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Let me now turn specifically to financial regulation. To the extent that financial regulation contributes to procyclicality and excessive risk-taking, supervisors could design their regulation in a counter-cyclical fashion to reduce procyclical behaviour of financial institutions. Reflecting this thinking, discussion to date on the role of financial regulation to address procyclicality has focused on four areas. The first is to reduce procyclical tendencies of the Basel II capital regulation by aligning capital requirement more with a longer-term perspective of risk. On this, key measures under discussion include: (1) building capital buffers by capital conservation measures; (2) reducing procyclical effects of minimum capital requirement by adopting through-the-cycle risk parameters to achieve a less pro-cyclical capital ratio; (3) promoting forward-looking provision that can cover loan losses that are not yet incurred but expected, with supporting accounting rule and valuation; and (4) using additional capital charge for the large and more complex banks based on indicators of systemic relevance. The second area of focus is the use of macroprudential supervision. The aim is to use prudential measures, when needed, to restrain the build-up of risk either in the overall financial markets or in specific asset class. Examples here include use of loan-to-value ratio on real estate loans and margin requirements for derivatives and securities transactions. Also, a recent idea of using leverage ratio to help take account of the unknown risk beyond those identified by the risk-adjusted capital regulation also falls into this category. | This prompted Bank Negara Malaysia to document the industry’s transformation in a box article that we published in our latest edition of the Financial Stability and Payment Systems Report. Today, the industry stands among the more developed money services markets in the world and our MSB companies have a good reputation that will open doors for growth opportunities both within and outside Malaysia. The industry’s credibility has also avoided the negative impact from de-risking strategies by banks that have been experienced in other countries. We should not forget however that good reputations are hard to earn, and easily lost. So while we have come a long way, a number of priorities must continue to stay in clear focus for the industry to progress further. Let me just mention three of these priorities. First, we must continue to work at reducing transactions that are conducted through informal channels – in particular, through education and enforcement activities. Since 2012, the Bank has taken enforcement actions against 140 illegal MSB operators. This included criminal and civil actions pursued against over 70 companies. We will continue to intensify our efforts on this front. Second, we must continue to raise compliance and professional standards across the industry, regardless of size. Every company that holds a licence must be able to meet the expectations that have been set to protect the integrity of the financial system and provide a high standard of service to the public. Over the years, more companies have been given licences for longer periods. | 0 |
The lender is taking a risk on the option it offers the borrower to buy the car at a fixed price three years down the road. It’s not difficult to see how this could be self-reinforcing. If used car prices were to fall, and PCP purchasers opt to give back their cars as their contracts expire, the supply of used cars onto the market could increase substantially, pushing prices down further. The advent of PCP means – as the small print always says – the past may not be a good guide to the future. 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 Mortgages Developments in mortgage debt are much less striking than those in consumer debt and car finance. Mortgage lending has increased by just 3 % over the past year. But even here there are some tentative signs of boundaries being pushed. Lenders have been reporting that their objectives to grow market share are pressing them to make credit more available (Chart 16). But of course, not everyone can gain market share. Some of that fierce competition for business has shown up in reduced fees for those taking out a new mortgage. Nearly a half of mortgages were extended without fees in the first part of 2017 – four times the rate in 2011 (Chart 17). Boundaries are being pushed in less benign ways too. Lending at higher loan to income multiples has edged up. | In addition, trading income recovered strongly as financial markets rebounded after the first quarter of 2009. Finally, revenues from fees and commissions held up remarkably well throughout the financial turmoil. At the same time, a number of significant risks remain and some may have even increased. First, the slowdown in the growth of assets held by euro area banks limits their future earning capacity in terms of interest and investment income. Second, a deterioration in the credit quality of borrowers may put a drag on banks’ future earning capacity. In fact, while large and complex banking groups seem to be gradually absorbing the losses they suffered on their securities holdings, driven in part by the reclassification of assets, they have reported sharply higher provisions for loan losses. Let me now turn to capital ratios. The recovery in the earnings of large and complex banking groups in the euro area, together with a slowdown in the growth rate of both risk-weighted and total assets and an increase in capital, from both public and private sources, has meant that the capital ratio of the average banking institution has typically been relatively stable. There is, however, considerable divergence between groups. A somewhat reassuring finding is that the institutions which reported the largest increases in loan loss provisions also seem to have the highest capital buffers. This may mitigate the solvency risks originating from deteriorating asset quality in the future. | 0 |
In particular cases where monetary policy is supported by capital controls, however, internet banking may make enforcement of such controls more difficult, since it would be operationally easier for those wishing to evade regulations to maintain offshore bank accounts. Of course, every bank in reputable jurisdictions has in place rigorous procedures to combat money-laundering, but these procedures do not normally result in customers being turned away if they are merely trying to escape capital controls or the tax regime in their home countries. Similar considerations lead some observers to enquire whether the internet might encourage substitution out of the national currency, resulting in dollarisation and also perhaps weakening the central bank’s influence over domestic monetary conditions. If internet facilities enable or encourage people either to economise on the usage of money (for example by netting payments due among two or more parties or by practising barter) or to reduce the frequency of movements of money (for example by leaving export receipts in an internet account in order to pay for imports, rather than repatriating them first), then there may be a prospect of a general reduction in transactions traffic in all currencies. The usage of some may fall more than others. I do not, however, see anything particularly sinister in such developments, except to the extent that the internet might facilitate avoidance of rules on remittances. | The financial authorities within countries, and on a collective basis internationally, may also have a role to play in developing recognised common standards in these arenas of technology and security. The second characteristic deserving our special attention is the nature of the person or company which is offering us banking or payment services over the internet. If we are merely using electronic services provided by our usual bank, which we know to be sound and to be supervised by an acknowledged regulator in a known jurisdiction, then we should be in no more danger of losing our money than we would be by banking with the same bank in the conventional manner, provided of course that both the bank and the regulator have kept pace with the requirements of internet banking, such as in respect of the security aspects discussed already. But it is quite a different story if we are tempted to part with money to some organisation masquerading as a bank, or which actually is a bank but is registered in a jurisdiction with lower supervisory standards than those to which we are accustomed. In Hong Kong, in order to protect the public we already have legislation governing usage of the word “bank”, and governing the advertising for deposits within our boundaries by anyone not authorised to take deposits in Hong Kong. But we cannot protect people from the possible consequences of clicking onto a website in a far-off place which is luring them to part with their money. | 1 |
The economy is in a good place, but not without risk and uncertainty (there, I said it!). Persistently low inflation is a key area of my attention, with the core PCE inflation rate—which strips out volatile food and energy prices—running at 1.6 percent, nearly half a percentage point below our 2 percent longer-run target. 1/3 BIS central bankers' speeches On its own, inflation somewhat below our longer-run goal would not be such a big deal, especially with our economy strong. But the broader context is important. Ongoing disinflationary pressures from abroad, and the risk that inflation expectations in the U.S. may have drifted down after many years of inflation running below 2 percent, form an important part of this picture. If we look beyond the headline GDP figure, which remains good, there are more mixed signals coming from different sectors. Robust consumer spending is balanced by signs of slowing business investment. We’ve also seen a decline in exports and weakening manufacturing data, reflecting slowing global growth and uncertainty related to trade and geopolitical risks. I am carefully monitoring this nuanced picture and remain vigilant to act as appropriate to support continuing growth, a strong labor market, and a sustained return to 2 percent inflation. Monetary Policy Adjustments This brings me to our decision to lower the federal funds rate in July and how that fits into recent history. Cast your minds back to a year ago, when the Fed was continuing along the path of normalizing monetary policy. | Since its inception, SAMA has supported banks to develop human resources by establishing the Institute of Banking, which contributes to training and qualifying a large number of national cadres in the financial services sector. The Institute continues to professionally exercise this role and make efforts to cope with the developments in the financial and banking sector by providing information solutions and diverse educational programs consistent with individual bank needs. The Institute's programs have covered important banking fields, such as treasury, investment and credit, and contributed effectively to developing and qualifying national cadres. Thus, Saudization in the banking sector exceeded 85 percent by the end of the first half of 2006. Dear Audience, These developments, which have diversified and expanded the services provided in the Saudi market, have given rise to substantial challenges to financial institutions. One of the most important challenges is to provide a sufficient number of qualified human resources to meet the needs of these institutions. Despite the employment efforts made by banks to cope with this expansion, and though 4,246 employees were appointed during the first half of 2006, the total needs of these institutions are still not satisfied. Hence, SAMA has promptly exerted expeditious efforts in search for solutions to these challenges. To this end, it has instructed the Institute of Banking to study the situation and propose practical solutions to help banks bridge such gap over both the short and long terms. | 0 |
For issuers, green bonds are a way to tap the huge $ trillion pool of patient private capital managed by global institutional fixed-income investors. The shift to the capital markets from banks will also free up limited bank balance sheet capacity for early-stage project financing and infrastructure lending. Over the last two years, the City of London has been glowing green with sixteen renewable infrastructure funds with a value of $ listed on the LSE. The City has been the centre of a series of landmark global green bond issuances, from China’s first Green Covered Bond – the country’s first ever international issuance of a green bond – to the first green Masala Bond worth INR 20bn. In our view, such local currency green bonds will be particularly important to the climate transition in emerging market economies (EMEs). However, while they are important catalysts, green bonds will not be sufficient to finance the transition to a low carbon future. They accounted for only 3% of global bond issuance in 2018. Achieving the transition will require mobilising mainstream finance. Advances in reporting and risk analysis are paving the way for investors to realise the opportunities in climate-friendly investment by re-orienting their focus to broader, more sustainable long-term value creation. Such investment approaches are becoming increasingly common. | These long and short-term risks are, of course, linked – any overall misalignment with climate goals increases the short-term risks from a disorderly transition, possibly caused by extreme weather events or abrupt shifts in climate policy. A system-wide stress test can help supervisors and climate policymakers judge the adequacy of the current transition and whether further actions could be expected. As the Bank of England considers the timing and design of such a stress test, we are working with colleagues in the Network for Greening the Financial System (NGFS) to develop a small number of highlevel scenarios.16 And in our Climate Financial Risk Forum we will work with banks, insurers and asset managers to ensure these scenarios are rolled out effectively within their organisations. Together with our work on this year’s insurance survey, these initiatives will provide a basis for our future assessments of the system-wide exposure to climate risks. The third and final area is return A new horizon brings new opportunities. The IEA estimates that the low-carbon transition could require $ in energy sector investments every year for decades – twice the rate at present. Under their scenario, in order for carbon to stabilise by 2050, nearly 95% of electricity supply will need to be low carbon, 70% of new cars electric, and the CO2 intensity of the building sector will need to fall by 80%. With an estimated $ trillion of infrastructure investment expected between 2015 and 2030, smart decisions now can make sure that investment is both financially rewarding and environmentally sustainable. | 1 |
Households live forever and have standard intertemporal preferences over consumption (Ct) and hours worked (Ht). Investment (It), which is subject to adjustment costs, cannot be funded directly by households and instead must be financed by borrowing from a bank. Bank loans (Lt) are financed by the capital of bankers (Bt) and deposits (Dt) from households. Banks are owned and run by bankers. A proportion (1-γ) of bankers die at the end of each period and are replaced by a new generation. Bankers reinvest all their earnings in the capital of the bank whilst they live, and leave their net wealth to households when they die. In log-linear form (carets denote log-deviations from steady-state), the standard block of the model is described by: 1) Market-clearing condition for output (Yt); 2) Production function (Zt is TFP and Kt is capital); 3) Labour market equilibrium (Xt is marginal costs); 4) Price of physical capital (qt); 5) Return on capital (rkt); 6) Law of motion for physical capital; 7) Consumption Euler equation (rnt is deposit rate); 8) New Keynesian Phillips curve (πt is inflation rate). The special ingredient is a moral hazard friction in the banking sector. | Such confidence is, in its turn, of fundamental importance in ensuring that the occupational pension system can perform its key economic role. This consists of giving people the certainty that the assets they have saved in their pension scheme during their working lives will actually be available to them in their old age. A good pension system makes it possible for people to reliably plan their future material needs, and fosters security for individuals and stability for society. It is therefore a key precondition for the prosperity and development of a modern economy. A healthy pension system is central to ensuring social cohesion and is one of the cornerstones of Switzerland’s success. With its three pillars – AHV, occupational pension schemes and private pension provision – Switzerland has for several decades operated a comprehensive and well-functioning pension system. Our pension arrangements have been envied abroad, which is also reflected in the relevant rankings. In recent years, however, our country has lost considerable ground in this discipline (cf. chart 1). Have we become worse, or have the others improved? Whatever one might think about such comparisons, it is in Switzerland’s own interest to do everything it can to ensure that the pension funds – as key players in the whole system of pension provision – are able to manage the numerous challenges facing them as effectively as possible. In what follows, therefore, I will look at two important and specific challenges: the ongoing low interest rate environment and the rise in life expectancy. | 0 |
From a more macro perspective, these risks may impair productivity and also cause a reallocation of resources, not only of physical capital, but also of labour, through migration. Special features of climate change risk factors In general, these risks can be considered to manifest themselves in financial institutions through the traditional financial risk categories (credit, market, liquidity, operational and reputational risk). However, climate change incorporates some fundamental special features into these traditional risks, which must be taken into account if they are to be managed and supervised appropriately.7 First, the consequences of climate change are unprecedented and will occur over a very prolonged period. Historical experience is thus of little use to assess their magnitude and evolution, and therefore the uncertainty associated with how and when they will materialise is very high. Second, that uncertainty is exacerbated by the fact that the physical and transition risks are interrelated non-linearly, and possibly subject to tipping points. This, in essence, means that the magnitude of the effects of their materialisation could be greater than expected and will affect economic agents more generally and more abruptly than other risks. Third, the problem has a global dimension. There is little any one country can do on its own to avoid the problem and there may always be free-riders. That is why utmost collaboration and cooperation are required. International organisations and institutions therefore need to play a key role in this area. | At European level, the European Commission’s proposal for a Corporate Sustainability Reporting Directive (CSRD) is also a significant step forward in terms of improving the information available to market participants and supervisors. This initiative, still in the negotiation phase, revises and strengthens the sustainability reporting standards for companies operating in Europe and establishes mandatory sustainability reporting standards for more than 50,000 firms, including all large and listed firms, although simpler standards will apply to listed SMEs.14 In January this year, the EBA published disclosure standards for environmental, social and governance (ESG) risks. These provide the basis for publication by the European banking sector of comparable quantitative information on how climate change risks affect their balance sheets. Compliance with these standards will undoubtedly require a significant effort on the part of banks, which ultimately depend on the information available on their counterparties. As a result, the EBA has introduced certain transitional features in the standards to facilitate the adaptation process. In any event, providing this information to the market will encourage banks to improve their information systems and databases. Moreover, improving public information will ultimately enhance the ability of financial market participants to discriminate. The BCBS is playing a notable role globally. In November 2021 it publicly communicated its support for the creation of the ISSB.15 At the same time it indicated its intention to explore in parallel how to use the bank disclosure framework (Pillar 3) to promote a common disclosure baseline for climate-related financial risks across internationally active banks. | 1 |
The Central Bank is doing its utmost and intends to boost its efforts and the quality of these efforts by providing top quality and highly reliable public domain quantitative and qualitative information. Our research capability is one of our top priorities. This enhancement of our capability to produce reliable knowledge will benefit all discerning stakeholders including the policy maker (who we are statutorily committed to advise) and the potential investor (who abhors any vacuum of knowledge concerning the target location). Promoting a healthy business environment also requires action to reduce excessive bureaucracy, to increase the efficiency of our judicial system and to ensure that our legal and regulatory frameworks remain appropriately flexible. At the Central Bank of Malta we have taken initiatives to help the business environment by launching the Credit Register and by promoting the setting up of the Development Bank to give better access to credit for SME’s and to infrastructure investments on the Public Private Partnership (PPP) model. We are also piloting changes to pre-insolvency procedures in an effort to curb unnecessary liquidations and save businesses that deserve a second chance through financial restructuring. We are also leading efforts to amend legislation to achieve more efficient contract enforcement procedures to address the long duration of NPL’s on bank balance sheets. These initiatives will help us climb the admittedly steep ladder of international rankings measuring business efficiency. | I would put particular emphasis on the tasks of completing the creation of a credible bank resolution regime that will work on a crossborder basis, and developing effective recovery regimes for key financial market infrastructures. I also agree with Hélène that monetary policy in the United States—given the size of its financial markets and the U.S. dollar’s status as a reserve currency—can have a significant impact on 1/4 BIS central bankers' speeches global financial conditions, including exchange rates, and that shifts in U.S. monetary policy can lead to consequential shifts in global capital flows. However, it is also important to note that the impact of U.S. monetary policy restraint on emerging market economies (EMEs) has varied widely across tightening cycles. The impact depends on many factors, including EME fundamentals, asset valuations, and the extent and composition of prior capital inflows to those economies. Importantly, the impact has tended to be more benign when U.S. yields rise in response to good U.S. growth prospects. In contrast, spillovers have tended to be more adverse when increased monetary policy stringency is associated with a deteriorating U.S. economic outlook.2 These observations point to the need for the United States to keep its own house in order. Promoting economic growth and financial stability in the United States, I believe, is the most important contribution we can make to promoting growth and stability worldwide. Like nearly all central banks, the Federal Reserve has a domestic mandate set for it—in our case, by the U.S. Congress. | 0 |
Ex post transparency of aggregate amounts lent is provided immediately for market-wide liquidity provision, and with a lag for any usage of the bilateral Discount Window. The Bank also publishes an annual report on the operation of its published facilities 3. The Bank’s published facilities now provide a rich toolkit for responding to a wide range of sterling liquidity needs. But not every eventuality can be predicted in advance – and UK institutions might on occasion require assistance in larger size, against alternative collateral, or in currencies other than sterling. The terms and conditions for any bilateral lending done outside of the Bank’s published facilities – so-called “Emergency Liquidity Assistance (ELA)” – would use as a starting point those in the SMF, including pricing and collateral eligibility and haircuts. But, recognising the potential for discretionary deviation from these terms, and the large sums of money that such lending can involve, ELA is also subject to enhanced governance and accountability arrangements, published in a Memorandum of Understanding (MoU) 4 between the Bank and HM Treasury. These arrangements are somewhat shaped by history. In his autobiography 5, the then Chancellor of the Exchequer Nigel Lawson records his deep annoyance at being given only half an hour’s notice by the Bank in October 1984 to decide whether to provide a government guarantee to back a large loan to Johnson Matthey Bankers, “a bank of no great consequence”, which the Bank had been working for some time to save. | Taken together, these steps mean that LOLR no longer has to shoulder as much of the burden of preventing insolvency ex ante, or dealing with it ex post. As such, the Bank is now able to state, as a presumption, that all banks and building societies meeting the supervisory threshold conditions for authorisation may sign up for, and access, the Bank’s published liquidity facilities 2. So changes designed to reduce the risks of lending “too much” have actually allowed the UK to offer a more effective LOLR scheme. The second lesson drawn in the UK was that, to avoid the twin pitfalls of “too little” and “too much”, the central bank should have access to the best possible information to judge solvency; and wherever possible be ready and willing to lend on pre-defined terms, against pre-defined collateral. Prior to the crisis, the Bank said very little about the terms on which it would be willing to provide LOLR, or the collateral against which it would lend. Indeed the provision of liquidity insurance wasn’t explicitly acknowledged in its public framework, in large part with a view to minimising moral hazard. In addition, the Bank had limited access to information on the financial position of firms to whom it might have to provide LOLR, because banking supervision was carried out in the Financial Services Authority, a separate organisation. In practice, efforts to tackle moral hazard had little effect: in the absence of formal regulatory requirements, banks took minimal steps to self-insure against liquidity risk. | 1 |
One point worth noting to begin with, is that the Swedish nation as a whole has not increased its indebtedness in recent years. On the contrary, the large surplus on the current account indicates that external debt has declined. This should have contributed to making the economy as a whole less vulnerable to a rise in interest rates. In this respect we differ from a number of other countries, where household indebtedness has increased rapidly, while they have had a deficit in their current accounts for several years. This applies, for instance, in the United States, the United Kingdom and Australia. Developments in household indebtedness in Sweden are not remarkable when seen in relation to other OECD countries. It is clearly difficult to compare the level of debt ratios between different countries. Differences in taxation systems, credit terms and the percentage of the population that are home-owners are just some of the factors that complicate this analysis. On the other hand, a comparison of how much the debt ratio has increased in different countries in recent years can provide some perspective for developments in Sweden. It appears that developments in, for instance, the United Kingdom and Australia have been much more dramatic than in Sweden. Property prices have also risen more rapidly in these countries. However, in the United States, which deregulated its credit market at an earlier stage than the other countries, indebtedness has increased at a slightly slower rate, although it did not show any decline in the mid-1990s, as there was in Sweden. | It is also worth mentioning that during the property crisis at the beginning of the 1990s, it was not the households that caused problems for the banks. As I mentioned earlier, the Riksbank, like many other central banks, conducts a flexible inflation-targeting policy. In addition to taking account of price stability, monetary policy may in certain cases wish to take into account developments in the real economy as a whole. This can mean, for instance, conducting a less aggressive interest rate policy and thereby allowing inflation to return to the target gradually after a disturbance to avoid excessive fluctuations in production and employment. In connection with the build-up of household debt and price trends in housing, there could be a situation where households may have based their decisions on incorrect expectations and the trend may have proved unsustainable, or that we see a tangible risk of this situation arising. This could lead to an adjustment process, where house prices fell heavily and there was a decline in the real economy as a whole. We explained in a clarification of monetary policy published in 1999 that, if we choose to take these considerations into account, we will clearly motivate our decision. If flexible inflation targeting functions well, it leads to smaller fluctuations in production, without this causing average inflation to rise. The scope for conducting such a policy is determined by households’ and companies’ confidence in monetary policy. | 1 |
It is clear, however, that the ambitions of most countries still fall short of the requirements in the Stability and Growth Pact. This is certainly attributable in part to the economic slowdown, with Italy as the clearest example. But it is also notable that the ambitions for budget consolidation are now lower than before the move to Stage Three. The relatively good growth during 1998 ought to have left room for budget consolidation in many countries but it was not used and in certain countries the structural deficit has actually increased. The Ecofin Council has in fact criticised a number of countries, including Germany, France, Austria and the Netherlands, for the low level of ambitions in their stability programmes. In Sweden, the budget position looks comparatively healthy. Our fiscal policy is likewise less restrictive than before but the structural deficit has been turned into a surplus that is now growing and the ambition is still to achieve a budget surplus of 2 per cent of GDP on average over the business cycle. At the same time it should be underscored that some variation in the objective across countries seems reasonable. The degree of fiscal readiness — and thus the requisite size of the surplus — depends on a number of factors. One is the cyclical sensitivity of government finances and another is the level of government debt. It is then reasonable that a country like Sweden has a larger public sector financial surplus than a country where the automatic stabilisers and government debt are smaller. | Even if the development of inflation in one country may conceivably disturb the path for the union, that country cannot be required to tighten its fiscal policy as long as it complies with the Stability and Growth Pact. 5 BIS Review 76/1999 Secondly, at present there is thus no mechanism whereby a fiscal adjustment could be spread over the participating countries. This is also a problem because the implementation of the Pact indicates that there is a risk of this contributing to a procyclical budget policy. To date, the Pact’s surveillance process has focused on countries with a budget deficit close to the limit. There is nothing remarkable about that: this is where the problems are most apparent and the risk of failure — with problems for the credibility of the Pact as a whole — is most acute. But there is also the risk of the Pact having a procyclical effect. Countries that are close to the maximum deficit on account of weak activity are obliged to follow a restrictive line, while those with good activity and a surplus do not need to tighten their policies in this way. This problem has arisen because the Pact was actually constructed so that it only functions properly when all the member states have established the necessary margins. That is still not the case. For the euro area as a whole it would presumably be best in the present situation if the countries with high activity were to tighten their policies even more. | 1 |
We call our system PayNow; Thailand calls theirs PromptPay. MAS and the Bank of Thailand have agreed to work together to link PayNow and PromptPay. The aim is to enable someone in Singapore to send money to someone in Thailand, and vice versa, using just their mobile phone numbers – instantly, securely, and at any time of the day. Talent and Research To sustain our FinTech efforts, we need a strong pipeline of talent and research capabilities. We are pleased to announce that MAS and the Massachusetts Institute of Technology (MIT) have agreed to enter an R&D collaboration in FinTech. This will enable our local FinTech talents to work alongside world-class researchers at the MIT Media Lab to come up with technology solutions to real-world use cases. They will run pilots using distributed ledger technology, cryptography, quantum computing and big data, artificial intelligence, and machine learning. One area where we want to make a concerted effort is data analytics and artificial intelligence. MAS is launching a $ million Artificial Intelligence & Data Analytics Grant. This is part of the $ million Financial Sector Technology & Innovation Scheme. The new grant will support the adoption and integration of AI and data analytics in financial institutions. 3/9 BIS central bankers' speeches Just as important, it will be used to help professionals in the financial sector to up-skill and adapt to the use of these new technologies. Conducive Regulation One of the most critical pieces that we must get right is regulation. | Just in the last few years, global MNCs have set up more than 30 FinTech innovation labs or research centres in Singapore. The FinTech start-up space has become a lot more vibrant. More than 400 FinTech enterprises have set up base in Singapore. We have start-ups experimenting with new ways to pay, save, invest, buy insurance, and plan for retirement. No innovation ecosystem is complete without physical spaces to facilitate experimentation and collaboration. Last year, we saw the launch of LATTICE80, Singapore’s first FinTech innovation village, occupying two whole floors of 80 Robinson Road. Well, the entire building at 80 Robinson Road will now become a FinTech innovation hub. It will be named 80RR – that’s 100,000 square feet dedicated to housing FinTechs, right in the heart of the financial district! Open Architecture A Smart Nation needs an “open API economy.” APIs are the “connectors” that allow systems to talk to one another, enabling service providers to harness information from multiple sources and produce holistic solutions for customers. MAS has been encouraging financial institutions to develop and share their APIs openly, so that they can work with other service providers to give customers a richer and more seamless experience. We started the ball rolling last year. With the Finance-as-a-Service API Playbook, banks have a common guide to identify and develop APIs. And with the Financial Industry API Register, FinTech start-ups have a one-stop shop to explore the open APIs that have been made available. | 1 |
