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The two key geopolitical tensions in the world today – between Europe and Russia and between the US and China – are likely to persist over the medium term and lead to some degree of economic fragmentation. A weakening in globalisation in turn means less cost efficiency, less technology transfer, less innovation, and ultimately less productivity growth. The ongoing war in Ukraine could put Europe’s fiscal sustainability under growing strain. The continent is facing an energy crisis, with record high natural gas prices in the wake of the Ukraine war and hydroelectric energy production affected by widespread droughts. Governments across Europe are having to spend more to cushion households and businesses against high fuel and electricity prices and to accelerate investments in renewable energy. Europe is also entering a period of significantly greater defence spending in view of heightened geopolitical tensions. This will further strain public finances. The strategic rivalry between the US and China is deepening across multiple fronts, with increased decoupling in trade, technology, and finance. The US-China trade conflict has reduced bilateral trade and dampened global trade more broadly. The trade tariffs imposed by the two countries on each other have not helped either country, contributing to supply frictions and price pressures. More worryingly, the volume of global trade stagnated since the imposition of the tariffs in early 2018 until the eve of the pandemic in end-2019.
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Finally, a rapidly aging population in many parts of the world could mean growing demand for goods and services that a shrinking workforce will struggle to meet. Third, the energy transition is likely to mean energy prices remaining on a steady upward trajectory. The imperatives of energy security and environmental sustainability are driving in the same direction – to reduce dependence on imported fossil fuels and switch to renewable energy. In the short to medium term, this transition to cleaner energy is likely to be inflationary. The Bank of England estimates that inflation will increase by nearly 0.6 percentage points in the 2020s in an orderly transition scenario and by as much as 2 percentage points by the early 2030s in a disorderly scenario. With the ongoing energy crisis. we are probably seeing a preview of a disorderly transition. And it is not just energy prices. Demand will surge for minerals such as copper, aluminium, cobalt, lithium, nickel, and rare earths, which are critical to various clean energy technologies, including wind turbines and electric vehicles. This could lead to what some analysts have referred to as greenflation, or rising prices for those metals and minerals that are essential to renewable energy and technology. Fourth, climate change could disrupt agriculture, driving food prices higher. Extreme weather conditions are becoming more frequent worldwide. Just this year, China and Europe have experienced one of their worst droughts on record, and Pakistan and India have seen devastating floods.
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Ladies and gentlemen, On the 8th of May this year, only 15 days ago, Macedonia had the honor to represent its first preaccession economic program at the ministerial dialog between the ministries of economy and finance of the EU and the candidate countries in Brussels. The adopted conclusions that refer to our country, amongst other things, state that "generally, the document suffers from a lack of reliable statistics, impeding the analyses of the position of the country regarding the growth cycle...", which, you would all agree, has to do with the reliability, in such situation, with inflation calculations, particularly of the expected one. Furthermore, page 4 says that "in the area of economic statistics, top priority for Macedonia is to establish a capacity for regular production and submission of annual and sub-annual statistics", but, also, not failing to notice that "a certain progress has been made in the annual national accounts, following the ESA 95 concepts", and that we should move on in that area.
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As long as the SNB can conduct an autonomous monetary policy, the Swiss franc will remain a crisis-resistant investment currency, and the interest rate bonus will be maintained. 4 BIS Review 60/2002 4. The euro's implications for the SNB's monetary policy 4.1. The monetary policy concept With the euro now existing in its physical form, some cash transactions will tend to be effected in euros rather than in Swiss francs. This development will, in turn, have a negative impact on the demand for Swiss francs. But as I have set out before, there is no doubt that the large majority of domestic payments will continue to be transacted in Swiss francs. On the whole, the decline in seigniorage, i.e. the profit that central banks achieve with the circulation of money, is likely to be very limited. However, the main point I want to make here is that even if the creation of the European Monetary Union did have a significant impact on the demand for Swiss francs, this would not call the viability of the SNB's monetary policy concept into question. A possible change in the demand for money hampers monetary policy decisions especially if a central bank pursues money supply targets. The steering of the money supply as a monetary policy concept has by now been abandoned by many countries.
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The second curve in the figure represents variations in the amount of credit or degree of indebtedness in the economy. There are slightly different terms for these cycles in academic literature – credit cycles, leverage cycles or financial cycles. 3 They can have slightly different meanings in different contents, but essentially refer to the same thing. For the sake of simplicity, I shall use the term credit cycles here. The credit cycle and the business cycle may occasionally coincide quite well, but can at times develop differently. In the figure, the two cycles are for illustrative purposes assumed to evolve rather differently. One occasion when the two cycles coincide, however, is when the credit cycle shows a rapid downturn, as at the end of the figure. Such a downturn is more likely when the preceding upturn has been unusually strong and characterised by exaggerated optimism and risk has been underestimated and under-priced. Credit boom that “goes wrong” – credit and business cycles coincide At some stage it becomes clear that the large amount of credit and the high level of indebtedness are based on overly optimistic calculations. Interest in selling the asset, usually housing, at the base of the credit expansion suddenly becomes greater than interest in buying it and a downward price spiral starts. The value of the collateral falls and the banks become cautious and reduce their lending. Households on the other hand see the value of their assets plummeting while the size of their loans remains unchanged.
