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As I mentioned before Parliament scarcely a month ago, these events come at a time when the Spanish economy continues to show considerable buoyancy, with GDP growth in the first half of the year around or slightly above a rate of 4% and employment growth somewhat higher than 3%. This period saw the continuation of the slight moderation in domestic demand first seen in 2006 and of the improvement in the contribution of net external demand to growth, which began that same year, enabling the composition of domestic and external sources of expenditure to be brought more into balance. But the change in composition extended also to domestic demand, where lower relative household spending growth and stronger business investment were observed during the first half of the year. Indeed, the gradual moderation in household consumption initiated some 2 BIS Review 130/2007 quarters ago continued, reflecting a natural adaptation to less generous monetary and financial conditions as a result of the interest rate rise under way since late 2005 and of the weaker wealth effect on consumption due to slower house price rises. However, the buoyancy of employment and its effect on income prospects are helping to smooth the adjustment of consumption to more sustainable levels. | Spain’s net borrowing, although it has continued to increase, is doing so more slowly than in previous years. The changes I have described in GDP composition on the expenditure side have been feeding through to the various productive branches which, as a whole, have remained most robust in the first half of this year. Noteworthy in this respect is the strength of industrial production and the mild slowdown in construction activity. But the most notable feature on the supply side was again the abundance of labour resources, which continue acting to smooth the adjustment of activity to the buoyancy of demand, preventing cost pressures and excessive prices. The growth of consumer prices, spurred by a temporary turnaround in oil prices in the first half of the year, posted a year-onyear rate of 2.2% in August, leaving the differential with the euro area close to its historical low. However, it is very likely that, once the base effect of the energy price falls in the closing months of 2006 has been stripped out, inflation will again rise and that at the end of this year it will reach levels similar to those at end-2006. This is in fact suggested by the HICP growth flash estimate of 2.7% for September. In examining the outlook of the Spanish economy for the coming quarters, it has to be kept in mind that there are still few indicators of the situation since the turbulence erupted on international financial markets. | 1 |
That requires measures in various areas. In addition to the above-mentioned labour market reforms, human and technological capital improvements must also be made. In this connection, it is essential to improve the quality of the education system, adapting it to the challenges posed by globalisation, technological progress and the automation of tasks. Moreover, the presence of high and persistent profit margins in some sectors advises lowering the potential barriers to competition in such sectors. It would also be worth mitigating the effects of those factors that prevent growth of the most productive firms (chiefly, the regulatory thresholds linked to size). Finally, despite the progress made in recent years, the banking sector continues to face farreaching challenges, largely shared with other European financial systems. Spanish banks must firstly speed up the sale of their non-earning assets. These weigh down not only their profitability, but also their capacity to allocate resources to those economic activities that most contribute to growth. In addition, the reduction in non-earning assets originated before the European single supervisory and resolution mechanisms were established may bring us closer to culminating a Banking Union. Such a Union would then 6/7 allow us to address the need to pool macrofinancial risks within the euro area and to strengthen its governance mechanisms. That would make the European financial system – and therefore the single currency – sounder and more resilient to future financial shocks. | The other investment component, that linked to construction, has undergone a most significant adjustment in the past decade. This means that, in 2018, following several years 4/7 of recovery, this GDP component was still at around 16% of its pre-crisis level. The downscaling of investment in housing entailed a decline in its weight in GDP to levels close to 5% in 2018, in line with Spain’s peers, compared with 12% pre-crisis. The reduction in housing investment activity came about in parallel with a decline in house prices which, despite the growth observed in recent years, remain in real terms some 32% below the nationwide levels observed in 2007, albeit with some cross-regional dispersion. All these developments better position this sector to support economic growth, as indeed has been the case in 2018. The weight of non-residential construction, for its part, has also diminished considerably, largely reflecting the impact of the reduction in public-sector investment spending. Beyond these improvements, as I stated in my introduction the Spanish economy remains prone to certain vulnerabilities and faces significant challenges, which I shall now set out. First, despite the notable above-mentioned reduction in private debt in recent years, on the latest available data for 2018 Q3 the negative net International Investment Position (IIP) of the Spanish economy stood at 81% of GDP, and that of gross external debt at 168% of GDP, levels that are high in relation to other advanced economies and which mark a factor of vulnerability for the economy as a whole. | 1 |
To address this issue, last week, the Bank of Thailand as well as the Ministry of Finance filed a new 2-part measure, which received the cabinet approval. The first component of that 2-part package was a 250-billion-baht facility to encourage lending to SMEs using credit guarantee schemes. The second component was a 100-billion-baht package orienting towards what we called “asset warehousing”. Under this facility, they can park their assets with the bank and not have to worry about paying any interest or principal payments on Page 3 of 11 that debt. Furthermore, they also have the option to repurchase those assets at a later date at a fair price. The reason we undertook these measures is to provide support for firms that are experiencing excessively high debt burdens but are still viable over the long term. These measures would help, not just to alleviate the debt burden, but also to reduce the likelihood that borrowers are forced to undertake fire sales of assets which would have a negative impact on the economy by causing all asset prices to drop. Another aspect is that most of these measures that have been undertaken are of a very long horizon which is to ensure continued economic recovery. For example, in the previous SMEs loan scheme, loans were extended for 2 years with the credit guarantees component extending for 2 years. This time, however, we are extending the measures to be very long; the loan component is 5 years, and the credit guarantees component is 10 years. | With such technology, they tend to increase the opportunity in creating more values from the traditional services that we have been offering; not just in a higher valueadded way but in a more scalable way, using technology to increase the footprint of the medical tourism and wellness services. The fourth area might seem a bit far-fledged but it is something that has been constraining Thailand’s ability to grow in the way that other countries have grown. That is the Page 9 of 11 link again between digital work-from-anywhere technology and our stalled or delayed urbanization. Thailand, oddly enough, is a country where level of urbanization, the percentage of population lives in large cities, is extremely low given our level of development. We are here in Bangkok so we might not feel that because here in Bangkok and Eastern Seaboard are all very crowded. However, the urbanization is all here in Bangkok and the second- and thirdlargest cities are all close to Bangkok. In contrast, the pattern of other countries, especially those that have grown quite rapidly, is largely due to the substantial growth of the urban middle class. People are coming to the cities as they want to live the middle-class urban lifestyle. This drives domestic consumption growth in a lot of countries in the region like Indonesia or even for the countries that are more developed compared to Thailand like South Korea and Malaysia. | 1 |
They should tell people whether we are meeting our commitments to regulate in a way that harnesses the UK’s strengths as a global financial centre, that maintains trust, and that is tailored to UK circumstances. They should also be designed in a way that is consistent with how Parliament has Page 8 ranked our objectives – they should make it easy to see how we have pursued our new objective properly subject to advancing our primary objectives. For example, we know that the operational effectiveness of the PRA is important for the UK’s success as a global financial centre. That is why we have committed to increasing the frequency with which we report on our efficiency handling regulatory transactions, including authorisations. We will also provide more information on the time taken to determine cases and provide new breakdowns of these metrics by type of firm. [25] Amongst other things, this will help people understand how long it takes to set up a new bank or insurer – which clearly matters for the UK’s competitiveness. Conclusion Let me briefly sum up. Be in no doubt that our new objective will lead to big changes in how we make rules. We have already been working hard developing our ideas about what competitiveness means for the financial services industry and how it is connected to growth. We have a plan for pursuing the new objective. That plan recognizes the hierarchy of our objectives and it is focussed on what we can control. | 10 In countries where supervisory competences lie with an institution other than the central bank, a representative of the latter can also attend meetings, although only one vote per country is counted. 11 To prevent conflicts of interest between monetary policy and supervisory powers, the ECB ensures a separation of objectives, decision-making, processes and tasks. This includes strict separation of the Governing Council’s meetings. 12 This procedure does not apply to ECB decisions relating to its general framework, which are adopted by the Governing Council in accordance with the ECB’s standard procedures, following a proposal of the Executive Board. Nor does it apply to macroprudential decisions, which are proposed by the Supervisory Board and may be approved, rejected or amended by the Governing Council. 5 draft decision (which has not yet been the case), it is returned to the Supervisory Board, which will examine the Governing Council’s reasons and submit a new draft decision. To resolve any differences of views expressed in this interaction, the SSM Regulation provides for the creation of a Mediation Panel, on which each Member State has a representative chosen from among the members of the Governing Council and the Supervisory Board. This mediation process is activated at the request of one or more NCAs, when they fail to agree with the rationale for the objection raised by the Governing Council. | 0 |
We have taken into account that an interest rate change will affect the krone exchange rate. It is assumed that monetary policy credibility remains intact. Developments in the krone exchange rate have a considerable impact on inflation in a small economy such as Norway. Our analyses, which are based on relationships in the Norwegian economy over the past 20-30 years, indicate that it takes some time for the effects of a lasting change in the exchange rate to pass through to consumer price inflation. The effect seems to be strongest the second year and then shows a gradual decline. A sustained appreciation of the effective krone exchange rate of 5% could reduce the rise in consumer prices by a quarter percentage point the first year, by close to half a 2 percentage point the second year and about a quarter percentage point the third year . Our analyses indicate that a sustained increase in wage growth of 1 percentage point will, in isolation, push up consumer price inflation by a quarter percentage point the first year and half a percentage point the second year. The mandate implies that the interest rate must be adapted to the outlook for the Norwegian economy. If it appears that inflation will be higher than 2½% with unchanged interest rates, the interest rate will be increased. If it appears that inflation will be lower than 2½% with unchanged interest rates, the interest rate will be reduced. This orientation of monetary policy will normally also contribute to stabilising output and employment. | Change in consumer price inflation in percentage points 0 -0 .1 -0 .2 -0 .3 -0 .4 -0 .5 År -0 .6 1 2 3 4 Source: Norges Bank JB 7. februar 2003 Effects on consumer price inflation of a persistent appreciation of 5 per cent of the import-weighted krone exchange rate. | 1 |
Typically, a bank that runs its operations in a normal course of business is already expected to generate returns on their business or normal profits. If the entire profit is taken as base to calculate bonus for their board members, would that seem fair to the institution? I understand that some banks are exploring ways to remunerate board members which are linked not only to the profits of the bank, but also to other factors, such as the reduction of NPL, appropriate provision of loan loss and other indicators of stability. There is still no consensus on the issue, but moving away from the model of basing remuneration solely on net profit is the move in the right direction and is to be encouraged. In fact, if we continue to explore the question with an open mind, we should be able to come up with a better and fairer model. I would like to leave you with a thought: 4 BIS Review 25/2006 the part that is linked to profits should more appropriately be linked to excess return rather than normal profits. Finally when the remuneration has been set, the Board of Directors should take care to reconsider that the amount is not unreasonably high, as the Board is in the position to be the “Role Model” of what should be appropriate practices for the bank. If the Board takes undue benefits from the institution, this would undermine its authority and set bad example for staff and management to follow. | And that’s probably because the UK economy has weathered the squalls of the past few years rather better than both the US and the euro area. Since 2000, we have grown more strongly than the euro area, and more steadily than the US; indeed we are alone among major industrial countries in not having experienced a single quarter of falling output for more than a decade. As a result the UK emerged from the slowdown in the world economy with less slack than other economies. That is the key reason why we were the first to start raising interest rates last November, when world activity started to pick up and demand at home accelerated. Since then, a number of other countries, including the US, have begun to raise their rates to more normal levels. When I joined the Monetary Policy Committee a year ago, both the Fed and the ECB had just cut their interest rates to exceptionally low levels, reflecting real concerns about the strength of the world recovery. Activity picked up sharply in the US last autumn, but the mood only changed decisively early this year, when a million new jobs were created in just three months. It is now clear that a broad based world recovery is well under way, led by the US and Asia, especially China, but spreading to other regions. The news from Japan is more encouraging than it has been for over a decade. | 0 |
Hamad Al-Sayari: Recent economic and financial developments in Saudi Arabia Speech by His Excellency Hamad Al-Sayari, Governor of the Saudi Arabian Monetary Agency, to the Custodian of the Two Holy Mosques on the occasion of presenting the 44th Annual Report of the Saudi Arabian Monetary Agency, Riyadh, 11 October 2008. * * * It is a great pleasure for me to present to you the 44th Annual Report of the Saudi Arabian Monetary Agency which reviews the latest economic and financial developments in the Kingdom. Custodian of the Two Holy Mosques, During 2007, the national economy continued its strong growth for the fifth consecutive year, with real GDP increasing by 3.4 percent. The roles of the private and the government sectors in the development process were enhanced, recording growth rates of 5.8 percent and 2.7 percent respectively. The State budget witnessed remarkable improvement in 2007, resulting in a surplus for the fifth consecutive year amounting to 12.3 percent of GDP. The balance of payments registered a surplus for the ninth consecutive year which stood at 24.9 percent of GDP. The monetary and banking sector also contributed effectively to the economy by providing adequate liquidity to finance growing and accelerated activities. Financial institutions played a significant role in the growth of the economy by providing various modern financial services. Custodian of the Two Holy Mosques, With the establishment of the Supreme Economic Council (SEC) under your wise leadership, the Saudi economy has witnessed a dramatic transformation. | Industry platforms such as VBI-COP and the JC3 could potentially play a central role to ‘intermediate’ the data. As a first step, conversations between the Islamic banking and takaful operators to identify impact-driven and innovative financial solutions under VBI and VBIT, can take place to facilitate respective outreach to the underserved or unbanked population. Outside the financial sector, FIs can embark on collaborations with organisations sharing similar sustainability aspirations including state religious authorities, waqf institutions, business industry associations and advocacy groups, or non-governmental organisations who are at the heart of the vulnerable communities. For example, FIs can collaborate with government agencies and utility companies to support the consumers’ shift to energy-efficient residential homes or vehicles. Beyond the existing sustainable financial products offering preferential rates for the purchase of electric vehicles (EV) or green residential properties, more can be done to raise consumer awareness and to develop complementary infrastructure namely, charging stations. Initiatives such as the development of the VBIAF sectoral guides which are now underway for the manufacturing, construction and infrastructure, as well as oil and gas sectors, is a step in the right direction to streamline the cross-sectoral understanding of sustainability issues, thus allowing for better coordination of efforts to address sustainability risks throughout the value chain. In conclusion, it is our fervent hope that with sustainability, an innovative and collaborative mindset, we can come to develop value-driven solutions and discover new avenues for synergistic collaboration. | 0 |
Can one be sure that confidence in the inflation target will not weaken if the interest rate is lowered still more? Perhaps demand can be stimulated deliberately. Timing these matters is still not easy and there is a large risk of cyclical tendencies being reinforced instead of the opposite. But few of us would be prepared to relinquish the 3 possibility entirely. Current challenges So what does this imply in relation to the present situation in Sweden? How should we handle the combination of clearly slowing activity, persistently large uncertainty as to the direction in which we are travelling, an exchange rate that at present is unprecedentedly weak and inflation above the Riksbank’s target? First let me repeat that the initial position is relatively favourable, even though the strong upswing in recent years would have been an appropriate time to press forward with the work of improving our economy’s long-term growth potential. Just a few years ago, not many people would have believed, for instance, that our public debt would fall below the EU average. The remarkably high growth has contributed to this but so has a relatively tight stance based on clear principles for budget policy. Given a downturn of the magnitude most people now foresee, there is a risk of the budget surplus slipping to less than 2 per cent. That need not be dramatic, however. What matters is that the 2 per cent target is met over the business cycle. | 3 [5] The idea of all these seven measures is that together they will function as a type of insurance for the Swedish economy. This is a point that needs to be reiterated. The purpose of the measures is to prevent problems on the financial markets which in turn exacerbate the situation for Swedish companies. The Riksbank is supplying banks with money almost free of charge to create the conditions for companies to gain access to loans if and when they most need them. Banks having good liquidity themselves and not seeing a need to participate in the Riksbank’s programme can be a positive sign. It means that companies should not have problems obtaining bank loans and the Riksbank’s measures act as an insurance that this will continue to be the case. Another point that is worth reiterating is the magnitude of our measures. The programme of corporate lending amounts to SEK 500 billion in total, which is more than the sum of all the loans currently taken out by small and medium-sized enterprises put together. Added to this are new asset purchases of up to SEK 300 billion, almost doubling the Riksbank’s bond holdings. The Riksbank also has the possibility to, via an agreement with the US Federal Reserve, lend US dollars corresponding to SEK 600 billion. This is more than the total value of the Riksbank’s gold and currency reserves. | 0 |
We have planned an open and rolling application process for these roles and intend to name additional counterparties in the weeks ahead. Complementing this effort, the New York Fed also announced a parallel process last week whereby firms may also apply to become agency CMBS dealers to support the Desk's purchases of agency CMBS. In closing, let me finish where I started. In this time of pain and hardship, we have choices to make in how we respond, and the opportunity before us is to create generational opportunities for a broad and inclusive set of businesses to help advance an equitable recovery. I look forward to partnering with you on this work for years to come. 1 1 Rajashri Chakrabarti and William Nober, “Distribution of COVID-19 Incidence by Geography, Race, and Income,” Federal Reserve Bank of New York Liberty Street Economics, June 15, 2020. 2 2 Rajashri Chakrabarti, William Nober, and Maxim Pinkovskiy, “ Are Financially Distressed Areas More Affected by COVID-19?,” Federal Reserve Bank of New York Liberty Street Economics, August 17, 2020. 3 3 Daleep Singh, “The Fed’s Emergency Facilities: Usage, Impact, and Early Lessons,” remarks at Hudson Valley Pattern for Progress, July 8, 2020. 4 4 Jerome H. Powell, “Coronavirus and CARES Act,” testimony before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., June 30, 2020. 4/4 BIS central bankers' speeches | This indicates that the countries which are still below that level have an enormous potential for further growth. But the question posed has been whether such growth would be sustainable or not in the long run. In other words, whether it could continue to create wealth and improve the standard of living of the people. It has also been observed that countries which generate a share of 60 percent and above from the services sector have been able to record a sustainable GDP expansion over the years. The larger share of services, as claimed by critiques, has in no way contributed to retard their growth. In fact, the preponderant growth in the services sector has helped them to improve both agriculture and the industry sectors on efficiency grounds, infusing sustainability to those two sectors as well. Hence, it can be safely concluded that a share of about 65 to 70 percent in the services sector would provide a country with immense prospects for wealth creation, provided it gains competitive advantage in the production of such services. In this context, the future growth prospects available to China are enormous, since its services sector still accounts for only 35 percent of its GDP. Both India and Sri Lanka too stand to gain on account of the leeway available for them to push the services sector’s contribution to above 65 percent. Hence, it is important that they should exploit this growth potential without further delay. | 0 |
The fundamental problem with this arrangement was that these hybrid debt instruments often only absorbed losses when the bank entered either a formal resolution or insolvency process. It was more often the latter in many countries, including the UK, since there was no special resolution regime for banks (unlike today). But the insolvency procedure could not in fact be used because the essence of too big or important to fail was that large banks could not enter insolvency as the consequences were too damaging for customers, financial systems and economies more broadly. There were other flaws in the construction of these capital instruments. They often included incentives to redeem which undermined their permanence. They were supposed to have full discretion not to pay coupons and not to be redeemed in the event of a shock to the bank’s condition. But banks argued that the exercise of such discretion would create an adverse market reaction which would be disproportionate to the benefits, thus undermining the quality of the capital. More broadly, these so-called innovative instruments introduced complexity into banks’ capital structures which resulted from the endeavour by banks to optimise across tax, accounting and prudential standards. The big lesson from this history is that a going concern capital instrument must unambiguously be able to absorb losses when the bank is a going concern. Apologies for stating the blindingly obvious, but history painfully demonstrates why it is important to state the obvious. | In brief: the definition of capital set in Basel I included instruments that did not properly absorb losses; capital requirements were too low in relation to the underlying riskiness of assets, particularly for the trading book; and banks were able to move risk assets increasingly into the trading book. The finger is often pointed at Basel II for enabling all of this to happen, but the timeline suggests that the problems built up under the combined Basel I and Market Risk Amendment regime. That said, Basel II had its own flaws, and was not well implemented, points I will return to later. But, first, I want to look more at the flaws of the pre-crisis regime, starting with the definition of capital. This was flawed from the outset in the late 1980s, both in the definition of eligible capital instruments and the approach taken to the adjustments which should ensure that accounting balance sheet items such as goodwill are not recognised in regulatory capital. A further issue in my view has been the treatment of provisions. Basel I allowed hybrid debt instruments to count as Tier 1 capital even though they had no principal loss absorbency mechanism on a going concern basis. They only absorbed losses after reserves (equity) were exhausted or in insolvency. It was possible to operate with no more than two per cent of risk-weighted assets in the form of equity. | 1 |
Zeti Akhtar Aziz: Expanding further understanding of Islamic finance Welcoming remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the INCEIF's (The Global University in Islamic Finance) Public Lecture by Dr Abbas Mirakhor, the First Holder of INCEIF Chair of Islamic Finance, Kuala Lumpur, 29 January 2010. * * * It is my great pleasure to welcome you to the INCEIF's Inaugural Public Lecture by Dr Abbas Mirakhor, a distinguished scholar and the first holder of the INCEIF Chair of Islamic Finance. The INCEIF Public Lecture Series aims to provide a forum for promoting intellectual engagement to discuss the issues, developments and challenges in the area of Islamic finance. The global financial crisis that has dominated the headlines across the world for more than two years has brought to the forefront the fundamental issues in the international financial system that need to be addressed. Now, as the growth prospect resumes, the debate is focussed on the priorities and direction needed to reshape the post crisis world to ensure that the recovery will be sustainable. While Islamic finance has demonstrated its resilience during this period, the industry is now entering into an environment that is fundamentally different in this post crisis era. The international financial reform agenda will result in new structures, standards and regulatory regimes for the global financial industry. Greater financial inter-linkages and integration will also require greater cooperation and collaboration in the endeavour to preserve global financial stability. | The dilution of investment yields has reinforced risks for the industry such as a serious lapse risk if interest rates were to rise abruptly, financial losses for insurers who guarantee high technical rates compared to financial returns, or risks related to insufficient cost coverage. Among this quick review of the most salient characteristics of the environment in which insurers have been operating I would like to add that climate change risk has now become a reality and although insurers usually know how to deal with climate risks, including in extreme events, it is more than likely that further adjustments will be needed. Against this backdrop, French insurance companies have reacted in three main ways: lowering of paid interest rates in life insurance, development of alternative investment strategies and adaptation of their traditional business model including an increased business diversification. As a result, for instance, unit-linked liabilities are increasing, and the profit-sharing payments for euro-denominated contracts are decreasing. However, I note that these payments remain significantly higher for mutual undertakings: they amounted to 2.3% last year while the French average is lower, and the reserves for deferred profit sharing have been strongly reinforced and amount to approximately 6% of mathematical reserves at YE 2017, which is 50% higher than the French average. | 0 |
The conditional inflation forecast is based on the assumption that the three-month Libor will remain at –0.75% over the entire forecast horizon. Despite depreciating somewhat in recent months, the Swiss franc is still significantly overvalued. Furthermore, inflation prospects have largely remained the same. We have therefore decided to maintain our expansionary monetary policy. The target range for the three-month Libor is unchanged at between –1.25% and –0.25%, and interest on sight deposits at the SNB remains at –0.75%. The interest rate differential with other currencies, even following the European Central Bank’s (ECB) mild interest rate cut, is thus still markedly higher than at the beginning of the year. The negative interest rate makes the Swiss franc less attractive, and continues to help weaken the currency. The SNB also remains active in the foreign exchange market in order to influence the exchange rate situation, as necessary. The negative interest rate and our willingness to intervene in the foreign exchange market are intended to ease pressure on the Swiss franc. Our monetary policy thus helps to stabilise price developments and support economic activity. Global economic outlook As our inflation forecast is heavily influenced by economic developments abroad, let me now present our assessment of the global economy. Global economic growth was weaker than expected in the third quarter of 2015. This was mainly due to subdued manufacturing activity around the globe and sluggish world trade. | Our monetary policy, which is currently geared towards this challenging set of circumstances, consists of two key elements: the negative interest rate and the SNB’s willingness to take an active role in the foreign exchange market. Both of these elements are intended to make Swiss franc investments less attractive, thereby supporting economic activity. Swiss sovereign money initiative (Vollgeldinitiative) In conclusion, let me say a few words about the recently submitted sovereign money initiative. This popular initiative aims to fundamentally remodel Switzerland’s monetary policy and banking system. The initiative aims to remove the banks’ money creation powers. Instead, all new money would be created by the SNB and distributed directly to the Confederation or the citizens. Under the new system, proponents want any income that the SNB derives from note-issuance to be distributed to the public. Moreover, they claim that such a system would enhance financial stability. The sovereign money initiative would entail a radical overhaul of Switzerland’s financial system, creating a regime that does not exist in any other country today. The introduction of sovereign money would be a risky experiment. We must therefore carefully analyse the impact of the proposed constitutional change on the structure and implementation of monetary policy. Equally, we must take a comprehensive look at its implications for financial stability, the exchange rate and the economic cycle. We will comment further on the sovereign money initiative in due course. Ladies and gentlemen, thank you for your attention. | 1 |
