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All indicators point to a general decline in confidence, both of consumers and investors. This decline is not unique to France; on the contrary, it is much stronger in our partner countries and particularly in the United States. Indicators, however, only provide information on the near future. Beyond one or two quarters, forecasts are based more on analysis, debate and judgement. In the present circumstances, this is particularly difficult. This is perhaps why, over the past few days, a current of opinion bordering on an intellectual vogue has prevailed, with a view that any banking crisis is bound to have far-reaching and long-lasting consequences. Along these lines, the optimists refer to the Swedish experience in the 1980s, which was marked by almost three years without economic growth, and the pessimists allude to Japan's "lost decade" following its banking crisis. However, a comparison is misleading. The situation today is profoundly different. First, as I have said, our banks, and particularly French banks, are financially sound. Furthermore, the reaction in terms of economic policy has been particularly rapid and vigorous. | We are ensuring that these earnings are reported using the strictest standards. In all likelihood, this trend – of lower but positive profits – should continue for the rest of the year. Third, our banks have regular sources of income. They are universal banks. This sets them apart from banks in some other countries that depend exclusively, or for the most part, on the financial markets. Our banks have sound and revolving sources of future profits. This is a vital asset at a time when it is difficult to raise capital by issuing shares on the market. Lastly, the “manoeuvrability” of our banks remains excellent and they are now ready to play their role in the possible restructuring of the international financial sector. These facts give me reason for confidence. Beyond the sometimes serious tensions and incidents that have affected the recent period, our banks may be justly proud of the progress in terms of productivity and innovation that they have made in the last two decades, which now positions them to cope effectively with turmoil that may occur in the future. 2 BIS Review 130/2008 Public policy during the crisis Over the past two weeks, we have witnessed a marked change in public policy with regard to financial institutions. Having hitherto been exclusively geared to providing liquidity, public intervention is now also aiming to support banks’ financing and own funds. This shift in stance is significant. The problem of liquidity remains crucial at this stage of the crisis. | 1 |
The “non-cash” euro is already in use The final stage of the introduction of the euro will include two changeovers: the changeover to the noncash euro, which concerns all book-entry transactions (cheques, bank accounts, bank card payments, transfers, loans, etc.) and the changeover to the cash euro, which concerns banknotes and coins. This summer, banks in France started to systematically convert bank accounts into euros and provide customers with euro cheque books. In various participating countries, in particular France, all bank accounts have already been converted . It is now up to each citizen in the euro area to establish a new scale of values for the currency and to make payments in euro. In this respect, retailers have a fundamental role to play: their active participation and their readiness to accept payments in euro will greatly facilitate the euro changeover as a whole. The cash euro will be in circulation within 8 weeks As regards the cash euro, the main task now consists in frontloading the banknotes and coins so that, on 1 January 2002, transactions can be carried out smoothly in the best possible security conditions. To achieve this, frontloaded coins are supplied to credit institutions. Banknotes will soon be provided to them (as of 1 December in France). Retailers will also be provided with frontloaded banknotes and coins. | The recent European Council meetings in Stockholm in March 2001 and Gothenburg in June 2001 confirmed these guidelines and even added a number of important issues such as the consequences of the ageing population in the European Union, the role of biotechnologies in economic growth, and the environment. The European Heads of State and Government, meeting in Ghent a couple of weeks ago, called for an acceleration of the whole process. All European countries must resolutely pursue the reforms they have already initiated. It must be acknowledged that much has already been done, in particular with the implementation of the single market. However, continental Europe is still experiencing levels of unemployment that are too high, despite the fact that the unemployment rate has been declining significantly in most of its economies for the past three years. According to the IMF, the OECD and central banks, 75% of unemployment is of a structural nature, i.e. generated by an environment which handicaps job creation. There is no doubt that EMU stimulates structural reforms on the labour market. With increased capital mobility and the smooth functioning of the single market, firms will become increasingly sensitive to the general environment in terms of their competitiveness when choosing a particular location in the euro area. The actual process of selecting an investment location within the euro area will be a major incentive for undertaking the necessary reforms. b) Besides structural reforms, a strong emphasis must be placed on competitiveness. | 1 |
At the same time, however, the global scope of the sanitary emergency has favored the sharing of knowledge among those in charge of controlling it, and practices that seem to have worked better in some countries can be adopted. Meanwhile, the simultaneous nature of the economic shock has led every Central Bank and government to promote measures in the same direction, providing greater support to prevent an economic meltdown. Our country is also making great efforts to mitigate the impact of this emergency on the population’s wellbeing. The government has announced a series of measures, at a cost of USD 11.5 billion, aimed at protecting employment and household income, while at the same time ensuring the continuity of businesses. In the CBC, we have taken swift decisions to mitigate the effects of this new scenario. First, over a period of two weeks we lowered the Monetary Policy Rate (MPR) by 125 basis points to its technical minimum of 0.5%. Then we introduced a set of extraordinary measures for a total in the order of USD 19 billion, to ensure adequate access to credit and the normal functioning of financial markets. These measures seek to preserve the correct transmission of monetary policy and facilitate the flow of credit to companies and individuals in need of financing to overcome this complex stage. 1 The package of measures that the Bank has implemented is very significant and should provide meaningful support for businesses and households to withstand this emergency. | The Federal Reserve believes that the goals of agency action and legislative change should be (1) to ensure that supervisory agencies have access to high-quality and timely data that are organized and standardized so as to enhance their regulatory missions, and (2) to make such data available in appropriately usable form to other government agencies and private analysts so that they can conduct their own analyses and raise their own concerns about financial trends and developments. In my testimony this morning I will first review the data collection and analysis activities of the Federal Reserve that are relevant to systemic risk monitoring and explain why we believe additional data should be collected by regulatory authorities with responsibility for financial stability. Next I will set forth some principles that we believe should guide efforts to achieve the two goals I have just noted. Finally, I will describe current impediments to these goals and suggest some factors for the Congress to consider as it evaluates potential legislation to improve the monitoring and containment of systemic risk. 12 BIS Review 16/2010 The Federal Reserve and macro-prudential supervision The Federal Reserve has considerable experience in data collection and reporting in connection with its regulation and supervision of financial institutions, monetary policy deliberations, and lender-of-last-resort responsibilities. The Federal Reserve has made large investments in quantitative and qualitative analysis of the U.S. economy, financial markets, and financial institutions. | 0 |
Whilst in Switzerland disturbances affecting, in particular, the demand for central bank money “for reasons still unknown” have increased in recent years, the ECB faces additional uncertainties at the beginning of Monetary Union in terms of the effects of the shift of regime to a single monetary policy in Europe. It is difficult to assess whether conventional and reliable macroeconomic relationships are changing as a result of the introduction of the euro. In view of these uncertainties, but also in general, it is unwise to rely on a few indicators or only one when making monetary policy decisions. Indeed, to date our studies have BIS Review 99/1999 2 revealed that the M3 monetary aggregate shows clear signs of stability and healthy indicator properties. This provides a sound basis for the prominent role given to the M3 monetary aggregate. Monetary policy instruments and the operational framework of the Eurosystem The operational framework of the Eurosystem has proved to be an effective instrument for steering money market interest rates and for limiting fluctuations. The Eurosystem controls money market interest rates by means of either the provision or withdrawal of liquidity in the banking system. Open market operations play an important role in the context of monetary policy strategy. The weekly main refinancing operations give an indication of the Eurosystem’s monetary policy and provide the largest share of liquidity. Longer-term refinancing operations provide the banking system with longer-term liquidity (three months). | Indeed, the global financial crisis witnessed unprecedented levels of global cooperation as the world came together to pursue a common interest of restoring stability and building more sustainable financial systems. In the same manner today, the future of finance demands strong leadership and cooperation in fostering collective will towards achieving the necessary positive transformation. The Responsible Finance Institute, as a think tank connecting various responsible finance practices and expertise around the world, is in a unique position to contribute towards realising this aspiration. But for responsible finance to gain real traction, this cannot be an undertaking of a single institution. Finance, with its potential to serve society, is capable of so much more. As responsible global financial participants, the opportunity to come together again to rebuild trust and provide the foundations of a more stable and sustainable long-term economic growth can be achieved through our commitments to responsible finance. The call is for greater global cooperation and leadership to unlock the future of finance and expand its positive impact in the global economy. With that, I wish you an engaging and impactful summit. BIS central bankers’ speeches 3 | 0 |
But the large fluctuations in growth rates, capital flows and exchange rates are in themselves problematic and create uncertainty regarding economic developments in the emerging markets. A divided Swedish economy The Swedish economy is dependent on developments abroad, and of course has been affected by the financial crisis and economic downturn in recent years. In an international comparison, overall quantities such as GDP and employment have nevertheless developed well since the financial crisis. BIS central bankers’ speeches 1 However, behind the overall picture is a divide, where household finances in particular have been strong. Their disposable incomes have increased every year during and since the crisis (see Figure 1). Growth in consumption has also been good. Housing prices and loans to households have increased rapidly, probably partly due to strong households finances and an expansionary monetary policy (see Figures 2 and 3). Developments in the corporate sector have been weaker, which is reflected in weak growth in exports, low investment and only modest growth in loans to companies (see Figure 4). | Vítor Constâncio: The nature and significance of Banking Union Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the conference “Financial regulation – towards a global regulatory framework?”, Chatham House City Series, London, 11 March 2013. * * * Ladies and gentlemen, Thank you for inviting me to speak to you at Chatham House today. The topic of my address is the nature and significance of establishing a Banking Union in Europe. To many this seems like a new initiative borne out of the experience of the crisis. But it is in fact based on an older debate. During the preparations for the Maastricht Treaty in the early 1990s, there was already the strong conviction that a single system of banking supervision was as a key element in the construction of monetary union. Indeed, one of the foremost proponents of this view was a Bank of England official, Brian Quinn, who chaired the preparatory subcommittee on banking supervision.1 This conviction was based on the relatively logical observation that the single currency would deepen financial interdependence in Europe and so require an integrated system of supervision. It was also in line with the prevailing model at the time of banking supervision being entrusted to the central bank. | 0 |
Accordingly, better than expected outcomes in food and energy prices or in other global factors will be perceived as an opportunity to bring down inflation faster than that is implied by the revised target path. Should the upside risks materialize; monetary policy will be conducted so as to minimize any upside deviation of inflation from the revised targets. Target revision is the solution that is provided by our Bank to the aforementioned “problem of demarcation”, which is faced by almost all central banks today. However, the revision will work only if necessary policy stance is adopted. For this reason, the second pillar of monetary policy comprises the implementation of a monetary tightening that is consistent with the new inflation targets. Newly set targets are references that would help decision BIS Review 82/2008 5 makers in the economy understand the reasoning behind the policy stance, i.e. the factors that have led to monetary tightening and the extent of monetary tightening if and when necessary. In other words, the Central Bank has announced, via the target revision, the limits of its tolerance to the first round impacts of supply side shocks. Dear Guests, In this part of my speech, I would like to cover the Central Bank’s reasons for implementing a measured course of monetary policy tightening, in further detail. Obviously, interest rate decisions are not taken in order to curbe hikes in food and energy prices. It is not possible to control direct effects of supply side shocks with monetary policy tools. | The Swedish banking sector was one of the first in Europe to be consolidated, largely because the banking crisis speeded up the restructuring process. The consolidation enabled Swedish banks at an early stage to rationalise overlapping branch networks and to reduce staff numbers. Even though several EU countries now have caught up with or even passed by us in terms of consolidation, the Swedish banking sector stands out by having the lowest number of both branches and employees per capita in the EU15. That might indicate that the limited improvement potential is due to Swedish banks already being highly efficient. But a low number of branches and employees is not necessarily the same thing as an efficient banking sector if it means that the range of financial services is being rationed. It may be the case that the Swedish banking sector is stingy rather than efficient. The Swedish banking sector is in fact relatively small, in terms of assets in relation to GDP, but this is probably not explained by low lending, which is average, but by the fact that relatively speaking Sweden together with Finland has the lowest level of deposits among all EU15 countries. On the other hand, that is because in comparison with households in many other countries Swedish households make greater use of other forms of saving than bank accounts. | 0 |
8/17 At the same time, there is also evidence that these developments have been accompanied by some degree of borrower selection for the supply of credit, so that access to funding has improved more markedly in the case of firms in a more favourable economic and financial situation. This has been reflected in an increase in the positive association between the receipt of loans by firms and their productivity. This period has also seen a significant improvement in credit institutions’ solvency ratios, with their tier 1 capital ratio rising from 7.5% in 2007 to 13.5% by the end of 2018. 9/17 Current situation and future challenges of the Spanish banking sector Despite all these improvements, the Spanish banking sector still faces significant challenges. The challenge to banks represented by the task of reducing troubled assets is now greater, because the troubled assets already sold were naturally the most attractive ones. It is thus crucial for banks not to relax their credit standards if they wish to minimise their new bad debts and maintain their active management of NPL and foreclosed asset portfolios. While net interest income has held steady, the decrease in unproductive assets and writeoffs has helped to improve profitability. Specifically, at the end of 2018 the return on equity stood at 7.2%, the highest since the global financial crisis and also above the European average. Despite this, the return on equity is still below the cost of capital, making low profitability one of the main risks facing Spanish and European banks. | However, analysis of Spanish bank capillarity shows that between 2007 and 2017 the increase in the proportion of the population without a bank branch nearby was 0.7%, as the closures were concentrated in areas of high branch density. Also, the emergence of new technologies allows bank services to be offered using more flexible and mobile methods. In any case, we should not forget that the average size of Spanish bank branches remains small, in comparison with other European countries. This drive to correct the excessive size of the Spanish banking system has been accompanied by significant restructuring. As you well know, the financial crisis led to considerable deterioration in the quality of Spanish banks’ assets. In fact, the excessive concentration of Spanish banks on the real estate sector and the intensity of the recession caused the non-performing loan (NPL) ratio to reach, within just five years, unprecedented levels of around 14% by the end of 2013. Moreover, as a consequence of defaults, banks foreclosed a considerable volume of real estate, which formed part of the collateral for many loans. In 2014, their foreclosed assets amounted to more than € billion. The lower return on assets, along with the increase in provisions for NPLs, when a large part of the general provisions built up during the preceding expansion had been used, caused the banking industry as a whole to post a loss in 2012. | 1 |
The Monetary Policy Statement (MPS) remains the key monetary policy communication tool of the central bank to provide the rationale for monetary policy decisions. Given the pronounced changes in the economy and the significant changes taking place in the financial sector, the industry would essentially need to respond to the new challenges arising from: i. Greater linkages, integration and interdependence between nations. This trend is likely to intensify as more countries embark on initiatives to promote closer regional economic and financial integration, to enhance their level of economic performance. ii. The challenge of intensified competitive pressures, arising not only from changes in the financial environment, the technological advancements and financial reforms but also the entry of new players, including the non-traditional competitors such as non-financial services. iii. Consumers are increasingly confronted with a wide range of new and innovative products and services that are delivered via new and more efficient delivery channels. As consumers are becoming increasingly demanding and financially sophisticated, greater emphasis needs to be given to the provision of the variety and quality products and services at competitive prices through the most effective channels. Banking institutions need to anticipate and rapidly respond to these new demands and expectations. iv. Policymakers are also confronted by the challenge of maintaining overall financial stability whilst at the same time, promoting efficiency in the financial system. Balancing the trade-offs arising from meeting these objectives will be necessary to determine the best course of action. | Some of you have been through a few or even several departments in your career. I want to thank all of you for making MAS what it is today. I hope this Gallery is a testament to your work in building up an MAS that has credibility, at home in Singapore and all over the world. BIS central bankers’ speeches 3 | 0 |
10 BIS central bankers’ speeches Chart 6 Global imports of goods and services (% of GDP) Import share of GDP Per cent 35 30 25 20 15 10 5 1980 1984 1988 1992 1996 2000 2004 2008 2012 0 Note: Value of total imports of goods and services divided by world nominal GDP. Source: IMF World Economic Outlook database and Bank calculations. Chart 7 Persistent divergence in the price of (core) goods and services Note: Six-month average of the log-difference of core (excluding food and energy) goods and services price indices (2005=100). The US series uses PCE price indices and begins in 1999 due to data limitations. Sources: DataStream, national sources and Bank calculations. BIS central bankers’ speeches 11 Chart 8 Average world output gap and core inflation (weighted by UK-import shares) 4 Per cent of world GDP Percentage change on a year earlier 2.5 3 2.3 2 2.1 1 1.9 0 1.7 -1 1.5 -2 1.3 -3 1.1 -4 2001 2003 2005 2007 2009 2011 2013 2015 Global core CPI inflation (RHS) UK-wtd world output gap (LHS) 0.9 Notes: Average world output gap and core inflation (weighted by UK-import shares). Source: IMF, ONS, DataStream, and Bank calculations. 12 BIS central bankers’ speeches | Mohamed S Fofana: Banking developments in Sierra Leone Statement by Mr Mohamed S Fofana, Deputy Governor of the Bank of Sierra Leone, at the launching ceremony of the new Guaranty Trust Bank logo, Freetown, 28 July 2006. * * * Mr Chairman, Hon Vice President, Solomon E Berewa, Hon Ministers, Board of Directors, Management and Staff of the Guaranty Trust Bank (SL) Ltd, Distinguished Ladies & Gentlemen I am pleased to be here with you this morning at the launching ceremony of the new logo of Guaranty Trust Bank (SL) Limited. We are all aware that change is inevitable in a dynamic world. And that change itself is dynamic, which is why we are all gathered here today. Distinguished Ladies and Gentlemen, a logo is a symbol or trademark designed for the clear and easy recognition of an institution by both its clients and its competitors. We in the Banking industry, as indeed the nation in general, have come to identify Guaranty Trust Bank with a particular logo in the recent past. The change from the old logo, which is two small squares flanking Guaranty Trust, to a new logo, which is a big orange square with a small white square at the top right side and GT Bank inscribed at the bottom of the orange square, is welcomed by the Bank of Sierra Leone. | 0 |
Default on a mortgage carries much more risk for households – the potential loss of a home – than non-payment of unsecured debt. It’s just that this has become more the case in recent years. As outlined in the introduction, almost all the growth in unsecured household debt, relative to income, involves two relatively new developments that involve less pound-for-pound risk, at least for borrowers, than other forms of debt. Nor do they tell you anything about whether households are “living beyond their means”. One involves a change in the way people pay for cars. Conventional loans for car purchase have been around for a while. But over the last decade or so these have been overtaken by so-called “personal contract purchases” (PCPs) in which buyers make lower monthly payments but don’t own the car outright (there’s usually an option to buy at the end of the term, but the car is otherwise returned to the dealer). This is a highly contingent contract and, as far as households are concerned, it’s one that looks more like a rental arrangement than normal debt. The payments are mostly for depreciation, not pure interest. (They’re, in any case, set in advance and are therefore insensitive to subsequent changes in short-term interest rates.) The car owner can choose costlessly to walk away from the contract, at least once half the original price has been repaid. | Claes Norgren will be talking later on about the proposals for new rules. I should like to acknowledge that the task of achieving such a far-reaching reform of the international capital adequacy standards is by no means easy. Quite apart from the exceptional technical complexity of the substantive issues, it is not always evident how the political and cultural differences that nevertheless exist can be reconciled. BIS Review 9/2000 4 I know that Claes Norgren’s international efforts have been most valuable and appreciated around the world. Permit me to conclude by congratulating the Director General of Sweden’s supervisory body on his successful work. 5 BIS Review 9/2000 | 0 |
The respective shares of debt and equity on a firm’s balance sheet don’t matter for anything. What economists have done since is to understand how certain market imperfections – particular departures from MM (as it’s often called) – affect this choice. Some focus on the difficulty in monitoring managers who might have different incentives from the owners of a company. Managers might be tempted to do all sorts of things (spending more on nice offices, building empires) that aren’t in owners’ best interests. Higher debt levels can provide something of a discipline in this respect. They limit managers’ room for manoeuvre. Debt instruments often come with explicit restrictions – so-called “covenants” – on what can be done with the money. They can also deliver control rights to creditors – a say in the decisions of the firm – in the event that something goes wrong. On the other hand, too much debt might itself distort managers’ incentives. For example, excessive leverage can encourage managers to pursue high-risk projects that benefit everybody when they go well but whose costs are borne disproportionately by the debt holders if they go wrong. As I say, there is a huge area in economics and I’m not really going to go into it here. The one point I want to make is that, while these theories have been reasonably successful in explaining the cross-sectional variation in leverage – which types of firms issue debt and which use more equity – they have a harder time accounting for changes over time. | The issuance of loans has grown very rapidly, especially in the United States but also in the U.K. and other European countries (Chart 15), and now accounts for close to a tenth of aggregate corporate debt in the advanced economies. At the same time, the terms on which they’ve been issued have become looser: the share of “covenant-lite” loans, imposing fewer restrictions on borrowers, has risen significantly.11 And at least until recently, the spreads on these loans – the extra margin on the interest rate, relative to safer government debt, demanded by lenders – had been falling (Chart 16). Chart 16: Spreads tightened through much of that period Chart 15: Large flows of leveraged loans over the past two years 12-month flow £ 110 12-month flow £ Basis points 500 2,500 US (RHS) UK (LHS) EU (LHS) 90 Leveraged loans 400 70 High-yield bonds 2,000 300 1,500 200 1,000 100 500 50 30 10 -10 2001 0 04 07 10 13 16 19 Sources: LCD, an offering of S&P Global Market Intelligence and Bank calculations. 2005 2008 2011 2014 2017 Sources: LCD, an offering of S&P Global Market Intelligence, ICE/BofAML, Board of Governors of the Federal Reserve System (US) and Bank calculations. | 1 |
But we will try wherever possible to be sympathetic to AIs’ concerns on compliance costs. Terrorist financing The most obvious thing we need to do is to incorporate into our guideline specific recommendations relating to terrorist financing. In particular, we need to make AIs aware of their responsibilities under the United Nations (Anti-Terrorism Measures) Ordinance that was enacted in July of this year and will begin to come into operation in the near future. The New Ordinance is intended to meet Hong Kong’s commitments under the FATF’s eight Special Recommendations on Terrorist Financing. To that end, it criminalises the financing of terrorism and associated money laundering and provides for the freezing of terrorist-related funds. It also imposes an obligation on AIs and other persons to report knowledge or suspicion that funds are linked to terrorism. We have already asked AIs to report to the JFIU suspicious transactions that may be related to terrorism. But the legal obligation to do so is now clear and unambiguous, as is the criminal offence of dealing in terrorist funds. AIs therefore need to ensure that they have the necessary measures in place to comply with the law. This is not an easy task. It is accepted that terrorist financing is difficult to detect even when AIs are provided with lists of terrorist suspects. The FATF published in April of this year a document called Guidance for Financial Institutions in Detecting Terrorist Financing that I would recommend you to look at. | Existing customers As I have already mentioned, it is likely that AIs will have to upgrade their due diligence procedures in some respects to comply with changing international standards. Obviously, these enhanced procedures would be applied to new banking relationships. But this begs the question about what should be done in relation to existing customers. To what extent should institutions go back and undertake renewed verification of the identity of existing customers? Our current view is that we should not impose an across the board requirement in this respect, but it would certainly be sensible to review those existing customers who fall into higher risk categories. The six major banks in the UK have just announced that they will undertake a risk-based initiative of this type. I would encourage those AIs with a large customer base to do the same. Other triggers for review of existing records may arise when a customer undertakes a significant transaction and where there is a material change in account operation or customer documentation standards. The way forward These are some, but by no means all, of the current issues we are considering in the context of our revised guideline. We hope to have something ready for consultation with the industry later in the year. While this may impose new obligations on AIs, we will try to ensure that these are of a nature that wellmanaged institutions would adopt of their own accord. | 1 |
Experience has shown that phases of a weaker Swiss franc can be followed by periods in which the franc exhibits an upward trend. Financial market players and businesses should therefore be aware of the exchange rate risks they take. Monetary policy decision The inflation outlook forms the basis for the monetary policy decision. How does this look to us? As has already been pointed out in the considerations on the economic situation, there is likely to be an above-average utilisation of economic resources. The monetary analysis shows that lending is still growing vigorously and that the Swiss franc is trending relatively lower against the euro. Yet the inflation outlook remains favourable. The reasons are three-fold: First, falling oil prices will push inflation down considerably next year, at least during the first six months. Second, the opening of the labour market is making production more flexible, thereby exerting a favourable influence on inflation. Third, the National Bank lifted its interest rates at an early stage. The chief contribution of today's interest rate adjustment is to prevent resources from being over-utilised in 2007 and 2008. As a consequence, inflation is also likely to be muted in 2008 and 2009. 2 BIS Review 123/2006 Inflation forecast graph The new inflation forecast is shown in the graph as a red dashed line. It covers the time span from Q4 2006 to Q4 2009 and depicts the inflation forecast on the assumption that the interest rate remains at 2.00% during this period of time. | Almost all components of demand continue to grow, albeit at a more moderate pace. Private consumption will benefit from the healthy improvement in disposable income. Equipment investment is being stimulated by the high rate of utilisation of production capacity and the favourable business outlook in many industries. Residential construction is likely to see a measure of calm. Yet increased investment in commercial and industrial building may offset this development to some extent. The somewhat weaker global economic development – though still favourable overall - will probably continue to have a positive impact on exports. For 2007, we expect overall GDP growth of about 2%. Monetary developments Allow me to explain developments in the financial markets and the monetary aggregates. Two topics merit particular attention: the development of credit and money supply and the exchange rate. In addition to long-term interest rates and exchange rates, loans – among other things – play an important role when changes in key interest rates are transmitted to the economy. What information can we derive from the development of lending activity? Loans are registering constant growth. Mortgage loans, which account for the great majority of all bank loans, have grown at a rate of more than 5% since 2003. This is a reflection of the clearly expansionary monetary policy at that time. The growth rate of mortgage loans has gradually slowed, however, and is now slightly below 5%. This is nevertheless still a high growth rate. Other loans, however, are witnessing stronger growth and are currently expanding by 6%. | 1 |
