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The following two structural changes, in particular, drove our decision to adopt the new approach to implementing monetary policy. 4 First, since the GFC the stock of reserves has grown tremendously. 5 As a result, the money market is today characterised by a structural reserve surplus instead of a structural reserve deficit. A return to the status quo before the GFC would have required us to reduce the stock of reserves on a very large scale. 6 Given the substantial quantities involved and the long time it would have taken to complete this task, we doubt that we would have been able to steer money market rates in the short term. Second, the landscape of Swiss franc reference rates has changed significantly. In particular, Libor was replaced by SARON as the new reference rate in Swiss francs. 7 SARON – an acronym for Swiss Average Rate Overnight – is calculated based on actual transactions by the private sector in the overnight segment of the Swiss franc repo market. A sufficient volume of interbank money market activity is therefore required to ensure a robust basis for calculating SARON. Why does the SNB apply reserve tiering? Let me now explain in more detail how our approach works and, in particular, why both elements of the approach are required in order to implement our monetary policy in a positive rate environment. We begin with the first new element in our implementation approach, which is reserve tiering.
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As I will show, remunerating reserves lets us steer money market rates in an environment with a positive policy rate and a large stock of reserves. 8 However importantly, and in contrast to many other central banks that also pay interest on reserves, the SNB does not apply the same interest rate to all reserves. Instead, we employ reserve tiering. To illustrate how reserve tiering works, let us consider a highly stylised banking system, depicted on Slide 6. The SNB grants each bank that holds reserves a so-called ‘threshold’. This is marked on the slide by a red vertical bar. Each bank’s individual threshold is a function of its minimum 4 5 6 7 8 Berentsen et al. (2018) examine various approaches to implementing monetary policy based on the assumption of a large stock of reserves. Uncertainty about both the level and variability of the structural demand for reserves has also increased during this period. This uncertainty is partly due to new liquidity regulations that came into effect in the wake of the GFC. The stock of reserves could be reduced by selling some of the foreign currency acquired in previous years and by absorbing reserves via open market operations. In both cases, negative effects, such as a substantial appreciation of the Swiss franc, could not be ruled out. Libor, which had been the key reference rate for several decades, ceased to exist in many currencies at the end of 2021. SARON has fully replaced Swiss franc Libor.
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One means is to fix a system that enables the authorities to take control over the bank and to write down not only capital but also claims in an orderly manner, while extending a guarantee to the new financing needed when the bank is under public control. The payments needed to maintain the stability of the financial system would be effectuated, while other payments could be temporarily stopped. A draft model for such a system was presented by the Banking Law Committee in Sweden in 2000 and the proposal is currently being considered by the Swedish Government. As I understand it, there is also work being done in other countries to bring about solutions that would mean that the authorities could claim in all credibility that it was possible to reduce claims even in more complex cases, where there was a risk to financial stability. Ideas that have been put forward include immediately being able to impose a partial payment stop on certain claims, haircuts, in connection with the authorities taking control over the bank and transferring the assets to a temporary bank, known as a bridge bank. To be effective, all these proposals make considerable demands for having IT systems in place that can quickly distinguish different types of claims. A number of other preparations are also required, for instance to be able to transfer contracts.
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Fiscal deficits in emerging Asia are 2–3% of GDP. The debt burden is low. Public sector debt ranges from about 25% to 55% of GDP. External debt is about 30% of GDP. Official foreign reserves are healthy. The banks are well-capitalised. The 25 largest Asian banks comfortably meet Basel III Tier 1 capital adequacy ratios. Governance is stronger. Stronger regulatory frameworks and corporate governance reforms following the Asian financial crisis in 1998 have improved the resilience of the financial and corporate sectors. There is policy flexibility on the fiscal, and to some extent, monetary fronts, in the event global growth slips more than expected. Notwithstanding emerging Asia’s strong fundamentals, there is no room for complacency. The region is not without significant challenges which, if unaddressed, will prevent it from realising its potential and render it more vulnerable to shocks from the advanced economies. Let me highlight three medium-term imperatives for emerging Asia. Increasing domestic demand First, Asia must increase domestic demand. As growth slows in the advanced economies, it is in the region’s interest to reduce reliance on external demand and develop indigenous sources of growth. This will help to strengthen and stabilise Asian economies over the longer term. If an increase in domestic demand in Asia is complemented by fiscal consolidation in the key industralised economies, a longer term rebalancing of global demand could be achieved. 2 BIS central bankers’ speeches Demographic factors will work to increase domestic demand in Asia.
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This presupposes, however, that the banks have made realistic value adjustments and provisions. We currently assume that this is the case. Moreover, average lending limits for mortgage loans have changed only insignificantly and may be regarded as cautious. For instance, the proportion of low-risk first mortgages – i.e. those mortgages with the lowest lending limit – is over 90%. The criteria used in extending loans can also be rated as conservative. As a rule, assessments of a debtor’s future solvency are based on considerably higher interest rates than the current ones. Mortgage debtors should therefore be able to meet their liabilities even if there is a marked increase in the interest rate level. Our analysis focuses on system-relevant banks and on different groups of banks. We rely on aggregated data and on a random sampling of banks or groups of banks. Problems with individual institutions cannot be excluded but should not threaten system stability. Increase in interest rate risks These assessments, which have so far been positive, are becoming slightly clouded because of higher interest rate risks. Smaller banks in particular have seen a relatively strong increase in direct interest rate risks. A sharp rise in the interest rate level could affect the valuation of assets and liabilities of such banks to such an extent that their capital resources would in some cases be reduced considerably. While such losses could still be absorbed, we would, however, consider a further rise in interest rate risks as critical.
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2 BIS Review 86/2005 Graph 2: Interest rate risks by bank groups (reduction in net present value as a percentage of equity following an interest rate shock of +100 basis points) Source: SNB Conclusion: Increased efficiency without higher risks The slight narrowing of interest rate margins supports the assumption of increasingly fierce competition in the mortgage market. From the viewpoint both of consumers and of economic efficiency, this would be a welcome development. However, in the banking business there is always a danger that fiercer competition might encourage excessive risk taking by the banks. A bank can outperform its competitors by offering more favourable conditions while at the same time accepting poorer risk cover. However, as already mentioned, our aggregated analysis suggests that caution has not waned. Banks’ gross margins are declining slightly because their cost savings and improvements in efficiency are being passed on to customers. The capacity to absorb risks is not compromised by granting customers better conditions. Currently, the positive aspects of healthy competition are taking hold without apparently having any negative side effects. The SNB will nevertheless keep a close watch on trends in the real estate market. In particular, we will monitor interest rate risks, which have already reached a high level. With an appropriate normalisation of money market rates, the SNB contributes to limiting the danger of an abrupt rise in interest rates. In the current environment of historically low rates, however, there is no guarantee that the future trend in interest rates will be moderate.
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However, macroprudential policy is designed to monitor and take measures to counteract vulnerabilities in the financial system as a whole, including addressing financial imbalances that may threaten macroeconomic stability. Finansinspektionen has several tools at its disposal to prevent financial imbalances. They are responsible for microprudential and macroprudential policy and the design of the regulatory framework. But responsibility for financial stability is shared with other authorities. The Swedish National Debt Office is responsible for the deposit guarantee, the Ministry of Finance is responsible for legislation and bank support, and the Riksbank is responsible for overseeing the financial system and can provide extra liquidity when needed.27 Collaboration between Finansinspektionen and other authorities exists both in preventive work and in crisis management. This is an arrangement that I think has worked well during my time at Finansinspektionen. For example, the Riksbank together with Finansinspektionen, the Swedish National Debt Office and the Ministry of Finance cooperate in the Financial Stability Council. Among other things, the 25 The concept of financial dominance was introduced by Fraga et al. (2003) in connection with the introduction of inflation targets by many emerging economies. They described a situation where the central bank – due to a weak or overleveraged financial system – was not willing to tighten monetary policy at the necessary pace because of the threat to the stability of the financial system.
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It was therefore understandable that the so-called inflation targeting policy introduced by many countries in the 1990s had a focus on price stability and that risks in the financial system disappeared into the background. This also applied to Sweden, despite the fact that we had had a serious financial crisis in the early 1990s. Another reason why the risks in the financial system were overlooked may have been that the deregulation of the financial markets was new and that the risks of financial imbalances building up were underestimated. 13 See Board of Governors of the Federal Reserve (2023) and FDIC System (2023). 12 [30] The global financial crisis highlighted the importance of financial stability. Inflation targeting policy seemed to be working well for a long time. Inflation was low and stable while growth was good. US economists James Stock and Mark Watson even coined the expression ‘the great moderation' in the early 2000s, suggesting that the economy had entered a calm and stable era.14 This era came to an abrupt end with the global financial crisis. Much of the deregulation and innovation that had laid the foundations for the favourable economic development had at the same time contributed to the build-up of new risks and imbalances in the financial system.15 An important lesson from the financial crisis was that financial imbalances could be built up even in an environment with low and stable prices. However, this knowledge was not entirely new.
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The private sector will drive the transition to a low carbon economy and contribute to countries meeting the commitments made in the 2015 Paris Agreement. Reducing emissions will require significant investments in new technologies and infrastructures. 7 See PRA (2018), ‘Transition in thinking: The impact of climate change on the UK banking sector,’ September 2018. See PRA (2018), ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change,’ Consultation Paper 23/18, October 2018. 8 4 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 4 A4S’ Financing our Future report highlights the need for everyone in the investment chain to act: from individuals managing their savings, to financial intermediaries investing in the real economy, to regulators and policymakers creating the frameworks for action, to real economy firms investing in new processes, products and services. TCFD Doing so requires the right information. That’s why in 2015, in response to a call from G20 leaders, the Financial Stability Board (FSB) established the private sector Task Force on Climate-related Financial Disclosure (TCFD) under the leadership of Michael Bloomberg.
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Conclusion As I mentioned initially, I have in this speech referred to some of the new information received and compared it with the forecasts made in connection with the February Monetary Policy Report. It is important to point out that a lot of important new statistics will be received prior to the next monetary policy meeting in April, and it is not until then that an overall assessment can be made of the monetary policy consequences. When I look at what has happened since out monetary policy meeting on 12 February I think that events so far support the general outline given in the Monetary Policy Report. Neither does the difference between my own assessment and the main scenario apply to developments in so short a term as a month or two. My slightly more pessimistic view applies to what the consequences might be of the turmoil in the financial markets. It is a question of the risk of a weaker development abroad and the consequences this may have on developments in the real economy and inflation in the Swedish economy. My assessment in February was that, given the considerable prevailing uncertainty, we should wait before raising the repo rate. At the same time, it is important to emphasise that all we Executive Board members, regardless of our stance at the most recent meeting, look seriously upon both the risk of aggravated financial turmoil and weaker development abroad as well as the risk of inflation in Sweden becoming entrenched at a high level.
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We can only imagine what would be the situation if we still had fifteen different currencies, with so many bilateral exchange rates potentially as volatile as other asset prices currently are. That single thought experiment is enough to show how much Europe benefits from having a single, truly global, currency. Two days ago, we took two very important decisions. First, in an unprecedented move concerted with all major central banks, we decreased our policy rate by 50 basis points. Then, in a separate deliberation, we further adjusted our liquidity provision framework. I will spare you the technicalities. Suffice it to say that, as a result, banks will have regular access, against collateral, to unlimited amount of liquidity at the policy rate i.e. 3.75%; this, at least until the end of January 2009. Let me briefly comment on those two decisions. First, on liquidity provision. Since the crisis broke out, central banks have tried and restore an orderly functioning of money markets. Even when modalities are different, there has been a convergence in objectives and frameworks. Central Banks have stepped up their supply of funds at longer maturities. Some have broadened the range of collateral accepted in their secured lending operations. They expanded the scope of eligible counterparties so as to ensure a wider dissemination of funds. Importantly, major central banks conducted coordinated actions to provide longer-term funds to address dollar funding needs of non-US banks, thereby ensuring an adequate distribution of liquidity across borders.
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In addition, long term inflation expectations, as measured by the "5 years in 5 years" break even (or swap) inflation rate, has dropped significantly under 2%, perhaps reflecting the credibility created by our past actions. To be sure, we must remain vigilant as regards wage developments and the still possible second round effects from past price surges. But, overall, I would asses that our new monetary stance is in line with what is necessary, in current conditions, to fulfill our mandate. Let me now elaborate on two other set of policies, which, although not directly linked to the currency, contribute to underpin the strength and stability of the euro area. The crisis has given a new impetus to discussions on the proper architecture of financial supervision. In Europe, with market integration moving at a quick pace, supervisory structures will have to adapt. I am a strong supporter of the Lamfalussy process and believe that current efforts to improve and develop it deserve all our attention. But I would also argue that the process must be conducted with pragmatism and a constant look at reality rather than by reference are some theoretical scheme and vision, and I would like to take this opportunity to mention two lessons that I draw personally from events of the last 12 months. First, there are clear advantages in having banking supervision close to (or at least not too far away from) the Central Bank.
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A third source of vulnerability is the large degree of connectivity and interdependency of the financial sector. Y2K and the terrorist attacks of September 11, 2001, highlighted this type of vulnerability. One key lesson learnt was that vulnerability extends beyond these systems since they crucially rely on utilities such as electricity and telecommunications or on service providers like S.W.I.F.T. Let me sum up again. There are three major sources of a financial system’s vulnerability: economic concentration, geographic clustering, and connectivity and interdependency. The latter are an obvious characteristic of financial networks. Networks contribute to increased efficiency and facilitate risk management. At the same time they also can act as channels as well as origins of systemic crisis. From vulnerability to resilience Hand in hand with a new awareness of the vulnerability of the financial system, those responsible for its safety and stability in private firms, in financial market infrastructures as well as in the regulatory agencies have recently been taking a new hard look at the financial system’s capacity for resilience. In retrospect the Y2K problem was a first mild but nevertheless rather valuable test. The Y2K test was mild in the sense that everybody had enough time to prepare for it. What helped in Y2K was the clear deadline. All the contingency and communication networks could be set up before the event. Many of us gathered here today knew exactly where we had to be on December 31, 1999, what we had to do and whom we had to call if there were problems.
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As much as public bodies are willing to step in as coordinators before and during times of crisis and eventually as lenders of last resort, they also want to see private sector entities being involved and actively participating in shaping resilience and resolving crises. The responsibility for financial stability is a shared responsibility. I am fully aware that none of us can precisely estimate today the economic consequences of what we all yet have to do in order to increase the resilience of financial systems. Since this resilience is bound to be tested again harshly sooner or later, there is no alternative to rapid, serious, adequate and if necessary costly preparations by all of us. Let me end by expressing my gratitude. I enjoyed contributing to the exchange of information, evaluations and views. This is the essence of the SIBOS conference. I am particularly grateful since I know that all of us in this room as well as those financial sector professionals who were unable to attend this conference, those of the private sector as well as those from the public sector, willingly share the noble responsibility for the efficiency and stability of today’s and tomorrow’s financial systems. Thank you very much for your attention. BIS Review 55/2002 5
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ESIGELEC - Rouen 25 May 2023 Digital transformations and financial system turbulence: What lessons for regulators and supervisors? Speech by Denis Beau, First Deputy Governor Introduction [Go to slide 2] Dear Professors, dear students. I am very pleased to have the opportunity of sharing with you some of the lessons that we at the Banque de France and the ACPR, under our financial stability mandate, have learned from the recent turbulence that has affected the international financial system. This turbulence, which has impacted both traditional financial players in the wake of the SVB bankruptcy and players in the "new digital finance" ecosystem in the wake of the FTX bankruptcy, results from the realisation of risks, whose impact has been amplified or whose spread throughout the financial system has been sped up, by digital innovations that are transforming at high speed, or even shaking up, the way in which finance works. While the effect of this turbulence on the financial system as a whole and the real economy seems to be contained for the time being, the impact of digital innovations raises questions as to the regulation and supervision practices of both traditional finance and the emerging digital finance. I propose presenting these questions to you one after the other, together with the answers that I believe to be appropriate. 1 1. Traditional finance put to the test by the digital world: what lessons can be learned from recent bank failures?
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In the United States, these rules were not applicable to SVB, as certain exemptions, introduced in 2019 under the proportionality principle, apply to banks that are considered to be less important, this concept being understood in a broad sense since it includes banks with a balance sheet total of up to USD 250 billion. - The post mortem analyses carried out and published by the FED suggest that, had SVB been subject to these rules, it would not have complied with the short-term liquidity ratio as defined by the Basel Committee. Moreover, SVB's heavy reliance on tech companies' deposits should have alerted its supervisor if the additional monitoring tools required by international standards had been put in place. The same FED analyses estimate that SVB's interest rate risk sensitivity was around 35% before the crisis, well above the 15% alert threshold set out in the international rules and supposed to trigger supervisory action. - Monitoring compliance with regulations calls for strict, intrusive and reactive supervision, which, according to the FED, was not the case. Let me reassure you on one point: the European situation is radically different. The Basel Committee's rules are applied in Europe in their entirety and to all banks. By the way, I would like to add that Europe is in the process of finalising the transposition into European law of the latest reinforcements of the Basel III agreements, ahead of the other major jurisdictions.
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There was, it must be said, a greater determination at least to pool expertise and discuss possible solutions in various international forums. But the political motivation for further reform gradually weakened during the period of strong global growth for most of the last decade. The present financial crisis has much in common with the Asian financial crisis in that it has involved massive failures in financial intermediation, a rapid transmission of problems, and a strong element of surprise. However, the present crisis is global, not regional, and it centres on the world’s most advanced economies. At its climax, in September 2008, the crisis raised the real possibility of a collapse of the world financial system. The reputations of many leading institutions and individuals have been damaged or destroyed. Large sectors of major financial systems have been effectively nationalised. Disillusion has spread, and fundamental questions have been raised about the future of free markets, as people count the cost of the excesses of the past few years. Inevitably, central banks and regulators have been among those that have faced criticism: for not seeing – or not heeding – the danger signals; for having allowed financial innovation to get out of hand, to the benefit of intermediaries but to the detriment of the public; and for not responding quickly enough when the crisis began to emerge. Although there are many lessons to learn, not all of these criticisms are fair.
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As Governor Zeti has persuasively argued, Islamic finance encourages business activities that generate legitimate profits, and rests on principles of fairness, shared risk and ethical practices.1 There is, I think, much for us all to reflect on in this when considering how badly things have gone wrong recently in what might be called "traditional" finance. No institution with such a long history can have escaped controversy, and BNM has had its fair share. What is interesting, however, is that perhaps the most controversial action by the Malaysian authorities in recent years – the response to the 1997-8 Asian financial crisis – has now come to be understood as appropriate and effective. At the centre of this response was the imposition of capital controls to contain speculative capital flows, stabilise the ringgit, and give the economy a breathing space. This was widely criticised internationally as a retrograde step. Yet it was a limited and temporary measure, which, along with other policies succeeded in stabilising the system and providing the conditions for economic recovery. The role of Bank Negara in promoting international understanding of this measure was crucial to its effectiveness. It is not, of course, my purpose to recommend capital controls as a general solution to financial crisis. The lesson here is that unorthodox measures can be effective, provided that they are well thought out and properly implemented.
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Before explaining how we designed and executed the consolidation process, I thought I should share with the distinguished audience, the basis and the background to this process, which was designed to re-organise the structure in the financial system within the existing legal framework, while taking into consideration some global experiences. In this regard, I will talk on four areas: the role of the Central Bank; evolution of our financial system; global experience in consolidation; and the transition of the burden of financial crises from shareholder to tax payer. Basis 1: Central Bank’s role in financial sector consolidation I would like to begin by explaining the role of the Central Bank in this process. As you all know, securing financial system stability is one of the core objectives of the Central Bank. In terms of Section 5 of the Monetary Law Act, the Central Bank is empowered to ensure financial system stability in the country. The importance of maintaining a sound banking system was also emphasised in the “Report on the Establishment of a Central Bank for Ceylon” by the Central Bank’s founding Governor, John Exter. There he said, I quote, “Banking is an economic activity which affects the public welfare to an unusual degree, it touches in one way or the other almost every phase of the country’s economic life. Sound banking is essential to a healthy and vigorous economic development”.
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14 BIS central bankers’ speeches Phase III (from 1 August to 31 December 2014) Action 1: Revisiting and modifying the regulatory framework As we move onto a new platform of maintaining financial system stability with a set of relatively larger financial institutions under the transformation process of the domestic economy as well as the global economy, we feel that existing Directions, and Rules and Regulations that were used to assess the compliance of the banking and non-banking institutions too need to be revisited and modified in accordance with the financial sector consolidation programme. Accordingly, two internal committees have been officiated by the Departments of Supervision of Banks and Non-bank Financial Institutions to study the existing regulatory framework and propose changes in line with international best practices. The recommendations of these committees are expected to be submitted to the management of the Central Bank by end 2014. Action 2: Reviewing consolidation plans and meetings with the Boards of Directors In September 2014, the third round of meetings were held between the Consolidation Unit and the Boards of Directors of a few selected NBFIs to have a closer dialogue about their progress on the merger and acquisition plans. At these meetings, the Unit discussed in detail about the issues hindering their action in progressing with the consolidation programme, and provided them with necessary guidance for resolving the prevailing issues with a view to facilitating the expeditious implementation of their merger plans.
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Turning to structural policies, measures that reduce adjustment costs and promote moderate unit labour cost growth are of the utmost importance in the current economic circumstances. While this is crucial in all euro area countries, it is particularly pressing in those that have experienced a significant loss of cost and price competitiveness over recent years and where unemployment has already started to rise. Moreover, fostering productivity BIS Review 105/2008 3 through enhanced investment in innovation and education enlarges the scope for increases in real incomes in the longer run. We are now at your disposal for questions. 4 BIS Review 105/2008
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A more granular disclosure of data could allow the construction of more meaningful sets of indicators and prevent misleading comparisons across institutions. On the analysis of capital adequacy, uncertainly about the computation of risk-weighted assets is shifting the focus to indicators calculated on the basis of total assets or tangible assets, balance-sheet equity and leverage ratios. Clearly, in the medium-term, a higher quality of data for financial stability surveillance and assessment may also be achieved through a better disclosure policy on the part of financial institutions. Benefits would come also from timely and harmonised reporting. 5. What is missing: remaining data gaps and other challenges confronting macro-prudential analysis While data gaps can never be closed in full – also because they are a moving target – attempts to reduce these gaps are vital. With respect to macro-level data, efforts to improve the effective coverage of the so-called shadow banking sector – i.e. of credit intermediation, liquidity and maturity transformation activities that take place outside the regulated banking system – need to be continued. Important components of the shadow banking system include certain money market funds, structured investment vehicles, off-balance-sheet vehicles (reliant on banks’ credit lines) and securities lenders. Although some progress has been made, data gaps remain that render the proper monitoring and assessment of systemic risks arising from securities financing transactions (notable via repurchase agreements and securities lending) unfeasible. Challenges also arise from the activities of the shadow banking system that go beyond a specific group of entities or types of business.
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CEMFI is the outcome of the ambition of the leadership of the Banco de España in the late 1980s, who saw the possibility of innovating in the organization of a graduate programme comparable to the best programmes in Europe. It was Luis Ángel Rojo, at that time the Banco de España's Director General of Research, who invited Rafael Repullo to lead this venture. Precisely as a token of appreciation for his decisive contributions in the early days of CEMFI, the prize for the best Master student bears his name. The Banco de España is very proud of its ongoing support and collaboration with such a special institution providing first-class graduate education and research, contributing a host of public goods to the Spanish economy and generating valuable ideas for public policymaking. An excellent example of this collaboration is the co-organisation of the biennial Financial Stability Conference that concluded this morning at the Banco de España. Demonstrating an outstanding academic level and policy relevance, it has enjoyed the presence of a large number of distinguished visitors, including the Federal Reserve Board Chairman, Jerome Powell. Building on this example, I am pleased to announce a new collaboration between the Banco de España, CEMFI, and the Universidad Internacional Menéndez Pelayo, an annual conference on the Spanish economy, the first edition of which is due to take place next week in Santander.
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The successful introduction of a broad range of pan European and sector-based indexes, and the subsequent launch of derivatives and new investment vehicles such as Exchange Traded Funds (or “trackers”) based on these new indices, highlights this change in investors’ approach. Empirical evidence suggests indeed that sector-related factors are playing an increasing role in price dynamics. As integration enlarges the range of potential investors, it also fosters the development of private equity and the financing of young and innovative firms, a trend that is obviously welcomed. 1.4 Behind the scene, supporting the evolutions that I just touched upon, market infrastructures have undergone radical changes. As an example, as regards trading infrastructures, the creation and expansion of EURONEXT is a striking illustration of the on-going consolidation process: the EURONEXT group now links the French, Belgian, Dutch and Portuguese stock markets, and has concluded co-operation agreements with several other European markets. The group also significantly increased its presence on interest rates derivatives markets. This ongoing movement of consolidation affects securities clearing, settlement and depository infrastructures, as providers aim to propose an integrated transaction service covering the entire securities processing cycle. In the field of post-market infrastructures, CLEARNET is pursuing its pan-European expansion by completing its operational integration throughout the EURONEXT area. The clearing house also reached an agreement with its Italian counterpart, enabling it to offer central counterparty services for transactions executed on the Italian government securities market.
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Changes in market structure and regulation have implications for monetary policy implementation, and today’s discussion provided some interesting insights on these topics. This combination of changes in money markets and new policy tools, as well as observations on how central banks’ operating frameworks did or didn’t work during the financial crisis, suggests that those of us responsible for monetary policy operations should be researching and analyzing how monetary policy will be implemented in the years to come. What are the lessons from the crisis and the long period spent at the zero bound and how do these lessons change our views regarding monetary policy implementation? These are questions that many central banks are currently facing, particularly in advanced economies. They are certainly relevant for us at the Federal Reserve as we begin our own efforts to think about a long-run framework for monetary policy implementation.3 In my remarks tonight, I would like to give you my views on the significant issues, and the questions I believe deserve further study. I also want to emphasize how important it is for those of us charged with monetary policy implementation to seek broad engagement on these issues, particularly in our effort to better understand how our money markets function and how best to implement monetary policy in these markets. Motivation and background Why should we think hard about issues related to monetary policy implementation? After all, central banks could always go back to the frameworks they used before the crisis.