First, the strengthening of the capital position of banks, following the conclusion of the cleaning-up, recapitalisation and restructuring of the 2 BIS central bankers’ speeches financial system, is contributing to enhancing their capacity to finance the economy. The Comprehensive Assessment carried out last year at the European level also contributed notably to restoring investors’ confidence in the Spanish banking industry. The increasing reintegration of European financial markets since 2013, stemming from various actions taken both at the national and European level, does also facilitate the normalisation of the economy´s financial flows. These initiatives include the adoption by the Eurosystem of a number of bold, unconventional monetary policy measures, including the introduction of new long-term operations linked to new lending (the so called TLTROs) and the purchase of public and private sector securities. The ongoing improvements to euro area governance arrangements are also operating in the right direction, helping stabilise European financial markets and reducing their fragmentation. One key development in this field is the Banking Union, which, though still incomplete, marks an unprecedented step towards a genuine European common mechanism of rules and procedures for supervising and resolving banks and protecting their depositors. All in all, the recent normalisation in European financial markets has contributed to a significant easing in financing conditions in those jurisdictions that were previously under higher macrofinancial pressure, including Spain. As a result, the cost of lending in these countries has tended to converge gradually to the lower levels observed in the core euro area. | How this policy should actually be carried out in practice is a complicated issue and I believe that the IMF can play an important role in this context too. The financial crisis revealed major problems The era in which we were said to be living in the best of all possible worlds, popularly known as “The Great Moderation”, came to a disastrous end in 2007. Following a long period of steady growth and stable low inflation, we had been lulled into the belief that this would never change. We believed that the financial markets were excellent at converting savings to loans and distributing risks so that they were taken by agents who both wanted and were able to 1 The Nordic-Baltic constituency consists of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden. BIS central bankers’ speeches 1 bear them. The risks that were mainly discussed were the imbalances in the global economy in the form of countries with large current account surpluses and those with corresponding deficits. Those who raised questions about the stability of the global financial system and the risks relating to a rapid expansion of credit found it difficult to be heard in this situation. The financial crisis brought into focus the inability of the international community to prevent and manage crises in the global financial system. There were several problems. First, there was a lack of knowledge about the links and the contagion risks in the financial system. | 0 |
Macroeconomic stability was preserved and performance of the Chilean economy was much better than in previous world recessions (figure 1). Also, the financial system endured the global financial crisis with no setbacks, no systemically important financial institutions experienced major stress, and macroeconomic policies set the stage for the healthy recovery we are witnessing now. The macroeconomic framework of the Chilean economy was very important in attaining these results. This framework rests on four pillars. First, monetary policy management is based on a flexible inflation-targeting regime, conducted by an autonomous central bank and supported by a floating exchange rate system. The inflation targeting scheme considers a 3% annual inflation target, with a two-year horizon to correct deviations and a ±1 percentage point tolerance range. 1 The floating exchange rate regime includes the possibility of intervening in the foreign exchange market under exceptional circumstances, which has happened four times since September 1999. Second, a fiscal policy that is accountable and predictable thanks to a structural balance rule. 2 The significant amount of savings accumulated during the run-up of copper prices was a crucial factor in bolstering the resilience of the Chilean economy and in providing a countercyclical fiscal boost. Third, a high degree of commercial and financial integration with the rest of the world. | 8 BIS central bankers’ speeches Figure 7 International reserves to GDP (percent) 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Brazil Colombia Israel Malaysia Mexico 2003 2004 2005 2006 2007 Peru 2008 Thailand Chile 2009 2010(*) (*) Growth forecast and last available data of international reserves as from the IMF. For Chile, GDP growth forecast from December 2010 Monetary Policy Report. Sources: Central Bank of Chile and International Monetary Fund. BIS central bankers’ speeches 9 | 1 |
The Fed wouldn’t necessarily be forced to return to the much smaller balance sheet we had prior to 2008 before we could begin the monetary policy normalization process. When interest is paid on reserves, these reserves retain value even when they are no longer scarce. Banks may be able to borrow funds at lower interest rates from financial entities such as money market funds that are not permitted to hold deposits at the Federal Reserve and place these borrowed funds with the Federal Reserve to earn the higher interest rate paid on reserve balances. How well the ability to pay interest on reserves works in practice in raising the entire constellation of short-term interest rates depends critically on the willingness of banks to engage in such arbitrage activity. Prior to lift-off, we were uncertain how much friction there might be that would limit the willingness of banks to expand their balance sheets. These frictions include limits on bank leverage that can make the use of balance sheet capacity costly, competitive frictions given the relatively narrow range of banks that are viewed as sufficiently creditworthy to warrant being recipients of large uncollateralized loans and, for those banks that accept FDIC insured deposits, insurance premiums that increase when they borrow reserves and their total liabilities increase. To help ensure that money market rates would track the federal funds rate regardless of these frictions, the FOMC developed a second tool – the overnight, fixed-rate, reverse repurchase facility (overnight RRP). | As we noted in the December FOMC statement, we anticipate that we will continue reinvestment “until normalization of the federal funds rate is well underway.” I think this policy makes sense not only because the decision to end reinvestment will represent a further tightening of monetary policy, but also because it is difficult to assess ahead of time the impact of such a decision on financial market conditions given the lack of historical experience. I also believe that continuing reinvestment until the federal funds rate reaches a higher level makes sense. We want to ensure that we have the ability to respond to adverse shocks by easing monetary policy by lowering the policy rate. Having more “dry powder” in the form of higher short-term interest rates seems more desirable than less dry powder and a smaller balance sheet. Now the words “well underway” in the FOMC statement are vague – what does that mean in terms of the level of the federal funds rate? Reiterating the disclaimer that I am speaking for myself, my view is that we should not set a numerical tripwire for ending reinvestment. If the economy were growing very quickly and the risks of an early return to the zero lower bound for the federal funds rate were deemed to be low, then I could see ending reinvestment at a relatively low federal funds rate. | 1 |
The analyses show that a credit gap of more than 4 percentage points can predict almost 80 per cent of banking crises in a selection of countries. In some cases, the indicator also signals some banking crises that do not materialise. Accuracy improves when other indicators are included in addition to the credit gap. The credit gap for Norway was above the "critical" level prior to and during the crisis in the 1920s. This was first due to high debt growth and later to a fall in GDP. During the Second World War, private sector debt fell sharply, but was followed by a catch-up period. The next episode of a high credit gap was in the 1980s, prior to the last banking crisis. The gap is also high today. 4 Borio, and Lowe (2002): "Asset prices, financial and monetary stability: exploring the nexus", BIS Working Papers No. 114. 5 IMF (2003): World Economic Outlook, April. 6 Source: Norwegian Association of Real Estate Agents, Association of Real Estate Agency Firms, FINN.no (Norwegian search database for classified advertising, including real estate, on the Internet) and ECON. 6 BIS Review 25/2003 More sluggish developments in the Norwegian economy have contributed to a sharp rise in the number of bankruptcies over the past year. In spite of the pronounced reduction in interest rates in recent months, we must expect a large number of bankruptcies and somewhat higher bank losses in the period ahead as a result of continued rather weak economic growth in Norway. | Muhammad Al-Jasser: Review of the latest economic developments in Saudi Arabia Speech by His Excellency Dr Muhammad Al-Jasser, Governor of the Saudi Arabian Monetary Agency (SAMA), to the Custodian of the Two Holy Mosques, on the presentation of the 46th Annual Report of the Saudi Arabian Monetary Agency, Riyadh, 25 September 2010. * * * It is a great pleasure for me that the celebration of our National Day coincides with the submission of the 46th Annual Report of Saudi Arabian Monetary Agency which reviews the latest economic developments in the Kingdom for fiscal year 1430/1431H. (2009) and the first quarter of the current year. Custodian of the Two Holy Mosques, The impact of the global financial crisis on the world economy continued during 2009, with the world production of goods and services recording a downturn of 0.6 percent in 2009. However, economic variables over the past months of the current year indicate positive growth rates. Given that our national economy is characterized by its openness to the external world and high levels of trade integration with it, it is natural to affect and be affected by developments in the global economic system. The growth rate of GDP at constant prices declined to 0.6 percent in the Kingdom during 2009 compared to 4.2 percent in the preceding year. The non-oil sector maintained good growth rates, growing by 3.8 percent in 2009 compared to 4.3 percent in the preceding year. | 0 |
One central area where I believe we should have achieved more is legislation and regulation with regard to how and by whom banks in distress should be managed. Following the previous crisis I saw important reforms in legislation being investigated over a long period of time only to be more or less forgotten with nothing implemented. I fervently hope this will not happen again. Quite simply, it must not happen again. Towards a cohesive and efficient financial regulatory framework The Executive Board of the Riksbank and the General Council of the Riksbank have presented a joint report to the Riksdag where we propose that one or several commissions of enquiry should be appointed to review the regulatory framework in the financial sector. We need to create a cohesive and efficient regulatory framework. It should contribute to maintaining financial stability and if a crisis nevertheless arises, it should minimise the costs to consumers and to society as a whole. These are questions that should neither be discussed endlessly nor allowed to come to nothing when the situation stabilises. If we are to BIS Review 25/2010 11 prevent costly crises in the future, we must together investigate and implement changes. Urgently! Around the world there is already extensive work being carried out in this field, particularly with regard to the international supervision perspective. But implementing changes at international level can take time. | We have passed the worst economic trough in several decades and have now entered a new phase of economic recovery. Monetary policy will probably begin to be adjusted to a more normal economic downturn situation in the summer or early autumn this year. And this is a healthy sign. The road ahead of us is certainly not an easy one. New challenges and considerations await us, but we are at the same time more than ready to meet them. The resources that we were forced to use some time ago for more or less acute crisis management can now be partly used for analysis, development of our methods and the work on preventing imbalances in the economy and future crises. No one can say that the latter is a simple task. There are many problems that need to be solved. But we are not alone in this work, which must be conducted on both a national and an international level. As long as we have the motivation and the will to succeed our chances are good. In the most acute phase of the crisis many of the countries of the world joined together and took action to prevent a total collapse. When it has been necessary, the authorities here in Sweden have showed an excellent ability to cooperate. We must make use of the drive and spirit of cooperation that were demonstrated in the crisis. | 1 |
Mario Draghi: Opening statement at Deutscher Bundestag Speech by Mr Mario Draghi, President of the European Central Bank, at the discussion on ECB policies with Members of Parliament, Berlin, 24 October 2012. * * * Dear President Lammert, Honourable Committee Chairs, Honourable Members of the Bundestag, I am deeply honoured to be here today. As President of the European Central Bank (ECB), it is a privilege for me to come to the heart of German democracy to present our policy responses to the challenges facing the euro area economy. I know that central bank actions are often a topic of debate among politicians, the media and the general public in Germany. So I would like to thank President Lammert and all Committee Chairs most warmly for this kind invitation – and the opportunity it gives me to participate in that discussion. It is rare for the ECB President to speak in a national parliament. The ECB is accountable to the European Parliament, where we have scheduled hearings every three months and occasional hearings on topical matters. We take these duties of accountability to the citizens of Europe and their elected representatives very seriously. But I am here today not only to explain the ECB’s policies. I am also here to listen. I am here to listen to your views on the ECB, on the euro area economy and on the longer-term vision for Europe. | We have all the necessary tools at our disposal to maintain it and to withdraw any excess liquidity in case of upward risks to price stability. Conclusion Let me conclude these opening remarks. BIS central bankers’ speeches 3 Three elements are essential for understanding the policies of the ECB: immutable focus on price stability; acting within our mandate; and being fully independent. The ECB’s new measures help to ensure price stability across the euro area. They also contribute to improving the economic environment. But completing that task of economic renewal demands continuing action by the governments of the euro area. It is governments that must set right their public finances. It is governments that must reform their economies. And it is governments that must work together effectively to establish an institutional architecture for the euro area that best serves its citizens. We are already moving in the right direction. Across the euro area, deficits are being cut. Competitiveness is being improved. Imbalances are closing. And governments are working seriously to complete economic and monetary union. It is important that Europe’s leaders stay on course. In doing so, they will be able to unlock fully the enormous potential of the euro to improve living standards and carry forward the project of European integration. Thank you for your attention – and I look forward to our discussion. 4 BIS central bankers’ speeches | 1 |
The Economist Journal, 122, November 2012. Michael Lewis “Flash Boys, A Wall Street Revolt”. W.W. Norton and Co, 2014 Roland Meeks, Benjamin D Nelson and Piergiorio Alessandri “Shadow banks and macroeconomic instability” Bank of England Working Paper No 487 – 2014. http://www.bankofengland.co.uk/research/Pages/workingpapers/2014/wp487.aspx Morgan Stanley and Oliver Wyman, “Wholesale and Investment Banking Outlook, Liquidity Conundrum: Shifting risks, what it means, March 2015. Benjamin Nelson, Gabor Pinter and Konstantinos Theodoridis “Do contractionary monetary policy stocks expand shadow banking?” Bank of England Working Paper 521, January 2015. Adrian, T. E. Eutula and J Muir, “Financial Intermediaries and the cross-section of Asset Returns”. The Journal of Finance 2014 http://www.bankofengland.co.uk/research/Pages/workingpapers/2015/wp521.aspx Simon Potter “Challenges posed by the Evolution of the Treasury Market”. Remarks at the 2015 Primary Dealer meeting, New York City. Chris Salmon “Financial Market Volatility and Liquidity – a cautionary note. Speech given at the National Asset Liability Management Europe Symposium, 13 March 2015. http://www.bankofengland.co.uk/publications/Pages/speeches/2015/809.aspx. Senior Supervisory Group, “Algorithmic Trading Briefing note” April 2015 http://www.ny.frb.org/newsevents/news/banking/2015/SSG-algorithmic-trading-2015.pdf. BIS central bankers’ speeches 9 US Primary Dealers’ corporate bond inventories Source: Federal Reserve Bank of New York, as reproduced in the Bank of England Financial Stability Report – December 2014. 10 BIS central bankers’ speeches | These were the factors behind the MPC’s decision at the last meeting to raise rates: but it may well be that there is now an opportunity to wait and see for a period how the economy develops; and this need not damage our prospects of meeting the inflation target; and it might improve the chances of continued sustainable growth in output and employment, and, perhaps, of a return of sterling to a more realistic level. I would like to finish by thanking the Cardiff Business Club and Sue Camper for providing me with the opportunity to speak to you tonight. I believe most of you know Sue and the work she does as the Bank’s Agent in Wales. The Agents play a vital role as a channel of communication not only for the BIS Review 19/2000 4 Bank to explain more widely the monetary policy framework and the reasoning behind MPC decisions; but also to hear the views of others on the economic conditions they are facing. And I am grateful, on behalf of the MPC, for the support you give her. 5 BIS Review 19/2000 | 0 |
I am aiming at the need for the existence in any bank, of a real concern and of a positive pressure to make sure that those structures and procedures are applied to their real meaning, throughout the institution and down to any single employee. At the same time, I mean the real willingness of the bank for a careful and proactive role in the inter-institutional relationships, with the aim of leaving away the formalism and qualitatively improving the process of AML. I will be focusing in more details on these issues, as I proceed. Prior to proceeding with more details, allow me to put myself in each of your’s position. I feel I can do this, since I was one of you, as the executive director a commercial bank and head of the Association of banks. We have shared common concerns about the speed and about the quality with which the legal requirements on AML were approved and implemented in practice. I still believe that a law is good when its requirements are applicable in practice and when they represent affordable costs for its subjects. I must say that the existing law on AML, needs to be revised under these considerations. At the same time, we have often discussed about the concern that the way this process is being implemented is endangering to go in the opposite direction to our major objective of reducing the informal economy and bringing down the cash in circulation. | Jean-Pierre Roth: Monetary policy and credit markets Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the University of St Gallen, St Gallen, 22 January 2004. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * The economic slump of the past two years has affected the credit markets. Corporate loans declined, and on the capital market redemptions of shares and bonds of private borrowers exceeded new issues. In this speech, a few general points concerning credit financing and monetary policy will be discussed. The financing opportunities and, concomitantly, a borrower’s expenditure behaviour depend on the value of capital assets eligible as collateral or, more generally, on the borrower’s balance sheet structure. Due to the major significance of real estate as security, the situation on the real estate market in turn has a considerable bearing on credit conditions. The Swiss National Bank thus keeps a careful eye on price development in the real estate market. Monetary policy influences the prices of investments and thus impacts on the economy via the borrowers’ balance sheets. This is not the only channel - and certainly not the most important one through which monetary policy exerts an influence; it may, however, be relevant under certain circumstances. Since corporate balance sheets differ considerably from one enterprise to another, monetary policy has distributive effects. | 0 |
Building stronger macroprudential frameworks The ESRB has promoted stronger macroprudential frameworks across the Union. Specifically the ESRB has issued recommendations to encourage national legislators to establish macroprudential authorities within their jurisdictions. Its Handbook on Operationalising Macroprudential Policy in the Banking Sector embodies practical information on how to set policy using the newly-established powers. The Handbook sets out best practice on an instrument by instrument basis, suggests indicators to guide their use, and outlines the legal framework governing them. It also details potential spillovers. Where it judges that best practice is not being followed, the ESRB can use “soft law” to issue recommendations on an “act or explain” basis to mitigate financial stability risks and curb spillovers. For example, last year the ESRB gave guidance to national macroprudential authorities on how to set countercyclical capital buffer rates. The ESRB will follow up that guidance with a published assessment of implementation in 2016 Q3. With macroprudential policy still in its adolescence, the ESRB is helping it to mature. BIS central bankers’ speeches 1 Recent ESRB studies have evaluated the case for using margining to counteract pro-cyclical behaviour in derivatives and securities financing transactions. And this year, the ESRB assessed the value of including macroprudential buffers within the leverage ratio framework. The Bank of England has followed this approach to ensure that the leverage ratio complements the risk-weighted capital framework in a way that makes it robust to cyclical and structural risks. | One of the strengths of the ESRB is its ability to harness data and conduct analysis across all EU Member States. In its work on the leverage ratio, the ESRB collected new empirical evidence showing banking sector leverage has been pro-cyclical at an aggregate level in almost all Member States. Average risk weights tend to fall in credit booms and rise in downturns. Working with EBA data, the ESRB found that systemically important banks in Europe typically have lower risk weights and leverage ratios than other types of banks. Taken together, theory and evidence demonstrate the importance of a dynamic leverage ratio to a robust macroprudential framework. Another way that the ESRB has led in identifying best practice and influencing the international agenda has been to take a macroprudential perspective on how elements of the financial system can support long-term prosperity. For example, in its examination of Solvency II, the ESRB has considered how long-term investors like insurers can bring diversity and stability to the system. In my view, more can be done to ensure that Solvency II creates the right framework for long-term investment. The ESRB can provide a constructive and objective macroprudential perspective as an input to Parliament’s review in 2018 of aspects of the operation of Solvency II. Openness puts a premium on shared understanding of risks. The ESRB plays a vital role for the EU, enhancing members’ assessment of new and evolving risks. The structure of the financial system has changed significantly since the crisis. | 1 |
This is especially the case if the collateral is lower quality and markets are already illiquid. Moreover, if creditors are left with the collateral instead of being repaid, fear of widespread collateral liquidation might further erode collateral values. If investors respond by seeking more collateral to ensure they will be secured – that is, that they will be made whole in a liquidation scenario – the firm may run out of high-quality collateral that the firm can borrow against. This is a significant risk when a financial firm is highly leveraged and equity is only a very small proportion of total assets.5 The risks of liquidity crises are also exacerbated by some structural sources of instability in the financial system. Some of these sources are endemic to the nature of the financial intermediation process and banking. Others are more specific to the idiosyncratic features of our particular system. Both types deserve attention because they tend to amplify the pressures that lead to liquidity runs. Turning first to the more inherent sources of instability, there are at least two that are worthy of mention. The first instability stems from the fact that most financial firms engage in maturity transformation – the maturity of their assets is longer than the maturity of their liabilities. | Even if the borrowing firm ultimately turns out to be solvent, there may be a delay in a lender getting its funds back, and this delay may prove to be unacceptably costly to the lender. This second cause of liquidity runs – the risk of untimely repayment – is significant because it means that expectations about the behavior of others, or their “psychology”, can be important. This is a classic coordination problem. Even if a particular lender judges a firm to be solvent, it might decide not to lend to that firm for fear that others might not share the same assessment. The less certain any one lender is about the willingness of other lenders to provide liquidity to a firm, the greater the risk that too few loans will be extended to prevent liquidation. In that case, even if the lender turns out to be correct in its judgment of the firm’s solvency, there still will be a cost in terms of delay in receiving repayment. A few pictures can help to illustrate these concepts. Figure 1 illustrates what a creditor’s assessment of the net worth of a financial firm might look like in normal times. Creditors have uncertainty about what that value is, thus, the valuation is represented by a probability distribution. The higher the degree of uncertainty, the greater is the degree of dispersion in the probability distribution. | 1 |
The absence of a sufficiently thorough system of banking supervision and the lack of transparency not only became problematic before the crisis, but also caused confidence problems later on. Fourth, the quality of the assets of the banking system is vital for the soundness of macroeconomic policy. In allocating savings to investment use, the banks should be extremely careful about the risks that must be taken for a variety of reasons. There are five main types of risk that the banking system and of course the appropriate authorities have to deal with: interest risk; foreign exchange risk; maturity risk; loan risk; and market risk. A sound financial system is the best assurance of efficient monetary and fiscal policies. In my view, all four of these factors contributed to the change of foreign perceptions and sentiment and produced a cutback in normal financing (in fact, 95 percent of external flows to emerging market countries come from the private marketplace). This cutback, in turn, weakened the external reserve positions of these countries. Then the combination of weak reserves and a weak financial sector brought on a liquidity crisis. We are now in a position to draw some lessons from the East Asian crisis. First, policy implementation must pursue sound macroeconomic policies in order not to lose the confidence of the markets. And second, four main principles must constantly be kept in mind: • The currency should not be allowed to appreciate, except as part of a bold anti-inflation program. | What is clearly more important than the amount of information given is that the communication policy, as part of the strategy, is consistent with the structure of the internal decision-making process. I can assure you that this is indeed the case. During the monthly press conferences, I make an introductory statement summarising the Governing Council’s discussions and conclusions before answering questions from journalists. As the statement is agreed, in substance, with all the Council members beforehand, it is similar to what others call BIS Review 128/1999 2 minutes. I am convinced that, for the purposes of establishing credibility and reducing uncertainties in the market, informing the public of such an agreed position on the part of the Governing Council is superior to publishing details of a Council discussion which are naturally difficult to assess for those who are not present at the meeting. Moreover, as mentioned, we should not pretend to know more than we do. It is thus important not to try to give guidance when the ECB itself is not sure. I very much agree that giving too much information is not always helpful. I am convinced that the Eurosystem already provides timely, high-frequency information of good quality, but, as I have said, trying to further improve our communications is an ongoing exercise. 3 BIS Review 128/1999 | 0 |
However, in presence of externally generated and domestically generated shocks the banking system in the countries of the region can be vulnerable to lower profitability, less willingness on the part of the banking group to provide capital, and, ultimately, generate a credit crunch. Among the external shocks were listed rises in euro zone interest rates, adverse shocks to one or more of the countries of origin of the foreign banks, and contagion from an adverse shock elsewhere in the CEE region altering investor perceptions regarding the domestic economy. On the other hand domestic shocks such as declining margins from foreign banks fighting to gain market share, and lowering of credit portfolio induced by a 8 BIS Review 119/2007 weakening economy or an unexpected domestic political event could have large effects in the presence of less adequate risk management in the context of foreign owned banks rapid expansion and increasing euroization of financial assets. 5. Policies to mitigate financial vulnerabilities: constraints and challenges In some cases supervisory authorities (Serbia, Croatia) have recurred to less market oriented macro prudential measures to contain credit growth. While credit controls create the incentive to route lending through less regulated non-bank intermediaries, the imposition of such credit controls in Bulgaria and Croatia was accompanied by a jump in cross-border loans. Watson (2007) argues that prudential policy needs to allow for the fact that foreign-owned financial institutions, with a majority of assets in most cases, have deep pockets in terms of capital and liquidity. | Financial Sector Assessment Program (FSAP) calls for further strengthening of the underlining of the supervisory framework, even though unified supervision under a single supervisory agency was considered premature. Capital and money markets are small or nonexistent. At this stage of development it is necessary that the policy of regulatory institutions should focus on enhancing infrastructure and governance. - Banking system in the region is close 100 percent privately owned, with clear dominance of foreign capital. The banking system in the region amounts from 40 percent of total assets to GDP in Macedonia to 119 percent of total assets to GDP in Croatia and is dominated by private foreign owned/joint ventures banks. The privatization of large state owned banks has been completed in all countries, except Serbia and representing approximately only 38 percent of total capital in the banking system respectively. The system is dominated by a restricted number of big European banks that have set presence across all countries in the region. Lately there is evidence of increasing interest of other banking groups as well. - Increased financial intermediation of the recent years has lead to a rapid credit expansion. This trend reflects increasingly deep financial integration with EU Member States and supports rising trade, investment flows, and institutional 6 BIS Review 119/2007 strengthening. The expansion of the financial sector and inflows of foreign savings can strongly support real convergence. | 1 |
Population aging implies a continued decline in the proportion of the working-age population, which in turn poses a challenge to sustaining per-capita income growth, as a given income earner has to transfer a larger share of his or her income to the retirees. Chart 5 shows how diverse the region is in this context, with some countries already facing serious challenges. In this chart, the horizontal axis is changes in working-age population, and the vertical axis is the proportion of the working-age population to the total population. A rise in this proportion is often called a “demographic bonus,” while the opposite is called a “demographic onus.” And the size of the bubble is proportional to the absolute number of the working-age population. As you can see, over such a long period of time, even glacial demographic changes seem dramatic. Japan has already entered deep into the period of demographic onus, with the absolute number of the working-age population declining at a significant pace. The NIEs, China and some ASEAN countries are about to follow Japan in this regard in the not-sodistant future. Meanwhile, India and other Asian countries are expected to enjoy a favorable demographic environment at least until the middle of this century. The third challenge is what I call the “Malthusian trap.” In Malthus’ original work, the existence of a limited resource – land in his case – constrains growth. Likewise, limitations in the supply of natural resources, such as oil, are thought to threaten global growth in the longrun. | In addition to surveys, international organizations have mobilized to develop a range of indicators to assess the different dimensions of financial inclusion. Since the Cannes Summit in 2011, the G20 has focused on developing financial inclusion indicators, including indicators on access to and use of financial services, financial literacy, and the quality of financial service provisioning and consumption, as part of a continuous reflection process integrating new international trends in this field, notably the development of new distribution models and the emergence of digital financial services. The AFI also published a set of basic indicators on access to and use of financial services in 2013 and on quality in 2016 with the aim of harmonizing data among its members by providing them with a common tool to ensure comparability and foster peer learning. Ladies and gentlemen, In Morocco, since 2007 both the Ministry of Finance and Bank AlMaghrib have considered financial inclusion as a major instrument to develop a comprehensive strategy of the financial sector by 2020 which aims to deepen the national banking market, develop capital markets and position our country as a regional financial hub. Through our commitment to the Maya Declaration in 2013, we announced our pledge to promote access to and use of quality financial services based on sound and solid foundations. That same pledge was 4 reaffirmed in 2016 as part of the roadmap of aligning the Moroccan financial sector to sustainable development goals at the COP 22 held last year in Marrakech. | 0 |