Makrofokus Sverige, Makroanalys 11 November 2013. Woodford, Michael (2012), Inflation Targeting and Financial Stability. Sveriges Riksbank Economic Review 2012:1. 10 BIS central bankers’ speeches Figure 1. GDP per capita and employment rate compared with pre-crisis figures Change in per cent 2007–2012 and 2008Q1–2013Q2 (alt. most recent outcomes) respectively 6 6 GER 2 GBR Employment rate -2 FIN ITA -6 -2 AUS EU CAN NOR NED -6 USA DEN -10 2 JPN AUT SUI FRA NZL SWE BEL -10 POR IRL -14 -14 ESP -18 -18 GRE -22 -22 -22 -17 -12 -7 GDP per capita -2 3 Note. GDP per capita, annual data, constant 2005 USD. Employment rate, ages 15–64, seasonally-adjusted data. Sources: The OECD and the World Bank WDI Figure 2. Employment and labour force compared with pre-crisis figures Change in per cent 2008Q1–2013Q2 (alt. most recent outcomes) 9 9 AUS 7 7 NZL Labour force 5 5 CAN SWE NOR BEL AUT ITA FRAGBR GER EU NED 3 GRE 1 SUI ESP 3 1 USA FIN -1 DEN POR -3 -1 -3 JPN IRL -5 -21 -18 -15 -5 -12 -9 -6 -3 0 3 6 9 Employment Note. | The large increase in household debt over the past fifteen years coincides to a large degree with the rise in housing prices (see Figure 7). One important reason for this is that the supply of housing has been small in relation to demand. After the crisis in the 1990s, housing construction in Sweden has been remarkably low, lower than in most comparable countries. The reasons are not entirely clear, but there are a number of explanations that are usually given, such as high construction costs, demanding regulations and regulated rents. I do not 11 Jeremy Stein at the Federal Reserve’s Board of Governors has expressed it as the advantage of monetary policy being that it “gets in all of the cracks” (Stein, 2013, p. 17). The Riksbank has also raised this argument in various contexts, see for instance, Ingves (2010) and Nyberg (2011). 12 In a study of 18 OECD countries over the period 1921–2011, Bordo and Landon-Lane (2013) show that expansionary monetary policy has a significant effect on asset prices, particularly during periods when asset prices have increased rapidly, followed by a later severe downward adjustment. Maddaloni and Peydró (2013) find in a study of data for the euro area that banks ease their credit conditions during periods with low policy rates, even when the borrowers’ credit risk is held constant. 13 See, for example, Blanchard, Dell’Ariccia and Mauro (2013), Borio (2013), Carney (2013), Smets (2013) and Stein (2013). | 1 |
However, I suspect that these efforts will not fully succeed without measures to develop marketplaces and infrastructures that promote greater transparency for all OTC derivatives activity, including more and higher-quality information on prices and transaction volumes. OTC derivatives dealers have natural incentives to favor opaque, decentralized markets that preserve their information advantage relative to other participants. The greater profit margins that derive from this advantage create incentives to favor more bespoke OTC derivatives over more standardized OTC instruments. Making more and better pricing information available to a wider range of market participants will increase competition and lessen the profit incentives that stem primarily from the opacity of these instruments and markets. Improving transparency should make the benefits that stem from standardization such as increased liquidity, reduced transaction costs, and lower counterparty risks more dominant, helping push the evolution of the OTC derivatives market in the direction of greater standardization and homogeneity. This doesn’t mean that bespoke products will vanish. They will continue to exist. But they will exist primarily because they better serve the needs of the OTC derivatives customer, not because they create an informational asymmetry that allows rents to accrue to the securities dealer. Greater transparency would also have other benefits. If regulators had ready access to current OTC derivatives transaction information in trade repositories, I suspect that this would serve as a brake on the use of OTC derivatives that are used for more questionable purposes. For example, this includes trades undertaken to evade accounting rules or to circumvent investment charter limitations. | Macroprudential supervision, which I characterize as the top-down assessment of risks throughout the financial system, is essential because it addresses the problem of gaps in the regulatory regime and the regulatory arbitrage that such gaps can encourage. In addition, macroprudential supervision is needed because the financial system is interconnected. As amply demonstrated during the crisis, siloed regulatory oversight is problematic. Supervisory practices must be revamped so that supervision is also horizontal – looking broadly across banks, nonbanks, capital markets, payment and settlement systems and geographies. In the United States, the Federal Reserve is well suited to play a major role in such oversight because it alone has the expertise in three major aspects of the financial system – banking, capital markets, and payments and settlement systems. It also currently has oversight responsibility for most of the firms that one would view as systemically important. In evaluating what the Federal Reserve should do, it is important to recognize that the Federal Reserve’s three primary roles – monetary policy, the lender of last resort function, and supervision – are closely interlinked. Each one of these activities helps the Federal Reserve perform the others. For example, the information we collect as part of the supervisory process gives us a frontline, real-time view of the state of the financial industry and broader economy. Monetary policy is more informed as a result. Only with this knowledge can a central bank understand how the monetary policy impulse will be propagated through the financial system and affect the real economy. | 1 |
Very soon we will reach out to stakeholders to join us in this most meaningful project. 13. Thank you. 2/2 BIS central bankers' speeches | It was clear in September that the labour market had tightened further. The increase in the number of persons employed had been around as large as we were expecting in the June Report. However, the number of people in the labour force had not increased at the same rate we expected then. This meant that unemployment was also lower than we had predicted. Given these signs of a tighter labour market, it was fairly reasonable to believe that wages would increase more rapidly in future than they had done in previous years. But we could note that this was not yet visible in the statistics. The picture painted by the National Mediation Office’s statistics shows very moderate increases. But as I pointed out at our September meeting, it is probable that this picture will change when the new central wage agreements signed in the spring begin to make their mark in their respective sectors. And just as for developments in the labour market as a whole, this is something we follow closely. As I have just noted, it is now clear that an increasing number of people are working. It is normally the case that when many new people obtain work towards the end of an upturn phase of the economic cycle, the work is a little less efficient, that is, productivity growth declines. And this is just what we have seen during the first half of this year. | 0 |
They will probably have to satisfy international requirements placed on similar systems. This is not to say that Norges Bank will dictate specific solutions for these systems, but that we will demand that risk be identified and brought under control, and that there be satisfactory solutions for dealing with crisis situations. Several alternative solutions may be possible. The banks will have to decide for themselves within the limits set by sound risk management. 11 BIS Review 7/2000 An example may serve to illustrate this. Risk in net settlement arises primarily because of the time-lag between payment and settlement. It has been common up to now for the payee bank to make funds available to its customer - pending the final transfer of funds from the payer bank in the settlement. This practice can lead to large and unforeseen exposure before settlement is finalised. If the payee bank postpones crediting instead, credit risk will be eliminated from the net settlement, but at the expense of efficiency - because the customers receive funds one (or perhaps two) days later. The advantages of delayed crediting must therefore be weighed against the disadvantages. My point here is that the banks themselves must be responsible for this assessment, while we at Norges Bank must evaluate whether the relevant measures are sufficient for promoting the objective of the law. Let me add that licensing does not mean that Norges Bank has issued a stamp of approval for the technical solutions of the interbank systems. | While these initiatives bode well for inclusiveness, the government must be careful not to excessively gear government spending towards populist policies that eventually add financial burden to the already-tight budget and sovereign debt in the future. In particular, it is important that the government prioritize and balance between public consumption and public investment accordingly. More importantly, efficient management with good governance will be the key ingredients to policy success in this regard. For our part, the Bank of Thailand has also put inclusiveness as one of the main agenda in the Financial Master Plan II, other than efficiency and provision of financial infrastructure. The objective is to provide financial access for all, particularly to the underserved, in an efficient and financially viable manner without compromising financial stability and prudence. This is still an on-going process which we are committed to. Ladies and Gentlemen, Before ending my talk this evening, I would like to address some of the concerns raised by Japanese corporations in Thailand, as reported in a survey from JETRO (Japan External Trade Organization). The key concerns include political stability, development of customs-related system and human resource development. On politics, I have good faith that the upcoming election is another important step towards political stability, while commitment to improving inclusiveness mentioned earlier would bring a long-term solution to the country. | 0 |
Under the proposals, essential payment services and insured deposits would be provided by a ring-fenced bank (RFB), capitalised separately and with no direct financial links to the group’s other businesses. If that succeeds in making the RFB super-resolvable, it should be easier for the UK authorities to retreat to maintaining at least the most basic payments services if a preferred strategy of top-down resolution of a whole group could not be executed. The introduction of ring-fenced domestic retail banks is, therefore, consistent with the broader international agenda on resolution. For each SIFI, the global authorities probably need not only a preferred resolution strategy for the group as a whole, but also a fall back. For example, are the clearing services provided by broker-dealers so important that they need to be maintained come what may? Recovery plans and preparing for resolution A final point. There is great emphasis on recovery and resolution plans, RRPs. As familiarly used, Recovery is a binary process – either it works, the firm survives and, thankfully, there is no resolution; or, alternatively, the best-laid and executed recovery plan fails, the firm fails, and it enters resolution. But this is too crude a way of thinking about Recovery. Of course Recovery is primarily about delivering recovery. That is what we all want. But it is not all. The period in which recovery is being attempted also provides a window for the firm and the resolution authorities to prepare in case recovery cannot in the event be achieved. | Therefore, their actions are focused, in all advanced economies, on making sure that the impact of their decisions is felt in all parts of the 2 BIS central bankers’ speeches economy. In other words, they aim to ensure that the monetary policy transmission mechanism is working. Let us now turn to fiscal policy. In all advanced countries, and primarily in the US, the fiscal stance is being hotly debated. As we all know since Musgrave has introduced his famous distinction, fiscal policy has three dimensions: stabilization, allocation and distribution. In a post crisis environment, governments are struggling to find the right mix. Today, what constitutes a “growth-friendly” fiscal policy? Discussion has sometimes focused on the stabilization aspect, and more specifically, on one important, but limited feature: the so-called “fiscal multipliers” which are set out to measure the impact of a change in the fiscal balance on GDP. This narrow standpoint focuses on the negative impacts of fiscal consolidation, especially when the output gap is significantly negative, as is now the case. However, we need to take a broader perspective and take into account the effects of fiscal policy on consumer and investment confidence as well as on the efficient allocation of resources. Where could the gains come from? To answer this question, it is important to consider the interactions between the fiscal stance and debt markets. | 0 |
Sweden is highly affected by what happens abroad but we have coped much better than many other countries, partly because we have not been hit by problems resulting from an excessive level of debt in either the public or the private sectors. Figure 2 Weak developments abroad have affected Sweden GDP, quarterly changes in per cent, annual rate, seasonally-adjusted data 12 12 9 9 6 6 3 3 0 0 -3 -3 -6 -6 KIX -9 USA EMU -12 -9 -12 Sweden -15 -15 05 07 09 11 13 Note. KIX is an aggregate of countries that are important for Sweden’s international transactions. Sources: Bureau of Economic Analysis, Eurostat, national sources, and Statistics Sweden 2 BIS central bankers’ speeches After the sharp downturn in 2008–2009, Swedish GDP growth initially recovered quite quickly. Unfortunately, the improvement in the rate of growth stopped short when the financial crisis developed into a debt crisis in Europe, and this has restricted Swedish exports. This has happened directly, as the euro area is Sweden’s largest export market, and indirectly, as the euro area affects industrial activity in other parts of Europe and Asia that in turn are important growth markets for the Swedish manufacturing industry. However, while indicators have long shown that the manufacturing industry is in a weaker than normal state, the financial situation of the households has been relatively strong. | The NGFS has acted quickly in looking into nature-related risks, well ahead of the financial industry. We collaborated with INSPIRE2, an independent research network, to produce reports setting out the importance of biodiversity for the macroeconomic and financial systems. These reports also made preliminary recommendations on how central banks and supervisors might align themselves with the structural transformations required to deliver a nature positive global economy. The NGFS, in the next phase of its work, will aim to equip central banks and supervisors with a common base of knowledge of nature-related risks. We will provide recommendations on how nature-related risks can be integrated into the other work programmes of the NGFS, including supervision, scenario analysis, and monetary policy. We will make nature-related risks more tractable, by focusing on nature-related risks with a nexus to financial risks. We will identify a few local case studies to work through concrete examples where the link from ecosystem degradation to climate change is clear, such as in deforestation. Finally, CAPACITY BUILDING AND TRAINING. The NGFS will provide guidance on how central banks and supervisors can build up their capabilities in climate-related and environmental risks. The importance of building capacity and expertise on climate issues within the central banking and regulatory community has been consistently espoused by the NGFS since its beginning. Our members are at different stages of progress in their ability to address climate-related and environmental risks. We want to make sure they have the support they need to make meaningful progress in addressing these risks. | 0 |
For insurance companies, the PRA will have the second objective of contributing to securing an appropriate degree of protection for policyholders. Why do we need a second objective for insurance? One reason is that in taking out some forms of insurance policies, the public can become locked into very long-term contracts, much longer often than is the case in banking with deposit contracts. Bearing this in mind, the public interest I think justifies a second objective for insurance, which is more directly targeted at the situation of individual policyholders. There are a number of important points in this description of the PRA’s objectives. First, the emphasis on economic well-being as an ultimate goal aligns the supervision of banks and insurers more closely to the field of macroeconomic policy. This is in line with the definition of financial stability in terms of the continuity of supply of critical financial services which are important to the functioning of the economy. Four services stand out here: the protection of savings; the provision of payment services including access to funds; credit extension; and risk transfer. This definition is critical to clarifying the public interest-objective in a stable financial system, and that this public interest can diverge from the private interest of a firm in profit maximisation without reference to the public interest. One of the biggest lessons I take from the financial crisis is the need to ensure that the boards and management of firms appreciate and act consistent with the public interest. | First, I will talk about why the Basel Committee developed the Basel II capital framework and what it intends to accomplish. Second, I will share some thoughts on how prudential banking supervision contributes to the stability of the financial system. Next, I will discuss how I see Basel II contributing to financial system stability. Finally, I will offer some thoughts on steps countries can take in preparation for adopting Basel II. But let me advance the main conclusion of my presentation: In a nutshell, I think that the new capital framework represents a significant step towards achieving a more comprehensive and risk sensitive supervisory approach. Basel II is about much more than just setting better quantitative minimum capital requirements. It is about establishing incentive-based approaches to risk and capital adequacy management, within a comprehensive framework of three mutually-supporting pillars. In my view, the combination of better risk management, a stronger capital structure and improved transparency standards in the banking system can significantly improve financial stability. Why Basel II? Let me begin with an overview of the Basel II capital framework, which was released in June last year. As you may be aware, Basel II has probably attracted more public attention than any other banking supervision reform. While I will not go into the details of the new framework, it is important to spend a few minutes talking about what the Basel Committee hopes to achieve with Basel II. | 0 |
The most famous cartoon of the Bank of England - Gillray’s The Old Lady of Threadneedle Street - shows Pitt, Prime Minister at the time, ravishing an old lady personifying the Bank - whose dress is made of one pound notes. The Pitt Government had made repeated demands on the Bank of England for gold to pay for the wars against France. Eventually, the fall in the Bank’s reserves forced it to suspend convertibility of its notes into gold, and low denomination notes were issued for the first time. The Gillray cartoon - which appeared in May 1797 was the origin of the moniker, the Old Lady of Threadneedle Street. Was it mere coincidence, or divine retribution, that it was exactly two hundred years later, to the very month, in May 1997, that the Bank of England regained its independence? In an age when governments are increasingly held responsible for more and more aspects of our lives, there are not many examples of major decisions being delegated to a non-political body. The Monetary Policy Committee has broken new ground in British constitutional history. Only three months before the MPC was set up, Peter Hennessy described the British system of government as dependent upon “a handful of inside advisers spinning between them what Phillip Ziegler has called ‘instantly invented precedents’ from the warp and woof of past constitutional practice and experience”. For much of the past forty years there have been rather too many “instantly invented precedents” in the conduct of monetary policy. | On the Committee itself various suggestions have been made: to extend the terms of appointment of members of the MPC, to make those longer terms non-renewable, and to appoint people with more diverse backgrounds. By far the most fundamental of these suggestions is the proposal to appoint representatives of different industries or regions to the Committee, as opposed to monetary policy experts. That would change the nature of the debate and undermine the mutual confidence of members of the Committee in each other if it were felt that some were representing a specific interest group. With experience of the MPC, I think that this argument has come to be accepted. The proposal that the minutes of MPC meetings should include more description of individual views I discussed earlier. The Committee has been opposed to such a change for the reasons I gave. In its early days the Committee was sensitive to the view that the minutes, then published six weeks after the meeting, should be published earlier, and it shortened that lag to 13 days in October 1998. The forecast process has attracted much attention, and was discussed at length in the Kohn Report. Presenting the forecast in terms of a fan chart, in order to highlight the balance of risks to the outlook, has proved successful. But it has proved more difficult to explain the role of a projection conditioned on the assumption of constant official interest rates. | 1 |
At this time, although monthly value of land transactions has risen back to the previous peak level in 1996 and bank credits extended to real estate developers has picked up, we feel that there is no sign of overheating in this sector yet. Latest land prices have increased only by 14 percent on average, while housing prices for low- and medium-income families rose by less than 10 percent over that of last year. Nonetheless, it is important to keep a watchful eye on developments in the real estate sector, by making sure that bank lending to this sector is prudent. And for our part, there is now greater willingness to use the necessary prudential measures to discourage or forestall any undesirable development. Financial institutions are now required to report all real estate loans exceeding 100 million baht. Any real estate lending that is deemed too risky would require immediate additional provisioning. This should help ensure that growth of the real sector is driven by quality growth with least amount of bubbles, and that policy is proactive enough to prevent a reoccurrence of the real estate bubble prior to the 1997 crisis. To improve our ability to monitor this sector, we have developed a housing price index in cooperation with a number of agencies including the Government Housing Bank. This housing price data will be important for assessing the underlying conditions in the housing market, and will allow us to monitor any concentrations of risk before they develop in this sector. | As for households, despite a reported rise in household debt by the National Statistical Office, the current level of household debt in Thailand is still much lower than average levels of both industrial and regional economies. While the Thai household debt to GDP ratio stands at 33 percent, the corresponding figures for Australia, Singapore and South Korea are 84, 85, and 63 percent respectively. If we look at the components of household debt, we see that mortgage loans increased by a reasonable rate of 15 percent, while we see an increase of over 30 percent in credit cards loans. Therefore, as a precaution, the Bank of Thailand has implemented a number of prudential measures to curb possible build-up of imbalances in the credit card loans. In November 2002, we have raised the minimum income levels for credit card qualification. And later on in April 2004 we have raised the rate 2 BIS Review 58/2004 of minimum monthly payments from 5 percent to 10 percent. These proactive measures so far have yielded desirable and positive results. Let me now move to the financial sector Stability of Thailand’s financial system, in particular the banking sector, has improved remarkably in the past few years. The 1997 crisis has weakened our financial system. Commercial banks’ returns on assets were persistently negative, and NPLs stood at a record high level. Since 2001, the Bank of Thailand has tackled these problems in two steps. | 1 |
Looking back we can see that it was the pains and problems of those decades culminating in being forced out of the ERM that produced a broad political consensus on a new approach to monetary policy and the independence of the Bank. And my predecessors can take great credit for the success of recent years. We have also been benefiting from benign world conditions with the emergence of low cost producers in the Far East and strong world GDP growth, which has been over 5 % in the last 3 years, the strongest 3-year period of growth since 1968-70, and there is every reason to hope that this benign trend will continue. However it is important not to exaggerate this stability or to forget the substantial uncertainties that still exist. The last decade has seen some big and unanticipated changes. Since 1999, oil prices have risen from below $ a barrel to over $ a barrel, the US Fed BIS Review 84/2007 1 funds rate has varied between 1% and 6.5%, and the stock market has experienced its post dotcom boom, bust and recovery, with the FTSE All Share falling from its 2000 high of over 3200 to below 1660 in 2003 before now recovering to over 3400. We have seen 9/11 and the onset of a new form of international terrorism, the explosive growth of new financial instruments and new players to exploit them, and we have seen the emergence of China and India into major forces in the world economy. | During 2005 and 2006, anecdotal evidence suggested that UK pension demand for gilts (and associated hedging by dealers) was a contributory factor in driving long-horizon sterling nominal and real interest rates lower. Indeed, this may have been one reason why UK long-term real interest rates fell by more over this period than overseas rates. Assessing the impact on gilts prices is important for the Bank because we commonly use the differences between indexed and conventional gilts to estimate longer term market inflation expectations. And these calculations have shown an increase in forward inflation breakevens especially in the last few months as nominal long term rates have increased (Chart 10). If that reflects a genuine increase in investors’ expectations of future inflation in the long term that would imply a loss of credibility in the UK regime. However, there are few signs from surveys and market intelligence that UK long-run inflation expectations have picked up. Market contacts cite the sheer weight of institutional demand in the relatively illiquid index-linked gilt market as a more likely explanation why the price of long-dated index-linked gilts has not fallen by as much as conventional bonds over recent months. The comparisons are complicated by the fact that the measure of inflation that is used to index gilts is the RPI while our target is set for the CPI and the gap, which largely reflects the impact of interest rates and house prices on the RPI is significant, is about 0.7% on average and variable (Chart 11). | 1 |
Banks, like other companies, need to discover what will or will not work in the internet world. They are thus exposed to their own mistakes. But they are also exposed to the potential mistakes of their customers. For example, if the telecom companies in Europe really have taken too big a gamble on 3G, this would have repercussions for the banks that have financed them. These challenges are also confronting banks in Asia as they recover from the hangover of the Asian crisis. I do not think that bankers anywhere would ever claim that they have an easy life. But certainly the existence for banks in Asia before the crisis was easier than it is now. If I take Hong Kong as an example, the banks here have always competed actively. But that competition was taking place in a buoyant market, whereas business is currently much harder to find. A few simple statistics illustrate the point: in the six years from 1992 to 1997, domestic lending by the locally incorporated banks grew at an average rate of 21% per annum, and pre-tax profits rose at an annual rate of 15% during the same period. In contrast, the equivalent annual figures for the three years to mid-2000 were 1¼% and 4½% respectively. It is true that bank profits staged a sharp recovery in the first half of this year. But growth in bank lending has remained sluggish. | At over 400 USD/ounce, the gold price was at a seven-year high at the beginning of December. Because of the weak dollar, the gold price increase in francs was more modest. However, its peak of approximately 17,000 CHF/kg was still the highest for several years. The main reason for this rise was persistently modest hedging activity by gold producers. 2 BIS Review 58/2003 Equity markets International equity markets exhibited a positive course overall, steadily making up lost ground after their mid-March low (see graph 3). As the equity environment began to present a perceptibly brighter picture, turnover also picked up. This, together with the more confident investor sentiment, reduced volatility. The ambitious profit expectations now reflected in share prices suggest that market players are optimistic about the economic situation and the corporate environment. To sum up, the financial markets are currently influenced by a complex interplay of factors: a globally synchronised economic recovery is taking place against a backdrop of external imbalances. An autonomous economic recovery outside of the US - underpinned, not least of all, by supply-side reforms - would help substantially to redress these imbalances. Key features of the SNB’s future investment and risk control process The SNB’s investment activity is subordinated to monetary policy and is determined by the criteria of liquidity, risk and returns. The new National Bank Law will extend the SNB’s investment opportunities. The current National Bank Law (NBL) limits eligible investments to gold and fixed-interest securities, and eligible borrowers to states, international organisations and banks. | 0 |
The way our economy has reacted to the recent changes in the terms of trade and external financial conditions is precisely a reflection of our policy regime, which allows for timely adjustments in the real exchange rate and interest rates, letting the economy grow near its potential, smooth the capital account’s adjustments and maintain the credibility of the inflation target. This marks a difference with our economic history. 2 BIS central bankers’ speeches Over the years, the Central Bank has given proof of its commitment with price stability and the inflation target. It has operated with consistency in order to build credibility and trust, which gives us the necessary flexibility for monetary policy and the real exchange rate to work as buffers of the business cycle whenever advisable. In the past, when our economy’s fundamentals were not as strong, and the exchange rate regime was rigid and poorly suited to confront external shocks, when faced by a drop in the terms of trade or stringent financial conditions, in order to stop a currency depreciation the Bank had to sell international reserves and raise the interest rate to reduce capital outflows. Monetary policy, far from cushioning the external cycles, made them worse, generating economic costs and financial risks. More often than not, these experiences ended badly. Overall, as usual, the present scenario has varied risks, most of them coming from emerging economies, because of both their importance in commodity prices and the behavior of world financial markets. | Scenario analysis can be an important and useful tool in the hands of financial institutions and their supervisors to guide such necessary 2/3 BIS central bankers' speeches effort. Thanks a lot for your attention. 3/3 BIS central bankers' speeches | 0 |
Such a self-reinforcing price spiral would have resulted in even more severely disrupted gilt market functioning. And that would in turn have led to an excessive and sudden tightening of financing conditions for households and businesses. In response to this threat, the Bank of England intervened on financial stability grounds. But what led to that intervention? The root cause is simple – and indeed is one we have seen in other contexts too – poorly managed leverage. So today I’ll set out how leverage outside the banking sector can create risks to financial stability, starting with that small corner of the pensions market. And then I’ll set out what needs to be done - by participants, by their regulators and by financial stability authorities - if we are to ensure those risks to financial stability are reduced. How did a small corner of the pensions industry threaten financial stability? Many UK DB pension schemes have been in deficit, meaning their liabilities – their commitments to pay out to pensioners in the future – exceed the assets they hold. DB pension schemes invest in long-term bonds to hedge the interest rate and inflation risk that arises from these long-term liabilities. But that doesn’t help them to close their deficit. To do that, they invest in ‘growth assets’, such as equities, to get extra return to grow the value of their assets. An LDI strategy delivers this, using leveraged gilt funds to allow schemes both to maintain material hedges and to invest in growth assets. | The long run containment in inflation necessarily relies on containment of monetary expansion and increase in production in the country, particularly by improving productivity. As the Central Bank, what we can do? Obviously we cannot produce goods or services for the consumption of the economy, but certainly we can create the right conducive environment enabling the country’s economic performance. Why should the Central Bank be interested in productivity? Our role is to maintain economic and price stability and financial system stability. We also provide necessary payments and settlement infrastructure. We advise the government in economic affairs and policy making, and we provide important agency services such as exchange control, public debt management, provident fund management and regional development activity. In all these functions, our Mission is to “contribute to Sri Lanka’s prosperity”. At the same time, the Central Bank widely pronounces the theme of “success through productivity”. 4 BIS Review 116/2008 But, obviously this cannot be done by ourselves… The success through productivity needs a consolidated national effort. That is why we all have to push ourselves to a greater productivity level. We have to, • work smarter, • combine better, • deliver results, • get it right. It should be noted that the private sector has continued to make commendable efforts in order to improve productivity in the country. What can the ICC Sri Lanka do? ICC Sri Lanka too can play a prominent and essential role. | 0 |