The labor market rigidities, wage and price settings, financial market imperfection, impact of foreign direct investments and many other issues must be appropriately taken into consideration in the monetary policy implementation and probably we have all put in a great deal of effort to accommodate our models to capture these specifics. The last global crisis, with its overall severity, time length and countries coverage reactivated the importance of structural issues for the advanced economies too, pointing to the fact that not always same measure fits any situation, not always same risk affects in a same way and not always same threshold is valid for everyone. Nowadays, we speak about flexible and innovative monetary policy, designed on a broadly based information platform, incorporating structural features of the economies and all specifics of the monetary policy transmission mechanism. Since the onset of the crisis, we have tried to better incorporate financial stability aspects into monetary policy decision making. In addition, we learnt that zero lower bound rate in the advanced economies or historically lowest interest rates in emerging economies were not able to revive credit growth, until we moved towards renovating our toolkit. Nonstandard monetary policy measures in different modalities have been widely used by the central banks around the globe during the crisis period, with the ultimate goal to capture countries’ specific structural features. These tailor made measures proved to have ability for more effective monetary signals transmission, considering the additional impairments of the traditional transmission channels during the crisis. | The exponential increase of contagion effects through cross border flows and stocks, but also asset price volatility, has led to an evolution of the IMF’s view on capital flows, from its original doctrine of liberalisation, into a more pragmatic Institutional View. More importantly we need to enhance the crisis prevention toolkit and avoid excessive risktaking. Our first line of defense to address financial stability issues should be sound macroeconomic, prudential and structural policies. It is the reason why it is so important to strengthen the bilateral and multilateral surveillance of the IMF. But, prevention can never cover all risks. The Global Financial Safety Net (GFSN) has been reinforced over the past few years, thanks to the increased IMF capacity – whose total resources amount to about 1.3 $ trillion, and should be at least maintained in the future –, the development of regional financing agreements (RFAs) in Europe and Asia, and networks of central banks swaps. But the GFSN is still imperfect in coverage, and of insufficient size: total IMF resources have dropped from about 4 % of global external liabilities in 1980 to less than 1% in recent years.1 Besides, the coordination between the different layers of the GFSN should be more effective in case of a systemic crisis. There is also scope to make better use of precautionary instruments, and to protect sound by-standers without increasing moral hazard, as suggested in particular in the report of the G20 Eminent Persons Group on Global Financial Governance. B. Two new challenges after extending globalisation I. | 0 |
The suggestion made in some quarters that the MPC has slavishly followed the inflation target in recent years – that it has been fixated with inflation at the expense of growth and employment – is simply at odds with the facts. Based on the MPC’s central projection for inflation published last month, over the decade to the end of 2015, CPI inflation will average close to 3%. It will have been above its 2% target for 90% of that time, and above 3% for 40% of the time. Yes: some of this might be the result of poor forecasting. But much more important was the recognition that a lower profile for inflation was possible only by tightening monetary policy at the cost of an even deeper recession and an even larger rise in unemployment. Monetary policy has been on the frontline in supporting our economy through the financial crisis and it continues to be so. Indeed, it is striking that while some criticise the MPC for focussing too narrowly on inflation, others argue that we’ve worried too much about the real economy and taken our eye off the inflationary ball. “Is the MPC’s job to hit the inflation target or not”, they ask? Has the inflation target become a sham? The remit given to the Monetary Policy Committee makes clear that our job is to hit the 2% inflation target. | But it also acknowledges that inflation will on occasions deviate from its target as a result of shocks and disturbances, and that “...attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output”.1 Although the language is arcane, the meaning is clear: monetary policy should try to prevent damaging booms and busts in output and employment. This secondary objective matters and has been central to the recent conduct of monetary policy. To repeat: we could have delivered lower inflation over recent years, but only at the 1 The relevant clause of the remit states “The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output.” See http://www.hmtreasury.gov.uk/d/open_letter_from_chx_to_boe_22032011.pdf 2 BIS central bankers’ speeches expense of providing less support to growth and employment in the midst of the most significant economic downturn of our generation. That monetary policy should be concerned with growth as well as inflation is nothing new. Indeed, way back in 1997 – the year that the MPC was first established – Mervyn King, then just the lowly Chief Economist of the Bank of England, referred to the value of the “constrained discretion” built into the inflation targeting regime.2 The “discretion” relates to the speed with which inflation is returned to target. | 1 |
This conflict has not been talked about much, if at all, even in central banking forums; but it is, I am quite sure, one important contributing factor to the making of financial crises. Financial intermediaries are often, and rightly so, rewarded handsomely for their innovative efforts, which, it is claimed, bring a higher rate of return for those with surplus money and a lower cost for those in need of money; in other words, a narrowing of the intermediation spread, or greater financial efficiency. But there is an internal contradiction in this phenomenon. Greater profits for financial institutions and larger bonuses for those employed in them mean, to me at least, BIS Review 106/2009 1 a widening, rather than a narrowing, of the intermediation spread; in other words, lower financial efficiency. Yet we do observe greater profits and larger bonuses in the financial system along side (probably apparent) improvements in financial efficiency. For example, the innovative effort variously described as "securitisation", "originate-and-distribute", and "credit risk transfer" did raise the rate of investment return and lower the cost of credit. The explanation for this, if I may venture a guess, is in the time dimension. The observed narrowing of the intermediation spread comes at the expense of, or presages, a future, possibly sharp widening that often occurs in the context of a financial crisis. | This often results in structural defects in the financial systems that are not conducive to the maintenance of monetary and financial stability; for example, regulatory gaps, low transparency and market concentration. These defects also breed unethical behaviour. Indeed, free and open emerging markets are considered by some as markets that can be rather freely manipulated. They also call them ATMs. But I still believe that financial openness outweighs the risks of financial instability, and that the risks I mentioned just need to be, and can be, managed, simply by being sensible in the development of the financial system, reminding ourselves always that the primary purpose of the financial system is financial intermediation that supports the economy. Although it provides employment for quite a number of people, including us, and profits for a lot of capital, the financial system does not and should not have a life of its own. Gradualism is perhaps a prudent attitude, even if this means taking a little more time or appearing for a time to be not as welcoming as the top players in international finance would like. "Because others have it" is definitely a risky attitude to take in financial development. And as developed markets are going back to basics, a no-frills approach to financial development may not be a bad idea. Financial openness does not mean getting all the top brand names to set up shop in your backyard and importing innovative financial instruments and practices. Indeed, some of those innovative financial instruments may be toxic. | 1 |
On the Committee itself various suggestions have been made: to extend the terms of appointment of members of the MPC, to make those longer terms non-renewable, and to appoint people with more diverse backgrounds. By far the most fundamental of these suggestions is the proposal to appoint representatives of different industries or regions to the Committee, as opposed to monetary policy experts. That would change the nature of the debate and undermine the mutual confidence of members of the Committee in each other if it were felt that some were representing a specific interest group. With experience of the MPC, I think that this argument has come to be accepted. The proposal that the minutes of MPC meetings should include more description of individual views I discussed earlier. The Committee has been opposed to such a change for the reasons I gave. In its early days the Committee was sensitive to the view that the minutes, then published six weeks after the meeting, should be published earlier, and it shortened that lag to 13 days in October 1998. The forecast process has attracted much attention, and was discussed at length in the Kohn Report. Presenting the forecast in terms of a fan chart, in order to highlight the balance of risks to the outlook, has proved successful. But it has proved more difficult to explain the role of a projection conditioned on the assumption of constant official interest rates. | Inevitably, payment networks could become more interconnected and a single and large payment network could emerge. It then becomes essential to be in a position to manage the risks that may emanate from places beyond national boundaries. There has to be then a high level of preparedness against any disruption in the flow of information, funds and securities becomes vital. Ladies and Gentlemen, The policy response How have these developments changed the way Bank Negara Malaysia operates? In Malaysia , efforts are currently being taken on several fronts to meet the challenges arising from these trends. These range from structural enhancements to the macro surveillance systems, to strengthening of the robustness and capacity of financial players, in addition to promoting greater understanding of the intricacies of the interconnectivity, and the nature and speed of contagion risks within the overall system. On the regulatory front, closer regulatory oversight is particularly important in ensuring the strength of the risk management framework of large and complex financial institutions that are active in crossborder transactions. Towards this end, Bank Negara Malaysia is enhancing its prudential framework for the management of operational risks among such financial institutions, with the introduction of BIS Review 32/2006 1 sound practices. The Bank's prudential framework has also been refined and enhanced to ensure that financial institutions address the risk management implications of new financial products, including credit derivatives, credit default swaps, credit linked notes and collateralised debt obligations. | 0 |
Given the rapid growth of the hedge fund industry, a natural focal point is the nature of the relationship between record industry inflows, diminishing returns and the potential use of excessive leverage. Again, the basic argument is a simple one: Elevated hedge fund investment returns in the past have tended to attract a large number of new entrants into the hedge fund industry. Increasingly, these new entrants and their activities tend to eliminate market inefficiencies which had, to a large extent, accounted for the past high returns. With diminished returns, hedge funds are finding it difficult to justify their elevated fee structure. In an attempt to preserve returns commensurate with their fees, hedge fund managers might be driven to resort to increasingly elevated levels of leverage. The data on flows and returns suggest that at least some components of such a dynamic are currently at work. Record inflows to the hedge fund industry during the first quarter of 2004 have indeed been followed by unsatisfactory performances throughout most of the hedge fund industry during the second quarter of 2004. Leverage figures are much harder to assemble and to interpret than flow and performance data. The Bank of England recently concluded that overall leverage in the hedge fund industry had not markedly increased and remained moderate compared with the 1997-1998 period. On balance, however, it is not particularly useful to put too much stock in such cursory assessments of industry leverage. First, the data aggregation problem is significant. | These problems notwithstanding, the question of leverage in the hedge fund industry deserves further study. The primary focus should continue to be directed at the risk management operations and processes of the world’s major investment banks. They are the primary trading partners of the hedge fund industry. They are also the most important providers of leverage to the industry. Since the LTCM crisis, the global investment banks have clearly strengthened their risk management operations. On the other hand, the hedge fund business has become a significant source of profit for the big banks. Competition in providing lending and brokerage services to the hedge fund industry is fierce. Some erosion of lending standards is a likely consequence of such an intensely competitive environment. In light of the previously discussed difficulties in measuring leverage, senior bank executives, risk managers and bank supervisors should be particularly vigilant in ensuring disciplined lending frameworks, fierce competition notwithstanding. If the leading global investment banks maintain adequate counterparty risk and liquidity risk management systems and operations, leverage in the hedge fund industry should represent but a marginal risk to the stability of the global financial system. Fortunately, the global investment banking community is a small and concentrated one. Moreover, adequate bank supervisory structures exist and are currently being modernized. This should facilitate further study of the nexus between the risk taking of individual hedge funds and the risk management systems and processes within the world’s most important financial institutions. | 1 |
Partly reflecting the improvement in the terms of trade, the nominal krone exchange rate has remained strong. Wage costs in Norway are now very high compared with other countries, measured in a common currency. The current situation is considerably different from that of the mid-1990s. At that time, performance in the manufacturing sector was strong partly owing to solid competitiveness. Today, the manufacturing sector is faring well in spite of a strong krone and a high cost level. The reason is the unusually buoyant markets for Norwegian goods. At the same time, the strong krone exchange rate has eased the impact of revenue gains. In periods, the effects on the krone may nevertheless be somewhat excessive, partly owing to the low level of inflation in Norway. Low interest rates, increased petroleum investment, strong global growth and the improvement in the terms of trade have contributed to solid growth in the Norwegian economy. Capacity utilisation has probably reached a higher-than-normal level, and the cyclical upturn is continuing. Enterprises are steadily increasing their debt to finance investments. So far, the cyclical expansion has been marked by strong production growth, with ample labour supply and unusually low inflation. 1 2 Adjusted for lower maximum day-care rates. BIS Review 44/2006 For a long time, employment growth measured by number employed was lower than in previous upturns, partly reflecting the fall in sickness absence as of summer 2004. In 2005, the number of person-hours worked increased relatively rapidly and productivity growth picked up. | It is considerably above the range the SNB equates with price stability, namely between 0% and 2% over the medium term. How is the SNB handling this situation? We made our initial response to the emerging inflationary pressure already in the final months of last year. At the time, both inflation and also our inflation forecast were still at a low level. Abroad, however, inflation had already increased markedly. In order to reduce the inflationary pressure from abroad, at our monetary policy assessment in December 2021 we announced that the SNB would allow the Swiss franc to appreciate to a certain extent in nominal terms. The Swiss franc appreciated nominally by around 4% between autumn 2021 and spring 2022, making imports cheaper and so countering the general increase in prices. In June 2022, we then raised the SNB policy rate by half a percentage point to –0.25%. Yesterday, we tightened our monetary policy further and raised the SNB policy rate by 0.75 percentage points to 0.5%. It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term. To provide appropriate monetary conditions, we are also willing to be active in the foreign exchange market as necessary. Our tighter monetary policy is countering the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected. | 0 |
Empirical methodologies may be used to uncover interrelationships in the economy with a reasonable degree of accuracy. Haavelmo’s contribution can be put to good use when Norges Bank, as the central bank, is to set the interest rate with a view to stabilising inflation. The Bank’s monetary policy assessments and decisions must be based on knowledge it can obtain on interactions within the Norwegian economy and how the interest rate interacts. The theory the Bank applies and the empirical methodology it employs will depend on the purpose of the analysis. A model apparatus that is to be used as an aid in making interest rate decisions requires different attributes and is based on different principles than models that seek to provide optimal nearterm inflation and output forecasts. Chart: Different time horizons – different models Current statistics and anecdotal information can serve as a basis for providing some indication of how the economy has evolved up to the present. But the statistical basis is uncertain. Statistics are published with a lag and are often subject to revision. Data from different sources can provide different pictures of the situation at hand. Statistical models can provide us with good support and help distinguish between news and noise in the data. They can capture time series properties in data and correlations that in many cases will be able to produce good forecasts of developments in the next months ahead. It then makes little difference whether or not the models are based on economic theory. | Captive risks will differ from traditional insurance, and they also vary significantly between different types of captives, depending on ownership and structure, scope of business and nature of risks insured. Managing these risks cannot simply be addressed at an institutional level. Macroprudential 3/4 BIS central bankers' speeches measures might have relevance in certain circumstances. For example, a pure captive insurer that merely underwrites the risks of its parent may pose low financial and consumer risks, but if the parent is an economically significant entity, with critical financial linkages, a different regulatory response and approach might be warranted. To a large extent, our ability to design suitable regulatory frameworks for captives remains constrained by the paucity of data on captives. This needs to be addressed as a matter of priority. Broader measures need to be taken, both at a national and global level, to collect better data on captives to understand their nature, evolution and impact on macro-financial developments. Increased efforts by governments to tackle profit shifting and tax base erosion (BEPS) have been another factor behind recent regulatory developments. Significant changes have taken place affecting offshore financial centers in the past decade, shaped by heightened expectations for enhanced transparency and exchange of information between tax authorities. These winds of change are likely to pick up speed for captives. And they will change the way captives have operated in the past. Very likely it would pave the way for the transformation of offshore financial centers. | 0 |
It should come as no surprise to anyone that the conditional nature of the decisions, which has always been a significant feature of ECB monetary policy practice, should take on particular significance in the current setting of particularly high global uncertainty. Hence in the coming months the main channels through which financial shocks could affect the European economy will have to be monitored very closely. In my opinion, three factors require particular attention. First, it is necessary to gauge the true extent of the US slowdown, its possible spread to the world economy and the possible impact on exchange rates. Second, at the European level, the effect of the turbulence on the cost and availability of financing for the private sector will have to be calibrated. Finally, the possible impact on corporate and consumer confidence will have to be monitored carefully. The signs identified in these latter two channels, i.e. credit and economic sentiment, will be particularly informative for euro area economic growth when they affect countries in which consumption growth is still somewhat hesitant. I also believe that, echoing the words of the ECB President after the Governing Council meeting, this is an appropriate time to reiterate the firm commitment of monetary policy to the objective of price stability, which is the best way to promote the sustained growth of output and employment and thus the welfare of European citizens in general and of Spaniards in particular. | […] In sum, achieving price stability is not only important in itself; it is also central to attaining the other mandated objectives of maximum 12 sustainable employment and moderate long-term interest rates.” The ECB, for its part, aims to maintain price stability in the “medium term”, thus minimising economic fluctuation in the short term. In other words, in line with its mandate as enshrined in the Maastricht Treaty, the ECB is not indifferent to short-term economic growth trends. 2.4 Empirical results So, on balance, what have been the factors underlying the difference in approach between European and US monetary policy? From the empirical results we see that the overall persistence of inflation is basically alike in the euro area and in the United States, even though inflexibility is far more pronounced in the euro area. Secondly, the evidence suggests that monetary policy impacts on the process whereby inflation expectations in the euro area are shaped. These expectations have remained basically in line with the quantitative definition of price stability provided by the ECB for the best part of the last ten years, and have displayed low variability, as can be seen in Table 1. Recent studies have confirmed the importance of a clear definition of price stability. For instance, the response of long-term interest rates (which should respond better to the 13 anchoring of inflation expectations) to economic news has virtually disappeared. | 0 |
The structural problems, high inflation and speculative behaviour all warranted a realignment of economic policy. In time, the necessity of a change was supported more and more widely. The tax system was reformed and so were certain segments of the transfers system. Sweden also applied for membership of the European Union. Our currency was pegged to the ecu and during the wave of international exchange rate speculation in the autumn of 1992 the krona was defended to the bitter end in order to demonstrate the determination to re-establish a credible low inflation regime. The economic policy realignment coincided, however, with the setback that followed the bursting of the bubble from the late-1980s and the Swedish economy descended into a profound crisis. Whether this dramatic downturn could have been managed somewhat differently is a question that will no doubt be analysed in the future. Some things could certainly have been done differently in the late 1980s, as well as in the throes of the crisis. 1 BIS Review 41/2000 However, I believe that the main lesson to draw is that the roots of the deep crisis ran quite a long way back. A realignment of economic policy was essential. The fact that there had been no credible stability oriented policy regime in Sweden for almost twenty years had had far-reaching repercussions that ultimately affected our material prosperity. It was high time to establish a new anchor for monetary and exchange rate policy, wage formation and economic policy in general. | Everything suggests, moreover, that the economy will continue to impress. Last year, GDP growth was 3.8% and the increase in employment was the highest in the past twenty-five years. Another indication of the good circle in which the Swedish economy is developing at present is that forward-looking GDP assessments have also been revised upwards, whereas forecasts of inflation have not been adjusted upwards to the same degree. Financial market pricing is also a tribute to the present credibility of Swedish economic policy. Who would have believed a decade ago that the Swedish economy would achieve such a favourable path? The successful combination of relatively high GDP growth and low inflation can in principle be attributed to a number of factors. One may be the plentiful supply of unutilised resources after the crisis in the early 1990s. A change in pricing behaviour may have contributed once the rate of inflation had been brought down to a low and stable level. Increased competition in connection with, for example, deregulations, globalisation and IT commerce may also have played a part. But it may also have to do as well with an upward shift in trend productivity, so that more goods and services can be produced without an increase in prices, in other words, a higher rate of potential growth. It can be argued that all these factors have in fact contributed to the favourable development. When the upswing started there were plenty of unutilised resources. | 1 |
Unlike Norway and Denmark, Sweden has no card network of its own. At the same time, new technology is leading to new, convenient ways of paying becoming available, such as the mobile application Swish, for example. In Sweden, 6.5 million of 10 million inhabitants are connected to Swish. As the rest of society becomes digitalised, demand is increasing for digital payments and, above all, for rapid payments that can be made in real time. For the Riksbank, this means adjusting or complementing the RIX system so that it is able to manage instant payments in a secure and efficient manner. It is important to ensure that all participants involved in payments act under equal and equitable rules. At the moment, we are busy analysing whether we can take advantage of our European cooperation by joining the European Central Bank’s system for instant payments. 4 We are aware, however, that this would mean that part of our infrastructure for payments would thereby end up outside Sweden’s borders and are thus mulling over whether some kind of domestic back-up would be needed and over how the ekrona could be paired with this as a complementary means of payment. This is particularly important as we expect instant payments to become increasingly important in the future. The trend towards a cashless society has also continued – a trend that risks leaving Sweden without functioning cash in the near future. My speech two years ago was part of a proactive strategy to create different alternative courses of action from this trend. | 12 Ongoing efforts to recreate safe, transparent and consistent securitisation may, to some extent, support the supply of safe private collateral. 13 Against this background, rebalancing the euro area fiscal stance towards faster debt reduction in high debt jurisdictions, and using fiscal space where it is available, would yield benefits for the supply of safe collateral. 14 See e.g. Corradin, S., F. Heider and M. Hoerova (2017), “On collateral: implications for financial stability and monetary policy”, ECB Working Paper No 2107. 15 See e.g. Mancini, L., A. Ranaldo and J. Wrampelmeyer (2015), “The Euro Interbank Repo Market”, The Review of Financial Studies, Vol. 29(7), pp. 1747–1779. 16 See the Opinion of the European Central Bank of 8 November 2017 on amendments to the Union framework for capital requirements of credit institutions and investment firms (CON/2017/46). 17 See Cœuré, B. (2017), “The known unknowns of financial regulation”, panel contribution at the conference on Rethinking Macroeconomic Policy IV, Washington D.C., 12 October. See also the ongoing FSB-led review of incentives to centrally clear, the Derivatives Assessment Team (DAT). 18 See FSB (2015). 19 See FSB (2017). 10 / 10 BIS central bankers' speeches | 0 |
This is understandable, given the sheer size of China and, particularly for Asia, where China is now a most important component of an economically integrated region. As I argued earlier, interdependence is synonymous with the transmission of financial shocks, particularly financial contagion. It is therefore in the interests of others 6 BIS Review 66/2004 in Asia to understand China, where the dilemma between pursuing financial openness and the maintenance of financial stability is a most difficult one to resolve. The ability of China to get it right in meeting the many challenges of this task has serious implications for all. And, as I also argued earlier, the dynamics of Asian finance are such that financial crises do not necessarily occur or be most serious at source. The task confronting China is, arguably, a task for others in Asia as well. Whether one adopts the inward-looking attitude of trying to limit possible contagion to the domestic market, or becomes more proactive in contributing, through appropriate assistance and co-operation, to the effective performance of that task in China, or both, is a matter of choice for individual jurisdictions. For Hong Kong Special Administrative Region, which is part of China but operates different banking and monetary systems under the arrangement of “One Country, Two Systems”, we are too close to the Mainland to afford to be inward looking. | Domestic demand for equipment goods could even turn out to be the most severely affected component of final demand. Developments have been slightly different for the construction sector and its most important component, residential investment. Housing construction has been in decline for the past few years, although the cut in interest rates could now halt this trend. All these factors have brought about a sharp deterioration in business confidence, which should put a damper on job creation in our country. Unemployment will start to rise again. Consumption should continue to grow, but at a considerably slower pace. The household sentiment indicator was sharply down at the beginning of the fourth quarter, reflecting expectations of greater job insecurity. In contrast, the unexpected fall in inflation will contribute to an increase in real income, which will support consumption. For 2009 as a whole, the SNB is forecasting a decline in real GDP. This decline is likely to lie between 0.5% and 1%. Changes in monetary and financial conditions As I mentioned in my opening remarks, the target range for the three-month Libor has already been cut by 175 basis points in three steps since our September assessment. These successive cuts were rendered necessary by a number of factors that contributed to a tightening of monetary conditions, whereas the deteriorating general economic environment 2 BIS Review 157/2008 called for relaxation. | 0 |
The Riksbank has emphasized that one should see the price stability objective in an annual perspective—nothing more precise than that. As to the width of the band, we have started from an interval of +1 per cent, which is fairly normal among countries with an inflation target. Summary The policy with an inflation target has functioned well in Sweden and in other countries that have chosen to work with an inflation target. Inflation has become low. In addition an increased understanding of a policy directed at price stability has been created in Sweden as well as in other countries with an inflation target. This is especially notew orthy because many of the countries which now work with an inflation target are the very same countries that earlier had problems with inflation. When monetary policy is conducted with an inflation target, production and employment are normally stabilised too. For example, increased demand usually implies an increased rate of inflation. When inflation forecasts indicate that a risk for inflation will exceed the target, raising the instrumental rate is warranted, thereby also slowing down demand growth. In practice the room for an active stabilisation policy is circumscribed by the uncertainty about future inflation. Another important complication relates to how credible the policy is. Increased credibility of monetary policy creates more room for both rapidly shifting BIS Review 56/1997 - 10 - policy in a more expansionary direction in situations of weakening demand and deferring interest rate hikes. | It is important to note that the big changes which occurred in the repo rate and thus in the interest costs of housing in recent years were linked to the transition from the high inflation regime of the seventies and eighties to a regime of price stability. A continued confidence in the low inflation regime would imply that such large changes in the interest rate component are less likely in the future. It is evident from what the Riksbank has said earlier in various contexts that there are price effects, which will not be caught within the tolerance interval and which we do not need to counteract fully by monetary policy measures. Attempts to do so could destabilise the economy further, partly due to time lags in the effects of monetary policy. Consequently, if unexpected disturbances were to occur, or if taxes and subsidies were to be changed, for example in connection with a major change in the tax system, we would have to accept that this would have an immediate effect on the price level. Temporary deviations from the targeted inflation rate may therefore happen. What is important with respect to such deviations is to drive inflation back to the target within the horizon where monetary policy has its biggest effect on price developments. The possibility to achieve the inflation target is accordingly affected not only by how the target variables are defined, but also by what time perspective is used when the policy is evaluated and how wide the applied tolerance level is. | 1 |