The balance financial intermediaries are regulated by various authorities while some are not regulated at all. Banking companies in Sri Lanka come under several jurisdictions, but the Banking Act is the centrepiece for financial regulations. It sets out all necessary regulatory provisions for capital requirements, shareholder limits, credit operations, provisioning requirements, consolidation, acquisition and mergers, suspension, winding up of banking companies, etc. Sri Lanka’s banking sector is currently operating on Basel I, but getting ready to implement Basel II Capital Adequacy Ratios from early 2008. Basel II is basically risk mitigation in banking operations and, it allows supervisors and regulators to encourage or require banks to build up capital buffers in good times. Financial regulations have thus been set taking into consideration the cyclical situation which banking firms face in home and host countries. In addition to the provisions in the Banking Act, the Monetary Law Act which governs the operations of the Central Bank, also provide for regulation of banking companies. However, in recent times, through various amendments, most of the provisions of the Monetary Law Act have been incorporated in the Banking Act. Their stock market operations come under the purview of the SEC Act. In addition to the banks, the Central Bank regulates the finance companies under Finance Companies Act and the leasing companies under the Leasing Act. The primary dealers who deal in the government securities market irrespective of whether they are banks or not, are under the supervision of the Central Bank. | They have also made some progress in improving their international competitiveness, though there remains an opportunity for further structural reforms in labor and product markets – and not just in the periphery – to increase productivity and strengthen long term growth prospects. The European Central Bank’s (ECB) introduction of the outright monetary transactions (OMT) program has reduced financial market tensions considerably in the peripheral countries, so that sovereign debt funding costs in those countries are at more reasonable levels. The risk that interest rates in the periphery could spiral upward has been significantly diminished. Also, the commitment to European integration remains strong, a factor that U.S.based analysts and investors do not always sufficiently appreciate. Over the past few years, when the situation has been the most bleak, the choice in favor of the Union with the euro at its core has always won out. The bad news is that the eurozone is still in a recession and the political support for further rounds of budget-tightening has clearly lessened. The eurozone financial system is being fragmented and the partial easing of pressure on peripheral sovereign debt markets has not translated into a corresponding easing in private-sector borrowing costs in these nations. If growth does not resume relatively soon, then the political support for continued fiscal and structural adjustment could further erode. In Europe, a key challenge is to strengthen the economic foundations of monetary union at the system level. | 0 |
Strong international cooperation and collective support from member Central Banks and regulatory authorities of the IFSB and global institutions, as well as the strong connectivity with other international standard setting bodies and relevant organisations would ensure continuous close engagements that would allow the attainment of balanced views. The IFSB has had a key role in shaping the global Islamic financial industry, with a decade of achievements that have provided a solid foundation for the progressive growth of Islamic finance that is underpinned with stability. Significant contributions have been made by the IFSB in realising the recommendations in the eight building blocks identified in the Islamic Finance and Global Financial Stability Report 2010, particularly in the areas of prudential standards and liquidity management. It is encouraging that the cross-sectoral prudential standards issued by the IFSB since 2005 have now been implemented in nine countries and more are expected to follow as we progress forward. These standards have taken into account the distinct characteristics and specificities of Islamic finance. The effective implementation of these standards contribute to promoting the soundness and stability of Islamic financial institutions. There has also been strong support by the IFSB for its members BIS central bankers’ speeches 1 to effectively implement the standards through technical assistance that aims to enhance juridictional preparedness in adopting the standards. | The aspirations of ten Central Banks and the Islamic Development Bank – was to lay the foundation for the development of a sound and stable Islamic financial system that will pave the way for its successful integration as a viable and credible component of the global financial system. A decade later, the IFSB has build a solid international reputation as a credible standard-setting body for Islamic finance, with the IFSB charting its achievements in increasing regulatory cooperation, encouraging uniformity of regulatory frameworks and enhancing the monitoring of financial risks in the Islamic financial system. The current global landscape of the Islamic financial system, with enhanced stability and resilience that has contributed to the vibrant growth and internationalisation of Islamic finance is a realisation of the aspiration and vision of the IFSB Founding Members. The efforts are largely attributable to the unwavering commitment and dedication of the members of the IFSB that have relentlessly pursued the goals. The increasing support for the IFSB, signified by its continuous growth of membership over the decade would ensure a progressive continuity in the work of the Founding Members. There are now 187 members from 43 jurisdictions. Malaysia is honoured to host the IFSB here in Kuala Lumpur, and is committed to provide full support in the journey to achieve a sound and resilient Islamic financial services industry. | 1 |
In order to supply liquidity to companies quickly and with minimum red tape, the Federal Council drew up an aid package, together with the SNB, the Swiss Financial Market Supervisory Authority FINMA, and the banks. Under this programme, the banks grant loans to companies. The Confederation assumes the default risk and the SNB provides the banks with liquidity through a new refinancing facility. Thanks to this facility, banks can refinance these loans favourably at the SNB policy rate of Page 2/5 –0.75%. All indications are that the supply of credit and liquidity to small and medium-sized enterprises in Switzerland is currently working well. Another feature of the financial centre is that, in carrying out their activities, banks and insurance companies themselves add value and create jobs. The financial sector is an important employer in Switzerland, with around 218,000 full-time positions in 2018. In that year, it generated a nominal gross value added of around CHF 63 billion, or almost 10% of GDP. 1 Its size, however, means that both positive and negative developments in the sector have a particularly strong effect on Switzerland. The SNB, too, is dependent on an efficient and effective financial sector. This is because by granting loans, the commercial banks transmit our monetary policy to the Swiss economy. And by participating in the Swiss franc repo market, insurance companies, too, play a role in Swiss money market pricing. The financial sector thus makes an important contribution to the transmission of our monetary policy. | 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 |
A gradual increase in the repo rate, where the policy is brought step by step onto a less expansionary path, in my opinion reduces the risk of a development that would lead to abrupt adjustments in house prices and household indebtedness later on. This also thus reduces the risk of an unfavourable development of the real economy 3 . In this context, I would, however, emphasise that the reference to household indebtedness and house prices is not, as some have understood it, an expression for our having introduced new targets alongside the inflation target. There are though, as I have just explained, reasons to take into account the impact of these factors on the real economy and inflation, even in a longer perspective, and under different designs of monetary policy. Uncertainty over the future repo rate path We thus always try to be as clear as possible about our view of future macroeconomic developments, including the monetary policy with which this development is normally associated. One question that therefore deserves a comment, before I finally go on to discuss current moentary policy, is how accurately is the future repo rate depicted by market expectations as expressed in implied forward rates? It is important to remember that our view of the development of the repo rate at the monetary policy meetings is based on the information available at the time of the decision. Our considerations may, of course, subsequently be changed due to new statistics becoming available or to the economy facing unforeseen shocks. | Inflation can be expected to be somewhat higher than this forecast for some time to come due to the higher energy prices, although, it is a matter, as I see it, of changes in a rather short time perspective. However, as we have earlier pointed out, there is also reason to assume gradually increasing inflationary pressures as the economic upswing leads to a rise in capacity utilisation both in Sweden and abroad. The basic assessment of inflation developments over the next few years still stands, given the new information received since the Inflation Report. My overall conclusion is that the new information received since the Inflation Report in February mainly confirms the picture then outlined of economic activity in Sweden, while it indicates a slightly stronger development abroad. Inflation prospects in the next few years also appear to have held up rather well on the whole. In February, when we chose to raise the repo rate, our conclusion was that the interest rate should perhaps be increased at a somewhat slower rate than was anticipated according to the interest rate path on which the forecasts in the Inflation Report were based. Personally, I do not see any reason in the current situation to change that assessment, although international developments now look slightly better than we had anticipated in February. This is something I will discuss with my colleagues when we meet next week. | 1 |
Allow me to return to the first topic of the day and say a few considerations about Artificial Intelligence, Machine Learning and Big Data. The interconnected use of new technologies is 1/2 BIS central bankers' speeches already a common practice in many operational fields, such as the defense industry, the automotive industry or the healthcare sector. It is, therefore, natural that new technologies would penetrate the financial sector. Their applications are diversified in design and scope, examples of which are: algorithmic trading, portfolio optimization, scoring and pricing models. Moreover, the use of these new technologies receives more and more attention in the financial and economic areas, as the transition from classical banking sector products and services is growing exponentially. In this context, the focus moves from the individual to more general issues and the question arises about the effects that the trinity described by artificial intelligence, machine learning and big data analytics, have on the financial system. Implicit answers to this question are formulated as considerations of financial stability. In other words, the key question is related to the costs and benefits that the new technologies listed above have on financial stability. The answers to this question are quite varied, given that this issue has not been thoroughly investigated up to this moment. Among the best-known benefits, some of the areas where progress can be made by using the specified technologies are: regulatory compliance, systemic risk monitoring, fraud detection and supervisory effectiveness. | However, in recent years, I have seen that there has been an increasing interest in this matter and in other issues, once considered exotic for central banking. Let me give you two examples. First. A few years ago, at a Central Banks’ Governors’ Club of the Central Asia, Black Sea Region and Balkan countries meeting in Shanghai, there was a presentation about the role the central banks could play in reducing pollution. Second. Early this year, in Bruges, within the IMF Dutch-Belgian Constituency, the National Bank of Belgium gathered central bankers to discuss policy challenges related to doing business in the digital era. So, it is not a real wonder that we talk today about Artificial Intelligence here, in Bucharest, at the National Bank of Romania. It is good for central banks to review from time to time what they are doing. As Agustin Carstens, the head of the Bank for International Settlements, has recently said that central banks are ‘acutely aware of the need to adapt’ their frameworks. That opens the way to new ideas, such as allowing inflation to temporarily overshoot to compensate for past years of weak price growth. I will not go into detail regarding inflation and all the variables that allow us to acknowledge and deal with it. Deputy governor Liviu Voinea thoroughly addressed the inflation puzzle and the present whereabouts of Phillips Curve, during dinner last night. | 1 |
Norman T L Chan: Excessive leverage – root cause of financial crisis Speech by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at the Economic Summit 2012 “Roadmap to Hong Kong Success”, Hong Kong, 9 December 2011. * * * 1. Following the outbreak of the Global Financial Crisis in 2008, it is now generally recognised that serious imbalances in the global economy have been built up over the past 10–20 years. There are many different theories on how these imbalances came about and on their contributions to the Global Financial Crisis. A commonly held theory in western countries attributes the global imbalances and the financial crisis in the US and Europe to the so-called “savings glut” in the Emerging Market Economies (EMEs), especially China. In other words, the problems and miseries being experienced in the US and Europe arose because the EMEs not only over-exported, over-saved and under-spent, but also have been lending moneys at very low rates to the industrial economies and have financed the consumer booms and fuelled the credit and asset bubbles there. I do not subscribe to this view. However, given the complexity of the global financial system, it is very hard to try to come up with a grand theory that can fully explain what has gone so badly wrong that it has resulted in the worst Global Financial Crisis since the World War II. | BIS Review 133/2010 11 When assessing the external demand outlook, it is important to consider our trading partner’s headline growth forecasts as well as the composition of growth. In this respect, it is noteworthy that the latest Consensus Forecasts release indicates a noticeable change in the composition of the euro area 2011 growth forecasts. More specifically, along with the depreciation of the euro owing to financial distress and the weaker growth outlook, euro area private consumption and investment forecasts have been revised downwards, thereby emerging as a potential factor to affect our external demand prospects adversely (Table 2). In other words, despite the absence of a major revision in euro area growth forecasts, the change in the composition of GDP growth indicates a weaker external demand outlook for Turkey compared to the previous Report. Although weak external demand restrained recovery in industrial employment, the steady recovery in the labor market continued in the last period and non-farm employment posted a significant rise in the last one-year period fuelled by the steady increase in employment in construction and services sectors (Figure 30). The continued rise in labor force participation rates in the first quarter of 2010 curbed further decline in unemployment rates. Unemployment rates fell markedly in April amid increased employment and reduced labor force participation (Figure 31). Leading indicators imply that the recovery in non-farm employment will continue, albeit slower. | 0 |
Behind recent trends, in fact, lies the emergence of countries like China and India, who have doubled their share of global output over the past twenty years and are now also competing in markets for high technology products. China alone manufactures half of the world’s cameras and its share of world exports of computers increased tenfold, to almost 20 per cent, in the ten years to 2003! We, too, must find a way to participate actively in globalization and gain from it. ... compounded by a sharply higher oil price ... The second challenge derives from the sharp increase in oil prices. There is a silver lining to this dark cloud in the sense that the price rise is not expected to have a significant effect on world output. The IMF, for example, anticipates global growth to average 4.3 per cent both in 2005 and 2006. This is mainly because it is due to an expansion in demand that is underpinned by economic growth, particularly in Asia. It is still the case, however, that a massive redistribution of wealth is underway from countries which consume oil to those which produce it. Malta is inevitably on the losing side of this process. The estimated increase in the fuel bill for 2006 arising from the production of electricity and the consumption of liquid fuels is not far from the expansion in nominal GDP forecast for 2005. | In the five years to 2004, the annual growth rate averaged only 1.2 per cent in real terms, well below that of many of our EU partners; and while this year’s growth rate up to September, at 1.7 per cent, may be encouraging, it is too early to know whether the implied acceleration will be sustained. And yet the need to achieve a faster pace of economic growth has probably never been as urgent as at the present time. Growth is not only necessary in order to satisfy society’s legitimate aspirations for higher living standards. Beyond that, an expansion in the economy’s supply capacity and an enhanced degree of international competitiveness are essential to overcome the daunting challenges the country is currently facing. A threefold challenge: globalization and its implications The first challenge derives from the pervasive process of globalization, which, powered by rapid advances in technology and trade liberalization, has given rise to an unprecedented mobility of resources between countries in pursuit of the best cost-quality combinations. Suffice it to say that over the past two decades exports and foreign direct investment have been growing twice and three times faster than global output, respectively. Globalization is undoubtedly creating numerous profitable business opportunities. At the same time, however, it represents a potential threat for open economies like Malta’s because of the concurrent intensification of competition. | 1 |
This cooperation has also included active participation in public-private partnership initiatives, including the National Scams Response Centre. As a member of the Financial Action Taskforce or FATF, Malaysia will once again be undergoing a Mutual Evaluations Exercise in 2024 and 2025. For the uninitiated, this is an in-depth assessment of the country's measures to combat ML/TF risks and its compliance with the international standards set by the FATF. This will be the fourth time for us and the last one was done in 2014. It is my hope that the stride made in Malaysia's AML/CFT ecosystem, strong commitment of all institutions towards a highintegrity financial system, and effective cooperation between the industry and public authorities will be reflected in the eventual outcomes of the Evaluation Exercise. In particular, it is paramount for all staff of reporting institutions to maintain high professional standards, adhere to existing confidentiality requirements, and undergo adequate AML/CFT trainings. Ladies and gentlemen, I would like to leave you with a line that is often quoted when speaking about integrity: "Integrity is doing the right thing even when no one is watching". While the quote may have been over-used, it has not dimmed its truth one bit. It is much easier to do the right thing under other watchful eyes, the safety barriers of procedures, or even the instruction of prescriptive rules. But oftentimes, the decisions that will matter most are what we choose to do when nobody, but our conscience is watching. | While each individual is responsible for maintaining high standards of integrity in their personal conduct and everyday work, the institution's management has a duty to ensure that the systems in place do not become an impediment to individual acts of honesty, transparency and integrity. Encouraging staff at all levels to voice their concerns, fostering an environment of healthy debate, and championing individual examples of personal integrity in the workplace are all important steps towards a robust check and balance system within the institution. A strong governance framework would promote these ideals, while mitigating the worst effects of their absence. This includes, among others, clear roles and accountabilities across all key actors or leaders within the institution, strong whistleblowing policies, transparent procurement procedures and a continuous commitment towards awareness training on best practices in these. In this regard, leaders have an important role to play; from setting the right tone from the top to exhibiting the right values and behaviours, that is walk the talk. Within Islamic finance, these are practices that are in line with the principle of Maqasid Al-Shariah. The consideration of wider social welfare and the greater good should form the basis of all personal conduct, and on a higher level, institutional decisions. Valuebased intermediation, or VBI, similarly calls for Islamic financial institutions to deliver the highest ethical standards in all aspects of businesses by embedding self-discipline and continuous improvement within their operations and practices. This is in line with Shariah principles of righteousness (or what we call ihsan) and consultation (or istisharah). | 1 |
I should note that the Review uses data that was available up to 5 May 2006. In my presentation (some of the slides), I will refer to developments since this cut-off date. In presenting the main findings of the analysis, I will broadly follow the structure of the Review (as outlined on slide 2). 2. Overview of the main risks and vulnerabilities I would like to begin with an overview of some pertinent developments in the euro area financial system and of the main sources of risk and vulnerabilities for euro area financial stability, in comparison to the assessment in the December 2005 Review. Overall, the developments since last December lend support to the view that the euro area financial system is robust and well-capable of withstanding shocks. First, the pace of global economic activity has strengthened and it has become more evenly distributed. Second, the balance sheets of euro area banks and insurance companies have continued to strengthen. At the same time, these positive developments are clouded by the fact that the risks and vulnerabilities we identified in the December 2005 Review remain and some of them have increased. Global imbalances have continued to grow. Moreover, it cannot be excluded that tightening liquidity conditions in the G3 economies could yet expose vulnerabilities in the pricing of assets following a protracted period of hunt for yield in a low interest rate environment. Particularly at risk are leveraged investors, especially hedge funds, and this could accentuate the risks of disorderly market corrections. | The price-earnings ratio of the euro area stock market (shown on the left of slide 8) indicates that despite the rather elevated level, this valuation measure remains well below its peaks reached in 2000. However, should corporate earnings growth unexpectedly slow down, the consequent rise in price-earnings ratios could make stocks look relatively expensive to other assets. The chart on the right plots the implied volatility of euro area stock prices and corporate bond spreads which both gradually declined throughout the first five months of the current year, despite rising longterm bond yields. The rather sharp jump in these indicators during the last two weeks, suggests that there was room for adjustment to a higher pricing of risk in the context of changing views regarding the future macro-financial environment. Before discussing the developments in euro area financial institutions, let me first highlight an important dimension of the market-based intermediation process: the rapid development of structured finance products. Although the risk-transfer that this market has facilitated has very likely led to efficiency gains and a better management of risks within the financial systems, there are several concerns which mostly arise from the fact that relatively little is known about how this market has effectively spread risk and how it would function in a situation of extreme stress. Since June 2002, the size of the global credit default swaps market has increased nearly exponentially (see chart on the right on slide 9). | 1 |
As for the components of expenditure, private consumption growth was low and investment continued to fall in annual terms. The sharp decline in durables consumption and in investment in machinery and equipment stood out once more (figure 2). The drastic adjustment of expenditure and the depreciated peso have resulted in a fast reduction of the current- account deficit, whether measured at either trend prices or actual prices (figure 3). As I said, the sluggish economic figures of the third quarter are compounded with partial fourth-quarter indicators that show no significant recovery in spending. The annual change in imports of consumer and capital goods remains negative; various indicators of retail sales show similar trends to those of previous months; and construction-related data shows persistent weakness (figure 4). A similar picture is seen in manufacturing which, with the main exception export sectors, reveals a steady decline in activity. The scenario for investment in construction and works, one of the most inertial components of expenditure, has also deteriorated. The September survey of the Capital Goods Corporation (CBC) further revised the amounts foreseen for 2014 and 2015, taking them below 2013 figures. This economic slowdown has occurred in a context where business and household expectations have turned more pessimistic (figure 5). For consumers, this worsening occurs in a scenario where higher inflation has eroded households’ purchasing power. | It is striking, too, to find how many of the lessons of the CREST project remain relevant today, as the Bank begins its consultation on a new RTGS service: • We set out the strategic drivers for change in a speech by the Deputy Governor for Markets and Banking in January this year: a combination of aging core technology and an unprecedented pace of change in the external payments environment. We secured the broad support of others in the public sector, including HM Treasury and the Payments Services Regulator. And we set out a clear set of policy goals: to maintain or enhance stability and resilience, whilst also delivering a system better able to enable change, innovation and competition. 6 The “nasty” description of Iain Saville owes more than a little to journalistic licence: a somewhat later interview with him at the time of CREST’s launch paints a rather sweeter picture – his car, a Vauxhall Carlton Estate; his passion, singing with the Dulwich Choral Society; and his reason for shaving off his bushy moustache in 1994 not the pressures of the project but his wife’s (firmly stated) wishes! 7 According to the FT, a computer manager at one of the big four banks described TAURUS as “like building a car that had air conditioning, a fancy stereo and electric windows … we should have built a straightforward production car first, then added the bits on later.” Expectations of automotive technology have clearly moved on since the 1990s. | 0 |
William C Dudley: The regional economic outlook Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Federal Reserve Bank of New York’s Economic Press Briefing, New York City, 26 August 2015. * * * Good morning and welcome to the Federal Reserve Bank of New York’s Economic Press Briefing. I am pleased to have this opportunity to speak with you today about economic conditions in our District. As always, what I have to say reflects my own views and not those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. Tracking economic conditions in our region is an important part of our work here at the New York Fed. We need to understand how the diverse economies in our District are performing—from the metropolis of New York City and its surrounding areas, to rural communities in upstate New York and the tropical island of Puerto Rico. I take all of this to the table when the FOMC discusses business and economic conditions and trends. In addition, we provide our regional analysis to the public so that everyone can benefit from our work. At today’s briefing, we will share some of this work with you. As president of the New York Fed, I believe it is essential to listen firsthand to a broad set of businesses and people in the communities we serve to get as comprehensive a picture as possible of how our region is doing. | As in many places around the region, employers in Rochester are having difficulty finding workers to fill a number of middle-skill jobs, like nurses, automotive technicians and computer-controlled machine operators. Out of this partnership, we launched a pilot project challenging college students to create a short video profiling middle-skill jobs that are available in the area in order to drum up interest in opportunities many people may not even know exist. Access to credit for small businesses is another important issue we’ve focused on in recent years. Our outreach group conducts a bi-annual poll of small businesses in our region to better understand their credit needs and access to credit. The results consistently show that gaining access to credit is one of the top growth challenges for small businesses. In my visits across the District, I have heard small business owners voice similar concerns. In response, we’ve helped bring small businesses together with lenders to help smooth access to credit. Over the past year we have conducted ten access-to-credit events— workshops, clinics and conferences—for companies interested in learning about traditional and alternative sources of financing. We partnered with local and national government agencies, small business development centers and local nonprofit organizations to hold these events throughout the District. One such workshop was held recently in Queens. The Queens Economic Development Corporation and the Queens Chamber of Commerce, with support from the New York Fed’s Asian Professional Network Alliance, co-sponsored a resource clinic for small businesses. | 1 |
This development in turn is a consequence of the consolidation of central government finances in the euro countries. However, at the same time, the introduction of the euro has led to increased competition for treasury-bond investors' money. Previously, the governments were alone in their respective domestic markets. Today, they are doing battle for loans from the same source of financing. This competition has led to a number of changes to increase liquidity on the secondary market for treasury bonds. For instance, the average size of the issues has increased. The editions have also become increasingly standardised. Other means used to maintain liquidity are repurchases and bond swaps. On the other hand, the cross-border diversification in investors' portfolios has increased at a much slower rate than anticipated. Rapid expansion in the euro stock market With regard to the stock markets, stock exchange trading in the euro countries was converted into euro right from the start of the EMU in 1999. This means that approximately three-quarters of share trading throughout Europe and one-quarter of international share trading is now in euro. If one examines this development a little more closely, it becomes clear that the increased degree of financing outside of the banking sector that can now be perceived on the interest rate markets is also visible in the stock market. It is possible to measure this development in slightly different ways, but all measures show the same picture. | 4 BIS Review 85/2001 However, in the short-term and medium-term, real incomes may vary depending on the currency in which wages and prices are contracted, as wages, prices and nominal exchange rates are adapted at different rates to changes in productivity. As we know, in the short-term and medium-term, nominal exchange rates can vary considerably, and to a greater extent than is motivated by the differences in inflation rates between different countries. This means that an article can have different prices in different countries during a fairly long period of time. This can be noticed for instance, in Sweden, where price levels are still higher than in other countries in most fields, without this being fully explained by differences in VAT. While Sweden's membership of the single market has certainly led to stiffer competition and greater price pressure in some areas, competition still appears to be weak in several branches and sectors. Increased competition contributes in principle to a convergence in price levels, as the rate of price increase declines, or as prices perhaps even fall on a market exposed to greater competition. All else being equal, inflation in Sweden would then be lower than the inflation target of 2%, and this would not normally be counteracted by the Riksbank's monetary policy, as it is a temporary effect. Naturally, it is difficult for the Riksbank to decide in practice whether such price trends are a result of increased competition unless they are, for instance, connected to changes in regulations. | 1 |