This is not about the societal question of the level of pay, but about the prudential question of its structure. To properly align risk and reward, the Prudential Regulation Authority will be prescribing deferral of variable remuneration, the ability to reduce deferred bonuses when subsequent performance reveals them to be undeserved, and the ability to claw back bonuses after payment. But as the Chancellor stressed tonight, we must do more. Recent events have shown the necessity of measures to ensure the fairness and effectiveness of core markets. That is why I welcome wholeheartedly the Fair and Effective Markets Review announced tonight by the Chancellor, and to be led by the Bank’s new Deputy Governor, Minouche Shafik. Through that Review, we will build true markets: – Markets that are open and transparent; – Markets where access extends beyond a privileged few; – Markets where all who wish to trade have common information and commonly accessible prices; and – Markets where the informational integrity of key benchmarks is beyond question. Some of this will require changes to the way markets work, including changes to how benchmarks are calculated and the implementation of reforms currently underway to create greater pre- and post-trade transparency of standardised derivatives. Some can be delivered, as the Chancellor announced, by bringing more activities within the scope of regulation. And some may require new codes of conduct. | If the financial sector ceases to mediate payments efficiently, it could have very serious consequences for economic development. One of the Riksbank's tasks as established by law is to promote a safe and efficient payments system. It is not as easy to see the direct usefulness of the modern financial system as it is to realise the importance of energy and transport. However, the functions of the financial markets - financing, risk management and mediation of payments - are as necessary in an advanced industrial and services society as the supply of energy and a functioning transport system. In advanced societies, savings are at least partly separate from investment activities. The financial sector has the important task of balancing savers' need of security and liquidity against investors' need of long-term financing. It often takes a long time from investment until production results come onto the market. Households that save money could suddenly find themselves in need of access to their money, which is made possible by selling their savings in the form of, e.g. shares and bonds on secondary markets for these securities. A company like Stora Enso wants long-term financing for a new paper machine, which it might not be possible to sell in a couple of years' time should the company be forced out of the investment. The company's issues of shares and/or bonds provide this long-term investment, partly because the securities can be sold on a market without having to be redeemed by the company issuing them. | 0 |
As chairman of the Global Economy Meeting which takes place every two months in Basel, under the auspices of the BIS, I mentioned regularly in 2006 as well as in the first months of 2007 that my colleagues and I were judging that there was a significant underpricing of risks in global finance. This situation was substantiated by a very low level of spreads, a very low level of risk premia, an abnormally low level of volatility in a large number of markets. We had explicitly and publicly called for institutions and markets to prepare themselves for a correction that was both unavoidable and necessary to pave the way for more sustainable path of global finance. Such analysis and diagnosis were reflected pretty well in most Financial Stability Reviews published by central banks, not the least in the ECB publication a long time before the market correction. The BIS publications were themselves equally clear in this respect. Second, a good analysis and a pertinent diagnosis are a necessary condition for future necessary market corrections to be as smooth and as orderly as possible. But it is not a 8 See European Commission (2006), Financial services: Commission proposes self-regulatory improvements to deposit guarantee schemes, Brussels, 28 November. 6 BIS Review 17/2008 sufficient condition per se as is clearly demonstrated in the present episode of turbulence and as was regularly observed in the previous periods of sharp and abrupt market corrections. | Some concerns that I have about the outlook, however, are the possibility of continued sluggishness in private demand, and the possibility that supply-side constraints – both in the labor market and the production sector – could hold back the future potential of investment and exports. Through this turbulent time, the Bank of Thailand has been steering its monetary and financial policies with prudence. The flexible inflation-targeting framework succeeds in anchoring inflation expectation, thus fostering continued growth and stability. The managedfloat regime accommodates baht movements that are in alignment with fundamentals, with policy instruments ready to curb excessive speculation and overshooting if needed. The strong international reserves position, at the same time, helps cushion against sharp flow reversals. Efforts have also been expended on financial liberalization and regulatory reforms under the Financial Sector Master Plan. And for the banking sector, banks’ capital bases have been strengthened well above international standard, while granting new subsidiary licenses for foreign banks will ensure that the future banking system stays competitive and vibrant. C. Lifting barriers to sustainable growth Distinguished audience, Sound macroeconomic and financial practices have been instrumental in safeguarding economic stability and helping the country weather through numerous shocks that have come its way. Sufficient policy spaces in monetary and fiscal policies provided buffers amid intense headwinds and supports in the times of need – notably in the aftermath of the global financial crisis and the flood devastation in late 2011. | 0 |
Consequently the pressure for austerity is greater in the periphery, than it is to boost demand in the core. So, while the euro-area authorities have been making substantial progress in constructing the economic architecture to support the monetary union, the adjustment process taking place in the periphery is nevertheless likely to continue to weigh on euro-area demand prospects for some time. And that will also act as a headwind to the recovery here in the United Kingdom. Let me turn finally to the global picture. During the build-up to the financial crisis, significant international payments imbalances emerged (Chart 9). On one side were the advanced economies, most especially the United States, running large and persistent current account deficits. On the other side were the emerging economies – most notably in Asia – and latterly the oil exporters, showing large current account surpluses. In the decade prior to the financial crisis, for example, the US current account deficit widened from under 2% of GDP to 5%, while the surplus in China rose from 4% of GDP to 10%. That constellation of international payments flows, with emerging economies exporting capital to advanced economies, was the opposite of what conventional economic models would predict. Normally one would expect countries in the catch-up phase of economic development with temporarily high investment levels to import the necessary savings from overseas. But a combination of limited household safety nets and under-developed domestic financial markets generated unusually high private savings rates. | Turning to fiscal policy, the baseline scenario assumes that the trajectory of public spending is consistent with the fiscal rule and with the Administration’s announcements that it will BIS central bankers’ speeches 3 follow a path of fiscal consolidation, which has resulted in an adjustment of expenditures planned for 2016. This is consistent with a lower trend price for copper than was assumed in the formulation of this year’s budget. Risk balance One of the main external risks comes from the international financial markets. New volatility episodes may be repeated like the ones we saw in the early months of this year, because many of the underlying elements are still present. In particular, doubts around the situation in China, and doubts concerning the Fed’s decision on the policy rate. This, because of both its difference with what can be inferred from market prices and the divergences with other developed countries’ monetary policies. Nor can we rule out that the increased appetite for riskier assets observed in the past few weeks could persist. Any outcome will have effects, among others, on external financial conditions and emerging economies’ currencies and, it will thereby have an impact on local output and inflation. Another risk scenario has to do with the outlook for world activity. On the downside, there are doubts about the growth capacity of China, which couples with doubts surrounding the solidity of the US recovery. | 0 |
This is what we have assumed in our latest Inflation Report forecast, where conditional on a smooth Brexit investment growth resumes in 2020 and 2021 (Chart 9). But we are unlikely to achieve full certainty until the final outcome of negotiations is known, and there is a risk that more persistent uncertainty could push out the pick-up in investment and continue to drag on growth. The weakness of investment also casts further doubt on how durable the resilience of the labour market has been. Usually business investment and employment rise and fall together – in aggregate, businesses either increase hiring and investment at the same time, or they cut them both. For businesses to be increasing employment at the same time that they are reducing investment suggests something unusual is going on. One explanation would be if they are substituting labour for capital, perhaps on the grounds that hiring would be easier to reverse in the event of a shock than capital expenditure. Another would be if demand is shifting away from capital-intensive, export-oriented businesses and into labour-intensive, domestically-focused ones. Either way, this shift away from capital and towards labour matters for the economy. Bank staff calculations suggest it has left the economy around 1½% less capital-intensive than we were forecasting ahead of the Brexit referendum. By itself that reduction in capital intensivity accounts for a ½% reduction in labour productivity, even before allowing for the additional impacts of foregone innovation and process improvement. | Our financial systems regulatory frameworks should be enhanced to ensure that what has happened else where does not visit us in the near future. Thank you and I wish you successful deliberations. BIS Review 44/2009 3 | 0 |
If we were to dispense with it, Swiss interest rates would increase compared to those of other countries, Swiss franc investments would be markedly more attractive, and we would Page 3/6 Berne, 12 December 2019 Thomas Jordan News conference have to expect a marked and rapid appreciation in our currency. Inflation would thus fall significantly into negative territory, and the economy would be slowed. But why are interest rates so low in the first place? This is in some part due to the expansionary monetary policy. However, the main reason is that for some time saving has been increasing worldwide, with comparatively little investment being made. The high saving rate is largely attributable to demographics. The dearth of investment is due, among other things, to low productivity gains. Both these factors have been heightened by the prevailing uncertainty since the onset of the financial crisis. If there is more saving and less investment, the interest rate at which the economy is in equilibrium falls. Switzerland cannot distance itself from this global development. Central banks set their policy rates relative to this equilibrium interest rate. To have an expansionary effect, a policy rate must be lower than the equilibrium interest rate. And if the latter is very low, it can be that the policy rate has to be lowered below zero. | A summary of the results has for some time now been published in our quarterly Business Cycle Signals report. The enclosed study explains the objectives and the methods underlying these company talks. You will also find the latest issue of the Business Cycle Signals in your press kits. Both of these sources of information are, of course, also available on our website. Page 5/6 Berne, 12 December 2019 Thomas Jordan News conference Ladies and gentlemen, thank you for your attention. It is now my pleasure to give the floor to Fritz Zurbrügg. Page 6/6 | 1 |
11 No 1, 73–92. SFS 1988:1385, Sveriges Riksbank Act in its wording as of 1 July 2011, Sveriges Riksdag (the Swedish parliament). Statistics Sweden (2012), Housing and construction statistics yearbook 2012, table. Svensson, Lars E.O. (2010), “Why a lower repo-rate path?” speech in Umeå, 24 February 2012, www.larseosvensson.net . 10 BIS central bankers’ speeches Svensson, Lars E.O. (2011), “Practical monetary policy: Examples from Sweden and the United States”, Brookings Papers on Economic Activity, Fall 2011, 289–332. Svensson, Lars E.O. (2012a), “Adjustment of the Riksbank’s estimate of long-run sustainable rate of unemployment”, annex to Sveriges Riksbank (2012b), www.larseosvensson.net. Svensson, Lars E.O. (2012b), “Different views on monetary policy”, speech in Stockholm 8 June 2012, www.larseosvensson.net. Svensson, Lars E.O. (2012c), “Monetary policy, debt and unemployment”, speech in Stockholm 14 November 2012, www.larseosvensson.net. Svensson, Lars E.O. (2012d), “The possible unemployment cost of average inflation below a credible target”, working paper, www.larseosvensson.net. Swedish government (1997), Riksbankens ställning (the position of the Riksbank), government bill 1997/98:40, www.regeringen.se. Sveriges Riksbank (2011), The Riksbank’s inquiry into risks in the Swedish housing market, www.riksbank.se. Sveriges Riksbank (2012a), “Long-run developments in the Swedish labour market”, article in Monetary Policy Report, July 2012, www.riksbank.se. Sveriges Riksbank (2012b), “Minutes of the monetary policy meeting no. 3”, 3 July 2012, www.riksbank.se. Sveriges Riksbank (2012c), “Minutes of the monetary policy meeting no. 5”, 24 October 2012, www.riksbank.se. Sveriges Riksbank (2012d), “Minutes of the monetary policy meeting no. 6”, 17 December 2012, www.riksbank.se. BIS central bankers’ speeches 11 Figure 1. | The best way to justify why a certain reporate path has been chosen is to compare the consequences of this path for inflation and the real economy with those of the alternatives. What does this mean in concrete terms? Well, it means that one must be able to show that the repo-rate path one prefers gives rise to the forecast for inflation and resource utilisation that best stabilises inflation around the target and resource utilisation around a normal level. It is as simple as that. Figure 2: Forecasts Figure 2 shows the forecasts for CPIF inflation (panel a), the output gap (panel b) and the hours-worked gap (panel c) for the main scenario and for the extended repo-rate path. The curves marked “Expected” show the forecast under the following assumptions: The extended-repo-rate path is announced in April. It is perceived as credible in the sense that the market from and including April expects an unchanged repo-rate path until the end of the fourth quarter of 2010. The curves marked “Unexpected” show the forecast under the following assumptions: The extended repo-rate path is not incorporated in market expectations and the market instead continues to believe in the main scenario’s repo-rate path. The market is taken by surprise in the third and fourth quarters of 2010 when the repo rate is left unchanged. We can see that the effects of an expected extended repo-rate path are greater than those of an unexpected extended repo-rate path. | 0 |
9 6 Similar arguments are made by Marvin Goodfriend Mervyn King in their Review of the Riksbank’s Monetary Policy 2010–2015, (Stockholm: 2015). 7 Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann, “The costs of deflations: a historical perspective,” BIS Quarterly Review, March 2015, pp. 31–54. 8 See the box entitled “A tale of two crises: recent developments in euro area and US employment,” in the December 2015 issue of the ECB Economic Bulletin, and, for a longer term analysis, the article entitled, “Productivity developments and monetary policy,” in the January 2008 issue of the ECB Monthly Bulletin. 9 Lawrence Summers, “Reflections on the Productivity Slowdown,” Keynote Address to the Conference: Making Sense of the Productivity Slowdown, Peterson Institute for International Economics (Washington, D.C.”: 16 November, 2015): http://www.iie.com/publications/papers/transcript-20151116keynote.pdf. BIS central bankers’ speeches 3 There may well be some truth in this. After all, it’s well-known that the national accounts often take a long time to fully count the effects of innovations in technology. For example, US national accounts did not reflect the output from automobiles for nearly 15 years after the Ford Model T was available. 10 But even if we are mis-measuring productivity, we still need to raise it: the euro area is still lagging considerably behind others. And worse still, we only seem to be able to achieve productivity growth if it’s traded-off against employment. | 19 And since such goods and services typically command a price premium in the market, that would in turn lift the value of output, raise national income and secure and expand employment. 15 David Autor and David Dorn, The Growth of Low-Skill Service Jobs and the Polarization of the US Labor Market, American Economic Review, 2013, 103(5): 1553–1597. 16 See the article entitled, “What is behind the recent rebound in euro area employment?”, ECB Economic Bulletin, No. 8 (December 2015). 17 Ulf Lewrickb, Lukas Mohlera and Rolf Weder, When firms and industries matter: understanding the sources of productivity growth, BIS Working Papers No 469 (October 2014). 18 Among several other papers, see e.g. Krizan, C.J., Foster, L. and Haltiwanger, J.C. (2006), “Market selection, Reallocation, and Restructuring in the U.S. Retail Trade Sector in the 1990s”, The Review of Economics and Statistics, MIT Press, Vol. 88(4), pp. 748–758, November. 19 Valerie Jarvis and S.J. Prais, “The Quality of Manufactured Products in Britain and Germany,” International Review of Applied Economics, Vol. 11:3 (1997), 421–438. BIS central bankers’ speeches 5 Indeed, even with the technological advances at our disposal, advanced economies such as the euro area cannot afford to try to out-compete the lower cost producers on price – not if we want to maintain the benefits of our welfare states and less precarious patterns of employment. | 1 |
Chart: Early warning models for financial crises The chart shows estimated crisis probabilities for Norway based on various combinations of explanatory variables and trend estimation methods. A clear pattern is that crisis probabilities increased markedly in the years ahead of the banking crisis in 1988–1993 and ahead of the financial crisis in 2008–2009. Both of these periods featured rapid growth in credit and real estate prices, combined with a surge in banks’ wholesale funding ratio. The chart shows that the estimated crisis probabilities have declined since the financial crisis, although the spread between the predictions from different variants of the model is considerable. The relationship between the indicators and the probability of a crisis in the model is not linear. The greater the magnitude of the financial imbalances at the outset, the more pronounced the effect of an increase in credit growth or house price inflation will be. We have seen that financial imbalances often wind down in connection with crises. The ratio of household debt to GDP fell markedly in Norway in the wake of the 1990s banking crisis and it has fallen in countries such as Spain, the UK and the US after the financial crisis in 2008. In Norway, household debt has continued to grow faster than income, which may indicate that the vulnerabilities that built up prior to the crisis are still present. An assessment of systemic risk must include an analysis of both the probability and consequence of a crisis. | The buffer rate will be increased when financial imbalances are building up or have built up, thus bolstering resilience when we need it most. The countercyclical capital buffer can thereby have an impact on both the probability and the costs of a crisis. The buffer may thus also reduce fluctuations in the economy. We are now in a phase where banks are facing a number of new capital requirements. Banks can choose to adapt to the higher capital requirements by, for example, increasing lending margins or by tightening lending. Thus, higher capital requirements could curb economic activity in the short term. As the new requirements are phased in, the buffer will have to be adjusted to the economic situation and other requirements applying to banks. This does not mean that the countercyclical capital buffer should be changed frequently in pace with normal cyclical fluctuations. Once the buffer has been built up, the costs of maintaining capital levels will probably be low. The buffer rate should not be reduced automatically even if there are signs that financial imbalances are receding. This is in line with the international guidelines for the countercyclical buffer. The countercyclical capital buffer is only one of the elements in the new international regulatory framework for banks. The European Systemic Risk Board (ESRB) provides, among other things, for sector-specific capital requirements and limits on loan-to-income and loan-to-value ratios. 3 In New Zealand, the authorities have introduced limits on banks’ share of high LVR residential mortgage lending. | 1 |
MAS also set up a $ billion US Dollar Facility that is available to all banks, on the back of the swap arrangement with the US Federal Reserve. This Facility has helped to stabilise US Dollar funding conditions in Singapore, and enabled US Dollar lending to businesses in Singapore and in the region. About $ billion has been provided through this Facility. FINANCIAL STABILITY The COVID-19 shock has also increased the risks to global financial stability. The world entered the current crisis with one strong card and one weak card. The strong card is the banking sector. Globally, banks are generally in good shape, with healthy capital and liquidity buffers. The weak card is the corporate sector. In many parts of the world, corporate debt levels were already high pre-COVID, and will increase further through the course of this crisis. With tight cash flows, over-leveraged entities could face financial distress, leading in turn to ratings downgrades and corporate defaults. Mounting corporate defaults will strain banks’ profitability and capital positions. The strong card could become progressively weaker. If this happens, banks will be less able to sustain credit to the real economy. Worse still, if funding conditions also tighten and confidence is shaken, some banks could run into trouble, possibly triggering a financial crisis. MAS is determined that the financial system in Singapore remains robust and resilient. Our banks have built up strong capital and liquidity buffers, and are well-placed to weather these risks even as they continue to extend credit. | To support banks’ capacity to lend, MAS has implemented transitional measures till endSeptember 2021: Allowing banks to recognise 100% of regulatory loss allowance reserves as Tier 2 capital; and Reducing from 50% to 25% the amount of stable funding that banks must maintain on loans to individuals and businesses maturing in less than six months. MAS also provided guidance to financial institutions on estimating their loan loss allowances in the context of COVID-19: That in assessing COVID-19’s impact on future economic conditions, financial institutions should consider the government’s support measures in bolstering economic resilience; and That financial institutions need not maintain higher loan loss allowances solely because 8 / 15 BIS central bankers' speeches COVID-19 relief measures were applied to certain loans. MAS provided room for insurance companies to rebalance their investment portfolios in the face of uncertainties in financial markets: By extending to end-2021 the transitional measure in the calculation of their financial resources under RBC 2. OPERATIONAL RESILIENCE OF FINANCIAL INSTITUTIONS The financial sector has been operationally resilient, functioning with minimal disruption in the face of COVID-19. The financial industry has maintained a high level of customer service throughout the Circuit Breaker period, as well as Phases One and Two of the re-opening. They have also continued to seamlessly conduct their wholesale and international businesses. The industry’s operational resilience reflects sound business continuity planning and agile adjustments to work processes. | 1 |
There are diminishing returns in terms of the benefits of ever higher capital requirements. Setting the bar at too high a level would increase intermediation costs too much and drive activities offshore or into areas that are not as closely regulated. At some point, higher requirements would not make the financial system safer, just the regulated sector much smaller. On this last point, some argue that the new standards are too severe. They argue that, in the short run, the higher standards could lead to a significant constraint in credit that could hurt the nascent economic expansion. And, they argue, in the long run, that the higher capital standards will inevitably drive up lending costs and that this will hurt economic performance. Although I believe the new standards do impose some real costs on the financial system in order to achieve real benefits, I believe that concerns over the costs are exaggerated. Turning first to the issue of the transition to the new regime, we cannot precisely predict the size of the adjustment costs as they will depend importantly on the strategies bank managers employ to meet the new requirements, and how bank investors respond to these actions. Nonetheless, I believe the transition is likely to be quite manageable for three reasons. 4 BIS Review 131/2010 First, many of the large U.S. banks already have large amounts of tangible common equity. In part, this represents the regulatory response during the crisis. | It is also my hope that by establishing a robust global regime, we can mitigate the incentives for national regulators and supervisors to impose local rules that make it hard for globally active institutions to manage their operations on a global basis, thereby undermining the global integration of markets that has supported economic globalization. Over the next 12 to 18 months, regulators will be particularly busy in implementing these reform efforts. Broad legal statutes now have to be turned into specific rules and regulations governing business practices, conduct and operations. Doing this well – in particular, in a way that is sufficiently informed, deep and broad – will be very important. Basel III and the 1 Governor Daniel K. Tarullo, Comments on “Regulating the Shadow Banking System”. Brookings Panel on Economic Activity, September 17, 2010. 8 BIS Review 131/2010 Dodd-Frank Act are important markers on this road, but it will always be a journey to a neverreached destination of perfection. Thank you for your kind attention. I would be happy to take a few questions. BIS Review 131/2010 9 | 1 |
The high interest rates offered by these markets kept the efficiency of monetary policy in steering the interest rate pending. In addition, other issues, such as the high concentration of deposits and loans in three state-owned banks, their operational losses as a result of the increase in non-performing loans’ portfolio, the undeveloped and incoherent regulatory framework in supervision had become an impediment to the expansion of reforms in the banking sector. Following this period, the banking system consolidation process began to progress. This period is characterized by the reduction in the share of state-owned banks, their gradual privatization and the considerable increase in the number of private banks from 4 operating in 1997 to 17 banks in 2006. In this context, the central bank has been extremely prudent in selecting and licensing the private banks, where only three of them licensed the recent years are of entirely Albanian capital. Despite the increase in the number of domestic commercial banks, the expansion of the banking activity until 2003 was a prudent one, being in line with the country’s economic development. During 1998-2003, the banking system’s total assets grew by an average of 13 per cent a year, consistent with the nominal GDP growth during this period. Nonetheless, there has been a swift growth in banking assets by 67 per cent in the last three years, which is 2-3 times higher than the cumulative growth of nominal GDP. | And that, according to Eurosystem calculations, the output gap will return to close to zero by the end of the year ( 0.6%), even though France’s situation is less favourable due to its growth lag (output gap of around 1.4% according to our calculations). The non-standard monetary policy that we have been conducting since 2014 is contributing to this acceleration of growth in the euro area, by supporting domestic demand and by fostering very favourable financing conditions. In concrete terms, this acceleration results in more jobs – over 6 million jobs created in the euro area since the start of 2013 – and in a pick-up in investment. Corporate investment in particular, decisive for supply capacities, is clearly recovering: up 4.7% in 2015, 6% in 2016, and is expected to be up 4% in 2017 and 2018). [slide] This improvement in investment is underpinned notably by ongoing growth in lending to the private sector, at 2.5% year-on-year in August 2017 for firms and at 2.7% for households, with interest rates moreover remaining very low. This growth in lending is over twice as high in France, which incidentally leads us to be very vigilant at the High Council for Financial Stability. We are also observing favourable developments in inflation, which is gradually moving back towards our target of 2% over the medium term [slide]. After peaking at the start of 2017, the inflation rate stood at 1.5% year-on-year in August. | 0 |
However, these general responses are tinted by the intense uncertainty—observed both in Chile and around the world—regarding the shock’s persistence, its actual consequences and the magnitude of its indirect or second round effects. (6) Optimal response to foreign exchange shocks The above considerations can apply to the optimal response of monetary policy to parity shocks. In general, in its conduct of monetary policy, the Central Bank does not react to exchange rate movements beyond their effects on inflation and output. This because of the favorable response of the Chilean economy to increased exchange rate volatility that has been present since the late nineties. First, the pass-through coefficient from exchange rate depreciation to inflation has dropped substantially in Chile, to very low figures in the range of 20% to 30%, in the policy horizon. Second, the currency mismatch has been reduced in non-financial firms which, in turn, are being insured against residual parity risks generated by short-term exchange rate volatility in an increasingly deep market. Finally, the Central Bank reserves the option to intervene directly in the foreign exchange market with sterilized operations and in publicly announced conditions, if it evaluates that a temporary exchange rate volatility or misalignment so warrants. | Beneath the surface of these encouraging macroeconomic data, there is - and has been for some time a serious imbalance, with some parts of the economy doing very well (including many of the services sectors and some manufacturing activity) while other parts of the economy (including much of agriculture, many manufacturing businesses and even other services sectors such as inward tourism) face the toughest business conditions that many of them can remember. To take just manufacturing, total output has risen by only 2% over the past two years, and it has actually fallen by 0.9% if you exclude the so-called “high tech” sectors (ie computers, office and telecommunications equipment and electronic components). Total employment in manufacturing has fallen over that period by some 230,000, of which 200,000 were outside the “high tech” sectors. For what it’s worth there is a similar imbalance in the US, where total manufacturing has increased by 10½% over the past two years, but by only about 1½% similarly excluding the hi-tech sectors; total employment in US manufacturing has fallen by some 435,000, but by nearly 600,000, outside the “high tech” sectors. There is no single explanation for these developments. They result partly from continuing and unavoidable long-term structural adjustment of capacity to market demand; it results also partly from the effect of increasing global economic integration, inducing the relocation of manufacturing capacity in response to shifts in comparative productive advantage. | 0 |