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In the context of the economic recovery in 2021, the insurance sector saw a return to growth in all its activities: net inflows increased by 18% compared with the previous year. This allowed insurers to consolidate their solvency, with the average Solvency Capital Requirement (SCR) coverage ratio rising to 253% after the slight decline seen during the Covid crisis. Page 2 of 8 French banks in turn saw a “return to normal” in 2021 in terms of dividend payouts, which was completely justified. Their solvency ratio, which was already solid, increased even further over the year, reaching 16% for the top six French banking groups. Their profitability also improved (their RoE stood at 7.1% at end-2021 compared with 4.6% a year earlier and 6.4% in 2019): it is close to the European average but still structurally too low. Page 3 of 8 Banks continued to play their full role in financing the economy, providing a robust supply of credit: 4% growth in loans to SMEs and even 6% growth in residential housing loans, which is a particularly high rate. Credit in France is continuing to grow faster than the economy, so private debt – that of corporations and households – is still rising. With regard to corporate loans, I said here last year that the gradual winding down of the government aid measures posed a manageable risk to the financial sector. Indeed, the wave of business failures feared by some has not in fact materialised.
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Imbalance within the economy has in fact been a persistent pre-occupation for us on the MPC. We necessarily, of course, take account of the exchange rate in trying to predict the future course of the economy. Its strength against the euro has been a factor which has dampened both external demand and the rate of inflation, so that interest rates have certainly been lower than they would have been if the exchange rate had been weaker. It is nevertheless true that, in common with most other analysts, we have not fully anticipated the persistence of euro weakness. We don't of course have a crystal ball. But even if we had, it is important to recognise that the link between relative interest rates and exchange rates is much more complicated - and indeed more unpredictable - than is often suggested. Our own exchange rate against the euro today, for example, is actually somewhat stronger than it was before our reductions in interest rates this year; and the dollar, too, is substantially stronger against the euro than it was before the much larger cuts in US interest rates. So, in setting interest rates, we can - and do - make allowance in our projections for what has happened, and, on a best guess, for what is likely to happen, to the exchange rate, and that may cause the exchange rate to soften or it may cause domestic demand growth to strengthen, thereby offsetting the exchange rate's dampening effect on the economy.
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And at the very heart of that is their capacity to bring together financial resources not currently needed by their owners for expenditure on consumption or physical investment, and to channel those resources to wherever they can be most productively used – always allowing for risk. The free movement of capital, like free trade in goods and services, is an immensely powerful means of promoting efficient resource allocation nationally, regionally and globally, and as such it can make a major contribution to improving economic welfare – reducing poverty and raising living standards – which is, of course, what we all want to see. Certainly the free movement of capital, like free trade, needs to be governed by rules designed to minimise distortions and unfairness, and to reduce the risks of intermediaries being unable to honour their commitments or of broader, systemic, instability. I don't pretend for a moment that it works perfectly in practice: we could all well do without the wellpublicised institutional failures of recent years, for example, or the volatility which characterised the Asian financial crisis or the more recent "tech stock" bubble. But it is certainly the most effective means of financial resource allocation that we have so far discovered. The challenge is to make it work more effectively – more efficiently, both in terms of intermediation costs, and crucially in terms of the direction of the flow of resources – but also more reliably and securely for both savers and borrowers. This is largely down to financial markets themselves.
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So, if it’s not fun and you’re not enthusiastic, you’re probably not going to do very well at it. So, the first thing is to find something that you’re really liking, you’re enthusiastic about. And two, basically find something where you can continue to learn. If you get into a job and you’ve been in the job for a long time and you’re doing the same thing, you’ve sort of mastered the job, then it’s probably time to move on. I was at a large investment bank for many years – 20 years to be exact – and I decided at the end of 2005 that I was going to retire because there was no job that they had that they would give me that I wanted. And vice versa. There was no job I wanted that they would give me. So it was sort of, I can keep doing my same job of being the Chief U.S. Economist and continue to do that for a great many, many years. But at that point I felt I was no longer learning so much. I was bringing in a little bit less enthusiasm to the job, and so, it was time for a change. I didn’t know what that change was, and after I announced I was retiring, Tim Geithner, who was the President of the Federal Reserve Bank of New York at the time, called me up. First conversation was, he asked me if I’d be an advisor at the New York Fed.
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In fact, what did I do last weekend? Well, I was in Basel, Switzerland, at the BIS. This is where central bankers get together from across the world, exchange information with one another. So, the first thing is to explain ourselves to people in the community. Because the Federal Reserve is pretty mysterious in terms of – when I went to grad school even, I wasn’t really sure again what the Federal Reserve was. Had to be explained to me. The second thing we do in the community, and this is the more important piece, is to really learn what’s going on, on the ground, in the community. What’s happening in terms of businesses – are they successful? If they’re having trouble, what are the reasons for the trouble? Do they have access to the credit? Can they find people with the job skills they need to support their businesses? What are the challenges in the community, in terms of education, in terms of transportation? Queens, one of the issues is that if you’re not located near a subway line, it’s pretty hard to get around in Queens, and that has pretty significant implications for people’s ability to get to and from work, which is important in terms of economic development. Another issue is the affordability of housing. Queens is actually doing quite well. If you look at the employment growth in Queens over the last few years, it’s been very strong. Just like New York City as a whole.
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A few examples serve to illustrate the point (Figure 1). A first distinction is between interventions in the boom and bust phases of a credit cycle. Imagine that some information came along to suggest that the banking system, while adequately capitalised currently, will taken as a whole be stretched down the road if credit continues to expand rapidly. Assuming for the moment common information to the market and the authorities, in this case a macroprudential intervention to require banks to build up capital in order to underpin their resilience in the period ahead might add only a shade to the cost of finance, as banks lose a small proportion of their tax shield. And if banks choose to de-lever, shedding risk to achieve the temporarily higher capital requirement, that action in itself might slow the boom. Now imagine a scenario in which information came along to reveal the system was seriously under capitalised right now. Maybe a bubble had gone unnoticed until it burst or some banks or funds unexpectedly fail, revealing inadequacies in the regulatory regime. Once the market came to appreciate that capital levels were too thin, funding costs would rise sharply. In those circumstances, an injection of additional capital, if it could be achieved, could help to bring financing costs back down. Although reliance on relatively expensive equity would be increased, that is dominated by a large fall in the cost of debt finance as failure becomes a more remote possibility.
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In this programme it committed to reducing the budget deficit to 3% of GDP by 2013, by means of sharp cuts in public spending, although the programme was based on a relatively benign macroeconomic scenario, thereby BIS Review 86/2010 5 raising the question of the need for additional efforts should budget deviations arise, an eventuality expressed by the ECOFIN Council in its recommendation on the programme. The scale of the fiscal crisis in Greece has led the Spanish government to strengthen and accelerate its fiscal consolidation programme in order to prevent market deterioration and the attendant serious consequences for the economy and the stability of the euro area. The package of measures approved on 20 May brings forward a significant portion of the effort to be made to reduce the deficit in 2011, when it should stand at 6% of GDP, and acts directly on its structural component, which is projected to fall by somewhat more than half with respect to the estimated 2009 levels. The government’s unprecedented austerity drive reflects the exceptional nature of the situation and the resolve to set public finances on the right track and thereby dispel the doubts which were fomenting contagion and instability. The unquestionable costs this will entail for society will be compensated by the enhanced protection from instability and by a sounder position on which to base recovery. It is thus absolutely essential to meet the new targets set, even if the macroeconomic scenario ultimately proves to be less dynamic than envisaged by the government.
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Chart: The government’s petroleum wealth It may be useful to think of the government’s total petroleum wealth as the sum of the fund and the estimated value of the remaining oil and gas reserves. The chart shows how the composition 5/7 BIS central bankers' speeches of this wealth has changed over time. Ten years ago, the estimated value of the reserves was more than double the value of the fund. Today, this relationship has reversed – the fund now constitutes more than two-thirds of the government’s estimated petroleum wealth. This could have a bearing on the choice of equity share. It is reasonable to assume that oil and gas reserves in the ground entail greater financial risk than a global, diversified securities portfolio. The risk associated with the government’s total petroleum wealth has been reduced by gradually transforming oil into financial assets. If we maintain the same level of risk tolerance for total government petroleum wealth as previously, we can take on somewhat higher risk in the financial portion without increasing overall risk to a higher level than previously. This point was also emphasised by the Mork commission. THE EQUITY ALLOCATION AND FISCAL POLICY As I mentioned in my introduction, one of the objectives of the fund and the fiscal rule is to ensure that Norway’s oil wealth will also benefit future generations. We have achieved this by limiting oil revenue spending over the central government budget to the expected real return on the fund over time.
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VOLATILITY IN THE FUND’S VALUE Let me now turn from expected returns to the return volatility that must be expected when different equity allocations are applied. The most common measure of risk in financial markets is standard return deviation, i.e. return volatility around the average. The standard deviation of the fund’s benchmark portfolio is determined by two factors: equity return volatility and bond return volatility, and the degree of covariance between the two asset types. Chart: Equity allocation and volatility Volatility is lower for bonds than for equities. As illustrated by the straight line in the chart, this means in isolation that portfolio risk increases with the increase in equity exposure. There is a pattern in our data showing that the standard deviation for equities has over time been two to three times higher than for bonds. The analyses do not support estimates that differ from those of ten years ago for equity risk relative to bond risk. Equity and bond returns do not move in tandem. As a result, bonds reduce the variation in the fund’s value in addition to the contribution from lower volatility. For a given equity allocation, portfolio volatility will be smaller the lower the correlation between equities and bonds is, as illustrated by the dashed curves in the chart. The blue curve assumes a degree of positive correlation between equity and bond returns. This means that although bond and equity price often covary, this is not always the case. For the purple curve, we have assumed that the correlation is negative.
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The European Commission recently estimated that the single market has brought about an increase of 2.75 million extra jobs and an extra increase in welfare of € per head in 2006, corresponding to a 2.15% increase of the EU’s GDP over the period 1992-2006. 12 However, much remains to be done, in particular in some market services sectors. The extension and deepening of the EU internal market remains clearly a priority as regards further financial market integration, the pursuit of effective competition in the energy market and the implementation of the Services Directive. The growing economic importance of services 13 suggests that improvements in European living standards are likely to depend especially on a high degree of competition and on productivity improvements in the services sector. Let me now focus more specifically on the financial sectors. Financial integration is indeed of key importance for the ECB, given the relevance for the conduct of the single monetary policy. The process of European financial integration is gradually taking place and considerable progress has been made for instance in capital markets and wholesale banking. However, the retail banking sector appears to have not yet reached its potential, and competition seems insufficient in this area leaving European consumers unable to take full advantage of the benefits of the EMU and the Single Market. 14 This seems also to have constrained, to some extent, the economic performance and development of these sectors in the euro area.
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This inflation corrodes the households' purchasing power, increases the uncertainty for the future in every cell of the economy, heightens the volatility of financial markets, and damages the long-term perspective of development. Therefore, the primary focus of economic policies should be the undertaking of coordinated measures to mitigate the cost borne by inflation, and control and return it to its target, in the shortest time period and with the lowest cost possible. Against this backdrop, the Bank of Albania has embarked on the gradual normalisation of the monetary policy. This normalisation is undertaken in parallel with all the other central banks, across the region and around the world, which are facing the same high inflation phenomenon. It engenders a progressive raise of the key interest rate, by slowly changing the nature of the monetary policy stance from the current position, which has been stimulating, towards a more neutral position, which provides a more sustainable support for the long-term growth of Albania. During the discussions of the past two weeks, we have gladly observed that our viewpoint is also shared by the IMF Mission and the Ministry of Finance and Economy. 1/2 BIS - Central bankers' speeches Our future projections suggest that inflation will continue to remain high in the two next quarters as well. Furthermore, the stabilisation of prices in foreign markets and the normalisation of the monetary policy stance will induce a progressive reduction of inflation, until its return to the target in 2024 H1.
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The slope of the Phillips curve given exogenous changes in labour force participation and productivity (b) Productivity 0.4 0.1 0.1 0.2 0.2 0 0 0 0 -0.1 -0.1 -0.2 -0.2 -0.2 4 5 6 7 8 Unemployment 9 -0.2 Nominal wage growth Nominal wage growth (a) Labour force participation 0.2 0.2 -0.4 3 5 7 Unemployment 0.4 9 -0.4 Note. Quarterly percentage change and share of labour force. Sources: Own calculations In the second example, it is exogenous changes in productivity that affect the fluctuations in the economy. The effects on wages and unemployment can be illustrated as follows. An increase in productivity leads to companies’ production costs being lower. Prices can then be cut and production can rise, which reduces unemployment. The increase in productivity does lead to real wages rising, but because the price fall is greater than the increase in real wages, this means that the nominal wages fall. In this example, therefore, both nominal wages and unemployment decline and the covariation is therefore positive. This should not be interpreted to mean that lower unemployment leads to lower nominal wages – the causality 11 [24] goes from improved productivity leading to lower nominal wages and also lower unemployment. Figure 6b shows the example. The Phillips curve has a positive slope, as you can see.
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That would be a positive effect of the crisis. Why study economics? The British economist Arthur Cecil Pigou once noted what he considered to be the true purpose of economics in society: “The complicated analyses which economists endeavour to carry through are not mere gymnastics. They are instruments for the bettering of human life. The misery and squalor that surround us, the injurious luxury of some wealthy families, the terrible uncertainty overshadowing many families of the poor – these are evils too plain to be ignored. By the knowledge that our science seeks it is possible that they may be restrained. Out of the darkness light! To search for it is the task, to find it perhaps the prize, which the “dismal science of Political Economy” offers to those who face its discipline”. 1 Most of us may find these words rather grandiloquent. Economics is a subject that makes positivistic attempts to explain the interaction between firms, households and government. But the subject can also in more normative terms be used to indicate how society and markets should be organised. It took many years for economics to gain its own department at the University of Oslo. In the 1800s, political economy, as it was called at that time, was initially placed under the faculty of law. It was not until 1932 that the University Institute of Economics was established as a department in its own right. Many attempts have been made to define economics.
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In this regard, your thought leadership in addressing the legal issues embedded in Islamic finance holds important element in the continued growth of the Islamic financial services industry. Here, I would like to take this opportunity to congratulate the Islamic Financial Services Board for organizing this timely seminar. I trust it will continue to be a constructive platform for the legal and industry practitioners to deliberate on effective and pragmatic solutions to the legal issues in Islamic finance. On this note, I wish all of you a productive and successful seminar. BIS Review 117/2009 3
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Zeti Akhtar Aziz: Roadmap of financial integration for Malaysia and ASEAN – what can business expect? Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Asean Business Club Corporate Networking Lunch “Roadmap of financial integration for Malaysia and ASEAN – what can business expect?”, Kuala Lumpur, 1 December 2014. * * * In this more challenging global economic and financial environment, ASEAN economies have demonstrated the ability to weather the turbulent storms experienced in this decade. The ASEAN economies have essentially benefitted from the payoffs from our earlier economic and financial restructuring and reforms. Our potential is now being further enhanced by steps to intensify our regional economic and financial integration. In particular, the region has taken the opportunity during our period of growth and stability within this decade to pursue regional financial integration. It is my honour to be invited today to this distinguished gathering of corporate leaders organised by the ASEAN Business Club to speak on the subject of financial integration in ASEAN. My remarks today will touch on our motivation for pursuing regional financial integration, the benefits to be gained from advancing this agenda and the different approach that is being adopted by ASEAN in comparison to that which has been pursued by Europe. I will also discuss the progress and future direction of this integration process, its future direction and the opportunities that this integration process will provide to the business community.
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Given the immense funding requirements that ASEAN has, particularly for large investment projects and infrastructure development, greater financial integration will facilitate channeling part of the region’s surplus funds towards productive investment opportunities in the region. Regional financial integration will also allow for more efficient risk diversification of assets to include foreign assets from within the region. This will not only reduce vulnerability to external developments but will contribute to achieving more stable conditions in the regional financial markets. Additionally, this trend has been reinforced by greater coordination and cooperation among the regional Central Banks and regulatory authorities to safeguard financial stability. The collective actions that have been taken have enhanced the ability to manage and respond to risks confronting the region. Greater financial integration has also created an enabling environment for businesses. It has facilitated improved access to financing investments in the region. In particular, the presence of larger and increasingly more viable financial institutions in the region along with more developed financial markets have generated greater cross-border funding possibilities in the region and has allowed for more funding options for businesses. Further work in this direction is underway and significant progress on this front is expected to occur in this next decade. Key distinguishing features of ASEAN’s model of integration While ASEAN may draw on the experience from the European model of monetary and financial integration, the region has charted its own path towards greater financial integration.
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This finding is consistent with other past and ongoing research here at the New York Fed that points to the potential longer-term negative implications of student debt on homeownership and other types of consumer spending. Of course, homeownership is more than just consumption—it has historically been an important form of wealth accumulation. For a large share of households, housing equity is the principal form of wealth. Thus, changes in the way we finance post-secondary education could also have important implications for the distribution of wealth. Before turning it over to my colleagues, I would like to comment briefly on the importance of college costs, financing and access to higher education. It is well known that the average earnings premium from having a college education is high and has risen over the past few decades, in part because of a decline in real average earnings for those without a college degree. In addition to higher earnings, a college education is associated with increased homeownership, as I just discussed. The economic and social returns to having a well-educated and skilled labor force are also well documented. However, I would like to highlight another important role of higher education: it is a pathway to and engine of upward income mobility. I believe that income mobility—the degree to which individuals or families can move up or down in the income distribution over time—is a foundational element for a well-functioning society and indicates the ability of an economy to provide opportunities for all.
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One possibility is that recent budget cuts may have forced these colleges—which tend to be mid-tier public institutions—to raise tuition and change their admissions policies more than other institutions, such as less budget-constrained elite private institutions. Empirical evidence points to a greater sensitivity to college costs in the higher education decisions of low-income populations. As a result, continued increases in college costs and debt burdens could inhibit higher education’s ability to serve as an important engine of upward income mobility. In my view, these developments are important and deserve increased attention. Thank you for your kind attention. I will now turn it over to Wilbert van der Klaauw, who will give a brief overview of the current state of household debt. 1 See Economic Opportunity and Income Mobility, Remarks at the Association for Neighborhood and Housing Development Annual Community Development Conference, April 11, 2016. 3/3 BIS central bankers' speeches
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John C Williams: 901 days Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Securities Industry and Financial Markets Association (SIFMA), New York City, 15 July 2019. * * * As prepared for delivery Thank you for the kind introduction and the opportunity to speak this morning. It’s a particular pleasure to be sharing the stage with Andrew Bailey, who has played such an important role in leading efforts on establishing robust references rates to replace the London Interbank Offered Rate (LIBOR). This critical undertaking traverses markets and transcends jurisdictions, making international cooperation and coordination essential for success. Before I go any further, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. Where Have We Come From? Today I’m going to talk about the progress we’ve made, and the path that lies ahead. But first, given that 12 years have passed since LIBOR first became an acute area of concern, it’s important to remember why replacing it is so critical. LIBOR is based on submissions from individual banks. The volume of actual transactions that term LIBOR is based on is very small—totaling around $ million on a typical day.
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But we are now at a critical point in the timeline. The very complexity of this issue is why the industry cannot afford to wait any longer. The clock is ticking, and there are 901 days left. 1 Alternative Reference Rates Committee, Second Report, March 2018. 2 Financial Stability Oversight Council. 2018. Annual Report. Washington (revised June 20, 2019). 3 International Organization of Securities Commissions, Principles for Financial Benchmarks, Final Report, July 2013. 3/3 BIS central bankers' speeches
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BIS Review 22/2008 1 it was felt that, unless an effective strategy is adopted to alleviate poverty among those who could not get integrated to the market economy policies, the country was within sight of another socio-economic explosion similar to the one which it experienced in 1971 in the near future 4 . As a counter strategy, several poverty alleviation schemes were initiated by the government with focus on the poor. Along with these schemes, the Central Bank too entered the foray by implementing some pilot projects based on microfinance and support services so that it could develop microfinance techniques and systems for others to emulate. One such project, funded by the International Fund for Agricultural Development (IFAD) and Canadian International Development Agency (CIDA) was implemented by the Central Bank in four districts where the incidence of poverty was the highest under the title “Small Farmers and the Landless Credit Project (SFLCP) or Isuru Project. To supplement this project, another initiative was taken to introduce a Forward Sale Contract Scheme for agricultural produce to facilitate farmers to obtain a pre-agreed price for their major agricultural crops. This paper will cover the strategy, methodology and the techniques adopted in these initiatives so as to develop a sustainable socio-economic security system in Sri Lanka. The paper is organised into four parts. Part I will critically review some aspects of the current theoretical knowledge on socio-economic security systems from the point of view of costeffectiveness and sustainability.
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So, clusters numbering about 8 to 10 groups were set up by making informal arrangements for them to work together. Separate cluster rules were prepared and the members were trained in keeping cluster accounts and records. This process went on continuously for about 12 to 18 months from the beginning of1999. When the newly formed clusters showed sufficient maturity of being able to operate independently, the next move for the project was planned by the project. In the second stage, it was necessary to give legal status to the clusters. Many options like registering them under the law relating to cooperatives or under the Companies Act were considered, but finally, decision was made to incorporate the clusters under the Societies Ordinance as limited liability societies under the name “Isuru Development Society Ltd”, for the simplicity it provided to the beneficiaries. The societies were registered with the Registrar of Companies in terms of the Ordinance. The societies so registered had the objective of realising a common goal of attaining economic well-being of the members with a mutual 8 BIS Review 22/2008 support. The incorporation of societies as limited liability societies was completed within two years by 2001. The next phase was to further consolidate the limited liability societies into still larger economic organisations. Such a consolidation was essential in order to permit this larger organisation to effectively function as a strong economic entity. This goal was attained by consolidating the common efforts of societies in a particular district into a district-wide limited liability company.
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Our main objective is to entrust several strategic credit bureaus with the imperative to aggregate information on aggregate debt payments. These offices will be subject to greater regulation, primarily concerning data protection. If the market cannot come to an agreement, we will have to take an alternative route and create a single integrator. Furthermore, we plan to eliminate certain issues with regulation. These include the collection of credit histories in cases of securitisation, license revocation or bank resolution. Furthermore, in recent years financial regulation has been advanced by adding further objectives that are completed using this regulation. Therefore, alongside the main objective of ensuring the stability of individual banks and financial institutions, ensuring financial stability now falls within the remit. In our opinion, there is currently room for one more addition. Let me explain. The aim of financial regulation has conventionally been seen solely as risk limitation. Attempts to put in place differentiated regulation that would curtail one area of business but stimulate other, higher-priority ones, have always been met with outcry. But proportional regulation, for example, which we started to develop, stimulates small business lending. This was one of the goals for its introduction. Another example: the discouragement of unsecured consumer lending forced banks to cultivate mortgage lending, among other things. For example, a large share of bank lending is currently used for mergers and acquisitions. This creates risks for banks, is unlikely to significantly benefit the country, does not create additional gross product or new jobs, and simply facilitates the redistribution of property.
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We are of course not yet in a position to observe the actual outcome; there may, as last year, be surprises in store. My examples have been based on 12month HIBOR; there may, of course, be benchmarks higher or lower than this reference point which are more relevant to individual decisions. I hope that I have succeeded in demonstrating that the measurement of real interest rates is rather more complex than may appear at first sight, and is dependent also on the context. If you were to look at only the popular measure of the real rate - the nominal rate deflated by a measure of past inflation - then the recovery in asset prices in Hong Kong over recent months would seem inexplicable, because real rates would have appeared so high. The recovery in asset prices would, however, be consistent with a reduction in perceived real rates - which is in fact what I am suggesting has occurred, on a fairly significant scale, as expectations of inflation have probably become positive while headline recorded inflation remains negative. For those who see some downside in all of this from the implication in the consensus forecasts that general inflation is now expected to resume, it is worth noting that the forecast magnitude is only very modest. I would not pretend that every piece of evidence unequivocally supports my thesis today. For instance, the continuing lethargy of bank lending to business in Hong Kong might suggest that high real interest rates remain a deterrent to borrowing and investment.
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Much of this work involves international institutions like, for instance, the International Monetary Fund, the World Bank, the Bank for International Settlements, the Basel Committee on Banking Supervision, and the OECD, as well as the newly created Financial Stability Forum. 1 Governor Bäckström is also Chairman of the Board and President of the Bank for International Settlements. Before becoming Governor of the Riksbank in 1994 he was State Secretary in the Ministry of Finance with responsibility for Fiscal and Financial Affairs, which included the responsibility, under the minister, for the handling of the Swedish banking crisis in the early 1990s. 1 BIS Review 88/1999 However, the work, often hard, of implementing policies and codes lies with national authorities. These measures will contribute to improved financial stability only if countries actually adopt and implement them. A crucial ingredient in achieving this is of course to involve countries, formally or informally, in the development of the policies, codes and standards. But even if that is achieved, I know from my own experience how difficult the actual implementation sometimes can be, not least for political reasons. I would also like to make the point that today’s favourable trends in the world economy should not lead us to conclude that the danger is over. Instead, policymakers throughout the world must continue to work on forestalling new problems both because some evident threats to international financial and economic stability still remain and because there may well be vulnerabilities that are not so evident.
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Chart 8: Accounting for intangibles reduces the missing-investment puzzle Note: The orange line shows the investment puzzle using industry-level data, and the shaded area around it is the 95% confidence intervals. The line shows the estimated year fixed effects from an industry-level regression of investment rates on the wedge, including industry fixed effects, and standard errors clustered at the industry level. See Appendix B to Bailey et al. (2022) for full details. The blue line shows the same statistic from the regressions in which both investment rates and the wedge are adjusted to include intangibles. See Appendix A.2 to Bailey et al. (2022) for a discussion of the adjustment. Source: ONS, KLEMS, Jordà et al. (2017) Macrohistory Database and authors' calculations. The remaining puzzle is mostly concentrated immediately after the global financial crisis, and so it is possible this is not driven by structural factors, but rather the lingering impact of the global financial crisis, for example related to the sluggish demand recovery or financial frictions. [22] While the results suggest an important role for intangibles in explaining the missing-investment puzzle, a few notes of caution are in order. It could be that certain drivers of investment, such as financial frictions, are captured more accurately only at more granular level, such as in firm-level data. Moreover, there could be large non-linearities related to the nature of the global financial crisis that cannot be captured by the simple regression framework used above.