As has been the trend of the last few quarters, its evolution has been closely related to the exchange rate (figure 1). The surprise in headline inflation came mainly from foodstuffs (particularly fresh fruits and vegetables), whose prices showed atypical behavior for the season, very different from historical patterns. As a reference, between August and October these prices —which represent 2.9% of the CPI basket— averaged an annual variation of around -9%, which compares with roughly +7% in the last ten years. The baseline scenario assumes that headline inflation will remain around 2% during the first half of 2018, and will return to 3% during the first half of 2019, somewhat later than we expected in September. Core inflation will also remain low in the coming quarters, to converge to 3% in the second part of 2019, somewhat later than headline inflation (figure 2). The projected behavior of prices in the medium term is mainly based on a gradual closing of the activity gap, a process that is expected to begin during the second half of 2018. On this point, neither the recent data nor the projections of the baseline scenario have changed much from September. In the third quarter, non-mining activity—used to estimate the gap—continued to show limited annual growth (which reached 1.7%), below the potential of the economy (which we continue to estimate around 2.5%) and aggregate GDP (2.2%). | Mugur Isărescu: Some considerations of the impact of monetary policy on the economic convergence Speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the Conference on Europe Economic Integration 2018 "How to finance cohesion in Europe? ", Panel 1 "The role of monetary policy in catching-up", organized by the Central Bank of the Republic of Austria (Oesterreichische Nationalbank),Vienna, 26 November 2018. * * * As prepared for delivery Ladies and gentlemen, I am honoured to join such a distinguished audience. After so many years spent as the Governor of the National Bank of Romania, today’s discussion gives me yet another opportunity to look back at the role that monetary policy has played in supporting nominal and real convergence in Romania. It is almost two decades since the Romania – EU accession negotiations had been opened (back then, in 2000, I served as the prime-minister). Romania has been an EU member for more than 10 years already. Allow me to share with you my view, shaped by the lessons learned over all these years, on the relationship between monetary policy and economic convergence. Let me first make a couple of considerations about economic convergence. First, while the nominal convergence criteria are deeply rooted in the minds of policymakers, the Maastricht Treaty also explicitly stipulates that “a high degree of sustainable convergence” is needed. Yet, this requirement seems to have been overlooked sometimes. Second, practical experience with euro adoption so far has proved that real convergence is also critical for success. | 0 |
This translated into a drag on the economic recovery. As a result, the singleness of monetary policy was no longer ensured, posing significant challenges to the ECB’s policy conduct. Fixing the monetary transmission mechanism and the elimination of tail risks The ECB responded forcefully to these challenges with a number of standard and nonstandard monetary policy measures. The main purpose of the non-standard measures was to reduce financial fragmentation and restore an appropriate functioning of its monetary policy across the euro area. In particular, the measures were geared towards removing two sources of risk premia: bank funding risks and redenomination fears. Higher funding risks for banks had been a symptom of the crisis ever since liquidity strains had first emerged, almost overnight, in the summer of 2007. They had escalated to systemic proportions after the Lehman demise. Since the onset of the crisis, the ECB’s mainstay response to this problem has been twofold: a policy of unlimited provision of liquidity at fixed interest rates against eligible collateral in the weekly main refinancing and longer-term operations, and an extension of maturity of the liquidity operations from 3 months to up to 3 years. This dual approach to crisis management has been reinforced by two further initiatives. First, collateral rules have been adapted in various stages with a view to broadening the pool of assets that banks could mobilise for Eurosystem liquidity provision. | Thank you for your attention. 4/4 BIS central bankers' speeches | 0 |
If the Central Bank had stayed its hand now, despite the worsening outlook and the myriad of indicators of continuing deterioration, accusations of indifference, and even cowardice, would have been appropriate in view of the criticism to which the Bank has been subjected recently, some of it from quite unlikely sources. A few decades ago, when Iceland was engaged in disputes over its territorial fishing waters, we shot blanks first before loading the weapons on our tiny Coast Guard cruisers with real ammunition, and even then we thought it sufficient to shoot wide of the mark rather than aiming directly at the alleged offenders. The Cod Wars are bathed in a romantic glow in Icelandic history, but they were no small matter at the time, a daring game of chance by a tiny country contending with much larger neighbours. At one point it was said that Icelanders had won that unequal battle, that we couldn’t have afforded to lose it. The same applies, actually, to the fight against inflation. We can’t afford to lose it. Inflation must not take root in this economy again. We must take decisive action against it, no matter how unpleasant – or even costly – the effort may be in the short run. There is no need to go into detail about the consequences of inflation for the income and financial position of businesses and households; the repercussions are familiar enough. | Unemployment in the EU and the euro area has reached historic levels, especially amongst the youth. Economic growth is weak and is mainly concentrated in central countries of the euro area. Our countries have been affected by this situation for objective reasons. Trade relations, movement of capital and workers, and the financial system are channels that pass these problems on to our economies. The form, size and extent of this impact have evolved over the past four years. At present, the situation is reflected in the decrease of domestic demand, decline of economic growth, reduction of available income, loss of confidence and deterioration of optimism; this is, in turn, reflected in higher savings. Consequently, these developments have placed the focus of economic policies towards economic activity and revitalisation of optimism in order to boost investments and consumption. On the other hand, maintaining financial stability becomes a necessity, creating thus a binomial of priorities that condition each other and require a simultaneous solution. The Albanian economy is increasingly facing the challenge of economic growth. Although the Albanian economy enjoys consolidated macroeconomic stability and sound financial foundations, aggregate demand has been weak during the first nine months of 2012. Both domestic and foreign demand suffer from high uncertainty, relatively tight lending standards, and limited space for discretionary and stimulating policies. | 0 |
In China, for example, the service sector has grown to more than half of GDP in 2015, much of it driven by a surge in e-commerce and the expansion in logistical services required to support it. Moreover, as the cost of digital technology declines, a wider range of services are becoming more tradable including design, marketing, business processes, and education. Thus not only has the service sector 3 become more important within a country, the share of international trade in services has also increased markedly. The third, and perhaps most unsettling transitional force, is the ultra-accommodative monetary policy stance adopted by major advanced economies. What started out as extraordinary responses to a precipitous crisis, unconventional monetary policy measures have not only been maintained, but in many cases have been applied more intensively with ever greater degree of experimentation and radicalism. It is striking that after all this time, the crisis mentality among policy circles has yet to fully abate. The agglomeration of these transitional forces has had profound impacts on economies the world over. Together, the slowdown in world trade and the shift to services have underpinned important changes in inflation and growth dynamics. In terms of inflation, globalization has for many years increased the importance of foreign factors in price dynamics. Persistently low and more synchronized inflation is partly attributable to the effects of rising competitive pressures in world markets as well as common forces such as falling energy prices. As global trade adjusts, the influence of external factors has regained prominence. | Today, it amounts to 13%. It was also said at the time that one franc out of three was made abroad. Today, it is one franc in two! The 1990s marked the real turning point in our economy’s trend toward globalisation. Our commercial relations with China are exemplary in this regard. After having levelled off at approximately 900 million francs a year in the late 1990s, our exports to China grew at a rapid pace in more recent years, reaching 2.9 billion francs in 2004. With regard to Chinese exports to Switzerland, the trend is just as spectacular, but much more steady. Sales of products manufactured in China in the Swiss market have risen continuously for 20 years now, be it textiles, electronic equipment or - naturally - product components that are reintegrated into our domestic production. Owing to soaring exports to China, our trade balance with this country has thus flattened out steadily; toward the end of the 1990s, it was clearly negative, in 2004 we even had a slight surplus. Despite the rapid expansion of our trade with China, its overall significance remains modest, amounting to just 2% of total Swiss trade. From a Chinese perspective, the relative importance of trade relations with Switzerland is even smaller. Switzerland accounts for less than 1% of Chinese imports and exports. A similar picture can be observed with respect to Swiss foreign direct investment here. Despite a thirty-fold increase between 1993 and 2003, it still amounts to less than 0.6% of total Swiss investment abroad. | 0 |
Zeti Akhtar Aziz: New platform to serve the Islamic financial industry Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the launch of Bloomberg’s Enhanced Islamic Finance Platform, Kuala Lumpur, 21 February 2011. * * * It is my pleasure to join you this morning at this Launch of the Bloomberg Enhanced Islamic finance platform. This development is timely as Islamic finance is envisioned to continue to make great strides in this new decade. Such an information platform is an important element for the more efficient functioning of the Islamic financial markets in the international financial system. In this recent ten years we have seen significant developments in Islamic finance in both our domestic and the international financial system. In this more challenging and uncertain environment, Islamic finance has demonstrated its resilience and viability and has sustained its growth momentum. Today, with the increasing internationalisation of Islamic finance, its continued growth and expansion will very much depend on extensive information which can be efficiently accessed. Bloomberg has for two decades been serving the Islamic financial community providing access to news offerings and timely data and information. The initiative today to enhance its Islamic finance platform is thus a highly welcomed development. The seamless flow of information in the Islamic financial markets is integral to facilitate the efficient price discovery process and maintain the vibrancy of the Islamic financial industry. | 2016 has already got off to a volatile start: weakness in financial and commodity markets, originating in China and the Middle East; political uncertainty in Europe, in southern Europe, in Eastern Europe, in north-western Europe with the British referendum, and even in central Europe with the refugee crisis. It is our duty to be vigilant, but we have two other imperatives: on the one hand, to separate the reality from the hype, the real challenges – and there is no shortage of them – from the sensationalist and sometimes excessive statements made early this year; on the other, to stick to our medium-term objectives in the face of the current volatility. This evening, I will not speak of monetary policy, since we are in the silent period before the Governing Council meeting on Thursday. But this long-term strategy must apply to economic policy as a whole, including the need for reform. a) Today a confirmed recovery is underway, with growth of over 1% in France in 2015 and 1.5% in the euro area. In 2016, despite the uncertainties, all indicators point to higher growth. | 0 |
The question we ask is ‘could they reasonably be judged to be stretched?’ In global corporate bond markets, the answer is yes. As we highlighted back in November, corporate credit appears priced for perfection. Investors expect short-term risk-free interest rates to stay pretty low. And they are demanding little compensation for that being wrong or for the possibility of corporate default. Conviction that interest rates will remain low has meant the ‘term premium’ investors’ demand for holding longer-dated fixed income bonds has rarely been lower. Conviction that growth will be steady and corporations healthy has meant the credit risk premium investors demand for holding corporate bonds has compressed. All in, spreads between corporate bond yields and the estimated path of expected short-term interest rates are below pre-crisis levels. So it’s not just that, as in recent weeks, corporate bond yields are at risk from the – hardly radical – possibility that sustained global growth might mean higher global interest rates. They are also at risk of a reappraisal of how uncertain the outlook is for interest rates and corporate health. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 The compression of bond yields has been especially pronounced at the riskier (‘high yield’) end of the market. The difference between yields on high-yield and investment-grade bonds has shrunk to levels seen prior to the global financial crisis. However you look at it, it’s cheap for companies to borrow in bond markets. | Corporate credit markets are stretched. Finance is cheap because bond investors seem to be less concerned about the safety of their investments. So in this speech, I want to consider the degree to which these markets have become stretched, and how well conditioned the wider economy is for that stretching. Will it cause a strain? 1. When do stretched asset prices (not) strain the wider economy? Before we turn to the world today, I’d like to frame the issue. I start from the point that asset prices are not - horror of horrors - always a reflection of the rest of the economy. 3 They can be stretched above levels supported by ‘fundamentals’ as investors squeeze the compensation they get for the risks they take. When they later adjust, some investors have a bad day and others a good one, but the ups and downs of asset markets don’t have to be a problem for the wider economy. For stretched asset prices to strain the economy, I think one or more of the following channels needs to be active. All share the common theme of the wider economic body not being fit enough to cope. 3 See Claessens and Kose (2017) for a review. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 i) The level of debt in the corporate sector comes to rely on stretched asset prices. | 1 |
The real exchange rate of the króna is somewhat below its likely long-term average, although it has risen in the past year. 6 BIS Review 138/2010 As economic recovery gains pace, the outlook for capital account liberalisation improves. Recovery tends to be accompanied by increased inflow of foreign capital in the form of credit or direct investment. Significant inward foreign direct investment could set the stage for removal of the controls. Although suggestions that recovery began late in 2009 or in the first half of 2010 have proven to be a mirage, a number of indicators imply that Iceland has hit bottom or is close to it, and that growth will resume in the latter half of this year. But the pace of the recovery will depend greatly on our success in attracting foreign capital for exportgenerating investment. The main objective of the IMF programme is to build confidence in Iceland’s economy and economic policy. If that confidence existed now, it would be possible to lift the controls today. Considerable discussion has been devoted to the instability of foreign capital that could flee as soon as the controls that hold it in place are reduced or eliminated. Although the magnitude of foreigners’ frozen ISK assets is broadly known, information on non-resident retail owners of ISK assets is largely hidden. | The partnership between the European Investment Bank and the commercial banks in Romania ensure the effective transmission mechanism to allocate and distribute the European structural funds to the infrastructure projects, to the development of production capacities of the small and medium enterprises and to the creation of new jobs in the economy. The banks are well capitalized, have an excellent solvency and a superior liquidity, prerequisites for co-financing the companies and the economy. The loan-to-deposits ratio is below 100%, indicating available resources for financing. Nonperforming loans have decreased more than three times, from 22% to about 6%, showing a positive trend in a healthier internal ratings model and a sound balance sheet position, while the lending dynamics for companies is below the European average. We have the potential to accelerate the access to finance to support investments as a base for economic growth, instead of a consumption driven growth. This potential is demonstrated by the low financial intermediation in Romania, around 29%, although this percentage can be misleading, as large corporations usually access financing directly abroad, from the headquarters or from the financial institutions in the countries where they are headquartered. The more prudent lending policies and the risk aversion of commercial banks are factors that could be perceived as a break in financing investments at full capacity; however there is a positive side, too. It is a safe approach to credit as a driver of economic growth, as credit (lat. | 0 |
The prospect of a disintegrating monetary union is harmful for both weak and strong member countries. Weak economies experience a currency run, which in the single financial space of a monetary union translates into two phenomena: loss of value for any liability issued by domestic borrowers – including the sovereign – and a depleting deposit base for domestic banks. Here, the scramble for liquidity and the flight from bank liabilities act as a powerful shock on domestic money demand. This is a money demand shock of the worst possible kind, one which shrinks the money multiplier and puts downward pressures on domestic consumer prices. At the same time, countries perceived as safe havens are the target of significant capital inflows, which mainly take place via cross-border bank transfers. In these receiving countries, the monetary base expands. But in order to induce local depositors to hold the excess cash which they are receiving, the expected return on all the competing assets has to fall. This means that the prices of a wide range of securities and of real capital are bid up on impact. Asset price inflation looms. What is the role of the central bank which finds itself in the middle of these panic transactions? 3 Monetary policy should offset the genuine drift in the nominal scale of the economy, which measures the progressive loss of purchasing power of the currency. | It has addressed the risk that those households and firms which consume more energy as a proportion of their income and/or lack the savings or access to external finance that might help them deal with the cash-flow implications of sharply higher energy bills – in other words, less well-off households and small businesses – could not manage the dramatic energy-driven cost-of-living squeeze that threatened over the summer. The UK Government's Energy Price Guarantee (EPG) is the main vehicle here. Decisions such as these are, rightly, in the domain of the government and not for independent central banks to make. However, I will discuss the implications for our economic forecasts in a moment. But I want to flag that the MPC's most recent baseline projection published in the August Monetary Policy Report incorporated the significant increases in European wholesale gas prices we experienced over the summer, but – owing to the pause implied by changes in political leadership– did not incorporate a fiscal policy response to those increases. This reflected the MPC's usual conventions and assumptions underlying the production of its forecasts, but – in the specific circumstances faced at the time – resulted in a baseline projection with debateable internal consistency. The Committee took the unusual step of distancing itself from that baseline in August, and relied more heavily on complementary analysis in scenarios and variants in motivating its decision. | 0 |
It would not be easy to reduce the central government deficit in a situation with declining oil revenues. We might, of course, be fortunate enough to experience a rise in oil prices again, so that we do not have to deal with this problem. Perhaps the oil price is abnormally low at present. But it is important to be aware that the government, in expanding welfare programmes and public sector activities, has not taken due account of the possibility that oil prices will remain low over a longer period. 15 BIS Review 20/1999 We have already witnessed a depreciation of the krone in response to the deterioration in Norway’s terms of trade. This may reflect expectations of continued low oil prices and lower revenues in the long term. This also compromises confidence in the government’s long-term financial position. It is risky to increase expenditure and reduce taxes when there is doubt regarding the long-term balance of the economy. An expansionary fiscal policy could increase uncertainty and the fluctuations in the exchange rate, and reduce Norges Bank’s freedom of manoeuvre. On the contrary, fiscal policy should be oriented to provide room for lower interest rates that can counter a cyclical downturn in an environment of stable wage and price inflation. The authorities must be very cautious about further embedding fixed long-term priorities in the central government budget. | Growth above this level leads to decreased unemployment and vice versa. But it is not just the strength of demand growth that determines the level of unemployment. Other factors, such as economic structures, are also involved and at some level of unemployment the only result of additional growth stimuli is bottlenecks and shortages. Wage costs will then rise in a way that conflicts with low and stable inflation. The GDP growth rate of 3.7% for the first half of this year accordingly exceeds any reasonable assessment of the Swedish economy’s long-term potential. For a time, however, such a high growth rate can be feasible if firms are able to recruit the necessary labour, for instance because the economy is recovering from a situation with high unemployment. That has been the case in Sweden’s labour market and pressure from wages and prices has thereby been able to remain low. Neither are any dramatic changes foreseen in respect of wages in the near future. But how long can this situation last in the present economic upswing? How far can unemployment be reduced without firms encountering recruitment problems more generally? Even with the high unemployment at present, it is, for example, already difficult to recruit computer consultants and some other occupational categories. The situation in certain segments of the Stockholm labour market is also tighter than in other parts of Sweden. But so far, the bottleneck problems seem to be fairly restricted. As yet there are no indications of more widespread shortages. | 0 |
The insurance industry found itself in a position of having to defend its activities from being subjected to the same fate of the wide-ranging regulatory reform that has consumed the banking sector following the crisis. The loss of confidence in financial intermediaries has been particularly damaging. Consumer confidence and trust in financial intermediaries have fallen to all-time lows and continuing discoveries of misconduct have done little to restore confidence. Consumers are unfortunately prone to painting all intermediaries with the same broad brush and asking themselves how far they can trust their financial service providers. As a result, conduct issues are coming under significant scrutiny globally, and the expectation of professional conduct is no longer taken for granted by consumers and regulators alike. This general shake-up of the industry that followed the crisis has meant that insurance brokers, swept up in the tide, must confront the very basic ethos of their business. They must make serving the real economic interests of businesses and helping individuals secure their financial futures the heart of their business. They need to be concerned about BIS central bankers’ speeches 1 the social and environmental impact of the business decisions that they make. And they must commit to providing a fair deal to their customers and building enduring long term relationships. The environment has become far more unforgiving of anything less. | The question that is being asked with increasing urgency is “How can the financial sector play a more significant role in supporting disaster risk reduction strategies?” Along with this focus has been a growing call for actors in the financial sector to do more to reduce vulnerabilities to climate and disaster risks, including through better analytics, professional advice, providing or supporting effective risk mitigation solutions, and by conducting their business in a socially and environmentally responsible manner. Going forward, society will be more demanding of financial service providers, including brokers, to discharge these responsibilities with much greater diligence, and those that do not are likely to bear more severe consequences. The fourth reason that insurance broking is finding itself at a critical crossroad is a more obvious one – the technology revolution. This phenomenon is hardly new and we continue to experience new technological revolutions at an unrelenting pace. The challenge is in 1 2 Swiss Re, Sigma No. 3/2014: “World Insurance in 2013”. BIS central bankers’ speeches understanding and anticipating how evolutions such as aggregator capabilities, internetbased insurance, and big data are impacting insurance broking business models. So far, brokers appear to be taking some comfort in views expressed that technology is having the biggest impact on the more commoditised market for personal insurance lines, while brokers will continue to retain their share in the corporate insurance placements. | 1 |
With the launch of the euro, two decades ago, the Banco de España started to participate in the formulation and implementation of the euro area common monetary policy. Governors from the national central banks in the euro area are members of the Governing Council of the European Central Bank, a collegial decision-making body. Governors do not represent national interests and they vote in their own capacity considering the interest of the euro area as a whole. National central banks in the euro area can also carry out other functions as long as they do not interfere with their responsibilities in the common monetary policy. For instance, the Banco de España is the national competent authority for banking supervision. However, all these additional functions do not necessarily enjoy the same level of independence3 as the monetary policy tasks conferred by the Treaty. With the creation of the Single Supervisory 2 National inflation rates had not be more than 1.5 percentage points higher than the average of the three lowest inflation rates in the European Union. In 1993 inflation in Spain maintained levels close to 5%. Achieving the Maastricht inflation criterion required major efforts in a very short period of time. Inflation dropped to levels below 2% in 1997, allowing our country to join the euro area in 1999. 3 See remarks by Yves Mersch, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, Roundtable Discussion on Central Bank Independence (Frankfurt am Main, 12 November 2019). | • In the area of crisis prevention and resolution, the crisis in the early eighties revealed the lack of sanctioning powers and tools for crisis management. The list of possible infringements was updated. The supervisory authority was also given new tools for crisis management – as intervention measures or the replacement of management –, and an ex-ante Deposit Guarantee Scheme was established, which is also prepared to offer help and bail-out plans. This set of measures promoted and encouraged banks to adopt appropriate risk control systems and practices oriented towards prudent performance and enhancing transparency with both clients and markets. Beyond these changes, Spanish banks also learned direct lessons from the banking crisis, and managed to cope with the challenges linked to competing in a liberalised environment. In fact, banks realised that they have to make continuous efforts to retain adequate internal risk control methods and to invest in technology and human capital. Furthermore, banks have to maintain their capacity to adapt to a changing environment and be able to take advantage of the new financial landscape. The supervisory model will face new challenges ahead, as the global banking system is continuously evolving. New products of increasing complexity and new players subject to little or no regulation are continuously appearing. The model must be flexible enough to maintain its adaptability, without losing its solid foundations. Accordingly, Spanish banking supervision has recently developed its own methodology based on the continuous monitoring of every banking institution, complemented by frequent on-site inspections. | 0 |
Other mechanisms that in certain situations can reduce the impact of monetary policy from its normal level include the banks tightening their credit standards - known as a credit crunch - because they cannot increase their credit risk exposure, for example, as a result of the capital adequacy rules. 4 BIS Review 80/2001 Following a long period of a strong expansion in credit, based on lenders' expectations of continued growth and high wealth levels, a severe downturn in the economy and falling asset prices can, for instance, lead to the banks limiting their lending due to uncertainty over the quality of their existing loan stock. With hindsight, the banks can conclude that they have probably misjudged credit risks earlier and thus lent money at an interest rate that was too low, as well as failing to reserve sufficient funds to cover future losses. Monetary policy relief can in such situations have less impact than otherwise, as the banks are not prepared to make loans even to profitable investments. To summarise, there is good reason to try to learn more about what affects monetary policy's impact, for instance, via the banks, in different situations. Developments on the financial markets over time and differences between various countries indicate that the impact on demand and inflation of a particular monetary policy measure should differ between periods and between countries. | The extent to which the banks are prepared to mortgage shares and property is of no minor significance. If the banks manage to capture the risks connected with fluctuations in asset prices in their credit risk management, this reduces the likelihood of such fluctuations also being reflected in variations in production and employment. I have mainly devoted my speech today to the role the banks play in monetary policy. Nevertheless, from what I have said it becomes clear that there are many, close links between the Riksbank's two tasks – to promote price stability and to promote financial stability. This is an area of analysis that we are endeavouring to develop further at the Riksbank. However, I shall have to return to this another time. BIS Review 80/2001 5 | 1 |
It includes 42 new or amended directives which have a bearing on the financial sector. Disappearing exchange rate risks … It is easy to conclude that there has been a dramatic decline in interest rate spreads between the countries that have introduced the euro, in the region of from around 5 down to 0.3 percentage points for government bonds. Some of this decline is, of course, connected with the consolidation of government finances in the EU member states, but as long as the national currencies remained, investors often also demanded a premium for managing exchange rate risk. The remaining interest rate spread can be largely explained by different credit ratings of member states in the euro area, which are carrying different baggage weights from debt previously incurred, as well as by differences in liquidity between different bond issues. The introduction of the euro has also contributed to increasing the breadth and depth of European capital markets and in any case led to almost complete integration of the part of the money market trading that is closely connected with the Eurosystem’s monetary policy transactions. To be sure, it is the quintessence of a common monetary policy that there should be uniform interest rate conditions for the liquidity supply across the entire monetary union. This has also led to an integration of deposit markets, i.e. short-term financing without formal collateral. | 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 this environment, macroprudential policies that slow the build-up of household leverage ex-ante can be 32 All speeches are available online at www.bankofengland.co.uk/speeches 32 welfare-improving in avoiding this outcome. Farhi and Werning (2016) also offer a model of macroprudential policy in the face of aggregate demand externalities. Another strand of the literature emphasises behavioural sources of pro-cyclicality. For example, powerful narratives, such as a collective belief in a ‘new paradigm’, might manifest themselves in over-exuberance in the financial system (Tuckett (2011), Shiller (2017)). Myopia about risk might also drive excessive risk-taking, especially as memories of past financial crises fade (Guttentag and Herring (1986), Herring (1998), Haldane (2009b), Gennaioli, Schleifer and Vishny (2012)). And such behaviour might be amplified by contracts that reward short-term performance excessively and by herding in financial markets (Avery and Zemsky (1998), Lakonishok et al (1992), Bikhchandani and Sharma (2001)). Aikman, Nelson and Tanaka (2015) show how reputational concerns and peer benchmarking can drive credit cycles. The case for macroprudential interventions to address build-ups in leverage also has empirical support. Mian and Sufi (2010) argue that the persistence of the decline in US GDP after the crisis was caused by excessive household leverage. Jordà et al (2013) report that credit booms not only increase the likelihood and severity of financial crises, but also make normal recessions more painful. | Clear communication reduces the risk of confusion, volatility, and spillovers, and helps others prepare for challenges that may lie ahead. Experience has demonstrated that transparency in monetary policy can both increase its effectiveness and reduce unintended consequences. Shared Insights and Analyses 1/2 BIS central bankers' speeches That is why the perspectives we gain through ongoing dialogue with our counterparts are so valuable. Across the globe, many central banks—including the Federal Reserve—are moving to unwind the highly accommodative policies they put in place at the start of the pandemic. And we are doing this at a time when the economic implications of COVID-19 and the war in Ukraine remain highly uncertain. As we all take these steps, the Bank for International Settlements (BIS) has provided an indispensable venue for sharing insights, analyses, and concerns. By engaging with each other, we are able to stay ahead of the trends and issues that affect other economies and their financial markets. And that is true not only when it comes to policy development and execution, but also in understanding economic and financial developments across the globe. A particularly apt example of the value of dialogue is the BIS’s Consultative Council for the Americas, which I’ve had the pleasure of chairing since 2020. Agustín, Julio, Roberto, and our colleagues from Argentina, Canada, Chile, Colombia, and Mexico are participants in meetings of the Council. Suffice to say, we’ve had a great deal to discuss over the past two years. | 0 |