We would do well to remember, however, that people’s perceptions of the future are often shaped not so much by words as by actions. So, after a series of purposeful decisions by the Government, the Riksdag (Sweden’s parliament) and the Riksbank, economic policy’s general commitment to macroeconomic stability began to inspire confidence. Economic policy’s credibility gave the Riksbank greater freedom to act The growing confidence accordingly meant in turn that, without jeopardising the objective of price stability, the Riksbank was able to lower the repo rate relatively markedly, from almost 9% to just over 4%. Interest rates for longer maturities also fell. This led, as we have all seen in recent years, not just to higher GDP growth but also to a more uniform development of demand in different sectors. When the cyclical upswing began towards the end of 1993, most of the growth came from the export sector. However, lower levels of interest rates benefited Swedish households and firms by easing the heavily restrictive effect of the high level previously. This contributed to an increase in domestic demand as well and broadened the economic upswing. That can be said to have instigated the considerable reduction of unemployment we have seen in recent years. Neither the Asian crisis in 1997 nor the turbulence in international financial markets in the autumn of 1998 had much of an impact, thanks not least to a monetary policy realignment in many countries. The Swedish repo rate was also cut, to a low of 2.90%. | Both the pattern of international fund flows and the underdeveloped state of the regional bond market require this. Fostering regional bond market development involves co-operation on a number of fronts among economies with very differing economic, political and cultural backgrounds. It is often said that the diversity of this region - in comparison with, say, Europe - is a considerable obstacle to the kind of financial, economic and monetary co-operation that might be desirable. Nevertheless, it is heartening that, in this area at least, considerable progress has been made over the past few years, particularly among central banks. This co-operation has taken two forms: market development initiatives, which help promote the growth of a regional bond market, and infrastructural initiatives, which facilitate that growth. Let me, in the remainder of this address, briefly outline some of these initiatives. A number of collaborative initiatives have been undertaken by central banks in the region to foster the development of both local and regional bond markets. These can be grouped into three main clusters, each falling under the auspices of a major regional multilateral organisation. The first of these is the APEC Initiative on the Development of Securitisation and Credit Guarantee Markets, which is being spearheaded by three APEC member economies (Hong Kong, Thailand and Korea) and sponsored by the World Bank. The aim of this initiative is to address structural impediments to the development of bond markets and to provide an effective and immediate solution to the credit gap problem. | 0 |
Prices adjust automatically to supply and demand, and the general view was that Newton’s theory shown to be insufficient, during the solar eclipse of 1919. Scientists were then able to observe that the light from distant stars was bent by the Sun’s gravity, just as Einstein had predicted. Many scientists once believed that the Earth looks the way it does, with mountains and valleys, because the Earth was originally a red-hot mass that gradually shrivelled as it cooled. We know what an orange looks like after a long drying process or what clay looks like after being exposed to the air for a time. What was a smooth surface becomes wrinkled. It was 100 years ago this year that the German meteorologist Alfred Wegener proposed an alternative theory of continental drift. He used heuristic arguments based on studies of coastlines. Brazil has a coastline that is an apparent perfect fit with the Gulf of Guinea on the west coast of Africa. Even so, the theory was not accepted until it was given a proper theoretical foundation and empirical grounding. The breakthrough came 50 years ago, when the American geologist Harry Hess proposed his theory of sea-floor spreading, and by the end of the 1960s the theory of plate tectonics became established science. The Centre for Advanced Study, which is located here in the Academy, recently hosted a research group that is at the very international forefront of this field. | We value highly human and civil rights ranging from gender equality, data protection, to the condemnation of torture, including the rejection of capital punishment. The protection of these values and rights relies on the vigilance of the legal professionals here in this room and elsewhere. This is even more important vis-à-vis a reality of extreme and obsessive forms of nationalism. The EU has also increased personal choices. The ability to travel, work and live across borders has been enhanced. The European Health Insurance Card permits European citizens to obtain healthcare wherever they are. 1.5 million people, perhaps including some of you here today, BIS central bankers’ speeches 1 have completed part of their studies in another member state as part of the Erasmus programme. More than 15 million EU citizens have moved to other EU countries to work or to enjoy their retirement. This wider range of options increases people’s wellbeing. These reasons, and the other positive aspects of membership, have been drowned out in debate by concerns over migration and the large wave of refugees from troubles in the Middle East and elsewhere, the impact of the crisis, disaffection with high levels of unemployment – especially youth unemployment, and a perceived lack of accountability and legitimacy of the EU institutions. I fully recognise that Europe in its current state is not perfect. The crisis has shown that Economic and Monetary Union is incomplete, and further work is required, particularly in the areas of banking and credit markets. | 0 |
Faced with the possibility that they would have to finance these vehicles themselves, banks with spare cash have hoarded it and have become reluctant to lend to other banks beyond very short maturities. That has been evident in the spreads between interbank lending rates and central bank interest rates in the UK and equally in the euro area and United States. The bottom line is that banks that had financed themselves by borrowing from their peers, or by securitising and selling their loan assets, found that their funding dried up. In the United Kingdom, Northern Rock was particularly exposed. It was able to borrow only at shorter and shorter maturities. The present financial crisis is of a most unusual nature in that it comes against a background of five years of strong growth of the world economy and a decade and more of remarkable economic stability at home. Moreover, most banking and financial crises in the past – from the failure of Overend and Gurney in 1866, to the collapse of BCCI in more recent times – were associated with bad loans and significant losses on assets. The remarkable fact about this crisis has been the relatively small size of the bad loans compared with the total assets of banks. The crisis has arisen instead from the way banks have managed their liabilities. What did the Bank of England – as the central bank – do for the banking system? | Richard W Fisher: A report on the Texas economy and a hawk(s)eye view on recent Fed pronouncements – what does it all mean? Remarks by Mr Richard W Fisher, President and Chief Executive Officer of the Federal Reserve Bank of Dallas, before the Headliners Club, Austin, Texas, 2 February 2012. * * * Thank you, Patti [Ohlendorf]. I am flattered that such a great group of Austinites has turned out tonight. I am especially pleased that Alejandro and Rosa Laura Junco are here. Alejandro is CEO of the print media company Grupo Reforma. He has earned a sterling reputation for journalistic independence in a part of the world where independence is a rare and sometimes dangerous thing. Columbia University, the University of Missouri and Michigan State University have honored him for his journalistic accomplishments, and the University of Texas at Austin has named him a Distinguished Alumnus. Alejandro’s company and its flagship paper in Mexico City take their name from La Reforma, a period of liberalizing reforms that transformed Mexico into a nation state in the mid-19th century, beginning with the overthrow of the man Texans know best and like least – Santa Anna – and ending with the ascension to power of a good general gone bad, Porfirio Diaz. As a child growing up in Mexico City, I was taught about La Reforma in school. | 0 |
It should be kept in mind that the persistence of certain global imbalances and protectionist pressures and the uncertainties over oil and other commodity prices represent risk factors for growth, which date from before the outbreak of the current bout of turbulence. Turning to prices, the behaviour of production seems to have been accompanied by a slight upturn in inflation to around 2% in the medium term, since the smaller contribution of indirect taxes (which has been especially marked in 2007) should be offset by the larger contribution of unit labour costs, in what is a buoyant labour market. Against this background, a possible increase in wage pressure associated with the aforementioned taking-up of slack in the labour market, or a widening of the margins in those sectors more sheltered from international competition, pose risk factors for price stability in the euro area. The current financial market turbulence has naturally heightened the downside risk to growth, and this has in some way mitigated inflationary risks, which nevertheless continue to rise. Above all, however, the turbulence has widened the range of uncertainty associated with the central scenario for the European economy that I have just described. In these conditions, the first ECB Governing Council meeting this month unanimously decided, as you know, to hold interest rates unchanged and gather more information on this episode of turbulence and study it in more detail before taking any new decisions. | While it is clear we have come a long way since 2008, we can’t just settle for making a promise that no bank will be ‘too big to fail’: as Resolution Authority the Bank must be able to deliver on that commitment. Fundamental to that delivery, the UK now has the requisite statutory tools, and powers to underpin a credible bank resolution framework. These are set out transparently in the Banking Act 2009 and there are 6 Also known as the Purple Book, and subsequently updated in 2017. As set out in the December 2019 Financial Stability Report. 8 The December 2020 Financial Stability Report sets out the FPC’s latest assessment. 7 4 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 4 safeguards in place so that these powers can only be used in the right circumstances. These features allow market participants to have confidence in the integrity and predictability of our decision-making, which is supported by the UK’s strong and effective institutions. These powers also form an important complement to supervisory and prudential tools; that these are embedded within the UK legal framework ensures they function as a credible and independent backstop for banks at risk of failure. Flexibility and proportionality in implementation While a credible and transparent policy regime is necessary it requires flexibility and proportionality in development and implementation to ensure overall effectiveness of the regime. | 0 |
Most recently, we still see a sizeable contribution from FDI and long term borrowing by banks and non-financial corporates, whereas portfolio inflows have been relatively weak. The share of long term debt in total debt has been increasing steadily. The banks and firms are able to roll their debt comfortably, and the roll-over ratios are still above 100%. Figure 8. Financing of Current Account Deficit (12 Month Cumulative, Billion USD) 100 80 60 40 20 0 -20 FDI and Long Term Portfolio and Short Term CAD 11.16 02.16 05.15 08.14 11.13 02.13 05.12 08.11 11.10 02.10 05.09 08.08 11.07 02.07 -40 *Long term inflows are sum of banking and real sectors’ long term net credit and bonds issued by banks and the Treasury. Short term capital movements are sum of banking and real sectors' short term net credit and deposits in banks. Source: CBRT. 5 Dear Participants, Now, let me turn to inflation developments. In the past few months, we have observed a marked increase in the CPI inflation, while the core inflation indicators have shown a milder upward movement (Figure 9). The main driver of inflation in the most recent data was unprocessed food prices, most of which can largely be attributed to adverse weather conditions. Tax hikes and the exchange rate passthrough have also had a visible impact on inflation in recent months. | 7 Dovern, J. and G. Kenny (2017), “The long-term distribution of expected inflation in the euro area: what has changed since the great recession?”, ECB Working Paper No. 1999. 8 See Kozlowski, J., L. Veldkamp and V. Venkateswaran (2015), “The Tail that Wags the Economy: Beliefs and Persistent Stagnation”, NBER Working Paper No. 21719. The authors argue that if people base their beliefs on past realisations, then extreme, albeit transitory, events can generate persistent changes in our cognitive framework. 9 See e.g. Gerba, E. and D. Żochowski (2017), “Knightian uncertainty and credit cycles”, ECB Working Paper No 2068. 10 See e.g. Benigno, G. and L. Fornaro (2017), “Stagnation traps”, ECB Working Paper No 2038. 11 See Rossi, B., T. Sekhposyany and M. Souprez (2017), “Understanding the Sources of Macroeconomic 6/7 BIS central bankers' speeches Uncertainty”, Barcelona GSE Working Paper No 920. 12 See e.g. ECB (2017), Financial Stability Review, May and November. 13 See e.g. Draghi, M. (2017), “Accompanying the economic recovery”, speech at the ECB Forum on Central Banking, Sintra, 27 June. 7/7 BIS central bankers' speeches | 0 |
But it is testimony to the strong credentials that Carney brought to these jobs: • a solid academic grounding – with a PhD in Economics from Oxford University; • extensive experience in the private sector – having spent more than a decade at Goldman Sachs; • a background in public policy – working on a variety of economic issues at the Canadian Department of Finance; and • most important, a commitment to serve the larger good of society. • Carney’s topic today is The Future of Financial Reform. He is uniquely well placed to talk about this, having lived and breathed financial reforms in the aftermath of the Crisis, especially as the Chairman of the Financial Stability Board. • Under Carney’s leadership, the FSB has worked intensely to correct the fault lines that led to the Global Financial Crisis. • The FSB, in partnership with various standard setting bodies, has presided over perhaps one of the boldest and most far-reaching set of regulatory reforms in recent memory. • We look forward to hearing from Carney the progress and implications of that work, the new risks emerging on the financial horizon, and the forward agenda of the FSB. I have had the pleasure and privilege of working with Mark at many international meetings over the last three-and-a-half years, at the BIS, the FSB, and the IMF. There are many smart central bankers on the international circuit. There are also many sharp financial regulators. | In practice this means that non-financial companies may obtain funds by issuing and selling certificates to the banks, which in turn use them as collateral for loans from the Riksbank. This credit facility is also available through an auction, where the minimum rate is the current repo rate plus a premium. Since it is mainly large companies that issue certificates, it is they that will benefit directly from the advantages of these facilities. But since banks can increase their liquidity by using the certificates to borrow from the Riksbank, there is less risk of them cutting back on loans to small and medium-sized enterprises that are directly dependent on bank financing. The way ahead? When the dust after the crisis has settled, we face a major task. We must carefully analyse the crisis and determine the areas in which supervision, regulations, etc. need to be 4 BIS Review 140/2008 tightened up and in which areas the problems are best solved by players from the finance industry. Crises create space and acceptance for necessary reforms. At the same time, extreme situations such as this always generate demands for extreme measures. Careful deliberation is therefore important before implementing new regulations. It is all too easy to go too far and implement regulations that are too far-reaching and extensive. Such regulations could control and conserve market structures for a long time to come or involve major costs that reduce efficiency. This crisis will need follow-up care. | 0 |
Well, the central counterparty, who is a known player, functions as the counterparty to each of the parties to the transaction. The seller and the buyer then have a claim and a liability, respectively, with the central counterparty instead of with each other. The advantages of a central counterparty are that securities settlement can be both safer and more efficient. The transactions can be netted out 5 and the counterparty is known. The counterparty risks can be managed by the central counterparty obtaining collateral. Moreover, the central counterparty has its own financial resources. The drawback with a central counterparty is that the market risks are concentrated to a single player – a high concentration of risk. Provided the operations are properly organised, however, this is not a problem. Still, the concentration of risk does mean that central counterparties are often systemically important. Supervision and oversight are therefore highly relevant. 6 I shall leave counterparty risks for the moment and turn to the problem in the United States with insufficient market transparency. Many American credit derivatives are non-standardised products and have therefore been inherently difficult to understand and value. If attempts were made to cope with the lack of transparency, one way would be to use electronic trading because this enhances market transparency and reduces the risk that access to information is not uniform. Another important effect of electronic trading is that concentrating trading to one facility makes pricing more efficient. Each order can be matched with the best price. | Turning now to market transparency, what is the situation in Sweden? MiFID entails the introduction of rules for transparency before and after share trading. The requirement applies to all trading facilities and involves the publication of prices and volumes. So for shares there are no deficiencies concerning transparency in these respects. There may, however, be shortcomings in over-the-counter trading in interest-bearing securities and derivatives. A large proportion of fixed-income trading in Sweden is done by telephone rather than on a market. Derivative instruments can also be traded off-market. 8 If trading is arranged instead with an electronic facility, each order is matched against the best price and market access can be improved for new players. Still, there may be financial markets whose functioning is not improved by increased transparency. It should therefore be up to each market, including the Swedish fixed-income market, to decide which approach is most effective. What are the lessons from this argument? Well, in times like these, coloured by financial market uncertainty, there is much less propensity to take risks. Financial market participants are more interested in low-risk assets, low-risk markets and counterparties that they know and are safe. In a severe situation, this can mean that in certain cases trading ceases altogether because even small risks are perceived as too large. This is because the problems associated with counterparty risks and a lack of transparency become more tangible when markets are turbulent. Every measure by which the financial markets can be made to function even in turbulent times is welcome. | 1 |
This is equivalent to 16% of the GDP of these economies, or nearly $ per citizen.2 But, this is only a lower bound of the cost of the crisis. If we also include the impact on GDP and the loss of production relative to its pre-crisis trend, the costs rise. This has been showed by several studies, including the one just mentioned by IMF economists, which estimates that banking crises that occurred between 1970 and 2000 are resulting in output losses of more than 20% on average if we look at all countries, and more than 30% of GDP in advanced economies.3 These results are in line with the BIS finding that the median discounted cumulative loss of output over the course of a crisis in the same period was about 19% of pre-crisis GDP.4 Now, the question of exactly how much regulation leads to the optimal outcome in terms of long-term growth is, of course, debatable. But let me underline that ambitious attempts have been made by the BIS, but also the OECD and others, to assess the net effect of recent regulatory reform measures, and the results generally point in one direction: that the net effect of reforms is positive. In addition, let me also underline that the Basel Committee has not been blind and deaf to the worries expressed by the industry about excessive regulation. Many adjustments have been made, not least when it comes to the new liquidity regulation. | The issue here is not only the financial effort involved, but also the difficulty, from a political perspective, to explain to the public the need for a financial contribution to mechanisms benefiting wealthier countries for the time being. A case in point is the fall of the Radičová cabinet in Slovakia in 2011. Euro adoption – a conclusion In my view, euro adoption is in the best interest of EU Member States in the long run – given the high degree of business cycle correlation and market integration –, but several essential preconditions, added to the nominal criteria, need to be cumulatively fulfilled in order to make the most of these benefits. I have been on this job long enough to remember a time when the dominant view was that fulfilling nominal convergence criteria was enough for successful euro area membership. The paradigm appears to have shifted. First, the emphasis falls now on the sustainability of nominal criteria fulfilment. Second, achievement of a relatively high degree of income per capita convergence, prior to joining the euro area, is considered increasingly important, since too much catching-up in terms of real convergence poses the risk of more intricate economic cycle management in the absence of independent monetary policy. Third, another essential prerequisite is that the new institutional framework of the euro area has to prove its efficacy in preventing and addressing the imbalances menacing economic activity. | 0 |
When banks' access to liquidity dried up on every market, this hit all banks, including those that are financially strong, like the Swedish banks. Many central banks around the world had been taking measures for some time to strengthen liquidity in banking systems but the Riksbank had not needed to act. The interbank market and other short-term markets had worked, though interest rates had climbed sharply. When BIS Review 140/2008 1 the crisis had a more tangible impact on Sweden, the Riksbank also implemented a series of interventions. Meanwhile, central banks in the rest of the world continued with their interventions and governments approved crisis packages to guarantee financial stability. Against the backdrop of this summary of events in the financial sector over the past year, today I will speak about the effects of this financial crisis on the Riksbank's work of maintaining a safe and effective payments system. But first I would like to briefly describe how we carry out this work under normal circumstances. I will also conclude with a comment on the crisis’ effects on monetary policy. Work with financial stability under normal circumstances The task of maintaining a safe and effective payments system includes the role of the Riksbank as the banks' bank. This task includes maintaining the RIX payment system for payments in Swedish kronor. Participants in the system may borrow during the day and overnight to cover temporary deficits. The task also includes continuous oversight of the financial system. | We are in a situation in which there is hardly any conflict between inflation and real economic considerations in monetary policy. Our decision to lower the interest rate is guided by normal monetary policy considerations – in other words, "business as usual". BIS Review 140/2008 5 When we lowered the interest rate we also noted that the effect of the lower rate would probably be smaller than usual. This is because the confidence crisis in the financial system has led to high risk premiums whereby short-term market interest rates were disconnected from their normal relationship to the repo rate, as I described earlier. The reduction we implemented on 8 October did not lead to an immediate drop in interbank rates. Consequently the mortgage institutions' borrowing costs did not drop either, neither did interest rates for loans to end customers. This clearly illustrates how the impact of monetary policy is dependent on financial stability. Some closing thoughts The Riksbank has worked on two levels during the current crisis. Interest rates were cut to alleviate the effects of the financial crisis on the real economy. In addition, measures have been taken on an ongoing basis to improve the functioning of the financial markets and to support financial stability. The interest rate decisions have been based on essentially the same type of considerations as those on which monetary policy is usually based. | 1 |
SPEECH Measure Twice, Cut Once May 11, 2021 John C. Williams, President and Chief Executive Officer Remarks at SOFR Symposium: The Final Year (Part II) (delivered via videoconference) As prepared for delivery It's a great pleasure once again to be sharing a platform with Andrew Bailey as we discuss the transition away from the London Interbank Offered Rate (LIBOR). While it's no surprise that our work often brings us together, Andrew and I have joined forces on this issue to such a great extent because the LIBOR transition is essential to the integrity of the global financial system. Given its ramifications for institutions, markets, and economies around the world, strong cooperation at the international level is of critical importance. As the saying goes, time flies, and it's hard to believe that we've reached 2021. It's been more than a decade since LIBOR has been exposed as a flawed and unreliable reference rate. And, with only 235 days until January 1, 2022, I am pleased to say that the endgame for LIBOR is clearly in sight.1 This transition has been a monumental feat. The enormous amount of progress was made possible by a significant and coordinated effort across the globe, as well as in the United States. | First, it sets out the evidence base on the benefits and costs of the current shareholder-centric model of companies. Second, it makes some tentative suggestions for reform which might tackle some of these costs. There are possible remedies on the table. Part of the solution to the shareholder shorttermism problem may come from mobilising and catalysing what is at present a dispersed, and too often disinterested, long-term investor base. The falling share of institutional investors in equity ownership, together with the rise of passive investment strategies, has exacerbated the trend towards “ownerless corporations”. This is a particular problem in the UK, given its relative lack of block shareholding. 55 Under the auspices of the Investment Association, an Investor Forum has been set up following the recommendations of John Kay’s review. 56 And, internationally, an initiative by asset managers called “Focussing Capital on the Long Term” is seeking some of the same objectives. 57 Ultimately, however, it is simply too soon to say whether any of these initiatives will mobilise and catalyse long-term investors sufficiently to exercise leverage over company management in ways which support long-term value creation. A second, complementary strand would be to seek to reinforce and broaden the “purpose” of companies, to better reflect their broader societal role – their role in serving stakeholders plural (employees, customers, clients) as well as shareholders. Some companies have been able to do so voluntarily by defining clearly their societal purpose and sticking with it. | 0 |
It could be argued, too, that this is more likely an underestimation than an overestimation, as there is systemic positive bias in household inflation expectations and the breakeven inflation rate in the market entails risk premiums. The effect that the real rate has on domestic demand and inflation depends on what the equilibrium real rate is considered to be at any given time; that is, the real rate that neither stimulates nor dampens the economy. The equilibrium real rate has probably fallen in Iceland, as it has in most economies in the wake of the financial crisis, but exactly where it lies is highly uncertain. One of the Monetary Policy Committee’s tasks is to attempt to assess it. It is normal that Central Bank interest rate should rise above equilibrium when a positive output gap develops and inflation is above target, but neither is the case at present. That being so, it was appropriate to contain the rise in the real rate by lowering the Bank’s nominal interest rates. 2 BIS central bankers’ speeches Some will surely ask: Shouldn’t the Bank have lowered interest rates earlier? Hasn’t the monetary stance simply been too tight in the recent past? I don’t think this is the right time to dissect these questions, not least because many things look different in the rear-view mirror. As is said in Njáls saga, “Everything is ambiguous in retrospect.” That said, I think there are solid arguments in favour of a negative response to both questions. | There is uncertainty about the exchange rate, in connection with the settlement of the failed banks’ estates and the liberalisation of the capital controls. There is little I can say about that at this point, but the aim of the work the authorities are doing at present is to minimise that risk. It can be done, but it is a risky process, and one that could be derailed at many points along the way if great care is not taken – and perhaps even if great care is taken. And now I will turn to monetary policy. Yesterday the Monetary Policy Committee decided to lower Central Bank interest rates by 0.25 percentage points, in view of recent developments and the near-term outlook for inflation and the decline in inflation expectations, which I mentioned a moment ago. If the Bank’s interest rates had remained unchanged, its real rate would have been higher than is warranted by where we are in the economic cycle and by the near-term outlook, particularly in view of the fact that it could rise still further in coming months. Estimating the Central Bank’s real rate is not always a simple matter, as different measures of inflation and inflation expectations give differing results. According to an estimate based on the average of various measures of inflation and inflation expectations, the Bank’s real rate was about 2½% before the recent reduction, and it had risen by approximately a percentage point in the previous year, which is a large change in terms of real rates. | 1 |
How to: MACROPRU. 5 principles for macroprudential policy Speech given by Alex Brazier, Executive Director for Financial Stability Strategy and Risk Member of the Financial Policy Committee London School of Economics, Financial Regulation Seminar Monday 13 February 2017 I am grateful to David Aikman, Jonathan Bridges, Matthieu Chavaz, Angus Foulis, Rønnaug Johansen, Vasileios Madouros, Joseph Noss, Rachana Shanbhogue, Robert Sturrock and Jagdish Tripathy for their help in preparing these remarks. 1 All speeches are available online at www.bankofengland.co.uk/speeches It is an honour to be here at this LSE London Financial Regulation Seminar. My theme this evening is macroprudential policy – the business of ensuring, through regulation, that the financial system can serve the real economy, in good times and bad. Macroprudential policy regimes are the child of the financial crisis; the institutional memory of the mistakes and behaviour that led to the crisis and that had such severe cost. And the LSE has been the scene of many important contributions to assessing what went wrong and to the building of the post-crisis regime, including from central bank governors, past and present. So I stand tonight on the shoulders of giants. But I want to simultaneously keep my feet firmly on the ground – on the practice of macroprudential policy. It’s now part of the framework of economic policy in the UK. Like monetary policy, it has a statutory policy committee to set it – the Financial Policy Committee of the Bank of England. | Bank Rate has been reduced by 4½ percentage points in the past six months. And this month the Bank began a series of asset purchases aimed at boosting the supply of money in the economy directly. In due course, this will act to expand money spending. In its entire 300 year history, the Bank of England has never acted so swiftly or extensively in response to an economic downturn. The second aspect of the required policy response is effective stabilisation of the banking system. The experience of those countries that have most successfully resolved banking problems, such as Sweden in the early 1990s, suggests that that will require uncertainty about the values of some of the more opaque assets on bank balance sheets to be dispelled. It will take many months to audit forensically the true state of those balance sheets and for some of the underlying macroeconomic uncertainty to dissipate. In the meantime governments have to stabilise the banking system by reassuring creditors in order to prevent the risk of either retail or wholesale runs of the kind we saw in the Panic of 2008. They have to subscribe sufficient equity capital – plain ordinary equity – in order to underpin the capital position of banks in the event of future losses. | 0 |