Therefore, Sweden had already learnt the importance of maintaining sustainable deficits and debt levels, and had already imposed many of the public reforms required to deal with structural problems that can inhibit economic recovery. BIS central bankers’ speeches 5 (ii) access to the necessary information and the analytical capability to set policy; and (iii) control over a sufficient set of tools to achieve its mandate. The need for a clear mandate Effective governance arrangements must ensure that the macroprudential agency has a clear mandate. That is, the objectives of macroprudential policy, the tools available to the macroprudential agency and the interaction of macroprudential policy and other public policies must be clearly set out. This is necessary to ensure that: (a) there is no ambiguity about the macroprudential agency’s role; (b) expectations on the agency are in line with what it can achieve; (c) the macroprudential agency can be held accountable for its actions (or lack of action); and (d) any overlaps between policy areas or agencies can be better handled. It may be desirable to set out the macroprudential mandate (and objectives) explicitly because this could make it easier for the macroprudential agency to defend unpopular but necessary interventions. It would also allow policy objectives to be ranked, which would help manage policy trade-offs. However, when setting explicit mandates or objectives in law, care must to be taken to avoid inadvertently constraining policy actions. This is a potential problem because we do not fully understand the variables that influence financial stability. | This is best illustrated by considering the relationship between macroprudential policy and monetary policy. Monetary policy instruments can affect financial stability Monetary policy instruments can have an effect on financial stability. Recently, it has been proposed that monetary policy can affect the build-up of risk in the financial system through the “risk-taking channel”, an independent and previously unrecognised part of the transmission mechanism. 8 There are a number of ways in which (loose) monetary policy is said to encourage risk-taking. Low interest rates can encourage investors to substitute lowyielding, safe assets for higher yielding, riskier assets – the “search for yield”. Investors (such as pension funds) may make this substitution in the hope of attaining returns that match their commitments. 8 The concept of a risk-taking channel was introduced by Claudio Borio and Haibin Zhu in “Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?” BIS Working Paper No.268, 2008. BIS central bankers’ speeches 7 Alternatively, investors may be encouraged to take greater risks if they perceive that monetary policy is being used asymmetrically – that is, that the policy rate is reduced aggressively in the event of a sharp fall in asset prices but the policy rate is not used to address sharp increases in asset prices. Another, more indirect channel, is formed by a feedback loop that amplifies asset price increases and causes banks to increase their holdings of risky assets. | 1 |
But perhaps equally important is the fact that it has been possible to adjust workforces and wage growth at a local level. First, companies can adapt the use of labour to production by using overtime, part-time positions or contract labour. Moreover, the supply of labour is highly flexible. When demand rises, the number of job-seekers increases. Those who are already employed work more. During upturns, we have in particular observed an increase in labour force participation among young people. Along the same lines, the number of persons in education tends to rise when unemployment is rising. When labour demand increases, we see an influx of job-seekers from our neighbouring countries. In addition, close to 30 000 persons had some form of employment in Norway throughout or during parts of 2001, but resided in Sweden. With the enlargement of the EU, Norway has become part of an extended labour market. Enlargement also provides scope for increased trade in services. This increases the production capacity of the Norwegian economy. For example, it seems that capacity in 1 See Kydland, F.E. and E.C. Prescott (1977): “Rules rather than discretion: The inconsistency of optimal plan”, Journal of Political Economy 85, pp. 473-490. 2 See Akram, Farooq Q. (2003): “Reell likevektsvalutakurs for Norge” (Real equilibrium exchange rate for Norway), Norsk Økonomisk Tidskrift 118, pp. 89-112. 4 BIS Review 21/2005 the construction industry has increased. The activity level is now very high, and there are still no signs of rising wage growth. | The current upturn has lasted about two years. The fairly low level of growth in employment, as measured by the number of employed, must be seen in the light of the sharp decline in sickness absence through 2004. The decrease in sickness absence has reduced the need for new employees. Measured in terms of person-hours worked, employment growth was solid last year. 2 BIS Review 21/2005 Inflation was low in 2004. Underlying inflation rose by 0.3 per cent from 2003 to 2004. The unusually low rise in prices for imported consumer goods over the past few years is partly due to structural developments, primarily changes in Norwegian import patterns. It is difficult to estimate how long the effect of these changes will last. High capacity utilisation, a tighter labour market and higher wage growth imply that the rise in prices for domestically produced goods and services will move up in the years ahead. The projections for the years ahead are based on a gradual rise in the interest rate. This is in line with financial and foreign exchange market expectations. A gradual rise in the interest rate will after a period curb the strong growth in demand, and capacity utilisation in the economy will decline and then stabilise. Economic policy tasks The various components of economic policy have varying effects. This is why they have different functions: • Monetary policy steers inflation in the medium and long term and can also contribute to smoothing swings in output and employment. | 1 |
As the Presidents of the European Council, European Commission, Eurogroup and European Central Bank argued in their report, European monetary union, which has so far relied on fiscal rules, will not be complete until it builds mechanisms to share fiscal sovereignty.27 Possible 23 Kenen (1969). 24 This refers to a fall in output relative to potential output. See Chamberlin et al (2013). 25 These estimates are reported in Melitz and Zumer (2002). 26 The Delors Committee (1989) report, which provided the foundation for monetary union in Europe, recognised that market discipline would not be sufficient to ensure that participating countries followed sound fiscal policies, and that fiscal constraints would therefore be required. Beetsma and Uhlig (1999) provide a formal motivation for the resulting stability and growth pact as a device to internalise the costs of inflation that might otherwise result from imprudent fiscal policies. See also Chari and Kehoe (2007). Recent experience demonstrates that overindebtedness can also have costly spillovers through financial crises. 27 See Barroso et al (2012). BIS central bankers’ speeches 7 options range from a transfer union to a pooled employment insurance mechanism. Whatever is ultimately chosen, the degree of fiscal risk sharing will likely have to be significant. Similarly, in a monetary union between an independent Scotland and the rest of the UK the two Parliaments would have to agree on whether fiscal rules were sufficient or whether similar risksharing mechanisms were necessary. | Solvency II allows insurers to apply to the PRA for permission to use a model to calculate their capital requirements. The purpose of these models is to estimate the amount of capital needed to protect the insurer against losses in a ‘1 in 200’ scenario over one year. They are highly complex. Taking the example of a life insurer, a typical model might involve: Producing a base balance sheet. Many assets and liabilities can be valued without models: for example using market prices. But other valuations are themselves based on models; Estimating a distribution of outcomes over one year for the material risks to which the insurer is exposed: such as, changes in interest rates, credit spreads, inflation, property prices, longevity, etc; Assessing to what extent these risks are inter-dependent: for example, asset prices are related to interest rates; Estimating the impact of the combination of risks to which the insurer is exposed on its balance sheet across many different scenarios; Taking these outputs and converting them into a simpler set of equations – or proxy model – that relates the insurer’s net assets to a series of risk factor inputs. The purpose of estimating a proxy model is to make it tractable to run many more scenarios. The complexity of the underlying valuation models would make this impractical computationally. | 0 |
But even before all these trade tensions started, value chains around the world had begun to change in even more significant ways, thanks in part to the advancement in technology. To this point, I’d like to highlight a few observations by McKinsey Global Institute report earlier this year. 5 First, services are becoming a larger part of the global value chain. Cross border services are growing more than 60 percent faster than trade in goods. The valueadded share of services is increasing as firms around the world today are spending more on brands and intellectual property. Manufacturing firms in many areas start providing leasing services, which add value to downstream processes and blur borders between products and services. In addition, as people’s standards of living increase, they shift their consumption towards services, which could range from tourism, medical services, financial services, and educational services. Unlike trade in goods, trade in services are not the focus of the ongoing trade tension, which makes service-related value chains less vulnerable. The second observation is that global value chains are becoming more knowledge-intensive and are relying more on high-skill labor. This is partly attributed to the first observation, as service-related tasks generally require higher skills than manufacturing tasks. The introduction of technologies such as automation and the rising wages in developing countries diminish the importance of labor-cost differences. Contrary to the common perception that the global value chains are driven by cheap labor in developing countries, today less than 20 percent of global trade is driven by labor-cost arbitrage. | Palmqvist, Stefan (2013), “Konsumentprisindex i Sverige och Kanada är inte så lika” (The CPI in Sweden and Canada are not so similar) (In Swedish) Post on the blog Ekonomistas, http://ekonomistas.se/2013/11/20/konsumentprisindex-i-sverige-och-kanada-ar-inte-sa-lika/. Reserve Bank of Australia (1998), The Implications of Recent Changes to the Consumer Price Index for Monetary Policy and the Inflation Target. Reserve Bank of Australia Bulletin, October. Reserve Bank of New Zealand (1999), Minor Technical Change to Inflation Target. Press release, 28 October. The Riksbank (2010), The Riksbank removes the tolerance interval from its specified monetary policy target Memorandum, Basis for Decision, 31 May 2010, http://www.riksbank.se/Upload/Dokument_riksbank/Kat_publicerat/Pressmeddelanden/2010/ nr27_beslutsunderlag.pdf. The Riksdag (2014), Committee on Finance appoints top names to evaluate the Riksbank's monetary policy. Press release, 17 June. Skingsley, Cecilia (2015), Inflation-targeting policy after the financial crisis. Speech at Almega, 22 May. Svenska Dagbladet (2015), “Professorn varnar för låga räntan,” (Professor warns about low interest rate) (In Swedish) 18 November. 10 BIS central bankers’ speeches Figure 1. Stable Swedish economy Note: The yield differential refers to 10-year government bonds, monthly data. Sources: Thomson Reuters and the Riksbank Figure 2. Major direct impact of interest rate changes on CPI inflation Note: Weighted mortgage rate is chained in December 2014 due to an altered measurement method. Sources: Statistics Sweden and the Riksbank BIS central bankers’ speeches 11 Figure 3. CPI inflation varies a lot more than CPIF and HICP inflation Note: The CPIF is the CPI with a fixed mortgage rate. HICP refers to the EU-harmonised index for consumer prices. | 0 |
This assessment still applies, and it is gratifying that recent events have confirmed an improvement, although forecasts of the future of course remain uncertain. 8 BIS central bankers’ speeches Figure 6 Positive signs Purchasing Managers’ Index PMI, manufacturing industry, seasonally-adjusted data 70 70 65 65 60 60 55 55 50 50 45 45 Sweden 40 40 USA EMU 35 35 30 30 06 07 08 09 10 11 12 13 Source: Markit Economics Uncertainty remains However, apart from uncertainty regarding developments in the euro area there are, to paraphrase Donald Rumsfeld, the former Secretary of Defence of the United States, also other “known unknowns” that may affect the short-term prospects. One example of this is if there is a tangible change in market expectations regarding monetary policy in the United States. Ahead of yesterday’s meeting of the US central bank, the Federal Reserve, long-term interest rates had risen in the United States and Europe, partly due to expectations that the Federal Reserve would reduce its asset purchases and partly due to the more positive signals about the performance of the economy. Share prices have risen in parallel with the rise in interest rates. However, a side effect of the better growth prospects and the expectations of a less expansionary monetary policy in the United States has been that several emerging economies have been hit by capital outflows. | Economic activity improving When it comes to the prospects for higher demand from the euro countries following the debt crisis and all the structural problems, I have become gradually less pessimistic over the last 12 months. This is for example because several highly-indebted countries have made progress in reducing their budget deficits. The Swedish crisis of the 1990s made a great impression on me as an economist and my experience from that period tells me that when households and companies see that the worst problems are over and that the situation is being managed then there is potential for increased confidence about the future, which we have also seen in recent months. This is despite the fact that unemployment is still high and that the recovery of economic activity in these countries is starting from a low level. Of course a lot remains to be done and here the responsibility primarily lies with the politicians in the respective countries. The euro area’s common monetary policy is an important tool for easing the readjustment, but it cannot correct all the causes of the crisis. This requires decisions at the national level in order to come to terms with weak public finances and to change economic and political structures so that competitiveness is improved. It has long been the Riksbank’s assessment that the crisis can be resolved in an orderly way and that economic growth will gradually improve. | 1 |
If policy is given the narrower goal of protecting the banks from the cycle and it proves possible to set clear rules in place (for example a simple leverage ratio) there would be no need for a further policy maker to be involved. However if policy is given the broader macroeconomic goals of stabilising credit – protecting the cycle from banks if you will – and judgement is required on the state of the cycle and whether and when to vary the rules, then it would be essential for the Central Bank to play a leading role, albeit in close consultation with the regulator. In my view that is the more likely outcome. Conclusion One theme you may have noticed in these reflections is the need for policy makers to be willing to back their judgements – whether in identifying asset bubbles or identifying firms or markets which threaten financial stability – and to take pre-emptive action. For example, if most macro-models were not giving us warning signals in recent years, our analysis of the financial sector certainly was. As I mentioned earlier, successive Financial Stability Reports did set these dangers out in 2006 and 2007 and indeed earlier. One of the lessons we have acted on already is to make more of such warnings. | A single regulator Alongside this macro framework, there was a consensus that industry and commerce was best left to the market with market failures and externalities controlled by independent regulators, like OFGEM, OFCOM and OFWAT, rather than through ownership. In the case of the financial services sector, responsibility was given to the FSA and banking supervision moved out of the Bank. The new FSA inherited from the Bank an approach to prudential supervision in particular which was based as far as possible on principles rather than a detailed rule book . There were positive and negative reasons for that move. The positive were that a single financial regulator would be more effective at a time when the lines between banking, insurance and securities dealing were breaking down. It was efficient for the firms to have just one regulator to deal with and good for the regulator to be able to look at all aspects of their business. On the negative side there was a worry that responsibility for supervision even of banks could unbalance the Bank and distract it from its monetary role. So while the Bank retained a role in promoting financial stability and monitoring the vulnerabilities in the system as a whole, it was not given any statutory objectives or powers in the new legislation. This piece of the UK system was controversial in some quarters but it definitely topped the international best buy tables in 2006. | 1 |
Bandid Nijathaworn: East Asian financial markets – some thoughts on the way forward Speech by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at a high level panel on “East Asian financial markets: the next frontier” seminar organised by the World Bank and Hong Kong Monetary Authority, Hong Kong, 22 June 2006. * * * Thank you Mr. Chairman, First, let me thank the World Bank and the Hong Kong Monetary Authority for the invitation. It is always a pleasure to be here in Hong Kong, and I should also congratulate the organizer for putting up what looks like another important and useful seminar. My task today is to speak on East Asian financial markets. In the recent years, I think there is no disagreement that the economies and the financial markets in East Asia have gone through an important phase of transformation and growth. So, it is ideal that we do take stock and think ahead on how things should best evolve going forward, so that the region’s economic potentials would be best leveraged, and to see what role can the region’s financial markets play. Given the limitations of time, I want to use this opportunity to make just two points. The first is the issues that are currently being discussed in the region on the areas that we need to do more in developing financial markets in East Asia. And the second is my view on the role that policy can play in supporting future developments. | The first is that, while it is agreed that more needs to be done to achieve a robust and diversified financial system, the key focus of financial sector reform in the region should remain to be the serviceability or access to finance for the majority of the region’s population. This is to say that for financial sector development to really matter, the people of East Asia across all income groups must be able to enjoy the access to and the benefits of a modern financial sector. The second is the observation that the region’s financial sector continues to be less integrated within the region than with the rest of world. And it follows that, with weak regional integration, the region will lose the opportunity to leverage on its own high levels of savings to support investment. The financing cost for corporates and SMEs will also be higher because of the round-tripping of funds. This, I think is a fair and important point, because greater reliance on the region’s own savings will help reduce the volatilities associated with capital reversals that we have seen in the recent months. The third is the concern that, despite rapid growth, the role of Asian financial institutions remains small. Their participation in the region’s finance, especially cross-border finance, is not at par with the flows of savings that need to be intermediated. | 1 |
Judging from the monetary indicators of these recent years, we notice that Lek supply (M2 growth) in the internal market has been declining due to the lack of government’s privatization incomes, which the Bank of Albania converted in Lek by injecting liquidity in the market. The reduced Lek supplies, together with its increased demand (due to the high interests rates of financial assets in Lek during 2003), have been exercising pressures on the Lek appreciation during 2003. 1 4 Foreign sector forecasts belong to June 2003. BIS Review 8/2004 3. Main suppositions of the monetary program of the Bank of Albania for 2004 In designing the monetary program for 2004 particular attention was given to the Bank of Albania’s target, that is keeping up the annual inflation rate within the limits of 2-4 percent. In hitting this target, the monetary program aims the control of money supply growth so that the level of real monetary assets responds to the real needs of the economy for a 6 percent economic growth. The economy demand forecast does still rely on the quasi-constant velocity forecast of money circulation. This forecast, judging from the nominal GDP level, is the bridging gap between inflation and money supply growth (intermediate objective). The monetary program guarantees the observance of quantitative objectives set by the Bank of Albania, the level of NDA and NIR of the Bank of Albania within the limits and the control of government’s domestic borrowing at the level of 2.7 of the GDP. | In these last three years, it was within the interval of 2-4 percent, as targeted by the Bank of Albania. 2. Monetary program of 2004 Pursuant to drafting and implementing the monetary policy, the Bank of Albania designs each year the monetary program, which is a financial plan aiming at disciplining the funds circulation in economy, in conformity with the development objectives of the country. The main objective is meeting the needs of the economy for monetary assets, without influencing the balance of demand-supply for monetary assets, generating thus inflation or shrinking the economy. The monetary program of 2004 has also been set up on the same premises. Its not a secret the fact that in the coming year as well, as in the previous ones, the two main decision-making institutions of the country in the field of economics and finances, the Albanian Government and the Bank of Albania, have agreed upon the general objectives of the country’s development, including also the so called harmonized cohabitation between the fiscal and monetary policies. This process, albeit all, was part of a constructive consultation with institutions such as IFM and the WB, enabling thus a new financial agreement between these two institutions for 2004. BIS Review 8/2004 3 Table 2. | 1 |
This can be done in a variety of ways: reverse repo transactions with dealers and other counterparties, securities sales from the Fed’s portfolio or bill issuance by the Treasury, with the funds deposited at the Federal Reserve. Although our ability to pay interest on excess reserves is sufficient to retain control of monetary policy, it is not bad policy to have both a “belt and suspenders” in place. As a result, we are working out ways to drain reserves to provide reassurance that we will not – under any circumstance – lose control of monetary policy. A related concern is the question of whether the Federal Reserve will be able to act quickly enough once it determines that it is time to raise rates. This concern reflects the view that the excess reserves sitting on banks’ balance sheets are essentially “dry tinder” that could quickly fuel excessive credit creation and put the Fed behind the curve in tightening monetary policy. In terms of imagery, this concern seems compelling – the banks sitting on piles of money that could be used to extend credit on a moment’s notice. However, this reasoning ignores a very important point. Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. | This does not differ much from how the Federal Reserve has behaved historically – set the fed funds rate at a level consistent with the desired level of economic activity and inflation over time. So how does the IOER rate relate to the fed funds rate? The two rates are likely to track each other closely in most circumstances. 4 First, banks generally do not have any incentive to sell fed funds at rates below the IOER rate. Only nondepository institutions – such as the government sponsored enterprises (GSEs) – that can buy and sell fed funds but are not able to hold excess reserves with the Fed, might have an incentive to sell fed funds at rates below the IOER rate. But even in this case, the fed funds rate would not likely fall far below the IOER rate. After all, if the fed funds rate were to fall significantly below the IOER rate, banks could purchase the fed funds and hold them as reserves with the Fed, earning the difference. The ability of banks to engage in arbitrage should limit the size of the deviations between the IOER rate and the fed funds rate. Thus, through the IOER rate, the Federal Reserve can effectively retain control of monetary policy. In addition to paying interest on excess reserves, the Federal Reserve also has the ability to drain the excess reserves from the banking system. | 1 |
2 BIS central bankers’ speeches Chart 3 Total sovereign debt in advanced economies is almost as high as it was after World War II, following a period of soaring, debt-financed military spending. The long post-war boom helped to reduce debt. Experience shows that it is difficult to restore growth after a financial crisis. Necessary austerity measures can amplify an economic downturn, with falling tax revenues and rising spending on benefits, trapping both public finances and economic activity in a downward spiral. This is what we have seen in Europe. Today, economic growth is low in virtually the entire OECD area. Many countries are forced to implement fiscal consolidation measures, while there is also a need to stimulate the economy and create jobs. That is a difficult balancing act. The European crisis was acute about a year ago, at the beginning of 2012. Spanish and Italian government bond yields had risen markedly. The reason was not only the uncertainty related to sovereign debt problems in those countries. Markets also reflected fears that the construction – European monetary union – might crumble. The question of the fate of the euro was on the table. Through 2012, the European Central Bank (ECB) intervened with resolute measures to calm the markets. The banking system was offered large amounts of long-term funding. In summer 2012, the ECB declared that it was prepared to make unlimited purchases of government debt which fulfill the conditions for borrowing from the European Stability Fund. These measures seem to be working. | And it is key to the 1 2 www.bankofengland.co.uk/-/media/boe/files/record/2017/financial-policy-committee-meeting-september-2017.pdf www.bankofengland.co.uk/financial-stability-report/2018/june-2018 2 All speeches are available online at www.bankofengland.co.uk/news/speeches 2 Bank’s objectives – risk free rate transition is a core part of the Bank’s strategic goal to catalyse reforms in financial markets to make them fairer and more effective. The good news is, transition is happening. There has been real progress in establishing SONIA as the successor to sterling Libor. In the past 6 months there have been a number of positive developments in the sterling cash market. From a zero base this time last year, SONIA linked floating rate note (‘FRN’) issuance now dominates sterling floating rate financials issuance and there is clear momentum towards using the compounded SONIA rate across bond markets. The first 5 months of 2019, have seen 21 different banks, sovereigns, and supranationals issue FRNs referencing compounded SONIA, with a total value of about £ We’ve also now seen the first move by a bond issuer to switch their outstanding Libor linked bond to reference compounded SONIA instead. They are currently going through a bondholder Consent Solicitation process, with the deadline next week. This is a development which is being closely watched. We have also seen the first SONIA linked securitisations issued. In other areas, we are seeing progress. One UK firm has announced it has switched the basis of its balance sheet over to SONIA. | 0 |
But there are also costs: a loss of seignorage; constraints on liquidity management, including the provision of lenderof-last-resort support; and substantial costs associated with the transition process. In the case of Hong Kong, we would also face important legal issues regarding the provisions of the Basic Law, as well as how to provide an efficient US dollar clearing and settlement system in Hong Kong. We will continue to study these issues because, at the very least, research into all possible options helps us to clarify and refine our existing policies. I am, however, confident that the measures taken last autumn to strengthen the currency board arrangements, and the additional credibility gained from weathering the storm of 1997-98, have put the existing system on an even more solid — and sustainable — footing. Conclusion To recap the main arguments in this presentation, let me reiterate that exchange rate policies must meet the needs of the economy they serve if they are to be more than mere empty promises. They must also be compatible with broader policy choices and capable of sustaining the external shocks that arise in an increasingly globalised financial environment. In particular, as the Asian financial crisis has demonstrated, the exchange rate regimes devised for small and open economies must be able to deal with ‘hot’ capital flows, which are not only the conductors of external shocks, but increasingly the main agents of volatility and instability. This is no easy matter, as the collapse of one exchange rate policy after another has shown. | By ‘all parties’ I mean both the industrialised countries and the emerging market economies. Countries that perceive that they have little at stake in improving the system from their own perspective may be underestimating the implications on their own growth of sound growth in emerging market economies. And emerging markets that have been through the crises of the past two years have valuable experience to contribute and special needs to address. The path taken by Hong Kong Let me now turn to Hong Kong’s experience in the light of the general points I have made above. As you may know, Hong Kong had only a relatively brief experience with floating exchange rates, from 1974-83. This episode was not very satisfactory: inflation rose to rather high and volatile levels, and the period ended in an exchange rate crisis triggered by uncertainties about the objectives of monetary policy and about Hong Kong’s political future. Against this unfavourable background, the linked exchange rate system was reintroduced to restore confidence and stabilise expectations. In addition to these psychological factors, there was - and still is - a strong case for believing that a fixed exchange rate regime was appropriate from the point of view of Hong Kong’s fundamentals. Hong Kong is a very externally oriented economy, with a completely open capital account and a large financial sector. These factors leave us heavily exposed to financial shocks stemming from volatilities either in domestic confidence or in external markets. | 1 |
In recent years, long-term interest rates have gradually fallen to historically low levels, which has led to a search for yield, investors seeking new asset types, which initially also benefited the hedge funds. Hedge funds and the financial markets Hedge funds fulfil several valuable functions in the financial markets; they provide liquidity, they improve pricing and they increase transparency. The fact that hedge funds contribute to better liquidity is particularly noticeable in new and more complex markets, such as the market for credit derivatives, where the hedge funds currently account for an estimated 25 per cent of the activity among primary dealers. The hedge funds that have specialised in identifying mispriced assets – that is, classic arbitrage – often contribute to more correct market pricing, which in turn leads to a more efficient 4 BIS Review 116/2006 allocation of resources and better risk management. This is an important contribution to the efficiency of the financial markets. However, as I observed at the beginning of my speech, the rapid growth in hedge funds has created an international debate on the risks entailed in their operations and potential negative effects on the financial system. There is concern both for the role of the hedge funds as counterparties to other agents and for the hedge funds’ own activities. With regard to counterparty risks, these mainly concern the banks’ exposures to hedge funds and indirect risks through contagion effects in the markets. Large and complex positions in certain markets may make the contagion risks difficult to distinguish. | Somewhat unexpectedly, it has also turned out that the CCP provides a comprehensive national picture of total outstanding student loan balances and delinquency rates that heretofore did not exist. It was in a Quarterly Report, for example, that we first reported that student loan debt exceeded credit card debt, in early 2010. Our findings helped bring the surge in student debt and delinquencies to the attention of the public. Our research also highlighted its potential implications for consumption growth, showing a strong association between the increase in student loan debt and the decline in mortgage and auto loan origination rates over the past few years. Coming back to the broader issue of data innovation, it is interesting to note that dataset merges have been behind a growing number of important academic studies and research findings in recent years. While showing how the value of datasets can be greatly enhanced by linking them, these studies underscore the need for creative thinking to maintain anonymity and representativeness of the matched sample. We are currently pursuing various ways to enhance the value of the Consumer Credit Panel further by linking to property deed records, employer payroll records, small business credit data, and student college records. The CCP shows how existing data – in this case credit reports – can be re-purposed to serve new public policy and research uses. But sometimes existing data sources just can’t provide the answers we need, and in those cases data innovation requires creating something completely new. | 0 |