They are initially aware of the limitations, but after a while they tend to forget them and start to regard highly stylised models as a correct and complete presentation of the economy. What is not included in the model ceases to matter to them. I am thinking here in particular of the banking sector, capital markets and real estate, which in most countries is a key investment asset. Fiscal policy has also been marginalised. Neglecting important factors increases the likelihood of systematic economic policy mistakes. How can this be avoided? Seemingly simply – it is important to recognise that putting all your eggs in one basket is not appropriate when considering macroeconomic dynamics and the effects of monetary policy. We should not forget that there are many different stories playing out in the economy at any given time. Some are fast-moving and some slow; some are strong at a given moment but later fizzle out; some prevail over time, even if no one would have put a brass farthing on them at first. I would liken it to a symphonic orchestra in which different instruments play very different music at different times in terms of number of notes and volume. But in an economy, no sheet music is handed out – it's a socio-political system that creates its own endogenous dynamics, that is, it rewrites the score itself, and in quite different ways each time. | B. Fostering “co-opetition” between established players and new entrants Innovation is often associated with FinTech firms and challengers, such as the start-ups that build success from an ability to focus their business and cut costs for a specific service or link in the payment chain. Yet commercial banks, which have traditionally been a major force in payments, also play a key role in innovation. Likewise, the main card schemes helped to drive the emergence of new payment methods, such as contactless payments and mobile payment terminals. Through partnerships, acquisitions and incubation projects, but also by harnessing in house R&D, established participants have expanded their service offerings to add new solutions, while developing competition and cooperation with new entrants. “Co-opetition” relationships are a deep-rooted feature of the payment industry and are proven to generate value. The challenge now is to nurture them over the long run, taking care to ensure that relationships with BigTech firms are included. This is because the potential network effects enjoyed by BigTech payment solutions and the upstream payment chain positions of these firms could create risks of competitive distortion, particularly in situations where these participants also provide hardware or software components. Users could find themselves effectively captives of an ecosystem and left with no choice in terms of payment service, or at least be influenced by BigTech firms to use their services at the expense of competitors. | 0 |
Mervyn King: Monetary policy developments Speech by Mr Mervyn King, Governor of the Bank of England, at the University of Exeter, Exeter, 19 January 2010. * * * Some dates are easier to remember than others. 1789 and the French Revolution, 1989 and the fall of the Berlin Wall, 1929 and the Wall Street Crash are easily recalled. How will 2009 be remembered: as the year when the world economy fell off a cliff but was rescued by government and central bank intervention around the world? Or the year when we finally recognised that genuine reform to the international monetary and banking system was essential to restore prosperity? Time will tell. The world economy is now coming out of recession. But the cost of the banking crisis has been high. After an unprecedented period of sustained growth, total output in the United Kingdom has now fallen for six consecutive quarters. It contracted last year by around 5%, the largest fall in output since 1931. National income is around 10% below the level it would have reached in the absence of the financial crisis. Around the world, governments and central banks put a massive sticking plaster on the wounds in the form of an extraordinary degree of monetary and fiscal stimulus. As a result, business confidence, orders and output, which all collapsed at the end of 2008, are gradually recovering. But there is a long period of healing ahead. | Although openness alone cannot provide growth, one fact is clear there are no countries that have achieved wealth through autarchy and isolation from the rest of the world. Openness is thus a necessary condition, but not sufficient in itself, for achieving wealth. Many other policy elements are required, including macroeconomic stability, a good standard of education, legal security, efficient bureaucracy and protection of private property, to create good conditions for broad growth in a market economy. The Peruvian economist Hernando de Soto was a pioneer in the study of practical bureaucracy in some developing countries. His view was that it was not primarily a lack of property that made people poor, but rather a lack of legal property. The problem is that many poor people have no paper to prove ownership of their property, because it is so expensive and complicated to obtain in most developing countries. De Soto showed that, for instance, in Lima, Peru, it took six years and eleven months going through 207 legal stages among 52 different public authority offices to obtain permission to build a house. Obtaining legal permission to start a small company required six hours work a day for 289 days to follow the various bureaucratic steps, and it cost 31 times as much as the monthly minimum wage applying at the time. The fact that poor people therefore cannot formally own their houses or businesses means that they can have them stolen from them at any time, without the guilty parties being punished. | 0 |
Second, the banking sector’s resilience during the crisis has benefited crucially from the decisive economic policy response (monetary, fiscal and prudential), which has substantially alleviated the impact of the crisis on the financial position of households and non-financial corporations, thus lessening the effect on financial institutions’ balance sheet quality. The decisions taken by macro- and microprudential authorities have also allowed the banks’ capital positions to improve during the crisis, and have authorised the use of buffers to help smooth the provision of financing to other economic agents, as a complement to the fiscal and monetary measures. 1 Although banking was among the hardest-hit sectors – in terms of stock market valuations – during the initial stages of the crisis, its share price valuations have recovered significantly on international financial markets after the development of vaccines was announced in November 2020. This reflects the fact that, thus far, the crisis has largely been prevented from developing a relevant financial component. Some examples will suffice to illustrate the banking sector’s resilience during the crisis and the role played by economic policies in maintaining it. 2 The resilience and role of the banking sector during the crisis First, let us look at the indicator reflecting credit developments. For the first time since the global financial crisis, the volume of bank lending to the resident private sector in Spain increased in 2020 (by 3.5%). | In the future, given the uncertainties associated with the impact of the crisis on firms’ and households’ credit quality and with the repercussions of gradually withdrawing the support measures, we must be alert to indications of latent credit risk and ensure an appropriate and timely coverage of such risk, in keeping with supervisory guidance. Ensuring suitable 14 risk coverage, while maintaining a flexible prudential approach, may make it easier to prevent any undue contraction in credit that could hamper growth in the new phase of economic recovery that we are entering. The impact of the pandemic has exacerbated some of the pre-existing structural challenges faced by the banking sector. These notably include the challenges associated with the cost of capital exceeding profitability, digitalisation and climate risk management. To address them, it is essential that banks continue to make efficiency gains, by cutting costs and making intensive more use of new technologies. To afford the European banking sector a greater chance of success in adapting to the longterm challenges, it would be highly desirable for the European Union to fully adopt the Basel III accord, complete the Banking Union and further develop the Capital Markets Union. This would enable the European banking sector to explore the synergies and benefits of diversification associated with potential consolidation processes at continental level. Thank you. 15 | 1 |
The current scale of the international financial crisis, with credit institutions having an enormous difficulty for recapitalising without public intervention, has revived the interest on procyclicality of accounting standards and capital requirements. The topic has sprung from the academic arena, to which it was confined until very recently, to the forefront of regulatory and financial policy discussions. The Financial Stability Forum, the International Monetary Fund, the Basel Committee on Banking Supervision and certain central banks have, among others, highlighted the need for an in-depth discussion of procyclicality and regulatory mechanisms that may help reduce it. I believe that the Spanish experience of dynamic provisioning can serve as the starting point for this discussion. I am convinced that these provisions have significantly strengthened the solvency and stability of the Spanish banking system, both on aggregate and at the level of each institution. Clearly, this provision did not insulate Spanish institutions from the global financial crisis, but it had certainly positioned them better to withstand it. Let me conclude with three thoughts. First, I would like to see the standard-setting agencies, and the IASB in particular, as European law is one of the first to have adopted its guidelines, acting with greater subtlety when setting these standards, and also in their dialogue with other regulators. The present serious financial crisis has shown that fair value is an accounting concept and doctrine that has no better alternative, but that also should not be inappropriately applied. | Central banks can help reduce the negative effects of an excess of credit growth if they apply a monetary policy that is oriented to maintain price stability in an horizon long enough as to account for this cyclical behaviour of debt, thereby ensuring that the effects of the crisis are not so devastating for households and firms. Indeed, this should be of particular concern since we know that a monetary policy successful in containing inflation can also contribute to increase household and corporate leverage. A successful inflation fighting monetary policy manages to anchor agents' inflation expectations. In such a setting, the demand-side excesses that tend to be generated during cyclical upturns do not translate – or do so only very slowly – into inflationary pressures. Consequently, central bankers do not consider it necessary to tighten monetary policy, so that interest rates remain very low and continue to fuel the cycle and the consequent expansion of credit and debt. White (Weiβ in German), which is not only a type of wine but also the name of the chief economist of the BIS who retired last summer, has been calling in recent years for the introduction of financial stability considerations into monetary policy design and implementation. And we should acknowledge that the latest events have shown the validity of his proposals. In short, he recommends that central banks act against the build-up of financial imbalances even in the absence of inflationary pressures at the usual reference horizons. | 1 |
Luis M Linde: “The New Hegemon or Last Country Still Standing” Speech by Mr Luis M Linde, Governor of the Bank of Spain, at the Frankfurt Finance Summit 2014, Panel IV: The New Hegemon or Last Country Still Standing, Frankfurt am Main, 20 May 2014. * * * As a result of the crisis, the institutional and intellectual setup of European Monetary Union is being deeply revised. Fresh views on the role of stability across several dimensions – including fiscal and macro-financial – have emerged and taken over the old approach of the Maastricht Treaty. Several players, including, indeed, the ECB, are contributing to this overhaul. I would like to review the main elements of the old institutional setup, the weaknesses revealed by the crisis and the way a reinforced culture of stability is contributing to their repair. The monetary union designed in Maastricht included, in addition to the ECB and the single monetary policy, a relatively loose governance framework for the euro area based, first, on a fiscal discipline device – the Stability and Growth Pact – and, second, on coordination for the remaining economic policies – the Broad Economic Policy Guidelines –. The setup also relied on governments, households and firms being able to internalise the stability patterns required within a monetary union and counted on financial markets penalising those who would not do so. | In the case of Thailand, BOT takes an active role in meeting regularly with financial institutions and IT companies to exchange views and experiences on the development of the businesses and IT environment. - In the process of drafting policies, we often seek out the view from our fellow regulators to ensure that our policy are in line with market and international practices, as well as to help us anticipate problems that may arise in implementation. - The final drafts of policies are sent out for comments from key stakeholders in and outside the Bank of Thailand, especially the industry, to ensure that the policies are practical and not posing any undue burden on financial institutions. - We also make sure that revision of regulations and guidelines is conducted regularly to ensure that e-banking policies are keeping with demand from the financial community as well as with market innovation and international best practices. - To maintain proactive supervision, the IT risk-based supervision is conducted continuously, updating each of bank's IT risk profile on a regular basis and performed overall assessment in certain areas. In case of getting a report of any incidents, we have to thoroughly analyze the impact on the financial institution system and consumer. And, to prevent recurrence of such incidents, we may urgently issue notification to financial institutions to provide preventive, detective and corrective control measures in self and customer protections. | 0 |
These geopolitical risks leave an imprint on the economy as businesses put off hiring and investment decisions until the air has cleared. Moving away from the global context, back to the United States, the tightening of financial conditions that occurred late last year will likely restrain consumer and business spending this year. In fact, we have already seen a sustained slowing in housing construction, in part reflecting less favorable financing costs. Now, I know this talk of slowing growth is causing uncertainty, some hand-wringing, and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. For quite some time, the economic fundamentals have pointed to GDP growth much lower than what we saw in the 1990s, for example. In fact, my 2 percent growth forecast is right in line with g-star. That means slower growth isn’t necessarily cause for alarm. Instead, it’s the “new normal” we should expect. And, it’s important to remember that this is happening at a time when the labor market is very strong. From the perspective of monetary policy, the overall picture of the economy is about as good as it gets: very low unemployment, sustainable growth, and inflation just about at our 2 percent goal. 2/4 BIS central bankers' speeches Given this favorable situation, when you look at monetary policy, things are looking pretty normal as well. | Given that this research was originally focused on the reasons r-star had risen, it’s ironic that I and others have ultimately dedicated much more of our careers to understanding why it’s dropped. In recent years, r-star has been averaging well below 1 percent. And it’s actually now lower than at any time before the Great Recession. One of the reasons for this dramatic decline in r-star lies in changes to the major factors determining potential growth: labor force growth and productivity growth. Baby boomers are retiring and fertility rates have come down. Both of these demographic shifts have significantly slowed labor force growth relative to past decades. Productivity growth has also fallen considerably from the boom years of the late 1990s and early 2000s. All the rapid changes in technology that we see around us every day may make this seem 1/4 BIS central bankers' speeches counterintuitive. But for the moment, being able to order a Nintendo Switch and have it arrive the same day is, shockingly, not increasing productivity in a meaningful way. I could go on for quite some time on this topic, but will leave it to another day! I should note that these demographic and productivity trends are not unique to the United States. In fact, we’ve seen similar slowdowns in growth and sharp declines in r-star in other advanced economies.1 So why did I take you back to simple days of the millennium bug, when you were playing Snake on your phone and ordering takeout from a paper menu? | 1 |
5 The sum of households’ net financial and gross housing wealth has declined by over 10% since the start of the crisis. In contrast, external estimates of the loss of supply capacity as a result of the recession, to which the fall in human capital is likely to be closely related, are around the 4-5% range. See, for example, HMT (2009) and IMF (2009). 4 BIS Review 114/2009 None of this is to deny that households’ balance sheets have been affected by recent falls in wealth. But the extent of that deterioration and hence the pressure on households to repair their balance sheets might be exaggerated by failing to take a more comprehensive view of their assets and liabilities. Nevertheless, it is clear that, even putting balance sheets to one side, the financial crisis has affected households and families in ways that have caused them to spend less. Most directly, the recession has led to a pronounced weakening of the labour market, with employment falling and incomes squeezed. The recession and the sharp rise in unemployment may also have led households to revise their beliefs about the stability of the economy and with it the predictability of their own incomes. The period from the early 1990s up to the financial crisis has been dubbed by economists as the Great Moderation. The UK economy enjoyed over 60 consecutive quarters of positive economic growth accompanied by low and stable inflation. | My own judgment was that the uncertainty surrounding both the economic outlook and the effects of asset purchases made it difficult to have a strong view as to the relative merits of increasing the asset purchase programme to £ billion or £ billion. Indeed, the inflation projection that was published in the August Inflation Report suggested that either policy was consistent with hitting the inflation target, depending on the future path of interest rates. For me, the decision came down to an assessment of the risks of doing too much versus the risks of doing too little. With regard to the potential risks of doing too little, my main concern was that nominal demand would not recover to a level consistent with hitting the inflation target. My main worry with doing too much stemmed from the uncertainty associated with using asset purchases as a policy instrument. We do not have much experience of conducting monetary policy via asset purchases and there is a risk that their effects will be transmitted through the economy in ways we do not predict and do not want. For example, the substantial injections of liquidity might result in unwarranted increases in some asset prices that could prove costly to rectify. I placed considerable weight on both risks and thought that they were best balanced by an expansion of the programme to £ billion. 6 BIS Review 114/2009 I am hopeful that we have started along the road to recovery. | 1 |
Stefan Ingves: Basel III is simpler and stronger Op-ed by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, published in the Wall Street Journal, 15 October 2012. * * * The economic cost of the global financial crisis during the past five years has been frighteningly large. One clear lesson from the crisis is that regulatory capital requirements for the banking system were too low. Or in other words, leverage was too high. Under the pre-crisis rules, banks were allowed to increase their leverage to unprecedented levels. This increased risk in the financial system and when the crisis hit, the implicit guarantees resulted in massive public bailouts around the globe. The Basel Committee’s capital reforms, known as Basel III, substantially raise capital requirements from pre-crisis levels to reduce the probability of bank failures and the associated risks to taxpayers and to financial stability. Recently, much has been made of the perceived shortcomings of Basel III. Some argue that Basel III, which comes into effect next year, is not enough. Others argue that Basel III is too complex and should be replaced by a simple leverage ratio, calculated as tangible equity to non-risk weighted assets. In my view, the Basel III agreement fundamentally enhances national and global financial stability by both raising the level of capital required by banks, and by simplifying the regulatory framework. It is no small task to reach a global consensus on these often quite technical matters. | Part of the consensus is that Basel III should be seen as a set of minimum requirements. Hence, countries are free to impose more stringent rules if they wish. But we should not underestimate how Basel III strengthens bank-capital adequacy rules. A fundamental feature of the new framework is the significant increase in required minimum capital levels. All banks must hold common-equity capital of at least 7% of their risk-based assets, compared with only 2% previously. In the event of a credit boom, banks under Basel III would potentially need to hold a further 2.5% in common equity, bringing the total to 9.5%. Finally, the most systemically important banks must hold up to 2.5% in additional common equity. That is a total of 12%, a sixfold increase from pre-crisis levels for these institutions. The Basel Committee supports a regulatory framework that is both prudent and as simple as possible. Hence the Basel III agreement introduces several simplifying changes to the regulatory framework. For instance, the definition of capital now focuses on tangible common equity, the truest form of loss-absorbing capital. Moreover, all components of the capital base and associated deductions such as goodwill or deferred tax assets must be disclosed in a fully comparable manner. By standardising and simplifying the measure of capital, Basel III makes the regulatory framework easier to understand, and will enable market discipline to work better. Another important step has been the introduction of a non-risk based leverage ratio as a supplement to the risk-based requirement. | 1 |
Or it may require a longer breathing space or a larger amount of support than that prescribed in the limits I have set out. Or it may propose other forms of security than the three that have been specified. Support in such cases would be considered in the light of the implications of failure on systemic stability and would not be granted without the specific prior approval of the Financial Secretary. In addition, the Monetary Authority would consider whether to appoint a Manager under Section 52 of the Banking Ordinance to safeguard the interests of depositors and other creditors. The aim in providing for cases that fall outside the conditions set out in the policy statement is to allow sufficient flexibility for the HKMA to deal with unpredictable situations, a point that has been well made by the HKAB, but also to ensure that this flexibility is matched by adequate checks and balances. Conclusion Before offering my concluding remarks on the policy of lender of last resort, I should like to make some observations on the institutional position of the HKMA as lender of last resort. | The interlinkages between financial institutions amplify risk in the financial system. In our assessments, it is important to be aware of any build-up of systemic risk. Residential mortgages provide a good illustration of the difference between the individual risk for a bank and systemic risk. Even during the 1990s banking crisis, Norwegian banks’ losses on residential mortgages were low. Today’s low risk weights for residential mortgages provide strong incentives for banks to extend these mortgage loans. However, housing market fluctuations, which go hand in hand with shifts in saving behaviour, are nonetheless a source of business cycle fluctuations and substantial losses when banks have to write off loans to firms selling goods and services to households. 8 BIS Review 131/2009 The Norwegian housing market is vulnerable. Both a high level of tax incentives for house ownership and a large volume of adjustable-rate mortgages contribute to wide fluctuations in activity and prices. 8 The rise in house prices in the past two decades has also been very strong compared with countries where housing bubbles have burst. To finance strong growth in residential mortgages, banks have to rely to a great extent on borrowing, thereby increasing their vulnerability to a liquidity squeeze. Thus, low risk weights for residential mortgages also lead to higher liquidity risk in the banking system as a whole. It is important to be aware of the similarities between developments in the Norwegian housing market and bank lending and developments in the countries most severely affected by the crisis. | 0 |
With stronger banks, credit is flowing again, helping businesses with new ideas and families looking for a home. In the past 2 years, lending by banks has grown in line with the economy: credit supply looks neither too cold - as it was after the crisis - nor too hot - as it was in the build-up to the crisis (Chart 1). 2 Carney (2017) ‘FSB Chair letter to G20 Leaders – building a safer, simpler and fairer financial system’, 3 July. http://www.fsb.org/wpcontent/uploads/P030717-1.pdf 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 Sadly we can never declare ‘mission accomplished’. Vigilance is needed because too much credit – the flipside of which is of course too much debt – poses economic dangers. The financial system has a habit of creating too much of it. And even when the overall temperature is just right, there can be pockets of debt that are too hot. The economic dangers of debt Household debt – like most things that are good in moderation – can be dangerous in excess. Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy. Let’s begin with mortgage debt. It doesn’t take a genius to know that households with big mortgages are more vulnerable to the unexpected. In Britain, they do everything they can to pay their mortgage debts through thick and thin. That is why banks did not take large losses on mortgages in the crisis. | Aggregate cumulative UK impairment charges over the five years of the (a) stress Impairments in the stress (left-hand scale) Impairment rates in the stress (right-hand scale) Per cent 25 £ billions 20 20 15 15 10 10 5 5 0 0 UK mortgages Sources: PRA regulatory returns, published accounts and Bank calculations. (a) Major UK banks’ core Tier 1 capital as a percentage of their risk-weighted assets. Major UK banks are Banco Santander, Bank of Ireland, Barclays, Co-operative Banking Group, HSBC, Lloyds Banking Group, National Australia Bank, Nationwide, RBS and Virgin Money. Data exclude Northern Rock/Virgin Money from 2008. (b) Between 2008 and 2011, the chart shows core Tier 1 ratios as published by banks, excluding hybrid capital instruments and making deductions from capital based on FSA definitions. Prior to 2008 that measure was not typically disclosed; the chart shows Bank calculations approximating it as previously published in the Report. (c) Weighted by risk-weighted assets. (d) From 2012, the ‘Basel III common equity Tier 1 capital ratio’ is calculated as common equity Tier 1 capital over riskweighted assets, according to the CRD IV definition as implemented in the United Kingdom. The Basel III peer group includes Barclays, Co-operative Banking Group, HSBC, Lloyds Banking Group, Nationwide, RBS and Santander UK. (e) CET1 ratio less the aggregate percentage point fall projected under the Bank of England’s 2016 annual cyclical stress scenario for the six largest UK banks. | 1 |
Prasarn Trairatvorakul: Thailand – assessment of recent economic performance and challenges for the period ahead Keynote address by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Institute of International Finance Asia CEO Summit, Bangkok, 14 March 2012. * * * Distinguished speakers, Ladies and gentlemen. Let me begin by thanking our hosts – the IIF and Bangkok Bank, for inviting me to speak before you at this occasion. It is a pleasure to participate in this unique forum that brings together so many experts from both the private and public sides of the international financial community. I would also like to congratulate the IIF for your proud 30th Anniversary. My designated topic for today is on Thailand’s recent economic performance and challenges for the period ahead. In this audience, I think it is safe to presume that most of you are familiar with recent economic developments so I will be brief in this respect and focus most of my remarks on challenges going forward. So let me start by offering a recap on the events of 2011 up to now. The main theme during most of last year was maintaining growth momentum while keeping stability in check. As the economy gained traction, the balance of risks began to shift away from growth and towards inflation. As a result, monetary policy was dedicated to normalizing interest rates. Then the table was turned. | It could be for France even slightly higher than forecasted (1.6%), if we look at our Banque de France forecast for Q4 published this morning – at 0.5%. It will be sustained in the next two years thanks to strong investment and increased convergence among countries. These forecasts, including a positive but still subdued inflation, confirm the adequacy of the gradual normalisation of our monetary policy we are engaged in. There is a risk, however, that the debate will continue to revolve around two long-standing divisions: “German rules” vs “French expenditure” and “community methods” vs “intergovernmental methods". Too many fears and suspicions have been inherited from the past, but we are living in a new era – which is also thanks to the acceleration of reforms in France – and in a time of unique historic opportunity. In Rome, on 25 March of this year, the Member States all expressed their clear will for “the completion of the Economic and Monetary Union". We are in agreement on the “why": greater stability, to counter the risk of a new crisis befalling an unprotected euro area; and greater growth, to catch up our past lag on the United States and finally treat the fatal disease of mass unemployment in Europe. But how can we achieve this shared objective? | 0 |
On one side, economists at the Bank for International Settlements (e.g. White, 2006), argued that monetary policy was too loose and should instead “lean against the wind” of a credit/asset-price boom in order to reduce risks further down the road. On the other side, people such as the Chairman of the Federal Reserve, Alan Greenspan (2002), doubted the feasibility of such an approach and advocated a policy of benign neglect during the boom phase, along with aggressive relaxation should there be a collapse of asset prices. As I noted some years ago (Bean, 2003), such “leaning against the wind” is in principle compatible with flexible inflation targeting: a central bank ought to be willing to undershoot its inflation target temporarily, if it believes that it will thereby improve its chances of meeting the target later on by avoiding a disruptive bust. The crisis and subsequent Great Recession seem to make this logic even more compelling. But unfortunately, by the time an unsustainable credit boom has been diagnosed, a small increase in policy rates is unlikely to do much to cool it. And a large increase is likely to generate unacceptable collateral damage to the real economy. In a paper for the Federal Reserve’s annual conference at Jackson Hole a couple of years ago (Bean et al., 2011), I reported the results of some simulations of what might have happened if Bank Rate had been 200 basis points higher during the four years before the crisis began. | 2 Estimation of an error-correction model in which the projection of the NFC lending rate depends on the lagged OIS3M and OIS2Y 3 April 2023 euro area bank lending survey (europa.eu), released on May 2, 2023 Page 7 sur 14 By the way, the growth of loans in France remains significantly higher than in the euro area average. Overall, evidence shows a quick and smooth pass-through of ECB decisions to broad financing conditions. But this is only the first part of the transmission to tame inflation. II. Transmission to the real economy and the decline in inflation In the textbook theory, tighter financial conditions moderate aggregate demand. Monetary policy also affect inflation through the exchange rate channel, but this is beyond the scope of my speech today. According to recent ECB work based on a set of models that complement each other,4 our policy tightening is estimated to lower inflation by around 2 4 Darracq-Paries, Motto, Montes-Galdón, Ristiniemi, Saint Guilhem and Zimic, A model-based assessment of the macroeconomic impact of the ECB’s monetary policy tightening since December 2021, ECB Economic Bulletin, issue 3/2023. Page 8 sur 14 percentage points as a mean over the period 2023-2025. But these estimates call for two caveats: - they vary substantially across models, and are lower in semi-structural models, which unlike structural or DSGE models, incorporate more inertia in consumption and less influence of forward-looking inflation expectations. | 0 |