We can certainly expect that data quality and analytical frameworks will continue to improve over time. But our understanding of future crisis dynamics will never be perfect. Far from it. This means that we must be prepared to change course when required and acknowledge errors in judgment sooner rather than later, even if it means re-evaluating wellreasoned positions. This brings me to my second point on agility. Financial crises are inflection points of a cycle which materialise in the least predictable manner. This demands a high degree of agility of policymakers and the financial system to adapt to the new operating reality. Such agility is derived from crisis management frameworks that are well-anchored in clearly defined strategic outcomes and accountability structures, but also flexible enough to respond to a range of conditions. And critically, it requires investing in resources with deep experience and knowledge. Going back to the 1996 Everest expedition, Hall and his team had made every reasonable effort to incorporate comprehensive risk management and contingency planning into the preclimb plan. As things turned south, it became clear that the team was unable to respond quickly to the dynamic situation. Outdated and inefficient radio systems led to a communication breakdown of vital information. Physiological, psychological and technical readiness of some of the climbers was also in question. Their inability to respond fluidly to changing conditions created an overdependence on key resource persons. Combined with lack of experience to deal with a series of new challenges, leaders were incapacitated and team dynamics disintegrated quickly. | Last, but certainly not least, is the element of trust. In the panic and chaos during crisis situations, feeble coordination and communication arrangements will falter easily. This can 2 BIS central bankers’ speeches occur even with well-established frameworks and dynamic resource persons at hand. Communication failures during Robert Hall’s expedition were not caused by the lack of infrastructure or defined channels for information dissemination. It stemmed from a more fundamental issue. Those involved in the final climb were complete strangers until several weeks before. Unfamiliarity among team members generated communication barriers, distrust and uncertainties. This did not engender efforts to create a robust co-dependency and coordination structure to collectively weather extremities faced on Mount Everest. Strong policy frameworks and institutional arrangements only make interagency coordination and communication feasible. But it is entrenched mutual trust, fostered during stable times, that makes them credible in challenging times. Trust ensures that collaboration arrangements, secured in good times, remain firm and functional in the face of crises. Trust nurtures confidence and enables reliance on the competence of others. Without trust and symbiotic crisis networks within and across agencies, a crisis framework offers little more than false comfort during crises. The Bank’s own experience in the management of crises, as well as global reforms that are taking place in this area, continue to be useful in guiding us as we navigate this increasingly demanding policy domain. We have continued to make important progress. | 1 |
The economic theory clearly refers to the fact that the financial system is a relevant factor for economic growth, and the new message, clearly sent by the recent crisis, as the president of the Bundesbank, Weidmann, once said in one of his recent addresses,1 is that there is a need of “well designed regulatory reform”. Otherwise, a financial system which is developed and widely globalized today could become an obstacle for the economic growth. Thus, even though the crisis is still present in our everyday life, the financial institutions have already been facing new banking standards, and the national regulators seek to incorporate them in the national regulation. The debt crisis in the euro area resulted in establishment of new fiscal framework of the European Union and emphasized the need of fiscal consolidation. Fiscal imbalances are not sustainable on a long run, which is a postulate that also applies to the countries of the region, particularly countries where fiscal consolidation is crucial for maintaining macroeconomic equilibrium. Besides the experiences above, during the crisis we also gained many other experiences related to the market sensitivity, the promptness of market response to the changes arising from the development of crisis, and the slow reversible process of regain of confidence among market participants. Lessons and experiences learnt from the crisis should help us face future challenges more successfully. 1 Jens Weidmann, president of the Deutsche Bundesbank, Keynote speech at the Frankfurt Finance Summit, Frankfurt, March 2012. | In periods of high or rapidly rising unemployment, the use of petroleum revenue can be increased, and, inversely, fiscal retrenchment is needed during periods of high economic activity and resource scarcity. 2 It now appears that capacity utilisation in the Norwegian economy may return to a normal level in one and a half to two years – and with a somewhat lower unemployment rate than today. A different path can be met with an interest rate response. Our understanding of the fiscal rule is that the government budget for 2012 or at the latest for 2013 should aim at bringing down petroleum revenue spending to 4 per cent of the capital in the Pension Fund. The scale of petroleum revenue spending – growth in public expenditure – is important for developments in competitiveness, also referred to as the real krone exchange rate, in the long term. But, in the short term, the krone exchange rate can vary widely, and it depreciated in autumn 2008 when capital sought safe havens. This helped Norwegian manufacturing in the first phase of the downturn. Since then, the krone has appreciated considerably. In 2009 and 2010, government petroleum revenue spending shows a substantial increase and foreign investment via the Pension Fund a decrease. This leads to higher commercial demand for the Norwegian krone which directly contributes to its appreciation. | 0 |
With the introduction of changes in the Board of Investment’s criteria for investment privileges, the government has geared up its effort in promoting high value added industries. It also announced Special Economic Zones in order to facilitate the growing networks of production, trade, and services initially with our neighboring countries. By expediting growth-enhancing infrastructure development and increasing ease of doing businesses, the government also helps promote crowding-in of private investment. Fiscal reforms are also in the pipeline in order to boost efficiency of the public spending, revenue collection, and other public administration. Reforms of state enterprises will also be vital to upgrading the country’s growth potential as they manage strategic assets of the country, and account for a large share of public capital expenditure. All in all, our car needs an engine overhaul. The government’s recent initiatives form an important part to uplift the car’s engine. In the meantime, I can assure you that we have a good suspension system to get through a bumpy road of market volatility ahead. Ladies and gentlemen, At this juncture – during which Thailand is going through multi-dimensional reforms – the Bank of Thailand will do our part to safeguard stability, support the economic recovery, and facilitate long-term structural reforms. 1 4 El-Erian, Mohamed A. “Navigating the New Normal in Industrial Countries.” Per Jacobsson Foundation Lecture. 10 Oct. 2010. Web. <https://www.imf.org/external/np/speeches/2010/101010.htm#P12_100>. BIS central bankers’ speeches There are three main elements of our policy navigation that I would like to share with you this morning. | Indeed, this is in line with the principles of Maqasid al-Shariah (objectives of Shariah). Financial innovation, as has been shown in the recent crisis has led to adverse consequences for the economy. By learning from the lessons of the recent crisis, the process of innovation in the formulation of Islamic financial products and services must be done carefully and in accordance with Shariah in its entirety and to take into account the distinct risk characteristics of Islamic banking. The second dimension is on the need for continuous investment in human capital development. It is important for the Islamic financial services industry to continually promote human capital development and expertise to create a larger pool of experts and high calibre professionals. This involves enlarging not only the existing talent pool, but also building a robust pipeline of skilled human resources for the future. Bank Negara Malaysia is committed towards promoting human capital development. The establishment of the dedicated ancillary institutions such as the Islamic Banking and Finance Institute in Malaysia (IBFIM), the International Centre for Education in Islamic Finance (INCEIF) and the International Shariah Research Academy (ISRA) to focus on the area of training, education and research are aimed to meet this objective. We would like to see a higher degree of engagements by the financial institutions to meet the talent need of the industry. Islamic financial institutions are encouraged to collaborate and engage with these educational institutions, with exchange of staff, attachments, and internships. | 0 |
“The Credit Rating Crisis”, NBER Working Paper, 15045. Freixas X., Parigi B. and J. Rochet (2000). “Systemic Risk, Inter-Bank Realtions and Liquidity Provision by the Central Bank”, Journal of Money and Credit Banking, 32(2). BIS Review 97/2009 3 Morgan D. (2002). “Rating Banks: Risk and Uncertainty in an opaque Industry”, American Economic Review, 92(4). Rochet J. (2008). “Liquidity Regulation and the Lender of Last Resort”, Financial Stability Review, Banque de France, February. 4 BIS Review 97/2009 | Instead, monetary policy affects the economy as the current change in short-term interest rates and expectations about future monetary policy changes influence financial market conditions more broadly. Developments in financial market conditions are thus an important element in the transmission mechanism of monetary policy to the economy. Changes in financial market conditions influence economic growth through a number of channels. For example, a stronger equity market raises household wealth and lowers the desired personal saving rate – lifting consumer spending. A stronger equity market also reduces the cost of capital for business, which may help encourage greater investment spending. Lower long-term interest rates push down business financing costs, which also supports investment spending. At the same time, lower mortgage rates support housing demand and reduce household interest outlays. A weaker dollar supports growth by making imports more expensive and by increasing export competitiveness. The combined effect is to increase net exports. If the linkage from the federal funds rate to financial market conditions were stable over time, there would be no need to focus on financial market conditions. In a world in which the linkage was solid and unchanging, adjustments to the short-term interest rate and communication about future policy would have a predictable and reliable effect on financial market conditions. Central bankers, then, could keep their focus narrowly on their policy rate. However, as has been very clear, especially in recent years, this linkage is not stable. | 0 |
A “ratcheting-up” of risk within the banking sector can occur over time, creating increasing vulnerability. 17 Low interest rates also encourage a higher level of leverage. Because financial intermediaries – whether banks, broker-dealers, shadow banks, or hedge funds – finance themselves with short-term liabilities, central bank decisions on the level of short-term rate affect their marginal price of leverage. As a result, the behaviour of financial intermediaries – which, by their nature, have high levels of leverage – can be strongly influenced by even small changes in short-term rates. 18 Low levels of interest rates encourage higher levels of leverage and, as a result, an accumulation of additional risk on bank balance sheets. Through all these channels, a prolonged period of low short-term interest rates can support the accumulation of risks and financial imbalances on the balance sheets of both financial intermediaries and the private sector. These imbalances render the economy vulnerable to financial crises: if confidence evaporates, lenders call in loans, balance sheets contract and a painful readjustment is required, with adverse implications for financial stability and the real economy. In particular, the build-up of leverage within the financial sector may unwind abruptly, leading to a tightening of overall financing conditions. 19 Such thinking sheds light on recent developments in the run-up to the financial crisis. Viewing the impact of globalisation on goods prices as the manifestation of a positive supply shock, we can map this abstract scenario into our experience of the past decade. | In this account, failures of financial regulation and supervision – rather than of monetary policy – lay at the heart of the crisis. 1 Yet an influential body of opinion takes an opposing line, claiming that an overly accommodative monetary policy – at the global level, and perhaps especially in the United States – was among the key causes of the crisis. 2 Its advocates argue that short-term interest rates were kept “too low for too long” following the bursting of the dot-com bubble at the turn of the century, and led to the economic imbalances that ultimately threatened the financial and macroeconomic stability of the world economy. The truth probably lies somewhere between these two extremes. No doubt financial regulation and supervision were weak. No doubt price stability is necessary but insufficient per se to achieve financial stability. Yet there is also no doubt that a monetary policy which turns out to be too lax to achieve price stability is likely to be responsible for fuelling excessive credit growth and thereby creating the potential for financial instability. There is substantial literature explaining this relationship, on which I will not elaborate further. 3 1 See: B. Bernanke (2010), “Monetary policy and the housing bubble”, speech at the 2010 AEA meetings http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm. 2 For a response to Bernanke (2010), see: J. Taylor (2010), “The Fed and the crisis: A reply to Ben Bernanke”, Wall Street Journal (11 January). | 1 |
The conduct of CCPs depends on clarity and certainty. A regime that does not provide the same certainty as that set out in CCP rules runs the risk of undermining the very reasons why international leaders have placed CCPs at the heart of the response to the financial crisis. Conclusion To conclude. Anniversaries are not always milestones to celebrate – and the anniversary of the failure of Northern Rock is a case in point. But even where the lessons of the past were painful, their anniversary provide a chance to step back and consider whether they have been learned. The lessons of the crisis, of course, go much wider than resolution. The first defence against bank failure is to ensure that banks are properly capitalised to withstand losses and continue to serve the real economy. A vast amount of work has been done over the past 10 years to put in place capital and liquidity standards and stress testing regimes to ensure a much safer and stronger banking system. Resolution should be seen as an integral part of making the financial system safer and stronger. Credible resolution regimes that impose losses on shareholders and investors, rather than taxpayers, when things go wrong will incentivise banks to manage their risks properly. | 1 Such liquidity may be secured against a wide range of collateral, building on the collateral eligible in Sterling 2 Monetary Framework operations. The Bank’s objective would be to provide liquidity in sterling or foreign currency as required, in the necessary scale and for a sufficient period of time to allow the firm to make the transition to market-based funding. The terms would be set in a way designed to support the effectiveness of the resolution regime, incentivise the transition of the firm back to market-based funding, and protect public money. Confidence in the regime for the resolution of international banks is of crucial importance to the UK. We are home to a number of major international banking groups. But equally, if not more important, we are host to a very large number of foreign banks, many of which have sizeable wholesale market operations in the UK. As the leading international financial centre, we import considerable risks from other jurisdictions. It is therefore crucial to financial stability in the UK that we can rely on foreign banks operating in our jurisdiction having viable resolution strategies in line with international standards. Absent such assurance, we would need to ensure the entities operating here have greater resilience locally. Non bank resolution It was the failure of systemic banks in the crisis that exposed the lack of an effective resolution regime. | 1 |
They are increasingly a source of finance for UK businesses. However, the ‘dash for cash’ in March 202011 led to a rapid deterioration in the functioning even of advanced-economies’ government bond markets and created market dynamics significant enough to raise the cost of lending. The episode clearly demonstrated the need to build resilience in market-based finance. 12 Given the global nature of market-based finance, the effectiveness of any policies in the UK will depend in part on policies implemented in other major jurisdictions. We are therefore working with international counterparts in the Financial Stability Board to take coordinated action to address these issues – including on open-ended funds, margins, the liquidity structure and resilience of core markets, to name a few. In the meantime, the FPC (and other UK authorities) need to continue monitoring them, starting by ensuring there is reliable data to do so. 2.The growth of cryptoassets and decentralised finance: regulatory frameworks need to evolve Another important challenge is seen in cryptoassets and decentralised finance (DeFi) which in recent years have grown to represent around 1% of global financial assets.13 Cryptoasset technology is creating new financial assets, and new means of intermediation. Many services now facilitated by this technology mirror those available in the traditional financial sector, including lending, trading and exchange, investment management and insurance. While that activity is currently small, if the pace of growth seen in recent years continues, interlinkages with the traditional financial sector are likely to increase. | So, even without any improvement in the trade deficit, the growth of final domestic demand will have to moderate to prevent GDP growth rising above trend and putting pressure on the supply capacity of the UK economy. Indeed, if the trade deficit is to be reduced, then domestic demand growth will have to fall below the growth of total output for a while. So by the time of the September MPC meeting much had changed from earlier in the year. New data showed that final domestic demand was growing faster than expected. The data on the housing market – for the UK as a whole not just the South East – as well as credit indicated that the strong consumption growth over the past year might persist. And house prices, I should add, enter our decisions, because of their implications for future consumption, not because we are trying to target house or indeed any other asset prices. Unemployment was still falling: the Labour Force Survey measure of unemployment had reached its lowest rate since the series started, while the claimant count had fallen to its lowest level since 1980. The Bank’s regional Agents had also noted tightness for both the skilled and unskilled. Oil prices had risen sharply during the year. These factors led a majority of the Committee to vote for a modest rise in interest rates of twenty-five basis points in order to keep inflation on track to meet the 2½% target. The task now is to continue looking ahead. | 0 |
Should the impact of the pandemic on household and corporate income be much greater than currently assumed, it could trigger a price correction in the real estate market. Equally, such declines in income could lead to a materialisation of the historically high affordability risks. Both of these developments would negatively affect the quality of the banks’ mortgage portfolios. Given these challenges, the available capital buffers of the domestically focused banks are a crucial element for their lending capacity and loss-absorbing capacity. The SNB’s scenario analysis indicates that, in aggregate, domestically focused banks would also be in a position to absorb the losses incurred under significantly more adverse conditions than assumed in the baseline scenario. Use of cash This brings me to the last section of my speech in which I will talk about the impact the coronavirus pandemic is having on the use of cash. There are currently two main developments. For one, banknote circulation in Switzerland rose sharply during the first wave of the pandemic in spring. This increase was mainly driven by the demand for large denomination banknotes and indicates an increased desire to hold reserves in the form of cash. Second, available data on card payments and cash withdrawals from ATMs suggest that for payment purposes, cashless methods are currently being used more than prior to the pandemic, while cash is being used less. Following the easing of containment measures, the amounts paid with cards have risen above their pre-crisis level. | Against this background, the capital situation at Credit Suisse and UBS has improved slightly since the first quarter. Looking ahead, the two globally active Swiss banks remain well placed to face the challenges posed by the difficult environment. An increase in provisions is likely in the coming quarters as a result of the expected deterioration in credit quality. Under the baseline scenario, however, the SNB estimates that the financial impact of the coronavirus pandemic on Credit Suisse and UBS will remain limited. Furthermore, the SNB’s scenario analysis shows that, thanks to their capital buffers, both banks could also cope with significantly worse developments in the economic environment than are assumed in the baseline scenario. At the same time, this analysis shows, however, that the estimated loss potential under stress scenarios at Credit Suisse and UBS continues to be substantial. Moreover, uncertainty about the future course of the pandemic and thus about the financial impact on the two globally active banks remains high. Both factors underline that the capital requirements under the current TBTF regulations are necessary to ensure adequate resilience at these two banks. Domestically focused banks I shall now turn to the domestically focused banks. Here too, there has been little change in the situation since the Financial Stability Report was published in June. These banks’ financial figures and risk indicators are still showing scarcely any effects of the coronavirus pandemic. | 1 |
These steps include the necessity to accelerate the potential GDP growth in the European Union and Japan through reforms of the labour market and the product market, increasing savings in the US by curbing the budget deficit, and reforms of the financial sector in China and subsequent gradual floating of the renminbi exchange rate. The central bank must consider possible scenarios of developments in the global economy and possible adjustments of global imbalances, as they significantly impact the perspectives of a national economy, and so the monetary policy pursued. Moreover, the central bank, as an institution that manages foreign exchange reserves, must monitor changes on the global financial market, as these changes and investment decisions made by the central bank influence the return on foreign exchange reserves. 5 This thesis was advanced, among others, in the frequently quoted work: M.Dooley, D.Folkerts-Landau, P.Garber “An Essay on the Revived Bretton Woods System“, NBER Working Paper 9971, September 2003. 2 BIS Review 57/2006 Re 2) Globalisation changes the wage and price setting mechanisms in a domestic economy. This ensues from the increased international competition and the growing role of outsourcing and offshoring. Offshoring consists in transferring of manufacturing, services or orders abroad, where such transfer may be made within a single company or to another company. Outsourcing consists in renouncing manufacturing or services in a given company and obtaining such goods or services from another company that may be located in the same or another country. | Mr Lee examines some of the major themes for strengthening the global financial system against the background of the financial crisis in Asia Opening address by Mr Lee Hsien Loong, Chairman of the Board of Directors of The Monetary Authority of Singapore and Deputy Prime Minister at the fifth meeting of Finance and Central Bank deputies on the Manila Framework at Shangri-La Hotel on 29 August 1999. * * * Introduction I am happy to address the Manila Framework Group. Prospects for the region have brightened considerably since your inaugural gathering in November 1997, in the depths of the regional economic turmoil. The worst of the crisis is now well past. Most of the crisis-countries are seeing growth again. Investor sentiment, while edgy, is generally upbeat. Equity markets have surged, some beyond pre-crisis levels. Currencies have stabilised; indeed some governments have had to temper the appreciation of their currencies. But financial markets are notorious for their short-term memories. An upturn does not necessarily mean that basic problems have been solved. It remains important for financial regulators and policymakers to remain mindful of the lessons thrown up by the crisis and to tackle them before another storm blows up. No two Asian economies are the same. During the crisis, hardly any were spared the panic and contagion. But how each was struck, how external problems interacted with internal weaknesses and how each government responded, varied from country to country. These diverse experiences offer rich materials for study and contrast. | 0 |
As a supervisor and regulator, I have a duty to households and businesses in the UK to preserve financial stability – to protect the UK economy from disruption. So I need to know on an ongoing basis that large CCPs on which the UK financial system relies are robustly regulated and supervised. But that should not necessarily mean I have to do the supervision of non-UK CCPs myself. Indeed if every host authority supervised every CCP that offers services to its banks and other financial institutions it would be untenable. We cannot have 21 different regulators’ hands on the steering wheel when it comes to critical cross-border infrastructure. That would hardly be a good result for financial stability - especially in a crisis, where clear and quick decision-making is critical. The solution is proportionate and informed reliance.8 Informed reliance means that, with sufficient information and a deep cooperative relationship with the home supervisor, I can defer to them to ensure that a CCP is as safe to operate in UK as those I regulate and supervise directly. Proportionate means that for cross-border CCPs that are very important to the UK financial system, I will need more information and even 7 8 BoE calculations. Principles for Financial Market Infrastructure Responsibility E on Cooperation. 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 deeper cooperation – and in the event that we are unable to secure this, I may need to resort to supervising the CCP directly. | At the same intensity, we strengthened the cooperation with the International Monetary Fund, the World Bank and the Bank for International Settlements, as well as regional central banks. The Bank of Albania has continued its contribution to the reporting for the Progress Report and the National Plan for European Integration, leading Chapter 4 “Free movement of capital” and Chapter 17 “Economic and monetary policies” and contributing in 6 other chapters of the Acquis. x. Human resources Improvement to the organisational structure of the institution has constantly been at the focus of human resources policies, with the main aim to enhance the efficiency of the activity of the Bank of Albania. It seeks to provide a better coordination and communication between the units, especially the successful implementation of engagements arising from strategic objectives and the approximation with the model of the European System central banks or the European Central Bank. The policies in the area of human resources have aimed at promoting the most experienced and proficient employees, through a professional competition. Staff motivation policies have aimed at preserving the stability and continuity of staff. Particular attention has been paid to observing gender equality. The professional development of the staff is realised, among others, through participation in specialised training organised by central banks or international financial institutions. In addition to enhancing professional capacities, there are also possibilities for the exchange of professional experiences and familiarisation with the most contemporary central bank theories and practices. BIS central bankers’ speeches 7 xi. | 0 |
It has attracted much attention here and abroad and I thought I will end off with a quick 9 / 11 BIS central bankers' speeches progress report on what has been happening in the sandbox. The sandbox basically provides a conduit for both regulated and unregulated firms to engage MAS with innovative ideas and proposals. Since its launch in June 2016, MAS has provided guidance to more than 140 firms and individuals. We have received more than 40 sandbox applications, covering a broad range of financial services and technologies. The services offered include investment management, broking, crowd funding, cross-border funds transfer, insurance, and financial advisory. We see interesting applications of big data, distributed ledgers, machine learning and artificial intelligence, to increase efficiency or derive new insights. Of the 40 over applications we received: Nearly half withdrew their applications for various reasons, exemplifying the fluidity of innovation and the natural volatility in the business of start-ups. About a third proceeded without the need to be tested in the sandbox. We take this as a positive reflection of our existing regulations, which provide sufficient flexibility for innovative models while safeguarding against risks. It is not necessary that innovation needs to happen only in a sandbox. The remainder of the applications—about one in five—were approved or are under review. To cite a few experiments in the sandbox: Kristal Advisors, is experimenting with machine learning to determine and recommend suitable investment portfolios for its customers. | Maintaining financial stability and trust are central to MAS’ mission. The annual report summarises our many regulatory and supervisory initiatives – to make derivatives markets safer, to enhance cyber security, to promote a good risk culture in our financial institutions. The annual report also devotes two pages of infographics to the enforcement actions MAS has taken against those who breach our regulations or fail to meet our standards. MAS does not tolerate: abuse of our financial system for money laundering or tax evasion; misconduct or manipulation in our securities markets; or mis-selling to consumers who place their trust and money in our financial institutions and their representatives. But being a no-nonsense regulator does not stand in the way of being also businessfriendly. For financial institutions who want to grow their business in Singapore, build up the skills of their employees, or want to innovate or experiment with new technologies, MAS is a happy partner and collaborator. 1 “The Goldilocks Economy – Will the Three Bears Return?”, Speech by Mr Ravi Menon, Managing Director, Monetary Authority of Singapore, at UBS Wealth Insights Conference, 15 January 2018. 11 / 11 BIS central bankers' speeches | 1 |
This step was necessary at this time to stop the turmoil in Turkey’s financial markets and calm depositors’ nerves. Now, as we all know, the 100 percent coverage may subject both bankers and depositors to moral hazard in the form of willingness to take greater risks to earn higher returns. Depositors may encounter moral hazard when they ignore greater risks associated with their choice of a depository institution which offers them higher rates for their deposits. But even though all the drawbacks of the present system of deposit protection are well known, current conditions in the world financial environment and their effects on the Turkish financial system have prevented us from making the necessary changes in the existing deposit insurance scheme just now. Once we manage to stabilise the macroeconomic environment, we will be able to reduce the 100 percent coverage to internationally acceptable levels. BIS Review 31/1999 4 How a powerful and effective supervision could be implemented for the Turkish banking system was foreseen many years ago. The system in effect during the 1930s had revealed its inadequacies, but the first step was not taken until 1959 with the establishment of the Board of Sworn Bank Auditors. The system was first applied to the Turkish economy under the direction of the Ministry of Finance. The Board recruited many valuable employees, trained them, and gained the power to supervise the system. | A soft landing after one of the sharpest upswings ever would represent a success confirming beyond all doubt that the Icelandic economy is highly adaptable and can respond more quickly than larger and more cumbersome systems, and that the largest investment in the country’s history followed by restructuring of the banking sector and housing market has not proved too much of a challenge for economic policy. It would be going to far to call such an outcome a miracle, but it would certainly be satisfying. Because over this same short period, enormous assets have been built up in Iceland. The infrastructure of the economy, and know-how within it and in the main business sectors have all strengthened, and Iceland’s competitiveness and potential for expansion at home and abroad have improved enormously. The old cliché of Iceland’s undiversified economy which also happened to be a fact is a thing of the past. | 0 |