from pension funds looking to maturity-match their longterm liabilities). What this means is that it is difficult to separate moves driven by changes in market liquidity, investor mandates or preferred habitat from moves driven by changes in underlying inflation expectations. For me, the inflation swaps market, which has grown and deepened in recent years, gives a more reliable read on underlying market participants’ views of inflation expectations than the gilt market data. Those swaps suggest that there has been little change in medium-term inflation expectations for some time (Chart 11). Chart 11 Medium term inflation expectations derived from inflation swaps(a) Per cent 5 4 3 2 1 2005 2006 2007 2008 2009 2010 2011 Sources: Bloomberg and Bank calculations. (a) Based on the 5-year, 5-year forward. Policy In these remarks, I have tried to explain how I personally read the main forces acting on the outlook for GDP growth and CPI inflation over the next few years. The final step is to explain my policy vote based on those views. At the moment, I see the risks to CPI inflation in the medium term as broadly balanced, around the 2% target. In particular, I expect that the upside risk from any deterioration in the level of potential supply is broadly offset by the downside risks to consumer spending. While there are certainly upside risks to the outlook from higher inflation expectations, those are not of immediate concern. | • Additional work is also needed on the concept of liquidity buffers, with some firms continuing to rely too much on uncommitted sources of liquidity. • And stress testing and scenario planning remain areas of continued focus, with challenges in designing scenarios that are sufficiently extreme. Beyond liquidity, additional work is needed in the area of capital planning. While this is not an area that financial market utilities have spent considerable time and resources on in the past, it is an area we will continue to focus on in our reviews and expect continued development and improvement over the coming year. As the industry continues to build resilience to future shocks, by enhancing the management of and the amount of capital and liquidity, as two important elements of resilience, the financial system will continue to grow stronger. It’s essential, though, that all parts of the financial system – banks, non-bank financial firms, market utilities – achieve enhanced resilience. Simply having one part of the system robust to future shocks, with other parts – connected and linked within the system – less robust, leaves the system vulnerable to future shocks and instability. Management I’d like to turn now to the second element of our supervisory framework: management. In addition to our focus on resiliency as an essential element in strengthening the financial system, we see enhanced risk management and corporate governance as a complement to resiliency and necessary to achieve stronger firms and a stronger system. | 0 |
It cannot be stressed too strongly that although the Riksbank’s sights are consistently on the target, inflation will always tend to hover around the bull’s-eye. Looking back, however, it will be seen that ever since the target was instituted, inflation has on average been very close to it. The intention is that this will continue to be the case in the future. More and more signs of a recovery So it is not the transitory price shocks that give the greatest cause for concern. Things are worse if we cannot rule out the possibility that part of an increase in inflation stems from strong activity earlier. Such effects usually show up after some time and tend to persist. During a strong upward phase, firms can begin to pass through rising business costs to consumers in the form of higher prices. Perhaps it is precisely this we have seen recently, at least to some extent. Support for such a conclusion may lie in that fact that, according to the latest statistics, the average wage level in Sweden is rising somewhat faster than is compatible with a 2 per cent inflation target. This may indicate that resource utilisation is in some sense more strained than we counted on earlier. If economic activity in Sweden were to rise only moderately, leading in time to a weakening of inflationary pressure, the risk of inflation would diminish. | In Sweden, economic policy has charged the economy with a good deal of stimuli that can help to generate a broader increase in demand now that the stocks cycle is beginning to have a favourable effect and the prospects for the international economy are brightening. As a result of lower taxes and increased transfers, for example, most things suggest that household purchasing power is rising comparatively strongly this year. Seen over a complete economic cycle, the Riksbank’s instrumental rate is comparatively low. Considering the rate of inflation and the signs that activity is picking up, the real repo rate (the repo rate less the rate of inflation) can be said to be low. Then there is the weak exchange rate, which has subdued effects of the international slowdown and is now helping to stimulate the export-oriented sector. All this amounts to not inconsiderable stimuli to general demand in the Swedish economy, stimuli that look like materialising successively. How heavily should we tread on the accelerator? If inflation, even disregarding the temporary effects, is above the target initially, activity is entering an upward phase and economic policy’s impact on the economy is expansionary, then monetary policy ought to contribute to a somewhat lighter foot on the accelerator. But if most of the unduly high inflation stems from transient increases in the price level and if an economic upturn is not yet assured, it may then indeed be advisable to somewhat defer an upward adjustment of the instrumental rate. | 1 |
Zeti Akhtar Aziz: Central banking – using leadership energy to build resilience Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Iclif Leadership Energy Asia Summit 2015, Kuala Lumpur, 1 December 2015. * * * Welcome to this year’s Leadership Energy Summit Asia organised by our Iclif Leadership and Governance Centre. This is our third summit in the series on leadership energy. The focus on leadership energy reflects its importance in today’s leadership. The contemporary environment we are living in has become increasingly more challenging – characterised by highly destabilising and tumultuous events. Not only are we living in a world that has become highly unpredictable and unstable but a world that is being more frequently subject to extreme conditions in which we are tested to the limit. How do we survive against the odds manifested in this environment? It is all about having the ability to endure and prevail. It is also about being able to succeed and thrive in such an environment. It is about being resilient. Resilience is key to surviving in this environment. Today we are privileged to hear and be inspired from the experience of personalities who not only survived against such great odds but who have also achieved great success. Let me take this opportunity to express our gratitude to our distinguished speakers who have come from different parts of the world to share their knowledge and experience on this subject. | This is especially true for low value transactions and cross-border remittances, where fees can be as high as 13% of the value of funds transferred.4 These high costs impede not only remittances but also bilateral trade and investment. We therefore need to work on solutions that will promote competition and innovations, making these services more affordable. While a complete solution for cross-border transfers is yet to emerge, significant progress has been made with respect to payment solutions within each GMS country. In Vietnam, OnePay allows customers to make financial transactions on e-commerce websites, as well as deposit funds into their bank accounts without visiting a physical bank branch. Wing in Cambodia, BCEL in Laos and Wave Money in Myanmar all provide instant money payments and transfers through mobile phones to recipients who do not have bank accounts. In Thailand, PromptPay is a modern, faster payment system that provides free transfer services for transactions up to 5,000 baht (or about 150 US dollars), one of the cheapest rates in the world. PromptPay allows individuals and businesses to transfer money between banks and e-wallets using their mobile phone or citizen ID numbers. | 0 |
Another conclusion from the Swedish case is that international reactions are not necessarily a bad thing; they can be just what is needed to overcome a political deadlock and pave the way for necessary changes. When foreign creditors turned down Swedish banks, we were forced to take resolute measures to resolve the bank crisis. This has not yet happened in Japan, presumably in part because there is not the same dependence on foreign capital; the crisis in Japan has therefore been more protracted and costly. A tax on currency transactions (a so-called Tobin tax) has been proposed in the globalisation debate as a way of curbing capital movements and reducing the risk of international financial crises. A tax would restrain these flows; its effect would depend on the size of the levy. It is by no means certain, however, that it would be just the more speculative flows that are checked; it could equally well be the more stabilising regular currency flows. There is, in fact, little indication — either in theory or in experience from earlier centuries — that an economy with sand in its wheels works better than one that is well-oiled. Just rejecting a Tobin tax won’t do, however, at least not if one considers, as I do, that, notwithstanding the problems, free capital movements are good for the global economy. Other methods must be found to reduce conceivable negative effects. Much is being done in this respect in various international fora where I represent the Riksbank. | This cannot go on for ever, and if there is a sudden turnaround it could have substantial negative effects on the real economy. This applies in particular if a situation were to arise where house prices fall and households’ net wealth shrinks. Once households have reached a situation where they consider that they need to consolidate their balance sheets by reducing their debts, it is difficult to break off this process with the aid of monetary policy. This can be clearly seen in the United States right now, for instance. I do not believe in a wait-and-see strategy that could mean that the repo rate needs to be raised even faster further ahead. A slightly higher interest rate now could make households begin to adjust and contribute to a more subdued development. To me, this is a wellbalanced monetary policy. This is fairly self-evident, but let me nevertheless emphasise: My aim is of course as always to try to attain the Riksbank’s objectives – that inflation and inflation expectations should be firmly anchored around the target and that developments in the real economy should be stable. But to achieve this, I would like to take into account risks that I perceive exist and to put them in a slightly longer perspective than the usual forecast horizon – as I currently see good reason to do this. | 0 |
In addition, like the Baker bill, the Bennett bill expressly provides that state consumer protection laws, as well as the Truth in Lending Act and the Electronic Funds Transfer Act, continue to govern consumer transactions that use electronic authentication. Finally, in early November 1997, Representative Eshoo introduced the Electronic Commerce Enhancement Act of 1997 (H.R. 2991), which would require Federal agencies to make forms available electronically and to allow individuals to submit forms electronically over the Internet. Digitally signed forms accepted in accordance with this act would have the same force and effect as if they contained a written signature. In addition, the bill calls for the issuance of digital signatures to appropriate Federal employees and the establishment of guidelines governing the manner in which Federal agencies accept certificates for digital signatures. These guidelines will permit a Federal agency to accept certificates issued by the agency or a trusted third party provided that: (1) the trusted third party is licensed or accredited by a state or local Government or an appropriate accreditation body; and (2) “in accordance with commercially reasonable standards, accepts liability for and is insured against negligent issuance or handling of certificates”. International Efforts While the United States Government has for the most part been an observer of the domestic efforts to establish a legal infrastructure for electronic commerce, it has been an active participant in the international arena through organizations such as the United Nations Commission on International Trade Law (UNCITRAL) and the Organization for Economic Co-Operation and Development (OECD). | The White House believes that the commercial and technological environment is changing far too rapidly for it to be able to develop policy that is both timely and appropriate. In the near term, therefore, the White House is calling for case-by-case monitoring of electronic payments experiments. In keeping with the spirit of the White House Framework, Federal bank supervisors in the United States have expressed a clear willingness to listen to what the private sector has to say on issues involving emerging electronic payments. For example, in 1996 the Board of Governors issued proposed regulations concerning the applicability of Regulation E to stored-value cards. As part of that proposed rule making, the Board requested comments from the public as to whether part or all of Regulation E should apply to electronic money or value residing on a computer system or personal-computer hard drive. Similarly, the FDIC requested public comment on the application of Federal deposit-insurance coverage to electronic value represented on computer systems. This openness, combined with an increasing willingness to let the banking industry partner with technology and other industries, reflects a commitment on the part of bank supervisors in the United States to allow the private sector to direct the future of electronic commerce and payments. From a longer term perspective, however, the market-place and industry self-regulation alone may not fully address all of the issues associated with e-money. | 1 |
In my opinion, this must be the guiding principle as long as it is Swedish taxpayers’ money that would ultimately be at stake in the event that Sweden were to be impacted by a financial crisis. The Ministry of Finance, Finansinspektionen and the Riksbank have signalled that the capital adequacy of the major Swedish banks needs to be increased considerably. According to the plan, capital adequacy is to increase to at least 10 per cent by 2013 and at least 12 per cent by 1 January 2015. 6 The Swedish banks have every chance of meeting these requirements due to their high earning capacities and their low loan losses. The four major banks are systemically important on a national level and, additionally, Nordea is systemically important on a global level. 7 The supplement for systemic importance is included in the capital levels that I have just cited. This is thus a measure linked to risks of a structural character. For the same reasons, there may be a need for Sweden to introduce tougher requirements for the Swedish banks’ liquidity reserves than are advocated by the Basel III regulations. The banks need to become better at themselves managing the liquidity problems to which their activities give rise, particularly as regards liquidity in foreign currency. If the banks match the maturities of assets and liabilities better and maintain sufficient liquidity reserves in foreign currency, they will be less sensitive to shocks on the financial markets. | Part III: The side effects of improved incentives Will higher capital restrict bank lending? Let me now turn to the examination of some of the potential side-effects of the measures described in the preceding section. A legitimate first question is whether improving incentives in the way we have described could have undesired indirect effects such as modifying the banks’ lending behaviour. An argument often heard is that higher equity requirements would force banks to set aside, or hold in reserve, funds that could otherwise be used for lending. Here the main observation is that extremely risky gambles should now be avoided as a result of improved incentives. There has been excessive risk-taking in the past; there should be less of it under the new incentives. Beyond this intended effect, which concerns only the most risky activities, the form of financing used by an institution – in itself – should have no impact on the profit-maximising business model. That is, as far as activities and revenues are concerned, imposing extra capital does not change the perspective of the decision-maker beyond restoring the incentives for balanced risk-taking. The exception is the case of marginally profitable activities, and here only to the extent that the cost of financing is increased (more on this later). Provided that activities are profitable, and bearing in mind that in banking the targeted return on equity is not only highly positive but incomparably higher than in other sectors of the economy, the cost of financing should not be the main determinant of activity. | 0 |
One step towards effective early intervention is the establishment of the Single Supervisory Mechanism (SSM). This will endow the ECB with the ultimate responsibility for specific supervisory tasks related to the financial stability of banks across the euro area. The need for a single supervisory mechanism arises from the increasing interconnectedness between financial institutions and financial markets across the euro area, such that problems that originate at a national level can quickly spread across national borders and imperil the entire European banking system. A central authority is better placed to spot these risks. However, the SSM framework alone will not be sufficient to successfully address significant threats to financial stability across the euro area, particularly in the light of the possibility of cross-border spill-over effects in the event of bank crises and the link between sovereign debt and bank debt. The European Commission has therefore identified the need for a banking union to strengthen the banking sector and restore confidence in the single currency, and this is projected as part of a longer term vision for economic and fiscal integration. Hence, the idea goes beyond the SSM or single-rule book. As President Van Rompuy points out in his report entitled Towards a genuine Economic and Monetary Union, the components of this integrated financial framework have to include not only bank supervision (as delivered by the SSM), but also bank resolution as well as bank deposit insurance. | The breadth and engagement of the membership gives its standards credibility and creates peer pressure within the industry to promote adherence. 8 Canute, King of Denmark, England and Norway, 995-1035, reputedly set his throne by the sea shore and commanded the incoming tide to halt and not wet his feet and robes. Yet "continuing to rise as usual [the tide] dashed over his feet and legs without respect to his royal person. Then the king leapt backwards, saying: 'Let all men know how empty and worthless is the power of kings, for there is none worthy of the name, but He whom heaven, earth, and sea obey by eternal laws.' 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 Second, peer pressure within firms should reinforce standards and, more generally, the commitment to real markets. Most banks have codes of ethics or business principles. These are necessary but not sufficient not least because it isn’t reasonable to expect every trader to absorb their meaning or to translate them readily into live situations. But it is reasonable to expect them to use FMSB guidance to help recognise the differences between a real market and a rigged one. And it is essential that business cultures encourage everyone to call out market abuse when it occurs. Third, buyside pressure for proper behaviour is made easier by clear, practical standards. | 0 |
We care about financial conditions not for themselves, but instead for how they can affect economic activity and ultimately our ability to achieve the statutory objectives of the Federal Reserve—maximum employment and price stability. Let me provide a few examples. A decline in mortgage rates can lift the demand for owner-occupied housing and support construction activity. A rise in equity prices can boost household wealth, which is one factor that underpins consumer spending. The foreign exchange value of the dollar can affect the relative competitiveness of importers and exporters, which, in turn, influences the country’s trade performance. Narrower credit spreads can reduce the cost of capital for business and help support greater business investment. 1/6 BIS central bankers' speeches In sum, financial conditions affect households’ and firms’ saving and investment plans, and, therefore, play a key role in influencing economic activity and the economic outlook. This is why the evaluation of financial conditions is so crucial in the conduct of monetary policy. The FOMC traditionally implements monetary policy by adjusting the federal funds rate—the short-term interest rate paid by banks that borrow reserves from other financial institutions. However, few economic decisions directly depend on the federal funds rate. Rather, changes in the federal funds rate affect the economy through their impact on other interest rates, which, consequently, influence broader financial conditions. If financial conditions moved predictably with the policy rate, then there would be no need for the FOMC to focus on financial conditions. | “Global Imbalances: Is the World Economy Really at Risk?” Dexia SA. 2 Bartolini, Leonardo and Amartya Lahiri. 2006. Twin Deficits, Twenty Years Later, Federal Reserve Bank of New York Current Issues in Economics and Finance, 12, no. 7 (October). BIS Review 41/2010 3 estate assets induced entrepreneurs to produce more of those assets. In the housing market, this increase in prices was helped along by the relaxation of loan underwriting standards, which made it easier to obtain a mortgage and become a homeowner. Credit growth was the strongest among households with relatively low credit scores (Chart 5). The homeownership rate rose after being relatively stagnant for two decades (Chart 6). The increased availability of credit to lower income borrowers and the sharp rise in housing values contributed to the rise of consumption as a share of GDP and the decline of the personal saving rate 3 (Chart 7). Now, with the aid of hindsight, it is clear that we built too many houses, invested in too much commercial real estate and overvalued both significantly. The market overshot for several reasons. First, there was rampant speculative behavior. The longer these asset prices continued to rise, the stronger the belief became that they would keep rising in the future. Second, the rise in prices reinforced the initial relaxation of underwriting standards. During the period of rising prices, defaults and loan losses were very low. A homeowner who had difficulty servicing the debt could typically sell the home for a profit and pay off the loan. | 0 |
Taken together, augmented resolution powers, recovery and resolution planning and better identification of systemic risks can move us substantially forward in dealing with failing systemically important institutions. Thank you for the opportunity to share these views with you. 8 BIS Review 140/2010 | Debt restructuring mechanisms need to be more efficient, so as to promptly resolve the insolvency problems some firms are experiencing. Other structural policies could also contribute to shoring up the composition of firms’ debt in order to assign a greater weight to capital. These policies might include the elimination of the preferential tax treatment of debt as opposed to equity and headway in developing equity markets in Europe. Finally, as mentioned on various occasions, all these measures must form part of an ambitious reform agenda aimed at tackling our economy’s structural problems. These include most notably high unemployment, labour market duality and the low productivity of our firms. And, in parallel, we must design a credible strategy for reducing, in a gradual but sustained fashion, our fiscal imbalances. Such a strategy may be implemented once the pandemic is behind us and the economic recovery is firmly entrenched. It would entail significant benefits, by increasing the economy’s reform-led potential growth and by enhancing the credibility surrounding the sustainability of public finances in the medium term. That, in turn, would increase the existing fiscal space available and would boost the expansionary effects of the current fiscal measures. In short, so we may have the fiscal leeway needed to be able to increase support measures to the economy should pandemic-related developments so require, we must resolutely implement the reform agenda, plan the fiscal consolidation process and reform support instruments to make them more flexible and targeted. Thank you very much. 9 | 0 |
There is much to be said both about the actual construction of the processes and what they have achieved to date. Moreover, knowledge of these matters is generally lacking in Sweden. Today, however, I shall be very brief. As I see it, there is a tendency towards an increased coordination of fiscal and structural policies. This takes many forms. The issues are discussed together, both at the highest level and further down among civil servants and experts. It is partly a learning process, an exchange of thoughts about good examples, a communication of ideas and so on. New, more specific knowledge is also being generated. At present, for instance, common principles are being drawn up for the measurement of budget outcomes and capacity utilisation. This is necessary for effective surveillance of compliance with the Stability and Growth Pact. Similar work has begun in the field of pensions. These quotidian efforts should not be underrated. They help to make many problems more understandable and promote a consensus about how they should be handled. Sweden has much to gain from this kind of international collaboration. To exemplify how international discussions can influence matters I can mention that when we at the Ministry of Finance were aiming to alter the economic policy agenda in the late 1980s, we were greatly inspired by the work that had been done under the auspices of the OECD and others. | The central issue, however, is how more pronounced problems or crises for stabilisation policy are to be handled. One approach to this is to relate once again to our own experiences. As I see it, we have had to face problems of two types. One concerns a lack of knowledge about the direction in which the economy is moving. A dramatic example of this is the crisis in 1990, when neither the problem that was looming with the real interest rate nor the crisis in the financial system was identified in time by virtually any Swedish observer. The other problem is political and has to do with the difficulties in keeping policy sufficiently tight over the business cycle, particularly when demand exceeds long-term supply. A good illustration of this problem is the late 1980s. Perhaps one should mention a third problem, namely that automatic stabilisers affect demand regardless of the nature of the preceding shock. If demand in general has weakened on account of, say, a share price fall that has affected household wealth, all will be well; a part of the loss of demand will be compensated automatically. Things will be different if the shock comes from the supply side, for instance as an oil price rise or a change in productivity. There could then be grounds for a discretionary policy move to adjust demand to the change in production capacity; this could be more difficult in the absence of an independent monetary policy. | 1 |
Norges Bank built up foreign exchange reserves while banks financed household and corporate saving deficits, partly by raising loans abroad. With the decline in oil prices, confidence in the Norwegian economy faltered, capital flowed out of the country and out of banks’ balance sheets. Norges Bank had to step in as lender to the banks. The developments that followed the decline in oil prices in 1986 will not be repeated. In 1986, confidence in the Norwegian economy faltered while inflation was high and rising. Monetary policy measures had to be applied – through a resolute fixed exchange rate regime from summer 1986 – to restore confidence in the national and international value of the Norwegian krone, i.e. to reduce inflation. The Norwegian economy is on a much stronger footing now than it was in 1986. None the less, fluctuations in household saving and corporate saving and investment could pose challenges for both monetary policy and our banks. The outlook ahead The past 15 years have been a golden era for the Norwegian economy. It must also have been a privilege to be in a position to engage in banking activities in Norway in this period. Selling loans has been easy, there have been virtually no losses, and deposits and borrowing have been stable. Banks have in addition been particularly adept at making use of new technologies and being more cost-effective. The combination has led to favourable results. Lending growth will probably have to be reduced and losses may rise. | BIS Review 115/2007 15 Norway has a substantial current account surplus. If oil prices remain high, this might also be the situation in the years ahead. Most of the current account surplus is matched by capital outflows from the state to the Government Pension Fund – Global. Adjusted for these outflows, the surplus has been between NOK 0 and 70 billion in recent years. It is also likely that oil companies invest substantial foreign exchange earnings abroad. In the chart, the term basic balance has been used to mean the current account adjusted for the estimated capital outflows from the state and oil companies. The basic balance has been negative in the past few years and is estimated to fall close to minus NOK 150 billion this year and next. 16 BIS Review 115/2007 The large basic balance deficit reflects a substantial saving deficit among mainland industries and households combined. Developments in banks’ balance sheets and sources of liquidity are influenced by these flows. The saving deficit is to a great extent financed by raising capital abroad, often through banks. Access to and pricing of this funding is influenced by the recent turbulence in international money markets. The situation has similarities with the situation in the mid-1980s. Then, as now, there was a large saving deficit in the private sector of the mainland economy, while high petroleum revenues laid the basis for a current account surplus. | 1 |
“Measuring the Natural Rate of Interest: International Trends and Determinants,” Journal of International Economics, vol. 108(S1), pages 59–75. Rachel, Lukasz & Smith, Thomas D., 2017. “Are Low Real Interest Rates Here to Stay?” International Journal of Central Banking, vol. 13(3), pages 1-42. World Bank, 2016. “Poverty and Shared Prosperity 2016: Taking on Inequality”. World Bank Group report. 2/2 BIS central bankers' speeches | Today we focus very much on the price increases on some services after the introduction of euro coins and notes, but let us bear in mind that prices on durable goods that are more subject to cross border comparisons, have indeed increased less than the average or even decreased. There are already signs of a convergence of prices on such durables and there is also area-wide euro pricing from some firms, which reflects increased price competition across borders. To conclude, the Monetary union presents an attractive proposition for Sweden, given that we continue to improve the functioning of wage formation and labour markets and that we ensure a solid institutional foundation for fiscal policy to stabilise the economy. The same could in fact be said about the euro area countries: With structural reforms and more solid foundations for fiscal policy, the present EMU-countries would have much better possibilities for employment growth and productivity gains. Monetary Union is putting pressure on both industry and politicians to improve their performance in the years to come. 4 BIS Review 70/2002 | 0 |
The changeover to the euro does not call for extensive reforms in Estonia, rather, it is a more exhaustive utilisation of the opportunities Europe has to offer. • The changeover to the euro cannot and must not be a seasonal election issue but an area where we proceed from Estonia's interests - hence, common sense, analysis of the economic situation, and knowledge of the theoretical foundations of the EMU. 2 BIS Review 26/2004 • The European Central Bank has indicated that due to the differences in the economies of the new member states, a single approach suitable for everyone for joining the exchange-rate mechanism, ERM II, and adopting the euro cannot be suggested. Besides, a common approach was not possible for the present member states either. An approach that takes into account Estonia's particulars means that accession is going to be based on the present currency board arrangement and that our application to join ERM II will be submitted as soon as possible. Prior to adopting the euro a country has to be a successful member of ERM II for at least two years. Also Estonia's technical readiness for changing over to the euro should be achieved by mid-2006. If such a scenario materialises, we will be among the first new EU members to adopt the euro. | Under the provisions of Art. 10(2) of the Statute, two groups of countries have been formed at present according to the size of their economies and their financial sectors. The first group of five governors has four voting rights and the second group of 14 governors has 11 voting rights. 4 The unweighted qualified majority regime (two-thirds of the votes) is used in very specific cases such as that envisaged by Art. 14(4) of the Statute regarding the performance of functions by the NCBs which might interfere with the objectives and the tasks of the Eurosystem. Where decisions are adopted by weighted majority (Art. 10(3) of the Statute), the rotation of voting rights does not apply. In these cases, an alternate or substitute appointed for the meeting is allowed to vote, which is not permitted for other voting. The votes of the Executive Board have a weighting of zero. The weighted simple majority regime is envisaged for decisions on the subscription of capital and adjustments to shares (Art. 28 of the Statute), on the key for capital subscription (Art. 29 of the Statute) or on the allocation of monetary income to central banks (Art. 32 of the Statute) or of losses and net profits to central banks (Art. 33 of the Statute). Where decisions are adopted by weighted qualified majority, half of the shareholders (10) and two-thirds of the subscribed capital are needed. The type of decisions adopted using this regime are those affecting increases in and payments of capital of the ECB (Art. | 0 |