For the region as a whole, the population in this age group will increase by 314 % from 207 million in 2000 to 857 million in 2050. Many nations are finding it increasingly difficult to provide adequately for the needs of their aged through state-provided social security. Faced with such prospects, planning for retirement has become more important, both for individuals as well as public policy to ensure sustainable financing and management of retirement and healthcare needs in the long term. In this context, the development of deep financial markets among ASEAN countries is critical. One of the significant challenges currently facing the insurance industry in this region has been the shortage of long term assets that match the duration of insurance liabilities. While the bond markets in several ASEAN economies have been extensively developed over the last decade, longer-dated papers remain scarce in most countries. This has been a key impediment to the development of private pension products needed to meet the increasing demand for channels through which the population can save for retirement. While there are significant efforts being made to further develop the longer end of the bond market, the engagement between the industry, regulators and Government needs to be maintained and intensified further to take this agenda forward. This is critical both for the management of risks in the industry, and to support sustainable growth in the longer term. | Another untapped segment of the market is the takaful sector in view of the fact that Muslims constitute more than 40% of the population in ASEAN, mainly in Malaysia , Indonesia and Brunei . Globally, the Muslim population accounts for about 24% of the total population. This has supported the growth of the takaful market in recent years as an alternative to 2 BIS Review 134/2007 conventional insurance. The global takaful market is expected to grow between 15 and 20 per cent per annum. Based on the market penetration level which is at 6.8% in Malaysia and less than 5% in many Muslim countries, this represents significant market potential for the future growth of takaful business. The expansion of insurance markets in ASEAN will need to be reinforced by further consumer education to increase awareness among the public on the importance of longterm financial planning as well as to equip them to evaluate product features and make informed decisions. The insurers must recognise that it is an important responsibility on their part not just to ensure that adequate information is provided to the consumers, but that consumers are suitably advised in the sales process. This includes ensuring that information about insurance products is presented in a manner that is meaningful and easily understood by consumers. This distinction between quantity and quality is important. | 1 |
Without going into the details of the Regulations, let me only mention that their effect is to strengthen the Stability and Growth Pact and to make sanctions a more credible threat. 6 See M. Salines, G. Glöckler, Z. Truchlewski and P. Del Favero (2011): “Beyond the economics of the euro. Analysing the institutional evolution of EMU 1999–2010”, ECB Occasional Paper No. 127. 6 BIS central bankers’ speeches Another important innovation has been the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, known as “fiscal compact”, which entered into force in January 2013. This is an intergovernmental treaty which establishes, among other things, that Member States must enact laws (preferably at Constitutional level) requiring their national budgets to be in balance or in surplus within the treaty’s definition. The laws must also contain a self-correcting mechanism to prevent any breach. The treaty defines a balanced budget as a general budget deficit less than 3.0% of the gross domestic product (GDP), and a structural deficit of less than 1.0% of GDP if the debt level is below 60% – otherwise it shall be below 0.5% of GDP. Finally, the so-called “two-pack” Regulations entered only very recently into force, subject euro area countries to the obligation of ex ante notification of budgetary plans to the European Commission. | That will call for a detailed review of the risk models used by banks and the adoption of corrective measures should unjustifiable deviations be detected. Macroprudential policy Macroprudential policy, insofar as it seeks to identify systemic risks, prevent them and increase the industry’s resilience, has an important role to play. The very nature of these risks is global in dimension, meaning that coordination between the various authorities with responsibilities in this field is needed. At the same time, it should be borne in mind that while the risks may be considered common to the euro area as a whole, their impact and intensity vary from country to country. This heterogeneity not only depends on the characteristics of each country, but also on the particular juncture of the financial cycle. For example, at present certain euro area countries evidence risks associated with excessive real estate market prices, while in others this risk is not discernible. Macroprudential policy thus requires a coordinated approach by the various institutions, and at the same time attention must be paid to considerations of a national nature. In a monetary BIS central bankers’ speeches 3 union like the euro area, the heterogeneity of the member countries’ financial cycles may be an important issue when it comes to designing these policies. The European Systemic Risk Board was set up in late 2010 as the authority responsible for macroprudential oversight in the European Union, empowered to issue warnings and recommendations in this connection under the “act or explain” principle. | 0 |
Minimum conditions would be first that Member States actually abide by common rules – the Stability and Growth Pact and the Macroeconomic Imbalances Procedure – and second that they actually conduct policies consistent with the euro area collective economic strategy. However, contrary to the ESM instruments that have been used so far, access to the SLI should not be conditional on the implementation of an adjustment program. Its design would be such that it does not involve a stigma for Member States. The issue of governance brings me to a broader reflection on the idea of a European Monetary Fund (EMF). An EMF would only make sense if its scope of action and its governance went beyond those of the current ESM. Otherwise, why would we give it a different name? The scope of action of a potential EMF should not be limited to crisis management. We should entrust it with the role of crisis prevention in a broad sense, including contingent lending through the SLI. This would require decision-making processes that would not be tied up by veto-based governance. 2/4 BIS central bankers' speeches As President of the Eurogroup and Member of the European Commission, the Finance Minister of the euro area would logically chair the Board of Governors of an EMF and play a stronger role in situations that require Board level judgement. | The challenge, now, is to calibrate and phase in the new framework in a way that does not impede the recovery and does not contradict our macroeconomic objectives. In the long run, we want stronger balance sheets in the banking system but too high capital requirements could have negative effects, reducing loan supply and, paradoxically, fostering risk-taking in order to keep a high return on equity. In the immediate future, disorderly deleveraging is one of the main downside risks to the recovery process. A macroeconomic assessment of the reforms is underway and will help us strike the optimal balance. The broader point here is that the proposed reforms may have significant macroeconomic consequences and these should be factored in when designing and implementing them. A critical issue put forward relates to the behavior of banks with respect to the capital buffers that they retain on top of the existing minimum. If banks target buffers above the regulatory minimum, which is an endogenous market outcome, they may need to raise even larger amounts of equity than what can be expected by just looking at the current package. We know from empirical studies that weaker capitalized banks typically exhibit weak loan growth compared to other better-capitalized banks. We also know that banks may find it less costly to adjust loan volumes and loan pricing than capital, as frictions in the market for bank capital make the latter option more expensive. | 0 |
The past five years have seen a number of damaging financial crises that have afflicted emerging market economies. Sudden reversals of short-term capital flows to some of those economies resulted in crises that led not only to deep recessions and sometimes political crises, but also a renewed debate about the role of the IMF in providing bailouts to some of these countries. Despite this volatility in international economic conditions the British economy, to date, has experienced greater stability. At first sight, this is encouraging. The UK has weathered some of the recent international economic storms, and achieved a post-war record of uninterrupted economic growth, falling unemployment, and inflation lower and more stable than for a generation. But no two storms are ever the same. Do the clouds on the international economic horizon threaten our economic stability at home? We cannot know. Rest assured that the Monetary Policy Committee will always act to maintain stability by keeping inflation on track to meet the target of 2½%. But the recent stability of inflation owes a good deal to the fact that economic shocks from overseas have tended to offset rather than reinforce each other. It would be rash to assume that it will be at all easy to keep inflation over the next five years within the 2%-3% range within which it has largely moved over the past five years. What matters most, however, is that any such deviations from target are short-lived, and that inflation expectations generally are firmly anchored on the target. | Mervyn King: No country is an island Speech by Mervyn King, Deputy Governor of the Bank of England, at the Institute of Petroleum Annual Dinner, London, 21 February 2001. * * * No country is an island - in terms of economics, if not geography. Trade and capital flows link all the economies of the world. Since 1970 the volume of world trade has increased more than five-fold. Globalisation is not a slogan; it is a fact. The economic winds can rapidly alter direction bringing significant changes in the economic weather. What happens in the world economy is of great importance to your industry. But no business in a country, such as the United Kingdom, which exports and imports almost a third of its national output each year, can ignore global economic developments. Recent events have reminded us of just how volatile that economic weather can be. Only a few short months ago, the United States was experiencing rapid economic growth at a rate which surprised us all. The new frontier had become the new economy, and some had forgotten that economic downturns are a regular feature of a market economy. Share prices had reached levels four times that of a decade earlier, and the price earnings ratio of America's top 500 companies was over forty, an unprecedented level. Now, after a swift and sharp fall of business and consumer confidence, the business cycle appears to be alive and well, and living in the United States. | 1 |
This will enable a more accurate assessment of an insurer’s financial and capital strength, even in times of stress. However, this can increase volatility in an insurers’ balance sheet, and raise overall risk charges and capital requirements on long-term assets. In order not to disincentivise insurers from investing in longer maturity instruments, it is therefore critical for regulators to continue to calibrate their solvency regimes carefully. We do note however, that some regulators have or are introducing into their capital frameworks, mechanisms to smooth out the effects of market volatility, such as the illiquidity premium in Australia and the matching adjustment & volatility balancer in Europe. These mechanisms recognize the long term and illiquid nature of insurance liabilities, where insurers are able to hold assets to maturity. Increasing Importance of Risk Management 13. So let me now move on to talk about the increasing importance of risk management in these challenging times. The forces I have mentioned earlier, have triggered an investment mindset shift, particularly in the last 6 to 12 months amongst insurers – from conservative asset allocation strategies and matching of liabilities – to reaching for yield. 14. In their search for returns, many Asian insurers are investing more tactically across asset classes and diversifying their fixed income portfolios. In addition, many are thinking outside the low yield box and considering an extension of the investment universe parameter. This would encompass non-traditional asset classes, such as emerging markets, infrastructure, trade finance, structured credit, and alternatives such as hedge funds, real estate and private equity. | Thomas Jordan: No end to the debt society without a culture of stability Summary of a speech by Mr Thomas Jordan, Vice-Chairman of the Governing Board of the Swiss National Bank, held at an “NZZ Podium” event, Zurich, 28 February 2012. * * * The complete speech can be found in German on the Swiss National Bank’s website. The most recent financial and economic crisis has resulted in an unprecedented rise in public debt. However, a chronic tendency towards deficits and higher indebtedness has already been observed in a number of countries for the past few decades. Excessive public debt has a negative impact on long-term economic growth, and deprives a country of its freedom of action during a crisis. Sound state finances are thus essential for ensuring an economy's competitiveness and maintaining its social security system, and hence also for social solidarity. Last but not least, excessive public debt also poses a serious threat to price stability and monetary policy independence. Yet how can state budgets be consolidated over the long term? There are limitations on how far fiscal policy powers can be delegated to independent groups of experts. Because fundamental decisions on taxation or expenditure – unlike monetary policy – are aimed at redistribution, they have to be taken at the political level. Even fiscal rules such as a deficit cap or debt ceiling can only achieve a lasting improvement of budgetary discipline if they are supported by a broad political consensus on the advantages of sound finances. | 0 |
In case of a favorable macroeconomic scenario, particularly one in which the job-rich growth observed in 2004 and 2005 continues over the period 2006-2008, the deficit could decline more than set forth in the Convergence Programme, even in the absence of consolidation measures but also without the introduction of new, deficit-increasing legislation. A stronger deficit reduction could be additionally supported by the implementation of the new Public Finance Act, which should contribute to more efficient fiscal management. Unfortunately, these upside risks to deficit targets in the Convergence Programme are far outweighed by downside risks in the form of new deficit-increasing legislation. This includes the recently proposed 4.5 point cut in social contribution rates. While this measure would bring about the much needed reduction of the tax wedge on labour income, it would cost the budget more than 1% of GDP in foregone revenue. Therefore it is essential that it should be accompanied by cuts in spending. Instead, it is more likely that spending will increase, with, among other measures, salary hikes promised to various groups of public employees, as well as more generous social assistance and pension indexation formulas. To sum up, in the medium-term horizon, Poland should be in a position to achieve a general government balance in line with the Maastricht fiscal criteria. This would require moderate discipline in public spending, which unfortunately does not appear very likely at the present moment. | While pull factors actually improved, and rating upgrades by Moody’s outnumbered downgrades by three to one in 2005, they cannot fully account for the magnitude of capital flows to emerging markets in that year. For example, BIS provides a measure of an average sovereign credit rating for emerging markets based on long-term foreign currency Standard & Poors ratings. While credit spreads fell to an all-time low, at the same time emerging markets sovereign ratings remained below their highest levels recorded in 1997. Therefore we may conclude that push factors have been playing an important role in emerging markets. For example, the hedge fund community came to a view that in early 2004 the Polish zloty was an obvious “no-brainer” trade, partly because it had depreciated significantly in previous years and partly because EU accession resulted in a significant and permanent drop in the country’s risk premium. In early 2005, hedge funds were telling me that the Brazilian real was another “no-brainer” trade, as the central bank would have to keep high rates to control inflation and a good external balance indicated that the exchange rate could appreciate. In both cases, the Polish zloty in 2004 and the Brazilian real in 2005 were star performing currencies, and hedge funds pursuing carry trade and momentum strategies were important players on these markets. Such a situation poses a true challenge for many central banks in emerging markets. | 1 |
Depending on the precise timing of the steps that will occur in the exit sequence, there will likely be opportunities to do so. For example, there is a good chance that the Desk will still be selling MBS at the time when the SOMA portfolio gets back to its normal size. 11 In such circumstances, the Federal Reserve would have to then engage in sizable Treasury purchases to offset the ongoing sales of MBS and to expand the SOMA portfolio as needed to meet currency demand and other factors. This period of Treasury purchases would allow the FOMC to rebuild its Treasury portfolio with the maturity structure that it sees as optimal. 9 This view was expressed by Chairman Bernanke in the press conference following the April 2011 FOMC meeting. 10 Of course, the minutes also noted that the path of sales could also be adjusted up or down in response to material changes in the economic outlook or financial conditions. 11 In this scenario, the Treasury portfolio, through redemptions of maturing assets, would have fallen below the levels that will be required once the SOMA portfolio has been fully normalized. This outcome would be intended to get the overall size of the balance sheet down more quickly, with a view that Treasury redemptions are an effective tool for doing so relative to more rapid sales of MBS. | Irma Rosenberg: Monetary policy and the conditions for growth Speech by Ms Irma Rosenberg, Deputy Governor of the Sveriges Riksbank, at an economics conference, Klippan (in the south of Sweden), 1 November 2004. * * * Let me begin by thanking you for the invitation to come here and speak. The subject for this year’s conference is growth. This is a subject close to the hearts of economists and one that often crops up in debate. What factors determine economic growth in the long term, and what can be done to increase it? I intend to approach this question from a central bank perspective. Is it possible, for instance, for the Riksbank to use monetary policy to raise the level of long-term growth? Are there means of affecting growth? Long-term, or potential, growth is a many-faceted concept and I intend to begin by speaking about the prevailing theory with regard to links to monetary policy. I shall then go into more detail on the underlying determining factors behind the long-term growth rate and briefly describe trends in recent years. I shall also speculate on possible future developments and what can be done to improve long-term growth prospects. Long-term growth and monetary policy Let us start with Figure 1, where the blue line shows developments in real GDP in Sweden during the period 1950 to 2003. One can see that there has been a clear trend increase during these years. | 0 |
Such NCCTs will be subject to sanctions if they do not come into line. Moreover, banks from NCCTs are caught under the newly enacted US Patriot Act. Such banks, and any others regarded as higher risk from a money laundering perspective, will be subject to increased scrutiny by their US correspondent banks and the US authorities. At worst, higher risk foreign banks could eventually find themselves shut out of the US payments system. Hong Kong has a good reputation internationally as a financial centre that takes seriously the need to combat money laundering. I am sure that you will agree that we all have a vested interest in keeping it that way - which means that we need to keep in line with international standards as they evolve. The role of the HKMA The role of the HKMA in this is to work with the other relevant authorities in Hong Kong - the Commissioner for Narcotics, the law enforcers and other regulators - to ensure that we have an effective framework to deter, detect and report cases of money laundering. Our particular responsibility relates to AIs. It is our job to verify that AIs have adequate policies, procedures and controls in place to enable them to: • identify suspicious customers and transactions; • report suspicious transactions to the Joint Financial Intelligence Unit (“JFIU”); and • assist the law enforcement authorities through providing an audit trail. | We do this through issuing guidelines that lay down the minimum standards that institutions should incorporate in their anti-money laundering systems. We then carry out on-site examinations to check that these standards are being adhered to. This year we introduced a two-tier, risk-based approach towards examinations. In cases where AIs may be at higher risk of money laundering, we conduct more in-depth examinations using specialist teams. This may involve sample testing and visits to branches to look at how controls actually work in practice and to ascertain at first hand the knowledge and awareness of staff. In more routine cases, higher level review of anti-money laundering controls is conducted, generally as part of our normal risk-based examinations. We intend to supplement our own examinations with a system of self-assessment by compliance officers of AIs on risk indicators of money laundering within their own institutions and the quality of BIS Review 47/2002 1 controls. This will be done using a structured self-assessment framework that we aim to release to the industry later this year. This should help the HKMA to conserve its own resources and direct them where they are most needed. But it should also serve to remind AIs that they have the primary responsibility for making sure that their own house is in order. The HKMA guideline Checking that standards are being observed is obviously important. But it is necessary to ensure that the standards themselves remain effective in dealing with risks. | 1 |
Financial stability is our common good, and we should also face a more subtle threat to it: debt complacency on a global level, in the context of accommodative monetary policies which will be less warranted in the near future. Global debt was already about 200% of world GDP before the crisis (2007), but is up to 220% today. Sound fiscal policies for public debt, responsible lending by financial actors for private debt and – if needed – macroprudential measures, should react against this debt complacency. 1/3 BIS central bankers' speeches More broadly on multilateralism, we should continue to work together to preserve the world economic and trade order. We Europeans, shoulder-to-shoulder with Canada, Japan and others, must resolutely defend international economic relations based on commonly respected rules and multilateral institutions: we are all aware that an escalation of protectionist threats from the United States would dampen growth everywhere. The recent uncertainty is probably already having some negative effects on investment: you saw it in the British economy since the Brexit vote in 2016. And real tariffs would hurt more: according to most calculations including ours, a 10% increase in tariffs would diminish world trade by double digit figures, and decrease global GDP by more than 2%, starting in the United States. 2. The finance of tomorrow Let me now turn to my second point: the finance of tomorrow in an interconnected world. | Similarly, no country or financial institution can adequately respond to the challenges of this changing world on its own: we must definitely join our efforts to build our future. Thank you for your attention. 1 ACPR study on the digital revolution in the French banking and insurance sector, March 2018. 3/3 BIS central bankers' speeches | 1 |
Michael Held: The evolving first line of defense Keynote address by Mr Michael Held, Executive Vice President of the Legal Group of the Federal Reserve Bank of New York, at the 1LoD Summit, New York City, 17 April 2018. * * * Good morning. It’s an honor to join you at the 1LoD Summit. The views I express today are my own, not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.1 I’ve heard it said that being in the risk control business can be, and often is, a thankless task. We get all the blame when something goes wrong, and none of the glory when things go right. So, I want to start my remarks with a word of gratitude to you, my fellow travelers in the world of risk controls. Thank you—not just for the invitation to speak today, but also for the work you perform each day at your firms. The growing sophistication and stature of the first line of defense is, in my view, an unqualified improvement in corporate governance—especially at financial firms. Let’s begin with what you are defending. The credibility and reputation of your colleagues, your employer, and your industry. The trust of your customers and clients. And, perhaps most important, the public interest. From my perspective, you are not just a first line of defense for your organization. You are the first line of defense against significant risks to the financial system. This may sound inflated to some. | The relative size of the programme, representing just 1.6% of the euro area GDP against 13.7% of GDP that has been bought by the Bank of England or the 11.4% purchased by the Federal Reserve, makes it easier to implement. The ECB continues to comply strictly to its mandate to ensure price stability and does not allow inflation to increase as a way of easing the burden of the debt. On this point we disagree with from some of the suggestions made recently by Professor Rogoff. The inflation tax is a blunt tool whose accidental effects would reflect mainly ex-ante institutional features (such as the degree of indexation or the maturity structure of liabilities) rather than the actual necessity to adjust. More importantly, Professor Rogoff has said himself, inflating the debt away would unduly jeopardise the most precious capital of the ECB and of any independent central bank, namely its credibility. The ECB will never debase the currency, as our record shows: we have remarkably preserved both internal and external value of the euro by keeping inflation low and inflation expectations well-anchored. As we have learnt and repeatedly experienced, credibility and in particular the ability to anchor inflation expectations are crucial for the smooth functioning of monetary policy. Their key role has been highlighted again and again during the financial crisis, particularly in preventing the danger of an entrenchment of deflationary expectations. The euro area is a highly integrated economic and financial area which needs to be managed through common decisions. | 0 |
In historical terms, households’ interest costs are currently very low. That the low interest rates have increased households’ ability to take on bigger loans is one cause of the upturn in house prices. During the summer and autumn, the rate of increase in house prices appears to have been dampened somewhat in certain areas, but the rate of increase is still high. Monthly data show that the annual rate of growth for the whole country during the period July to September was 10 per cent. The developments in Sweden are by no means exceptional. Internationally, there are examples of countries which have seen sharper rises in house prices, such as Australia and the UK. But there are also examples of countries where the rate of increase has been lower, such as Germany. Recently, however, the international situation has become more mixed in that house price inflation in some countries, e.g. Australia and the UK, has slackened considerably whereas in others, including the US, it has continued to pick up. In Australia and the UK, the rate of house price increases dropped when the central banks there raised key interest rates, although this occurred with a slight lag in Australia. In the US, the rate of increase has continued upwards in spite of rises in nominal short-term market interest rates. Longer-term rates, however, have not risen to the same extent since the Federal Funds rate began to be raised. | At that time the price increases were driven instead by expectations that prices would continue to rise strongly in the future. When it eventually became evident that these expectations were not going to materialise, the prices fell quickly. Such speculative elements do not appear to exist today. At the same time, property companies’ earnings and debt-servicing ability are good. As things stand today, the property sector will hardly cause any large loan losses for the banks and so it does not constitute a threat either to the stability of the financial system. Housing prices and household debt Over the past one to two years we in the Riksbank’s Executive Board have devoted quite a bit of attention to the house market, where a rapid rise in prices has gone hand in hand with an increase in household debt. But it is important to distinguish between the conclusions we have come to regarding 1/6 the significance for financial stability and the discussions we have had in connection with our monetary policy decisions. I will come back to this. That house prices have risen rapidly in Sweden and many other countries can hardly have escaped anyone’s attention. In Sweden, house prices in the past ten years have more than doubled, and the upswing has been especially strong in metropolitan areas. Increasing house prices have been accompanied by an accumulation of household debt. Due to the fall in interest rates, households’ interest costs have dropped, despite the rise in debt. | 1 |
At the moment, an intense debate is raging as to whether forward guidance can actually increase the effectiveness of monetary policy in a zero interest rate environment. What is crucial for the effectiveness of forward guidance is that it is transparent and credible. In the case of the SNB, the inflation forecast provides implicit information about the expected interest rate path. At present, however, the minimum exchange rate against the euro is also in place. With short-term interest rates close to zero, the minimum exchange rate makes it possible, for the foreseeable future, to ensure monetary conditions that are appropriate for the Swiss economy. Irrespective of any kind of forward guidance, international monetary policy is extremely expansionary. This has had a stabilising effect on international financial markets, as reflected 2 BIS central bankers’ speeches by the situation in spring, when long-term interest rates sank to a historically low level and risk markets benefited from strong capital inflows. Various stock indices recorded new historical highs and risk premia for corporate bonds have steadily narrowed. This positive sentiment was also reflected in volatility measures which had returned to the levels prevailing before the financial crisis. First attempt to normalise monetary policy in the US Together with a revival of the economy in the US, this favourable environment resulted in the Federal Reserve making a first attempt to initiate the process of normalising monetary policy. | In addition, delaying balance sheet normalization allowed the FOMC to meaningfully assess the efficacy of its tools to control short-term interest rates with a large balance sheet, and thereby judge how patient it could afford to be in reducing the balance sheet to its longer-run level.7 Reducing the balance sheet’s size Over the past year, as the FOMC came to judge that normalization of the policy rate was well under way, with another rate increase in December 2016, and further increases in March and June 2017, FOMC deliberations turned to how balance sheet normalization might best be done. As I noted earlier, for some time the FOMC has underscored that the balance sheet will be reduced in a way that is gradual and predictable, so as to avoid risks of surprise, disruption, or volatility, and would be achieved primarily by not reinvesting maturing principal. The FOMC’s recently initiated plan does exactly this.8 Principal reinvestment will decline in a phased manner, an approach which provides for an appropriate pace of reduction in the balance sheet, and is quite straightforward to communicate. Specifically, principal maturities will be reinvested only to the extent that they exceed gradually increasing caps.9 For Treasuries, the cap initially will be $ billion per month, and will increase in steps of $ billion at three-month intervals over 12 months until the cap reaches $ billion per month. Agencies follow a similar pattern, with a cap starting at $ billion and rising in three-month steps to reach $ billion. | 0 |
The Governors of the Nordic countries have built trust for a long time. This building of trust dates back to the 19th century. Although it is not very widely known, in 1873, Sweden, Denmark and Norway formed a monetary union based on the gold standard. This union was eventually dissolved in 1924. However, I believe that one legacy of the union has been that the Governors of the Nordic Central Banks – adding Iceland and Finland to the group – have continued to meet regularly since then. This tradition of regular meetings has built trust. It has taken some time, but today the trust is there. The Nordic example shows that trust between authorities can be achieved, but that trust takes time to build – so patience is warranted. At the same time, we need to start getting this process going immediately. On a European level, I think that the MoU can enhance crossborder cooperation by increasing harmonisation, regulatory convergence and, not least, by building trust. Consequently, we should continue to fully implement the MoU. We are working on this in the Nordic and Baltic countries and are currently establishing a Nordic-Baltic Voluntary Specific Cooperation Agreement. This may serve as an example and, although it may take some time, I am confident that we can increase trust in Europe as well. BIS Review 118/2009 5 Conclusion In my speech, I have talked about confidence and trust. Confidence is essential for a wellfunctioning financial system. | However, fiscal performance in 2009 was weak, mainly due to the global economic crisis, which reduced domestic revenues. Despite this, Government remained within the programmed domestic financing for the year. 1 December-2009 inflation revised to 12.0% in the Budget Speech for 2010 presented to Parliament on October 9, 2009. BIS Review 53/2010 1 Distinguished Members, the financial sector has remained resilient despite the effects of the recent global financial crisis. Currently, the Zambian financial sector is characterized by high liquidity levels, reflecting tighter lending standards in the wake of the lessons from the global financial crisis leading to marked decline in private sector lending. As a result, the demand for the relatively risk free Government securities has increased causing a decline in yield rates on Government securities. The decline in Government securities yield rates and relatively low inflation experienced since the beginning of the year should contribute to a decline in banks lending rates and thus stimulate borrowing by the private sector. I am aware that the high interest rates in the country pose a very big challenge for our manufacturers to borrow for recapitalisation and expansion of their businesses. Access to finance is essential for the economy to grow and therefore it is necessary that we find ways that could reduce the cost of borrowing to allow key sectors to expand. Ladies and Gentlemen, I wish to reiterate that the economic fundamentals point to a reduction in lending rates. | 0 |