The minutes of the monetary policy meetings are published after a time and record our discussions in outline, besides containing information about how each of us voted. We have deliberately refrained from labelling what we say at the meetings with our names. We believe that would not work very well; the discussion would presumably be more premeditated than one would wish. But even with the system we have chosen, there is presumably a risk of jeopardising the spontaneous exchange and testing of ideas. Our joint communication about monetary policy issues takes the form of the Inflation Report and the press notices and communiqués that are issued after the meetings. We also have an arrangement whereby one of us is entitled to speak for a majority of the Executive Board. An announcement to that effect is made and to date it has happened only when the Governor meets the Riksdag’s Standing Committee on Finance. At the press conferences on monetary policy, moreover, the Governor and myself, as the member responsible for the preparation of material, speak on behalf of the Board. Our procedure clearly entails risks. The media may focus most of the time on differences between our views, which could harm the Riksbank’s image and possibly also create internal problems. While that has generally not been the case, our system is vulnerable. It would not be difficult for a Board member to act in such a way that ‘conflicts at the Riksbank’ hit the headlines. | Perhaps I should add that we do have a rough idea of the level of the exchange rate that seems reasonable in the longer run. We have not intervened since the occasion during the financial turbulence in 1998 when the krona weakened in a way that both then and in retrospect seemed unreasonable. Assessments of the coming 1–2 years are crucial It takes time for monetary measures to affect inflation. Some effects of an interest rate adjustment may indeed occur very quickly. The stock market, for instance, is influenced as soon as an adjustment is announced and this can have immediate consequences for household consumption, for example, and thereby a quick impact on certain prices. Monetary policy can also elicit exchange rate movements and quickly affect prices for exports and imports. Normally, however, there is a time lag between monetary measures and their effects. For example, an interest rate hike leaves households with less money for other expenditure and also reduces the return on investments. By gradually influencing consumption and investment, this leads in time to changes in total demand. With weaker demand, firms then have more difficulty in raising prices and that leads to lower inflation. Interest rate adjustments accordingly affect inflation through a variety of channels that economists refer to as the transmission mechanism. We know more about some channels than we do about others. It is not clear just how long it takes for the effects to materialise. | 1 |
While controversial, the implementation of a single EU risk-free asset would likely become a common benchmark, allowing the prices of equities and bonds across the euro area to reflect fundamental risk more clearly, enhancing the effectiveness of monetary policy and fostering the attractiveness of European capital markets. A safe asset would also help mitigate the bank-sovereign nexus, reduce cross-border safehaven flows in the event of crisis and, ultimately, improve financial integration. Of course, we should be cautious to design it in such a way as not to water down the incentives for sound national fiscal policies, which are the essence of achieving safety. 4/5 Let me conclude. Throughout its history, the EU has followed a path towards greater economic and political integration, which has brought clear benefits in terms of economic growth and citizens’ rights. The BU is an important step in this direction and has been key to addressing the euro crisis. Still, the implementation of certain regulatory and institutional elements are needed to reap the economic benefits of an increase in cross-border banking activities. When assessing our capacity to deal with future financial crises, we should not forget that the institutional setting remains incomplete and policy space has been reduced. As memories of the crisis fade, we should strive to avoid complacency. It is often said that in life you should expect the best but be prepared for the worst. | True, some of them had to do with political change and policy uncertainty to the heart of the developed world, but on top of that, major empirical and theoretical puzzles are challenging central tenets of monetary policy. In particular, inflation appears not to be responding to monetary policy as expected in advanced economies. Despite record- low interest rates over many years and massive liquidity injections by central banks through asset purchase programs, inflation has not picked up as expected. Explaining the apparent unresponsiveness of inflation has become a theoretical and empirical challenge that has drawn great attention from academia and policymakers in the last couple of years. Inflation dynamics and the way they interact with other economic variables are, of course, crucially important to central banks that have price stability as their core mandate. Most of them currently deliver on this mandate under a forward inflation targeting framework, whereby the stance of monetary policy seeks to achieve convergence of forecasted inflation to the target over a medium-term horizon. This prevents central banks from having to respond to short-term price volatility, but if inflation does not respond to monetary impulses as predicted by models, policymaking may become a much more complex game. If price responses get delayed in a highly accommodative environment, financial imbalances may build up, fiscal discipline may be eroded and inflation risks may get underpriced by markets, exposing themselves to reversals with data surprises in the future. | 0 |
This is how best to deal with common shocks to global safe and risky yields. One striking feature of the past few years has been the extremely high correlation among asset prices globally, in particular among advanced economies. This is true of both “safe” rates of return on government assets and “risky” rates of return on private assets (Chart 20). In either case, correlations are extremely high, hovering around 0.9. This begs a number of questions, both research and policy. What is the root cause of these correlations? One possibility is portfolio shifts by global asset managers, allocating their portfolio on an asset-by-asset basis. If so, what implications does this carry for national monetary and macro-prudential policymakers, seeking to steer safe and risky rates respectively? Do high global correlations strengthen the case for international co-ordination of monetary and macro-prudential policies? There may be greater scope to co-ordinate macro-prudential tools. One way of doing so is to develop macro-prudential instruments which operate on an asset-class basis, rather than on a national basis. This would be recognition that asset characteristics, rather than national characteristics, may be the key determinant of portfolio choices and asset price movements, perhaps reflecting the rising role of global asset managers. There has already been some international progress towards developing asset market specific macro-prudential tools, specifically in the context of securities financing transactions where minimum collateral requirements have been agreed internationally (FSB (2014)). | I am confident that we will continue, with the same intensity, our joint efforts to integrate this very important factor into the Albanian economy at the fastest and broadest extent possible. 2/3 BIS central bankers' speeches Thank you! 3/3 BIS central bankers' speeches | 0 |
The Treaty was ratified by the parliaments and governments of all Member States of the European Union and in some cases endorsed by referendum. Thus the delegation of European monetary policy to the ECB is endowed with full democratic legitimacy. This bond of legitimacy is a crucial aspect of sound institutional foundations for monetary policy. There is no doubt that in order to be successful over the longer term, the ECB as the guardian of price stability - like any institution in a democracy will have to win and maintain the trust and support of the European public. It can and should be held accountable for fulfilling its mandate. This mandate is clear, but it is also limited. It needs to be understood what monetary policy can be expected to deliver, but also what it cannot be expected to achieve. This is particular important in the case of the European Monetary Union, which not only delegates the authority for monetary policy to an independent central bank but which also severs the traditionally close link between the currency and the nation state. Historically, currency jurisdictions and national borders have tended to coincide, at least in more recent times. This reflects the fact that the right to issue money has been seen as a key attribute of national sovereignty. Thus monetary union cannot be regarded as just a small and innocuous step of a primarily technical nature. | I must admit that, as a central banker charged with setting official interest rates, I have difficulties to accept this particular to my mind unfounded - belief, even if the authority in question was claimed to be Aristotle or the Bible, both of which I am quite happy to consult on other matters. 3. Credibility: the role of rules and institutions The weight of historical experience, a large body of theoretical literature and of empirical evidence point to the importance of price stability as the foundation of a well-functioning market economy and as a precondition for durable growth and prosperity. Nevertheless history is littered with episodes of high inflation which imposed high economic and social costs on society. To be sure, at times the importance of the common and precious good of price stability may have been underrated or forgotten by society. At other times stability may have been purposefully compromised in the pursuit of other seemingly more pressing objectives. However, the main lesson that I would take away from history is this: when it comes to price stability, good faith and honest intentions are not enough. Fundamentally, money represents a promise. It requires trust by the users of money in the issuer of money to honour this promise. Money is built on trust, but in turn trust must be built on solid foundations. The promise must be made credible and this - at least in relatively modern times - is the job of central bankers. A promise always concerns the future. | 1 |
Moreover, it is quite possible that pass-through may exceed 100% if companies making domestically produced goods and services are able to use the increased competitiveness associated with sterling’s depreciation to widen their margins.10 So there are a number of potential channels through which developments abroad may affect domestic inflation. But to repeat a point I made up front: inflation is home made. If we think that global price pressures are likely to push up on CPI inflation for an extended period, UK monetary policy will need to be set in such a way as to reduce domestically-generated inflation, and so leave room for these external price pressures. And to respond to an argument I have seen made by a number of commentators in recent months. No: raising Bank Rate will not directly dampen global inflation. But it can ensure that it does not lead to high and persistent domestic inflation. The second upside risk to inflation that I would highlight is if the prolonged period of above target inflation erodes the public’s confidence that the MPC will keep inflation close to target. Inflation has been above target for 49 out of the past 60 months. Over that 5 year period, inflation has averaged 2.8%. Inflation is likely to remain above target for the next year or so. This suggests that by mid 2012, inflation is likely to have been above target for the best part of six and a half years. | Taylor, J (2007) “Globalisation and monetary policy: missions impossible”, NBER Conference on the International dimensions of monetary policy, Girona, Spain, June. Taylor, J (2008), “The impacts of globalisation on monetary policy”, Banque de France, International Symposium: Globalisation, inflation and monetary policy, March 2008. 10 BIS central bankers’ speeches | 1 |
Beside this I will try, by asking questions, to make you reflect for a moment on some simple ideas. For example, one of the questions to which I am looking for an answer is whether we have in the past consistently checked our progress in transition not only against other countries or international standards, but against what must be the ultimate goal of the transition process - increasing the wellbeing of the people. My lecture is divided into three parts. First, I will try to answer a simple question: What is transition all about? The second part will discuss what the main “ingredients” are in the process of achieving rapid and sustained growth and will focus on human and social capital. In the third part I will discuss some obstacles to transition the way I see them, which means as a central banker. I will end by summing up my remarks. 1 I would like to thank Mr. Boris Vujcic and Mr. Gary O’Callaghan for their suggestions while preparing this lecture. The usual disclaimer applies. 1 BIS Review 43/2000 1. What is the transition process all about? Numerous researchers have analysed in depth the transition process in terms of speed of reforms, their sequencing, results and possible outcomes, but rarely do we ask ourselves the simple questions like: Why has transition started and why are we involved in it? Without elaborating the answer in detail, let me offer just one possible answer. | The second crisis occurred in banks founded after changes in the economic system that were not able to remain viable, because of either weak management and/or increased competition in the market as the transition period progressed. Croatia followed that pattern. The first banking crisis, the crisis of the old banks, as they were called, started with the beginning of the transition process (and even before it), and is even now ending with the sale of the rehabilitated state banks to foreign strategic investors. The costs of this crisis, brought about by the legacy of the past and as is too often forgotten, by the enormous consequences of the war, can be estimated at about 23% of GDP. These high costs are typical of countries caught up in a war, like Kuwait and Israel in parts of their histories. During the first half of 1998 the second banking crisis became visible in Croatia. The then government made a decision to rehabilitate two banks which represented about 7% of the total banks’ balance sheet. Bank rehabilitations are payed out of the budget. The Croatian National Bank required that bankruptcy proceedings be started in nine banks and four savings banks, while it withdrew the operating permit from one branch of a foreign bank, one bank and six savings banks. This has imposed high budgetary costs for the payment of insured savings deposits in banks in which bankruptcy proceedings have been started. The total costs of the second banking crisis could be estimated at about 4% of GDP. | 1 |
Without formal supranational solutions in place, it is all the more important to ensure cooperation between the central banks and supervisory authorities involved. The fact that a large share of the financial institutions in the new EU member countries are foreign-owned makes this issue even more relevant. In June 2003, the governors of the Nordic central banks signed an agreement on the management of a potential financial crisis in a Nordic bank with activities in two or more Nordic countries. The agreement contains procedures for the coordination of crisis management between the central banks. The Nordic supervisory authorities have drawn up a similar cooperation agreement. One particular problem in the Nordic region is the differences in the countries’ deposit guarantee schemes. The different schemes vary both with respect to guaranteed amount and type of deposit covered. However, these differences are also widespread across Europe and some convergence of rules and operating procedures is certainly long overdue. What instruments are available to secure financial stability? Monitoring and analysis of the financial system result in an assessment of the current situation regarding financial stability. This leads to the question: what instruments are available to enforce and secure financial stability? We can distinguish between preventive measures and measures for crisis resolution. Of relevance to the latter is the role of the central bank as the lender of last resort. In some countries this role was the main reason for establishing the central bank in the first place. | Clear and concise communication, verbally or in writing, from the authorities to the public on risk factors they consider to be the most pressing could also be used as an instrument in the event of 6 For further discussion, see Houben, Aerdt, Jan Kakes and Garry Schinasi (2004). “Toward a Framework for Safeguarding Financial Stability” IMF Working Paper, No. 04/101 4 BIS Review 34//2005 rising financial imbalances. For central banks, a suitable arena could be financial stability reports, an increasingly common publication. These reports can be described as a signalling device. However, there are limits to how effective signalling and information can be in curbing financial imbalances. Fiscal policy also contributes to financial stability, for example through a stable tax system built on well-founded economic principles. Some have argued in favour of counter-cyclical changes in the tax system, for example adjustments in tax deduction on interest rate expenses or property tax. However, such changes can prove to be difficult to adopt and implement for institutional and political reasons. Financial stability and monetary policy In recent years, the relationship between monetary policy and financial stability has received increased attention. Monetary and financial stability are two intermediate goals for public policy. In my view, these goals are often mutually reinforcing. Financial stability has a positive influence on price stability. First, it promotes a stable credit supply and capital flow, which is crucial to balanced economic development. Second, financial stability supports the transmission mechanisms of monetary policy. | 1 |
Mr Yam presents the 1998 Hong Kong Monetary Authority’s annual report Speech by the Chief Executive of the Hong Kong Monetary Authority, Mr Joseph Yam, on the occasion of the presentation of the 1998 HKMA annual report before the Legislative Council Financial Affairs Panel in Hong Kong on 3 May 1999. Introduction Mr Chairman, Honourable Members, I am most grateful to you for giving me this opportunity to speak to you on the occasion of the publication of the HKMA’s Annual Report for 1998. The Report is tabled at this meeting of the Financial Affairs Panel; it is also being distributed to all Members of the Legislative Council this morning. This Report covers the full range of the HKMA’s work for the calendar year 1998, in addition to giving an assessment of the economic and banking environment for the year. I have no need to remind Members that 1998 was, to put it mildly, an eventful year. The Report sets out the many problems and challenges that the HKMA has had to grapple with during the course of the year, and explains what actions and initiatives the HKMA has been taking to address them. You are all familiar with these issues, and you have the details before you. So I do not wish to take up too much time with a long description. My main focus in this presentation will be on the challenges for the HKMA in the coming year, particularly in the light of current economic trends. | But what we clearly did is to give the financial and economic sectors visibility over our monthly purchase volume for the whole of 2017. 2. What are the challenges facing the finance industry and how should we tackle them? A healthy financial sector is key for a robust economic recovery. I’d like to remind you of the significant progress that has been made in this area since the financial crisis. We shouldn’t judge the European financial sector only on the basis of its difficult cases, or those “trailing at the rear”. On average, the sector is now far more resilient than before the crisis. This is the result of considerable work carried out to strengthen regulation and to harmonise supervision in the euro area, notably with the Banking Union which is a significant step forward. It also comes from the industry’s remarkable efforts: European banks are now in a much stronger position than a decade ago, in terms of capital, liquidity or risk-taking. Regarding their capital for instance, the 2/9 BIS central bankers' speeches Common Equity Tier 1 ratio of significant euro area banking groups has risen from less than 7% in 2008 to more than 14% today. Overall, banks are now less risky, and investors should take into account this progress by reducing their expected rates of return: banks’ cost of equity should go down. However, while solvency has improved, there is still one challenge facing European banks: profitability [slide 4]. | 0 |
The insurance protection gap is widening inexorably: • Close to half of the world’s most underinsured countries are in Asia, and of these, half are in Southeast Asia. BIS central bankers’ speeches 1 • In the past two decades, Asia has borne 50% of the estimated global economic cost of natural catastrophes. Yet, less than 5% of all disaster losses in Asia are insured, compared to 40% in developed nations. • The 2008 Sichuan Earthquake is a case in point. Less than 1% of the total economic costs of $ billion were insured. The disaster further left governments and taxpayers with a hefty reconstruction bill of almost $ billion after the event. Going forward, it will also no longer be sufficient to just focus on traditional risks. As Asia continues to grow and become more digitally-connected, new and emerging risks will arise and we should be proactive in adapting to these needs. I would therefore like to challenge the industry to: • raise insurance penetration of traditional risks and find innovative ways to cast the net wider to cover more insureds, and • develop innovative and meaningful risk transfer products for new and emerging risks. Specifically, I would like to highlight 3 key growth drivers for insurers and reinsurers today: • New and emerging risks • New capital • New technology and innovation. | Not only will banks be expected to improve their external transparency, but they will also be expected to operate more transparently internally. In particular, banks will be expected to ensure that the board of directors and senior management are sufficiently well-informed to be able to meaningfully assess the bank’s risk profile. This will place a premium on effective and accurate risk reporting. Likewise, there is an expectation that senior management will communicate effectively to employees their responsibilities with regard to the effective management of risk. Finally, Basel II will enhance clarity by promoting international co-operation between supervisors. International banking organisations have grown increasingly complex over the years, to the point that in some cases it can be very difficult for supervisors - and even for bank management - to have a clear understanding of their global risk profiles. This highlights the need for effective supervisory co-operation for such organisations. Effectively combining the necessary supervision at the local level in the host country with effective supervision at the consolidated level in the home country requires more thorough exchange of information and better knowledge of financial instruments and links within financial groups. This will heighten supervisory understanding of banks’ activities and will promote consistency in the implementation of standards, a level playing field and the reduction of unnecessary regulatory burdens. Next steps While I have focused my remarks on the new capital framework, I would like to emphasise that corporate governance is much broader than Basel II. | 0 |
The authorities thus received constant feedback on key indicators affecting national economic performance and could react accordingly. These indicators were sensitive, multiple and very reactive. In contrast to the pre-euro period, a loss of competitiveness will not show up quickly on radar screens like foreign exchange markets, interest-rate markets or the external accounts. As a result, economic managers must monitor the relevant competitiveness indicators with even greater vigilance. The sanctions for economic policy errors could come more slowly and insidiously via rising unemployment and weak growth. The rules of a market economy, especially competition, continue to apply to each economy. Jobs are created by consumers when they choose the goods and services they feel are the best value for money. Businessmen allocate these jobs to various possible locations in various countries according to the relative competitiveness of these locations. It is therefore necessary to monitor competitiveness even more closely than before through indicators such as unit production costs and the tax and regulatory framework. The close multilateral surveillance and the frank discussions provided in the context, inter alia, of the Eurogroup, will help monitor competitiveness trends with a view to ensure early warnings and appropriate reactions. * * * Let me address, in conclusion, two questions: the issue of sustainable growth and the present diagnosis of the Eurosystem as regards the balance of risks. – Growth: Central bankers are sometimes portrayed as being excessively cautious and reserved with respect to economic growth. | 1 Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems 2 Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC 3 Directive 2009/110/ЕC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC 2/2 BIS central bankers' speeches | 0 |
However, policy-making becomes significantly more challenging at times of market stress, when historical regularities cannot be entirely relied upon, while increased volatility blurs the information content of market variables and other indicators. In periods of stress, analytical tools that under normal conditions provide valuable inputs into the information set available for policy decisions may at least to some extent lose their utility. And although comparisons with previous episodes of turmoil may add historical perspective and provide benchmarks for policy actions, spells of financial tensions often resemble each other only to a limited extent. Indeed, when thinking about the dynamics of financial turmoils and crises, one is tempted to recall the Ana Karenina’s opening that “All happy families resemble one another, but each unhappy family is unhappy in its own way.” Indeed, the current turmoil has been “unhappy” in its own way. From its origin in the relatively small sub-prime segment of the US market for mortgage loans to its somewhat unusual dynamics of transmission (for instance, the fact that the current turmoil initially manifested itself in the difficulty for banks, mainly European, to obtain short-term liquidity in the US dollar market), a number of factors have set this episode of turmoil apart from previous experiences. Thus, during the current turmoil we have been less able to rely on standard analytical tools and conventional information sets, particularly in the area of liquidity management. To illustrate this point, let me briefly recall how our liquidity policy normally works. | Evidently the supervisor’s aim must be to ensure that the banking sector is a fortress against the storm and not an added problem that we have to face at the worst time imaginable. 1 Recently, it has been frequently said that the banking sector is in much better shape than it was before the previous crisis. This will allow it to become part of the solution. In any event, crises are, by definition, periods of transition and COVID-19, despite its specific features, will be no exception. I believe this crisis will serve as a catalyst which will speed up many of the trends that we have already seen and discussed on many occasions at our meetings. First, as regards the importance of digitalisation. Second, in respect of the need to gain in efficiency and cut costs. Also, naturally, as regards the criticality of good governance and risk control, underpinned by the best international practices which will allow institutions to react appropriately to such changing circumstances. And, above all, regarding having a sound and sustainable business model for the medium and long term. We do not know what the future holds for us, but what we do know is that the better prepared we are, the better we will fare. Before I conclude, let me apologise for not having made the most of this address to introduce a supervisory “wedge”. | 0 |
C’est pour cette raison que je souhaite attirer en particulier votre attention sur les trois points suivants : - premièrement, l’Union économique et monétaire repose sur des fondations théoriques et économiques solides et profondes qui ont permis une introduction réussie de l’euro sur les marchés de capitaux ; - deuxièmement, la zone euro devra relever un certain nombre de défis si elle veut rester une zone de stabilité monétaire où la croissance est durable ; - troisièmement, le succès de l’euro contribuera largement à l’avènement d’une situation monétaire internationale plus équilibrée. I. L’UEM REPOSE SUR DES FONDATIONS SOLIDES ET PROFONDES QUI ONT PERMIS, IL Y A UN PEU PLUS D’UN MOIS, UNE INTRODUCTION REUSSIE DE L’EURO SUR LES MARCHES DE CAPITAUX Le 31 décembre 1998, les chefs d’État et de gouvernement ont adopté les taux de conversion irrévocables de l’euro vis-à-vis des monnaies des onze pays qui avaient été qualifiés pour participer à la zone euro. Cette étape historique correspond à l’avènement de l’Union économique et monétaire. Les progrès impressionnants qui ont été réalisés, en matière de convergence économique, dans les années qui ont précédé cette décision, ont contribué de façon déterminante à ce processus. Afin de donner une orientation aux marchés de capitaux, la méthode de détermination des taux de conversion irrévocables de l’euro avait été décidée à Bruxelles, le 3 mai 1998. Au total, c’est une idée tout à fait fondée qui est à l’origine de la création de l’euro; en outre, cette création constitue le couronnement d’un long processus économique et politique (A). | First, there were too many large financial businesses for which an AAA rating was, fatally, more than a description of their credit standing; it constituted their business model. Examples include Fannie and Freddie; the Landesbanks; the US monoline insurers; the SIVs; and, if they can be thought to have a business model, the ABCPs. These institutions distorted the supply of credit across the global economy. (In the case of the monoline insurers, for structured finance they were effectively in the business of providing “end-of-the-world insurance with a settlement period of T+1”.) An even wider group of private-sector AAA institutions were not required to collateralise derivatives-related counterparty-credit exposures. The effect for the system as a whole was to introduce an extraordinary vulnerability to a ratings downgrade of any of these institutions or structures. There was, in effect, a potentially systemic cliff. A second serious faultline in global capital markets – arguably the greatest – was the firm expectation of “no break the buck” in the massive global Money Market Mutual Fund industry; c. $ in the US, more or less the same size as commercial bank deposits. The failure to pay par at a major US money fund when Lehman collapsed helped trigger the unravelling of confidence across global markets. | 0 |
The growth rate intensified as the year unfolded, rising to a rate of 5.8% at the start of 2005. This acceleration has been driven by a higher increase in private consumption and the renewed buoyancy of construction coupled with a pick-up in investment in equipment. Households’ expenditure has been underpinned by the recovery in their disposable income, which has benefited from higher employment growth and from a comparatively favourable contribution by general government, through the net effect of benefits and taxes. But above all it is the increase in household wealth in recent years - largely linked to the rise in real-estate asset values - and favourable financing conditions which are most underpinning household consumption and residential investment decisions. The behaviour of productive investment has, in recent years, reflected the opportunities and uncertainties of this expansionary phase, many of them related to the external environment. However, business investment progressively took a lead from the robustness of demand during 2004 and it started the current year on a clearly more expansionary path. Lax financial conditions, the healthy position achieved by those corporations with most investment potential and favourable expectations about economic developments are behind this rise. Set against the increase in domestic demand, external demand has exerted an increasingly contractionary influence. Although world trade picked up in 2004, goods exports grew less than external markets, while imports climbed at very high rates, increasing their penetration in the Spanish market. | Inflation and Monetary Policy Outlook Now, I would like to present our inflation and output gap forecasts based on the outlook I have described so far. When forming our forecasts, we assumed that the tight monetary policy stance will be sustained for a while; and consequently, annualized loan growth rate will hover around 15 percent and the Turkish lira will display a mild appreciation trend. Accordingly, inflation is expected to be, with 70 percent probability, between 5.1 and 7.9 percent with a mid-point of 6.5 percent at the end of 2012, and between 3.3 and 6.9 percent with a mid-point of 5.1 percent at the end of 2013. We expect inflation to stabilize around 5 percent in the medium term (Chart 17). Chart 17. Inflation and Output Gap Forecasts * Shaded region indicates the 70 percent confidence interval for the forecast. Overall, although demand and cost conditions have not changed notably since the publication of the October Report, we revised our inflation forecasts for end-2012 upwards due to higher initial point (the initial point referring to the latest inflation data before the forecast period) resulting from higher-than-expected inflation during the past three months. As elaborated on in the Report as well, cumulative increases in the exchange rate and commodity prices coupled with soaring unprocessed food prices and the developments in administered prices pushed inflation to high levels in 2011. We estimate that inflation will remain flat in the first quarter and exhibit a gradual downtrend starting from the second quarter (Chart 17). | 0 |
