a unique and critical role in driving sustainable economic growth. Supervisors are also keenly aware of the potential unintended consequences of the supervisory and regulatory framework. One of our goals as supervisors is to ensure that our efforts are not having an adverse effect on the ability of firms to provide credit and financial services that supports economic growth at businesses of all sizes. As I said in an earlier talk, in my view, it is entirely appropriate to continuously evaluate and rigorously debate whether the supervisory and regulatory framework is meeting its objectives efficiently.2 I’ll return to this topic shortly. | 0 |
USD 1.7 trillion, of which a mere 3% resulted from off-shoring to countries of low manufacturing costs. It is expected that in 2008 the global trade in services will amount to ca. USD 2.4 trillion, of which 10% will represent off-shoring of business processes and ICT to countries with low manufacturing costs. For a comparison, the travel industry represents ca. 30% of trade in services according to the OECD data, whereas transport – 20%. Based on an analysis of eight representative sectors, McKinsey Global Institute estimated that in 2003 18.3 million jobs in the services sector could have been off-shored (this applies mostly to such sectors as the IT – 2.8 million, banking – 3.3 million, insurance – 2.3 million, health care – 4.6 million, retail trade – 4.3 million). Extrapolating these results for the global economy, it may be estimated that in 2008 there may be as many as ca. 160 million jobs in the services, i.e. 11% of the estimated 1.46 billion of global employment in the services sector, may be performed at a distance from the service recipient. Most evidently, the off-shoring of business processes to various corners of the world to optimise the process of manufacturing or performing services will grow, and the scale of this phenomenon will probably surprise many architects of the economic policy. In many rankings, Poland holds one of the leading positions for its off-shoring attractiveness 17 , which is also reflected by the business decisions taken. | This will offset the impetus to consumption and investment provided by the near-zero interest rates. 7. Some academics believe that the effectiveness of the quantitative easing policy in the US is also undermined by the fact that the US property market has not yet bottomed out and US households need to continue to de-leverage. Many policy measures introduced in the US recently aim to reduce the pain of households in a falling property market and slow down the process of foreclosures. Even though property prices have already fallen significantly, more than 50% in some places according to anecdotal reports, potential buyers still prefer to wait as they fear that prices may fall further once the huge stock of foreclosed properties are put back to the market or when interest rates return to more normal levels. In other words, while measures to slow the downward adjustment of the property market are well-intentioned and have their political merits, they could prolong the time needed for the market to reach a new equilibrium or find the so-called clearing price. In my view, this may delay a true recovery of the property market and create a negative drag on the repair of US 2 BIS central bankers’ speeches households’ balance sheets, making the recovery of consumer confidence farther and farther away. 8. Finally I would like to share with you a few policy lessons learnt from the latest crisis: (a) Households, companies and governments alike must avoid excessive leverage or borrowing. | 0 |
In times of crisis, as we have seen during the current crisis, other more unconventional methods can be used, such as fixed-rate lending at longer maturities and asset purchases (quantity easing) to affect longer interest rates and expectations of future short rates, and foreign-exchange intervention to prevent currency appreciation or even to induce currency depreciation. The authority responsible for monetary policy is typically the central bank. Financial-stability policy has the objective of maintaining and promoting financial stability. Financial stability can be defined as a situation where the financial system can fulfil its main functions of submitting payments, channelling saving into investment, and providing risk sharing without disturbances that have significant costs. The available instruments are, under normal circumstances, supervision, regulation, and financial-stability reports with analyses and leading indicators that may provide early warnings of stability threats. In times of crisis, authorities may use such instruments as lending of last resort, variable-rate lending at longer maturities (credit policy, credit easing), special resolution regimes for financial firms in trouble, government lending guarantees, government capital injections, and so forth. The responsible authority or authorities vary across countries. In some countries it is the central bank, in other countries there is a separate financial supervisory authority, and sometimes the authority is shared between different