Against this backdrop, I will refer to Max Weber’s distinction between ethics of conviction – Page 5 sur 10 a driver for a broad mandate but also to a risk of overpromising what central banks can actually deliver – and ethics of responsibility – a driver for realism and a more focused mandate. The Eurosystem’s answer to that question consists of a clearly hierarchical mandate, with one primary objective, price stability; if fulfilled, we can and must contribute to its secondary objectives of economic growth, social cohesion or the environment. In addition to preventing potentially conflicting objectives, achieving price stability is like killing two birds with one stone: monetary policy can mitigate income inequality by affecting the movements in and out of unemployment through its effects on the business cycle.iii And let me clarify that the Eurosystem’s strong commitment to fight climate change is motivated first and foremost by its profound implications for price stability, through impacts on the economy and the financial system. In other words, we are acting in the very name of our existing mandate. Inflation has accelerated significantly over the past year, reaching 9.1% in the euro area in August and 8.3% in the United States. Monetary normalisation is consequently fully warranted in the euro area among others. It’s too early to tell the final interest rates. But the neutral rate R* helps us to give some light on the first part of the journey. | In the context of the financial turmoil of the Middle Ages, in around 1355, Nicholas Oresme, a French scholastic philosopher, wrote his visionary Treatise on the origin, nature, law and alterations of moneyii in which he asserted that the currency does not belong to the “prince” but to the people, and therefore should not be manipulated. But it took several more centuries for trust in money to be "dematerialised": to move from trust in a physical medium - gold and silver, and metallic currencies - to trust in an institution. The 19th century, with the industrial revolution, saw the Page 4 sur 10 expansion of banking and finance, and the creation of many central banks. It was a first decisive step: a dedicated guardian was put in charge of issuing banknotes, as a first “immaterial” currency. The second decisive step, mainly from late 20th century, was to make central banks independent from political power: in the 1980s and 1990s most central banks enshrined their independence in their statutes, including the Eurosystem in order to ensure the stability of the single currency. The Eurosystem also defined a target for inflation, as did the Fed in 2012, a few years after Ben Bernanke strongly advocated for it. But independence – which I cherish – does not mean isolation. | 1 |
As we are lagging behind advanced Europe in terms of income and productivity, sustaining banks' financing can contribute in narrowing those gaps. At the same time, climate change and technological innovation continue to accelerate, pressing on our societies to transform towards greener and digital future. Banks can have a crucial role in financing the twin transition. To sum up, as policy makers we do face a difficult conundrum. After long time of economic moderation, all of the sudden we have to deal with major global shocks that impose tectonic shifts in the economic order, modify conventional macroeconomic paradigms, and accentuate the tradeoffs in policymaking. In this current context, it is crucial to preserve stability- stability of prices, as our primary objective and contribute to stability of the financial system. We all recall how profound consequences and scars instability causes, which is why we have to remain determined, focused and clear. It is the only way to preserve public trust, and as Brunnermeier said "the public is the ultimate source of central banks power and independence". Thank you and looking forward to the insightful debate! 1 Cited from "Monetary Policy in a High Inflation environment: Commitment and Clarity ", Lecture by Christine Lagarde, November 2022. 2 Geopolitical risk dashboard, Black Rock, December 6, 2022 3 "Front-loading" monetary tightening: pros and cons", BIS Bulletin 63, December 2022. 4 Three have increased the rate (Slovakia, Bulgaria and Czech Republic) while other four introduced the buffer for the first time (Croatia, Romania, Hungary and North Macedonia). | Starting from 1986, our economy has had an average annual per capita real growth rate of 2.3 percent, a moderate inflation (on average 4.0 percent), a debt to GDP ratio of 44.1 percent, which is still manageable, and a level of international reserves that is more than adequate (currently at 8.7 months of import payments). In the last two decades, Aruba has made great economic progress: we chose to invest in tourism and, currently, Aruba is one of the most popular tourism destinations in the Caribbean. Two out of three of our visitors are Americans, which does not make it strange to hear that the US dollar is a widely accepted means of payment in Aruba. These economic and institutional developments demonstrate that it is possible to issue and manage a local currency successfully in a small open economy like ours. 6. The case of the Netherlands Antilles Now, I would like to turn to the case of the Netherlands Antilles. I know that dollarization of the Antillean economy has been discussed before. As early as 1986, de Boer and Kamps investigated the possibilities of dollarization in the Netherlands Antilles in a study initiated by the University of the Netherlands Antilles. 1 The authors advocated prudence with respect to 1 J. de Boer / J.A. Kamps – Dollarisatie op de Nederlandse Antillen. Een verkennende studie. UNA Cahier, No. 21, June 1986. | 0 |
In the 11 FYs since the last recapitalisation, MAS returned a total of $ billion to the Government, more than two times the amount of the latest increase in capital. In sum, the $ billion net loss is not cause for concern though the investment performance bears close watching. The loss does not impair MAS' ability to carry out its functions. More importantly, it does not change how we will conduct monetary policy. The loss does not result in a draw on MAS' past reserves. The OFR position remains healthy even after MAS transferred $ billion of excess OFR to the Government. But the investment performance is likely to remain weak amid a challenging macroeconomic and financial market environment. A return to profitability and ability to contribute again to the Government's Consolidated Fund will take some time. HOW IS MAS HARNESSING THE BENEFITS AND ADDRESSING THE RISKS OF WEALTH INFLOWS? I will now move on to the topic of wealth flows into Singapore. This issue has attracted much media and public interest. MAS has focused on harnessing the benefits of these wealth inflows while addressing their risks. But before explaining how we do this, let 9/16 BIS - Central bankers' speeches me try to set the wealth inflows in context. First, as a trusted, vibrant, and well-regulated international financial centre, Singapore has attracted large inflows of wealth to be managed here. Assets under management (AUM) have grown an annual average of 15% during 2017 to 2021. | Growth in the domestic facing sectors is likely to taper, as consumer demand slows in the face of higher interest rates and more moderate wage increases. Singapore's GDP growth for 2023 is expected to slow to a below-trend pace within MTI's current forecast range. Consequently, the output gap is estimated to turn mildly negative, to around -0.5%, from the positive 0.6% recorded last year. Inflation in Singapore has clearly peaked and has discernibly moderated. In assessing inflation trends, it is instructive to focus on month-on-month momentum and price trends going forward rather than year-ago averages. Core inflation on a month-on-month seasonally adjusted annualised basis has come down sharply, to 3.6% in May 2023 from a peak of 9.1% in June 2022. The disinflation has been broad-based across most components in the core CPI basket. Notably, imported inflation has turned negative, reflecting the decline in global energy and food prices and the effects of a stronger Singapore Dollar. Even excluding oil, whose prices have fallen most sharply, imported inflation was minus 1.2% in May this year. The fall in inflation momentum is gradually translating to lower year-on-year inflation. Core inflation on a year-on-year basis moderated to 4.8% in Apr-May from 5.4% in Q1. Headline inflation slowed to 5.4% from 6.1% over the same period. Singapore should see further reductions in inflation by the end of the year. One, imported inflation should remain negative over the rest of the year. | 1 |
Global Money Week takes place on the 10–17 March and is a worldwide celebration through events and activities to help empower children and youth to be confident and responsible economic citizens. During this week, children are encouraged to engage in learning on how money works, including saving, creating livelihoods, gaining employment and entrepreneurship as well as living financially smart lives. And so for Samoa’s contribution to the event, the Central Bank decided to conduct a financial literacy poster competition to encourage kids to use their imaginations and knowledge about money choices, and help provide a creative outlet to demonstrate their knowledge. For this year’s poster competition theme “I can grow my money by...” myself and Mrs Vicseta Meredith of Business System Limited had the pleasure AND the hard task of judging the entries. We were very impressed with the quality of entries that were presented to us – so it pains us that there are only a limited number of awards we can give out for the competition. “Financial literacy” or “the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources” is an important life-skill in our diverse capacities as students, employees, consumers, savers and investors etc. In short, it is important for all responsible economic citizens to have. – So why not start now and start young? Start young on financial fitness...it will be fun and worth it! | Soifua ma ia manuia. 2 BIS central bankers’ speeches | 1 |
But a more careful analysis shows that other factors played an important role, such as the rapid growth of new financial instruments, the increasing presence of very active and highly leveraged financial market participants. Moreover, ample market liquidity also reflected an increase in risk appetite and a rise in leverage. And the recent market developments showed that an abrupt and sizeable increase in risk aversion caused an evaporation of liquidity in many markets and a rise in market volatility. Therefore, although financial globalisation can play a role in containing market volatility, it cannot be expected to have a dominant and permanent impact. Impact on financial stability – the financial market turmoil What are the broader potential implications of financial globalisation for the stability of financial systems? How are real and financial shocks likely to propagate across borders and asset classes in a financially integrated world? On the one hand, there is obviously an augmented risk of cross-border contagion of asymmetric shocks to the rest of the world if cross-border asset holding is widespread. On the other hand, this risk has to be weighed against the positive side of the very same coin, which is the benefit gained from an increase in international risk-sharing by means of diversification. The resilience of financial asset prices to negative shocks is improved when the market is more liquid and the investor base more heterogeneous. | Causes of the financial market turmoil What have been the underlying main causes of the financial market turmoil? What have been the key weaknesses in the functioning of the financial system that have been revealed? And what are the appropriate further responses of market participants and policy-makers? A full diagnosis of the causes and weaknesses is not yet complete and, indeed, not possible as the 19 8 See ECB (2007b), Box 7, on the propagation of the sub-prime shock to other markets. BIS Review 9/2008 market adjustment is still ongoing. Nevertheless, I would like to highlight four areas that are also pertinent to the issues of financial integration and development we are discussing. • First, the underlying causes and triggers are to be found in the price dynamics of the US housing market and the excesses and shortcomings (in the practices) in the US sub-prime mortgage market. So, a main determining factor of the financial market turbulence is that same one – property price overvaluation – that characterised previous episodes, as emphasised by Kenneth Rogoff. • Second, weaknesses in the functioning of the market for structured finance products. These included valuation uncertainties due to the complexity of many products, the imperfect information available about the underlying asset characteristics, inadequate appreciation by investors of the embedded risks, and excessive reliance on the ratings of such products by credit rating agencies. | 1 |
As a result, the structure of the euro area financial sector is changing. In 2008, total assets held by investment funds were only 15% of banking sector assets. In 2017, euro area investment fund assets had grown to 42% of total banking sector assets, amounting to EUR 12 trillion. This major growth in relative size is likely to have far-reaching implications for the ability of the financial system to absorb shocks and for the financing of the economy more broadly. On the positive side, an increase in market-based finance through the issuance of debt and equity instruments can help diversify the funding base of the real economy. It also gives investors more choice and enables them to benefit from diversification effects offered by investment products. This holds true for retail and institutional investors alike, as an increasing share of institutional investors are using professional asset management services. The growing share of investors outside the core financial system tends to increase the system’s risk-bearing capacity, as traditional end-investors, typically not leveraged, can absorb any potential losses more smoothly. One should also acknowledge that thanks to significant efforts in the last ten years, investment funds in the EU are subject to an enhanced regulatory framework. | Second, at the global level, tensions have grown in emerging market economies on the back of a stronger US dollar and increased trade frictions. These developments may undermine global growth prospects and ultimately lead to abrupt increases in risk premia. This could trigger a domino effect – leading to a sharp sell-off and further price pressures in assets with stretched valuations – with the potential to spill over to euro area financial markets. Third, in Europe we observe re-emerging debt sustainability concerns, both in the public and private sector. As regards public finances, Italy is the most prominent case at the moment in light of the overall debt level and the political tensions around the Italian government’s budget plans. The strong market reactions to political events have triggered renewed concerns about the 1/7 BIS central bankers' speeches sovereign-bank nexus in parts of Europe. Although contagion has been limited so far, it remains a possibility. This underpins the call for fiscal discipline and for observing and applying fiscal rules in Europe. But in the non-financial private sector too, debt levels remain high by both historical and international standards. In a number of countries, debt is above thresholds that are normally associated with a debt overhang. And growing debt levels should also be seen in the context of buoyant real estate market developments in a number of countries. | 1 |
Productivity gaps between regions and between large and small firms point to regulatory fragmentation which still needs to be addressed. To enhance productivity, measures to increase the scale of small firms in the SME sector, which tend to be smaller than in peer countries, need to be pursued. More attention needs to be placed on the education system and professional training to enhance human capital and reduce skills mismatches. Finally, greater investment in R&D and innovation by Spanish firms would enhance their competitiveness and contribute to generate more growth through higher value added. Only by raising productivity and correcting macroeconomic imbalances can the long-term growth potential of the Spanish economy rise. This is a condition to place Spain on a solid growth path, increase employment and raise wages to finally leave behind the financial crisis that erupted ten years ago. Let me conclude. The importance of increasing long-term growth potential is true for Spain as it is for the whole euro area. 3/4 BIS central bankers' speeches At the same time, I cannot emphasise enough that a robust euro area economy has to rely on sound economic governance. Solidifying the institutional architecture of EMU is essential at this juncture in order to foster cohesive economic performance without fragmentation or excessive imbalances. Reforms at the national and EU level are needed to uphold a stable financial system and a resilient monetary union. | Second, in the U.S., the banking system was recapitalized and deleveraging occurred quite quickly following the financial crisis. Capital from the Troubled Asset Relief Program, or TARP, was put into the large banks and soon many of them replaced this TARP capital by raising new equity. The SCAP stress test in 2009, and the annual CCAR stress tests that followed, worked to constrain the rate of bank capital distributions and, thereby, helped to build up bank capital ratios. And, U.S. banks worked hard to clean up their balance sheets. Poor assets were managed down or run off, and underwriting standards were tightened. Third, the Federal Reserve was particularly aggressive early on in its pursuit of monetary policy accommodation in order to keep inflation expectations well-anchored. This is a necessary condition, in my view, to maintain the efficacy of monetary policy. If inflation expectations were to get unmoored to the downside, then it becomes more difficult to pursue a stimulative monetary policy. Could things have been done differently in the U.S. in such a way that would have led to better outcomes? Absolutely. With the benefit of hindsight, we could have and should have been even more aggressive on the monetary policy side. While we made progress with some of the innovations on monetary policy that we eventually introduced – such as the openended purchase of $ billion of Treasury and MBS securities per month – it would have been better if we had done this sooner. | 0 |
Bahaj, S, Foulis A, Gal, P and Pinter, G (2016), ‘Productive and Unproductive Leverage’, mimeo, Bank of England. Baily, M and Montalbano, N (2016), ‘Why is productivity growth so slow? Possible explanations and policy responses’, Hutchins Center Working Paper No 22. Barnett, A, Batten, S, Chiu, A, Franklin, J and Sebastiá-Barriel, M (2014), ‘The UK productivity puzzle’, Quarterly Bulletin, Vol 54 (2), Bank of England. Bank of England (2016), ‘Understanding and measuring finance for productive investment’, Bank of England Discussion Paper. Barnett, A, Broadbent, B, Franklin, J and Miller, H (2014), ‘Impaired capital reallocation and productivity’, National Institute Economic Review. Barro, R and Sala i Martin, X (1992), ‘Convergence’, The Journal of Political Economy, Vol 100 (2), p.223251. Bean, C (2016), ‘Independent Review of UK Economic Statistics’, available at https://www.gov.uk/government/publications/independent-review-of-uk-economic-statistics-final-report. Bentolila, S, Jansen, M, Jimnez, G and Ruano, S (2013), ‘When credit dries up: job losses in the great recession’, Discussion Paper 9776, CEPR. Berlingieri, G, Blanchenay, P and Criscuolo, C (2017), ‘The Great Divergence(s)’, OECD STI Policy paper, forthcoming. 38 All speeches are available online at www.bankofengland.co.uk/speeches 38 Big Innovation Centre (2017a), ‘The Purposeful Company’, BIC Policy Report, February Big Innovation Centre (2017b), “Intangible Gold” final report, forthcoming Bloom N and Van Reenen, J (2007), ‘Measuring and explaining management practices across firms and countries’, Quarterly Journal of Economics, Vol CXXII (4). Bloom, N, Sadun, R and Van Reenen, J (2012), ‘Americans Do IT Better: US Multinationals and the Productivity Miracle’, American Economic Review No 102 (1), p167–201, doi:10.1257/aer.102.1.167. | Let that be a warning to those countries which have not yet signed up to the monetary integration project. The fall of the former hegemon is relevant not only for the current crisis, but also for the future of the monetary order in Europe. And here I do not see any positive perspectives, I must bitterly admit. I am not saying that the euro has to collapse, but I am pretty sure that if it prevails, it will be a completely different currency implying completely different monetary conditions from what the Germans in particular hoped for. And Germany faces a tough choice – further integration or a perfect monetary order. This question is rather new and painful. The answer to it will influence all of us, I believe. So let’s wish them good luck. Thank you for your kind attention. BIS central bankers’ speeches 3 | 0 |
Mr. Heikensten looks at the consequences for Sweden of joining EMU Speech by the Deputy Governor of the Bank of Sweden, Mr. Lars Heikensten, at the Baker & McKenzie’s EMU seminar held in Stockholm on 5/2/97. First a word of thanks for the invitation to talk with you about Sweden and the European Economic and Monetary Union. Today I have chosen to consider this matter from three angles: general aspects of the issue of Sweden and EMU; the work we did last year in the Union to prepare for EMU; and some consequences of EMU for Sweden’s financial sector. The EU’s preparations for the economic and monetary union are continuing. The member states are doing all they can to fulfil the economic criteria for participation in the euro area. Along with this, intensive political work is being done to remove any remaining obstacles. After the latest meeting of Heads of State or of Government, in Dublin last December, political agreements are in place on, for example, the stability and growth pact and the relationship between the euro and outside currencies. Solutions are still required on a number of important issues. One is how the path into EMU is to be arranged for countries that do not belong to the first group. Then there are many technical details to adjust in the course of the year. But the puzzle’s main pieces are now in place. | The composition of the Governing Board may be a problem; the appointment of members of Parliament to the Governing Board runs counter to traditions in Central Europe. 4. Debt conversion and issues The countries that join the euro area may - and it is also envisaged that they will issue treasury paper denominated in euro. A member state wishing to convert its stock of debt into euro will be allowed to initiate the appropriate measures. A member state may also take steps whereby private issuers and marketplaces (e.g. the Stockholm Stock Exchange, OM and the Securities Register Centre) can switch to euro in the changeover period. Many institutions and agents are in fact planning to do this. All private economic agents are to be free to choose between using euro from the start of Stage Three and waiting until the changeover has been completed. However, the agents in the Swedish securities market, banks, financial institutions, the Securities Register Centre, the Stockholm Stock Exchange, OM and others are unanimously in favour of a “big-bang” solution, that is, a quick, concerted changeover from kronor to euro right from the turn of 1998. 5. Banknotes and coins Euro banknotes and coins will not be introduced until the beginning of 2002. For a time, commerce will have to cope with two sets of prices, one in krona and the other in euro. A timetable for the substitution of banknotes and coins is to be fixed by each country. | 1 |
Differences among cohorts may lead to variations over time in the optimal shape of institutions, rather as Jefferson advocated. For example, Robert Shiller (1996) reports that 90% of those born before 1940 in Germany agreed with the statement that ‘The control of inflation is one of the most important missions of German economic policy’, compared with 51% of those born from 1950 onwards. Memories of hyperinflation can be vivid: Niall Ferguson cites the diary of one Frankfurt resident in 1923: “it was more than disorder that smashed over people, it was something like daily explosions… the smallest, the most private, the most personal events always had one and the same cause; the raging plunge of money” (p154). So it is not surprising that the generation of Germans which created the Bundesbank saw it as a crucial component of their new constitution. Countries, or indeed cohorts, which have not experienced hyper-inflation may be more willing to adopt monetary arrangements that are less entrenched in constitutional form than the postwar generation in Germany. The second aspect of the technology of collective decisions that creates a role for institutions is our ignorance of all possible future states of the world. That means that even if we were able to commit to a policy rule, we would choose not to do so. The exercise of some discretion is desirable in order that we may learn. The most cogent argument against the adoption of a fixed monetary policy rule is that no rule is likely to remain optimal for long. | Ravi Menon: The future of money, finance and the internet Speech by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Singapore FinTech Festival, 9 November 2021. * * * Good morning everyone. If you’ve just joined us, welcome to Day Two of the Singapore FinTech Festival. I want to talk about the future of Money, Finance, and the Internet. But first, a little history. JUNO, PLUTUS, MERCURY Money as a medium of exchange and store of value has been around for millennia. It is named after the Roman goddess of money, Juno, who carried the title Moneta. Rome’s currency was first minted at her temple in the third century B.C. Money has come a long way since: from bullion coins, to paper notes backed by the gold standard, to fiat currency backed by central banks, and now digital money. Finance or the intermediation of savings and investments existed in many ancient civilisations. The Roman god of wealth, Plutus, comes closest to being the presiding deity for finance. Finance too has come a long way: foreign exchange markets and bills of exchange emerged in the Middle Ages, before modern finance took shape with fractional reserve banking, stock markets, mutual funds, and insurance. The Internet is more recent. Its official birthday is 1 January 1983, though the concept itself – namely a computer network which enables information sharing among users – goes back to the US defence industry in the 1960s. | 0 |
Consequently the vulnerability of the financial system and its resilience are currently being reevaluated. • Three major sources of vulnerability have been identified: economic concentration, geographic clustering and connectivity and interdependency. Networks by their very nature can act as channels as well as origins of systemic crisis. • The awareness of vulnerability leads to new and substantial demands for investment in resilience. For instance, crisis management is a demanding activity. It involves private firms, financial market infrastructures, public supervisors and oversight institutions. Without the cooperation of all of them crisis management cannot succeed. • Investment in resilience, however, is costly. The benefits of the financial sector’s value growth cannot be enjoyed without paying this price. Should the price not be paid value growth would turn out to be unsustainable. There are no stable financial systems that are not at the same time highly resilient under crisis conditions. Allow me to expand on this last point: as a representative of a central bank I assure you that central banks are not likely to close an eye on this issue. Resilience of financial service providers in general and of the financial market infrastructure in particular has been placed at the top of regulatory authorities’ agendas. Indeed, it will stay there. As much as public bodies are contributing to the 4 BIS Review 55/2002 resilience of the financial system as a whole, they will make demands of the private sector. | The report examines the business conditions and credit environment for Latino-owned businesses, and compares Latino firms to non-Latino firms, as well as how their experiences vary across major metro areas. While I don’t want to get ahead of my colleague, Claire Kramer, and our partners from SLEI and Interise who will present the results of the report shortly, there are a couple of themes that caught my attention. First, Latino small business owners face significant financial barriers even after accounting for performance factors, including a disproportionate reliance on high-interest credit products. Those impediments manifest themselves at all stages of the business growth, from start-up to scale-up and beyond. Second, Latino small businesses are more concentrated in a few industries and significantly underrepresented in the professional, scientific and technical services sectors, which also tend to be the most lucrative. Third, the size of the Latino population in a given metro area does not mean that there is a larger share of Latino-owned businesses in the same—which is, to me, somewhat counterintuitive. Digging into and understanding the causes of these issues and identifying possible paths forward is not only an imperative but an opportunity, and of course the focus of much of today’s agenda. It is clear that there is a pressing need for expanding technical support, diversifying sources of financing, especially at the micro level, and, in the case of the geographic conundrum, further collaborating on policy and community advocacy. I very much look forward to today’s discussion and thank you again for your participation. | 0 |
John Gieve: Financial system risks in the UK – issues and challenges Speech by Sir John Gieve, Deputy Governor of the Bank of England, at a Centre for the Study of Financial Innovation Roundtable, London, 25 July 2006. * * * The Bank and financial stability The Bank of England’s central position in the economy owes a great deal to the development of its role in managing financial crises. The need for a central bank to provide liquidity to the market was identified as early as 1802, when Henry Thornton said: “…if the Bank of England, in future seasons of alarm, should be disposed to extend its discounts in a greater degree than heretofore, then the threatened calamity may be averted through the generosity of that institution.” 1 It took until the 1870s for that role to be institutionalised. The arrangement to request a letter from the Chancellor permitting the Bank to issue notes not backed by gold at a time of crisis was important to the remarkable financial stability that ensued. Indeed, some academics suggest that a true financial panic has not taken place in the UK since Overend Gurney & Company collapsed in 1866. 2 Of course a lot has changed since then but maintaining financial stability remains one of the Bank’s two core purposes. The current institutional arrangements are spelt out in a Memorandum of Understanding (MoU) between the Bank, the Treasury, and the FSA. | Rather than go over all that ground today, I’d like to pick out two themes that span many of these six vulnerabilities: first the increased competitive pressure on financial firms, and second the way in which changes to the structure of our financial system that have made it more efficient at sharing risk may also have made it more efficient at transmitting shocks. A changing financial landscape Over the past decade technological change, financial innovation, cross border financial consolidation and the increasing demands of investors for better performance have had a profound effect on financial markets and institutions (Charts 1 and 2), and have increased the flow of savings across markets and national boundaries. These changes have brought with them a shift away from bank-dominated finance, with its emphasis on a “special relationship” between lender and borrower, towards “anonymous” markets and armslength asset management. Traditional worries about bank runs – where vulnerabilities lay on the liability-side of the balance sheet – have not disappeared but these days there is equal concern about the reliability of apparent liquidity on the asset side of the balance sheet. The changing nature of financial activity is illustrated by developments in credit derivatives markets. The availability of these instruments is enabling a change in the nature of banking itself towards business models based on origination and distribution rather than the retention of credit risk. The notional amount outstanding on CDS contracts globally reached $ trillion in 2005, up from $ billion in 1996. | 1 |
Del Negro, Giannone and Patterson (2015) ‘The forward guidance puzzle’. Federal Reserve Bank of New York Staff Report n.574. 12. Lagarde (2021), Press conference on the ECB monetary policy statement on 22 July 2021. 13. ‘Norges Bank’s monetary policy handbook’, 2022. Other examples are from the Riksbank: “The publication of repo rate forecasts has given the general public greater insight into monetary policy and improved possibilities for evaluation and accountability.” (‘The Riksbank’s experiences of publishing repo rate forecasts’, 2017). And from the Reserve Bank of New Zealand: “Published forecasts help markets assess the economic environment and understand our policy strategy.” (John McDermott (2013) ‘The role of forecasting in monetary policy’). 14. In a speech in 2012, while still Governor of the Bank of Canada, Mark Carney put this well: “Today, to achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. Market participants may doubt the willingness of an inflationtargeting central bank to respect this commitment if inflation goes temporarily above target. These doubts reduce the effective stimulus of the commitment and delay the recovery.” 15. Haberis, Harrison and Waldron (2019) ‘Uncertain policy promises’, European Economic Review, Vol 111, pages 459-474. 16. More formal, written constitutions, which usually can’t be altered except by super-majorities in the legislature, and therefore evolve more slowly than the electoral cycle, could be seen as a commitment device to allow for (otherwise) time-inconsistent but optimal government policies. 17. | The role of regulators and their policies are thus important, at least regarding two aspects: the promotion of the use and development of technology, including the incorporation of technological improvements into financial services provision; and the need to ensure that headway in financial inclusion does not impair consumer safeguards or financial stability. I would like to offer some brief thoughts on each of these two points. Promoting the use and development of new technologies. Logically, developing technological solutions requires suitable telecommunications infrastructures. They must provide widespread access to the Internet, including in rural areas, while seeking to improve digital education and offer safeguards against vulnerabilities such as cyber threats. We should not forget that approximately two-thirds of the adult population without access to 1 See Cull et al (2014). 2/3 banks do have a mobile phone. And, as the World Bank points out, these devices are proving essential for improving accessibility to financial services. Moreover, the development of a stable institutional framework – paving the way for competition, providing legal security to the new financial proposals and ensuring an appropriate level of interoperability – is vital for generating the necessary confidence in financial services. Also, aspects such as legal recognition of digital identification, the use of biometrics in identification and ease of access to public data in “Know your costumer” (KYC) procedures, are matters the different tiers of government can push and which catalyse significantly the progress in financial inclusion. Monitoring the risks inherent in financial innovation. | 0 |