Professor Tilakaratna’s greatest contribution to economics was his continuous upgrading of the standards of the syllabuses and examination papers in economics at the GCE (Advanced Level) Examination to be on par with international standards. New theories, trends and ideas in economics were all built into his examination structures with a time gap of only one or two years. This strategy forced students, teachers and, above all, tuition masters, to continuously update their knowledge. The failure to do so would have meant failure at the examinations. From his side, to help them, he wrote text books, appeared on the educational services of both Rupavahini and the Broadcasting BIS Review 4/2007 1 Corporation and attended frequent public and teachers’ seminars. When the Central Bank broadened the definition of money supply and introduced the concept of high powered money, it took only less than two years for these new subjects to be a part of the examination paper. He confessed to us that he had to learn these concepts anew in order to handle them safely as examination material. He was also an administrator par excellence as the Chairman of the University Grants Commission. In this position, he was able to perform his duty without fear or favour. He had the remarkable ability of effectively managing politicians, friends and even relatives who made unreasonable demands which were against the approved rules and regulations. | Countries with cost-advantages, driven by technology and innovation, have been able to attain 6 The Consumer Finances and Socio-economic Survey Report 2003/04 – Part I, Central Bank of Sri Lanka p. 66 7 World Development Report, 2006, Table 3, pp 296-7 BIS Review 4/2007 5 specialization in sub-components of given final industrial products which are assembled in global factories. As reported by the World Bank 8 , the Ford Escort Motor Car which is finally assembled in the UK or Germany, had main components manufactured in 15 different countries. In the modern production processes, it has been observed that product development relating to personal computers takes place in USA. The components for them are manufactured in Taiwan. The final assembly takes place in Malaysia. The marketing is undertaken in Singapore. The inquiries relating to the products are handled by call centers in India. It, therefore, behooves developing countries like Sri Lanka to be a part of this ‘global factory process’ in order to raise their industrial production capacity and wealth. But the prime pre-requisite for that is the existence of a vibrant and dynamic services sector equipped with a free flow of information and capacity to impart knowledge on time. In other words, the modern industry cannot survive or sustain without services. Hence, any attempt at developing industry in isolation would drain it of a vital requirement for growth and sustenance, viz., competitive advantage. | 1 |
The importance of fisheries as a generator of foreign exchange revenue has diminished in relative terms - to less than a half of the total - while the importance of other sectors has risen, such as manufacturing industry, information technology and tourism. In these developments, Iceland is among other things drawing benefits from globalisation to strengthen the foundations of the economy. Foreign direct investment regulations are liberal with the exception that such investment is not permitted in the fishing sector. Foreign direct investment is most noticeable in power intensive industry, such as the production of aluminium, which is based on Iceland’s abundance of untapped renewable energy resources. Recent changes in corporate taxation in Iceland, lowering corporate taxes to among the lowest to be found, serve to attract foreign business to Iceland and encourage Icelandic companies with international operations to favour Iceland as the base of their operations. 2 BIS Review 55/2002 Direct investment by Icelandic companies abroad has risen rapidly in recent years and in a variety of areas, such as fisheries and fish processing, pharmaceuticals, retail commerce and financial services. These developments also benefit the Icelandic economy in the long run as they integrate Iceland further into the global economy, allow Iceland to draw more easily on the experience of others and bring in dividends. | This slowdown has been reflected in a fall in equity prices – including a sharp fall in the previously hugely overblown “tech-heavy” NASDAQ index; and this in turn has contributed to a typically rapid escalation in the florid language of commentators, from slowdown, to downturn or recession, to possible slump (though I haven’t yet seen meltdown as we did in 1998), which many of the commentators appear to regard as near-synonyms. Of course it is always possible that it will come to this – no-one has a crystal ball – and it goes without saying that we are all watching what’s happening very carefully. But that is not my own view of the most likely outcome, nor that of my central bank colleagues from around the world when we met in Basel a week ago. We met in the wake of the Fed’s move to cut interest rates which was widely welcomed as timely and appropriate, demonstrating sensitivity to the possibility of a spiralling decline in financial market and business and consumer confidence. We noted, too, that in announcing its move the Fed had made a point of emphasising its expectation of continuing relatively strong productivity growth, giving it more room for manoeuvre than it would otherwise have. | 0 |
Points in the upper right and lower left quadrants signal monetary and macro-prudential policy operating in the same direction; points in the upper left and lower right, these policies operating in opposite directions. The points are fairly evenly scattered across all four quadrants. This tells us that the right macroprudential/monetary policy mix depends critically on the relative needs of the economy and the financial system. But two arms beat one, hands-down. Institutional arrangements and macro-prudential policy Finally, if macro-prudential policy is a useful addition to the policy toolkit, who should have control over it? Here, a comparison with monetary policy experience is illustrative. Macro-prudential policy faces many of the same dilemmas as monetary policy. The most serious of these is the time-consistency dilemma [Kydland and Prescott, 1979; Chari and Kehoe, 2013]. In the monetary policy sphere, this manifests as a desire to loosen policy today to support the economy when tightening to control inflation tomorrow would be more appropriate. In the macro-prudential sphere, it manifests as a desire to loosen regulation to support today’s growth when tightening to counter tomorrow’s crisis would be more appropriate. In both cases, policy faces an inter-temporal trade-off in its objectives – a myopia trap. The time-consistency dilemma is likely, if anything, to be even more acute when fighting crises than when fighting inflation [Haldane, 2013]. The reason is that credit cycles last at least twice as long as business cycles. The myopia trap for macro-prudential policy is even more painful than for monetary policy. | Rajan (2005), “Has financial development made the world riskier?” Proceedings of the FRB Kansas City Jackson Hole symposium “The Greenspan years: Lessons for the future”; and F. Allen and D. Gale (2007), Understanding financial crises, Oxford University Press. 19 See: G.B. Gorton and A. Metrick (2009), “Securitized banking and the run on repo”, Yale ICF working paper no. 09–14. BIS Review 45/2010 7 element of truth in this characterisation. But the conditionality of such pre-commitments on the state of the economy may prove hard to communicate. Financial intermediaries may interpret pre-announced paths as a liquidity guarantee, promoting the excessive risk-taking behaviour I have discussed. Such behaviour may then limit the future flexibility of monetary policy-makers to react promptly to changed circumstances. All in all, such pre-commitments are not useful and, may even be damaging. Effective central bank communication should allow market participants to understand the decision-making framework. But a pre-commitment to a future path of short-term rates is best avoided. It limits the flexibility of policy-makers – operating within a transparent, rules-based framework – to take decisions as conditions evolve. Looking back over recent years, it seems likely that the adoption of such pre-commitments by some central banks led them to tighten policy too late and too slowly, thus helping to maintain the overly loose monetary stance that fuelled financial imbalances. 3. Assessing economic conditions Even with the most sophisticated models of the economy, policy-makers are still heavily reliant on an accurate assessment of the conjunctural situation. | 0 |
This makes it indispensable for the international community to strengthen the financial capacity of its central monetary institution to assist countries in a crisis situation. This is also why the Fund has established an emergency financing mechanism to allow financial assistance to be provided more speedily, when countries facing external crises are willing to take strong corrective action. This mechanism was used effectively to expedite the recent programs for the Philippines, Thailand, and Indonesia. Even if it would be naive to believe that such programs could produce an immediate return to the status quo ante, we are confident that once these programs have produced their full effects in the next months, these economies will be in a much better position to start growing again at a strong, but more sustainable, rate. In conclusion, these are trying times in Southeast Asia. But the mechanisms are in place at the national and multilateral levels—and soon, I hope, at the regional level -- to enable your countries not just to pull through this crisis, but to emerge stronger than before. The only other pre-requisite for your success is the resolve to put current problems behind you. I see no reason why we will not see the same determination in Southeast Asia in the future as we have seen in the past. BIS Review 111/1997 | Given the uncertainties, it should not surprise you that the Committee members disagree more often than not, but usually at the margin, on what should happen in any particular month to interest rates. I regard that as a strength rather than a weakness of the process. It should not surprise you either that even though we consistently aim to hit the target, we rarely achieve it precisely. As a matter of fact, I have been genuinely, and agreeably, surprised that the outcome over the past few years has been as consistently close to the target as it has been. The best we can realistically hope for is that we come close on average and over time. And to achieve that, when we identify developments which are likely to move us away from our target on one side or the other, we must be ready symmetrically to adjust our policy to bring us back on track. That is why, even though the economy as a whole continues to perform relatively well on the data, we have moved interest rates downwards this year, to reflect the emergence of the new downside risks; and it is also why we indicated, in our recent press release, that we will continue to monitor those downside risks. That is not a promise of further interest rate reductions, but it is a promise that we are prepared to move further if we have evidence that those risks are increasing. | 0 |
This willingness of American workers to move themselves and their family is a cultural characteristic of our people, no doubt based in the history of the United States as a nation of immigrants. To complement its high degree of labor mobility, the United States also has in place a federal fiscal system that allows the federal government to channel large transfers from fast-growing regions to slow-growing regions. Progressive income taxation, a high elasticity of corporate tax profits to changes in income, and an integrated federal budget are the main components of this system. In contrast to the United States, Europe is characterized by a more segmented labor market and very limited integration of its national fiscal systems. Both these characteristics limit the ability not only of Europe’s private sector to shift resources in response to regional recessions, but also of Europe’s public sector to compensate for this rigidity. This lack of flexibility is widely acknowledged to be one of the root causes of the high unemployment rates that Europe has experienced during the last decade. But, we may well ask, does it necessarily follow that because of the greater rigidity of its labor markets and the lack of a federal fiscal system, Europe cannot accommodate a common currency and instead needs to rely on periodic exchange rate adjustments as surrogates for productive flexibility? I do not think so. | Were we still producing the same labour-intensive goods as before, with output concentrated in industries like agriculture (including hops), textiles, coal-mining and ship-building, we too would have seen the price of our own output fall, just as it did for hop growers a century ago. Instead we allowed output and employment to expand in those industries where we could exploit a comparative advantage. In Kent, the expanding sectors include financial services, transport (with 18 million tons of freight passing through the Channel Tunnel each year) the exploitation of life sciences, and higher education (with five universities in the county). As consumers, we have benefited from falling prices of goods made in China and elsewhere in Asia. Between 1995 and 2005, the prices of imported manufactured goods fell by a sixth and, relative to the price of domestically produced output, by no less than a third. So over the past decade we have been able to increase consumption by more than the increase in production. Openness to the world economy has resulted in a higher standard of living. The second signpost marks the rise in oil and other commodity prices. Rapid growth of production in China, India and other newly integrated economies has led to a substantial rise in the demand for oil and other raw materials. Between 1995 and 2004, net imports of oil to China rose by a factor of seven. | 0 |
On the other side of the Atlantic, one of those drawing breath was the then-Governor of the Bank of Canada, Mark Carney. I am not sure what Mark went on to do next. But it was not just internationally where the regulatory reform bandwagon was rolling. In the UK, the Vickers Commission reforms created a fire-break between banks’ services to the domestic economy and their other activities. Complexity scientists would have approved. And sweeping institutional reforms were also underway in the UK, with the FSA’s prudential responsibilities merged into the Bank and a new consumer protection agency, the Financial Conduct Authority (FCA), created. The return of prudential regulation to the Bank was not, fortunately, a reversion to the pre-1997 orthodoxy. The Global Financial Crisis had laid bare the costs of separating finance and the economy, the micro and macro – a separation that had also been a feature of the Bank in the past. Crisis needed to be the catalyst for change, forging a link between the Bank’s analytical brain and its regulatory hands. And so it was, with the creation of a new policy body, the Financial Policy Committee (FPC). The FPC was charged with safeguarding systemic risk in the UK using new macro-prudential tools. An interim FPC was set up in 2011 ahead of a new statutory framework being put in place. And the interim FPC gave way to a statutory FPC in 2013 when the new Financial Services Act came into place. | Goods in consumer and producer channel 7 7 Consumer goods, producer prices (HM PI) 6 5 5 Consumer goods, import prices (IM PI) 4 6 4 Goods CPI 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 jan-98 Jan 98 jan-99 Jan 99 jan-00 Jan 00 jan-01 Jan 01 jan-02 Jan 02 jan-03 Jan 03 jan-04 Jan 04 -4 jan-05 Jan 05 Note. 12-month changes in per cent. Inflation measures computed according to Statistics Sweden’s new method. Sources: Statistics Sweden and the Riksbank 5. Product price, intermediate goods and profit margin in Swedish manufacturing sector 6 20 5 18 4 16 3 14 2 12 1 10 0 8 -1 6 -2 4 -3 Intermediate goods Product price Profit margin level (right scale) -4 2 0 1995 1997 1999 2001 2003 Note. Intermediate goods and product price are annual percentage changes, profit margin is the level in per cent of the value of gross output. Source: National Institute of Economic Research. BIS Review 25/2005 9 6. | 0 |
This contagion may not be fully in any individual firm's interests - or powers - to resolve, and it is this 'gap in the market' which creates the need for public involvement via central banks. Fortunately, banking crises do not occur every day of the week. But they do happen: an IMF study counted 54 across the world between 1975 and 1997, of which 12 were in developed countries. Such crises can have enormously harmful effects: recent Bank of England analysis suggested that, over the past quarter century, total output losses during banking crises have averaged around 15-20% of GDP in the countries in which they occurred. Whilst the Bank has responsibility for maintaining systemic stability, the day-to-day supervision of individual banks and other financial firms in the UK has been the responsibility of the Financial Services Authority (FSA) since 1997. Co-ordinating our system-wide perspective with the FSA's supervision of individual institutions and the Treasury's legislative responsibilities is essential to the smooth functioning of the new arrangements. A Memorandum of Understanding, signed by the Bank, the FSA and the Treasury in October 1997, sets out our respective responsibilities, both in 'normal' times, and in a crisis. And we work hard to foster these relationships, helped by the fact that I am a member of the FSA Board and Howard Davies is a non-executive director of the Bank. The three institutions also get together each month in the so-called 'tripartite Standing Committee' to exchange information and discuss current threats to financial stability. | But care is needed, not least because these models tend to be least robust in precisely the circumstances of most interest - ie those rather rare cases in which losses are very large, hidden away in the lowest parts of the bottom tail of the probability distributions. The evidence suggests that such events are not well captured by the normal distributions typically used in standard risk models. Markets tend to behave in highly non-linear ways - moving within relatively narrow ranges for long periods, but then adjusting quite sharply. Sometimes these adjustments can be related to clear external events - such as the World Trade Centre attack. But often there is no such trigger. The types of circumstances that generate these outcomes are not particularly well understood. This is, I believe, a central theme of the recent work of some of your founder members, and it is one with significant operational as well as theoretical implications. I noted a few minutes ago that the original Basel Accord had given rise to a number of distortions between economic and regulatory capital. This problem came to a head during the course of 1990s as banks increasingly engaged in so-called 'regulatory arbitrage'. Better credits, over-weighted by the Accord, were progressively being securitised, leaving relatively poorer credits on the banks' balance sheets. And banks were getting little allowance for risk reductions achieved through portfolio diversification and the use of risk mitigation instruments. | 1 |
Nothing could stem the tide of changes in technology and in tastes for new lighter - foreign beers, and attempts by government through higher excise duties to reduce the consumption of beer. A willingness to adapt and embrace, rather than resist, change is the key to greater prosperity. That road may at times be hard going - as I know many of you will have experienced in your own businesses but it leads ultimately to a more prosperous destination. To follow the right road we need signposts. In a market economy those signposts are movements in prices. If a particular product becomes more abundant or less in demand, its price will fall relative to the prices of other products. That relative price change is the signal which encourages consumers to buy more or producers to supply less. Over recent years, three new signposts have appeared. They mark a process that has transformed demand and supply conditions across the globe: the integration of China, India and other emerging market economies into the world trading system. The first signpost shows that prices of labour-intensive manufactured goods have fallen. China, India and the former Soviet Union between them have massively increased the supply of labour available to industry around the world. As labour-intensive goods have become more abundant, they have also become cheaper. The signpost points us in a familiar direction: the need to change what we produce. | However, it is not excluded that some of the existing banks will not survive the wave of technology-enabled disruption and are replaced by new technologydriven banks founded by FinTech and BigTech companies. In a more extreme scenario, which is not likely nowadays but may be viable in the very long run, banks are displaced by FinTech and BigTech companies and are no longer significant players on the market. In order to establish Open Banking in Macedonia, it is necessary to implement the best practices and regulations from European countries. Although our regulation is still in drafting process, our Banks are not passive in this field and are already undertaking activities for opening their IT systems with new interfaces and modules for interacting with customers and external companies. The biggest challenge that can endanger this process are digital space attacks (cyberattacks) in this domain, which are a relevant threat with a high probability of happening. The National Bank as a regulator is in charge of defining the framework for information security in our financial system. The task of our banks is to implement concrete safeguards on the technical, administrative and physical level based on performed analysis of risks from 3/5 BIS central bankers' speeches introduction and use of new services, which includes the risks of digital attacks. | 0 |
[17] The experience from these two crisis episodes shows that central bank liquidity provision can stimulate market functioning and lower money market rate dispersion. [18] During the pandemic, this was also clearly visible, as exemplified by the impact of our measures on term money market and commercial paper rates. [19] After 2015, excess liquidity was primarily driven by the Eurosystem’s large-scale asset purchases. Although excess liquidity reached new highs with the implementation of asset purchases and financial stress remained at relatively low levels, the dispersion index rose substantially in 2015 and 2016. One factor that could cause such a rise is an uneven distribution of excess liquidity across countries or across banks and non-banks, similar to what had happened in US money markets in September 2019. [20] However, in recent years, the divergence across overnight money market rates was primarily driven by repo rates secured by high-quality collateral. Research suggests that this increase in the dispersion index can be linked to scarcity effects, as asset purchases and the increased regulatory demand for safe government bonds withdrew collateral assets from the financial system. [21] To alleviate these scarcity effects, the Eurosystem introduced the securities lending programme in April 2015. However, the programme was initially only sparsely used. Only when the ECB introduced the cashcollateral option in December 2016, securities lending increased and contributed to lowering the dispersion of money market rates, thus supporting monetary policy transmission (Slide 7). | First, the availability of collateral in secured markets will remain decisive for market functioning, particularly against the backdrop of ongoing central bank asset purchases, even if collateral scarcity is mitigated by the broad fiscal policy response to the COVID-19 pandemic. Second, a high level of excess liquidity may further reduce cash-driven activity in some market segments, potentially raising challenges for setting money market benchmark rates. And third, non-bank financial institutions play an increasingly important role in money markets. Their market activity has a bearing on the formation of some money market rates, including the € Unlike banks, these market participants often do not have access to central bank operations. Were the transmission across money market rates to weaken, or rates to decouple from policy intentions, this could have implications for monetary policy implementation in the future. Understanding the changing forces that affect money market activity is essential for policy makers. To foster an improved understanding of recent trends in money markets, this conference brings together some of the best academics, central bankers and practitioners. I look forward to many insightful discussions over the next two days. Thank you very much for your attention. https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201123~8d9573b1b1.en.html 5/7 24/11/2020 Shifting tides in euro area money markets: from the global financial crisis to the COVID-19 pandemic [1] I would like to thank Marie Hoerova for her contributions to this speech. | 1 |
This expansion is a requirement of our business needs given the current size of our balance sheet, specifically the need to maintain appropriate control of short-term interest rates with abundant excess reserves in the 6 BIS central bankers’ speeches banking system.13 Primary dealers, and entities of the type that are currently eligible to be primary dealers, which typically exhibit structural demand for cash financing to support inventories, are unlikely to satisfy this requirement. To the extent that the ongoing evolution of the structure of the Treasury market, including technological advancements and changing investor behavior, affects the role of primary dealers as market makers, it is important to analyze the implications for the Fed’s ability to meet its objectives. The primary dealer system has proven to be very effective for both the conduct of monetary policy and the issuance of Treasury debt. I am very confident that the existing counterparty framework – continuing to utilize primary dealers for traditional domestic policy open market operations, expanding to new counterparty types, as appropriate, for targeted operations to increase the effectiveness of domestic policy implementation, and maintaining relationships with a sufficient number of large market participants in the relevant foreign exchange markets for possible foreign exchange policy and investment operations – provides enormous capacity to implement a wide range of monetary policies. Moreover, we have demonstrated a commitment throughout our history to make any adjustments necessary to ensure a robust and effective operational framework. | However, one welcome outcome from this experience is the consolidation of the banking sector, which is much more aware of the constant need for prudent risk management and good corporate governance. From our end, the Bank has also undergone a significant re-orientation of its supervisory techniques and approaches. These are now largely in line with international best practices and also constitute a platform on which we shall meet the future challenges facing the financial sector in the 21st Century. Ladies and Gentlemen, from time to time developments are associated with setbacks and the Bank of Zambia is no exception. Here I am referring to the issue of polymer notes which were introduced sometime last year. The introduction of these notes as we have explained at several fora was meant and is still meant to have cleaner notes in the economy and more importantly to have notes with a relatively longer life-span before replacement, than the traditional paper notes. With a relatively longer life-span, the nation would save resources because the frequency of replacing the notes would greatly be reduced. However, due to technical problems experienced by the printer, most of the notes have been fading faster than expected. May I re-assure the nation that we have continued to work with the printer and a solution is being worked out in the quickest time possible. Needless to say that this problem has posed a big challenge for all of us at the Bank of Zambia. | 0 |
One problem with this story, if experience prior to the Industrial Revolution is anything to go by, is that it could be a long wait for that next big wave. A second is that this story is far from the only possible reading of the historical runes. There is an alternative set of economic theories, and empirical facts, which paint a different picture of the genesis of growth either side of the Industrial Revolution. This alternative account might loosely be called “endogenous” growth theory. 23 The factors driving growth are multiple, not singular. They are as much sociological as technological – skills and education, culture and cooperation, institutions and infrastructure. These factors are mutually-supporting, not exogenous and idiosyncratic. And they build in a cumulative, evolutionary fashion, rather than spontaneously combusting. One way of accommodating these broader factors is to widen the definition of “capital”: physical capital (such as plant and machinery); human capital (such as skills and expertise); social capital (such as cooperation and trust); intellectual capital (such as ideas and technologies); and infrastructural capital (such as transport networks and legal systems). 24 Growth results from the cumulative accretion of multiple sources of capital. To take a simple example, the success of the railways relied not just on the invention of the steam engine (intellectual capital), but on the materials (physical capital) and skills (human capital) to build locomotives and track. And to become a GPT, railways needed in addition a network (infrastructure capital) and the cooperation and trust of the general public (social capital). | That suggests inequality could have been a drag on past US growth of almost one percentage point each year. In an era of low growth, that is a strikingly strong headwind from lower levels of social capital. And looking ahead, it is possible that sociological headwind could strengthen. One of the causes of rising inequality in advanced economies is believed to be the loss of middle-skill jobs, at least relative to high and low-skill jobs. There has been a “hollowing out” in employment. 55 Technological advance – the mechanisation of middle-skill tasks – is believed to have contributed importantly to these trends. The second machine age could intensify, possibly broaden, these trends. 56 Intelligent robots could substitute for lower-skilled tasks. If the capacity of the machine brain approached, or surpassed, the human brain, higher-skilled jobs could also be at risk. Where this leaves trends in employment, inequality and social capital is unclear. But, most likely, this would be far from blissful ignorance. 50 Nordhaus (2014). Note the world’s fastest super computer is currently NUDT in China, which is able to 16 process 3x10^ floating operations per second (or 30 Petaflops). 51 Berglas (2012), Nordhaus (2014). 52 Gordon (2012). 53 For example, Piketty (2014). 54 IMF (2014), OECD (2014). 55 Haldane (2014), Frey and Osbourne (2013). 56 Brynjolfsson and McAfee (2014). BIS central bankers’ speeches 11 A second secular headwind, closely related to rising inequality, concerns human capital. | 1 |
Revolutionary as they were for the public, these changes didn’t transform the banking business substantially. Banks kept taking short-term deposits to on-lend at longer maturities. They kept clearing funds and settling balances with one another and with the central bank to meet liquidity and reserve requirements. The main change for monetary policy in most countries was to switch from the control of monetary aggregates to the fixing of the policy rate for overnight liquidity operations. Technology is now creating opportunities for changes in financial services that are more farreaching, both for the public, financial institutions and central banks. Information technologies are doing this because finance is an information and record keeping business. By challenging the conventional centralized, multi-layered settlement and clearing system, distributed ledgers, supplemented by a number of other technological developments, create the possibility of an unbundling of financial services that question the very notion of a bank. These are exciting times not only for financial start-ups and the public, but also for leaders of developing countries, that see in these technological developments the opportunity to leapfrog financial development and remove one major roadblock to inclusive economic growth. To materialize this, however, policy makers—including central banks—need to make sure that they are not exposing people to greater risk, especially when they are using financial services for the first 18 Central Bank of Chile 29 June, 2017 time. Moreover, they may want enhanced access to financial services to facilitate formalization of economic activity rather than grow the shadow economy further. | (2017), “Hitting Stride - The 2nd Americas Alternative Finance Industry Report,” Cambridge Centre for Alternative Finance, June 2017. [SLIDE 19] This coexists with a rather large, diversified and deep market for conventional financial services. Under this framework firms can get financing from several sources including banks and bond market among others. In recent years, an increase of external financing is consistent with lower cost and the size of the operations of those sources. Firms used those external resources mainly for two purposes: (i) financing operations in the country or abroad and (ii) refinancing other 5 According to the Report “Breaking New Grounds” by the Cambridge Centre for Alternative Finance, Chile accounts for half of Latin America’s alternative financing industry. 15 Central Bank of Chile 29 June, 2017 debts. [SLIDE 20] Further, granular data confirm that currency risks are relative low from a historical perspective, which is possible due to availability of FX derivatives and flows from investments abroad. It should be noted that about a third of the total debt of the corporate sector is holding by firms which get financing only with local sources and do not report to local supervisor (SVS). Most of that local financing is provided by commercial banks which cover those loans with collaterals and provisions. | 1 |