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Even if you are right, consistently betting on that mispricing can drive you out of business if the majority of the other agents keep acting in such a way as to validate such mispricing. As in Keynes’ beauty-contest illustration, what matters for you is not so much to be right about fundamentals as to be right on what others will do. This position was best expressed just one month before the beginning of the crisis by Chuck Prince, then CEO of Citigroup, when, in an interview with the Financial Times, he stated that5 “[w]hen the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. […] At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way.” 4 See Shleifer and Vishny (1997). 5 See “Citigroup chief stays bullish on buy-outs”, by Michiyo Nakamoto and David Wighton, published in the Financial Times of July 9, 2007. 4 BIS central bankers’ speeches Those words provide the strongest possible refutation of the notion that an asset price being out of line with fundamentals will by itself guarantee that such a misalignment automatically disappears.
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This is why I find it helpful to draw insights from psychology. Zimbardo’s work draws from well-known controlled studies such as Milgram’s electrocution exercise and the Stanford Prison Experiment. He also examines real-life cases like abuses in the Abu Ghraib and Guantanamo Bay prisons. All these cases revealed that ordinary people are a lot more capable and willing to engage in shocking and unethical conduct than we would expect. For instance, the prison studies uncovered deeply disturbing abuses by guards in both real-life and controlled settings. Verbal insults. Humiliation. People being treated like animals – all these by men and women who had loving families, a good upbringing and otherwise ordinary lives. Zimbardo proposes a threefold framework of “system”, “situation” and “person” to make sense of the factors affecting such behavioural choices. He points out that ethical and behavioural choices are often the result of a dynamic interplay. “What do the people bring into the situation? What does the situation bring out of them? And what is the system that creates and maintains that situation?” It is fascinating to note his conclusion that “personal” convictions matter, but only slightly. The overwhelming evidence shows that the “situation” and “system” – pose the greatest influence on behaviour. While this appears to paint a grim and depressing picture of humanity, I believe that there is a silver lining here. These findings suggest that, given the right “situation” and “system”, people are capable of much good – even in the highly-competitive and fast-paced world of finance.
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To blend more ingredients into the world economic cocktail, again we face a substantial increase in commodity prices. As usual, it can be attributed to various factors. One is the fast growth of emerging economies and the subsequent increase in demand. Add to this, among others, climate elements that have hindered the production of foods, and geopolitical risks that have pushed up the oil price. These high prices, combined with the fact that emerging economies are near their potential growth level, some with clear signs of overheating, both actual and expected inflation have risen all over the world. Several emerging economies, Chile among them, have withdrawn monetary stimulus as a response to this cycle. In contrast, developed economies, with a timid recovery, have not only sustained their ongoing monetary packages but are expected to keep them in place for a while. This mixture of monetary policy imbalances, high commodity prices, and good growth prospects in emerging economies have created tensions in exchange rates and capital flows, two issues I will refer to now. The exchange rate and capital flows Before the financial crisis hit, some developed economies, particularly the United States, were accumulating big deficits in their current accounts. This excess spending was being financed by surpluses in emerging markets, primarily China with its high saving rates, and oil-exporting economies (figure 4). Global imbalances were an important factor in the crisis. This was not uncommon for emerging economies: low saving rates, large current-account deficits and borrowing used to finance unsustainable consumption or fiscal expansions.
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BIS central bankers’ speeches 7 Figure 3 Output gaps (*) (percent) 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 97 99 01 Developed economies 03 05 Emerging Asia 07 09 Latin America (*) OECD estimates are used for output gaps in developed economies. For the other regions, output gaps are obtained using an HP filter. Sources: Central Bank of Chile based on Bloomberg, Consensus Forecasts, OECD and the respective country’s statistics institute. Figure 4 Current-account balance (billions of dollars) 1.500 1.500 1.000 1.000 500 500 0 0 -500 -500 -1.000 -1.000 -1.500 -1.500 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Rest of the world Oil exporters Emerging Asia China Japan United States Eurozone Source: International Monetary Fund, April 2011's WEO.
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Yet, the view from the market seems to be that, while a declining proportion (but not a declining amount) of China’s goods will physically pass through Hong Kong, Hong Kong companies will continue to play an important intermediary function in sourcing the products and identifying the markets. Beyond this, it is likely that Hong Kong’s role will gradually change from one of intermediary into one of proprietor. The further liberalisation of China’s economy offers immense opportunities for Hong Kong investors, who, apart from possessing the necessary wealth, have a number of distinct advantages. They have a common language and culture with their counterparts on the mainland. They have an immense and very detailed knowledge of the mainland business landscape, and a great deal of practical experience. They also have proximity and wellestablished connections. This will no doubt be a profound change in role for Hong Kong. But I also have no doubt that Hong Kong will be able to cope well, just as it did over its history of economic development, from entrepot to manufacturing centre to international business centre. Those of you who speak with businessmen and women in Hong Kong - who are the backbone of our economy - will probably hear that many of them are already establishing or reinforcing their links, or opening branch offices across the border in anticipation of China’s WTO entry. This trend is already quite evident in the larger companies.
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Therefore I welcome the creation of a G7 group dedicated to cross-border cyber exercises, and I confirm today that the Banque de France will coordinate the G7 test in 2019. Cybersecurity will indeed be one of the priorities of the forthcoming French presidency of the G7 next year. Besides cyber risks, we need to seriously deal with the emergence of crypto-assets. The underlying technology clearly promises sustainable innovation. The Banque de France was the first central bank to offer a service to the market based on blockchain and we intend to carry on experimenting with this technology. But support for blockchain doesn’t mean blind support for bitcoin and the like speculative assets. We were clear in the G20 last month, and let me be clear today. First, the frequent use of the term “digital or virtual currency” misleads the general public on what those assets really are: they are not currencies, with none of a currency’s key functions – store of value, medium of exchange, unit of account. Moreover, crypto-assets carry obvious risks in terms of consumer and investor protection, as well as money laundering and terrorist financing. Therefore they require internationally harmonised answers: the Financial Stability Board, in consultation with other standard-setting bodies and the Financial Action Task Force (FATF), should make recommendations by next July. In particular, we should work on exchanges and platforms which provide services at the interface between crypto-assets and the real economy.
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According to INSTAT data, Albania’s annual economic growth was 3.4% in the first quarter, supported by the fiscal stimulus of this period and foreign demand for Albanian products. On the other side, private consumption and investments continue to be slow, reflecting cautious consumer behaviour and existence of spare production capacities in the economy respectively. The Bank of Albania deems that economic activity posted similar growth even in the second quarter, with higher contribution of the private sector and downward public sector and foreign demand. Consumer prices were under added inflation pressures during 2011 H1, mainly due to foreign price increase in global markets. Average annual inflation during the first and second quarters of the year was 4.0% and 4.1%, respectively. As regards the consumer basket items, prices of processed foodstuffs had the main impact on the formation of annual inflation. Their contribution to headline inflation floated around 55%, close to this indicator’s all-time record. Inflation of non-food consumer goods, such as oil and other day-to-day consumer goods and services, was an added contribution to consumer price hike. On the other hand, the contribution of non-processed foods to inflation was stable. Gradual upsurge of domestic food products supply during the second quarter, balanced the effect of these items price increase in international markets. Lastly, administered prices and increased excise on some products had an increasing impact on annual inflation, albeit lower compared to a year earlier.
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Lending to the private sector increased on average by 11.5% during the first five months of the year, about 1.5 p.p. higher than 2010 H2. In contrast to previous years, lending is oriented more towards the national currency: ALL-denominated loans increased by about 14% as at May. Lending continues to be impacted by a moderate demand for loans while the banking system has adopted prudent lending practices, with tightened lending standards for certain market segments. Financial markets were calm reflecting low risk premiums and a good liquidity situation. In the interbank market, interest rates fluctuated around the key interest rate, following its latest increase in March. The increase in the key interest rate is also followed by the yields in the BIS central bankers’ speeches 3 Government securities primary market and is reflected less in the ALL-denominated deposits and loans, due to factors of liquidity and risk that accompany financial intermediation. The yields curve has retained its trend, indicating low inflation premiums in financial markets. Summing up the expected economic performance, our projections and assessments suggest that economic growth will continue even in 2011 H2. Aggregate demand will be supported less by the public sector and foreign demand, while the private sector is expected to provide a larger contribution to the economy. Nevertheless, economic growth is not expected to fill completely the negative output gap.
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The whole region is going through a political, economic and social consolidation process. The policy-makers, the decision-makers, the examiners and almost everybody declare that their priority is the adherence to the European Union. The question to ask is if: we have either to converge towards the European economic zone with small and fragmented economic structures competing with each other for European markets and opportunities, or embrace a model: gaining from the economies of scale, encouraging and exploiting the advantages of the current competitive positions; that grows the economic prosperity of the whole region and of each individual economy? Personally I think that the second alternative is the contemporary approach that our region should embrace with no hesitation. The success of this process shall depend on all our attempts and devotion to see which our competitive advantages are and to build up the right 2 BIS Review 117/2010 economic, financial, legal and physical infrastructure to use and increase these advantages to become competitive in the global economy. Therefore, its is significantly important that the study of the growth model takes place not only from a regional point of view, but to be an approach directed deeply towards the future.
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To make things worse, the “originate-to-repo” transactions that took off when the turmoil started in July 2007 have often little in common with the “originate-to-distribute” assets that 2 BIS Review 84/2010 were marketed before mid-2007. Thus, the “originate-to-repo” securities do not aim at being attractive to investors, but serve a different purpose, namely to generate collateral buffers with the central bank. So, the significantly large volumes of retained issuance are effective indicators of the scale of the continuing dislocation of the ABS market and the vanishing of private markets. However, it should be obvious to everyone that the issuance of ABS only to serve as collateral with central banks cannot be a sustainable strategy for the ABS market. In normal times central bank operations are intrinsically of a short-term nature and of a limited size, and are designed to implement the stance of monetary policy. By contrast, ABS transactions backed by residential and commercial property loans have much longer maturities and must cover a very sizeable market. In other words, in normal times central banks tend to have a very limited involvement in financial intermediation and only private investors have the capacity and the need to offer long-term funding to originators. What are the more recent trends? Some developments in the last few months may be interpreted as showing tentative signs of a recovery as new ABS issues were distributed and placed with private investors .
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Our institutions have successfully tackled the COVID-19 crisis thanks to a combination of suitable risk management and the set of extraordinary measures approved by the public sector (governments, prudential regulators and supervisors). I am confident that they are well prepared to deal with these new tensions and turbulence. In conclusion, the economic situation remains highly uncertain, in particular due to the ongoing war in Ukraine, the implied tensions in food and energy markets, the sanctions enacted against Russia, and the risks surrounding the continuation of energy trade with the latter. The economic effects of this situation can now clearly be seen for the economy as a whole and, in particular, for the more vulnerable citizens. With all of the uncertainty that surrounds any projection in these changing circumstances, while we foresee a significant deceleration of the economy and high inflation in the very short-run, we also expect the economic situation to normalise thereafter, with inflation easing over 2023, once all of the factors I referred to earlier have returned to normal. Fiscal policy has a key role to play, provided it targets the households and economic sectors hardest hit by the crisis, as also recently stressed by the European Commission, given the limited room for manoeuvre in public budgets. An appropriate combination of policies would support economic normalization and help tackle the inflationary episode, as would the continuation of prudent approaches by wage- and price-setters. Monetary policy can certainly meet the challenge.
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Large established firms seem to be most advanced in deployment. There is some reliance on external providers at various levels, ranging from providing infrastructure, the programming environment, up to specific solutions. Approaches to testing and explaining AI are being developed and, perhaps unsurprisingly, there is some heterogeneity in techniques and tools. Firms said that ML applications are embedded in their existing risk 6 McKinsey (2018) ‘Adoption of AI advances, but foundational barriers remain’ 4 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 4 frameworks. But many say that new approaches to model validation (which include AI explainability techniques) are needed in the future. Of the firms regulated by the Bank of England that responded to the survey, 57 per cent reported that they are using AI applications in risk management and compliance areas, including anti-fraud and anti-money laundering applications. In customer engagement, 39 per cent of firms are using AI applications, 25 per cent in sales and trading, 23 per cent in investment banking, and 20 per cent in non-life insurance. By and large, firms reported that, properly used, AI and ML would lower risks - most notably, for example, in anti-money laundering, KYC and retail credit risk assessment. But some firms acknowledged that, incorrectly used, AI and ML techniques could give rise to new, complex risk types - and that could imply new challenges for boards and management. Challenges of AI and ML for boards Let me suggest that there are three challenges for boards and management.
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Until recently, most firms were using a rules-based approach to AML monitoring. But this is changing and firms are introducing ML software that produces more accurate results, more efficiently, by bringing together customer data with publicly available information on customers from the internet to detect anomalous flows of funds. About two thirds of banks and insurers are either already using AI in this process or actively experimenting with it, according to a 2018 IIF survey.4 These firms are discovering more cases while reducing the number of false alerts. This is crucial in an area where rates of so-called “false-positives” of 85 per cent or higher are common across the industry. ML may also improve the quality of credit risk assessments, particularly for high-volume retail lending, for which an increasing volume and variety of data are available and can be used for training machine learning models. But it is a prudential regulator’s job to be gloomy and to focus on the risks. We need to understand how the application of AI and ML within financial services is evolving, and how that affects the risks to firms’ safety and soundness. And in turn, we need to understand how those risks can best be mitigated through banks’ internal governance, and through systems and controls. Firms’ rates of adoption of AI and ML So what do we know about how – and how fast – the application of AI and ML is evolving within UK financial services?
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A recurrent vulnerability of the region has traditionally been the reliance on foreign currency denominated financing. This financing pattern was exposed to sudden stops in capital flows. With the progressive achievement of price stability, the attractiveness of local markets and local currencies increased and the Latin American authorities took this opportunity to promote the development of their domestic financial markets. The widening of the local banking base has been an essential complement to this policy. Foreign banks investing in the region have played an important role in a context of financial and banking liberalization. Most of those foreign banks brought a model based on retailing that fitted particularly well the need to strengthen the local financial base. The fact that many of the subsidiaries had to finance themselves locally – independently from parent institutions – also helped to promote financial inclusion among the population and contributed to reduce external vulnerabilities. Conclusions The economic and financial crisis in Spain and other euro area countries – with its particular mixture of international and domestic elements – has also brought important lessons in terms of financial stability. BIS central bankers’ speeches 3 One of them is the relevance of the macroprudential layer of supervision and the fact that having a good micro-prudential supervision is a necessary, but not sufficient condition to build a resilient financial system. There is the need for developing the framework and the tools to ensure that the macro perspective is duly taken into account.
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Memoranda of Understanding regulating these interactions will be prepared in the coming months. Conclusion To conclude, it is unavoidable that the existence of the SSM will alter the functioning of the ESFS. This is, after all, the most significant development in financial supervision in the history of the European Union. However, I am confident that the changes brought by the SSM will strengthen the ESFS, and will overall enhance the quality and consistency of supervisory and regulatory practices across Europe. The more Member States that are involved in Banking Union, the greater these positive effects will be. Thank you for your attention. BIS central bankers’ speeches 3
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However, the severe impact was quickly over by the end of the quarter, and external income from services started to return to normalcy by July. For August, the number of foreign tourists indicated positive year-on-year growth, and the service account was in strong surplus for the second consecutive month. Favorable conditions for the export of goods and improving environment for the export of services have allowed for a continued current account surplus and a reduction in external obligations. Steady external debt repayments, both by the public and private sectors, have resulted in a remarkable decline in the external debt stock, from the peak of 112 billion US dollars in June 1997 to only 52 billion US dollars at the end of July 2003. Even with the last portion of loan prepayment to the IMF two months ago, it is good news that our international reserves position continues to remain at a comfortable level of 39 billion US dollars. Looking ahead, barring any unusual market developments, export should do well for the rest of this year. We have already seen in recent months sizeable raw material import in preparation for export at end year. Beyond that, the momentum is likely to benefit from encouraging signs of economic improvement in the US and Japan. Ladies and gentlemen, The other important engine of growth in this recovery has been private consumption.
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The regulator's role is to ensure systemic stability, the integrity of the payments systems, and fair rules of competition, while promoting a conducive environment for the growth of the financial centre. The industry's role is to compete, innovate, and enhance the value of their business. But both seek a more integrated, efficient and sound international financial system. I hope your deliberations at this conference will contribute to this goal. BIS Review 45/2001 5
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But if we look ahead, it is likely that the picture will be further complicated by the changes that will follow in the wake of the financial crisis. What I am mainly thinking about here is the increased focus on macroprudential policies. After the financial crisis we have learnt two main lessons. The first is that the central banks’ interest rate-setting must take into account financial stability to a greater degree. The second is that we need new regulation in the financial market that focuses on systemic risk. But the macroprudential policies may have effects that are in many ways similar to the effects of monetary policy – particularly if the tools are varied over time. This increased interaction between monetary policy and macroprudential policies is another circumstance that means that the connections between the simple theoretical framework and practical monetary policy become twisted. Of course, it is not the case that monetary policy and regulation were two entirely independent policy areas prior to the crisis and that after the crisis they will be fully integrated. But I nevertheless believe that monetary policy and regulation will come closer to one another in the future. When I was here a year ago, I spoke at length on how monetary policy can contribute to maintaining financial stability and how different types of regulations can affect monetary policy and its transmission mechanism. I will not go into this again today.
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I need hardly say that the step between this simple theoretical example and a practical solution is fairly large. But this is actually just a further example of the complications that form the main theme of my speech. Perhaps I should add that the question of how to divide responsibility for the means of control is currently being examined by the financial crisis committee appointed by the government a while ago. It will of course be interesting to see the committee’s conclusions. Conclusion Let me round off. I would guess that many of you here today are used to seeing monetary policy through an academic’s eyes. When you hear the term monetary policy you may first and foremost associate it with the theoretical framework – the way that monetary policy is often portrayed in textbooks and scientific articles. Others of you may think instead of the more conventional, day-to-day image of monetary policy given in the media, with a focus on the Riksbank’s interest rate changes and possible disagreement among the Executive Board. One might say that these two images in some way represent the start and finish of the monetary policy process. When an interest rate decision is to be made, the process starts in one way or another with the simple theoretical framework. As I noted earlier, this captures fairly well the intuition behind flexible inflation targeting – that a well-balanced monetary policy concerns finding a suitable balance between stabilising inflation and stabilising the real economy.
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The discipline of economics can readily be formulated in the language of mathematics, and economic models are usually tested empirically before gaining acceptance. Conflicts arise when theories that appear to be patently true are unsupported by empirical evidence, or when contradictory theories find support at the same time. In other words, we economists are in a borderland between faith and the strict proofs of mathematics. The notion of learning from history cannot easily be explored without invoking the American physicist Thomas Kuhn. This year is the 50th anniversary of the publication of his groundbreaking work, The Structure of Scientific Revolutions.1 According to Kuhn, disciplines progress within an established set of truths – a paradigm. Observations irreconcilable with the paradigm are tolerated as inexplicable. Eventually, however, the number of inexplicable observations can become so overwhelming that the paradigm breaks down. New truths have to be established – a paradigm shift occurs. Such shifts can be painful. The old paradigm will usually be defended by those whose training lies in a more distant past, often persons in positions of leadership in academia and government bureaucracy. Long before Kuhn, Henrik Ibsen touched upon the same idea in An Enemy of the People. Dr. Stockman talks about the few who attain the new truths, unlike the compact majority that have yet to embrace them. Social scientists, like economists, face some peculiar problems when attempting to learn from history. First, we do not have a laboratory in which we can perform experiments.
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Hence, the extent of financial stability cannot be summarised in a single, simple financial variable. This type of measurement problem is in fact also apparent in the inflation rate and the resource utilisation. The formal inflation target for the Riksbank is measured using CPI, but we also use various measures of underlying inflation. In order to measure resource utilisation, we look at a series of different measures such as the GDP gap, unemployment gap and the employment gap. For inflation and resource utilisation, we have long learned to use different measures even though we know they are inherently uncertain. Applying that experience will be useful when it now comes to evaluating different measures of financial stability. Financial stability cannot be assessed by relying on various indicators alone, though. The reasons for the development must also be understood. It can be compared to the reasoning of central banks in assessing inflation. An increase in inflation does not in itself constitute a reason for increasing the policy rate. Appropriate monetary policy depends on the reason for the change. If the rise is due to price pressure from increased demand, the monetary policy will not be the same as it would have been had the rise been due to lower productivity. Similarly, rapid credit growth is not necessarily always a sign of lending being unsustainable and posing a threat to financial stability. A hot topic on that subject is how much house prices and the debt build-up of households should weigh in monetary policy assessment.
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However, today, when it is clear that bank-based systems are inferior to more capital market-based ones, and when loan-to-deposit ratios are close to one, the goal should probably be to turn towards developing more efficient structures of the financial markets. How should we, as policymakers, react to this? What are the next steps that we have to take? How much do we know? Well, we know that when it comes to standards of living, in the long-run it is all about labour productivity. And labour productivity, in turn, depends on the amount of capital per unit of labour and something that we call total factor productivity (TFP) or multifactor productivity. The problem is that both of these components are hard, or impossible, to measure, so we have to estimate them, and that is by no means an easy task. Much has been said about the TFP growth in the context of the discussions on the slowdown in the productivity growth, or discussions of the convergence in Europe. However, if you try to decompose the data that are used in these discussions, I believe that you'll come to realise that there are serious measurement issues. For example, it is hard to believe that there has been almost no increase in capital stock per worker in Romania and at the same time, the country managed to increase its TFP by far the fastest rate compared to any other country in the region, or to believe that an almost similar situation was seen in Slovakia.
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Initiatives have been taken by both the International Monetary Fund and the Bank for International Settlements to create a new international regulatory framework and system. This work is aimed at reducing the risk and effects of severe financial crises, and is so far-reaching that it has also been referred to as a new ‘architecture’ for the global financial system. Norway should support these endeavours. First, the new architecture must improve surveillance systems and promote greater openness and transparency in the finances and practices of government and enterprises. Necessary measures include more uniform accounting procedures and the development of international statistical standards. More modern company, bankruptcy and securities legislation must be drawn up in many emerging market economies. Second, private investors must to a greater extent bear the costs of their ill-advised investments. The IMF must impose requirements on banks in industrial countries so that they contribute to resolving the crisis they have contributed to creating. This will deter banks from assuming excessive risk. Third, supervision of the financial sector must be tightened. Capital requirements that are more closely linked to financial institutions’ exposure to risk are among the measures under consideration. In addition, it is important to enhance crisis management systems because, irrespective of what we do on the preventive level, we will probably never be able to eradicate financial bubbles that escalate into financial crises. The work on a new international financial architecture is a demanding and long-term process. This work nevertheless offers hope of achieving international agreement on some effective measures.
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In this context, the approach has varied both across time and across states. Shortly after the new Member States’ accession to the European Union, the assumed target dates for euro adoption were very ambitious, although the fulfilment of some of the Maastricht 1/4 BIS central bankers' speeches criteria was still a long way ahead at the time. The more prudent stance manifest afterwards does not necessarily point to the inability or difficulty in complying with the nominal convergence criteria. Rather, it occurred after the beginning of the global crisis, when some of the benefits of euro adoption faded away, while the related costs became increasingly visible. We are therefore witnessing a substantially revised and more comprehensive approach to the euro accession process overall. As regards the actual differences in countries’ strategies, for some it might be puzzling that Bulgaria is thinking of joining the euro area sooner than Romania. It is true that these neighbouring countries have a lot in common, but there are also other things that set them apart (not only the Danube!). Bulgaria has a currency board in place and it is natural for it to contemplate euro adoption as a sound exit from this monetary policy arrangement (the adoption of which, two decades ago, meant half a step towards the euro area).
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We had to manoeuvre through uncharted waters and we may not yet have arrived in the Promised Land”. It is obvious that for a smooth economic catch-up it is important to maintain a long-term perspective and to implement coherent policies and reforms. 3/4 BIS central bankers' speeches Past achievements in nominal and real convergence, while significant, do not guarantee future success (for instance, joining other countries in the middle-income trap is a real danger). A realistic and balanced approach to euro adoption implies that it should be steered taking into consideration absolutely all relevant elements for the sustainability of economic convergence. It is the only way we can safely sail to the port of destination… Thank you for your attention and I wish you lively, yet equally fruitful debates! 4/4 BIS central bankers' speeches
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In 1980, the self-employed accounted for less than 8% of the workforce. In 2016, they stood at an historic high of around 15%, or around 4 ¼ million people (Chart 6). The increase in self-employment has occurred within each age cohort, although the pick-up has been greatest among the old. In 1990, 30% of the self-employed hired other workers. Today, that share is around 16%, with more of the self-employed working independently. 8 As with decreasing unionisation, it seems unlikely these trends will reverse. As older workers are more likely to be self-employed, the ageing of the population will by itself generate further increases. As a rough ready-reckoner, were the incidence of self-employment in each age group to remain constant, the ageing of the population would by itself generate an extra 100,000 self-employed people over the next decade. If numbers in self-employment kept on increasing at the same rate as in the past, the increase could be much more substantial, perhaps as much as an extra 1 million people over the next decade. A more recent phenomenon in the labour market – and one which has attracted particular attention – is the “zero hours” contract. As recently as 2010, 0.6% of those in employment were on zero hours contracts, around 170,000 people. By 2016, that had increased to almost 3% of employees, or almost 1 million workers (Chart 7). It is unclear how much of the measured increase in zero hours contracts is a genuine trend, rather than reflecting increased awareness and reporting.