To reap the benefits of financial innovation and reduce its risks, we need robust and resilient financial systems and infrastructures. In this respect, concentrating systemic risks in central clearing counterparties for the most important markets (such as interbank and derivatives markets) may bring us a long way towards reducing them, provided these CCPs are properly regulated. In this respect, I think that locating these infrastructures in the same area as that of the currency they deal in and allowing them access to central bank money are key factors. A last option which is currently gaining some international momentum concerns the possible taxation of financial institutions and activities. In principle, this idea seems quite appealing. However, the diversity of objectives that may be given to such a tax shows that the policy BIS Review 57/2010 3 debate must be clarified. In a financial crisis prevention perspective, it is aimed at changing incentives and at forcing financial intermediaries to internalize the risks that their activities generate for the whole system. In a crisis management perspective, it should enable governments to recoup the costs of financial bailouts in a systemic crisis. My main concerns regarding this issue are twofold. My first point concerns the articulation with regulation. The added value of a tax over prudential regulation still remains to be demonstrated for countries, such as France, that have taken advantage of an effective regulatory and supervisory framework and in which public interventions in the financial sector have entailed no net costs to the government. | 6 The five-pronged strategy was outlined in the speech that I delivered at the Financial Services Forum for delegations from Pan-Pearl River Delta Region in Hong Kong on 23 March 2006, and in the discussion paper prepared for the Economic Summit on "China's 11th Five-year Plan and the Development of Hong Kong" on 11 September 2006. 4 BIS Review 98/2006 Fourthly, enhancing the capability of the financial system of Hong Kong to handle financial transactions denominated in the RMB, with a view to facilitating in Hong Kong financial intermediation of the Mainland, the conduct of experiments in financial liberalisation and the management of the associated risks; and Fifthly, connecting the financial infrastructures (the payment, clearing, settlement and custodial systems) of the Mainland and Hong Kong, to facilitate the orderly flow of money and financial instruments across the two financial systems. We are now working hard on the specific proposals under each of these five strategic headings. These, together with other proposals from a market-specific perspective, will form quite a rich menu on what we, the financial system of Hong Kong, can do for the country and on the benefits the country can derive from the arrangement of “one country, two financial systems”. BIS Review 98/2006 5 | 0 |
10 Figure 1 Inflation (1) (2) Core inflation (1) (2) (annual change, percent) (annual change, percent) 18 Headline CPI 14 Core CPI Volatiles CPI 15 Goods Services 12 10 12 8 9 6 6 4 3 2 0 0 15 16 17 18 19 20 21 22 -2 15 16 17 18 19 20 21 22 (1) Dotted vertical lines show statistical close of March 2022 Report. (2) For details on the different groupings and their share in headline CPI basket, see box IV.1 in December 2019 MP Report, Carlomagno and Sansone (2019), and Economic glossary. Sources: Central Bank of Chile and National Statistics Institute (INE). Figure 2 Cumulative inflationary surprises in MPR reports (percentage points) 2 Core goods excl. foods Other volatiles Total foods (*) Core services Volatile energy Total surprise 1,6 1,2 0,8 0,4 0 -0,4 Jun.21 Sep.21 Dec.21 Mar.22 (*) Sum of volatile and non-volatile foods. Sources: Central Bank of Chile and National Statistics Institute. | Mr Clementi comments on the systemic aspects of the Basel proposals Speech given by Mr David Clementi, Deputy Governor of the Bank of England, at a Financial Services Authority Conference, held in London on 2 December 1999. * * * Ladies and Gentlemen, I am delighted to be given this opportunity to address you today. I must first express my admiration for the pro-active and thorough way that the FSA is seeking views from the industry on these important proposals. I know that as well as this conference, their efforts have encompassed briefing sessions, circulars to banks, advisory group meetings, and a dedicated website. There will no doubt be a few focus groups springing up in due course! The Bank of England is in turn holding regular meetings with the main trade bodies, while various of the Basel Committees involved in developing the proposals have conducted surveys and received presentations from banks and others. I hope that, at the end of the process, if differences of opinion remain between the authorities and the banking industry, this will be the result of rational divergence between our different perspectives, and certainly not through any failure of communication. I intend to direct my comments to the systemic aspects of the Basel proposals. The Bank has a close interest in this subject and I will start by outlining the relationship between the design of the regulatory system and the Bank’s core purposes. | 0 |
2 BIS Review 134/2009 I would like to thank everyone, particularly Bahçesehir University and Koç University, who have contributed to the organization of this conference. I hope that it will be a productive conference and I would also like to extend my regards to the contributors of this event, to the participants and all the guests. BIS Review 134/2009 3 | Gent Sejko: Supervisory policies after the start of the Banking Union – initial experiences and outlook for CESEE economies Intervention by Mr Gent Sejko, Governor of the Bank of Albania, in 6th ECB Conference on CESEE: “CESEE, old and new policy challenges”, session’s topic “Supervisory policies after the start of the Banking Union – initial experiences and outlook for CESEE economies”, Frankfurt am Main, 10 June 2015. * * * Dear participants: I am honored and pleased to be in this important conference among distinguished professionals of banking and financial industry! I want to start by thanking the organizers for the invitation to be here, but also to congratulate the ECB on its new building: I wish it is as functional, as it is beautiful! Coming from the banking industry, I have been feeling the impact on the banking activity arising from the changing economic and financial environment due to recent global financial crisis. Since my appointment as the new Governor of the Bank of Albania at the beginning of this year, I have been seriously estimating the challenges we face in order to maintain the stability of our banking sector and ensure that it is fit to play its role in support of Albania’s economic growth. In my intervention today, I would like to share with you how we see the impact of changes in the financial landscape, including those in supervision superstructure, on the financial system of CESEE countries and more specifically on Albania’s one. | 0 |
Market contacts suggest this reflects a combination of the lower cost of issuance and a surge of pent-up supply being brought to market, and we have heard several specific examples of issuance plans being increased in size, targeted at longer maturities, or switched to sterling directly in response to the announcement. This bears similarities 9 Gilts with greater than three years to maturity are eligible for purchase in the programme. The 3.75% September 2019 gilt was due to fall below this limit shortly after the announcement, so the impact on its yield was lower than for other bonds. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 with the experience for the ECB where a comparable increase in Euro issuance was observed following the announcement of its CPSS scheme in early 2016. Stepping back, the big picture is of a discernible impact on the cost of funding for firms and a strong second half of the year for issuance, despite a big uncertainty challenge. The introduction of the CBPS has helped ensure that downside risks following the referendum did not materialise and that the market remained robust in the face of wider market volatility. In addition to those early successes, one area where the scheme has certainly been effective is the pace of purchases. Last week, and just four months since we started purchases, we passed the half-way mark for these purchases. | Malaysia has adopted a hybrid approach towards governance reform that includes legal reform, self-regulation as well as measures to encourage market-based regulation. The approach balances between prudential regulation, market discipline and shareholders surveillance. Malaysia has proceeded on the basis that there are aspects of corporate governance where statutory regulation is effective and necessary and in others where self-regulation is more appropriate. Building the necessary legal and institutional framework to support the development of good corporate governance practices within the capital and financial markets is therefore an important part of the process. Among the various measures initiated includes the law that provides the statutory framework to protect the interest of the depositors, customers and shareholders as well as the prudential framework to promote financial stability. This includes the legal provisions prescribing the maximum permissible shareholding limit to avoid concentration of ownership. There is also a restriction on extension of credit to related parties to avoid conflict of interest, as well as a limit on the lending to single customer. Other measures include the issuance of specific guidelines on the role and responsibilities of directors and the creation of various board committees. Greater emphasis is also accorded to the role of independent directors, minimum qualifications of such directors and their compensation to ensure sufficient independence to act in the best interest of the institution. In the area of Shariah governance, guidelines have been issued on the governance structure of the Shariah Committee in the Islamic financial institutions. | 0 |
But let me revert to my main theme of the monetary-policy objective and our performance against it. Since an inflation target was first adopted in October 1992, inflation on the target measure has averaged just 2.6% - and has been more stable than at any time in our history. Since 1997 when the present target - and accompanying regime - was introduced, inflation has averaged 2.4% against the 2½% target. And, on the latest reading RPIX inflation was 2.2% in the year to February. Now some people have suggested that, because inflation has recently been fairly consistently below target - albeit marginally below, by less than ½% on average over the past two years - monetary policy has been unnecessarily restrictive over this period. They've even suggested that we are not behaving 'symmetrically' - aiming to avoid an undershoot, below 2½% as determinedly as we aim to avoid an overshoot, which is of course what we are tasked to do. Well, of course, hindsight is a wonderful thing! Quite frankly I am amazed that we've been as consistently close to the inflation target as we have, and I'm astonished that I have not - or not yet at least - had to write an open letter to the Chancellor. | The exact timing of the relaxation of restrictions is unclear, but once it occurs we could find that this has an impact on this supply source, with potential consequences for monetary policy. Another unknown is the impact on demand in the UK economy. It seems pretty clear that migrant workers will spend at least a proportion of what they earn here, even if many will also repatriate savings to their home countries. The second dimension is bigger picture and less direct. Indeed some may not categorise it in terms of the labour market as such as it has an impact in a number of ways. But I like to think of it in labour market terms. I am talking about the entry of the new Asian economies, and in particular China and India into the world economy, and the ability of countries such as the UK to benefit from the much cheaper wages paid in those countries by sourcing the production of both goods, and increasingly services, to such countries. There is nothing new about the process, based as it is on the age old law of comparative advantage. But what is new is the sheer size of those economies, containing as they do over three times the number of people in the EU and USA combined on the one hand, and the willingness and ability of management of firms in the UK to benefit from them. | 0 |
I assume that this is one explanation why, for instance, it took Sweden until 1999 before there was sufficient political support to grant the Riksbank increased formal independence and to confirm by law the price stability objective, despite the fact that these reforms had been proposed when the inflation target was introduced in 1993. However, the concern among politicians over making central banks independent is quite unwarranted. The independence does not, of course, mean that the central bank is free to conduct any monetary policy they wish; it only means that it should be able to use the means at its disposal to meet the objectives set by the political system without outside intervention. This is usually expressed as the central bank being instrument independent but not goal independent. The delegation of powers should be regarded as a means for politicians to ensure that the long-term aim of the monetary policy that they endeavour to achieve – but have difficulty guaranteeing – can become a reality. Furthermore, a natural consequence of the independence is that the central bank shall be accountable for its actions and that monetary policy shall be conducted in a transparent manner. 7 It is interesting to note that, despite fairly substantial initial doubts, people have afterwards been very satisfied with the reforms implemented. Monetary policy therefore appears to have essentially delivered what was hoped for and I am not aware of any country where making the central bank more independent has been regretted. Conclusion Let me round off. | My point is that the Fed needs to examine and perfect the transmission mechanism under its purview just as intensely as it looks at monetary policy per se. And we must be ever-mindful that the central bank cannot carry the load alone, as Chairman Bernanke and others of us have often said. Indeed, there is great danger in any temptation to do so. A recent Economist article aptly summarized my perspective on this as follows: “Above all, there is a moral hazard in central-bank activism. It risks encouraging governments to sit back and let others do the work that they find too difficult themselves.”2 If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it. But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary. With that, I’ll stop. And in the best tradition of central banking, I’d be happy to avoid answering any questions you might have. 2 6 “The World Economy: Central Bankers to the Rescue?” The Economist, Aug. 13, 2011. BIS central bankers’ speeches | 0 |
Even if inflation deviates from target – as will often be the case – it is expected to return to target, and so inflation expectations are anchored. 5 That is why since 2007 the UK has been able to absorb the largest depreciation of sterling since the Second World War, as well as very large rises in oil and commodity prices, with an increase in inflation to an average of only 3.2% over the past five years and without dislodging long-term inflation expectations. So the framework has been tested and has proved its worth. But the current crisis has demonstrated vividly that price stability is not sufficient for economic stability more generally. Low and stable inflation did not prevent a banking crisis. Did the single-minded pursuit of consumer price stability allow a disaster to unfold? Would it have been better to accept sustained periods of below or above target inflation in order to prevent the build up of imbalances in the financial system? Is there, in other words, sometimes a trade-off between price stability and financial stability? 6 The intellectual foundations of monetary policy The experience of the past five years suggests that we reassess the intellectual framework underpinning monetary policy. 7 The emergence of inflation targeting, and the successful results in the form of the Great Stability, coincided with the development of the so-called New Keynesian consensus on macroeconomic theory. This framework offered a theoretical foundation for flexible inflation targeting. | Since pegging these crypto-assets to central bank money – the only legal tender in our monetary system and hence its anchor – is complex and tricky, to say the least, allowing such settlement assets to spread unchecked could affect the transmission of monetary policy and undermine financial stability. II. Our three levers for responding to these challenges I would like to share with you what we are doing to respond to these challenges. The Banque de France is working on three complementary areas: regulation, facilitation and experimentation. A) The first of these stems from the observation that security depends on having an appropriate regulatory framework in place that guarantees financial stability, but also encourages financial innovation in order to enhance end-user services and system performances. At the European level, we have welcomed and are supporting the proposed Markets in Crypto-Assets (MiCA) regulation and the Digital Operational Resilience Act (DORA), presented in September 2020: With the publication of the MiCA proposal, the European Union was the first G20 jurisdiction to respond to the urgent need to regulate the crypto-asset market. We also support the Digital Operational Resilience Act (DORA). The text will create a harmonised framework for strengthening the IT security of the overall financial sector. I’m thinking in particular of cloud players, whose role in critical segments of the sector raises the question of whether they should be located in the European Union. | 0 |
Acharya, V.V., and Yorulmazer, T (2008), “Information Contagion and Bank Herding”, Journal of Money, Credit and Banking, Vol 40, 1, 215–231. Adrian, T, Ashcraft, A, Boesky, H and Pozsar, Z (2010), “Shadow Banking”, Federal Reserve Bank of New York Staff Reports 458. Alessandri, P and Haldane, A G (2009), “Banking on the State”, Bank of England. Angeletos, G, Hellwig, C and Pavan, A (2006), “Signalling in a Global Game: Coordination and Policy Traps”, Journal of Political Economy 114(3). Bank of England (2009), “The Role of Macroprudential Policy – A Discussion Paper”, available at http://www.bankofengland.co.uk/publications/other/financialstability/roleofmacroprudentialpoli cy091121.pdf Bean, C, Paustian, M, Penalver, A and Taylor, T (2010), “Monetary Policy After the Fall”, available at http://www.bankofengland.co.uk/publications/speeches/2010/speech444.pdf Belratti and Morana (2006), “Breaks and persistency: macroeconomic causes of stock market volatility”, Journal of Econometrics, 131 pp 151–177. Bernanke, B, Gertler, M and Gilchrist, S (1996), “The Financial Accelerator and the Flight to Quality”, The Review of Economics and Statistics 78(1), pp 1–15, MIT Press. BIS (2010), “Countercyclical Capital Buffer Proposal – Consultative Document”, Basel Committee on Banking Supervision, Bank for International Settlements. Bordo, M, Eichengreen, B, Klingebiel, D and Martinez-Peria, M S (2001), “Is the crisis problem growing more severe?”, Economic Policy 16(1), pp 51–82. Bordo, M and Haubrich, J (2010), “Credit crises, money and contractions: An historical view”, Journal of Monetary Economics, 1–18. Bordo, M D and Helbling, T (2003), “Have National Business Cycles Become More Synchronized?”, NBER Working Paper 10130. Bordo, M D and Helbling, T (2010), “International Business Cycle Synchronization in Historical Perspective”, NBER Working Paper 16103. | Broadly, these models can be classified according to the underlying micro-economic friction. For example, a well-established body of literature has looked at the effects of asymmetric information between borrowers and lenders in placing limits on credit (Bernanke, Gertler and Gilchrist (1996), Holstrom and Tirole (1997)). These constraints can be loosened by the borrower pledging collateral to the lender, in effect as a substitute for information (Kiyotaki and Moore (1997)). This solves one problem, but at the potential expense of another: movements in the prices of collateral then have the potential to aggravate cycles in leverage and credit (Geanakoplos (2010)). These cycles can in turn act as a “financial accelerator” for the business cycle. These are typically models of a representative bank and creditconstrained investor. A second potential source of credit market friction arises from coordination failures among lenders (Gorton and He (2008)). In these models, banks are heterogeneous and their behaviour strategic. The individually rational actions of heterogeneous lenders can generate collectively sub-optimal credit provision in both the upswing (a credit boom) and the downswing (a credit crunch), perhaps through herding (Acharya (2009), Acharya and Yorulmazer (2008)). This is the result of a collective action, or co-ordination, problem among banks. In credit markets, these co-ordination failures are far from new. Keynes memorably noted: “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way with his fellows, so that no one can really blame him” (Keynes (1931)). | 1 |
Mark Carney: Inclusive capitalism – creating a sense of the systemic Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the Conference on Inclusive Capitalism, London, 27 May 2014. * * * Introduction Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations. Different societies will place different weights on these elements but few would omit any of them. Societies aspire to this trinity of distributive justice, social equity and intergenerational equity for at least three reasons. First, there is growing evidence that relative equality is good for growth. 1 At a minimum, few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined. Second, research suggests that inequality is one of the most important determinants of relative happiness and that a sense of community – itself a form of inclusion – is a critical determinant of well-being. 2 Third, they appeal to a fundamental sense of justice. 3 Who behind a Rawlsian veil of ignorance – not knowing their future talents and circumstances – wouldn’t want to maximise the welfare of the least well off? The problem: the growing exclusivity of capitalism This gathering and similar ones in recent years have been prompted by a sense that this basic social contract is breaking down. That unease is backed up by hard data. | IMF (2014), Fiscal monitor April 2014: public expenditure reform – making difficult choices. Available at http://www.imf.org/external/pubs/ft/fm/2014/01/pdf/fm1401.pdf Hayek, F (1960), The Constitution of Liberty, Routledge. Honohan, P (2005), “Banking sector crises and inequality”, World Bank Policy Research Working Paper 3659, July. Krueger, A (2012), “The rise and consequences of inequality in the United States”, mimeo. Lewis, M (2012), “Don’t Eat Fortune’s Cookie”, remarks at Princeton University, June 3. Lewis, M (2014), Flash boys: a Wall Street revolt, W. W. Norton & Company. Martin, R (2012), “The Gaming of Games & the Principle of Principles”, Keynote Address to the Global Peter Drucker Forum, Vienna, November 15. Merola, R and Sutherland, D (2012), “Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations”, OECD Economics Department Working Papers, No. 934. OECD (2011a), “Divided we stand: why inequality keeps rising. Special focus: inequality in emerging economies”. Available at http://www.oecd.org/els/soc/49170475.pdf OECD (2011b), Restoring public finances: Special Issue of the OECD Journal on Budgeting, Volume 2011/12. Available at http://www.oecd.org/governance/budgeting/47558957.pdf BIS central bankers’ speeches 9 OECD (2013), “Crisis squeezes income and puts pressure on inequality and poverty”. Available at http://www.oecd.org/els/soc/OECD2013-Inequality-and-Poverty-8p.pdf Oreopoulos, P, von Wachter, T and Heisz, A (2012), “The short- and long-term career effects of graduating in a recession”, American Economic Journal: Applied Economics, 4(1), pages 1–29. Ostry, J, Berg, A and Tsangarides, C (2014), “Redistribution, Inequality, and Growth”, IMF Staff Discussion Note 14/02. Padoa-Schioppa, T (2010), “Markets and government before, during and after the 2007– 20xx crisis”, The Per Jacobsson Lecture, June. | 1 |
Encik Abdul Rasheed Ghaffour: Shaping the future starts now Speech by Mr Encik Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the launch of the Financial Management for Retirement Module "Shaping the future starts now", Kuala Lumpur, 7 April 2017. * * * Importance of financial literacy There is a growing concern on the low financial literacy level of Malaysians as measured by financial knowledge, attitudes and behaviours. Based on the Financial Capability and Inclusion Demand Side Survey conducted by Bank Negara Malaysia in 2015, the main observations on the state of financial literacy of Malaysians can be described by: a. First – the majority of Malaysians have inadequate knowledge on financial matters to enable them to make informed financial decisions, particularly among the vulnerable groups; b. Second – a significant majority of Malaysians display short-sighted tendencies and are inclined to ‘live for the moment’ – that is to only focus on instant gratification at the expense of long-term financial planning; c. Third – more than 75% of Malaysians find it difficult to even raise RM1,000 to meet emergency needs; d. Fourth – only a quarter of Malaysians have any form of investment; and e. Fifth – most Malaysians indicated that they will face financial pressure should there be a loss of income. Therefore, building the financial capability and literacy of Malaysians is certainly a priority for the nation. | SAMA works side by side in cooperation with relevant authorities, namely, the Ministry of Finance, Ministry of Housing, Ministry of Justice, Ministry of Commerce and Industry to achieve the cherished objectives of the Finance Laws. The Implementing Regulations of the Real Estate Finance Law address criteria and conditions to be observed in the exercise of this activity for the purpose of regulating the finance sector, and protecting the rights of the dealers therein. The Regulations set a maximum limit on real estate financing that should not exceed 70 percent of the house value subject of the real estate finance contract. The Regulations also set up a regulatory framework for real estate refinancing, thereby, establishing a secondary market that contributing to providing the necessary liquidity and reducing the cost of financing to the consumer. The Public Investment Fund will contribute to the ownership of the Saudi Refinancing Company with a capital of five billion Riyals. The Implementing Regulations of the Financial Leasing Law include provisions related to the Financial Leasing contracts. The Regulations identify the basic rights and obligations of both the lessor and lessee, including determining the amount of ownership right and dues of the lessee and lessor in case of the cancellation of the contract. The Regulations provide for the registration process of Financial Leasing contracts in accordance with the best practices in this area through a company incorporated for this purpose. | 0 |
Mr. Chairman, in good times, we normally take the stability and integrity of our systems for granted. Perhaps one of the key lessons from the current crisis is that we should never, ever, take stability and integrity as being “given” conditions, in the future. But, let’s remember that memories are short. This global crisis will almost certainly be forgotten in a few years time. It is also likely that if we enjoy a strong run of growth and prosperity for a few years, our minds too will probably dismiss thoughts of destability. Today’s grim discussions would then be relegated to the drab background, and in its place, the glitz and glamour of fast growth, handsome profits, stunning incentives, and fabulous wealth would reign supreme. Unfortunately, Mr. Chairman, if and when that happens, the world would unconsciously drift into the danger zone yet again. Needless to say, if we do not want such an eventuality to take place, the price would be intense vigilance on the part of the regulators, governments, media and the academia. I know that is going to be tough, but in the interest of all stakeholders, I sincerely hope it works and that the academia, governments, media and regulators would face up to that challenge. | Concluding, I would like to underline that the Bank of Albania shall always be at the position the public expects it to be, in order to satisfy, at any given time, its legal responsibilities for price level and banking sector stability. In this process, state authorities, in particular the judiciary, would be needed to offer their indispensable cooperation and consider banking system issues a high priority, with the knowledge that a stable economic development of the country depends on it. The Bank of Albania calls on all relevant factors to accelerate their structural reforms on property title and execution of collateral as well as undertake a number of other administrative and bureaucratic regulations which affect banking system costs. Inviting you to openly discuss on these issues, I thank you for your attention! BIS central bankers’ speeches 3 | 0 |
Lastly and perhaps of most value to SMEs, is the insights that SMEs would gain from a better understanding of their financial deficiencies which lead to rejections of financing applications by financial institutions. This can be deduced from the analysis provided through the Bureau ratings and reports. The credit reports would also serve as a convenient tool for SMEs to carry out a self-evaluation to identify areas that need improvement and initiate adequate remedial actions to increase their competitiveness. SMEs are thereby empowered to improve their own profile, with correspondingly enhanced prospects for the SME sector as a whole. As I mentioned earlier, it is also encouraging to see a considerable turnout by financial institutions at this seminar. This underscores the sustained and growing attention by financial institutions in the SME sector that is critical to provide the enabling environment for the SME sector to thrive. Bank Negara has seen a paradigm change in the way in which financial institutions approach the business of SME financing. Banks have, and continue to invest significantly, in supporting SME financing niches, and the organisational changes that we have seen have been pervasive in many banks. These banks have acquired tremendous insights on effective strategies for successful interfaces with SME customers. In some banks, completely new business cultures for their SME segments have evolved as a result which bodes well for the SME industry. | Secondly, SMEs with good track records will not only enjoy a wider acceptance from banks, they will also be able to access financing on more favourable terms, and obtain faster decisions on their financing applications. This is because the Bureau acts as a one-stop center for banks to obtain consolidated information on SMEs, which is currently scattered, and will take longer for banks to obtain and verify individually. We have already seen how this can work in the case of consumer financing, where real-time and comprehensive information on consumers’ credit exposures and history that is available from CCRIS has 2 BIS Review 67/2008 significantly shortened loan-processing times. With greater availability of information on SMEs, the processing time for SME loans can be similarly shortened. Thirdly, the Bureau includes and takes into account both positive and negative information on SMEs. Certain third party information that financial institutions use in the evaluation of credit applications only provides negative information on the business conducts. Examples are information on bankruptcy and legal suits, which are sometimes not updated and may result in a biased assessment of creditworthiness. By collecting and disseminating both positive and negative information, the SME Credit Bureau will benefit SME loan applicants by providing a more balanced view of SMEs’ credit standings. In an objective rating process, credit bureaus typically accord greater weight to the more recent credit information or behavior. Negative records in the past can thus be mitigated by more current and consistent good track records. | 1 |
Mr. Heikensten discusses monetary policy Address by the Deputy Governor of the Bank of Sweden, Mr. Lars Heikensten, at the Autumn Conference arranged by the Centre for Business and Policy Studies on 14/10/98. First a word of thanks for the opportunity to attend this meeting. The autumn conferences are a fine tradition to which it is a pleasure to contribute. On previous occasions I have used the opportunity to look back over the past year and discuss what the Riksbank has been doing, including how monetary policy is conducted. Then I have tried to look ahead and pick out some issues of importance for monetary policy in the longer run. My approach this year will be broadly the same. First a review of what has happened since last autumn, with comments on how the Riksbank’s assessment of inflation has evolved over the year. Then, as previously, a look at the question of how we communicate policy and how it has been perceived in financial markets. On this occasion we are in the throes of an international financial crisis, with great uncertainty as to what its real economic effects may be. Contagious effects of the crisis have gradually become larger and larger. Looking back, one can clearly see how the economic forecasts of most observers have swung during the year, from a phase of concern about a future increase in inflationary pressure to a phase of strong anxiety that the global economy will be hit by a recession. | The assessments were based on an assumed appreciation of the Swedish krona from the current TCW index level of 124 to 120 in the coming year and just over 117 in the year after that. Inflationary impulses from the rest of the world were expected to be low in the forecast period. The rising domestic demand was not expected to result in an alarming increase in inflationary pressure. Investment growth and labour supply were judged to be sufficient to avoid general problems with capacity during the period. The development of wages and productivity was expected to be favourable for a moderate, though rising, rate of inflation. Inflation expectations among market agents, firms and households were still low. Inflation was expected to be below the target in the short run and then be in line with the target further ahead. With the fundamentally positive picture of the Swedish economy, including good growth in the forecast period and a successive return to the targeted rate of inflation, the Riksbank left the repo rate unchanged. As uncertainty had increased since the earlier assessments, however, the uncertainty interval surrounding the main path was considerably wider. But the risk spectrum was symmetrical, that is, the risks of inflation being higher than in the main scenario were judged to be as great as the risks of lower inflation. | 1 |