What is also important is our high degree of flexibility in the use of instruments and lengthening of the balance sheet. These two facilities allow us to combat major economic disruptions rapidly and effectively, as shown so impressively in the crisis. New monetary policy instruments merely serve to fulfil our mandate in a transformed environment. What also appears important to me is that central banks do not take on tasks that they cannot tackle with their existing instruments, thereby awakening false expectations and hopes. To ensure that monetary policy remains effective, it is important that central banks do not depart from their mandate of price stability. If expectations are too high, central banks are bound to disappoint them in the long run. This will cause them to lose credibility in their core BIS central bankers’ speeches 5 area, and this could lead to politicians becoming involved. In this situation, central banks’ independence would be at stake. Caution is to be recommended with respect to monetary policy trends. Certainly, the SNB will not simply go with the general flow, but will instead pursue its own path tailored to the needs of our country. Extended role and new financial stability approach I will now say a few words about financial stability. Financial stability means that financial system participants are able to carry out their functions and are resilient to disruptions. It is an important prerequisite for economic development and effective monetary policy implementation. | Therefore, the Eurosystem, as a major provider of critical wholesale clearing and settlement services in euro, should be open to experimenting these innovations in 3/4 BIS central bankers' speeches order to revisit and possibly improve the conditions under which we make available central bank money as a settlement asset. We, at the Banque de France, have started gaining exposure and experience with those innovations and in particular DLT. We were the first central bank to develop, regarding the specific use of SEPA creditor credentials, a decentralised register system based on a blockchain infrastructure, the “MADRE” register. Of course, this is only a first step, which does not exhaust an extremely vast and diversified field of experimentation. One possibility often mentioned would be for us to issue a central bank digital currency to support wholesale clearing and settlement services on a decentralised basis using DLT. We, at the Banque de France, are therefore quite open for experiments in that direction, together with the ECB and other central banks of the Eurosystem, in particular with regard to a wholesale Central Bank Digital Currency. Another operational contribution, which could be worth considering – and experimenting – by central banks, is related to one of the major failings of the current payment systems, which is cross-border retail payments. One solution to the weaknesses of private initiatives in the field of cross-border payments could be to interconnect these systems. It is technically and legally feasible for a given area, for example, in the euro zone. | 0 |
To take account of the experimental phase that crypto-assets are presently in and to satisfy the key requirements of ensuring payment security while encouraging innovation in the area, a possible alternative to the optional approach currently favoured by the PACTE Bill would be to maintain a proportional approach. This has been the basis for the European regulation of payment services up to now and consists in setting a mandatory framework whose requirements are adjusted according to the nature, development stage and risk of the associated services. This approach was employed under the Second Payment Services Directive (PSD2) to regulate the market development of account aggregators and payment initiators. In conclusion, it is hard to anticipate the role that crypto-assets might play in the payment system of the future, especially since the characteristics and features of these assets look set to change considerably. Right now, there are major limitations to their everyday use in retail payments, and crypto-assets still have to prove their attractiveness in this regard, particularly since an extensive range of payment solutions is available, and these solutions continue to modernise to address the need for instant exchanges, with, for example, 4/5 BIS central bankers' speeches the introduction of mobile payment solutions and instant transfers. That said, the underlying technologies that I mentioned, and especially blockchain, open up interesting development prospects for major payment and market infrastructures. | Uncertainty over the future of crypto-assets in the world of payments does not relieve us of the need to regulate their development, given the attendant risks. Adopting a framework that protects participants in the real economy will help to increase their confidence in the mechanisms associated with crypto-assets, thereby promoting growth in the new assets. The intrinsically digital and global nature of crypto-assets means however that a coordinated international approach must be taken to avoid creating an opportunity effect, because experience tells us that participants can easily relocate to another territory offering more flexible laws. Several international organisations have set up working groups to explore this question, under the leadership of the G20. While some of the discussions are still in their infancy, the aim in the medium term is to come up with a framework and an international code of conduct to preserve security for everyone and promote financial stability, which is a common good that we all share. Thank you for your attention. 5/5 BIS central bankers' speeches | 1 |
Prospective buyers must be mindful of their ability to cope with the potential risk that may arise from possible changes in the property cycle as well as mortgage interest rates. 7. The HKMA will continue to monitor the property market closely, and will introduce appropriate counter-cyclical measures to safeguard the stability of the banking system. 1/1 BIS central bankers' speeches | William C Dudley: “Remarks at the New York Fed’s Economic Press Briefing on the Regional Economy” Opening remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Economic Press Briefing on the Regional Economy, Federal Reserve Bank of New York, New York City, 18 August 2016. * * * Jaison Abel, Jason Bram, Hunter Clark, Giacomo De Giorgi, Richard Deitz, Jack Gutt, Andrew Haughwout and Joseph Tracy assisted in preparing these remarks. Good morning and welcome to the New York Fed’s Economic Press Briefing. I am pleased to have this opportunity to speak with the journalists covering our region. You are an important communication channel to the people in our District. This morning I want to focus on economic conditions in our region, giving particular attention to job growth. I also want to discuss our ongoing work on Puerto Rico. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. The New York Fed is deeply committed to serving our region. This commitment manifests itself in several ways. We produce business surveys and local economic indexes to help our constituents track regional economic conditions. My staff writes papers and blog posts on economic issues important to our region. We meet with a number of advisory boards comprised of community and business leaders. | 0 |
Pointing to the Future I trust you have gathered by now that for many reasons the crypto-assets in your digital wallets are unlikely to be the future of money. But that is not meant to dismiss them. Their core technology is already having an impact. Bringing cryptoassets into the regulatory tent could potentially catalyse innovations to serve the public better. Indeed, crypto-assets help point the way to the future of money in three respects: - By suggesting how money and payments will need to adjust to meet societies’ changing preferences, particularly for decentralised peer-to-peer interactions; - Through the possibilities their underlying technologies offer to transform the efficiency, reliability and flexibility of payments; and - By the questions they raise about whether central banks should provide a central bank digital currency (CBDC) accessible to all. 27 In the EU, the revision of the 4th AML Directive will bring exchanges and wallet providers in the scope of the anti-money laundering and combatting the financing of terrorism rules. In the US, virtual currency exchanges are regulated as money transmitters and required to abide by Bank Secrecy Act obligations. 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 Let me take these in turn. First, crypto-assets are part of a broader reorganisation of the economy and society into a series of distributed peer-to-peer connections across powerful networks. 28 People are increasingly forming connections directly, instantaneously and openly, and this is revolutionising how they consume, work, and communicate. | The Future of Money While Adam Smith was cautious about the role of the state, he recognised it should furnish the rules and conditions within which private innovation can flourish. In the monetary sphere, this means providing money which citizens can use with confidence and ease. The Bank of England delivers just that through the quality of our banknotes, the stability of UK inflation, the resilience of our financial system, and efficiency and reliability of our core payment systems. We are overhauling our system, RTGS, so that private innovation can flourish. Bringing crypto-assets onto a level regulatory playing field could also catalyse private innovation to create a more resilient, effective payments system. With these foundations in place, the scene is set for better payments, a better economy and a better Friday night out. 32 Oliver Wyman and Santander estimated that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by $ per annum by 2022. See: https://santanderinnoventures.com/fintech2/ 15 All speeches are available online at www.bankofengland.co.uk/speeches 15 | 1 |
Our lawyers perform pro-bono work for homeowners facing foreclosure and advise on legal reforms, while our researchers and market analysts have developed proposals to mitigate current problems and improve the future structure of housing finance. In my presentation today, I will explain why a more robust housing market matters for the wider economy. I will also highlight those factors specific to the housing market that create a risk that it will linger in an extremely weak state for longer than is necessary and remain vulnerable to further weakness. I will make the case for further housing-related policy interventions that would help stabilize home prices, improve the housing outlook and generate an earlier recovery in housing activity. I believe such actions would support growth and make monetary policy more effective in promoting the dual mandate given to the Federal Reserve by Congress – maximum sustainable employment in the context of price stability. The housing bust Given the excesses of the housing boom that took place in the early to middle part of the last decade, a substantial downward adjustment in housing was unavoidable. Since peaking in the second quarter of 2006, home prices have fallen by about 30 percent,2 returning to levels that last prevailed in mid-2003. In the states of Arizona, California, Florida and Nevada, where home prices rose much more than the national average, prices have declined by roughly 40 percent. Over the past year, house prices have declined by another 4 percent, though they remained roughly flat, when one excludes distress sales. | There are over 2½ million Gulf War II veterans alone, many of whom served multiple tours of duty overseas, and a significant proportion of them might otherwise not be able to purchase homes today. Our nation owes them a great debt, and such a policy would provide a boost to housing demand quickly. Moral hazard Some argue that any interventions to improve the real estate market would lead to moral hazard – that is these intervention would reward bad behaviors. I think these concerns are overstated. First, the programs that have been proposed can be designed with the proper incentives to limit moral hazard and to encourage desireable behavior. Second, in contrast to the earlier phase of housing crisis when mostly subprime borrowers came under stress, many of the borrowers running into trouble with their mortgages today took out conforming loans subject to standard downpayment requirements, had respectable FICO scores and borrowed a moderate amount to finance an average house. The problem was that these purchases occurred near the peak in the market and now many of the buyers have suffered an adverse life shock such as unemployment or illness. This isn’t a moral hazard issue, this is just the bad luck associated with the timing of the purchase and an exceptionally weak jobs market. Punishing such misfortune accomplishes little. The taxpayer interest I believe that the proposals I put forward are strongly in the public interest. I also believe that they would be good for taxpayers. Consider, for instance, the proposal for earned principal reduction. | 1 |
And were we to further integrate the consideration of the international financial cycle into the setting of domestic macroprudential policies, it would likely improve the available set of outcomes further still. However, the body of evidence required to justify including the interests of other nations in the setting of domestic policy is understandably large, even when the long run benefits would be to all. This is more true now than ever, as the unequal distribution of benefits from globalisation has increased scepticism about international co-operation. The analysis I have outlined today shows that even without consensus around a fully articulated global framework for macroprudential policy, we can make quite a bit of progress by countries pursuing their local national interests. 8 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 8 TECHNICAL APPENDICES 1. Foreign credit growth and domestic financial stability Cesa-Bianchi, Eguren Martin and Thwaites (forthcoming) explore the effect of ‘foreign’ credit growth (that is, domestic credit growth in the rest of world) on domestic financial stability. In particular, they look at the effect of foreign credit growth on the probability of experiencing a banking crisis at home. In order to do so, they extend the baseline regression in Schularick and Taylor (2012), which only looks at the effect of domestic credit growth, by also considering its foreign counterpart. | In order to put this number in perspective, it is useful to note that the domestic analogue of this figure is 1.6 p.p., and that the overall frequency of crises in the sample is only 3%. 2. Model of monetary and macroprudential policy coordination with market-based finance Aikman, Giese, Kapadia and McLeay (forthcoming) use a calibrated two-period New Keynesian framework to examine the trade-offs and interactions between macroprudential and monetary policies. Their model includes the possibility that rapid credit growth in the first period leads to a future financial crisis, and analyses the decision facing a policymaker with access to both a macroprudential tool, a countercyclical capital buffer (CCyB), and a traditional monetary policy tool, the policy interest rate. In the variant of the model used for the results shown in Chart 8, some credit is provided by a market-based finance sector, which reduces the effectiveness of macroprudential policy. This model is described by the following set of equations, where all variables except 𝐵1𝐵 , 𝐵1𝑀 (growth rates), 𝛾1𝐵 , 𝛾1𝑀 and 𝛾1 (probabilities) are expressed as deviations from steady state. | 1 |
borrow short term for funding longer term lending, it is irrational to assume plentiful liquidity to prevail at all times without treating liquidity as part of risk capital; • Increased financial pressures may lead financial institutions to shift their efforts away from focusing on the conduct of business requirements and from maintaining and strengthening business as usual; • Market participants and consumers may lose confidence in financial institutions and in the authority’s ability to safeguard the financial system; • A significant minority of consumers could experience financial problems because of their high levels of borrowings; and • Tighter economic conditions could increase the incidence or discovery of financial crime or divert the institution’s resources away from tracking financial crime. 2.3 In addition to these, there could also be institution specific risks, which may bring in potential disturbances. Conventional wisdom now is that the more recent episodes like Northern Rock were an accident waiting to happen as banking regulations have not been emphasizing on liquidity risks. The recent turmoil has exposed the vulnerability of a regulatory framework that places so much emphasis on how well capitalized a bank is, but makes little reference to whether it has an adequate cash cushion and liquid securities to see the institution through a period of market turbulence. In this instance, the Basel II regime also does not seem to offer much help. | Adopting an integrated GRC framework is a challenge 4.1 Understanding the demands of the organization’s stakeholders is the key in terms of performance and conformance, and aligning the organization to deliver against these objectives. Considering the risk appetite and risk tolerance of the organization, the processes and technology should be designed and deployed so that the achievement of objectives is measured, risks are assessed and continuous improvement is realized in support of effective GRC. Integrating GRC has become a challenge for virtually every financial institution looking to establish an integrated and consistent approach to controlling exposures, managing risks and creating value. 4.2 The major challenge in adopting an integrated GRC approach is the aligning of the GRC framework and processes to standalone and isolated solutions that are already in place. The difficulty is to integrate these isolated solutions through a flexible and add-on basis to embrace new requirements. Changing core business solutions without overhauling business requirements is considered to be a nightmare by many financial institutions. If it is 4 BIS Review 15/2008 properly planned and designed, it would not be that bad and those who have taken the bold decision to do so will be the winners in the future. 4.3 Another important challenge would be to adopt a GRC framework, which is consistent with international standards. To enable this, new policies and procedures have to be written with links to automated systems. | 1 |
However, in the 2010 survey, the largest share of volume reported by dealer respondents was for transactions with “other financial institutions” – a category that includes nonreporting banks; 5 other financial institutions such as institutional investors, hedge funds, and proprietary trading firms; and official sector institutions. This shift continued through the 2013 survey, when “other financial institutions” accounted for just over half of reported volume, reinforcing evidence of a broadening in foreign exchange trading, with nondealers playing a greater role in the market. The 2013 survey broke out the “other financial institutions” category for the first time. The data showed that nonreporting banks accounted for about 45 percent of the category’s trading volume while institutional investors and hedge funds/proprietary trading firms each accounted for about 20 percent. In a market where daily trading volume exceeds $ trillion, this represents significant activity and is consistent with a general theme of increased participation by nondealers in the FX market. Execution in the FX market One factor contributing to the expansion in participation by nondealers in the foreign exchange market has been the increased ease of entry into the market, attributable to an expansion in the number of execution platforms and services. In part, this has been supported by technological advancements, which, in some cases, have reduced trading costs, increased the speed with which transactions take place, and improved transparency. | And third, the expansion of that work into the current international effort to develop and implement a single global code of conduct for the foreign exchange market and to enhance adherence to that code among all market participants. Work of the Financial Stability Board’s Foreign Exchange Benchmarks Group (FXBG) Given the global nature of the FX market, as well as the number of jurisdictions in which wrongdoing has been uncovered, efforts to strengthen the market must be global in nature as well. Recognizing this imperative, the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, established the Foreign Exchange Benchmarks Group (FXBG) in early 2014. The purpose of the FXBG was to review FX benchmarks and associated market practices, including potential misaligned incentives, and make recommendations for change. The FXBG, which consisted of representatives from more than twenty countries, engaged with a range of market participants to analyze the market structures and incentives as they related to trading around benchmark fixings. The group produced a series of recommendations to enhance the structures and behaviors around FX benchmark trading. I would like to focus on two particular aspects of these recommendations – first, changes to the WM/Reuters calculation 10 and second, changes aimed at strengthening market conduct. The FXBG report highlighted the dominant use of the WM/Reuters (WMR) 4 p.m. London fixings by many different sets of market participants, including some not otherwise active in the foreign exchange market. | 1 |
The strong exchange rate gave us somewhat more time than we would otherwise have had to bring about this domestic slowdown – it meant that monetary policy did not need to be tightened as aggressively as would have been necessary otherwise. But we could not avoid tightening policy altogether, even though we realised that this would be likely to increase the pressures on the internationally-exposed sectors, because in anything other than the short term that would have put the whole economy – including the internationally-exposed sectors we were trying to shelter – at risk of accelerating inflation. I would remind you that right up until the summer of last year we were seeing signs of increasing pressures in the labour market, even in the manufacturing sector – reflected in increasing skills shortages and recruitment difficulties, in the employment/unemployment data, and in gradually increasing pay settlements. The uncomfortable reality, as I’ve said very often before, is that monetary policy can only target the economy as a whole – it can’t seek to protect individual firms, or sectors, or regions, however much we might wish it otherwise. That – as I’ve discovered – is not exactly a popular idea, but there’s no question that that is the reality of it. Over the past year the world – and I mean the world – has changed very substantially. | As a result, there is a lack of integration of GRC across business areas or functions. 2. New regulations and pressure for integrated risk management 2.1 During the past few years, regulatory and compliance requirements of the financial institutions have strengthened globally. Since the first updating of the Basel Capital Accord in the late 1990s, the Sarbanes-Oxley Act in 2002, the launch of new regulations seems to 2 BIS Review 15/2008 have become more frequent. With these new requirements, financial institutions are facing an amplified focus on risk management with risk based performance measures and capital allocation. Rating agencies too have expanded their analysis of Integrated Risk Management practices when determining credit ratings. 2.2 The Financial Services Authority (FSA) in the UK, which has come under much criticism in recent times due to the failure of Northern Rock, has published its risk outlook report in 2008, which has identified 5 priority risks. Although some of these may not be directly relevant or applicable to Sri Lanka’s financial institutions, they are common risks that need to be flagged by the Boards of Directors of financial institutions. The priority risks set out by the FSA are: • Existing business model of some financial institutions are under strain as a result of adverse market conditions. Given the nature of financial business, i.e. | 0 |
24 And, perhaps in keeping with changes in workers’ risk appetite, labour market indicators like the unemployment rate have signalled tightness for most of my time on the MPC without translating into pay pressure. 25 The MPC’s November Inflation Report forecast, which is the best collective judgement of the Committee, is that inflation will peak around 3% this year. In the later part of the forecast period, as the impact of externally generated inflation pressure wanes, domestic inflation pressures, particularly pay, rise so that inflation is slightly above the target at the 3 year forecast horizon. The forecast is based on the increase in Bank rate to 0.5% which the Committee agreed at its last meeting and on the market path for interest rates, which implies Bank rate rising to 1% over the next three years. At the November meeting I voted against increasing Bank rate. I did so not because I had a markedly different view to the majority of the right trade-off between output/inflation over the forecast period – or to put it another way, on the limits to tolerance of above-target inflation. In this respect, I share the overall framework of the Committee. Our framework, however, depends crucially on our estimation of the Phillips curve – both the slope and level. | 26 As is set out in Carney (2017a): The actual trade-off struck will be influenced by individual MPC members’ views of both the nature of the shocks hitting the economy and the transmission mechanism of monetary policy – in other words, why the economy is behaving as it is, and how interest rates affect output and inflation. Put another way, if members have, for example, different views of kappa – the slope of the Phillips curve – their lambdas will appear to be different. Indeed, it is quite possible for the Phillips curve slope to vary over time, and some have argued that it may have flattened in recent years. 12 All speeches are available online at www.bankofengland.co.uk/speeches 12 before tightening policy until there is clear evidence that pay growth is responding to the level of unemployment in line with our forecast. Finally, I have managed to get almost to the end of this speech without mentioning Brexit. Almost, but not quite. While Brexit is a further source of uncertainty, my policy decision does not anticipate any particular Brexit outcome. The questions I have described in relation to the Phillips curve framework are independent of Brexit. They arise in other advanced economies. But Brexit is relevant to monetary policy and to the MPC. Expectations of Brexit - the full and diverse range from the most optimistic to the most pessimistic – are in the UK economy now. | 1 |
In Europe, the economy is still marked by stagnation, and projections for growth in 2003 have been revised downwards a number of times. A moderate upturn is expected in 2004, but activity will remain at a low level. Even though Norges Bank is forward-looking in its conduct of monetary policy, thorough knowledge of the current state of the economy is extremely important. An up-to-date and correct picture of the current situation is necessary to make accurate projections for the period ahead. In autumn 2002, Norges Bank established a regional network as a tool to gauge the level of activity in the Norwegian economy. 1 Based on an assumption concerning forward rates and a gradual depreciation of the exchange rate. BIS Review 43/2003 3 Official statistics and evaluations of developments in financial markets will continue to be the main basis for our assessments, but due to the time lag and revisions of such statistics, supplementary information is useful. The regional network provides up-to-date information on the state of the Norwegian economy. Regular communication with local contacts in Norway’s business and community life provides us with information that supplements available official statistics. It also provides us with supplementary information on areas not covered by official statistical sources, and we learn which issues are of particular concern to enterprises. The network consists of companies, organisations and municipalities throughout Norway. | In mid-September, Norges Bank submitted a report to the Ministry of Finance. This report carefully examines the reasons for the low level of inflation and the measures that have been implemented to bring inflation back up to target. There are still prospects of low inflation for some time ahead. Developments in other countries indicate that prices for imported goods and services, measured in the producer countries’ currencies, will not rise appreciably. It also takes time for the effects of last year’s appreciation of the krone to dissipate. However, this year’s krone depreciation will gradually have an affect on inflation and thus contribute to higher inflation. The analysis in the June Inflation Report showed that a reduction in the sight deposit rate towards 3 per cent, combined with some depreciation of the krone, could bring inflation up towards the target at 11 the two-year horizon . The prospect of more moderate wage growth ahead could provide a basis for an even lower interest rate and a weaker krone without the projections for inflation exceeding 2.5 per cent in the period. With reduced pressures in the economy and an inflation outlook that is below target at the two-year horizon, Norges Bank has reduced the key rate a number of times in the last year. This summer the interest rate has been reduced in larger steps than has been customary. Interest rate reductions have been an important element in preventing inflation expectations from taking hold at too low a level. | 1 |
And to look at the judgments and uncertainties we now face. Needless to say, as always, the “data are difficult to read”. When I arrived on the MPC, we were seeing signs of a strong recovery – stronger than anyone had forecast – that had started in the spring of 2013. Over the middle 2 quarters of that year, GDP had increased at an annualised rate of over 3%. The key drivers of the recovery seemed to be renewed consumer and business confidence due in no small part to the de-escalation of the Euro crisis and an easing in credit conditions. These in turn released pent up demand in the economy. The evidence suggested that this strong growth would continue into 2014. Forward looking economic indicators were very strong. The business surveys were pointing to continued growth at that pace. The squeeze in living standards from higher energy and food prices had started to ease. But, growth seemed to be almost entirely driven by consumer spending and the emerging recovery in the housing market. That strength in consumer spending did not come from growth in real incomes but from a large, two percentage point, drop in the savings rate. Business investment still appeared to be dragging on activity. So there were real question marks about whether this strong growth could be sustained. The MPC took an optimistic view. We forecast business investment would increase as the surveys suggested and play a bigger role in supporting growth. | Recognising the potency of marketing, I set up in 2010 within the HKMA a new team dedicated to reaching out to promote Hong Kong as the premier international financial centre (IFC) in Asia. One of the priority areas that our team has sought to promote, which is highly relevant to our treasury practitioners, is clearly the use of Hong Kong as the corporate treasury management hub for multinational companies as well as Mainland corporates with increasingly larger business footprint offshore. Our team has in the past year alone reached out to nearly 300 companies. 3. Many corporates that we have approached recognise the attractiveness of Hong Kong as an IFC. Hong Kong is a major banking centre with mature and sophisticated capital markets. Our financial system is resilient and is underpinned by a robust regulatory regime. We have first class transport and communications infrastructure. There is a large cluster of finance and legal professionals and talents etc. Yes, we do have a long list of advantages that we can deploy to lobby corporates to come to Hong Kong to set up corporate treasury centres (CTCs) to manage their cash, FX, credit, hedging, interest rates transactions. However, the HKMA outreaching team soon realised that they had run into a major problem. The problem had to do with the tax asymmetry that treated CTCs’ overseas interest expenses and income differently. | 0 |