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Blanchflower, D, Costa, R and Machin, S (2017), ‘The Return of Falling Real Wages’, CEP Real Wages Update, London School of Economics Centre for Economic Performance. Bradley, J (2016), ‘Self-employment in an equilibrium model of the labor market’, IZA Journal of Labor Economics, 5:6. Bryson, A (2014), ‘Union wage effects’, article for IZA World of Labor. Chapman, B (2017), ‘UK must combat unfulfilling jobs and commit to ‘good work’ economy, says Matthew Taylor’, article in The Independent. Evans, C (2011), ‘A risk management approach to monetary policy’, speech delivered at the Ball State University Center for Business and Economic Research Outlook Luncheon. Gardiner, L (2016), ‘A-typical year?’, article for the Resolution Foundation. Gregg, P, Fernandez Salgado, M and Machin, S (2014), ‘Real Wages and Unemployment in the Big Squeeze’, Economic Journal, 124 (576), pp. 408-432. Hamilton, B,H (2000), ‘Does Entrepreneurship Pay? An Empirical Analysis of the Returns of Self-Employment’, Journal of Political Economy, Vol. 108, No. 3, pp. 604-631. Hook, L (2015), ‘Year in a word: Gig economy’, article in the Financial Times. Hudson-Sharp, N and Runge, J (2017), ‘International trends in insecure Work’, Report for the TUC. IMF (2017), ‘Understanding the Downward Trend in Labor Income Shares’, IMF World Economic Outlook, April 2017. Lewis, HG (1986), Union Relative Wage Effects: A Survey, University of Chicago Press. Monetary Policy Committee (2017), ‘Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 14 June 2017’, Bank of England. OECD (2017), ‘OECD Employment Outlook 2017’, OECD Publishing, Paris.
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So, allow me to proceed to look more closely at the determining factors behind long-term growth and see how they have developed historically and what can be said about future developments. I shall begin with labour productivity. Productivity growth Figure 2 shows the annual change in labour productivity, measured as GDP per hour worked, together with an estimate of the long-term trend. At the bottom of the figure is the average rate of change during different periods of time. We can see that productivity growth is nearly always positive and varies considerably from year to year, but also that it has had a tendency to increase over time, particularly during the 1990s. This is a clear difference compared with the previous decade. On average, the increase in productivity was 1.2 per cent during the 1980s. During the 1990s, there was a rapid increase and productivity growth reached an average level of above 2 per cent. This average subsequently remained at that level for the remainder of the period. What is the reason for this more favourable development? We do not have any certain answers, but there are still some factors that have most probably contributed to this development. To begin with, we must remember that the Swedish economy underwent a severe crisis at the beginning of the 1990s and this probably contributed to raising productivity growth during the first half of the decade. Many companies went out of business during the crisis; companies with relatively low profitability.
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Page 1 The PRA's future approach to policy − speech by Vicky Saporta Given at the City & Financial Global event Page 2 Published on 27 September 2022 Vicky explains how regulation that is strong and responsive can avoid unnecessary trade-offs between competitiveness and resilience. The Financial Services and Markets Bill 2022 introduces new powers and a new secondary objective on competitiveness and growth for the PRA. Vicky argues that the PRA can use these new powers to regulate responsively, and better tailor rules to the needs of the UK. Vicky sets out the PRA’s intention to take a proactive approach to the new objective. She explains that as a global financial hub, the UK’s competitiveness in financial services rests on its skilled workforce, and its deep and specialised markets. Vicky argues that the UK economy has more to gain by having a regulatory regime that is open to international business, nondiscriminating, predictable, transparent, responsive to threats and opportunities rather than in weakening standards to attract business. Speech Introduction The Government’s Financial Services and Markets Bill introduces important changes to the PRA’s powers and responsibilities. It does so to implement reforms identified by the Future Regulatory Framework for Financial Services Review, or the ‘FRF Review’. The reforms will move financial regulation back to a British style of regulation based on the Financial Services and Markets Act of 2000, which we refer to as ‘FSMA’. Most technical rules will be made by regulators accountable to Parliament.
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BIS Review 23/2006 5 our ability to effect settlements with tax offices (submit tax returns and effect payments), obtain a driving license or register a vehicle online. We have been assigned the last position among the EU Member States due to the lack of possibility to register a company online — we cannot even download the forms from the website. For a contrast, in seven EU Member States there is already a possibility to register a company online, without any additional paper-based procedures. The only area in which Poland meets all the criteria to catch up with the leaders, is the ability to submit customs declarations online. This service is available at top quality in a decisive majority of the EU Member States and only six countries provide it at a level lower than maximum. 20 It is worth noting that the purpose of e-administration expansion is not to rank high but to bring measurable and specific benefits to citizens, companies, the public administration itself and the entire economy. The research conducted by the European Commission shows that EU citizens save approx. seven million hours yearly given their ability to settle the income tax (submit tax returns or effect payments) online. If such a service were commonly available and exploited, the amount of time saved by EU citizens in connection with the income tax settlement could hit 100 million hours yearly. It has been estimated that each transaction online reduces the amount of time spent for its execution by more than an hour.
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But we must continue pressing on with the reform effort and not let reform fatigue get in our way. I need not remind you that Britain herself undertook deep and painful reforms during the 1980s. To a great extent, I believe the golden age the British economy is enjoying today reflects the hard work of not so long ago. Ladies and gentlemen, Globalization is a long and difficult road. We all know the rewards are considerable and the journey worthwhile. But sometimes the obstacles may seem discouraging, even insurmountable. The risks may seem too great. Nearly twenty years ago, the Thai economy was staggering from a global oil crisis. Ten years ago, Thailand was at the epicenter of the Asian financial crisis. Today, we face the challenges of global imbalances and high oil prices. I am optimistic that Thailand will once again overcome these challenges as it overcame those in the past with experience, lessons learned and foresight. The future will bring with it a new set of challenges. I cannot tell you the shape or form that these future challenges will take. But I can tell you this: ten years from today, when my successor addresses the distinguished members of the British Chamber of Commerce, I expect that this room will not be 4 BIS Review 64/2007 large enough for such a gathering. Your membership will have grown by leaps and bounds together with your enterprises. Ladies and Gentlemen, The road ahead still beckons. We have come a long way together.
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Indeed, global custodians not only rely on a worldwide network of sub-custodians offering easy access to all markets, but they also develop in-house clearing and settlement procedures with very competitive costs. Without any doubt, financial market infrastructures are facing great challenges in terms of higher technical requirements, the necessity to achieve efficiency gains, and higher competitive stakes. I believe that market forces - rather than political pressure - should drive the consolidation process. The 4 4 The Giovannini Group (2001): Cross-Border Clearing and Settlement Arrangements in the European Union, Brussels. BIS Review 37/2002 many changes taking place also challenge oversight authorities. It is their task to analyse the systemic implications of what goes on particularly at the cross-border level, and to make sure that these changes will enhance, and not endanger, the soundness of the financial system. Let me address these issues in the concluding part. Implications for oversight authorities I begin by quoting Alexandre Lamfalussy, Chairman of the Committee of the Wise Men, which, more 5 than a year ago, published the famous report on securities regulation within the EU . Lamfalussy was 6 very clear when he asserted that “the current [securities] regulatory system is not working” . Indeed, unclear and sometimes even contradictory regulations or inconsistent implementation of regulations among countries impair the creation of a single capital market within the European Union.
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Ladies and gentlemen, A mere glimpse into the conference program can show us how proud Africa can be of its diaspora, which has succeeded in positioning itself in the best universities in the world. This great potential can be harnessed by integrating some Africa-specific issues in its research agendas, and strengthening the ties with the African academic institutions. National authorities, for their part, have an important responsibility in this respect. They are called upon to put in place enabling frameworks that are flexible enough to attract this diaspora and benefit from its skills. 5 In our view, it also falls upon the international cooperation to strongly support Africa through this path, by systematically expanding its programs and including a component dedicated to enhancing research capacities. This becomes all the more important today as Africa has launched a major project of economic integration, namely the African Continental Free Trade Area, whose success is determined by taking into consideration other related fields, particularly research and teaching. Ladies and gentlemen, In conclusion, I would like to highlight the great interest aroused in our country by holding such a scientific conference which brings together many eminent researchers and professors here present today. I take this as a gesture of support and encouragement, but also as a sign of confidence in the future of research both in Morocco and Africa. I wish full success to this conference and I thank you all for your attention. 6
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Borg, Anders (2003), “Modern finanspolitik – en syntes mellan Keynes och Friedman” (Modern fiscal policy – a synthesis between Keynes and Friedman), Ekonomisk Debatt no. 7. Brainard, Lael (2020), “Bringing the Statement on Longer-Run Goals and Monetary Policy Strategy into Alignment with Longer-Run Changes in the Economy”, speech at “How the Fed Will Respond to the COVID-19 Recession in an Era of Low Rates and Low Inflation”, an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington, D.C., 1 September. Broadbent, Ben (2015), “The economics of deflation”, speech at Imperial College Business School, London, 27 March. Clarida, Richard H. (2019), “The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices”, speech at the Conference on Monetary Policy Strategy, Tools, and Communication Practices (A Fed Listens Event), Federal Reserve Bank of Chicago, Chicago, Illinois Clarida, Richard H. (2020), “The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution”, speech at the Peterson Institute for International Economics, Washington, D.C., 31 August. Federal Reserve (2020), “Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy”, press release, 27 August, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm Gagnon, Joseph E. and Christopher G. Collins (2019), “The Case for Raising the Inflation Target Is Stronger than You Think”, Realtime Economic Issues Watch, Peterson Institute for International Economics, https://www.piie.com/blogs/realtime-economic-issues-watch/case-raising-inflation-target-stronger-you-think Ingves, Stefan (2020), “The monetary policy toolbox”, speech at the Swedish Economics Association, 10 June.
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3 Larry Summers in particular warned that the Federal Reserve’s scope to cut interest rates would be too limited to effectively deal with a recession, see for instance Summers (2016). 4 See, for instance, Lundvall (2020) for a review of the factors behind the fall in real interest rates. 2 [15] What does an inflation forecast below the target entail? So how should one interpret the fact that the Riksbank is forecasting an inflation rate below the target? One interpretation has been that “the Riksbank has abandoned the inflation target”. If this merely means that we accept that inflation will not quite reach 2 per cent within the coming years, then it is of course true — this is after all what we are forecasting. However, I want to make it clear that it is certainly not true that we have abandoned the target in a general sense and are focusing on something else. What worries me somewhat is that in some quarters the view seems to be that the inflation target has become obsolete. The argument is that the inflation target was useful for bringing down inflation from the overly high levels it was fluctuating around earlier, but once we attained a low inflation rate, the target has no further purpose and might as well be abandoned. However, the purpose of an inflation target is not just to prevent high inflation, but also to ensure that inflation does not become too low.
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Jeanette R Semeleer: To dollarize or not to dollarize – the Central Bank of Aruba’s point of view Speech by Ms Jeanette R Semeleer, President of the Central Bank of Aruba, at the conference “Opportunities and Risks of Dollarization for the Dutch Caribbean”, organized by the Minister of Finance of the Netherlands Antilles, Curaçao, at the Bank of the Netherlands Antilles, Willemstad, 24 August 2009. * * * Ladies and gentlemen, good morning! 1. Introduction I am truly honored to have been invited to speak to such a distinguished audience on a topic that touches everyone’s wallet, and that is dollarization. With dollarization in this context I refer to as the use of the US dollar as the exclusive legal tender in a country. I must admit that at the Centrale Bank van Aruba (CBA), although we have regular bilateral meetings, we have been quite surprised with the recent consideration of the BNA to replace the Netherlands Antillean guilder for the US dollar as the legal tender for the island of Curaçao on a very short term. In view of the far-reaching consequences of such a change, possibly for Aruba too, I highly applaud Mrs. De Lanooy’s initiative to organize a forum of experts, which could enlighten us further on a rather complicated issue. At the end, it is of crucial importance that the required political decision is based on a thorough assessment of the opportunities and risks associated with dollarization.
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For example, we amended the liquidity coverage ratio to take into account unintended consequences under stress on core markets such as commercial paper and to clarify that liquid asset buffers are there to be used in times of stress. We changed the leverage exposure measure, for example by recognising that cash variation margins are effectively pre-settlement payment of the fair value of the derivative. In doing so, we reinforced banks’ incentives to centrally clear their clients’ derivative trades. In other words, we simultaneously reduced bank leverage while increasing the robustness of derivative markets. BIS central bankers’ speeches 3 And we’ve learned about the unintended consequences of prudential capital and retention requirements on the securitisation market. Regulatory changes arguably treat asset-backed securities in ways that appear to be unduly conservative, particularly relative to other forms of long-term funding. Efforts to rebalance these incentives are now a priority. As the Bank of England the ECB have argued, there is a strong case for differentiating between securitisations that are simple, transparent and consistent, and those that are not. The regulatory treatment of those securitisations should reflect their lower risk profile. By making changes, policymakers are applying a mature approach. We’re learning and adjusting. We will continue to do so, in a thoughtful, open, and deliberative fashion. The third element of the new approach is turning our attention to new and emerging vulnerabilities. Work to assess new market developments and co-ordinate responses will become increasingly important as macroprudential risks arise from outside the traditional banking sector.
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Finally, authorities will need new regulatory instruments to keep pace with the impact of new technologies – including high frequency trading, algorithmic trading and the new universal trading platforms, which are gaining ground very rapidly. Last week, the ESRB selected the members of its Advisory Scientific Committee to provide advice on analytical issues. We have also established the Advisory Technical Committee, which assembles experts from all central banks. The institutional set-up is completed and the ESRB will now focus on its substantive tasks, of which we will have a substantive review in June this year. Combining a focus on short-term risks with the medium- and longer-term perspective will be the major challenge. Conclusion Let me conclude. I believe we are now about halfway through the comprehensive reforms that the crisis has called for. We have achieved a blueprint of more stringent bank regulations that includes more loss-absorbing capital, better risk coverage and limitations for undue leverage. Countercyclical capital buffers are meant to lower pro-cyclicality. The oversight of financial institutions as well as markets and market infrastructure are being strengthened, and the organisational structure of financial supervision is being overhauled. But much remains to be done. The most important aspect is the implementation of these reforms. Moreover, the issue of systemically important financial institutions requires further reflection, and oversight of the proper functioning of financial markets in a way that avoids undue volatility, excessive influence of dominant players and oligopolistic market structures, while reinforcing transparency, needs to be addressed resolutely.
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This is why the ESAs and national supervisors together with the central banks are members of the ESRB and why the ESRB and the ESAs form the European System of Financial Supervisors. The ESRB’s main tasks are threefold: to identify and prioritise systemic risks; to issue early warnings when significant systemic risks emerge; and to issue policy recommendations for remedial action in response to the risks it identifies. The ESRB will not focus on individual institutions, individual countries or individual macroeconomic issues – it will take a strong horizontal focus, across countries, across sectors and across the boundaries between the financial sphere and the real economy. Interlinkages and spillovers should be key terms in its analysis. To achieve these tasks, the ESRB is drawing on information from many sources, including strong analytical input from its members; intelligence gathered from financial system participants; and the data necessary to understand the nature of interlinkages that define the financial system. ESRB analysis must be broad-based covering potentially any aspect of the EU’s financial system – markets, institutions and infrastructure. The ESRB is being established at a time when the concerns of markets and policy-makers about short-term vulnerabilities seem to prevail over perceptions of medium- and longer-term risks. This confronts the ESRB, as well as other macroprudential bodies around the world, with specific challenges. The ESRB needs to consider what activities to initiate, well before a fully-fledged macroprudential policy framework is developed in the medium term.
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We expect the fall in commodity prices, which is driven by the weak global demand, to bring consumer inflation down, and the awaited moderate pace of domestic demand to restrain the upside risks. Thus, we believe that underlying inflation will move downward in the forthcoming period. Distinguished Guests, Now, I would like to give a brief account of developments in economic activity and the shortterm outlook on which the inflation forecasts are based. According to the GDP data of the second quarter of 2014, economic activity was relatively weaker compared to the outlook we presented in the July Inflation Report. In the second quarter, we saw that industrial production remained virtually unchanged quarter-on-quarter, while national income posted a decline after eight quarters in seasonally adjusted terms (Chart 13). This decline was mostly attributed to the agricultural sector, which made a 0.3 point negative contribution to quarterly growth. Therefore, national income growth lagged behind industrial production growth (Chart 14). 6 BIS central bankers’ speeches Industrial production, which grew by 1.1 percent in the July-August period of 2014 compared to the preceding quarter, contributed to growth in the third quarter. On the other hand, we may see some decline in the agricultural value added. Thus, there are signals that GDP growth may fall short of the industrial production growth in this period as well. Factors like the slowdown in the European economic growth and geopolitical developments led the external demand to decelerate, inducing a marked slowdown in the growth of exports excluding gold (Chart 15).
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As a result, although we expect the slowdown in external demand in the third quarter to be partially offset by the rebound in domestic demand, I would like to emphasize that the third-quarter growth accommodates downside risks stemming from the agricultural sector. BIS central bankers’ speeches 7 A steady recovery in consumer and investor confidence is yet to appear, suggesting that downside risks to domestic demand still persist. We believe that the deceleration trend in external demand will curb the rise in exports for a while. However, we expect falling commodity prices to contribute positively to the current account balance by reducing import costs (Chart 16). Distinguished Guests, As you all know, food, energy and import prices also play a great role in inflation forecasts. Therefore, before moving on to forecasts, I will briefly talk about our assumptions regarding these variables. In the third quarter of the year, oil and import prices remained below the path we envisaged in the July Inflation Report (Chart 17). Accordingly, we revised our assumptions of average oil and import prices for 2014 and 2015 downwards. Given the current outlook, due to external prices, year-end inflation forecasts for 2014 and 2015 were revised downwards by 0.3 and 0.2 percentage points, respectively. Considering also the high course in food inflation in the third quarter, we revised our year-end inflation assumption for food prices upwards to 12.5 percent for 2014 and 9 percent for 2015.
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The chart illustrates the best possible combinations of variation in inflation and output that can be 1 achieved in the economy. The three points on the chart refer to different forms of inflation targeting. It would probably be possible, with an aggressive use of instruments, to force inflation back to the target within a time-frame of only a few quarters. This is often called strict inflation targeting. Monetary policy has the most rapid effect through the exchange rate channel. Strict inflation targeting will therefore often involve a relatively substantial appreciation of the exchange rate so that inflation can be brought down through a fall in imported inflation. Monetary policy should not cause unreasonably wide fluctuations in the real economy. We therefore apply a two-year horizon to achieve the inflation target. In practice, we allow inflation to vary in the very short term. 1 I refer to a more detailed discussion in a lecture entitled “Monetary policy, cyclical fluctuations and competitiveness”, given by Deputy Governor Jarle Bergo at a conference hosted by the Norwegian Association of Economists in Oslo, 5 September 2002. BIS Review 2/2003 3 Another possibility would be to place weight solely on minimising variation in output or unemployment. This kind of policy does not improve the growth potential in the economy, but smooths fluctuations. Furthermore, this would generate very large variations in inflation as the economy would then be without a nominal anchor.
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Index 1992=100 130 130 Real exchange rate 125 120 115 110 125 120 115 Relative GDP 110 105 105 100 100 95 95 90 90 85 85 80 1970 80 1975 1980 1985 1990 1995 2000 Source: Sveriges Riksbank. Inflation Report 2002:4. Note: The real exchange rate is a geometrical average of the bilateral exchange rates between Sweden and the respective countries in the euro area. SG 16. januar 2003 BIS Review 2/2003 9
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This would not only promote the opening of banking accounts amongst this target group but would also enable them to enjoy lower cost of financial services and better means of savings, thus benefiting the economy as a whole. As the electronic payment channels become more easily accessible, user-friendly and offered at a low cost, it would thus provide the opportunity to shift the remittance flows from the informal to formal channels. Indeed, electronic payments can be one of the strategic tools to meet these objectives and achieve higher economic growth. Electronic payment increases operational efficiency and improves productivity levels through expedient payments and receipts of funds. Electronic payments would also provide the speed and convenience of making payments from any place or time. It also reduces costs through the reduction of redeployment of resources used for handling cash and cheques. Accelerating the country's migration to electronic payments has therefore become a part of Malaysia's larger national agenda to increase the efficiency of BIS Review 69/2008 1 the nation's payment systems which would ultimately improve the competitiveness of our economy. Cash payments in Malaysia still account for a large portion of the number of transactions in the economy. Going forward it is expected that its use will level off and stabilise with the increased use of electronic means of payments. Credit cards, ATM cards, debit cards including the e-purse application embedded in the MyKad are among the card payments possibilities in Malaysia.
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The high penetration rate affirms mobile phone networks as an increasingly popular channel for Malaysians to perform a plethora of activities beyond voice communication, encompassing all forms of digital communication, commerce, banking and payments. Indeed, payments via text messaging has the potential to grow in importance. With 25 million mobile phone subscribers in Malaysia, there are immense opportunities to leverage on mobile phones to accelerate the migration to electronic payments, to widen the reach and appeal of electronic payment services, to deliver innovative mobile payment products that offer speed, simplicity and convenience at minimal cost for the public, as well as to provide an efficient and cost-effective method of delivering financial services even in the remote areas. Also of significance is the high level of financial inclusion in Malaysia. With a population of 27 million, the banking system in Malaysia has 55 million deposit accounts indicating that a high percentage of the population have deposit accounts with the banking system. This is confirmed by a survey of a sample of 5,000 in 2003 that indicated 97% of those surveyed have a bank account. The financialisation of savings is also confirmed by the high percentage of deposits to GDP at 152%. The high percentage of mobile phone subscriber and the high rate of participation of the population in the banking system are important pre-conditions for the significant use of the mobile phone as an ideal platform for personal payments.
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This applies both to companies competing on international markets and those supplying goods and services to the domestic market. In comparison with other countries, it is particularly productivity gains in banks and other service sectors that stand out. Examples are automated processes and swifter payments in the financial industry and improved inventory and management systems in commerce and transport. In sum, these positive supply side shocks have increased the growth capacity of the Norwegian economy, and have played their part in keeping inflation at a low level. Monetary policy assessments Monetary policy influences the economy with a lag. Norges Bank sets the interest rate with a view to stabilising inflation close to the target in the medium term. The interest rate path should provide a reasonable balance between the path for inflation and the path for capacity utilisation. When we reduced the interest rate in 2003, demand and output rapidly picked up. However, it took a long time for employment to rise and the next phase from a pick-up in employment to a fall in unemployment was also long. But now the upturn has entered into a mature phase. The enterprises in our regional network report that capacity constraints are now limiting further growth. Unemployment has fallen markedly over the past year. Wage growth appears to be rising, but so far only gradually. Prices for many inputs and services and building materials are rising markedly. Consumer price inflation is also expected to pick up further ahead. Thus, interest rates are rising.
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The Norwegian authorities have been successful in ensuring that the bulk of the petroleum wealth benefits Norwegian society as a whole. Both the state’s ownership interests through the State’s Direct Financial Interest in petroleum activities (SDFI) and the tax system have been important. The companies that extract oil earn a reasonable return on their investments and have incentives to invest, but the economic rent has essentially accrued to the general public. The authorities have so far also been successful in smoothing spending of petroleum revenues over time. This is important for several reasons. First, it is misleading to look upon the cash flow from 12 BIS Review 28/2007 petroleum activities as income. The appropriate economic perspective is to see the transfer of cash flow to foreign investments as a way of transferring capital from one account to another – from petroleum to foreign securities. By doing so, we diversify risk. Second, the size of the cash flow from petroleum activities varies. If petroleum revenues were to be spent as they accrue, this would lead to wide fluctuations in demand in the Norwegian economy. Third, petroleum revenue spending has an impact on competitiveness in Norwegian business and industry. A high level and substantial variations in petroleum revenue spending would have a negative impact on internationally exposed industries. The establishment of the Government Pension Fund – Global and the spending guidelines for petroleum revenues are part of the response to these challenges.
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To this end, we need to speed up international work under the aegis of the FSB. Highest priority should be given to the finalisation of the FSB recommendations on stablecoins and other crypto-assets, in cooperation with other international standard-setting bodies (CPMI, BCBS, FATF). The second priority should be to regulate the interconnection between the traditional financial system and the crypto-asset market in a secure way. The timely and faithful implementation of the Basel standards on the prudential treatment of banks' crypto-asset exposures, published in December 2022, will be key from that perspective. The development of crypto-asset based services in banks must take place within a prudent framework that limits the risks for financial stability. Consequently, the enforcement of prudential standards should strictly take into account the developments of interconnections between crypto-assets and regulated entities, such as banks. Lastly, two new issues will require a global regulatory response. DeFi is the first one: its use of public blockchains and its global reach make it difficult to allocate 3/4 BIS - Central bankers' speeches responsibilities and impose strong regulatory requirements such as in MiCA. But the FSB is working on it: it has already published a report on DeFi's vulnerabilities and policy work is in progress. Second, we need to address challenges raised by worldwide crypto conglomerates. The FSB has also initiated work on this type of crypto-asset service providers to identify and monitor the risks associated with the concentration of their activities.
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The problems with inflation were then accentuated when the financial markets were deregulated. Prices and wages rose steeply and Sweden was caught in wage-price spirals. The occurrence of price bubbles made investment decisions more hazardous and led to weak productivity. A high level of inflation became a permanent feature of our economy. As monetary policy at that time was focused on maintaining a fixed exchange rate, fiscal policy ought to have been tighter. Bit by bit, there was a growing awareness across party political lines that in the longer run this economic policy strategy was not viable, a perception that had already dawned on most countries in our part of the world in the early 1980s. It was now that low inflation in Sweden came to be seen as a necessary condition for achieving stable and sustained growth and thereby high employment. This was clearly expressed officially for the first time in the Budget Statement in January 1991. Combating inflation was given pride of place on the economic policy agenda. The final policy objectives were the same as before but the perception of the conditions that were needed to attain them had changed. This realignment of stabilisation policy occurred, however, at a time when the earlier policy’s negative consequences had begun to leave their mark. Due to the high level of costs in manufacturing, for example, economic growth in Sweden was weak. In addition, a rising real interest rate coincided with a period when the tax reform made savers and investors more sensitive to interest rates.