In the same vein, other economists suggest that dealing with divergences and asymmetries should not prove much more difficult within the euro area, at least in its major countries, than within a long-established monetary union such as the US. II. The euro as a catalyst for further progress While many acknowledge that the introduction of the euro has been broadly successful, one may ask at this point what needs to happen to ensure the success of the euro in the medium term. What is very encouraging in this respect is the fact that in a number of areas the euro itself appears to be as a catalyst for these conditions to be met. II.1 The euro and the single market a/ The euro is the crowning achievement of the single market. Need we mention the advantages inherent in the single market? It enables the productive sector to make significant economies of scale and allows savings to be allocated to the most efficient investments. It also enhances market visibility and boosts competition and innovation to the benefit of consumers. But the ultimate objective of the single market could not be achieved while monetary barriers continue to prevent the free flow of goods, services, capital and, in a way, people, by imposing unpredictable and erratic exchange-rate movements and transaction costs. | Therefore, the measures to revise the capital adequacy framework for Zambia enhances the resilience of the sector to both internal and external shocks by improving the quality and quantity of the capital available for commercial banks; 3) Introduction of the policy rate: the policy rate was introduced in order to provide a benchmark rate for the banking industry on which pricing for lending products can be based. It also promotes transparency in the price discovery mechanisms in the banking sector while minimizing information asymmetry particularly that associated with the credit markets; 4) Statutory Instrument No. 33 on Bank of Zambia currency regulations: This measure was introduced with a view to reinforcing the use of the Zambian Kwacha as the legal tender in the Republic of Zambia. The increased use of foreign currency cash in our economy has implications for the effectiveness of the conduct of monetary policy given that foreign currency cash is outside the control of the central bank; and 5) Currency rebasing: Since 2006, (except in 2008 when there were challenges arising from the global financial crisis) Zambia has enjoyed positive economic variables. For instance, overall inflation has been single digit and the country has continued to record favourable balance of payments surplus. During the recent past, inflation has declined to single digit levels such that in December 2011 it closed at 7.2%. This low level of inflation, coupled with favorable macroeconomic conditions, provided an opportune time to rebase the Zambian currency. | 0 |
Systemic Risk Relieved of our responsibility for supervising individual banks - and it is a considerable relief I can tell you - the “new” Bank can concentrate its energies on detecting and limiting systemic financial risk. That is a responsibility of central banks everywhere, and because it involves close monitoring of economic and financial market developments nationally and internationally - it fits more naturally and comfortably alongside our responsibilities for monetary stability. This responsibility will be overseen by a new, internal, Financial Stability Committee which effectively parallels the role and procedures of the Monetary Policy Committee. What we mean by “systemic risk” specifically is the danger that a failure of one financial business may infect other, otherwise healthy, businesses. This could happen in either of two ways: first through the direct financial exposures which tie firms together like mountaineers, so that if one falls off the rock face others are pulled off too; and second, by contagious panic which sweeps everyone off the mountain side like an avalanche. The dangers still relate particularly to commercial banking businesses, because banks are still at the centre of payments and settlements systems, and they are still relatively heavily engaged in the maturity transformation of liquid liabilities into less liquid assets as an important part of their core activity. But it is of course clear, in today’s world of global finance, that disturbances with the BIS Review 18/1998 -7- capacity to inflict systemic, financial, damage, and associated economic disruption, can originate outside the commercial banking system. | Still, we must be aware that accumulated trust does not suffice; in our present world such trust must be renewed every day, on the basis of the ability to respond to new demands and challenges. I will comment on some of these challenges towards the end of my presentation. On the recent evolution of the economy, the most noticeable event has been the drop in inflation. After several quarters in which the annual CPI variation was above 4%, in recent months it fell sharply to 3%, placing y-o-y CPI inflation at 2.9% in November. We had foreseen inflation declining at a slower pace. In the Monetary Policy Report we presented to the Senate last September, we projected that annual headline inflation would close this year at 3.5%. Today, private expectations—as well as our own—put it a little under 3%. In addition, in the baseline scenario I will be describing in a moment, we assume that this decline will continue, such that during most of 2017 annual CPI inflation will stand in the lower part of the tolerance range, to start converging back to the target by year’s end. Domestic activity has also shown some surprises. It grew in line with forecasts in the third quarter and even somewhat better in sectors not related with natural resources—what we call Other GDP. However, it began the fourth quarter quite poorly. The decline in mining activity weighed significantly, as has been the trend throughout the year, and so did some specific industry lines. | 0 |
It starts with a boy being taught the history of the Olmecs, Mayans, Toltecs and Aztecs; of the Grito de Dolores of Don Miguel Hidalgo – the real “Zorro”; and of La Reforma of Don Benito Juárez. It starts with a boy who spent Saturdays at las charreadas, cruised the then-clean waters of Xochimilco, water skied on Lake Tequesquitengo, and whose mother took him on Sundays to La Villa to the Basilica of Our Lady of Guadalupe. It starts with a boy laughing at Cantinflas and weeping for Marcelino Pan y Vino. It starts with a boy playing Little League baseball for los Tigres and later, los Leones, coached by a man named Norman Borlaug. On weekends, Mr. Borlaug would take that wideeyed boy on tractor rides through corn and wheat fields, where at the end of the day they would eat paletas while the coach analyzed samples from the fields. Those samples became the basis for the Green Revolution that he started in Mexico and that ended up feeding billions of people around the world. Well, I think by now you know that the boy I’m speaking of is me. I may be the only central banker on the planet whose Little League baseball coach went on to win the Nobel Peace Prize! My fondest childhood memories are from Mexico. | The problem we face is that unemployment’s critical level cannot be identified for certain and we do not know when shortages and rapid wage increases will actually arise. Estimating these matters is difficult and the results cannot be taken for granted. It is therefore hard to tell how much scope there is for a temporary phase of economic growth above the long-term trend. The ability to look ahead and formulate monetary policy cautiously is particularly important when an economy is moving further and further along an upward phase. Otherwise there is a risk of price and wage increases accelerating so that the brakes have to be applied more abruptly later on, leading to a situation that is worse than would otherwise have been the case. Thus it is in this phase of rising activity that we can be said to influence the depth of the next slowdown. It was the overheating in the late-1960s, the mid-1970s and the end of the 1980s that set the stage for the subsequent deep troughs. And each recession was worse than its predecessor. Looking back, it is easy to see that economic policy ought to have been tightened much earlier than was the case on those occasions. At the same time, it has tended to be difficult, not least in fiscal policy, to take such measures sufficiently early, particularly as that needs to be done before the problems are clear to everyone. | 0 |
As a result, we hope that the forward guidance on the monetary policy stance of the Bank of Albania will be adequately understood by all market agents and the public. Banks and entrepreneurs should use this opportunity to boost their activity resting assured that the central bank will continue to sustain and support their activity. In addition to the monetary policy easing, the Bank of Albania has paid special attention to the reform in the financial sector and the prudent supervision of the banking sector. The Chair of the Board of Governors of the Federal Reserve System, Ms. Yellen, in a statement not long ago leaves no doubt about the necessity of reforms in the financial sector, I quote “... a sine qua non for sustained economic recovery following a financial crisis is a thoroughgoing repair of the financial system.” From the perspective, in cooperation with the Parliament, government and other public regulatory entities we have undertaken a series of legislative and regulatory initiatives, aimed at creating incentives for the recovery and assurance in lending. Thanks to the reforms we have undertaken during this year, we have started to reap the first positive results as regards the situation of the non-performing loans. As a result, the ratio of the non-performing loans fell for the first time after almost seven years of continuous rise. The write off of loss loans, as I have explained in previous statements, was the finalisation of joint inter-institutional efforts. | Thank you. 1 Source: IMF World Economic Outlook Database, April 2019. 2 A Gini coefficient of 0 means everyone has the same income, and 1 means all disposable income of an economy is concentrated on one person. The Gini coefficients quoted are based on household income before taxes and transfer payments. Sources: Census and Statistics Department (Hong Kong) and the Congressional Budget Office (US). 3 Domanski, D., Scatigna, M., & Zabai, A. (2016). Wealth inequality and monetary policy. BIS Quarterly Review (March). 2/2 BIS central bankers' speeches | 0 |
First: As of January 1, 2005 we dropped six zeros from the Turkish lira. Thiswas an important development for the economy as a whole. Second: The Turkish Statistical Institution announced a change in the calculation methodology of the price indices including CPI, starting from January 2005. During 2005, in addition to these two developments, further steps were taken in order to improve conditions before starting full-fledged inflation targeting regime. We continued to develop our decisionmaking process towards more transparent and efficient policymaking. So, though the Monetary Policy Committee continued to be an advisory body in making policy decisions, it began to meet regularly on the pre-announced days to discuss developments on inflation and economy in 2005. Decisions on short-term interest rates of the Central Bank were made public on the following business day taking the evaluations during the meeting into account. Following the announcement of policy decisions, a report on inflation and outlook, which would include the reasoning of the decision and the views of the Committee members together with the signals on how the decisions on interest rates would evolve in the future, has been made public. Another step was the reorganization of the Research Department to fit the needs of policy design and analysis under the full fledged inflation targeting regime. Besides, the information set that we use to forecast future inflation was further enlarged; forecast models for inflation were improved and sophisticated. Now, let me proceed with some of the key elements of full-fledged inflation targeting regime that became effective in 2006. | However, the inflation targeting regime was also “implicit” rather than “full-fledged”, reflecting the fact that the preconditions such as a strong fiscal position of the government and further stability in the financial markets were not yet fulfilled. During the last four years, sound monetary and fiscal policies together with structural reforms, changes in the institutional framework and adaptation of the economy to floating exchange rates, however painful this might have been, have resulted in remarkable achievements on the way to price stability. During this period, the monetary policy of the Central Bank put greater and greater emphasis on ensuring the credibility of inflation targets. To this end, the Central Bank has often publicly stressed the importance of continuing with a tight fiscal policy and completing structural reforms without delay or compromise. As a result, inflation targets have been reached for four years in a row, significantly enhancing the credibility of the monetary policy. I am so glad to be able to say that today inflation is at its lowest level in thirty-seven years. Annual CPI inflation, which was 73.2 percent as recently as January 2002, is now down to single digit figures; it stands at 7.72 percent as of end of 2005. This performance in disinflation has obviously positively affected the economy. First of all, economic growth rates have been positive again in the last four years. Not only they have been positive, but very high levels have been attained. Total growth in real terms since 2001 is 31 percent. | 1 |
2 BIS Review 27/2007 Ladies and gentlemen. I would like to reassure you that we have always welcomed genuine foreign capital flows and investors and will continue to do so. The measure implemented in December was not meant to affect genuine investors and this was clear from the beginning. The measure announced on 18th of December clearly stated that capital inflow in the form of foreign direct investment (FDI) was exempted from the reserve requirement. And later on, as it turned out that genuine flows were still affected by the measure, we attempted to find an alternative option to alleviate pressure on the baht and adverse effects on productive sectors. To date, the exchange control measure has effectively slowed down the appreciation of the baht. On average, the nominal effective exchange rate in February strengthened by only 0.5% relative to January, compared to an appreciation of 1.7% between November 2006 and the first half of December – before the measure was implemented. After we have successfully slowed down the one-way appreciation momentum, we have allowed greater flexibility to the measure without compromising the needs to contain excessive volatility – by providing the fully-hedging option for all categories of inflows that are covered under the reserve requirement measure. We will closely monitor the hedging requirement. If its implementation is effective, we can lift the reserve requirement and keep only the hedging requirement. In safeguarding economic stability and fostering long term growth, the BoT also looks beyond the immediate horizon. | From a central banker’s standpoint, the role of asset prices in general and of inflation-indexed bonds in particular in the process of setting monetary policy is mainly related to their information content on future economic activity and inflation. As you have already probably noticed, the Governing Council of the ECB sometimes refers to the information delivered by the changes in the inflation-indexed bond yields both in its introductory statement and in its comprehensive assessment of recent economic and financial developments, as presented, for instance, in the ECB’s Monthly Bulletin. To elaborate further on this, I will develop three points. First, I will describe the information content of inflation-indexed bonds and explain why this information is relevant for central banks. Second, I will highlight some of the main drawbacks and potential biases that may alter this information content. Third, I will briefly review the other indicator variables that we also use in our cross-checking exercise at the euro area level. Finally, I will conclude my presentation by raising the issue of what I call the 1 Robert Shiller: “The Invention of Inflation - Indexed Bonds in Early America”, NBER Working Paper N°10183, December 2003. 2 In the year prior to the introduction of the indexed bond, the inflation rate was at 69.2% in Brazil, 22.2% in Chile, 19.7% in Colombia, 34.8% in Argentina, 16,1% in the UK in 1974 and still at 14% in 1980. | 0 |
I would like to discuss the changes in the financial environment and how they affect our different areas of operation, but before I do so I shall talk about the Riksbank's main role in the financial system, namely to provide the Swedish economy with safe money that is easy and efficient to use. The Riksbank provides the economy with money that safe and simple to use Money is needed so that we can buy and sell goods and services. If we are to have confidence in money, and want to use it, it needs to be both safe and easy to use. This requires in turn financial stability, price stability and smoothly-functioning payment systems. Let me describe how the Riksbank tries to create the right conditions. If we start with money being safe, this means that one can rely on money representing a particular value in goods and services, and that it will retain this value until the day one wants to redeem it for goods and services. The pieces of paper that we issue have no value in themselves, but function as a form of evidence that someone has produced something of value. 2 In the academic literature there is, for instance, a branch known as ‘monetary economics’ or in its modern form, ‘new monetarist economics’ 3, which looks into why money arises and under what conditions it retains its value. | When these transitory influences drop out of the year-over-year numbers this spring, the inflation rate is likely to move higher. Importantly, even as inflation undershot the FOMC’s objective over the past year, inflation expectations have been broadly stable. I would be much more concerned if low inflation outcomes were contributing to a decline in inflation expectations. That would make it more difficult to push inflation back toward our 2 percent objective and would increase the risk of getting stuck at the effective lower bound for interest rates following the next economic downturn, which inevitably will come. Even if inflation were to remain somewhat below 2 percent over the near future, that might not be a serious problem, if the economy were to continue to perform well in other respects. To me, it would imply that the unemployment rate associated with “maximum employment” is lower than current estimates and that we could let the labor market tighten a bit further. This would be a positive outcome because the productive capacity of the U.S. economy would be enhanced and more people would be able to find jobs, develop their job skills, and build their human capital. In short, 2018 looks like it will be a good year for the economy. I anticipate that the Federal Reserve will make further progress in achieving its dual mandate objectives of maximum sustainable employment and price stability. If circumstances evolve close to what I have outlined today, I will continue to advocate for gradually removing monetary policy accommodation. | 0 |
A prime example of this has been the Macro-prudential Research Network (MaRs), where researchers from the European System of Central Banks closely collaborated with experts from academia. The MaRs network was launched to develop core conceptual frameworks, models and tools providing research support to improve macro-prudential supervision in the EU. Its work, which was formally concluded last June, is summarised in a public report and represents a fine example of policy-relevant research. 1 To foster a constant communication with academics, the ECB also regularly organises seminars, conferences and workshops. These enable researchers, policy-makers and practitioners to meet and discuss the latest research findings and their implications for policy. In addition, to stimulate research at the highest academic standards, the ECB invites leading scholars to visit and conduct their research at the ECB, for example via the Wim Duisenberg Fellowship, and offers support to young researchers by funding five Lamfalussy Fellowships every year. Thomas Philippon’s contributions represent an excellent example of policy-relevant research. I will consider two main areas of his research which I find particularly interesting: the design of optimal interventions and the efficiency of the financial sector. In his 2012 paper, published as the lead article in the American Economic Review, Thomas and his co-author Vasiliki Skreta study the design of optimal public interventions in debt markets. The intervention aims at restoring an efficient level of investment when productive investments are forgone because firms face unfairly high interest rates due to adverse selection. | If that consensus exists, we stand ready to work with the market to deliver this complementary tool. We strongly encourage market participants to engage on this consultation and look forward to receiving responses. 15 For presentational reasons, Figure 3 shows the SONIA index and compound rates over different time periods from those shown in Section 2 of the accompanying Discussion Paper, but the underlying data and calculation methods are identical. 9 All speeches are available online at www.bankofengland.co.uk/news/speeches 9 Transitioning the Bank of England’s lending facilities away from LIBOR Our second announcement today also relates to our presence in the market – specifically, how we treat LIBOR-linked collateral in our Sterling Monetary Framework lending operations. We released a discussion paper on this topic last year and today we set out the actions we intend to take. Our lending operations are designed to provide liquidity support to market participants experiencing either a predictable liquidity need or a firm-specific or market-wide shock. We lend to firms against a wide set of eligible collateral. But to protect public funds we apply a risk-averse ‘haircut’ to that collateral to protect against possible falls in its value in the period between a counterparty default and collateral sale, including in times of potentially severe stress. The current average haircut on pre-positioned collateral is a little under 25%, giving the Bank a lending capacity of over £ after accounting for existing lending (for example under the Term Funding Scheme). | 0 |
Moreover, the influence of demand on prices will also depend on future changes in the epidemiological situation, the pace of recovery processes when vaccines become widely used, and an improvement of consumer sentiment and business expectations. As we could observe in summer and early autumn, when the situation returns to normal, the recovery may be sufficiently quick. At the moment, we consider it too early to adjust our medium-term inflation forecast since it is necessary to also analyse the effect of competing factors on price movements. As regards the near future, our preliminary estimates show that annual inflation will approximate 5% in 2021 Q1. Further on, if the influence of one-off factors diminishes rather fast, it will trend down and return to 4% by mid-2021. Given the accommodative monetary policy pursued, inflation is expected to equal 3.5–4.0% by the end of 2021, subsequently stabilising close to 4%. We will carry out an additional analysis to assess whether there are grounds for adjusting our forecast in February, for the core meeting on the key rate. As regards other risks for medium-term economic development and inflation, their estimate has remained unchanged overall. Various geopolitical risks are still relevant — they may provoke fluctuations in financial markets, affect exchange rate expectations and sentiments, and influence trends in the Russian and global economies. As always, further changes in budget spending are a critical factor. This has a considerable influence on our monetary policy decisions. | During the year, apart from enhancing the regulatory environment, MAS worked with other government agencies to improve the tax and legal environment for financial institutions involved in the wealth management business. The new Trustees Act is expected to come into force later this year. MAS will also be introducing a framework to regulate trust companies. The proposed framework will ensure high standards of business conduct, professionalism and competence in the trust services industry in Singapore. The Singapore dollar bond market has developed beyond serving the needs of just local borrowers and has attracted a diversified base of foreign issuers as an alternative venue for cost-effective funding. Large issuers, including Freddie Mac, Fannie Mae and Asian Development Bank have found cost-effective opportunities to tap our bond market. In five years, the market has grown significantly in breadth and depth. Product range has also increased significantly. Structured products now account for more than half of the Singapore dollar bond market. The asset securitisation market has also gained traction, recording a fivefold increase since 1999. To further enhance the attractiveness of Asian capital markets, MAS has, over the past year, worked with various governments in the region to encourage investor demand, and to address market access and market infrastructure issues. The Asian Bond Fund or ABF is one such initiative. After the successful launch of ABF 1, the Executives’ Meeting of East Asia-Pacific Central Bankers or EMEAP is making good progress on ABF2 to invest in local currency-denominated Asian bonds. | 0 |
6 [20] of the problems among the general public, market participants and economic policy decision-makers. But it is, of course, necessary that this raised awareness results in concrete measures or changed behaviour that counteracts the financial imbalance. It is doubtful, as far as Sweden is concerned, whether it can be said that this has been the case, at any rate not to such an extent or at such an early stage as could have been hoped for. The fairly modest leaning against the wind that we practised was thus insufficient to halt the build-up of debts and housing prices. Nevertheless, I myself was not prepared to keep the rate any higher than we did in an attempt to achieve this. This was also apparently true of the Executive Board as a whole. If we had set the repo rate significantly higher, the increase in indebtedness would perhaps have stopped more permanently, but, at the same time, there is a severe risk that the development of the economy would also have been significantly worsened. Perhaps even more importantly, the development of inflation would have been even weaker than it actually was and it would have been even more difficult to bring it up and maintain confidence in the inflation target. One further conclusion, or lesson, is that a policy that leans against the wind requires that there is confidence in the inflation target. | Why is it not possible for monetary policy merely to stabilise the real economy or lean against the wind? Such a monetary policy arrangement would be well in line with the new thinking in the international debate that I presented in my introduction, in particular if this were to be taken to its logical conclusion. 12 I intend to return to this debate soon, so let me put this issue to one side for a moment. Conclusion (ii): Fairly significant interest rate rises may be needed to brake the build-up of financial imbalances One issue in which I have gradually revised my opinion in recent years is that of how much a central bank should and must lean against the wind to deal with the build-up of a financial imbalance. Previously, I had a rather strong belief that leaning against the wind relatively moderately could have a good effect, primarily by sending a clear signal that the central bank is concerned over developments and perceives them to be risky. Today, I am more doubtful about this. It certainly seems reasonable that the effectiveness of such a strategy will vary over time and from economy to economy, depending on the exact circumstances, for example regarding market sentiment and debt levels, but overall I am significantly more sceptical than before. I still believe that a certain degree of leaning against the wind, combined with clear communication of the risks, could increase awareness 12 For one example, see Scholes and Alankar (2017). | 1 |
On the first one, our revision to core inflation – I've started answering already in the previous question–, a lot of it is attributable to the unit labour cost. That's a large chunk of the revision. The rest is what you have in the monetary policy statement, which is past upward surprises. So, it's a different starting point, which is informed by data that came in after the last projection that we made in March. The latest data that we had in terms of inflation was from January. Now, things obviously changed between those January data and the May data that we have incorporated because we cut off on the 23 May1. I think that's a small part of it. The large part of it is the unit labour cost. You asked me about the decision and the atmosphere. I have to tell you that it was quite a harmonious discussion and a very good and thorough economic discussion. As I said, we went really deep into the analysis of the labour market and tried to really understand the forces behind inflation to better fight it. It was a very, very broad consensus. By the way, I just want to remind that it was a twofold decision. It was, number one, the 25 basis points but it was also the decision, or the confirmation, that we would stop any reinvestment under the APP. What does the ECB know about lag effects? What takes longer to transmit into the economy? What are you looking at more closely? | Christine Lagarde: ECB press conference - introductory statement Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 15 June 2023. *** Good afternoon, the Vice-President and I welcome you to our press conference. Inflation has been coming down but is projected to remain too high for too long. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. The Governing Council therefore today decided to raise the three key ECB interest rates by 25 basis points. The rate increase today reflects our updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. According to the June macroeconomic projections, Eurosystem staff expect headline inflation to average 5.4 per cent in 2023, 3.0 per cent in 2024 and 2.2 per cent in 2025. Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation. They now see it reaching 5.1 per cent in 2023, before it declines to 3.0 per cent in 2024 and 2.3 per cent in 2025. Staff have slightly lowered their economic growth projections for this year and next year. | 1 |
The Bank of Albania will constantly monitor and confirm that you are taking the necessary concrete measures to maintain and improve the capacity to constantly generate a positive financial result, by preserving the assets’ quality and the liquidity indicators. If necessary, being the regulatory authority of the banking sector, the Bank of Albania will orient and support these measures through constant revision and creation of necessary regulatory stimuli. BIS Review 120/2008 5 | The total non-government sector deposits (including the demand deposits) are planned to increase by Denar 5,139 million or by 13.6% in 2001. The deposits growth should result from the increased confidence of the economic agents in the banking system, as a result of: • Stable macroeconomic environment • Increased income of the economic agents resulting from the projected acceleration of the economic activity • Initiation of bond repayment process of so-called “old foreign exchange savings” • Modification in the legal framework regarding the operations of the Insurance Deposit Fund, which has been transformed into a state fund. Moreover, the amount of the insured deposit, and the indemnfication percentage in case of risky event have been increased, as well • Increased presence of foreign investors in the banking system of the Republic of Macedonia. Analyzed by currency denomination, in 2001, Denar and foreign currency deposits are projected to increase by Denar 3,139 million, or by 12.0%, and by Denar 2,000 million, or 17.5%, respectively. Namely, following its introduction in the first half of 2002, the Euro will replace the currencies of the EMU member countries. This will result in enhanced Euro conversion of the households' foreign currency deposits currently denominated in these currencies and not deposited in the banking system. Hence, part of the converted savings are expected to remain within the banking system, increasing the foreign currency deposits. | 0 |
15 In addition, the Federal Reserve Board has been testing a facility through which it offers term deposits to credentialed depository institutions. Term Deposit Facility (TDF) transactions could be used to temporarily immobilize reserve balances. An eight-week series of tests this summer explored how demand for term deposits responds to variations in the maximum individual award limits and rates. Higher offered rates relative to IOER attracted greater use, both in the number of participants and the total dollar volumes. The next round of TDF testing, which gets underway in October, will incorporate an early-withdrawal feature, as well as gradual increases in the maximum individual award amount and rate. For details see http://www.federalreserve.gov/newsevents/press/monetary/20140904a.htm. BIS central bankers’ speeches 7 Conclusion In conclusion, during normalization the FOMC will continue to communicate the stance of policy through a target for the fed funds rate, and will move the fed funds rate into the target range primarily by adjusting the IOER rate. ON RRPs and other supplementary tools will be used as needed to control the fed funds rate. The Committee will continue to test features of the ON RRPs to determine how a facility might best be structured to supplement IOER in the control of the funds rate while limiting the potential for unintended effects in financial markets. Given the range of available tools, I am confident in our ability to raise short-term interest rates from the zero lower bound when the time to do so arrives. | Losses increase in downturns, and the supply of equity capital can dry up, compelling banks to restrict their lending. The impact is stronger since the value of property used as collateral fluctuates in step with cyclical developments. At the same time, counterparties and rating agencies may require higher capital levels. When credit is rationed by banks with large market shares, in regional or national terms, sound investment projects are also postponed. This results in an adverse feedback loop, with banks incurring higher loan losses and weaker earnings – as economic activity stalls. Banks operate with very low levels of equity capital. A manufacturing enterprise or a firm in the service sector should preferably have an equity ratio of between 30 and 70 per cent, depending on the level of risk involved. Banks can operate with a far lower level of equity capital because they are supposed to diversify risk, have sound management systems and be well regulated and under supervision. In Norway, banks’ equity capital makes up six per cent of their assets. Before the Second World War, the ratio was over 10 per cent, falling to five per cent in the postwar period. Government capital injections resulted in a rise in equity capital at the beginning of the 1990s, but the ratio has fallen again in recent years. Equity capital in investment banks in the US and Europe was very low, as low as 2-3 per cent of total assets. Many of these banks have now collapsed. | 0 |