But even for exports of processed metal goods and machinery does Switzerland have higher export unit values than, for instance, the EU. 15 Looking at developments over the last 20 years, it is primarily the prices of watch exports that have risen considerably. 16 Ireland also exports a lot of chemical and pharmaceutical products. Besides, the unit values of its exports of electronic products are also very high. 6 BIS Review 157/2010 Chart 3 Source: Eurostat. Overall, the results from a unit value analysis support the assessment that Switzerland is specialised in the production of high quality products. This is in line with previous studies. These show that Swiss export products largely compete on quality, rather than on price. 17 Given the level of know-how in Switzerland, this ought to be the case in the future as well, assuming that Swiss products can continue to fulfil the ever-growing demands on quality. To what extent could this have had a positive influence on the way in which exports developed in the most recent crisis? For the short term, at least, it can be assumed that higher quality products are more difficult to substitute than relatively homogenous goods. This applies not only to pharmaceuticals, but also to highly specialised products such as precision instruments. And this was indeed the case during the most recent crisis – Swiss exports of precision instruments receded only slightly, and have since risen to such an extent that they now already exceed their pre-crisis level. | In the Annales, he wrote: “The destruction of private wealth precipitated the fall of rank and reputation. At last, the emperor interposed his aid by distributing throughout the banks a hundred million sesterces, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found.” 1 Replace “emperor” with “governments and central banks”, “sesterces” with “dollars” or “euro”, “security” with “collateral”: this two thousand year old quotation could sound surprisingly familiar. Yet, even though two thousand years have passed, with many financial debacles in between, I think it is fair to say that we entered the current crisis less than ideally prepared. First, we had to improvise with an economic interpretation of the causes that led to those unprecedented market disruptions. The dramatic fall in confidence revealed a source of risk that macroeconomists had not modelled carefully and that had not even been considered relevant by most theorists of finance. Now, the concept of “systemic risk” is almost common knowledge. Second, we had thought that the financial system would act as a shock absorber. Portfolio theory had demonstrated that the dispersion of individual risks would attenuate aggregate risk. But the mispricing of risk multiplied exposures, and the assumption of similar risks by market participants increased the potential for contagion. In the event, we learned that dispersion does not necessarily mean effective diversification. | 0 |
7 To the side are two further images celebrating Austen’s work: an illustration of Miss Elizabeth Bennet 8 undertaking “The examination of all the letters which Jane had written to her”; and an image of Godmersham Park, home of Austen’s brother, Edward Austen Knight, and believed to be the inspiration for a number of her novels. The central design in the background of the note is inspired by the twelve-sided writing table and writing quills used by Austen at Chawton cottage, where she lived and wrote most of her novels. Also included is a quote from Pride and Prejudice – “I declare after all there is no enjoyment like reading!” 9 As Austen’s final resting place, this building – Winchester Cathedral – is also commemorated in the note, featuring in the foil. The Bank of England is committed to ensuring our banknotes recognise the diversity of their users not only through the characters represented but also through their ease of use. That is why we are introducing a new tactile feature on the £ to help the visually impaired: a series of dots in the upper left-hand corner. These dots join existing features, such as differing colour palettes and raised print, that enable those who are blind and visually impaired to recognise different notes, ensuring the nation’s money is as inclusive as possible. 10 This short video illustrates these and other features of the note. | A £ note may also have had a symbolic meaning to her, as it was the amount she was paid by publishers Crosby and Co. for her first novel, Susan. 2 Just as a £ banknote might have evoked memories for Jane Austen, so does money serve as a collective 3 memory for a country and its people. Our banknotes have cultural as well as economic value. Through the characters on our banknotes, we celebrate the breadth and depth of achievement across the United Kingdom, in fields ranging from literature to the visual arts, science and statecraft. Once she replaces Charles Darwin on the £ banknote this September, Jane Austen will sit alongside Winston Churchill on the new £ Adam Smith on the £ and Boulton and Watt on the £ Around the end of the decade, Smith will be replaced on the £ by JMW Turner. These individuals have advanced British thought, spurred innovation, exerted exceptional leadership, and more generally helped to shape this diverse society and forge our common values. 4 As the “mother of the great tradition of the English novel”, Jane Austen’s place in this august group is assured. Sir Walter Scott’s praise for Austen’s “talent for describing the involvement and feelings and characters of ordinary life which is to me the most wonderful I ever met with” is a sentiment that those reading her work today would recognise and endorse. | 1 |
We are watching closely to see whether there is a shift in relative pricing between them that could produce a flow from one to the other and thereby have implications for the structure of financial intermediation. 49 Assets under management in government-only funds could grow two ways: Prime funds could convert into government-only funds, or prime fund investors could transfer their money into government funds. Most prime funds have announced their intentions at this point, and among those that have converted to government funds, take-up has not markedly increased, so therefore we are less concerned about such conversions, but we continue to pay close attention to them, as we do to investor behavior. 14 BIS central bankers’ speeches | This is not only exemplary, it is an important lesson we can learn from the crisis for use in the future, and it holds true not only for households but for companies and public entities as well. There are many ways to express this message, but allow me to refer to French classical literature and recall for you Jean de la Fontaine’s celebrated fable about the cricket and the ant: “La cigale et la fourmi”. In the fable, the cricket who had not accumulated surpluses during the plenteous summer days preceding the crisis, found herself “fort dépourvue quand la bise fut venue”, that is, she “found when the winter winds blew free, her cupboard bare as bare could be”. The fact that, in this situation, the ant of the fable was not eager to lend to the singing cricket lends further realism to the analogy. II. Current environment and short-term prospects What now? We are not yet ashore and the relatively positive assessment of the previous paragraph does not reflect a definitive evaluation. First, private consumption could be less robust should conditions on the labour market improve less than currently anticipated or even deteriorate again. Here the main worry is the ability of the Swiss economy to quickly reabsorb the 60,000 individuals working on a short-time basis. Recently, developments have been encouraging. In turn, the situation of the labour market depends on the continued recovery of the 60% share of the economy that is geared to international markets. | 0 |
In fact, legislation might be necessary in order to ensure that the NCB can always obtain the information it needs to fulfil its responsibilities on financial stability, extraordinary liquidity assistance in a crisis, and monetary policy. In Sweden, the central bank concluded an MoU with our bank supervisors but we also have the legal power to ask the banks directly for information. It is difficult to sum up all the arguments for and against. If you are contemplating change in your country, I would say that a broad and objective assessment of the present strengths and weaknesses will give good guidance as to which way to go. The optimal solution for the near term may not be the same as for the long term. The aspects of cross-border supervision Financial institutions increasingly operate across national borders. They establish branches and subsidiaries in other countries and they have business linkages with institutions in other countries. Is there any structure of the domestic regulatory authorities that is particularly suited to the efficient supervision of international financial operations? I do not think so. What matters is that there are arrangements between home and host supervisors which ensure information-sharing and close cooperation in particular in crisis situations. Such arrangements can be agreed on whether bank supervision is in a central bank or combined with securities and insurance supervision in a separate authority. | There are arguments against changing the supervisory structures in the near term. The first one is the flip-side of the argument above. Also the banks are getting larger and more complex. In many countries they still dominate the financial sector and the payments system. Hence, society has a clear interest in strong banking supervision to avoid costly bank failures. We should take into account that banking supervision in many countries functions quite well, while supervision of the other financial sectors is much weaker. Major structural changes involving bank supervision will therefore hamper the conduct of such supervision for a long time due to the focus on the transition rather than on the operations. There is also an obvious risk that qualified staff will leave bank supervision due to the less attractive work prospects outside the NCB. For instance, government salaries and other benefits are usually not as good and it is less prestigious to work outside the NCB. The result would be weaker bank supervision without compensating improvements in other sectors. There are other ways of meeting the challenge. Many countries have instituted arrangements for closer cooperation between the supervisors. Memorandas of Understanding have been drafted so that information may be shared without legal or other impediments. Joint forums have been established where representatives from the different supervisory authorities meet regularly. Cross directorships imply that high level supervisors sit on each others’ Boards and can inform themselves of developments. | 1 |
The debit card should be positioned as a cost-effective payment card to make it more affordable for small merchants to accept card payments. The expansion of the POS network would allow for wider acceptance of the debit card to be used more pervasively, to displace the use of cash, thus bringing about cost savings for the country in the long run. To correct the distortions and promote competition in the domestic payment card market, a Payment Card Reform is certainly timely to stem the indiscriminate increases in interchange fees and correct the price signals with the view to widen the POS network especially in non-traditional industries and rural areas. 2. Development and sharing of infrastructure investment To be successful, e-payment solutions must not only be affordable, their expansion must also be sustainable in the long term. Sustainability entails the ability to leverage on an enlarged network which enables market players to build critical mass and achieve the desired economies of scale. In this regard, the importance of collective industry efforts to develop and share infrastructure cannot be emphasised enough. Infrastructure development is very expensive and the banking industry ought to share the required investments. Infrastructure should not be used as a competitive tool but rather as an enabler that would promote modernisation of the payment system. Besides minimising cost and lowering the entry barrier for new players, collective infrastructure development and sharing of infrastructure costs would allow market players to compete directly on product offerings and quality of services, thus providing better value to consumers. | On the one hand, the banks themselves may be encouraged to take on excessive risks; while, on the other, depositors may be encouraged to ignore risk and to become literally care-less as to where they place their BIS Review 13/1997 -3- deposits. So, both the safety and soundness of the banking system, and its competitive efficiency, and that of the financial system more generally, may be undermined. Central banks’ macro-prudential concerns for the stability of the banking system have necessarily meant that they have taken a close interest in the risk characteristics of individual banks as the component parts of the system. But more recently (at least in the UK with the coming into force of the first Banking Act in 1979) individual banks were brought under formal banking supervision for the first time, and non-bank depositors provided with limited deposit insurance. Such micro-prudential supervision of each individual bank, of course, also helps to reduce the risk of instability in the system as a whole, and even limited deposit protection may reduce the risk of bank runs, at least in the form of the sudden withdrawal of retail deposits. This, too, of course, can give rise to moral hazard problems if it is perceived as tantamount to a guarantee. But micro-prudential supervision and deposit insurance were introduced in the UK at least (though not in the US) with the distinct, social, purpose of providing individual, small, depositors with a degree of protection against the sudden loss of their principal liquid asset holdings. | 0 |
The changes that we have seen include action under both Pillars I and II of the Basel framework. The numbers I gave for minimum capital requirements (the change from £ to £ represent Pillar I. I mentioned earlier that Pillar II was not consistently or rigorously applied before the crisis. Between 2008 and today the Pillar IIA capital requirements for the major UK banks have risen from £ to £ This increase in capital required is additional to the impact of Basel III and the resulting increase in core capital requirements of around 7 times I set out above. The PRA’s approach to supervision emphasises the use of judgement on a forward-looking basis, and the use of Pillar II is evidence of that. A further important element of the new framework of supervision is so-called Asset Quality Reviews (AQRs), undertaken either by or at the request of supervisors like the PRA. AQRs are designed to assess the more structural features of loan books as well as their performance, including whether forbearance is being applied by the lender. The granularity with which AQRs are undertaken can vary with their purpose, but there is always a fairly high level of intensity in terms of the closeness of the inspection. In the best of all worlds, supervisory initiated AQRs should not reveal anything that isn’t already known. I will just say that experience shows that we are not there yet. Basel III requires more and better quality capital in banks. | Ardian Fullani: Economic and financial developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the Bank of Albania’s Annual Report 2009 to the Albanian Parliament on 29 April 2010, published on 30 April 2010. * * * Honourable Ms. Chairwoman, Dear deputies, It is a privilege to present to you today the Bank of Albania’s Annual Report for 2009. This Report, the key conclusions of which will be briefly reviewed in my speech today, makes a thorough and transparent analysis of economic and financial developments in Albania, and provides an overview of the Bank of Albania’s work to meet its legal obligations and institutional commitments. The year 2009 was a challenging year for the Albanian economy in all its dimensions. In response to the global economic and financial crisis, the following were put to the test during this year: The country’s macroeconomic balances; Our financial system’s stability; The business models and the private sector’s financial sustainability; and The analytical and responsive capacities of macroeconomic policies. In a broader setting, the shock that hit the Albanian economy in 2009 put the flexibility of Albania’s economic development model and its capacity to respond to a thoroughly transformed global environment to test. The global crisis provided a quick impact on the economic activity at home. | 0 |
Monetary policy must be conducted with caution as to not contribute to further build-up of financial vulnerabilities. Furthermore, amidst the prolonged period of low interest rate and the increasing search-for-yield behaviors, it is our view that supervisory coordination is increasingly imperative for effective risk monitoring to make sure that the regulations across different regulators are broadly aligned and that financial 4 activities cannot simply move from a regulated to an unregulated umbrella. This is reflected through our close collaborations with other regulatory bodies such as the Securities and Exchange Commission (SEC) and the Office of Insurance Commission (OIC). Ladies and gentlemen, While we have adequate external buffers to withstand short-term vulnerability in the global market, what would ensure the economy’s stability and resilience in the longer-run are productivity-enhancing infrastructures and ecosystem. This is crucial for the country’s competitiveness in the years to come. I am delighted to say that we are on the path of productivity improvement. With the limited time I have, it is difficult to do justice to all the projects that have been initiated. Some of the most notable examples are the Eastern Economic Corridor (EEC) and transportation and digital infrastructure projects that have been long-overdue. On our side, the Bank of Thailand is doing its part to develop infrastructure and ecosystem needed for the ongoing transition towards the digital economy. Under the e-Payment Masterplan, we, together with the Ministry of Finance and the Thai Bankers’ Association, launched PromptPay, which has allowed real-time fund transfers among individuals and businesses. | Very soon we will reach out to stakeholders to join us in this most meaningful project. 13. Thank you. 2/2 BIS central bankers' speeches | 0 |
Different firms can assess risk by different methods and models, using different data sets or applying different judgements: assessments undertaken by the BCBS1 have shown firms can generate quite different RWA calculations for an identical hypothetical portfolio. And firms may choose to optimise both their choice of assets and the weights attached to them to minimise capital requirements. It has been shown that differences in capital ratios calculated on an RWA basis have historically had little or no correlation with whether firms were able to survive a 1 4 Basel Committee on Banking Supervision July, 2013. “RCAP – Analysis of risk-weighted assets for credit risk in the banking book”. BIS central bankers’ speeches stress2. A leverage ratio offers an alternative approach, which is not risk sensitive but simply calculates total capital in relation to total assets. The degree of leverage has historically been a much better indicator of likely firm failure (although we can’t be sure that correlation will survive if firms start to manage to a constraint!). As alternatives, the RWA and leverage approaches would generate different incentives for firms to be capital efficient. Under RWAs the incentive can be to expand the balance sheet with assets that carry low risk weights. Under a leverage ratio, the incentive can be to limit balance sheet size but choose riskier assets. Ideally, the two measures would work in tandem to ensure sufficient capital to support both balance sheet size and risk taking. | In this lecture I will try to bring together in an accessible, structured way, summaries of the most important reform initiatives that are in train – at least those that affect prudential supervision – I will try to set out what they are aiming to achieve and how much further there is to go. I will then reflect on how the regulatory jigsaw fits together and the key questions that are being asked of it. Alongside the statutory Financial Policy Committee in the Bank of England (the FPC) and the Financial Conduct Authority (the FCA), the PRA was brought into life on 1 April 2013, as part of a reshaping of the UK’s financial regulation landscape. The PRA is the prudential regulator for deposit takers (banks, building societies and credit unions), insurers and major investment firms. It started with two objectives: (i) promoting the safety and soundness of its authorised firms and (ii) specifically for insurers, to contribute to the securing of an appropriate degree of protection for those who are or may become policyholders. A year later, an additional secondary objective was added: to, so far as is reasonably possible, act in a way which facilitates effective competition in the markets for services provided by PRAauthorised persons in carrying on regulated activities. The PRA’s strategy is to deliver a resilient financial sector by seeking: an appropriate quantity and quality of capital; effective risk management; robust business models and sound governance, including clear accountability of a firm’s management. | 1 |
Massive speculation on that day led to the announcement in the morning of a 2 percentage points rise in interest rates and, when that failed to dampen the pressure on sterling, of a further 3 percentage points rise in rates. That second announcement, far from bolstering the exchange rate, merely convinced financial markets that Britain’s membership of the ERM could no longer be sustained politically. The strong political commitment to joining European monetary union, which was the effective support for other currencies in the ERM, was absent in the United Kingdom. Following its departure from the ERM, the UK introduced an inflation target regime for monetary policy. It succeeded in bringing inflation down to around 2½ percent (see chart 2). 6 BIS Review 5/2004 Chart 2: UK inflation and inflation expectations, Oct 1991-Oct 2003 Per cent 7 Implied inflation (a ) from IGs RPIX inflation rate 6 5 4 3 2 1 0 Oct-91 Inflation target announced Bank independence Oct-93 Oct-95 Oct-97 Oct-99 Oct-01 Oct-03 (a ) Implied average inflation expectations from 5 to 10 years ahead, derived from index-linked gilts. Source: Bank of England, ONS But long-term inflation expectations did not fall as quickly. Only after the announcement in May 1997 by the new Labour government that the Bank of England would be made independent did inflation expectations fall quickly to the target level, as can be seen from chart 2. | However, I would like to underline that the attractiveness exerted by advanced countries on our graduates and our specialized profiles is making our task even more complex, especially in recent years. At Bank Al-Maghrib, for example, we lost about 20 computer engineers in just 18 months. I think that this point also deserves to be discussed and debated at meetings such as this one. Thank you! 7 | 0 |
Beyond the yearly shadow banking monitoring exercises, policy makers intended to make sure that no part of the financial system would be left unregulated and that a similar set of rules should apply to a similar set of risks. For the sake of a better regulation of globally systemically important institutions, some progress remains possible in the monitoring, and the need for relevant data in particular as regards the better understanding of inter-linkages among G-SII. Cross-sectorial consistency was seen as a key factor to prevent any opportunity for regulatory arbitrage and preserve appropriate level playing field. The Financial Stability Board following the G20 recommendation has launched an ambitious regulatory program which aims at better controlling risks which are related the shadow banking sector. Indeed, the US have recently adopted a regulatory framework for Money Market Funds (July 2014). Other reviews are still ongoing, I am thinking of the assessment of risks and systemicity of asset managers whose assets under management have experienced a major growth these last few years, or the rapid development of ETFs providing real time liquidity on their liability while their matching assets have a lower liquidity. In Europe, this global initiative translated into a number of regulatory initiatives such as the Securities Financing Transactions Regulation (repos and SFTRs) or the Regulation of Money Market Funds. The final objective was to turn the shadow banking sector into a safer and regulated “market-based financing”. 2. | Let me develop the first point: The 2008 crisis illustrated that the so called « shadow banking sector » played an important role in propagating and amplifying financial instability throughout the financial system. Shedding some light on these entities and regulating them to prevent contagion and regulatory BIS central bankers’ speeches 1 arbitrage has been therefore a key milestone of the G20 Financial regulation agenda ever since. The Banque de France has been involved in this policy work from the outset. A first part of the work consisted in defining what the “shadow banking sector” is about. It does embody a wide variety of institutions worldwide which accomplish credit intermediation along with maturity transformation outside of the “traditional” banking sector. As an output, it transforms illiquid assets into liquid ones. The approach of shadow banking has progressively expanded to a variety of actors and activities: Money Markets Funds; Securitization, Repos and Securities Financing Transactions. The work dedicated to preventing the financial risks arising from the shadow banking system became intertwined with the work aiming at ending “too big to fail”. In the wake of the Globally Systemically Important Banks, the Financial Stability Board started working on identifying and defining a regulatory regime applicable to Globally Systemically Important Insurers (GSIIs), Non-Bank-Non Insurance SIFIs (NBNIs), Critical Market Infrastructures/CCPs. The focus of the work also shifted from monitoring/statistical reporting to rule making. | 1 |
The persistence due to inflation's dependence on its past trends is often called “intrinsic persistence”, while the persistence produced by the expectation of inflation is called “expectation-based”. See Altissimo, F., M. Ehrmann and F. Smets (2006), Inflation Persistence and Price-Setting Behaviour in the Euro Area, ECB Occasional Paper No 46. 10 Regarding the importance of a commitment to pursuing the primary goal of price stability and transparency in connection with the quantitative definition of price stability, see Orphanides, A. and J. C. Williams (2006), Inflation Targeting Under Imperfect Knowledge, Chilean Central Bank Working Paper No 398. 11 See Sahuc and Smets (op. cit.) as well as Christiano, Motto and Ristagno (op. cit.). BIS Review 135/2008 5 However, we should not overstate the differences in the conduct of monetary policy between the euro area and the United States. On the one hand, the US central bank, too, assigns primary importance to price stability, as has been stressed on more than one occasion by the Federal Reserve’s most recent chairmen. For instance, the current Federal Reserve chairman himself argued (and I quote): “ Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability in output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the economy. | From the start of Economic and Monetary Union in 1999 to the present day the ECB has altered its official interest rate 25 times, including yesterday (see Figure 1). In that same time frame, the US monetary policy rate has been altered fully 45 times, almost twice as often. And we can see the difference also in terms of accumulated variations. For instance, the monetary tightening – or rather the abolition of accommodating monetary policy after the bursting of the dot.com bubble – which began in the United States in 2004 and in the euro area in 2005, was clearly different in intensity. The accumulated rise in the official rate through August 2007 was equal to 200 basis points in the euro area and to 425 basis points in the United States; from August 2007 to today the accumulated cut in reference rates was equal to 100 basis points in the euro area and to 425 basis points in the United States. How should we explain these differences in the degree of activism in monetary policy? We may consider three potential factors. The first concerns the macroeconomic shocks that have struck the two areas during this period. If the shocks have been different, then that may explain different monetary policy responses. The second criterion concerns the underlying economic structure in each area. | 1 |
However, there are limits to what the Riksbank alone can do to prevent bubbles arising in the financial markets. Swedish authorities can only influence the markets’ risk premiums to a limited extent. The risk premiums on Swedish financial instruments are also largely determined by international factors. To avoid suffering deep crises in the future we therefore need more international cooperation, better supervision of the financial markets, better regulation and increased transparency in the financial system. 8 BIS Review 162/2009 BIS Review 162/2009 9 10 BIS Review 162/2009 BIS Review 162/2009 11 References Bean, Charles R. (2009), “The Great Moderation, the Great Panic and the Great Contraction”, Schumpeter Lecture, Annual Congress of the European Economic Association, Bank of England, August 2009, page 1 and page 16. BIS (2008), Bank for International Settlements, Annual Report 2008, page 138. Borio C., Lowe P. (2004), “Securing sustainable price stability: should credit come back from the wilderness?” Bank for International Settlements, Working Paper No 157, page 19. ECB (2009), Alessi, L, Detken C., “Real Time Early Warning Indicators for Costly Asset Price Boom/Bust Cycles, a Role for Global Liquidity”, European Central Bank Working Paper Series no 1039, March 2009, page 6. Giavazzi, F. and F. Mishkin (2006), “An evaluation of Swedish monetary policy between 1995 and 2005”, Reports from the Riksdag 2006/07:RFR 55 page 55, Committee on Finance. Greenspan, A. (2002), “Economic Volatility”, Federal Reserve Bank of Kansas City Jackson Hole Symposium 2002, page 4. | M R Chatu Mongol Sonakul: Thoughts and reflections on the development of the domestic bond market in Thailand Speech by Mr M R Chatu Mongol Sonakul, Governor of the Bank of Thailand, at the ADB Conference on Government Bond Market and Financial Sector Development in Developing Asian Economies, held in Manila, 28-30 March 2000. * * * Mr Chairman, distinguished Guests, Ladies and Gentlemen, I am honored for the opportunity to share with you some of my thoughts and reflections on the development of the domestic bond market in Thailand. The Asian economic crisis, which started in Thailand in 1997, posed the most severe challenges to policymakers - how to contain the crisis, how to ease the burden of the poor and how to ensure a sustained recovery. But the biggest challenge to us all must be how the crisis could have been avoided in the first place. If I can turn back the clock and have a wish, my list may be long. But high in its ranking would be a well functioning Thai baht bond market. Benefits of bond markets A bond market provides a basic infrastructure for the development of the financial system and the overall economy. The bond market is an important alternative to bank lending. During a crisis, banks themselves often come under liquidity pressure, from both domestic and foreign withdrawals. Not only do they cease to lend, they also recall loan from their best debtors. | 0 |
Another shortcoming was that no authority had taken on the responsibility to oversee the financial sector as a whole, to promote overall financial stability, which is different from the supervision of individual institutions and markets. If we had had such an authority, the events and developments outside the financial sector that eventually undermined its stability might have been detected earlier. Corrections might have been implemented that could have prevented or at least reduced the impact of the crisis. Monitoring overall financial stability has now become one of the primary tasks of the central bank, the Riksbank. Let me stress this again: The fact that deregulation in some countries, also in South East Asia, was followed by banking problems does not imply that you should not deregulate. The conclusion is rather that deregulation must be carefully planned, succeeded by other and more modern types of regulation and monitoring, and supported by a sound macro economic policy. I will speak more about this in the following. The development of the banking sector in Sweden For many years there has been consolidation in the banking sector in Sweden as well as in other countries; this development was accelerated by the crisis. Banks merged and larger banks acquired smaller banks. For instance, the large network of co-operative banks merged into a single bank which later merged with the bank that emanated from the network of the major savings banks – forming one large bank. In this way, several hundred banks became one very large bank. | In order to avoid excessive regulation you should always ask yourself if the benefits from introducing a new regulation are greater than the costs of implementation. Here I include both financial and non-financial costs and benefits in a broad sense. Admittedly, this is often very difficult to measure with any degree of precision. Regulations should also conform to the way financial institutions and markets operate in practice. Hence, regulation should have a functional rather than an institutional approach. This implies that the same financial function should receive similar treatment, whether it is conducted in a bank or in another institution or market. Market-oriented regulations will cause the least interference to the regulatees and to the development of financial instruments and activities. As an example of modern regulation, the new framework for banks’ management of risks and capital from the Basel Committee, the so called Basel II, allows the banks to apply their own risk measurement methods and other internal bank processes. But the rules also grant strong powers to the supervisors to take remedial action if the banks step outside the boundaries of the allowed framework. BIS Review 111/2006 7 Obviously, regulations must be transparent. There are still many examples of legislation where the institutions and even the authorities themselves must frequently call on legal advice to interpret their meaning. This causes uncertainty and undermines efficiency. Speaking about transparency, there should also be consultations between the authorities and other involved parties when drafting the regulations. | 1 |
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