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These include the low precipitation that affected hydroelectric power, various diseases that affected livestock and the fact that Sweden and southern Europe suffered poor harvests. We are in agreement with other forecasters and analysts that the inflation rate will fall as the effects of the transitory price rises abate and inflation approaches 2 per cent in early summer. In the longer term perspective, however, the picture looks slightly different and developments indicate an inflation rate above the target of 2 per cent. The assessment contained in the main scenario of the most recent Inflation Report has CPI inflation at 2.2 per cent one year ahead and 2.4 per cent two years ahead. The corresponding forecast for underlying inflation, UND1X, is an increase of 2.2 per cent at both one and two years ahead. It is the latter measure that is the most central to monetary policy. However, each inflation assessment also takes into account the risk spectrum. The risk spectrum mainly concerns domestic inflationary pressure. If resource utilisation comes under greater strain than the Riksbank has estimated in its main scenario, or if the potential growth rate has been overestimated, there is a risk that inflation will be higher than expected in future. Taking into account the risk spectrum, underlying inflation comes out at 2.3 per cent both one year and two years ahead. Although the inflation rate is expected to fall over the coming months, the forecasts indicate that it will exceed the inflation target one to two years ahead.
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Elvira Nabiullina: Speech - OPORA RUS Governor SIA session Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at the OPORA RUS Governor SIA session, 3 December 2020. * * * Good afternoon, I am happy to welcome you, whether you are now in the Kaliningrad Region or are video conferencing — this format is becoming quite common now. I hope that this meeting is attended by a large number of participants. Indeed, I was listening very attentively and I think that the approach the Kaliningrad Region is pursuing to develop small and medium-sized businesses is promising and comprehensive. However, we are all very well aware that a lot of projects depend on how accessible funding is — it would be impossible to implement a project when there is no access to funding. Today’s meeting is very important to me: although the Bank of Russia influences the economy through the financial sector, the ultimate goal of our work is to ensure that the financial sector helps the economy and people overcome hardships and develop. Of course, we have always been concerned about the issues related to the financing of small enterprises. We carry out regular meetings with OPORA RUSSIA President Alexander Kalinin several times a year to discuss the most topical problems and advance in both the regulation and other areas associated with the development of multiple projects.
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11 In this 10 See Rachel, L and Smith, T (2015), ‘Secular drivers of the global real interest rate’, Bank of England Working Paper No. 571 and ‘Resolving the climate paradox’, speech by Mark Carney at the Arthur Burns Memorial Lecture, Berlin, 22 September 2016, available at http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech923.pdf. 11 Among companies responding to the Bank’s Decision Maker Panel survey between February and April 2017, Brexit was the largest current source of uncertainty for 10%, one of the top two or three sources of uncertainty for 30%, one of many drivers of uncertainty four 40% and not important for the remaining 20%. 4 All speeches are available online at www.bankofengland.co.uk/speeches 4 context, the best contribution the Bank of England can make is maintaining financial and monetary stability by pursuing the right policies within consistent frameworks. In recent years, the Bank has been determined to remove any lingering uncertainties that companies may have about access to finance in good times and bad. The Bank is building the resilience of the financial system through much higher capital levels, more prudent underwriting standards, rigorous stress testing and appropriate contingency planning. The core tier 1 capital ratios for major UK banks are now almost 14% (Chart 12). Yesterday, the FPC increased the countercyclical capital buffer rate to 0.5% from 0%, announced higher expectations of lenders’ underwriting standards for consumer credit, and recalibrated the leverage ratio.
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As the primary objective of monetary policy remains inflation control, any overshoot of inflation above the target can only be temporary in nature and limited in scope. As such, the MPC has been clear that its tolerance for above-target inflation is limited. Since the prospect of Brexit emerged, financial markets, notably sterling, have marked down the UK’s economic prospects. Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU. But it can influence how this hit to incomes is distributed between job losses and price rises. And it can support households and businesses as they adjust to such profound change. 12 See the statistical annex to the Bank for International Settlements 87th Annual Report, ibid. 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 As spare capacity erodes, the trade-off that the MPC must balance lessens, and, all else equal, its tolerance for above-target inflation falls (Chart 15). Different members of the MPC will understandably have different views about the outlook and therefore the potential timing of any Bank Rate increase. But all expect that any changes would be limited in scope and gradual in pace. When the MPC last met earlier this month, my view was that given the mixed signals on consumer spending and business investment, it was too early to judge with confidence how large and persistent the slowdown in growth would prove.
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Whether or not a banking licence is required, stable coin issuers must abide by certain regulations just like any other financial market participant. These range from investor and data protection to rules on combating money laundering and terrorism financing. As you see, ladies and gentlemen, stable coins present many regulatory challenges, which in turn require close cooperation between the various authorities. This is particularly true of cross-border projects like Libra. In addition to the regulatory issues, there is the question of whether stable coins might influence the effectiveness of monetary policy. If Swiss franc stable coins were to proliferate in Switzerland, this would have no immediate impact on the effectiveness of our monetary policy. In such a scenario, the Swiss franc would remain the relevant currency. The stable coins pegged to Swiss francs would simply be another Swiss franc-denominated form of money alongside bank deposits and cash. As long as prices, wages and loans are set in Swiss francs, the SNB can influence incentives for savers and borrowers via its monetary policy and thus ensure price stability over the medium term. However, if stable coins pegged to foreign currencies were to establish themselves in Switzerland, the effectiveness of our monetary policy could be impaired. How close stable coins will get to good money and what additional benefits they will offer versus traditional types of money remains to be seen. What matters is that the various book and token money providers operate under identical competitive and regulatory conditions.
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Such tokens could be used in payment transactions between financial market participants in the same way as sight deposits are today, and could ultimately result in efficiency gains for financial market infrastructures. Taking Switzerland as an example, this would mean that the SNB would make Swiss franc tokens available to financial market participants. The financial industry and a number of central banks are currently assessing whether, and to what extent, tokens can bring efficiency gains. For instance, experiments and tests are being conducted with digital tokens in the areas of securities trading, settlement and management. It is hoped that ‘security tokens’ could be transferred between counterparties in near real time, resulting in more efficient management of securities. In a ‘Swiss franc tokens for financial market participants’ scenario it would be possible to exchange security tokens for token money on a delivery-versus-payment basis. In-depth analysis will be required to determine whether security tokens can indeed bring the desired efficiency gains. Besides the technical hurdles that would to be overcome, steps must also be taken to ensure that applicable legal and regulatory requirements can be met. Moreover, efficiency gains must never be allowed to compromise the security of technical systems. It is too soon to answer the question of how best to configure money flows in trading with security tokens. In certain situations, security tokens could be traded and settled just as efficiently if the transfer of funds continued to flow directly via the sight deposits at the Page 6/7 central bank.
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This can best be achieved when the largest possible number of the community’s members are involved. 4 Individuals are at the same time citizens and economic subjects, thereby creating a crucial interdependency. Proper integration into a balanced economic environment is an important prerequisite for developing a sense of common purpose - in other words, identifying with society and thus also displaying a willingness to actively help shape its progress. This ultimately means that economic and social development can only progress in a sustainable and balanced way if an appropriate equilibrium can be maintained between them. 5. Even at a time when global economic and social developments are becoming more and more closely intertwined, being an integral part of a national community still plays an important role. It is still essential that these national communities should strive first and foremost to keep their own house in order - a house, though, which should not just be stable but open as well. 6. Ensuring the stability of the financial system is one of the core tasks of the supervisory authorities and of the central bank in its capacity as lender of last resort. However, the market players’ sense of individual responsibility is also of key importance. If a third party is to offer assistance in a system run on free market principles, this can and should be seen as nothing more nor less - than helping the others to help themselves. BIS Review 26/1998
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The euro has the potential to also be a complete strategic success in the future 1. The euro has the potential to become a major reserve currency as an alternative to the US dollar The euro is already the second most widely-used international currency in the global monetary and financial system. But, 18 months after the introduction of the single currency, it is fair to say that while the euro has become the first financing/issuing currency in the world, it has not so far made the same progress as a reserve/investment currency. The low level of interest rates in continental Europe has fostered the international financing role of the euro (euro-denominated bonds accounted for some 45% of new issues in 1999 which, as I mentioned earlier, somewhat exceeds the market share of new USD-denominated bonds). Conversely, these relatively low remuneration rates have reduced the role of the euro as a reserve currency (in central bank portfolios) or, more generally, as an investment currency (in private investors’ portfolios). Since the launch of the single currency, the low level of interest rates in the euro area and the continuous depreciation of the euro have temporarily slowed down the emergence of the euro as a major reserve currency. This leads me to say a few words on the depreciation of the euro in the past 18 months. 2.
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At first glance it would appear that card payments – which are 35 per cent cheaper for society to produce – should replace cash completely. But it is not quite so simple. There are major differences in how cards and cash are produced. Card payments require an extensive infrastructure of terminals, computers and lines of communication and have substantial fixed costs. But the cost of a card payment is always the same, regardless of whether one uses the card to pay for a purchase amounting to SEK 50 or SEK 50,000. For payments made in cash the variable costs are substantial. Cash payments require considerable physical management such as transport, counting, storage of banknotes, etc. The larger the transaction amount, the more expensive the actual cash payment will be, as it involves a larger share of this management. For payments of small amounts the cost of cash is therefore lower than the cost of a card payment. This means that from society’s point of view, cash may be preferable for making small payments. To obtain an idea of what the size of a transaction may mean, we estimated the costs to society of a cash payment and a card payment respectively as functions of the transaction amount. In this way we could also calculate when it was profitable to pay in cash. The results show that – at lease in 2002 – it was most cost-efficient to pay in cash for purchases amounting up to almost SEK 70. 7 Above this, card payments were always preferable.
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As regards the economic effects, the recent crisis concerning Ukraine and the consequent imposition of sanctions on and by Russia has so far had limited spillover effects on the euro area economy, either via trade or financial links. However, the Baltic states and Finland are more likely to feel any negative effects than other euro area economies owing to the strong trade ties they have with their eastern neighbours. But on the economic risks, I would like to add that the European “family” provides safety nets to partly offset the negative effects of geopolitical tensions related to Russia and Ukraine. For instance, the European Commission announced support measures to protect food producers affected by Russia’s food embargo. The euro area is a large market that can help Lithuanian producers to make up for losses from the Russian market. Finally, euro area countries can use the emergency liquidity lines provided in euro by their national central banks, which in turn would receive euro liquidity from the Eurosystem, in the event of significant turbulences in the financial sector. Why is lending to the real economy in the euro area sluggish? What else needs to be done in addition to the mix of different measures that the ECB is applying, such as low interest rates (or negative interest rates for bank deposits at the ECB) and the planned asset-backed securities programme? It is true that credit dynamics remain weak. At the same time, recent trends show some positive changes.
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First, I will review trend developments in financial intermediation and single out a recurring theme in the evolution of the financial markets over the last 30 years: the rise of securitisation and collateralised finance. I will then consider the consequences of this innovation for the transmission of monetary policy in the post-crisis world. I will start by looking at the money markets and turn to the wider financial system, including the shadow banking sector. Looking forward, the main sources of collateralisation will be an issue to consider if the present trend towards downscaling the creation of private asset-backed securities continues. Public debt instruments are likely to play an important role. This will lead us to reflect on the role of central banking at a time of high public debt. 1. The rise of collateral The financial system has undergone profound changes over the past few decades. Markets have grown significantly; competition has intensified. These are well-known phenomena. I would like to focus on the consequence of this, namely that the core of financial intermediation has moved from depository institutions – commercial banks – to a hybrid aggregate of institutions and functions, which is broadly referred to as the shadow banking system. The rise of the shadow banks, their ups and their downs, are inseparably connected with a key financial innovation of the last 30 years: securitisation. The emergence of a shadow banking system is not a new phenomenon.
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However, we also made clear that given the speed of growth and the growing connections with conventional finance, it could pose such a risk relatively quickly and we needed to get on with the work of bringing it within the regulatory perimeter. Recent events have not, in my view, changed that assessment. I should stress that when I refer to crypto here, I am talking about crypto technology in finance writ large, such as encrypted tokenisation and distributed ledgers (like blockchain), rather than just the dominant initial use case, which has been the creation of speculative assets such as Bitcoin. I do not know what the future holds for such assets, other than that they will continue to be volatile and that those that invest in them need to understand that the prices can collapse. Page 5 However, while the initial use case for crypto may or may not have a limited future, the technologies that have been developing in the crypto ecosystem and their possible use cases are, I think, likely to be developed further in both the crypto world and in the much larger traditional financial system. Indeed, I suspect that the boundaries between these worlds will increasingly become blurred. In this we should perhaps be mindful of the ‘Dot Com’ bust at the beginning of this century. The valuation and revenue generation from the original use cases of early online firms was highly speculative and collapsed.
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And while the actual tasks performed by the Bank’s branches have changed since the network began expanding in the 1830s, the end goal remains unchanged: to support and serve local economies in order to back local initiatives and provide assistance in coping with economic and financial risks. From the time of its creation until the First World War, operating in an economy with relatively few banks and in which few people had bank accounts, the branch network of the Banque de France aimed at facilitating payments and supporting the regions during economic shocks by offering discount refinancing solutions. France’s economy has changed enormously since the 19th century. GDP per capita has grown by a factor of more than 20 since 1800 and by more than seven since 1914.9 Our banking and financial system has also been greatly modernised and now offers payment and credit solutions that are much faster and less costly than in the past. Reflecting these dual economic and financial transformations, the way in which the Bank performs its task of serving the regional economies has evolved. Our service to support local economies have expanded and now extend to households, especially the most vulnerable people, and companies, particularly the smallest 8 Leclercq, Yves, 1999, La formation d'une banque centrale: la Banque de France (années 1830 - années 1850), Revue économique Vol. 50, pp. 151-174 9 Source: Our world in data, Maddison Project Database 2020, see Jutta Bolt and Jan Luitten van Zanden, Maddison style estimates of the evolution of the world economy.
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By bringing together senior officials from central banks and supervisory agencies from over 100 countries, this year’s meeting will provide the platform for us to move ahead on the core of the regulatory changes, and to chart the direction for the remaining areas of work. 5. The two themes for this year’s conference – building a more resilient banking system, and creating a stable financial environment for sustained economic growth underscore two key principles. First, the financial system needs to be resilient to avoid destabilizing the economy. Second, beyond resilience, rebuilding the nexus between the financial sector and the real sector is critical to supporting growth and development. This is particularly important in many emerging economies where the pace of financial sector development has not caught up with that of the real economy. 6. Let me now share some reflections on three themes that permeate discussion on financial resilience – microprudential regulations, macroprudential regulations, and supervisory approach. The Basel Committee’s reforms 7. Many banks entered the crisis with too much leverage, too little capital and inadequate liquidity buffers. We need better micro-prudential regulations. Banks need to reduce leverage, have higher quality and quantity of capital to absorb losses, and maintain a higher proportion of liquid assets to withstand shocks in the funding markets. 8. The Basel Committee has agreed on the need for standards relating to capital, liquidity and leverage.
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A second potential explanation for how the supply side data have evolved is that since the referendum workers have responded to uncertainties about the outlook by showing even more flexibility in their wage demands. People’s willingness to accept lower real wages would encourage firms to hoard labour, and shift away from capital expenditure toward more labour input for a given unit of output. Such a further increase in labour market flexibility would imply that part of the recent renewed weakness in productivity growth is cyclical, meaning there is a bit more room for the economy to grow without generating above-target inflation in the medium term. I attach some weight to the idea that workers have responded to the changing outlook by showing greater flexibility in their wage demands. This would be consistent with a trend I have observed throughout my career and in successive cycles in which peaks and troughs in unemployment have been lower in each cycle since the 1980s. Since the crisis, real wage flexibility has been particularly notable, and it may have intensified further since the referendum as the unemployment rate has fallen further to 4.3%. As supporting evidence I would point to the fact that the weakness in private sector real wage growth relative to the MPC’s May 2016 forecast has been greater than would be required just to match the weakness in productivity 3 growth , and that is in spite of the additional pressure on real income growth from higher import prices over 4 the same period .
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Ask not what the economy can do for insurers – ask what insurers can do for the economy Speech given by Anna Sweeney, Executive Director, Insurance Supervision Division Delivered at the Bank of America 25th European Financials CEO Conference 22 September 2020 I am grateful to Alan Sheppard, Megan Bell and Zachary Morris-Dyer for their assistance preparing this speech. 1 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice Good morning and thank you to Bank of America for inviting me to speak here today. In a normal year, I would use these remarks to run through our regulatory agenda. But this year it is inevitable that my remarks will focus on the effects of Covid-19: a human tragedy for millions, the worst economic crisis in the UK for several centuries and an unparalleled global challenge. Our economy and the actors within it are continuing to face numerous challenges and a great deal of uncertainty. The aim of the Bank of England – along with colleagues from other public sector institutions – has been to build a bridge across the economic disruption caused by the pandemic. And insurers – as providers of protection, as guarantors of retirement income and as institutional investors - have an important role to play in the recovery from that crisis.
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Marzunisham Omar: Capital flows management for monetary and financial stability Remarks by Mr Marzunisham Omar, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Seminar and Meeting of the SEACEN Expert Group on Capital Flows, Kuala Lumpur, 11 June 2019. * * * I am delighted to be here today. Let me take this opportunity to express Bank Negara Malaysia’s appreciation for the collaborative efforts of the SEACEN Centre and the Bank of Japan that have gathered us here for this biennial SEG event. It has been six years since I last attended the SEG Seminar in Manila, back in 2013 as the newly appointed co-chair. I am truly honoured to have had the opportunity to work alongside Deputy Governor Diwa. Under his capable stewardship and intellectual guidance, the SEG has developed into a beneficial platform for its members since it was established 19 years ago.
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This imperative translates into high demands on the use of standardised documents and agreements among financial market players, so as to increase market efficiency, transparency and uniformity, as well as to reduce the cost of transactions as we strive towards seamless global inter-linkages. Standardised documentation and practices for a number of products have already been adopted between jurisdictions through bilateral and multilateral agreements. This has facilitated issuance of financial market instruments, contributing towards enhanced liquidity in Islamic financial markets and greater inter-market linkages. Greater understanding and clarity on Shariah matters, will also contribute towards convergence and harmonisation of such interpretations across jurisdictions and thus contribute towards the development of Islamic financial products and services. Realising cross-border potentials and bridging economies With its international outreach and ability to provide comprehensive financial solutions, Islamic finance beckons us with a new frontier that presents new opportunities. As we enter into a more uncertain global environment, it also promptsus to revisit strategies to enhance the resilience of Islamic finance. The theme of this year’s Global Islamic Finance Forum 2012, “Internationalisation of Islamic Finance: Bridging Economies” focuses on the international prospects surrounding the Islamic finance industry and its tremendous potential role in strengthening cross-border economic linkages. More than 500 participants from over 50 countries across the continents gather today in this Forum to explore this prospect.
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Leigh-Pemberton, R. (1989), Speech given at the Ernest Sykes Memorial, 24 May 1989 available from Bank of England Archive, ref. 7A320/10. Mahate, A A (1994), “Contagion Effects of Three Late Nineteenth Century British Bank Failures”, Business and Economic History available at http://www.thebhc.org/publications/ BEHprint/v023n1/p0102-p0115.pdf Norman, B, Shaw, R and Speight, G (2001), “The history of interbank settlement arrangements: exploring central banks’ role in the payment system”, Bank of England Working Paper No. 412. Orbell, J (1985), “Baring Brothers & Co., Limited. A History to 1939”, Butler & Tanner Ltd. Roberts, R and Kynaston, D (1995), “The Bank of England: Money, Power and Influence 1694–1994”, Oxford, Clarendon Press. Roberts, R, Reading, B and Skene, L (2009), “Sovereign Rescues: How the forgotten financial crisis of 1914 compares with 2008–2009”, Lombard Street Research, Special Report. Saw, R (1944), “The Bank of England, 1694–1944”, George G Harrap & Co Ltd. Sayers, R S (1976), “The Bank of England 1891–1944 (Volumes I–III)”, Cambridge University Press. Wood, G (1999), “Great Crashes in History, Have they lessons for today?” Oxford Review of Economic Policy, 15 (3), pp 98–109. BIS central bankers’ speeches 9
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The first is the greater income and consumption volatility that have been observed in emerging markets, both in terms of the level and in terms of growth relative to developed economies. And the second is the fact that economic agents in 1 The views expressed in this paper are those of the authors and do not necessarily represent those of the Bank of Thailand or Bank of Thailand policy. I would like to thank Piti Disyatat, Ashvin Ahuja, Sarawan Angklomkliew, Jaturong Jantarangs, Nawaporn Maharagkaga, Don Nakornthab, Kobsak Pootrakool, Mathinee Subhaswadikul and Supradit Tangprasert of the Bank of Thailand for their substantial contribution to the drafting the original paper. BIS Review 98/2008 1 emerging markets face greater limitations in the ability to smooth consumption in response to shocks. The empirical evidence from two recent studies are summarized in Table 1. As documented by Aguiar and Gopinath in 2007, consumption is around 40 percent more volatile than income at business cycle frequencies for emerging markets, while the ratio is less than one for developed economies. The same is true when comparing relative volatility in growth rates of consumption and income. A study by Kose, Prasad, and Terrones in 2005 also shows greater income and consumption volatility in emerging markets relative to developed economies. Such heightened volatility in macroeconomic outcomes undoubtedly has adverse implications for welfare.
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Half of the respondents surveyed were not aware of the PDS while the majority of those that are aware claimed that they were given the PDS only after they had already decided to enter into a financial contract. Many of them were not informed of its purpose. The study also revealed a bias towards highlighting the benefits of a product in explanations given by sales agents or BIS central bankers’ speeches 3 advisers on the product, while risks and costs were not adequately explained. It should therefore not be surprising that 75% of respondents make financial decisions without adequately considering risk factors associated with a financial product, while almost half did not understand the costs involved. These findings are obviously a concern to the Bank as they undermine informed judgments by financial consumers. I raise these observations today because financial advisers clearly have a key role in addressing these concerns. Indeed, you have a professional obligation to your clients to present clear, unbiased and objective information to help your clients make informed decisions. The Bank intends to address these issues aggressively, through regulatory improvements, education, more intensive reviews of sales practices and continued enforcement actions. With effect from the second half of 2015, financial advisers and insurance and takaful brokers will also be brought within the scope of the Financial Ombudsman Scheme that will be approved under the Financial Services Act, providing an avenue for consumers to address complaints against advisers for non-disclosures or misrepresentations.
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There is also evidence of them arising from coordination failures, which generate spillover effects across banks and countries. 1 See IMF (2010). BIS Review 168/2010 1 Drawing on this evidence, Section 5 identifies some implications for the design of public policy. It suggests that neither monetary nor micro-prudential policy may be well-equipped to tackle the credit cycle. Instead, some new policy apparatus may be needed which (unlike monetary policy) targets bank balance sheets directly but which (unlike micro-prudential policy) does so systematically. This is one key dimension of so-called macro-prudential policy. 2 Various international macro-prudential policy committees are, or are about to be, put in place – in the US the Financial Stability Oversight Committee, in the euro-area the European Systemic Risk Board and in the UK the Financial Policy Committee. These provide one element of a macroprudential policy framework. Other elements remain to be put in place. Knowledge of the sources and dynamics of the credit cycle will be important in assembling those missing pieces. This paper is intended to be a contribution towards that goal. 2. A model of the credit cycle We begin by sketching a model which captures some key features of past and in particular the present, credit cycle. There are a number of existing models of the credit, or leverage, cycle. In all of these models, cyclicality in financial variables is aggravated by various microeconomic frictions. These frictions typically then amplify fluctuations in the real economy.
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A major infrastructure issue for the Treasury market has been the clearing and settlement practices of the cash market. This can be opaque, with a majority of trades cleared away from central counterparties (CCPs). While central clearing is more uniformly used in other segments of the Treasury market—such as futures—many market participants elect to clear and settle cash Treasury transactions in a bilateral fashion. This process includes many market participants: trading venues, clearing agents, and clearing banks. No single participant has a view of the entire clearing and settlement system. The Treasury Market Practices Group (TMPG), a New York Fed-sponsored group of market professionals working to support the integrity and efficiency of the Treasury market, has concentrated its recent efforts on this topic. Preliminary findings include an increasing volume of linked trades that clear centrally on one side and bilaterally on the other. This work has also uncovered information asymmetries in clearance and settlement risk management, which potentially could lead to a mispricing of these risks. Moreover, increased understanding about the depth, breadth, and durability of credit arrangements that support clearance and settlement seems desirable. This would improve market integrity through greater understanding of risk throughout the clearing and settlement process and how it is affected by different conditions. Since the financial crisis, there has been an effort to strengthen the resiliency of repo market infrastructure, which is another important element of Treasury market plumbing.
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Immediately after the crisis, the Federal Reserve was active in pushing reform of the tri-party repo market, which had been a locus of stress in 2008. More recently, Treasury repo markets have undergone further changes, including market adaptations to post-financial crisis regulations, and the introduction of multiple programs expanding access to central clearing to a wider range of market participants. These markets also have been affected by efforts to set heightened expectations for CCPs with regard to liquidity risk management, margins, and governance and recovery planning. This is consistent with the Treasury Department’s recommendation that regulators ensure appropriate risk management at CCPs and other financial market infrastructures. For example, earlier this month, the SEC approved the Capped Contingency Liquidity Facility—a liquidity risk management tool for the DTCC’s Fixed Income Clearing Corporation (FICC). This tool helps to ensure that FICC will have sufficient liquidity to cover the default of a Government Securities Division member to which FICC has the largest exposure. This development reflects another positive step toward a safer centrally cleared repo market, and aligns well with broader official sector efforts to maintain a well-functioning and robust Treasury repo market. Finally, the Joint Staff Report identified the importance of strong interagency monitoring of the Treasury market, in close collaboration with the public. Judging by this gathering, the commitment to this task is strong—which is good because many questions remain.
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The ACPR is paying close attention to the impact of the rising risk of bankruptcies on banks’ solidity, and has not so far noted any significant increase; I have already taken the opportunity to put some of the overly alarmist readings of the ESRB’s recent report into perspective. With the recovery, the lifting of the public health restrictions will need to be followed by a winding down of public aid mechanisms. Support for businesses has to switch from the widespread provision of liquidity to a more selective phase of quasi-equity based support, targeted at firms that are economically viable but that have been financially weakened by the crisis. As the health and economic situation gradually normalises, there will be no reason to maintain the exceptional crisis support measures beyond next year: this applies to the buffers and flexibilities decided on at the start of 2020. The restrictions on dividends could also be lifted from as early as September 2021. This is vital if we are to ensure that our financial institutions remain attractive in a context of heightened international competition, where the exceptional measures are often more flexible, as in the United Kingdom, or are in the process of being lifted, as of 30 June this year, for the majority of US banks. Three longer-term challenges I shall turn now to the three structural challenges that financial institutions will need to address in the next decade: profitability, innovation and climate action. For banks, profitability is no longer an issue linked to monetary policy.