Some institutions have an explicit policy of raising half of their borrowing requirement abroad in their own name, while others manage their borrowing abroad via their parent bank, which issues securities in the banking group’s name so as to ensure the lowest possible borrowing costs. Neither is it unusual for banks that own mortgage institutions to buy bonds issued by the mortgage institutions of competing banking groups. The reason for doing so is that banks are not allowed to use bonds issued by their own institutions as collateral when borrowing from the Riksbank, while they are allowed to pledge bonds issued by institutions outside their own banking group. As a result, mortgage bonds are largely owned by the banks, which contributes to reducing liquidity in the mortgage market. There are several factors that affect the ability of companies to borrow in the market. These include, of course, the possibility to easily assess the borrowers’ credit ratings and the quality of their assets. This is made easier if the borrower has an extensive contact network so that institutional investors are familiar with the borrower and its activities. Building up and maintaining this type of contact network and credibility requires time and considerable resources. The Swedish mortgage institutions have long established such contact networks, primarily in the Swedish securities market, where the liquidity for Swedish mortgage bonds is greatest. | Even the Basel II regulations, which will come into force in 2007, provide scope for regarding mortgage bonds covered by legislation on secured bonds as more creditworthy than mortgage bonds not covered by such legislation. However, the Swedish market for mortgage bonds is already a large, liquid market that has functioned well since its deregulation at the end of the 1980s. It is the third-largest mortgage bond market in Europe, after the German and Danish markets. After the Swedish government, Swedish mortgage institutions are the largest issuers in both the money and bond markets in Sweden. As much as around 40 per cent of all lending to the non-bank public is mediated via mortgage institutions, which largely finance their activities by issuing bonds and certificates in the securities markets. The market is dominated by five mortgage institutions, which together account for around 99 per cent of all borrowing. The four largest mortgage institutions are subsidiaries of the four largest Swedish banks, while the fifth, SBAB, is state-owned. The mortgage institutions’ annual reports show that as much as around 30 per cent of securities borrowing is carried out abroad, which suggests that there was already considerable interest among foreign players before the legislation on secured bonds was proposed. However, there are considerable differences between the institutions. | 1 |
Our fiscal deficit, now between 3 and 4 percent of GDP, is in the zone of unsustainability. Our external imbalance - the current account deficit - is now between 6 and 7 percent of GDP, a level without precedent in U.S. economic experience. Each of these imbalances magnifies the risk in the other. One might be less troubled by a fiscal imbalance of this size if it was not accompanied by a substantial increase in our reliance on the savings of the rest of the world. The external imbalance might be less troubling if the government was in balance and those substantial capital inflows were going to finance private investment. Together, however, these imbalances raise the potential for higher risk premia on U.S. financial assets and more uncertainty about future returns on claims on the United States. This in turn could reduce expected future investment, productivity growth and U.S. growth potential. This could reduce the willingness of the world’s savers to put their capital to work in the United States. And this could mean lower growth outcomes and slower growth in future incomes. These are risks, not certainties. And there are a number of reasons why the probability of a destabilizing adjustment to these imbalances is likely to be low. These explanations are worth some attention. There is a reasonable case to make that the U.S. fiscal deficit, although a problem, is a problem of manageable dimensions for the medium term, provided we deliver modest changes to the paths of expenditures and revenues. | Ladies and Gentlemen, The final part of my talk concerns the developmental role of central banks. When it comes to financial stability, this is an often overlooked and underappreciated role. Looking back at history however, one finds a number of financial crises were associated with flawed or ill-timed financial liberalization. Thus the path set forward for the financial sector by central banks may lead to destruction as well as prosperity. The Thai financial crisis in 1997 was a case in point. Although it was an inconsistent macroeconomic policy mix that precipitated the crisis, it was the decision back in the 1970s to allow structurally risky finance companies to operate alongside with commercial banks and the creation of the Bangkok International Banking Facilities in the hope to transform Bangkok into Asia fourth financial center after Tokyo, Hong Kong and Singapore that made the financial sector vulnerable with overloaded risks. Thus, when we started anew with our Financial Sector Master Plan to guide future developments of the Thai financial sector in 2004, the two structural weaknesses were the first two to be eliminated. Fast forward to today, all eyes are now on ASEAN financial integration under the AEC Blueprint to create a semi-integrated financial market by 2020. The ASEAN financial integration framework comprises four areas, namely financial services, payments and settlements systems, capital account, and capital markets. It is noted that the target date is beyond 2015 for the AEC. | 0 |
It is also hoped that foreign financial institutions will draw on their extensive global network to support the programme. I urge the industry to lend its full support to this effort which will ultimately benefit the industry. Collectively, these efforts will go a long way towards preparing students well for productive careers in the financial services industry and to provide a strong foundation for the development of the future generation of leaders and captains of industry. The second area relates to financial inclusion. Strategies that are aimed towards consumer outreach and promoting financial inclusion will serve to increase access to financial services for all segments of society, promote more balanced growth, while at the same time, providing 4 BIS Review 83/2007 new sources of revenue for the financial industry. Significant efforts have been taken to strengthen the elements that support financial inclusion. This includes various outreach initiatives, including the consumer education programme, development of small and medium enterprises, increased public accessibility to financial information and greater access to advice and assistance. Part of this effort is the development of a sustainable and commercially-driven microfinance industry in Malaysia . In Malaysia, there are at least 435,000 micro enterprises, but only 13% rely on financial institutions for funding. Of importance is promoting commercially viable microfinance ventures. In this connection, greater flexibility has been provided for foreign banks to enhance their presence in non-urban areas. | As a result of the realignment, the Bank is better positioned to conduct effective surveillance of the financial system; to address regulatory overlaps and duplication within the system; to deal more strategically with the weight of multiple objectives and range of issues confronting the financial system, and more importantly, to preserve regulatory neutrality in the management of similar risks between different financial service providers. Ladies and gentlemen, These emerging trends in the international and regional environment will have an important bearing on the changing climate shaping the banking sector. While it brings new opportunities, it will also bring challenges. Let me return to the theme of this summit – the continued reinvention and transformation that needs to be considered for the industry going forward. I would like to focus on three main areas. The first concerns human capital development. This is vitally important for the future development and growth of the financial sector. Going forward into the future this will become the pivotal factor determining the capacity to reinvent and transform. Financial institutions have two broad options. One would be to “buy talent”. This remains a viable option as long as productivity growth remains aligned with wage increases. Banks, however, need to be wary of bidding up wages without commensurate efficiency improvements or increases in value-add. This would not be sustainable and given the prevailing competitive market conditions, such a strategy will eventually erode the banks' competitiveness resulting from the additional costs. The other option is to “build talent”. | 1 |
In the UK, wearing our “resolution authority” hat, the Bank hopes to be able to work closely with individual banks and the FSA in helping to specify and guide what is needed in practice. My colleague Andrew Bailey will be discussing in more detail tomorrow one of the issues raised by past cases. The enterprise also entails thinking beyond the resolution of modest-sized domestic banks. Both the US and UK authorities are exploring how to extend resolution regimes to bank holding companies and to other types of firm that could prove systemically significant in some circumstances. As present, no one thinks that Large and Complex Financial Institutions could be resolved at all smoothly, as the rescues of the past twelve months show. Cross-border resolutions and the international “living wills” exercise There is, therefore, a substantial international dimension to this work, which is being facilitated by the Financial Stability Board. Over the next few months, the top 25 or so banks 5 6 Communication from the European Commission, An EU Framework for Cross-Border Crisis Management in the Banking Sector, 20 October 2009. http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm#overview BIS Review 144/2009 and dealers in the world will be working with the authorities to produce recovery and resolution plans. The effort will involve not only line supervisors but also resolution authorities and central banks. Firms are expected to produce recovery plans. For obvious reasons, resolution plans need to be produced by the authorities, while still drawing on inputs from the firms. | 3 FSA DP09/4: Turner Review Conference Discussion Paper, “A regulatory response to the global banking crisis: systemically important banks and assessing the cumulative impact”. 4 BIS Review 144/2009 Second and beyond liquidity planning, recovery can involve derisking. This might mean laying off risk, shedding positions or even selling businesses. Once in distress, banks absolutely must be prepared to shrink their franchise in order to sustain themselves. That may entail having businesses set up within groups in a way that would facilitate sale, if necessary. Sometimes what a group regards as its core franchise will not map exactly into what the authorities think of as the essential economic services it provides. That is obviously for discussion between firms and their regulators, who need to be ready to exercise powers to force risk-reduction and recapitalisation where necessary to preserve the soundness of the enterprise and the stability of the system. “Derisking” is all about the capital resources of banks in the face of idiosyncratic or widespread stress. There is, therefore, a read across from the “Living Wills” exercise to the question of how much capital banks should hold. Almost no amount of capital is enough if things are bad enough. Which is why contingent capital might potentially be an important element in banks’ recovery plans, as the Governor set out recently in Edinburgh. 4 This would not be the kind of hybrid capital that mushroomed in the decade or so leading up to the crisis. | 1 |
The downward slope of the current yield curve signifies a tight monetary policy stance (Chart 6). Additionally, loan interest rates have recorded a notable increase since October (Chart 7). As a consequence, loan growth rate declined to more reasonable levels towards the yearend (Chart 3). 4 BIS central bankers’ speeches Chart 6. Chart 7. Yield Curve* Consumer and TL Business Loan Rates*(Percent) Calculated by the return on bonds quoted on the ISE *Flow data. **4-week moving average. Bonds and Bills Market using the Extended Nelson-Siegel (ENS) method. Source: CBRT. Source: ISE, CBRT. Overall, the last quarter of 2011 was marked by ongoing tightening in monetary and financial conditions and a pronounced deceleration in loans. 2. Macroeconomic Developments and Main Assumptions Having climbed to 10.45 percent at end-2011, inflation was significantly above the target. As you all know, the Article 42 of the Central Bank Law stipulates that in the case of a significant breach of the inflation target, we are required to report to the Government and announce to the public the reasons behind the breach of the target and the necessary measures to be taken. I would like to announce that we will publish the Open Letter that will be sent to the Government today on our web-site at 12 a.m. Now, I will touch upon the macroeconomic outlook and our assumptions which constitute the basis for our forecasts. | Inflation and Monetary Policy Outlook Now, I would like to present our inflation and output gap forecasts based on the outlook I have described so far. When forming our forecasts, we assumed that the tight monetary policy stance will be sustained for a while; and consequently, annualized loan growth rate will hover around 15 percent and the Turkish lira will display a mild appreciation trend. Accordingly, inflation is expected to be, with 70 percent probability, between 5.1 and 7.9 percent with a mid-point of 6.5 percent at the end of 2012, and between 3.3 and 6.9 percent with a mid-point of 5.1 percent at the end of 2013. We expect inflation to stabilize around 5 percent in the medium term (Chart 17). Chart 17. Inflation and Output Gap Forecasts * Shaded region indicates the 70 percent confidence interval for the forecast. Overall, although demand and cost conditions have not changed notably since the publication of the October Report, we revised our inflation forecasts for end-2012 upwards due to higher initial point (the initial point referring to the latest inflation data before the forecast period) resulting from higher-than-expected inflation during the past three months. As elaborated on in the Report as well, cumulative increases in the exchange rate and commodity prices coupled with soaring unprocessed food prices and the developments in administered prices pushed inflation to high levels in 2011. We estimate that inflation will remain flat in the first quarter and exhibit a gradual downtrend starting from the second quarter (Chart 17). | 1 |
The Kingdom achieved a surplus in its budget amounting to 5.2 percent of GDP, and recorded a surplus in the balance of payments for the twelfth year in a row which stood at Rls 250.3 billion. The inflation rate rose slightly from 5.1 percent in 2009 to 5.3 percent in 2010, and stood at 5.2 percent in October 2011. It is noteworthy that the inflation in recent years resulted from a rise in food prices and rents. The pace of growth in the national economy is expected to accelerate during the current year. Several factors contributed to such growth in GDP, including increased government spending to unprecedented levels, a large part of which was devoted to various development projects, and an increase in domestic banks’ finance to both the public and private sectors. Custodian of the Two Holy Mosques, In continuation of your care to fulfill the needs of the citizens and provide the requirements of a decent life, you issued a number of royal decrees, which will, Allah willing, contribute to enhancement of the citizens’ standard of living. You ordered the establishment of the Ministry of Housing and approved the building of 500,000 housing units in all regions of the Kingdom over the coming five years with allocations of Rls 250 billion. The limit of housing loans extended by the Real Estate Development Fund was increased from Rls 300,000 to Rls 500,000 which will hopefully provide more houses for citizens and constrain the inflationary pressures stemming from the increase in house rents. | Inflation and Monetary Policy Outlook Now, I would like to present our inflation and output gap forecasts based on the outlook I have described so far. When forming our forecasts, we assumed that the tight monetary policy stance will be sustained for a while; and consequently, annualized loan growth rate will hover around 15 percent and the Turkish lira will display a mild appreciation trend. Accordingly, inflation is expected to be, with 70 percent probability, between 5.1 and 7.9 percent with a mid-point of 6.5 percent at the end of 2012, and between 3.3 and 6.9 percent with a mid-point of 5.1 percent at the end of 2013. We expect inflation to stabilize around 5 percent in the medium term (Chart 17). Chart 17. Inflation and Output Gap Forecasts * Shaded region indicates the 70 percent confidence interval for the forecast. Overall, although demand and cost conditions have not changed notably since the publication of the October Report, we revised our inflation forecasts for end-2012 upwards due to higher initial point (the initial point referring to the latest inflation data before the forecast period) resulting from higher-than-expected inflation during the past three months. As elaborated on in the Report as well, cumulative increases in the exchange rate and commodity prices coupled with soaring unprocessed food prices and the developments in administered prices pushed inflation to high levels in 2011. We estimate that inflation will remain flat in the first quarter and exhibit a gradual downtrend starting from the second quarter (Chart 17). | 0 |
Charles Bean: The future of monetary policy Speech by Mr Charles Bean, Deputy Governor for Monetary Policy of the Bank of England, at the London School of Economics, London, 20 May 2014. * * * I left the London School of Economics to become the Bank of England’s Chief Economist and a member of its fledgling Monetary Policy Committee (MPC) almost 14 years ago. The Bank had not long been given the responsibility for determining interest rates but had at the same time relinquished the responsibility for banking supervision. As I approach the end of my tenure, the Bank looks rather different: banking supervision has returned; and a new policy committee – the Financial Policy Committee – has been charged with preserving the stability of the financial system. As I look back, I think it is fair to say that it has been a pretty extraordinary – indeed unique – period to be involved in economic policy. My first seven years were years of plenty: growth was steady; unemployment was low; and inflation never strayed far from target (Chart 1). From time to time, the MPC nudged Bank Rate up or down a quarter point, and the economy obediently stayed on course. To economists, this period of unusual macroeconomic tranquillity is known as the Great Moderation. But the second seven years were years of famine, as the Great Moderation turned into a Great Tribulation: the worst financial crisis for a century; the most prolonged downturn on record; and inflation rising above 5%. | This is an opportunity for us to discuss the success of Bulgaria’s monetary policy regime in the broader context of the lessons from the current crisis. The speakers and discussants from the BNB today and tomorrow will share the knowledge we have acquired, based on our rich institutional experience. The experience of the Bulgarian central bank is unique. We are one of very few central banks in the world which have both practiced “conventional” monetary policy (involving setting of policy rates and conducting open market operations) and then operated a currency board after that. We have had a track record, during the last two decades, of monetary policy under two remarkably contrasting regimes. Thus our legacy is very different from that of the other similar monetary policy regimes in Europe (such as Estonia, Lithuania, or Bosnia and Herzegovina), where the currency boards were adopted by newly-established central banks in newly-independent states as a means of bringing confidence in a new national currency, promoting political emancipation and national identity. That was not our case, however. The currency board arrangements were introduced in Bulgaria exactly 15 years ago with the very same motivation that stays behind the current reform agenda in the euro area. We did it in order to achieve a much more efficient macroeconomic management and to bring in credibility in the whole policymaking process. Furthermore, the case of Bulgaria demonstrates the importance of maintaining wide consensus among politicians and the society at large, on the key principles of economic policy. | 0 |
BIS Review 101/2009 1 The Technical Committee of the International Organisation of Securities Commissions (IOSCO), charged with regulating the securities markets, broadened its membership to include Brazil, China and India, while the BIS Committee on Payment and Settlement Systems and the Basel Committee on Banking Supervision (BCBS) extended their memberships to encompass 9 and 14 new countries respectively, the majority of which are emerging economies. Nevertheless, there is a need now to ensure that a good balance is struck between the legitimate enlargement of these bodies to reflect our economic reality and the effective and efficient mechanisms those organisations have shown so far. For example, the Basel Committee must now find ways of adapting in order to function as a 27-member body, compared with a 13-member body beforehand. I would now like to turn to the work in progress in the areas of prudential regulation, accounting standards and the scope of regulation. As far as prudential regulation is concerned, the primary imperative is to improve the quality of capital and to harmonise its definition. And this move should go hand in hand with the quick and full geographical extension of Basel II because this framework is designed precisely to ensure that requirements are proportionate to risks and indeed it would certainly have helped if it had been implemented as initially planned before 2008. Beyond that, should we add a simple measure to our arsenal that enables us to assess leverage with a view to helping anticipate the formation of asset price bubbles? | We experienced four consecutive quarters of sequential contraction with a cumulative output loss of 9% – our deepest recession since independence. Conversely, with the subsequent recovery in the global economy, Singapore’s GDP rose sharply and now exceeds the level before the crisis. Last year, the economy grew by an estimated 14.7%. 4. Over the course of the crisis in 2008/2009, MAS’ monetary policy responses were deliberately graduated, underpinned by the objective of promoting price stability in the medium term. We did not react to every single development in the economy or the financial markets as this would have introduced unnecessary volatility and uncertainty. Following the significant deterioration in external demand in late 2008, MAS eased policy in October 2008 and April 2009 to provide support to the domestic economy. In early 2010, taking into account the strong recovery path of the economy and rising domestic cost pressures amidst high rates of resource utilisation, MAS shifted to a modest and gradual appreciation of the $ policy band. Subsequently, MAS tightened policy further in October 2010 by increasing slightly the slope of the policy band. 5. Singapore’s financial system experienced some initial strains but otherwise has proven resilient during the crisis. Banks and insurers maintained robust capital and liquidity buffers, and balance sheets were relatively strong. Their prudent risk management allowed them to weather the crisis well. MAS has also remained vigilant through the crisis, with my colleagues working hard to ensure that our regulatory and supervisory efforts remain robust. Challenges ahead 6. | 0 |
But French and European savers are more attached to security – or capital protection – than to liquidity. Therefore professionals should offer them savings products that are less liquid, with some long-term capital guarantee, and that offer the best equity performance over time. A crucial point is to avoid any tax distortions that might penalise these products more than liquid and risk-free investments. Low interest rates are not the disease, but the symptom of an imbalance between savings and investment; and low interest rates are probably an opportunity to speed up the cure towards productive investment. – At the European level, we need to build an ambitious “Financing and Investment Union” (FIU) bringing together existing initiatives – namely the Juncker plan, the Capital Markets Union and the banking union – which currently work in isolation and therefore do not bring sufficient results. We definitely need to put the pieces of the puzzle together to create a multiplier effect towards private risk-sharing in Europe: with more equity financing and more cross-border flows. The second way forward for raising investment and growth in Europe is to rapidly stabilise the regulatory environment for banks, eight years after the financial crisis. However, in finalising the Basel III reforms we need to avoid two pitfalls. First, as has been stressed by 2 BIS central bankers’ speeches the GHOS and the G20, the completion of reforms should not result in a “significant increase in overall capital requirements”. | At the same time we intend to keep a higher minimum level of capital adequacy ratio than the European standards, in order to provide for some cushion for other forms of risk like operational risk; Third, we try to gain as much as possible out of the experience and knowledge of other countries in the region, which are in a more advanced stage in their efforts of adopting Basel II requirements either partly or fully. We have also the privilege of being close to the euro area member countries, like Italy and Greece, with their banks playing an important role in our financial system. This gives us the possibility to benefit out of expertise of the supervisory authorities of these countries, in the process of adopting new requirements; Fourth, we have expanded our cooperation with other “peer” countries in the region, as the variety of problems found in our countries is very similar and the experience sharing in this respect, is very practical; Fifth, we are trying to promote an environment where issues of Basel II are being discussed in a professional level. We are not focusing only on directly involved parties (including government, other supervisory authorities of the financial market) but also on relevant clients of the banking and the financial sector. Concluding, I would like to stress that Basel II represents a logical and appropriate successor to Basel I. It embeds recent and past lessons and gives excellent directions to financial system and supervision authorities how to move ahead. | 0 |
Moreover, the ongoing rise in indebtedness levels and the prevalence of debt incurred at variable interest rates entails a greater sensitivity of the Spanish economy to monetary policy decisions, against a background in which the present generosity of monetary conditions may be expected to move to a more normal footing. The influence of interest 6 BIS Review 60/2006 rates on expenditure is undoubtedly sharper in the case of relatively more indebted households, which are in the lower strata of the income distribution. Along these same lines, the strong concentration of household wealth in property and the relative weight of productive activities related to the residential sector are resulting in a greater exposure of the economy as a whole to the changes in property-market activity and prices. Regarding the latter, 2005 appears to have marked the start of a slowdown in house prices, raising (all the more so the more firmly the deceleration becomes entrenched) the likelihood of the current overvaluation of housing being progressively reabsorbed, as in previous booms. Let me remind you, however, that some element of risk is always present in all scenarios involving the absorption of a phase of overvaluation. This is a consideration that all agents should bear in mind when deciding where to place their investments. | Managing a crisis also requires laws and regulations that enable a problem institution to be closed down quickly or managed in some other way. Sometimes it is necessary to take measures very quickly, perhaps even the same day. It is not possible to wait for the usual court process to be completed. To avoid this leading to any form of malpractice, the injured party should have the opportunity to obtain redress and damages afterwards. We had this kind of a law in Sweden during our financial crisis. Another question is when a court should be allowed to stop important authority decisions intended to deal with acute bank problems, such as closing a problem bank. When a bank needs to be closed, a difficult balance arises, between the owners' interests and the savers' interest, which are both safeguarded in law. One very current example of this dilemma in Sweden is the case of Custodia. Both the country administrative court and Finansinspektionen (the Swedish financial supervisory 2 BIS Review 83/2006 authority) have made their assessments on the basis of what they should take into account, that is to say the customers' interests and the company and owners' interests respectively. However, I feel that it is very unsatisfactory that we in Sweden do not have a clear legal framework that can manage this type of situation and I assume that these difficulties will quickly be repaired. Crisis prevention also includes creating sufficiently strong public authorities. | 0 |
The International Monetary Fund or the IMF has estimated the amount of money laundered worldwide to be in the region of 2% to 5% of global GDP annually or equivalent to USD800 billion to USD2 trillion a year. Indeed, the financial community now regards financial crime such as fraud, money laundering and terrorist financing, including cyber terrorism and crime, as one of the top operational risks that they face. While the direct cost of financial crimes to individual financial institutions may be substantial, it pales in comparison to the damage to the overall financial system that can arise from the failure to implement adequate measures to effectively combat financial crimes, in particular those relating to money laundering and terrorist financing. Such costs include reputational damage to the institution and country, loss of confidence of key stakeholders such as BIS central bankers’ speeches 1 depositors, investors and the public at large and perhaps more damaging, the loss of or restricted access to international financial system, including correspondent banking relationships. With the increasing trend by supranational bodies to publicly name jurisdictions that are seen to be uncooperative, and to call on their respective members and the broader international community to implement appropriate countermeasures in dealing with institutions and entities from these jurisdictions, the implications, both financially and socially, can be devastating to the countries concerned. | I hope you will exploit this platform to disseminate as much information on Islamic banking and finance as possible so as to provide an opportunity for the public to learn more on the products, services and benefits of Islamic banking and finance. This year's Islamic financial expo presents a different appeal altogether with various differentiated activities and events organised for the diversified target groups and consumers. I note that various activities have been arranged for the next five days including Islamic banking and finance exposition, the annual Islamic Finance Forum, colloquium on Islamic finance, convention on takaful and Islamic unit trust advisors and Muzakarah for Shariah advisors. This is indeed an excellent opportunity for exchanging ideas as well as providing relevant information to the public on Islamic finance. It is also timely and augurs well with the recent announcement of the initiatives to position Malaysia as the international Islamic financial centre. The Islamic financial industry in Malaysia has experienced rapid transformations particularly in the past ten years. The Malaysian Islamic banking system registered strong performance with higher profitability and positive trends in all key indicators. Profitability surpassed the RM1 billion mark for the first time in 2005, and this year the industry will again register good profit as for the first half of 2006, the amount of profit generated was already RM800 million. The total assets of Islamic banking currently stands at RM122 billion. The performance of the Malaysian Islamic financial market in particular the capital market has been encouraging. | 0 |
However, first and foremost I would like to point out that monetary policy aimed at stabilising the inflation rate should basically reduce the risk of over-valued asset prices leading to an exaggerated real demand. Fluctuations in the level of resource utilisation and in the output gap are traditionally assumed to be reflected in the inflation rate. If inflated asset prices stimulate demand in the economy, without a corresponding increase in the potential growth rate, inflation will rise. If the central bank anticipates this, monetary policy will normally be tightened to ensure that demand is compatible with long-term sustainable growth. And as long as demand in the economy increases at a rate compatible with long-term growth, there is less risk of exaggerated indebtedness. Inflation targeting should thus, at least in theory, reduce the risk of extensive financial imbalances accumulating. However, even with an otherwise successful inflation target policy, real and financial imbalances created by exaggerated asset prices can build up. If there are exaggerated expectations regarding growth in productivity and profits in a particular country, this can lead to a strong inflow of capital and strengthening of the currency. The increase in real demand, which is caused by exaggerated increases in asset prices, can thus be partly met by increased imports, while the currency strengthens and domestic inflationary pressure is reduced. | Eva Srejber: Inflation targeting and bubbles Speech by Ms Eva Srejber, Second Deputy Governor of Sveriges Riksbank, at the Adam Smith seminars, Paris, 9 July 2002. * * * Since the mid-1990s, inflation has stabilised at very low levels in the industrial nations. From an average inflation rate of 6 per cent during the period 1975 to 1994, the rate of price increase has been slightly below 2 per cent over the past 6 years. This entails a return to the same low inflation rate as prior to 1970. Inflation has also been reduced considerably in most other countries in, for instance, Asia and Latin America. There are many factors that have contributed to this. Firstly, price stability has become an explicit objective for monetary policy in many countries. An increasing number of central banks are orienting their monetary policy towards a fixed inflation target. This includes the Riksbank, which, after the fixed exchange rate was abandoned in November 1992, established an inflation target of 2 per cent with a deviation interval of plus/minus one percentage point. The orientation of monetary policy has in many countries been supported by a fiscal policy aimed at budget consolidation. Independence for the central banks in Europe, convergence criteria for EMU membership, the stability pact in Europe and the ban on financing budget deficits through printing new banknotes are all examples of measures that have helped increase confidence in the price stability target. Increased competition in the wake of globalisation has probably also subdued inflation temporarily. | 1 |
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