We have also seen a paradigm shift in the approach by financial institutions in the business of SME financing. Increasingly, banks have introduced strategies for interfacing with SME customers, evolving new business cultures for the SME segment and enhancing the financial products and services offered to the SME industry. The share of SME financing has increased from 30% of the total business financing of banking institutions in 1999 to 44% at end-May 2008. In addition, a sustainable and comprehensive Microfinance Institutional Framework was implemented in 2006. Since its implementation, there has been considerable progress in the participation of financial institutions in providing microfinance. Currently, nine financial institutions have launched microfinance products, which has helped to increase access to financing to micro-enterprises. The outstanding micro-financing now amount to RM325 million with more than 31,000 customers. In addition, the financial service providers such as the Credit Guarantee Corporation and Bank Pertanian Malaysia, now known as Agro Bank, have been transformed into institutions that are more effective, efficient and financially sustainable. In relation to this, the SME Credit Bureau, a key initiative under the transformation plan of the CGC has officially commenced operations on 1 July 2008. The Bureau serves as a source of reliable credit information for both the SMEs and their potential financiers. The Bureau will assist SMEs to build a track record and thereby enhance access to financing on more favourable terms, leading to faster decisions on loan applications, and providing a balanced profile of the credit standing of the SMEs. | In facilitating this transition, Bank Negara Malaysia is reducing transaction fees for the RENTAS system (the real time gross settlement system operated by Bank Negara Malaysia) for payments made by financial institutions on behalf of their customers. With effect from 15 July 2008, the RENTAS transaction fee imposed on the member banks will be reduced by RM1.00, from RM2.50 to RM1.50. This reduction in fees will result in a corresponding reduction in bank charges imposed by member banks on their customers for RENTAS payments with effect from the same date. In addition, the banking industry will be reviewing the fee structure for fund transfers to apply a fixed fee instead of the existing Inland Exchange Commission of 0.03%. In this environment, the SMEs also need to initiate their own measures to complement those undertaken by the Government and the banks. Achieving cost efficiency and productivity improvements needs to be a priority for SMEs. SMEs should look at every facet of their business operations to identify ways to streamline processes, eliminate waste, consolidate activities and adopt new technology and energy-efficient processes. SMEs that operate in common geographical locations and that have similar production inputs, should also consider pooling their purchase requirements to benefit from bulk discounts by suppliers, in addition to sharing common costs such as transportation. In this regard, the Chambers of Commerces and industry associations can have a key role. They can facilitate the bulk purchase of raw materials for their members. | 1 |
They are linked to one another in a network which seeks to create an Islamic state in Southeast Asia through violence and terror. The recent bomb attack in Bali was a tragic reminder that Southeast Asia is at the frontline of the worldwide war against terrorism. A third, more cyclical, factor underlying Southeast Asia’s under-performance, has been weakening external demand. Although Southeast Asia’s economies have been diversifying their sources of demand, they are still heavily dependent on external demand, unlike China. But Southeast Asia’s main export markets – US, Japan, and the EU – are all languishing. The timing and strength of a pickup in the US economy is uncertain, especially given the possibility of a war in Iraq, and the concomitant impact on oil prices and the international security climate. The Japanese economy is still mired in difficulties, with no imminent prospect of decisive fundamental change. With fiscal and BIS Review 61/2002 1 monetary policies constrained by the Maastricht Stability Pact and a stringent inflation target, the EU economy too remains weak. Southeast Asia’s response These three factors – China’s rise, regional political and security problems, and weak external demand – explain Southeast Asia’s under-performance, but they do not condemn Southeast Asia to perpetual stagnation. How can Southeast Asia overcome these problems? China First, Southeast Asia should not see China only as a challenge, but also as an opportunity. | We need to imbue our young with entrepreneurial instincts and attitudes, through their school education and life experiences. At the same time, the government should cut red tape, create more economic space for private enterprise, nurture high-potential local enterprises and develop a culture tolerant of risk-taking, experimentation and honest failure. A self-renewing, self-sustaining entrepreneurial culture will not emerge overnight, but we are making some headway. Ten Singapore companies made it to this year’s list of Forbes’ Global 200 companies with revenues under $ billion. This ranks among the largest number of companies for any country. A third area of focus is the development of our human capital, both local and foreign. Singaporeans rank highly in technical skills, and our students often top international mathematics and science competitions. But we need to improve our soft skills, such as people skills, management skills, communications skills, as well as cultural and artistic skills. We will also continue to welcome foreign talent to work, live and play here, to add to our talent pool. Fourth, we need to identify, nurture and promote new areas of growth in both manufacturing and services, the two complementary engines of our economy. The continuing emergence of lower-cost locations spurs us to constantly review and refresh our manufacturing value proposition, be it in refining our division of labour, exploiting economies of scale through shared facilities, or undertaking more innovation and R&D work. | 1 |
But the impact of this weak pay on companies’ costs has been offset by businesses appearing to hold onto more staff than warranted by the lower level of output. The corollary of the resilience in employment has been a sharp drop in labour productivity. As a result, growth in labour costs per unit of output has remained relatively firm, although it has fallen back as productivity has begun to recover. Companies that have spare capacity within their business should be able to use these underutilised resources to increase output relatively cheaply. As such, spare capacity within 4 4 See Benito et al (2010) for a discussion of the impact of the financial crisis on supply. BIS Review 122/2010 companies should, at the margin, push down costs and prices. But reports from our network of Agents suggest that some companies responded to the sharp fall in output by temporarily decommissioning some of their capacity in order to reduce their cost base. 5 Companies mothballed production lines; cut back on capital leases; reduced the number of shifts and so on. Although it is perhaps most natural to think of this mothballing behaviour in the context of manufacturing, it was also apparent within the services sector. It was relatively commonplace for professional services companies to encourage staff to take sabbaticals at much reduced pay. Aircraft were taken out of service. Shops were left empty. This type of adjustment has helped UK industry to withstand the effect of the recession. | GDP for Mainland-Norway has on average increased by 2.8 per cent annually since 1990. This compares to 1.7 per cent in Sweden, 2.1 per cent in Denmark, 1.9 per cent in Finland and 2.5 per cent in Iceland over the same period. The differences for average GDP growth since 1995 are somewhat smaller. Although GDP growth in Norway was moderate in 2001, capacity utilisation in the Norwegian economy remains high. So far, the impact of the international slowdown on the Norwegian economy has been limited, partly due to high oil prices. Unemployment has been low since the mid-1990’s. Private consumption is expected to remain buoyant due to high wage growth and an expansionary fiscal policy in the years ahead. Prices for domestically produced goods and services are rising fast. Inflation in Norway is being dampened by a close to zero rise in prices for imported consumer goods. The different cyclical developments in Norway are also reflected in the stock market. Norwegian stock prices have become much less correlated with world markets over the last years. The correlation is considerably lower than in the other Nordic countries. The correlation for Denmark is also rather low, but this is partly due to low exchange rate correlation. When looking at the correlations using national currencies, the Danish correlation is higher and more in line with that for Sweden and Finland. BIS Review 47/2002 1 Iceland and Norway have the highest key interest rates among the Nordic countries, at 7.9 and 7.0 per cent respectively. | 0 |
When the interest rate is zero the exchange rate becomes an interesting indicator of expectations of the future price level. According to the interest rate parity condition, the current exchange rate is determined by the expected future exchange rate, current and expected future interest rate differentials between domestic and foreign interest rates and expected future currency risk premia. The future exchange rate depends on future price level, the future real exchange rate and future foreign price level. For exchange rates and price levels expressed in logarithms we can specify the following relation: Current exchange rate = Expected future (exchange rate – interest rate differential + foreign exchange risk premium) = Expected future (price level + real exchange rate – foreign price level – interest rate differential + foreign exchange risk premium) With an expected future domestic interest rate that is zero or low, future interest rate differentials and foreign exchange risk premia for a small open economy are largely exogenous and given. At a reasonably long horizon, the expected future real exchange rate is given by a neutral real equilibrium rate and is largely exogenous for a small economy. The expected future foreign price level is also exogenous for a small open economy. Consequently, under these conditions, the expected future price level is practically the only endogenous variable that affects the current exchange rate. With this reasoning, the current exchange rate, all other things being equal, becomes a direct indicator of the expected future price level. | By observing the exchange rate, the central bank can thus observe expectations of the future price level. Higher inflation expectations and thereby a higher expected future price level lead then to a depreciation of the currency today, all else being equal. A measure that raises expectations of future inflation and the future price level should thus show up in a depreciated currency. A strengthening of the currency may therefore be ominous and interpreted as a sign that inflation expectations are falling. 11 9 www.rba.gov.au. 10 A well-argued proposal on a combination, a hybrid, between a price level target and an inflation target is presented in Giavazzi, F and Mishkin, F. S. ”An Evaluation of Swedish Monetary Policy 1995-2005”. (2006/07:RFR1), www.riksdagen.se. 11 See equations (8) and (9) and more details in the appendix to this speech. BIS Review 19/2009 5 The exchange rate as a policy instrument – "The Foolproof Way" to escape a liquidity trap The direct link between the current exchange rate and the expected future price level first leads, as mentioned, to the insight that the current exchange rate depends on the expected future price level and can be used as an indicator of the latter. But the link also leads to the idea that cause and effect can be reversed. Instead of the expected future price level determining the current exchange rate, the current exchange rate can determine the expected future price level. | 1 |
To be sure, wage growth among lower-skilled workers has outpaced that of supervisory staff in recent quarters, in the US at least, but this is likely a reflection of cyclical labour shortage in the low-skilled sectors rather than a sustained trend. Indeed, it is worth bearing in mind the bigger picture that UMPs did not help arrest the trend of a falling labour share of income, which emerged in the US since the 1970s, well before the GFC. It is clear that UMPs should not take all the blame, but it is true that the combination of stagnant wages, very low interest income and rising asset prices has fuelled the populist sentiment in many places, especially in the advanced economies. Questions for the future design and implementation of monetary policies 7. Ladies and gentlemen, as we continue to fortify the global financial system and economy against downside risks, a crucial question is how monetary policy, in conjunction with fiscal policy, may cause significant distributional effects on different segments of the society. It may be worthwhile to rethink how the monetary and fiscal policies can be modified to take better care of the less privileged or those who have been left behind. 8. The theme of our conference is monetary policy and heterogeneity, and I am glad that so many accomplished economists and researchers have assembled in Hong Kong to deliberate on issues relating to the distributional consequences of monetary policy. I hope that the discussions will be fruitful in helping us better understand these important issues. | It would be simpler to have just one set of basic licensing requirements, one set of basic requirements for general managerial skills and one set of basic requirements for the trustworthiness of senior officers for the entire financial market. We would welcome a single, universally applicable set of assessed functions and requirements for sound internal control systems. Examples could include harmonised basic requirements for outsourcing and for the distribution of own and third-party products. It is impossible, of course, to unify all requirements across the financial market. However, the basic set could, or even should, be unified. Even if we succeeded in harmonising only onethird of all the requirements, the quantity of regulations would decrease sharply. This would substantially reduce the load on financial institutions, which are currently struggling with inconsistencies in the sectoral regulations applying to financial groups and with the sheer number of such regulations. It would also be of great benefit to supervisory authorities. The necessary sectoral specifics could then connect to this single common base. Let me make one last remark on safety versus growth. In recent years, we have witnessed on numerous occasions just how diverse the impacts of financial sector problems can be on national economies. | 0 |
Mr Yam: Risks and challenges in coping with international capital flows Opening address by Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the Sixth Manila Framework Group Meeting, held in Hong Kong on 20-21 March 2000. * * * Ladies and Gentlemen, On behalf of the Hong Kong Monetary Authority, I would like to extend a very warm welcome to all of you to this Sixth Meeting of the Manila Framework Group.1 As you will no doubt recall, the Manila Framework Group was founded in the deep throes of the Asian financial crisis in November 1997 to develop a concerted approach to restoring financial stability in the region. With the worst clearly behind us, and with signs of a strong economic recovery in the region, the mission of this group has still not ended. This forum embodies a valuable spirit of cooperation, with wide participation of emerging market economies in the dialogue. The value of this forum lies in its quality dialogue on regional surveillance and on reform of the international financial architecture. There is no doubt that economic recovery in the region has gathered considerable momentum. Economic growth for most economies has been better than expected, external balances have improved remarkably, international funds have renewed interest in the region’s asset markets, and yield spreads of Asian sovereign bond issues over the US treasuries have narrowed notably. | Rapid deleveraging of positions in markets associated with the default of an HLI of the size of LTCM could have systemic impact even in large and mature markets, thereby threatening the global financial system. It has been said that a repeat of the like of an LTCM debacle is most unlikely to occur, given the downsizing of hedge funds. I certainly hope that this is the case but I also notice that the recovery of investor sentiment has seen more money from institutional investors as well as high net worth individuals flowing to the hedge funds. The second scenario, commonly known as the “Elephants in the Pond” problem, is a situation whereby the HLIs take very large and concentrated positions in smaller financial markets and adopt aggressive trading practices that could be destabilising to such markets. It is very encouraging that the “Elephants in the Pond” problem is by now recognised quite extensively as a real issue to be tackled. What is being done and is it enough? Different approaches have been floated to tackle the problems arising from the two scenarios I just described. The prevailing approach is through improving counterparty risk management. This is done indirectly by asking the banks and other financial institutions to be more prudent in granting credit lines to the HLIs, and directly by encouraging the HLIs to enhance their own risk management standards. | 1 |
The program covered the 19 largest domestic bank holding companies—firms with assets of at least $ billion—accounting for two-thirds of the assets and one-half of the loans in the U.S. banking system at that time. Collectively, these firms spanned nearly every business area in the U.S. banking industry—including commercial and consumer lending, real estate lending, trading, derivatives, custody services and investment banking. The key point in our paper was that the SCAP was a program that used microprudential supervisory tools to achieve macroprudential objectives. I am sure that everyone here is familiar with these two terms, but let me provide a quick overview. Microprudential objectives focus on the health, performance, safety and soundness of individual firms. This was the perspective that 1/6 BIS central bankers' speeches dominated supervision prior to the financial crisis. In contrast, macroprudential objectives focus on the stability and performance of the entire banking and financial system, emphasizing links among firms, how their activities can interact and the impact of the financial sector on the broader economy. This perspective has become more prominent since the global financial crisis. Macroprudential objectives can themselves be divided into two distinct groups. The first is what might be called structural objectives, which focus on the impact large, systemically important institutions have on the rest of the system when they fail or become distressed. | But the problem is not just the high volume of unemployment; it is also the high proportion of long-term unemployment (defined as the number of people out of work for over a year). Our rate of long-term unemployment has scarcely dipped from its 2014 peak, which means that it is currently three times as high as in 2008. If we only consider persons unemployed for over two years, the rate has increased by 44% in 2015, to four times the level in 2008. These levels of unemployment and long-term unemployment indicate the difficulty our economy has in matching supply and demand in the labour market and have, among others, two consequences that should not be overlooked: they generate inequality (unemployment has been and is in Spain, unquestionably, the driving force of greater inequality); and they pose difficulties for the public pension system, because the financing of the unfunded system obviously depends crucially on employment. Our labour market arrangements have traditionally – and by “traditionally” I mean over decades – suffered from two serious and chronic problems: first, the mismatch, in many cases, between companies’ working and wage conditions and their particular competitive, technical and commercial conditions; and, second, the highly marked duality between the conditions of temporary employment and of what we call “permanent” employment. | 0 |
Most importantly, we initiated actions to develop a National Financial Inclusion Strategy (NFIS) for Sri Lanka with the aim of promoting a more effective and efficient process to improve financial inclusion across the country. In this regard, the Central Bank signed a Cooperation Agreement with the IFC in January 2018. As a part of the NFIS, an island-wide survey was conducted to understand the overview and landscape of the current level of financial inclusion and financial literacy across the country. NFIS is expected to be launched by Mid-2019 to bring in financially excluded segments to the formal financial sector thereby promoting inclusive and balanced economic growth, while encouraging MSMEs in Agriculture, Industry and Services sectors by ensuring access to affordable financial services for production oriented economic activities. 40 5. Concluding Remarks Ladies and Gentlemen, We have come to the conclusion of my speech. At the outset, I mentioned that our country faced several difficulties during 2018 which threatened macroeconomic stability. However, in retrospect, I can record that the Central Bank and the government decisively intervened and implemented several policy measures to mitigate the impact of such challenges and uncertainties. It is evident that these measures have helped us to withstand certain shocks that we faced and to ensure broader stability of the economy in spite of some sectoral imbalances. Nevertheless, we do acknowledge that several challenges and threats still prevail and there is a plethora of impending risks that may exert further pressures on overall macroeconomic and financial system stability. | As per the recommendations made by the FinTech Committee, a National Quick Response (QR) Code Standard for Local Currency Payments branded as “LANKAQR” was issued to all financial institutions and operators of mobile phone based electronic money (e-money) systems to facilitate QR code based payments. Similarly, with regard to Blockchain technology, an inter-industry working committee is preparing a framework for a Blockchain based shared know-your-customer (KYC) solution. Further, the Central Bank appointed a taskforce to study on virtual currency schemes to examine regulatory steps that need to be taken to ensure system stability and the safety of public funds. In addition, several regulations were issued, in 2018, to ensure safe and efficient payment and settlement systems in the country. As for future plans and policies, the Central Bank will focus on promoting digital payment mechanisms to establish a less-cash society with a view to reducing cash management costs while enhancing safety and convenience. Accordingly, we will facilitate the implementation of a National Transit Card and Infrastructure Framework for ticketing and fare collection for the purpose of introducing a nationally accepted transit card for the country to be used in bus and rail transport. We will also continue to adopt measures to promote the usage of digital payment mechanisms by way of encouraging financial institutions to enable digital payment methods and creating awareness among general public on digital payment options and their benefits. 29 It is also planned to establish a regulatory sandbox to enable introducing innovative FinTech products, while ensuring compliance with regulatory requirements. | 1 |
And where the system needs strengthening as a whole, we can change capital requirements to put additional resilience in, either across the board through countercyclical requirements, or to particular sectors, through sectoral capital requirements. We are matching the strength of the banking system to the scale of risk it faces, so you can be more confident that credit will be there when you need it. Resilient underwriting standards We have to nurture more than the resilience of the banking system. Your balance sheets have to be resilient too. Over-gearing of your industry has been a major driver of instability in the past, making you vulnerable to the slightest change in sentiment. In part that’s the result of lenders offering deals in the good times that present even the most responsible investors with an impossible choice: gear up to uncomfortable levels or be forced out of the market. To avoid that Hobson’s choice, any slipping of lenders’ standards has to be addressed. That’s why we’re now reviewing the standards of major lenders regularly. 1 2 Carney M (2014) “The future of financial reform”, presented at a Monetary Authority of Singapore Lecture, November 17, 2014. BIS central bankers’ speeches This year we found loan-to-value ratios rising and interest cover ratios falling, but from a very conservative starting point. We’ll keep watching this, and there will be a new survey in coming months. We know that the importance of major UK lenders in financing you has almost halved since the crisis. | And in this, the measures I’ll outline this evening constitute one aspect of a broader post-crisis endeavour to build, and maintain, a financial system that supports, and does not disrupt, the real economy. It goes by the name of macroprudential policy. Banking system resilience The first step to nurturing a resilient environment is to reduce the prospect of a sudden crunching of credit supply from an injured banking system. In the financial crisis, as banks were holed below the waterline and new lending seized up, the flow of new lending to commercial property collapsed to a third of its earlier level. Since the crisis, the Bank of England has been building a safer banking system. Measured on a consistent basis, major banks hold 10 times more capital than they did before the financial crisis1. And through stress testing, we’re making sure they’re able to withstand severe stresses. By withstand, I don’t just mean survive. I mean continue to lend, including to you. Last year, we tested whether the banking system could withstand a snap back of long-term interest rates, a sharp fall in residential and commercial real estate prices, and a deep recession – all without cutting lending. This year we’re testing whether they can withstand a synchronised, sharp slowdown in China, emerging markets and Europe, and sharp falls in asset and commodity prices – all while increasing lending to the UK real economy by 10%. We showed last year that, where the tests say a bank needs more capital, we’re prepared to take action. | 1 |
On the basis of these data the Central Bank reduced its growth forecast for 2017 to 12%, compared to 1.5-2.5% in December. At the same time, for 2018 we are expecting the economy to grow between 2.25 and 3.25% (Table 1), based on the fact that the economy does not appear to have any relevant imbalances, the mining-related investment adjustment is expected to end, and a more favorable external outlook. Fiscal policy is assumed to follow the fiscal consolidation path announced by the Government. Table 1 Domestic scenario (annual change, percent) 2015 GDP Domestic demand Domestic demand (w/o inventory change) Gross fixed capital formation Total consumption Goods and services exports Goods and services imports Current account (% of GDP) Gross national saving (% of GDP) GFCF (% of nominal GDP) 2.3 2.0 1.7 -0.8 2.4 -1.8 -2.7 -2.0 21.4 23.6 2016 (e) Dec.16 Mar.17 Report Report 1.5 1.1 2.0 -0.6 2.8 0.1 -1.4 -1.7 19.3 22.2 1.6 1.1 2.0 -0.8 2.8 -0.1 -1.6 -1.4 20.2 23.2 2017 (f) Dec.16 Report Mar.17 Report 2018 (f) Mar.17 Report 1.5-2.5 2.6 2.0 0.7 2.4 2.0 4.1 -1.9 19.2 21.7 1.0-2.0 2.3 1.9 0.2 2.5 1.6 4.3 -0.9 20.3 22.5 2.25-3.25 4.1 2.8 3.0 2.8 2.7 7.2 -2.1 20.5 22.6 (e) Estimate. (f) Forecast. Source: Central Bank of Chile. 6 15. Our base scenario assumes that monetary policy will remain accomodative throughout the policy horizon. | For example, the leading global fund managers recently indicated that they consider sustainability to be a core criterion for investment selection, given that sustainable portfolios could offer higher risk-adjusted returns and that companies that follow sustainable criteria may have greater potential for success in the medium term. Let me finish my address by highlighting that there is still some considerable distance between expectations and the reality of the data at hand, but also that the pace of change is very brisk. Standards are and will always be imperfect, but this is no excuse for us not to try to move forward. Thank you. 4 | 0 |
Mr. Chairman, in a strange and a paradoxical sort of a way, it is somewhat “fortunate” that the current financial crisis shocked (and indeed, almost ruined) the worlds financial system, at the present stage of evolution of the worldwide financial landscape. If, on the other hand, this crisis had not impacted us at this time of history and consequently we had happily progressed at the same pace for a further 10 years or so, and then in 2017 or 2018 this shock had hit us, can anyone imagine the magnitude of the disaster at that time? In fact, I am quite sure that, if that eventuality had taken place, this crisis would have been too much for the world’s financial system to bear, and the resulting catastrophe would have crippled the world’s financial systems, as well as the world’s political, security and social systems with disastrous consequences. Perhaps some keen film maker might even consider doing a simulation of such a scenario, and then making a gripping and horror filled movie, allowing those of us with horror appetites to experience such a dreadful tragedy! Mr. Chairman, while we are putting into effect various initiatives to improve our processes and procedures to respond to the crises, we must also be conscious that we should not throw the baby out with the soiled bath water. Yes, the bath water has been terribly muddied and needs to be replenished. However, at the same time we must realize that the baby although rather dirty, is still quite wonderful. | The embarrassing summersaults that various governments had to perform by unceremoniously ditching some of their most sacred and fundamental policies, have also been better understood, by many communities. Now, what is needed is to move forward decisively within this new paradigm. To do so effectively, we have to essentially place some barriers to deal with unsustainable risk taking. The freedom of the wild ass that supported unfettered and reckless economic actions to create things out of nothing has to be dealt with. At the same time, we need to revisit some of the fallacies that developed over the last decade or so, including those that indirectly said: “Don’t worry too much about a few bubbles”; “markets are always right”, “innovation should not be discouraged”; “state intervention is dangerous”, etc. In a way, some of these positions perhaps prompted a kind of an unconscious regulatory anarchy! The resulting subdued regulatory reactions were of course exploited by the greedy market and the rest is history! This time round therefore, the wisdom of such concepts and absolute reliance on them, would need to be critically reviewed. What then should we do? Maybe, we could start by making a “Wish-list”, and then moving towards making a “To-do list” to realize such wishes. What could we wish for? First, perhaps we should wish for effective “immunization” mechanisms to safeguard national financial systems from the contagion effects of globalized viruses and cross border toxic elements. | 1 |
The crisis intensified in spring and summer 2012 amid growing fears that one or more member states may leave the euro. Refinancing costs in the affected countries climbed and BIS central bankers’ speeches 1 uncertainty among economic agents rose considerably. Owing to the fact that the Swiss franc was highly sought-after in its role as a safe haven currency, the deepening of the crisis triggered strong upward pressure on the franc. Particularly in the critical months of May to August, the only means of enforcing the minimum exchange rate was through extensive foreign currency purchases. Overall, the SNB purchased foreign currency last year to the value of CHF 188 billion. The SNB was well-prepared from the outset for the enforcement of the minimum exchange rate. Since its introduction, we have been monitoring the foreign exchange markets round the clock, from when they open on Sunday evening in Sydney to when they close on Friday evening in New York. In order to achieve the required effect on the exchange rate, we conduct foreign exchange transactions with a wide range of domestic and foreign counterparties. With a network of well over 100 banks from around the world as counterparties, we cover the relevant interbank foreign exchange market. The foreign currency purchases made in 2012 led to a significant rise in our foreign currency holdings. The increased volume also resulted in a considerably higher level of financial risks on our balance sheet. Yet these foreign currency purchases were necessary. | Gold as part of the Swiss National Bank’s currency reserves In my following remarks, I would like to speak about the subject of gold as part of the SNB’s currency reserves. As reported in the media last week, the so-called gold initiative has formally qualified for a referendum vote to be held. This popular initiative demands that the SNB hold at least 20% of its assets in gold, that it be prohibited from selling its gold reserves and that all gold reserves be physically stored in Switzerland itself. The SNB does not generally comment on any political initiatives. However, the gold initiative has a very direct impact on the SNB’s capacity to act. This is why we are taking the opportunity today to present our viewpoint for the first time on the demands of the initiative. The initiators see a high level of gold reserves as a guarantee for currency stability. They fear that the Swiss franc will decline in value and that price stability will be threatened if a large proportion of the balance sheet does not consist of gold holdings. They are also concerned that the SNB’s gold reserves held abroad are not secure and will not be accessible in critical situations. We share the objectives the initiators put forward, such as maintaining currency and price stability and ensuring both the SNB’s capacity to act and its independence. However, the measures proposed to this effect are not suitable; in fact, they are even counterproductive. | 1 |
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