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Hopefully we are also moving away from the days when regulators set regulations which have no real relation to how banks themselves look at risk, and how they manage risk. Basel II is a major step in this direction. It aims to link the way regulators look at risk to how banks themselves look at risk; to encourage the use of modern risk management techniques; to encourage innovation; and to encourage banks to ensure that their risk management capabilities are commensurate with the risks of their business. As a result Basel II brings regulation into the 21st century. Previously, regulators' main focus was on credit risk and market risk. Basel II takes a more sophisticated approach to credit risk, in that it allows banks to make use of internal ratings based systems - or "IRB systems" as they have become known - to calculate their capital requirement for credit risk. It also introduces, in addition to the market risk capital charge, an explicit capital charge for operational risk. Together, these three risks - credit, market, and operational risk - are the so-called "Pillar 1" risks. But Basel II goes much further than this in looking at risk. As you will I am sure know, as risk management professionals, these three risks are only scraping the surface. Banks' risk management functions need to look at a much wider range of risks than this - interest rate risk in the banking book, foreign exchange risk, liquidity risk, business cycle risk, reputation risk, strategic risk.
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Conclusion When I look back at monetary policy since the current monetary-policy regime, with a floating exchange rate and an inflation target, was introduced at the beginning of 1993, I think that it has on the whole functioned fairly well. One might possibly think that monetary policy was too tight in 1994–1995 when the Riksbank raised the repo rate at the same time as the budget consolidation work was holding back inflation. However, it was important to bring down inflation and inflation expectations to a much lower level than in the 1970s and 1980s. One might also think that the assumption of an unchanged repo rate that was used as a basis for the forecasts during the first years was too simple. On the other hand, one has to see this more as a part of the communication strategy that was being followed then. And it worked. Inflation expectations fell and have been established close to the target. I also think that monetary policy has worked well during the six years, 2006–2011, that I have been a member of the Riksbank’s Executive Board. CPI and CPIF inflation have on average been 1.7 and 1.8 per cent a year respectively. This is somewhat lower than the inflation target. However, given that the world has undergone the deepest recession since the 1930s during this period, it should nevertheless be regarded as a good result.
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Following the financial crisis, the model for prudential regulation in the UK has been further developed by the establishment of the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA). The mandates for both the FPC and PRA are set out in primary legislation: the FPC is responsible for protecting and enhancing the overall stability of the UK financial system; and the PRA’s primary objectives are to promote the safety and soundness of regulated firms and to contribute to the securing of an appropriate degree of protection for policyholders. But importantly, the mandates for the FPC and PRA ensure that other factors such as long-term productivity and economic growth are taken into account when setting policy. The FPC must pursue its financial stability objective without causing serious harm to the wider economy in the medium or I would like to thank Matthew Willison, Hugh Burns, Nicolo Fraccaroli and David Swallow for their assistance in preparing these remarks 6 long term. In other words, the FPC must avoid the ‘stability of the graveyard’. 6 And, the FPC also has a secondary objective, subject to its pursuit of its primary objective: that of supporting the economic policy of the government. The PRA also has an important secondary objective to facilitate effective competition, and must have regard to a set of regulatory principles, including the desirability of sustainable economic growth.
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The global economic recession paved the way for Keynes’ concept of demand management and active government intervention, and the rewriting of textbooks began. After the war, universities produced a new generation of economists filled with ideas of planned economies and regulation. The interest rate was regulated downwards to promote distributional aims. Other regulations had to be tightened to curb the consequences of distorting market prices. And new 1 Odd Nordstoga, Lykkeliten from the album November, Universal in 2010. BIS central bankers’ speeches 1 regulations were then added to alleviate the consequences of the former ones. One regulation came on top of the other and so on. That was the case not only in Norway, but also in many other countries. Detailed regulation – or fine-tuning – prevailed until the 1970s. The scale of regulation was summarised in a speech by Norges Bank Governor Knut Getz Wold at the Norwegian School of Economics in 1972: “Pursuant to the Act relating to access to regulating monetary and credit conditions of 1965, the King can decide to use a wide spectrum of instruments, such as liquidity reserves, foreign exchange reserves, supplementary reserves, investment obligation, direct lending regulation for certain credit institutions, interest rate caps on loans and issuance control in addition to reporting requirements in certain areas.
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The FROB legislation not only provides the Banco de España with the necessary tools to act when there are serious problems of viability, but also provides for a second course of action, of a preemptive nature, geared to preventing these problems from materialising. With the approval of the FROB, institutions and their managers were urged to assess their own situation and to adopt the decisions needed to ensure their viability, preventing the more traumatic effects that might stem from supervisory intervention, both for the institution itself and for economic activity in the regions in which it pursues its business. This second means by which the FROB may act involves supporting integration processes between institutions which, without being in serious danger, are seeking to improve their efficiency, streamline their management and re-scale their productive capacity. When the FROB undertakes such “pre-emptive” action, the Banco de España is entrusted with ensuring that the operations approved have a sound business plan that contributes to strengthening our financial system and that is accompanied by measures aimed at a realistic adjustment of bank resources to the new market conditions, using in this connection the smallest volume of public funds possible. Unlike cases in which institutions are taken under control and their directors replaced, and where decision-making is entirely the prerogative of the Banco de España, authority to pursue this second course of action lies with credit institutions and, in the case of savings banks, authorisation by the regional government is also required.
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BIS central bankers’ speeches 3 Another area where there needs to be greater international cooperation is in defining the roles of home and host countries especially during times of stress. What is the responsibility, for example, of the host country to provide lender-of–last- resort liquidity to foreign firms operating in their jurisdiction? At what stage, if any, does that responsibility shift to home country? Should these responsibilities change depending on the degree of information exchange or the degree or duration of stress? On the resolution front, we know that the benefits of a harmonized global regime would be substantial. By providing greater transparency to investors and depositors about the rules of the game in the event of distress, such a regime would likely reduce the likelihood of runs and financial panics while also allowing financial intermediation to occur on a global basis. However, it is proving challenging for some jurisdictions to provide clarity around how an orderly resolution would be implemented in practice. At the same time, this lack of clarity within jurisdictions is contributing to and exacerbated by the lack of a harmonized approach across different legal and regulatory regimes. Many questions must be answered: How would different creditor and counterparty claims be treated? Who would provide the bridge financing to facilitate the orderly liquidation? Would the home country regime ensure equal treatment of all banks’ claims around the world, regardless of jurisdiction or legal entity? Would there be clarity about this, ex ante?
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With different standards and core systems, financial transactions and data flows will face frictions, which will discourage competition, collaboration, and innovation. In the world of Big Tech, strengthening the value of our financial network is critical for a small economy like Thailand, and it needs to be done so that our network remains dynamic and efficient, fostering an ecosystem conducive to innovation and competition. The nature of financial services requires that we emphasize on strengthening the value-added of our financial network. Therefore, the transformation towards digital finance cannot be efforts of individual firms alone, and we need to focus on creating the digital finance ecosystem with active collaboration from a wide range of stakeholders. Ladies and gentlemen, Today I would like to take this opportunity to highlight four important principles that have underpinned our recent developments and will continue to guide our FinTech agenda. These are principles that will strengthen the value of our financial network and develop our digital finance ecosystem. The first principle is the open architecture framework. Important infrastructure must be made open, allowing both old and new market participants to easily connect as long as they meet the required security standards, appropriately share the cost of development and maintenance, and do not pose financial stability risks. The open architecture framework will level the playing field and eliminate barrier to entry for new players who often enter the market with innovations. The second principle is interoperability of systems.
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Euro area activity rebounded strongly in the second quarter of this year and looks set to also have been strong in the third quarter, supported by a marked recovery in domestic demand on the back of the success of vaccination campaigns and substantial monetary and fiscal policy support. While there is still uncertainty about how the pandemic will develop from here, we see the risks surrounding the euro area growth outlook as being broadly balanced over the medium term. The downside risks are related both to the pandemic and supply bottlenecks becoming more persistent than is currently expected. However, upside risks could also materialise from higher confidence effects and further spending by consumers. Inflation has increased markedly since the beginning of this year and we expect it to rise further this autumn. We continue to view this upswing as being largely driven by temporary factors, especially the strong recovery in oil prices from the sharp drop in spring 2020, the reversal of the temporary VAT reduction in Germany, and cost pressures arising from temporary shortages of materials and equipment. The impact of these factors should fade out of annual rates of price changes in the course of next year, dampening annual inflation. Our baseline scenario foresees inflation gradually increasing thereafter, but remaining below our 2% target over the medium term. Inflation could prove weaker than foreseen if a renewed tightening of pandemic-related restrictions were to affect economic activity.
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While there are certainly grounds for limiting exchange rate fluctuations to prevent temporary misalignments, targeting exchange rates is likely to be counterproductive in the long-run. Doing so requires policymakers to choose a level of the exchange rate to stabilize around. This can be very difficult to implement in practice, not least because the target would change over time as fundamentals evolve. Importantly, there is little that monetary policy can do to influence real exchange rates in the long run. Past attempts to give the exchange rate more weight in monetary policy decisions tended to generate more interest rate volatility, with little lasting effect on the real exchange rate. Here, I should note that emerging markets are generally better placed than in past cycles to withstand capital flow volatility. Key areas where progress has been made include: more flexible exchange rates, clearer monetary policy frameworks, larger foreign reserve cushions, generally moderate external debt levels, improved fiscal discipline, and better capitalized banking systems, supported by stronger supervisory and regulatory frameworks. Moreover, the general shift away from debt-based finance towards equity and foreign direct investment, which together now account for two-thirds of emerging market financing, is significant from a stability perspective. Nevertheless, I want to stress that there is an enormous amount of heterogeneity among emerging market economies. The underlying strengths and weaknesses in terms of institutions and economic capabilities of Thailand and Brazil, for example, are very different. The destinies of emerging markets are not tightly bounded to each other like General Cao Cao’s battleships.
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The current debate sometimes gives the impression that the Swedish economy has for some time been in a situation of almost overheating. But the fact is that we fairly recently, according to most empirical estimates, once again attained a level of resource utilisation that can be described as normal. Thus, although such estimates are uncertain, the Swedish economy appears to have been producing below, rather than above, its long-term capacity for several years following the financial crisis. 6 [20] Confidence in the inflation target unimportant or possible to maintain with a different policy? One thing that is rarely done, but I think is of utmost importance, is to spell out the practical consequences of this criticism. It is of course easy to agree that if the Riksbank had not needed to defend confidence in the inflation target, then monetary policy would not have needed to be so expansionary and the repo rate would perhaps not have needed to be negative. One may therefore draw the conclusion that those who say that monetary policy is wrong are arguing one of the following: Either that confidence in the inflation target is not so important, or at least less important than other things, or that the Riksbank should have been able to conduct a less expansionary policy while still being able to safeguard confidence in the inflation target.
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Competitiveness and market reform To put the favourable external sector performance on a firm footing, we must build on and further the improvements in competitiveness. In this connection, the markets for factors and goods and services must function in a way conducive to containing costs, margins and prices. Clearly, in the labour market, we need a stable employment-promoting regulatory framework which, at the same time, affords sufficient flexibility to attune working conditions to the circumstances of the business cycle. Indeed, greater moderation and flexibility can be seen in wage-setting in recent quarters, as can – and this is also important – a lesser degree of indexation. A more intensive use of the wage and non-wage flexibility mechanisms envisaged in the new regulatory framework would lend continuity to this ongoing improvement in competitiveness. But our problems of lack of flexibility and competition were not and are not only in the labour market. In the market for goods and services, the recently approved National Reform Plan includes a set of measures aimed at removing obstacles to competition, attaining productivity gains in various sectors and improving the functioning of various institutions. Private-sector deleveraging and lending The overindebtedness of households and firms is another of the major problems that arose in the last upturn in the Spanish economy. Private debt/GDP ratios have fallen from their peaks in 2010, but at a relatively slow pace. The main explanation for this sluggishness lies in the downturn in private-sector nominal income since the onset of the crisis.
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Ravi Menon: Monetary Authority of Singapore's Annual Report 2018/19 Remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at MAS' Annual Report 2018/19 Media Conference, Singapore, 27 June 2019. * * * Good morning. Welcome to MAS’ Annual Report media conference. GLOBAL ECONOMY The outlook for the global economy has deteriorated in recent months. In April, the IMF revised downwards its forecast for global GDP growth to 3.3%, from 3.7% last October. Last year at this time, at our annual report conference, I said that if the trade conflict between the US and China escalates into a trade war, all three engines of global growth – manufacturing, trade, and investment – will stall. We are now in the throes of a trade (and technology) war, and all three engines have indeed stalled. Global manufacturing is in a synchronised downturn. Last month, the global Purchasing Managers’ Index (PMI) for manufacturing fell to 49.8, its lowest level in more than six years. In the US, new orders are near their weakest levels in three years. In the Eurozone, the downturn in manufacturing is even more severe. In China, the manufacturing PMI is in negative territory. In Asia, manufacturing output is contracting in about half of the economies, including Singapore. Global trade volumes have declined for two quarters in a row – in Q4 2018 and Q1 2019. This consecutive two quarters of contraction in world trade is rare. The last time this occurred was ten years ago.
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There was a net increase of about 6,900 jobs in financial services and FinTech in 2018, driven mainly by the banking and insurance industries.2 Over the last three years (2016–18), we saw an average of 4,900 financial services and FinTech jobs created on a net basis per year. This is above our ITM target of 4,000 net jobs growth in financial services and FinTech. 9 / 11 BIS central bankers' speeches Hiring in the financial sector remains healthy so far this year and job growth is on track to meet the ITM target of 4,000. Sustaining this rate of job growth will not be easy in the face of technological change unless efforts are continually stepped up to upskill the workforce. As digitalisation and automation become more pervasive in the financial industry, jobs will be transformed. Some will inevitably be displaced. MAS, the financial industry, and our tripartite partners are taking this very seriously and undertaking a variety of measures to help prepare the financial sector workforce for a digital future. Last year, more than 20,000 individuals – or about one out of eight workers in the industry – went through MAS/IBF-supported upskilling programmes. Nineteen financial institutions have stepped forward and committed to re-skill close to 4,000 finance professionals and redeploy them in new or expanded roles over the next two years. Some 1,700 of them have already started this journey, and 800 have successfully transited into new roles. CONCLUSION Let me wrap up.
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However, unlike in Indonesia, the major creditor countries, particularly the United States, got together and agreed on an orderly roll-over of Korean banks’ short-term debt. This stabilised the situation and enabled the Korean economy to resume growth quickly. Hong Kong Hong Kong and Singapore were the two economies with the least structural problems or foreign borrowings, yet neither could escape the contagion. Hong Kong’s economy benefited from its linkages with China which was relatively unaffected by the regional currency turmoil. But the Hong Kong dollar’s $ peg to the $ caused Hong Kong’s real exchange rate to appreciate significantly when all the other regional currencies fell. The full adjustment to the changed external environment had to be borne internally, through nominal prices of assets and wages. The result was a sharp recession from which Hong Kong is just beginning to emerge. At the same time, the high $ led the markets to assess the risks of a devaluation. Interest rates rose, further squeezing the economy. After several speculative attacks on the currency and “double-play” on the currency and share markets, the HKMA intervened directly to buy shares in August 1998. The speculative attacks were successfully beaten off, but the Hong Kong Government remains extremely concerned over the dangers posed by speculators, and particularly hedge funds, to their economic stability. Singapore Singapore was more directly affected by the crisis than Hong Kong because of our close economic linkages to Thailand, Malaysia and Indonesia. Our growth slowed down drastically, turning negative for several quarters.
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But we could be sinning by omission, by passiveness. Contrary to a longstanding approach whereby central backs only dialogued with financial specialists, we must now direct our communication at all economic agents, Page 7 sur 10 including the general public. A better-informed society across categories allows for a better understanding of monetary objectives, and hence a greater efficiency of monetary policy. Tailored and active communication is now a centrepiece of central banks’ actions. In 2021, the “Banque de France listens” initiative included 17 events, with an audience of 300,000. This year, the Banque de France organised its annual National Monetary Policy Forum, reaching an on-line audience of 500,000. It adds up to sustained efforts on financial education: in 2021, almost 40,000 young people benefitted from our actions, and we are stepping up again in 2022. III. Does the international dimension of monetary trust still exist? Whether or not the international dimension of monetary trust can still inspire us is a key question for the IMF, which has sought to embody it since 1944. It has become a painful question, with the ongoing destructive Russian war in Ukraine adding to the other illnesses of multilateralism in the last six years, from Brexit to populism and (poorly-disguised) protectionism. Let us acknowledge it frankly: the G20 is today not in good shape, whereas it had been key to great progress over the last twenty years. And sanctions against Russia divide it.
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The interest rate regains its role as a policy instrument After the drop in oil prices and the last devaluation of the krone in 1986, the interest rate had to be set to support our currency. The alternative was further devaluations, high inflation and economic instability. With a binding commitment to a fixed exchange rate policy from early summer 1986, interest rate setting was largely shifted to Norges Bank. 30 High inflation is associated with substantial real economic costs. This came into evidence when we managed to bring inflation under control again in Norway at the end of the 1980s. The fixed exchange rate policy was crucial in this context (see Chart 3). 30 Hermod Skånland dates this to December 1986 (see Skånland (2005)): “Tilbakeblikk på 20 år med ny sentralbanklov” [“A 20 year retrospective on the new Norges Bank Act”], Penger og Kreditt 3/05 (Norwegian only). In my opinion, this shift occurred earlier. 8 BIS Review 154/2010 Perhaps we can say that the pendulum had swung back from the view that prevailed in the early years after the war. At that time, it was not Norges Bank, but on the contrary fiscal policy and the detailed regulatory system that had failed. Norges Bank had to be given a greater role again in promoting a well functioning economy. Later, it would transpire that having brought inflation under control and a series of farreaching structural reforms in the 1980s and early 1990s, would pave the way for two golden decades in the Norwegian economy.
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BIS central bankers’ speeches 3 Following our December 2008 meeting, the FOMC announced that it had cut the target range for the fed funds rate to 0-to-1/4 of 1 percent, and being thus “zero bound”, we floated the idea of purchasing longer-term Treasuries in order to provide further monetary accommodation (when we buy Treasuries or MBS and agency debt, we put money into the financial system, substituting for further interest rate cuts). On March 18, 2009, we announced additional purchases of up to $ billion of agency MBS and up to $ billion of agency debt, plus purchases of up to $ billion of longer-term Treasury securities over six months. That day, our balance sheet was marked at $ trillion.
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When we probed survey respondents about their understanding of changes to “prices in general” (the Michigan Survey question), we found that a significant fraction believed we were inquiring about the prices they themselves recently paid – often prices that had increased or decreased markedly, such as those for food or gasoline. This tendency to think more about prominent price changes in one’s own experience is less common among respondents with higher financial literacy. By contrast, when we asked about expectations for the “rate of inflation,” respondents tended to think less about a few salient price changes specific to their own experiences and more about price changes across a broader set of items or about changes in the cost of living – a result that aligns more with economists’ definition of inflation as a sustained increase in the overall price level. Asking about the rate of inflation directly therefore produces answers more consistent with the concept of forward inflation expectations of interest to central banks. Chart 4 plots the time series of median responses from our experimental survey to a “prices in general” question and a rate of inflation question. One can see that the median expectation for the rate of inflation question is less variable. We also find that the dispersion of responses is significantly larger with the “prices in general” question.
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Chart 3 shows some detail on recent behavior of the forecasts for core PCE inflation from the SPF and dispersion in long-run CPI inflation forecasts. The first panel shows the average of point forecasts since 2007 for the current year and year-ahead core PCE inflation rate. As one would expect, the current year forecast is more variable, and for the most part the yearahead forecast remains above the current year forecast after the financial crisis, consistent with the pull of anchored inflation expectations. However, both sets of forecasts are still below what some have called, based on the Summary of Economic Projections, the mandate consistent range of Federal Open Market Committee participants. 2 BIS central bankers’ speeches The second panel of Chart 3 shows a measure of uncertainty for these forecasts. Here we can see that uncertainty increased as the financial crisis took hold but has returned to 2007 levels recently. The third panel shows that disagreement across forecasters also increased with the financial crisis and has not returned to pre-crisis levels. Much of this disagreement appears to be related to differing views on the strength of standard Phillips curve dynamics versus other approaches to inflation dynamics. The final panel shows the disagreement in 10-year average CPI forecasts over the last 20 years. As you are aware, one of the great successes of the Federal Reserve in the 1980s and 1990s was a reduction in long-run inflation expectations.
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Interest rate developments should at the same time be able to provide a reasonable balance between the path for inflation and the path for overall capacity utilisation in the economy. In the assessment, potential effects of asset prices, such as property prices, equity prices and the krone exchange rate, on stability in output, employment and inflation are also taken into account. The following additional criteria are also useful: 3. The interest rate should normally be altered gradually and in line with the Bank’s previous response pattern. 4. Interest rate developments should result in acceptable developments in inflation and output also under alternative assumptions concerning the economic situation and the functioning of the economy. It should be possible to explain any substantial and systematic deviations from simple, robust monetary policy rules. The loss function Analyses in the June Monetary Policy Report illustrate what the different criteria signify. The interest rate forecast is the interest rate path that satisfies the criteria above to the farthest possible extent. Expressed mathematically, and obviously not exhaustively, the assessment can be represented by a “loss function”: The first term in the equation represents criterion 1, where the loss is higher the more actual inflation πt deviates from the inflation target π*. The second term represents criterion 2 and shows that the loss increases with the degree of fluctuation in the level of activity, measured as the gap between actual output yt and the normal level of output yt*.
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The floor system makes it easy to ensure that money market rates track key rate decisions. However, the system has proved to have undesirable side-effects. It makes banks passive. The market for short-term unsecured liquidity becomes very limited or disappears. The pricing mechanism – or the rates set in the money market – contains information that will not emerge if a public actor such as the central bank takes the market’s place. Consequently, we now need to set clearer boundaries between the central bank’s role as lender of last resort and settlement bank and the role of the market. In order to stimulate money market activity and reduce demand for central bank reserves, it should be more expensive for banks to hold substantial deposits in the central bank. We are therefore working on changes in our lending and deposit facilities. There are also other weaknesses in Norway’s money market. When setting household and corporate interest rates, banks not only take into account movements in the key rate, but also give weight to the money market rate, i.e. the Norwegian InterBank Offered Rate (NIBOR). In our opinion, there are shortcomings in the way this rate is set. The basis for setting the rate can be made more transparent for the benefit of other participants and it is calculated using information from only six large participants. This group does not include Norway’s largest saving banks or any international banks. We will take the initiative for improving the structure for setting NIBOR.
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However, the fallout from the crisis has brought to the fore the need to further enhance the regulatory framework by adopting and fortifying supervisory and regulatory practices which ensure prompt and effective policy responses to developments in the financial system. Ladies and Gentlemen, the introduction of credit reference services in Zambia was necessitated by the poor credit culture, which was identified as one of the weaknesses in the financial sector, under the FSDP. Bank of Zambia licensed the first ever credit reference bureau, in 2006, following the introduction of the Credit Reference Services (Licensing) Guidelines and Credit Data (Privacy Code) 2006. The substantive operations of the CRB commenced in the fourth quarter of 2008 after a Directive was issued by the Bank of Zambia on 10 December 2008 mandating all credit providers to use the services of a credit reference agency before issuing any loan and to provide credit data to a credit reference agency. However in spite of these efforts, the credit reference system still faces problems, largely relating to the coverage of sectors, as the current legislation is limited to the financial sector. In view of this, the Bank of Zambia is currently developing a comprehensive credit reference law that, amongst other things, will have jurisdiction over all credit providers and data sources and will provide for the treatment of credit data.
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Distinguished delegates, previously, supervision of cross-border banks placed significant reliance on the ultimate home country supervisor to ensure the soundness of the overall institution. This implied that other regulatory authorities could only provide input to the supervisory process in the home country. Hence, it was considered appropriate for global firms to gain the benefits of global approaches to the management of their business and had significant flexibility in the use of legal entities to book transactions and to manage liquidity globally. Therefore, the global inter-connectedness made it very difficult for individual national entities to survive group failure even though they are subsidiaries, given the huge importance of confidence factors in funding markets. The challenge is how to develop regulatory and supervisory approaches which will minimize the likelihood of cross-border failures and to reduce the severity of that impact in the event of a failure materializing. It would appear that an appropriate response would have to combine both greater coordination among supervisors and actions aimed at specifically addressing national concerns. On its part, the Bank of Zambia is currently settling Memoranda of Understanding with various central banks for effective supervision of entities with cross-border operations. This is also necessary for enhancing cooperation among the various regulatory authorities in the financial system in Zambia such as the Pensions and Insurance Authority and the Securities and Exchange Commission. Chairperson, in the wake of the financial crisis, there has been renewed interest in macroprudential supervision.
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Typically, potential output is divided into a contribution from the stock of capital – how much physical capacity there is in the economy – and something called “total factor productivity”, or TFP. The stock of capital is much bigger than the flow of new investment that adds to it, and it therefore evolves relatively slowly. And, while TFP is a catch-all for all sorts of factors, many associate it with relatively slow-moving things like the state of technological knowledge or average educational attainment. On this basis it’s hard to see how the overall rate of potential output growth – and, a fortiori, our estimates of that trend – could change much over any short period of time. Indeed, I think we can go further than this – not only can the view that changes in supply are gradual make sense in principle, I think it’s usually true empirically as well. Over shorter-run cyclical horizons, most movements in economic growth appear driven by demand, not supply. That’s why inflation tends to be higher in upturns than downturns. But that doesn’t mean such short-term hits to productivity are inconceivable. We saw a sharp step down in productivity growth after the financial crisis. And I think there are things involved in Brexit that, once one digs below the macro-economic surface, could potentially do the same. I’m thinking in particular of allocative effects.