institutions. Financial-stability policy and monetary policy are conceptually distinct, with distinct objectives and distinct suitable instruments. My point here is that this has to be taken into account when considering the lessons of the financial crisis for monetary policy. | Another conclusion is that interest-rate policy is not enough to achieve financial stability. The policy rate is an ineffective instrument for influencing financial stability, and policy rates high enough to have a noticeable effect on credit growth and house prices will have a strong negative effect on inflation and resource utilisation, even in sectors that are not experiencing any speculative activity. The use of the policy rate to prevent an unsustainable boom in house prices and credit growth poses major problems for the timely identification of such an unsustainable development, as well as for the assessment of whether policy-rate adjustment would have any noticeable impact on the development, and of whether, in the longer run, the development of inflation and resource utilisation would be better (Bean et al. 2010, Kohn 2008, 2009). Other instruments like supervision and regulation, including appropriate bank resolution regimes, should be the first choice for financial stability. Preventing a financial crisis requires not only improvements in the supervision of financial institutions, but also a greater emphasis on the supervision of the financial system as a whole. As regards the regulatory framework, generally, to the extent that financial instability depends on specific distortions, good regulation should aim to attack these distortions as close to the source as possible. Macro- 3 See Svensson (2003) for a discussion of policy options before and in a liquidity trap. 4 See Assenmacher-Wesche and Gerlach (2009), Bean (2009), Bean et al. (2010), Bernanke (2010), Dokko et al. (2009), IMF (2009). | 1 |
Given the nature of the recent rise in inflation, the first question we should ask ourselves is how our monetary policy should respond to it. In July 2021, the ECB adopted a new monetary policy strategy, the cornerstone of which is a symmetric inflation target of 2% in the medium term. The aim of the ECB is therefore not to stabilise current, observed inflation, but to stabilise inflation over the medium run. This medium-term orientation responds to two considerations. First, monetary policy affects inflation with variable lags. The transmission mechanism of monetary policy operates first by affecting banks’, firms’ and households’ financing conditions. This, in turn, affects credit, investment, and consumption decisions. The resulting changes in aggregate demand exert pressure on firms’ production needs, thus lowering their demand for labour and other inputs, and hence on production costs, and will end up affecting prices. This process however takes time. Empirical studies typically show that monetary policy decisions have their maximum effect on inflation after one-and–a-half to two years. Therefore, attempting to stabilise observed inflation at all times is a futile, and probably counterproductive task, as it increases the volatility of macroeconomic aggregates. Second, the optimal response of monetary policy depends on the nature of the shocks that cause inflation to rise. For instance, an energy shock is typically considered as a supply or “cost-push” shock, as it increases production costs for firms. | Much of these data were granular enough to differentiate economic effects across the income, sector and geographic distributions. 10 The fourth and final set of issues involves the interaction of pre-pandemic structural trends with cyclical developments. The recent global shocks have deep implications for previously identified structural trends such as secular stagnation and the shifting relationship between technology and jobs. Workers’ increased reliance on remote solutions during the pandemic probably accelerated the digitization of tasks, which in turn has broader implications for income distribution and productivity growth, as well as the property market. In contrast, other structural trends may have been somewhat arrested by recent events; for example, pandemic and geopolitical disruptions injected fresh fragmentation impulses to the world economy and possible unmoored economies from their previous low inflation equilibria. 11 These four issues—the complex nature of shocks, along with the appropriate policy response, labour market effects and interactions with pre-pandemic structural trends— are key pivots that confront the global economy. And they will each have some hearing at this year’s Forum. Prof Viral Archarya started us off last evening with an astute and realistic assessment of the global landscape before us and the vulnerabilities that lurk in financial market adjustments, drawing in insights from his research. 12 For the Policy Note session on “Labour Market Policies after COVID-19”, our speakers are Professor Eric French and Professor John Haltiwanger, two eminent labour economists whose work central bankers have always paid close attention to. | 0 |
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