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The predicted values are from a regression of daily changes in UK 3-year nominal spot interest rates on near-term surprises in economic data, from the UK and a range of other countries. 2 All speeches are available online at www.bankofengland.co.uk/speeches 2 That uncertainty about wage formation may have been one thing that tempered the market’s reaction to stronger-than-expected economic data. But I suspect there was something else at work as well – and that’s Brexit. There’s been a persistent strain of opinion that EU withdrawal is something that necessarily means lower interest rates, or at least that it’s a reason to avoid putting them up. If so, then I think the belief has been overdone. It’s not that the opposite is true. I’m certainly not going to argue here that interest rates will inevitably rise as Brexit proceeds. Apart from anything else, it isn’t the only show in town. Economic shocks come along all the time, in both directions. For example, one of the things that has sustained the UK economy over the past year or so, and to that extent contributed to the recent decision on interest rates, is the strength of the global recovery. On a UK-weighted basis, the world economy looks to have grown by almost 3% in the year to Q3, faster than for many years. This has nothing to do with Brexit and, if global growth were to falter, that too would have implications for the UK.
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Cross-jurisdictional payments enjoy growing interest all over the world, not only because of their potential as a test bed for new technologies, but also due to the growing relevance of e-commerce, international trade and migration.5 Indeed, according to the CPMI Chair, Sir Jon Cunliffe, global financial transfers amounted to well over $ trillion in 2019 and are expected to hit $ trillion by 2022.6 Other aspects, such as addressing front-end fragmentation in the common market, swiftly achieving a greater scale and securing stronger European governance, also explain why this topic is becoming an increasing concern for the euro area. Given their differences both in scope and goals I think it is best, for the sake of clarity, if I walk you through these various projects one by one. Starting with the latter case, I would like to mention the recent decision by 16 major European banks in various Member States to launch the European Payment Initiative or EPI. This project builds on the success of the Single Euro Payments Area -SEPA- which laid the foundations for a truly cohesive cashless euro payments space and has made an essential contribution to the efficiency and competitiveness of the European economy. However, despite all the efforts, SEPA fell short in delivering full integration at the point of sale, thus leaving the door open for alternative proposals such as the EPI.
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Rather, it encourages combining these new technologies with more traditional measures and advocates establishing a sound shared vision as a first step in the laying of the necessary foundations.10 This implies that to really achieve a profound transformation, an ambitious range of actions is required, beyond the mere operational or technical aspects, like the development of international guidelines, improvement of surveillance practices or the removal of obstacles to the exchange of data, just to name a few. Nevertheless, the importance of digital technology in this context should not be underplayed, even though its full potential may only be realised in the long run. Indeed, it is worth mentioning that a number of the enhancements foreseen as part of this action plan 7 “Enhancing Cross-border Payments: Stage 1 report to the G20”, Financial Stability Board, April 2020. [https://www.fsb.org/wp-content/uploads/P090420-1.pdf] 8 “Enhancing cross-border payments: building blocks of a global roadmap: Stage 2 report to the G20”, Committee on Payments and Market Infrastructures, CPMI Papers, No 193, July 2020. [https://www.bis.org/cpmi/publ/d193.pdf] 9 See footnote 8. 10 Indeed, one such measure is devoted to the potential issuance of a CBDC/stablecoins. This underlines my key message, i.e. that emerging technologies offer us an opportunity to address old problems in novel and, eventually, more effective ways. 5 are ultimately designed to help knock down some of the existing barriers to the emergence of new cross-border payment infrastructures and arrangements. Conclusion I would like to conclude by sharing some final thoughts with you.
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The weak domestic demand has created spare capacities in the economy, and has led to weak pressures for higher production costs and wages. Additionally, stable prices and exchange rates in global markets resulted in contained BIS central bankers’ speeches 1 pressures from imported inflation. Developments in the real economy, especially the weak domestic demand and low monetary expansion, will condition low inflation rates to continue even in the period ahead. Inflation expectations remain anchored and in line with price stability. During the second quarter, economic growth was driven by public sector demand, whereas other components were weak. Though higher than in the first quarter, consumer spending did not manage to provide significant contribution to economic growth. The performance of this domestic demand component continues to be affected by high uncertainties and limited financing resources. Against the low consumer demand, presence of spare capacities, and relatively tight lending standards, private investments remained low. Developments in fiscal indicators during the first nine months of the year point to a stimulating fiscal policy, especially in the first half of the year. Stimulating features were present both in terms of expenditure and revenues. During this period, budget expenditure increased 8.3% from a year earlier, driven by both current and capital expenditure. At the same time, revenues marked a 4% annual decrease, reflecting the decline in most of its constituent items.
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Financial union is essential in a single currency area where cross-border capital flows can lead to credit booms and other imbalances – and where the negative effects of a bust can spread rapidly to other members. One essential part of financial union is a single banking supervisor. As you know, the European Commission has recently proposed that the new supervisor should be based at the ECB. This is important to ensure consistency across the euro area and to prevent regulatory capture. Day-to-day tasks, however, would remain with national supervisors who have the competence and resources to implement them. But financial union does not have to imply the pooling of deposit guarantee schemes, an issue that I know is of concern in this country. Organising and funding deposit guarantee schemes can remain a national responsibility, with comparable effectiveness. In the longer term, all four pillars are equally important. They are the bedrock for the enormous potential of the single currency for Europe’s citizens. Completing economic and monetary union would give citizens greater security against any future crisis. It would create the foundations for sustainable growth and employment. For all citizens of the euro area, it is therefore essential that Europe’s leaders stay on course. Thank you for your attention. BIS central bankers’ speeches 5
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Funding of the restructuring firm. The reactions of rating agencies and of customers either influenced by rating agency actions or subject to bylaws or guidelines. Legal authority and enforceability across jurisdictions. The appropriate legal authorization not only needs to exist in each home country jurisdiction, but we also need proposed legal mechanisms to ensure that: – Supervisors in other countries will not treat the triggering of bail-in as an insolvency event; – Supervisors in other countries will coordinate with the home country in exercising any supervisory trigger in their jurisdiction; and – The company’s debt conversion will be honored in all jurisdictions (through choice of law or other legal foundation). I’ll conclude with the timing of the trigger. A key question is when such a mechanism has the greatest chance of success. In my personal view, it seems unlikely that the proverbial “one minute to midnight” is the right moment for action – by then most firms would face a severe shortage of liquidity and serious constraints in the ability to undertake new business. Timing that is too early brings with it a host of repercussions and risks, of course. If I interpret a bail-in mechanism against the three-part supervisory program for troubled firms that I described at the beginning, conversion of debt to equity stakes is a mechanism to replenish capital, a critical element, but just one of the three key elements.
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Conclusion I’ll conclude with this: If the history of central banking teaches us one thing, it’s that “necessity is the mother of invention.” Severe crises demand innovative and decisive responses, and the Federal Reserve is striving to deliver just that. These are unprecedented times, and the pandemic presents truly unique challenges. However, the actions we have undertaken harken back to why the Federal Reserve was created in the first place. That is, to do what only a central bank can do: to keep credit flowing when fear and uncertainty take hold, and in that way to foster a strong economy with maximum employment and stable prices.1234567 1 More information about this financial crisis can be found in Donald P. Morgan and James Narron, The Final Crisis Chronicle: The Panic of 1907 and the Birth of the Fed, Federal Reserve Bank of New York Liberty Street Economics, November 18, 2016. 2 For a more detailed overview of the Federal Reserve’s responses to the pandemic-related disruptions in financial markets, see Michael Fleming, Asani Sarkar, and Peter Van Tassel, The COVID-19 Pandemic and the Fed’s Response, Federal Reserve Bank of New York Liberty Street Economics, April 15, 2020. 3 The impact of these strains on liquidity in the Treasury market is discussed in Michael Fleming and Francisco Ruela, Treasury Market Liquidity during the COVID-19 Crisis, Federal Reserve Bank of New York Liberty Street Economics, April 17, 2020.
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In this context, there are several key issues that Malaysia needs to address to face a new world, a world in which trend growth will be lower, capital will be less readily available and at higher cost, competition more intense, short-term capital flows remain volatile and protectionism could rear its ugly head again. Malaysia also has to position itself to seize the opportunities to fully benefit from the growing economic integration and dynamism in Asia. Yet at the same time, Malaysia must be ready to face more intense competition for foreign direct investments (FDIs) and markets from key Asian neighbours. Aftermath of the crisis – emergence of a new world After one of the worst crises in modern history, the global economy – led by the emerging economies, especially China – is now en route to recovery but this revival is yet entrenched and risks remain on its sustainability. The global economy is still fundamentally weak, with the recovery uneven and growth remains highly dependent on policy support of very large fiscal stimulus and aggressive monetary easing around the world. The crisis-affected advanced economies continue to face rising unemployment, weak financial systems, ongoing de-leveraging of households and financial institutions with weak balance sheet. Although financial markets have begun to stabilise following extensive policy support, the progress of financial sector resolution and reforms in the advanced economies is far from complete.
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Øystein Olsen: Management of the Government Pension Fund Global Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting, Oslo, 3 May 2021. * * * Please note that the text below may differ from the actual address. I would like to thank the Committee for the invitation to speak on the Bank’s management of the Government Pension Fund Global (GPFG). Norges Bank manages the GPFG with the objective of achieving the highest possible return over time within the limits of the investment mandate defined by the Ministry of Finance. The GPFG is to be managed within an adequate control and risk management framework and in a responsible and efficient manner with a high degree of transparency. The GPFG is managed to track the benchmark index fairly closely, ie the return largely tracks the return on the benchmark index. The benchmark index is defined by the Ministry of Finance and endorsed by the Storting. However, even though Norges Bank closely tracks the GPFG’s benchmark index, many large and small choices have to be made every day. These choices are based on a clear mandate from the authorities and a well thought-out investment strategy. The year 2020 was a special year for us all, including the GPFG. As for many others, working conditions during the Covid-19 pandemic have been demanding.
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A robust Shariah governance framework is another important element to assist the takaful industry in achieving full Shariah compliance in the development and application of their products and services. Given that Islamic finance has its roots in Shariah, it is an overarching requirement for an Islamic financial institution to ensure that its objectives and operations are in accordance with Shariah principles. Recent enhancements to the Shariah governance framework are aimed to assist Islamic financial institutions in meeting this overarching requirement, through further strengthening of the existing Shariah governance process, decision making, accountability and independence. Reinforcements of the Shariah compliance functions include introduction of internal Shariah review and audit requirements, supported by an appropriate risk management process and research capability. The new framework is envisaged to contribute towards evolving a more robust and sound Shariah 2 BIS central bankers’ speeches governance framework within Islamic financial institutions, with the establishments of end-toend Shariah compliant control mechanism that promotes greater Shariah observance throughout an organisation. Effective implementation of the new Shariah governance framework will further promote stakeholders’ confidence and enhance the integrity of the Islamic financial industry, and for the takaful industry, by reducing the risk of Shariah noncompliance, takaful products would be at a more competitive edge in comparison with conventional insurance products, as discerning customers would opt for takaful as their ethical financial solutions. In respond to the ever changing business environment, it is imperative for takaful operators to enhance their institutional capabilities and operational efficiency with the aim to strengthen their competitive position.
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The firm has access to a pool of liquidity providers, and will compare pre-trade price quotes, perhaps making use of proprietary TCA tools from those providing liquidity. It might execute some trades electronically. But it has bigger costs to worry about than FX trade execution alone – including the broader bundle of services it needs across asset classes. And it is conscious that larger FX trades involve material risk, including as a result of market dynamics it doesn’t necessarily understand. So it will also work to maintain broader relationships with liquidity providers – and will tend to revert to voice trading with a trusted counterparty for larger orders, or at times of heightened volatility. It may not always have complete clarity on the basis on which such trades are executed (internalised vs externally traded, principal vs agent) or rejected. And it recognises that, in seeking quotes, it may be leaking information about its position. But broadly speaking it is content with the service it receives on FX, and feels it has bigger fish to fry elsewhere. In many ways, it is hard to label this case ‘bad’. The firm is trying to inform itself about market trends. But it recognises that FX is a professional market, whose complexities it needs assistance to navigate. It knows it may not always be getting the finest price, or the perfect service – but feels that the cost/benefit case for investing in a lot of extra data or understanding is not in its favour.
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I must stress, however, that the most important efforts to implement the Core Principles continues to be the job of the individual countries. Without the support and backing of national authorities to follow through with the implementation of these principles, our broader efforts simply cannot be effective. In this connection, the Basel Committee has long recognized the need for effective training and seminars for participants in the global bank supervision community. Over the years it has sponsored numerous programs which have been beneficial in allowing supervisors from different countries to share experiences and exchange ideas for improved practices. Building on its longstanding commitment to these outreach efforts, the Basel Committee, together with the Bank for International Settlements, jointly established the Financial Stability Institute in 1998. The Institute currently conducts leadership training targeted to supervisors in emerging market countries, facilitates technical assistance in individual countries, and provides training on a regional basis. The Basel Committee also plays a key role in the Financial Stability Forum that was established by the G7 Finance Ministers and Governors in early 1999. Through the Forum, the Basel Committee is able to share its experience in implementing the Core Principles with other organizations that have embarked on similar initiatives, such as IOSCO, the International Organization of Securities Commissions. More broadly, the Financial Stability Forum is coordinating an effort to improve awareness of and accessibility to training for regulators and supervisors worldwide.
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Of course, to add value over and above the minimum capital standards, improved disclosure must go beyond the simple reporting of minimum capital ratios. When banks disclose timely and accurate information about their capital structure and risk exposures, market participants can better evaluate risks and act accordingly. The disclosure of timely and accurate information, in turn, is an incentive for banks to ensure that the market perceives them not only as effectively managing their risks, but also as being adequately capitalized. Market reactions to the public disclosures of banks can also play an important signaling role for supervisors in assessing the adequacy of a bank’s capital. A further reason to encourage disclosure beyond the reporting of regulatory capital ratios is that these ratios have become the primary focal point for investors and industry analysts. The result has been that bank managements have had an incentive to focus solely on improvements in these ratios, even when the ratios are not fully reflective of risks. More comprehensive disclosure could lessen this incentive. With these considerations in mind, the Basel Committee is seeking to design an expanded set of disclosure guidelines, taking into account the proprietary information needs of banks. I believe that fuller disclosure for all banks can take us a long way towards effective market discipline. We also encourage banks to include in their fuller disclosures information specific to their risk profile. The timeliness and the quality of disclosure are important. The frequency of disclosure should reflect the nature of the risks involved.
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Luis M Linde: The recovery of the Spanish economy Speech by Mr Luis M Linde, Governor of the Bank of Spain, at the XVI Congreso Nacional de la Empresa Familiar, Instituto de la Empresa Familiar, Madrid, 28 October 2013. * * * Let me begin by thanking you for inviting me to take part in this Congress. It is an important meeting and offers me the opportunity to discuss, firstly, the recently released data suggesting an improvement in economic activity across the European Union, and also in Spain. And, secondly, to address the strengthening of the Spanish banking sector and its role in the start of the recovery we expect in 2014. In the euro area, the indicators signal that activity is beginning to pick up, and most analysts foresee that this recovery can take root. As a member of the European Central Bank’s Governing Council I should, before continuing with my address, highlight the contribution of the monetary policy applied by the ECB to containing the crisis. In facing up to the crisis, the European Central Bank has used its full range of measures, providing abundant liquidity at increasingly lower prices. The easing of monetary conditions has led to a substantial reduction in official interest rates, to their current level of 0.5%, almost 4 pp down on that five years ago.
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This was all done in collaboration with the European Commission, the ECB, the IMF and the European Banking Authority, in the presence of independent consultants and auditors, and with the participation of the Banco de España supervisory and regulatory teams, which was technically very important for the performance of the exercise. The recapitalisation of our banks has been carried out through private access to markets; the injection of capital financed via the financial assistance programme agreed with the European authorities; the conversion of hybrid instruments into capital instruments; and the provision of funds by the FROB (Fund for the Orderly Restructuring of the Banking Sector) and the Deposit Guarantee Fund. From May 2009 to last September, the public assistance afforded to financial institutions to reconstitute their capital amounted to a somewhat over € billion (6% of our 2012 GDP), close to € billion of which were under the Financial Assistance Programme approved with the European authorities in July 2012. The essential aim of these recapitalisation operations using public funds has been none other than to preserve the deposits in the institutions in question (as is widely known, these are the only bank liabilities not to have undergone any loss throughout the process), providing for business continuity by these institutions’ own means or by their absorption by others. This is a crucial point I wish to highlight, as it is not always well-understood.
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SPEECH DATE: 31 August 2022 SPEAKER: Deputy Governor Anna Breman VENUE: Sveriges Riksbank SVERIGES RIKSBANK SE-103 37 Stockholm (Brunkebergstorg 11) Tel +46 8 787 00 00 Fax +46 8 21 05 31 [email protected] www.riksbank.se From 500 per cent to −0.5 per cent to − what is next? * On the afternoon of 16 September 1992, my teacher Conny came into our class and exclaimed: “The Riksbank has raised its policy rate to 500 per cent”. I said spontaneously “no” – I did not believe him. I studied the science programme at upper secondary school and thought I was good at maths, and an interest rate of 500% was something no one could pay. I started to contradict him. But the teacher insisted he was right - and so he was. The Riksbank had raised its policy rate to 500 per cent in an attempt to defend the fixed exchange rate. This sparked an interest that led me to study Economics at university a few years later. The so-called 1990s crisis fundamentally changed Sweden. It led to a series of reforms that we are still living with today: the inflation target, the fiscal policy framework and the Industrial Agreement. At present, the economic policy framework, and not least the inflation target, is being put to the test.
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In addition, the tax rules meant that the impact of interest expenses was reduced, which would change with the tax reform in 1990-91. Moreover, there was a strong domestic inflation trend with price and wage spirals, which had long been something of a structural problem in the Swedish economy. The combination of high inflation, high inflation expectations and the design of the tax system meant that the interest rate after tax and inflation was negative for many investors and households, which of course made it tempting to take out a loan. Stabilisation policy was not sufficiently strict to dampen lending, and so the economy was heading toward overheating in the late 1980s. In 1990–91, there was a substantial reversal in the real interest rate, for several reasons. German reunification pushed international interest rates upwards, foreign exchange market unrest forced the Riksbank and central banks in other ERM countries to raise their policy rates to defend their respective exchange rates, and 5 More detailed accounts of the 1990s crisis and its background can be found in, for example, the Economic Commission (1993) and Wetterberg (2009). 3 [16] the tax reform in 1990–91 made it more expensive to borrow. From having been negative, the real interest rate rose in a short time to around 5 per cent, in what has been called the ‘real interest rate shock’. This reversal shook up the financial system, property prices fell and a combined financial, banking and property crisis broke out.
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This involves the favourable vote of half of its members with voting rights plus one (11), where abstentions count as a “no”. In the event of a tie, the President has the casting vote. Monetary policy decisions are adopted by simple majority.4 Adoption of decisions by the written procedure at the Governing Council The Governing Council adopts a large number of decisions on a daily basis using the written procedure (Art. 4(7) of the ECB's Rules of Procedure). More than 1,200 decisions were adopted using the written procedure in 2019; less than 1% of them had to be submitted to a physical meeting to facilitate discussion, after comments had been received from Council members. 1.4 The General Council of the ECB The General Council of the ECB is composed of the President and the Vice-President of the ECB and the governors of the NCBs of all 27 EU Member States. It meets every three months and decisions are adopted by simple majority, unless provided otherwise by the Statute of the ESCB. The President of the ECB must keep the General Council informed of the decisions adopted by the Governing Council. Under the Statute of the ESCB, the 3 As from 1 January 2015, when Lithuania joined the euro area and the number of 18 countries was exceeded, a system of rotating voting rights, agreed by the EU Council in 2003, came into operation in order to ensure that the ECB would be able to continue to take decisions efficiently and swiftly.
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Institutional transparency is also a basic principle for the proper functioning of independent public authorities, given that confidence in and the credibility of these institutions are the basis for their effectiveness. In this respect, the Banco de España has a Transparency Portal16 where it publishes institutional and planning information (functions, legal framework, organisational structure, plans and schedules, codes of conduct, the calendars of the Governor and the Deputy Governor, and personal data processing records), information of legal importance (documents with legal effects; documents subject to public consultation; reports, technical applications and guidelines; documents from international organisations), and miscellaneous economic information (contracts, agreements, management delegation agreements and concession contracts, cultural and social work, budget management, annual accounts, salaries of governing body members and senior directors, conflicts of interest of public employees, fixed assets and official vehicles, historical objects and art collection). The Banco de España also has a long-standing tradition of publishing statistics and analysis and research reports, including the Annual Report, the Financial Stability Report, the Economic Bulletin and the Statistical Bulletin. In addition to the information provided on our website, the Banco de España runs specific web portals such as the Bank Customer Portal; the Education Portal and Finance for All (on financial literacy); and portals encouraging the use of e-administration, such as the Virtual Office. Looking ahead, we have set ourselves the objective of improving the quality of our statistics and publications, along with their clarity and accessibility, bringing them within reach of the broadest possible audience.
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Jean-Claude Trichet: Interview with Le Monde Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in Le Monde, France, conducted by Mr Frédéric Lemaître, Mr Stéphane Lauer and Mrs Marie de Vergès, on 31 May 2010. * * * Is the euro in danger? The euro is a very credible currency which keeps its value. Since its introduction 11½ years ago, average annual inflation has been below but close to 2%, in line with our definition of price stability. The euro’s capacity to maintain its value is absolutely essential for the confidence of investors both inside and outside the euro area. So what is the problem? The issue is that of financial stability within the euro area on account of bad fiscal policy in certain countries, in particular Greece. It is imperative that this be corrected. The responsibilities of each of the countries concerned are the primary cause. But there is also a true collegial responsibility. Close multilateral surveillance, which is fundamental in the spirit and the letter of the Stability and Growth Pact, has been terribly neglected. This is not particularly surprising, given that in 2004 and 2005 the Pact was unfortunately subject to severe criticism, including from large countries such as Germany, France and Italy. They set a very bad example, both in terms of managing and being accountable for their own fiscal policy, and as members of the Eurogroup and thus essential figures in the surveillance of the fiscal situation in each country.
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As you know, I never comment on what my colleagues have said. On the basis of our decision, which was taken by the Governing Council with an overwhelming majority, I would like to emphasise the following points. First, we are totally independent of governments and pressure groups of any kind. It is not by chance that we have guaranteed price stability, but by taking decisions which have pleased neither governments nor lobby groups. Second, our mandate is price stability. From 1999 to the present we have delivered average annual inflation of 1.98% for 330 million European citizens. We are unswervingly committed to price stability. Third, we re-absorb all of the liquidity that is injected through our interventions. We are not printing money and there is no change to monetary policy. Fourth, the aim of our interventions is to enable certain markets to function more normally, in order to ensure the correct transmission of our monetary policy, which is unchanged. Fifth, we have taken note of the decision by governments not only to strictly comply with their undertakings to reduce deficits, but also, on the part of a number of them, to step up their budgetary consolidation efforts. For us, this is absolutely of the essence. BIS Review 76/2010 3 Does the situation of the Spanish banks concern you? I have no particular comments at this stage. On the international level, prudential supervision by the Banco de España has always been regarded as rigorous, particularly with its concept of dynamic provisioning.
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Many observers fear that the forthcoming ruling by Germany’s Federal Constitutional Court will impose strict limits on OMTs, and that this could trigger turbulence. How big is that risk? I don’t know how the judges in Karlsruhe will rule either, and I have great respect for the court – from one independent institution to another. I think, though, that the views of market participants in New York, Frankfurt and Hong Kong are quite clear: the OMTs are fine the way they are, without any limitations being imposed. Is it really realistic to assume that the mere announcement of OMTs will be sufficient in the longer term? Jens Weidmann, President of the Deutsche Bundesbank, has said that one lesson from the crisis is the fact that announcements will be tested. BIS central bankers’ speeches 5 The principle of deterrence also applied in the cold war. But what matters is that we are completely ready to act. When the necessary conditions have been met, we will take a monetary policy decision. We’ve had extremely low interest rates worldwide for a long period of time, combined with unprecedented non-standard measures. The Bank for International Settlements (BIS) is warning that, this time, the exit will be even more difficult than in the past. Is it actually possible to exit this situation without turbulence? Otmar Issing said that an exit was a question not of technical possibilities, but of political will. This exit will certainly be more complex on account of the non-standard instruments.
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Would that be appropriate, and would it be feasible from a political perspective? 6 BIS central bankers’ speeches I don’t think the answer here is black and white. On the one hand, every central bank has a national mandate. And I don’t think that will change in the foreseeable future. On the other hand, there is already some coordination – at the BIS, at the G7 and at the G20. The latest G20 summit has just ended. Little came of it. Are you disappointed? The summit was clearly overshadowed by events in Syria. I think the fact that the issue of tax avoidance and tax structuring is now being raised at G20 level is a positive development. There was some limited progress in terms of financial regulation. However, I was indeed disappointed by the decisions made in the area of fiscal policy, as the United States and Japan in particular – especially the latter – have no credible medium-term consolidation plans. These are required as a matter of great urgency. You have talked about the reform of the global financial system. Almost exactly five years after Lehman Brothers, where are we exactly? I do think that the global financial system has become more robust. However, it’s quite clear that we are not yet where we should be. Progress is urgently needed on the “too big to fail” issue, which primarily concerns the complexity of these institutions. The second issue is shadow banking. It is true that we have tightened up the regulation of banks.
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And the best prepared people are those who know what they want to achieve, in other words people who have a vision of a certain state in future they are pursuing. Lack of vision poses a risk of discrepancies in understanding the goal, pursuit of inconsistent goals and in consequence leads to wavering and wasting time and money. Lack of vision almost certainly leads to failure, as today everything happens very fast. And sharing one vision does make a difference. First of all, we are all moving in the same direction. And we are likely to accelerate the pace. A clearly defined vision allows – after reviewing what we have now – choose suitable methods and means to achieve a desired state, that is to set indirect goals. The vision of John Global may seem a distant future, but in fact it can come true faster than it is currently believed. The majority of examples from John Global’s life in 2026 are already a reality, not a figment of my imagination. That is how life is in Asia now, and with increasing frequency in Europe too. I do not know your morning routine, but in my case it is not significantly different from John Global’s. True, while driving to work I still scan papers (I completed a course in speed-reading). When I am at work, though, I start my day with reading an e-newspaper I designed myself by using the features offered by Web 2.0.
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As you can imagine, on the ECB Governing Council we closely track labour negotiations in several countries, as the outcomes can directly affect the prospects for price stability. 2 BIS Review 59/2007 Immigration In several euro zone economies, and notably in Spain, it is immigration that has had the biggest economic impact. Immigration to Europe has surged and taken several forms. Sometimes you will see workers move permanently from one country to another. In other cases, they move back and forth. What is happened is that immigrants have not only increased the labour force in the euro area; they have also brought more flexibility and dynamism to our labour markets. Since the turn of the century, Spain’s immigration rate has been the highest in Europe. Once an emigration country, Spain’s foreign resident population rose from just over 900,000 in the year 2000 to 4.2 million in 2006. As a result, Spain’s population has increased by a number roughly equivalent to the total population of Ireland in just six years, as a result of immigration. The proportion of immigrants in other Western European countries may be bigger yet, but it is hard to find examples in recent times of such a large influx of immigration in such a small period of time. Clearly, what has attracted the immigrants to Spain rather than to other euro-zone countries has been the long economic upturn that has already lasted thirteen years.
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Employer’s bank Employer Other financial market participants – in and outside Sweden The financial crisis of 2007-2009 impacted borrowers in other countries hard Source: Federal Reserve Boston BIS central bankers’ speeches 7 Problems in the housing sector could have severe consequences for households Distribution of new mortgage loans by amortisation period, per cent 70 60 50 40 30 20 10 0 0 - 10 10 - 30 30 - 40 40 - 50 > 50 None Amortisation period, years Source: Finansinspektionen The European Commission is concerned about developments in Sweden From Alert Mechanism Report 2011/2012 ”Despite overall good macroeconomic performance some countries display developments in assets markets, including in particular housing, and a continuous build-up of indebtedness in the private sector, which also warrant further analysis” The European Commission would like a closer examination of Swedish households’ indebtedness Sweden’s mandate to handle the situation depends on how the Basel III regulations are implemented in the EU Source: European Commission 8 BIS central bankers’ speeches The Riksbank has an important role to play in the prevention of financial crises The Riksbank is responsible for means of payment and can provide liquidity The Riksbank monitors the financial sector with a systemic perspective But the Riksbank lacks sharp preventive tools The Riksbank represents Sweden in International regulatory cooperation Preventing financial crises is of great importance for Swedish households Swedish households need functioning financial services and protection from financial crises and their effects Citizens have the right to expect that authorities will prevent and manage financial crises to the best of their ability Authorities need the right tools to prevent and manage crises BIS central bankers’ speeches 9 References European Commission (2012): Alert Mechanism Report Finansinspektionen (2012): Den svenska bolånemarknaden (the Swedish mortgage market) Modestino, A. S., & Dennett, J.
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I also pay tribute to my predecessors in office in the independent Macedonia, governors Borko Stanoevski, Ljube Trpeski and Petar Goshev and to all management structures of the Bank, both current and former, largely present here tonight. I extend special thanks and recognition to all generations of employees of the National Bank, that dedicated their work life to the institution, and have contributed with maximum commitment and professionalism to the continuous growth and development of the National Bank. This order is your merit, but also a responsibility to continue delivering great results. To continue investing in constant upgrade and to protect the reputation of the institution, thus helping it to come closer to the family of the central banks of the Member States of the European Union. I am convinced that in the next period the National Bank will continue to build and develop itself, and will successfully accomplish its mandate! May we celebrate this great event for many years! 2/2 BIS central bankers' speeches
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Each has an important potential bearing on financial stability and on the fair value debate: 9 4 “Excess volatility”: Some of the earliest evidence against EMH focussed on the tendency of asset prices to fluctuate more than could be justified by movements in fundamentals – so-called excess volatility. While early evidence focussed on the behaviour of equity prices, the same tests have now been applied to a wide range of asset markets, including corporate bonds, asset-backed securities and exchange Shackle (1972) quoted in Bronk (2009). BIS Review 28/2010 rates. 10 There is overwhelming empirical evidence of excess volatility in asset prices. “Medium-term misalignment”: Excess volatility, while inconvenient, need not by itself severely distort the functioning of capital markets. Asset prices’ signals might be noisy, but correct on average. But there is emerging evidence of asset prices becoming persistently misaligned from fundamentals in a variety of markets including equity, residential and commercial property and corporate bonds. 11 “Apparent arbitrage”: A third aspect of the failure of EMH is evidence of seemingly pure arbitrage opportunities being sustained by market participants for lengthy periods. Unlike excess volatility and misalignment, these deviations from fundamentals represent riskless opportunities to make profits. They have been evident in past, and in particular in the present, crisis. Ultimately, the importance of these three features is an empirical question. Charts 1 and 2 plot the long-run behaviour of the equity market, in the UK from the 1920s and in the US from the 1860s.
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The European Central Bank, meanwhile, indicated towards the end of the year that further extensive monetary policy easing measures would be necessary in the euro area. Against this background, the US dollar began to appreciate and the euro came under strong downward pressure. Because of the minimum exchange rate, the Swiss franc also depreciated against the US dollar. This caused pressure on the minimum exchange rate against the euro to rise very substantially and made increasingly large interventions necessary. Instead of broad-based Swiss franc strength, we were faced – to an ever greater degree – with pronounced euro weakness. In this fundamentally changed environment, the minimum exchange rate was no longer sustainable. Had the SNB attempted to maintain the minimum exchange rate, it would have lost control of its balance sheet and, with it, monetary conditions in Switzerland, because of the increasing magnitude of the interventions. Consequently, on 15 January 2015, the SNB discontinued the minimum exchange rate. To cushion the upward pressure, the SNB simultaneously lowered the interest rate on sight deposits to –0.75%. It also stressed that it was willing to intervene in the foreign exchange market as necessary. These were no empty words, as can be seen from our foreign currency purchases, which amounted to more than CHF 86 billion last year. A large portion of these occurred during the period immediately before and after the discontinuation of the minimum exchange rate. The Swiss franc initially shot up after the discontinuation, but then stabilised. Since May 2015, it has weakened again slightly.
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However, there may be reason for some upward revision to the inflation forecast made in May, and perhaps even to the one made in August. One factor which could indicate a higher inflation rate, at least in the short term, is the high oil prices. Resource utilisation may also be slightly higher than anticipated in the coming years. One reason is the strong figures for Swedish growth that we have seen over the summer. Another is that fiscal policy will probably become more expansionary BIS Review 51/2004 5 now. Inflation can nevertheless be expected to be in line with the Riksbank's target two years from now. This is also the picture painted in a speech by Riksbank Governor Lars Heikensten in London today. Conclusion Let me summarise what I have said this evening. Despite stock market fluctuations and a periodically weak economic climate, both household indebtedness and house prices have increased substantially, on a national level, in recent years. There have been similar developments in many countries, and households’ debts and interest payments as a percentage of disposable income are not remarkably high in Sweden. Although the debt ratio is approaching the high level prior to the financial crisis at the beginning of the 1990s, the low interest rates have meant at the same time that households' interest expenditure as a percentage of income has largely been halved since then.
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Savers want to hold their funds in highly liquid, short-term assets. But borrowers want to lock up their funding over long time periods. Banks help bridge that gap. Pushing banks hard on the liquidity side runs up against this constraint. 6 BIS central bankers’ speeches clearing counterparties by the end of 2012. Similarly, I have my doubts whether the next set of industry recommendations to reduce risk in the triparty repo market will be sufficient to eliminate all the major potential sources of instability – including inadequate risk management practices and lack of resiliency to a dealer default. Experience suggests that it is not easy for market participants to agree on measures that enhance financial stability when this goal conflicts with the commercial and business interests. If the private sector falls short in this instance, public authorities may need to intervene and impose more forceful regulatory solutions. I also think that the scorecard is mixed with respect to making financial institutions, in their practices and structure, less prone to amplifying and propagating shocks. On one hand, the capital rules and the CCAR process should cause banks to husband their capital better during times of stress than was the case during the financial crisis. Also, compensation practices are improving in that more pay is deferred and over longer time periods. Similarly, risk management practices have improved.
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Macroeconomic studies argued that this was due to monetary policy’s focus on price stability which caused prices to adjust more slowly (Devereux and Engel (2001), Taylor (2000, 2007), Devereux, Engel and Storgaard (2004)). Empirical studies such as Ihrig et al (2006), found that the exchange rate pass-through to consumer prices in the U.K. had fallen from 0.20 before the 1990s to almost zero thereafter; similar effects were found in other G7 countries with the exception of Germany. 5 The February 2011 Inflation Report (Section 4 and the box on pages 34–35) describe estimates which suggest that import price increases since 2007 have added 4% to 6% to the overall price level. This equates to pass-through of between 66% and 100%. I discussed some reasons for why the degree of pass-through may have been larger or at least faster than predicted by earlier studies in a speech last year (Dale 2010). 6 The analysis presented here is based on the forecast made in February 2009. The extent of the surprise stemming from the degree of exchange rate pass-through in subsequent forecasts reduced more quickly than suggested by this analysis since the MPC learnt from this high pass-through and adjusted subsequent projections accordingly. 7 There are of course many other elements of the MPC’s forecasts which have differed from what was projected. For example, previous Bank analysis (see the box on pages 48–49 of the August 2010 Inflation Report) has highlighted the smaller than expected impact from the weakness of demand.
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TerraForm Labs and Luna Foundation Guard are not licensed or regulated by MAS, nor have they applied for any licence or sought exemption from holding any licence. Three Arrows Capital was not regulated under the Payment Services Act. It had operated under the registered fund management regime to carry out limited fund management business, but had ceased to manage funds in Singapore prior to the problems leading to its insolvency. Vauld is currently not licensed by MAS nor has it sought any exemption from holding a licence under the Payment Services Act. It has submitted a licence application, which is pending review. MAS and relevant government agencies will take firm enforcement action if any entity is found to be conducting illegal activities or performing regulated activities without a licence. The crypto industry globally is still evolving and regulation is still catching up with industry trends. Singapore is often seen as being at the forefront, with a clear licensing and regulatory framework. But the focus of crypto regulation to-date in Singapore, as well as in most major jurisdictions, has been on containing money laundering and terrorist financing risks. Most regulatory regimes today do not cover areas such as consumer protection, market conduct, and reserve backing for stablecoins. This is changing. Reviews and public consultations are underway, among international standard-setting bodies and regulators, to strengthen regulation in these areas. MAS is targeting to consult on proposed measures in the next few months.
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However, in terms of seeking investment returns, Asian insurers are operating within similar market trends as their global counterparts. To illustrate, long-term government bond yields in the US and Euro area have declined an average of 200 to 300 bps compared to the 10-year average prevailing before the Global Financial Crisis. In Asia, long-term government bond yields are, on average, 50 to 300bps lower than pre-crisis levels. Asian insurers also have to face increasing costs of capital4, compounding the pressure to generate higher returns. 10. Addressing the duration mismatch between assets and liabilities has been a persistent challenge for insurers in Asia, due to a shortage of long-dated instruments as well as restrictions on investments in some jurisdictions. A number of governments in Asia, including Korea, Taiwan, China and Singapore, have responded by issuing long-dated bonds; and easing restrictions on specific assets classes that insurers can hold. Notwithstanding this, the supply of high quality government and corporate bonds remains limited relative to the strong demand from a wide spectrum of investors for these “safe haven” assets, such that insurers can be crowded out. Regulatory reforms 11. Finally, let me touch on the oncoming regulatory reforms, such as Solvency II, which will also play a significant role in shaping insurers’ investment strategies. Almost 80% of the respondents to a recent Goldman Sachs survey listed regulatory capital treatment as the predominant non-market related concern. 12. Insurance regulatory reforms are converging towards a principles-based and fair value approach for the total balance sheet.
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Lower returns in the new normal 8. First, lower returns in the new normal. There has been increasing acceptance that the era of low yields is not just a cyclical phenomenon, but is in fact the New Normal. In advanced economies, policymakers are faced with conflicting challenges as they seek to maximise economic growth on the one hand; while having to pursue fiscal consolidation and financial sector reform on the other. Meanwhile, emerging economies will grapple with tighter financial conditions and by implication, slowing growth when unconventional monetary policies are unwound. The outlook is highly uncertain as the normal cyclical recovery template cannot be applied to structural deleveraging episodes such as the one we are currently in. Although bond yields are expected to rise from their current low levels, it is likely that insurers will have to settle for much lower returns from fixed income investing in the years ahead than that achieved in the pre-crisis period. Over the next 20 years, the slowing demographic outlook for the world will also exert pressure on economic growth and lower the expected returns for most asset classes. Shortage of long duration assets 9. Next, a shortage of long duration assets. Asia has often been singled out as the bright spot in the global insurance industry, as rising incomes and lower than average 2 Allianz Global Investors estimates. 3 OECD Global Insurance Statistics. 2 BIS central bankers’ speeches insurance penetration in many markets offer rosy opportunities for growth.
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But these opportunities can only be realised if new forms of digital money are safe – which means recognising and properly regulating the elements that are age-old. I am grateful to Morgane Fouche, Matthew Osborne, Stephanie Haffner, Robert Page and James Pople-Hoskins for their help in preparing these remarks. I am also grateful to Antoine Lallour, Nicholas Butt, David Copple, Shiv Chowla, Andrew Hauser and Victoria Cleland for their helpful comments. 1 Private money mainly takes the form of deposits held in bank accounts. The only form of public money accessible to the general public is cash, in the form of coins and notes. 2 This is based on the amount of cash held by the public as a share of total cash and sight deposits. See Part V of ‘A millennium of macroeconomic data’, Research dataset, Bank of England. 3 See LINK News and media contact, 'Coronavirus Crisis means cash use down but UK still withdrawing £ from ATMs each week’Opens in a new window; See LINK, 'Statistics and trends’Opens in a new window; See chart A in ‘New forms of Digital money’ DP, June 2021. Moreover, in practice, the UK authorities remain committed to ensuring access to cash to those that need it. The Bank, HMT, FCA and the PSR have been working together on the Joint Authorities Cash Strategy group to monitor the use of cash, ATM availability, and ensure cash remains available despite the impacts of Covid. 4 See the example of the Corralito in Argentina.
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Jean Claude Trichet: Welcome Malta! Speech by Mr Jean Claude Trichet, President of the European Central Bank, at the event for launching the joint communication campaign for the euro changeover at the Central Bank of Malta, Valletta, 30 September 2007. * * * Ladies and Gentlemen, It is a great honour and pleasure for me to be here at this festive moment. This is to mark the launching of the joint communication campaign for the euro changeover in close co-operation with the Central Bank of Malta and with our friend, Michael Bonello, just 92 days before Malta adopts the euro on 1 January 2008. This will signify a great milestone in Malta’s history, especially since Malta only joined the European Union (EU) almost four years ago, on 1 May 2004. Let me first offer my warm congratulations to all of those who have helped bring Malta to this point. In 2002 for the countries that were in the euro area at the time, as well as for Slovenia this year, it was a memorable moment and a positive step. So I can well imagine how the Maltese feel at the moment. You can be proud of Malta’s successful convergence process. In fact, we are very pleased about the fruitful cooperation between the European Central Bank (ECB) and the Central Bank of Malta in the preparations for the changeover, be it at the technical level or through the participation of Governor Bonello as observer in the Governing Council since last July.
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This is targeted for completion by the second half of this year. This initiative will significantly improve transparency in the corporate bond market and provide reliable mark-to-market prices for the industry and asset managers alike. Conclusion 43. Let me conclude. There are fundamental structural forces shaping the global economic outlook for the next few years. The effects of deleveraging and monetary expansion will be with us for some time. They pose twin risks: lower economic growth and higher inflation. 44. But the Asian growth story remains intact, and Asia’s rise as both a source and destination for investment augurs well for the asset management industry. All of you gathered here belong to an industry that has been and will remain one of the star performers of Singapore’s financial sector. 45. 6 I wish you fruitful discussions. Thank you. BIS central bankers’ speeches
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Caleb M Fundanga: The role of insurance brokers in the growth of the Zambian economy Speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, on the occasion of the annual dinner of the Insurance Brokers Association of Zambia, Lusaka, 24 May 2006. * • The Chairperson • Distinguished Guests • Ladies and Gentlemen * * It gives me great pleasure to officiate at this annual dinner and to talk to you on the subject “The Role of Insurance Brokers in the Growth of the Economy”. It is my hope that our interaction this evening will give us a better understanding and appreciation of the important contributions that insurance brokers have made to the economic growth of this country. The insurance world will continue to have a vital role to play as we continue to move the economy towards further stability and growth. Mr Chairman, before I talk about your role in the growth of the economy, I would like to begin by giving you a brief account of the macroeconomic developments in Zambia in the recent past. I know that many of you have been following the economic developments in the country. The economy has performed relatively well in recent years, with inflation and interest rates coming down. The exchange rate has relatively stabilized, following a steep appreciation in 2005. The growth in real Gross Domestic Product (GDP) averaged 4.7 percent per annum during 20012005.
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26 See the article “Rapidly rising housing prices despite the coronavirus crisis” in the Monetary Policy Report in April 2021(Sveriges Riksbank (2021b) 27 See Figures 5 and 34 in the Riksbank (2020b). 28 Based on arguments such as these, I entered a reservation against the decision in November 2020 to extend and extend the asset purchase programme, see Appendix and my comments at the monetary policy meeting (Riksbank 2020c, p. 21-24). 15 [30] I want to use my (long!) review of the experience of asset purchases since 2015 to try to evaluate whether financial losses are offset by other gains for the national economy. I shall also discuss whether the losses will weaken the Riksbank's financial independence and, in that case, make monetary policy less effective. But let me first focus a little more on the financial losses. How has the Riksbank's balance sheet been affected by the purchase of assets, and how has the value of the assets we have purchased developed? The Riksbank's financial results are now deteriorating Prior to the global financial crisis, the Riksbank's balance sheet was relatively small and uncomplicated. The size of the balance sheet, corresponding to approximately 6 per cent of GDP, was determined mainly by the liabilities side, which was dominated by banknotes and coins in circulation and the Riksbank's equity. On the assets side, these liabilities were matched by the foreign exchange reserve, which consisted mainly of US and European government bonds.
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I see several reasons why this is the right thing to do. I do not believe that the Swedish asset purchases will significantly affect how expansionary monetary policy is when the financial markets are functioning well. In that case, selling bonds does not entail any significant tightening of monetary policy. I do not mean that sales would go unnoticed. On the contrary, I believe that sales would lead to price movements and some disturbance in the market. But that is exactly what we should avoid. The Riksbank should as far as possible avoid interfering in market pricing. The arguments against active sales are strengthened by the fact that the maturities of many of our assets are relatively short. In principle, it would be good if we 45 I have highlighted the risk to the Riksbank's finances (Flodén 2016 and 2018, as well as my contributions at the monetary policy meetings in December 2017, April 2019 and November 2020) and risks to the functioning of the government bond market (April 2019). I have also pointed out that it is desirable that pricing of risk should normally be left to the market (November 2020 and November 2021). 24 [30] could rapidly reduce our holdings of private securities, that is, mortgage and corporate bonds. However, these assets have the shortest maturity and almost the entire holding will mature within five years (see Figure 14).46 The strongest argument for active sales concerns government bonds.
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In some jurisdictions, such as the UK, the securities regulator is the listing authority. In others, such as the US, listing documentation is approved by exchanges, with minimum disclosure requirements set by the securities regulator. This is tied up with whether regimes retain an element of Self-Regulatory Organisations. 9 In the UK, although the FSA was given a “financial stability” objective in 2010, it did not apply to its functions as UK Listing Authority. The proposed objectives of the planned new securities and conduct regulator, the FCA, are intended to apply to the UKLA. 10 IOSCO Objectives and Principles of Securities Regulation (2010). 4 BIS central bankers’ speeches whole in ways that are opaque to everyone. For example, in the USA, as the SEC has commented, a lot of structured-finance products, including pretty well all CDOs and AssetBacked CP, were issued privately and so were exempt from a panoply of disclosure requirements that apply to “registered” offerings.11 Reducing that opacity, and ensuring the integrity of these market mechanisms, could well be in the interests of investors in private placements themselves. This issue is not easy. On the one hand, it is reasonable for the regulatory regime to make allowance for private transactions amongst “consenting adults”. And the issuance of small amounts of any type of security cannot possibly jeopardise stability.
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I believe that central banks can play a special role in this area. Important “intra-financial system markets” are not restricted to banking. The reinsurance markets, and the mechanisms for sharing risks in Lloyd’s of London, are other examples. As are the inter-dealer markets in derivatives, which have traditionally employed different protocols (notably collateralisation, under Credit-Support Annexes) than get used in transactions with end users. Away from banks, these Over the Counter derivative markets have been the principal focus of policy. They are being rethought, under a mandate from the G20 Leaders7. The third category of markets is those that matter directly in their own right to end users. Notably the primary markets in equity and debt. These markets and the associated secondary markets often rely on “market makers” for liquidity, but they are not the marginal source of financing or risk management for banks and dealers. In the past, they have often 4 Drysdale, Lombard Wall, and so on. 5 See Tucker P M W (2010), “Shadow Banking, Financing Markets and Financial Stability”, January 2010. 6 See Gary Gorton “Securitized Banking and the Run on Repo”. 7 In September 2009, G-20 Leaders agreed in Pittsburgh that: “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.
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News conference Berne, 15 December 2016 Fritz Zurbrügg Introductory remarks by Fritz Zurbrügg In my remarks today, I will start by presenting our current assessment in the area of financial stability, looking first at the big banks before turning to the domestically focused banks. I will end my remarks with a few words on the new banknote series. Big banks Since the Financial Stability Report was published in June, the Swiss big banks have improved their capital situation slightly; at the same time, they have substantially increased their holdings of bail-in bonds. Bail-in bonds are debt instruments that can be written off or converted into equity in the event of restructuring or resolution. They form the basis for a crisis-hit bank to be resolved or restructured in an orderly way. Alongside capital requirements, the qualitative and quantitative requirements on such debt instruments are a key component of the revised ‘too big to fail’ regulations which came into force at the beginning of July. These revised regulations envisage that the requirements will gradually be increased to the specified level over a phase-in period ending at the beginning of 2020. As regards core capital (Common Equity Tier 1, CET1), both big banks already largely meet the targets that will apply after the end of the phase-in period. There is still a need for action before the transition deadlines expire, as regards bail-in instruments and high-trigger contingent convertible capital instruments – or high-trigger CoCos.
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As expected, today – a good six months after the new note was issued – around two-thirds of the eighthseries 50-franc notes originally in circulation have been exchanged. The next denomination to be released will be the 20-franc note. It will be presented at a press conference on Wednesday, 10 May 2017, and the first notes will be issued one week later, on 17 May 2017. The new 20-franc notes will be put into circulation continuously from that date onwards. Issuance of the third denomination, the 10-franc note, is planned for autumn 2017. We will announce the exact date in due course. Page 3/3
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Andrew Bailey: The outlook for financial regulation in the UK Speech by Mr Andrew Bailey, Executive Director for Banking Services and Chief Cashier of the Bank of England, on a regional visit to Edinburgh, Edinburgh, 10 January 2011. * * * Andrew Bailey will become the deputy chief executive of the Prudential Regulation Authority (PRA) on its creation. Thank you to Linda Urquart for inviting me to speak today and Morton Fraser for allowing us to use your venue. I would also like to thank Will Dowson, the Bank’s Agent for Scotland for the assistance that he has given me, and for the work that he does to ensure that the Bank is well connected to the UK’s most important financial centre after London. Will worked for me when he first joined the Bank as a graduate entrant, and I can assure you, drawing on that experience, Will is an excellent person to ensure that the Bank and you as our contacts in Scotland are well informed and understand the relevant developments that affect each of us, and of course that we in the Bank understand the state of the economy in Scotland and the financial sector here. It is quite right that first and foremost our Agents support the needs of monetary policy and the MPC. The information that they gather from you, their contacts, makes a real difference to the monetary policy process. There is a parallel in our responsibilities for ensuring financial stability.
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In an important financial centre like Edinburgh, we need to be well connected, and to understand your assessment of the threats to financial stability and we need to explain what we are doing to tackle these threats. Our market intelligence function under my colleague Paul Fisher plays an important role here, and is in frequent contact with the Scottish financial community. This contact will be even more important under the new arrangements in which the Bank will be responsible for macroprudential policy and its focus on the stability of the financial system, with a new policy making body, the Financial Policy Committee, or FPC. Alongside and feeding into the Bank’s macroprudential role will be our new responsibility for microprudential supervision of deposit takers, insurers and major securities dealers, also in a new body, the Prudential Regulation Authority, or PRA. It is therefore a period of major change at the Bank, and we are taking very seriously our role in building a system of regulation in the UK that must meet the very reasonable expectations of the public for a safer and sounder financial system. The overarching objective for the Bank is to put the stability of the financial system at the heart of the mission of financial regulation. We are now in the fourth year since the financial crisis started in the middle of 2007. The Scottish banking system took a pounding during the earlier stages of the crisis.
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Christian Noyer: The power of monetary policy Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Paris Europlace Financial Forum, Tokyo, 25 November 2014. * * * Two weeks ago, I had the privilege to chair in Paris our triennial Banque de France Symposium. Governor Kuroda made us the great favor to participate. At that Symposium, one speaker remarked that, during the financial crisis, Central Banks in most countries had been (quote) “the only game in town” (end quote). And he went on wondering whether this would still be the case in the future. This observation captures the essence of my remarks today. I would like to talk about the power of monetary policy in the current – low inflation – environment. Central Banks have been all powerful and decisive in fighting off the biggest financial crisis of the last 70 years. And they succeeded in avoiding a prolonged recession and the collapse of our financial system. Today, however, they are facing a different challenge. Growth has been disappointing in many parts of the world and forecasts have been constantly revised downward. Even more worrisome for central banks, inflation has persistently undershot our definition of price stability. For the euro area, it has declined from 2.5% in 2012 to 0.3% in annual terms, as of last September. This drop in inflation has occurred despite the most accommodating monetary conditions ever witnessed in Europe.
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Whether they are, or not, correctly implemented will make a big difference in our capacity to quickly return to price stability. BIS central bankers’ speeches 3
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