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It includes a suite of tools ranging from prudential instruments like loan-tovalue ratios and fiscal measures like stamp duties on property transactions, to supply-side and other administrative measures. Singapore does not target asset prices but keeps a close watch on asset price movements, looking for signs of speculative froth, excessive leverage, or concentration risks. 19. Systemic stability is also a shared responsibility. It requires coordinated efforts across different government regulators and agencies. MAS is fortunate in this regard. As an integrated regulator which supervises the banking and insurance industries, as well as the capital markets, MAS is well placed to take a comprehensive view of risks within the financial system as a whole. As a central bank responsible for macroeconomic stability, MAS is also able to monitor and understand the effects of monetary and liquidity conditions on systemic risks. And MAS works closely with other government entities on issues such as system-wide safety nets – such as the deposit guarantees of 2009 and 2010 – taking a comprehensive whole-of-government approach. Reconciling international standards and domestic discretion 20. The third dimension of rebalancing in regulatory reforms is that between international standards and domestic discretion. We have known for some time that we live in a globalised, interconnected world. But we did not know the extent of our interconnectedness until the crisis hit home. Cross-border bank lending is more than 40 per cent of world GDP. Global finance is really a vast and complex network of connections. Financial shocks are transmitted through this network with speed and virulence.
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In addition, one of the most important decisions for resolution authorities will be which legal entities within a systemically important firm to place into insolvency proceedings and which entities can and should be maintained for sale as going concerns. In his September 1 testimony before the Financial Crisis Inquiry Commission, my colleague, Tom Baxter, general counsel of the Federal Reserve Bank of New York, described how Lehman’s brokerdealer was not placed into insolvency, remained a going concern temporarily funded by the central bank and was sold within days after Lehman’s bankruptcy filing. The work needed to understand how coordinated resolution might work and when it will work underscores for us that an immediate jump to a fully fledged international resolution process is not really feasible. This is in fact why doing the hard and painstaking work of resolution planning is so important. Resolution planning is a smaller version of the statistical simulation I described, more closely tied to the specifics of the individual institution’s case, in which the financial authorities in the jurisdictions where the firm’s major operations are located work through potential scenarios. Those scenarios will reflect the current structure of the firm and the normal range of the distribution of assets and liabilities across legal entities. Resolution planning is likely to contribute a great deal of insight into how a full-fledged international process could work, insight that we do not have today.
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Some of the issues in resolving large, internationally active financial firms have been recognized for some time – the multiplicity of jurisdictions, differences in insolvency regimes across countries, complexities in unwinding certain books and the largely untested nature of national, much less international, resolution processes for such very large financial firms. Over the last 20 years, the international legal and supervisory communities have undertaken several efforts to address these issues. In the wake of the financial crisis, the Basel Committee on Banking Supervision formed a Cross-Border Bank Resolution Group to identify what improvements could be made to the international resolution process and recommend actions to be taken. It published its recommendations in March 2010. The CBRG’s report is admirable in its clear description of the problems encountered in the fall of 2008 and the concrete nature of its recommendations. I will be referring to them throughout my remarks. As the CBRG was completing its draft report, the Financial Stability Board asked a working group, the Cross Border Crisis Management Group, to advance the development of recovery and resolution plans for cross-border institutions as recommended by the CBRG. I’d like to make three points today. The first is to highlight the importance of timely supervisory action in preserving the value in a financial firm. The second is to underscore the important innovation in supervisory practice represented by recovery planning. The third is to paint a picture, an admittedly optimistic picture, of the improvements in the international resolution process made possible by following the recommendations of the CBRG.
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A negative figure implies output is below potential and a positive that it is above In the opposite direction, growth could surprise on the upside, requiring monetary policy to be tightened by a little more, a little sooner than in the May conditioning path. For example, if business investment growth were to recover much more strongly than currently projected – perhaps because of improved in sentiment about progress on Brexit – then demand would grow well in excess of supply, pushing inflation above target throughout the forecast in the absence of tighter policy. 19 These scenarios illustrate how guidance, by revealing the MPC’s reaction function, allows people to anticipate how policy will adapt as the circumstances change. The Other Brexit Path Now consider a different Brexit path where the transition isn’t smooth and/or the final outcome is less open than the MPC’s conditioning assumption. The Bank is doing all it can to reduce the risks of the former. We are taking steps to reduce financial stability risks around Brexit, just as we did around the referendum when we engaged in extensive contingency planning with HM Treasury, foreign central banks, and private financial institutions. In particular, the FPC has identified the Brexit “cliff edge” risks and now publishes a quarterly checklist of progress towards their mitigation. Wherever it can, the Bank is reducing Brexit financial stability risks.
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To understand the MPC’s potential response, businesses, households and market participants can draw on the Committee’s track record of managing the trade-off that emerged after the referendum, since exactly the same framework would apply. As then, the policy response would reflect the balance of the effects of a sharper Brexit on demand, supply and the exchange rate. Given the exceptional circumstances, the Committee would have to decide whether to extend the period over which inflation is returned to target in order to provide support to jobs and activity. Although the exact policy response cannot be predicted in advance, observers know from our track record that, in exceptional circumstances, we are both willing to tolerate some deviation of inflation from target for a limited period of time and that there are limits to that tolerance. Conclusion In recent years, the UK has faced a series of supply shocks and regime shifts that have created a series of difficult trade-offs for monetary policy. Brexit is the most recent and potentially the most important of these. It will soon be entering a critical phase. The paths that the economy, and monetary policy, could take from here are connected by the expectations of households, businesses and financial markets. Since the referendum was called, these have reacted at different speeds and to varying degrees to the prospects for the UK’s departure from the EU. Financial markets, particularly sterling, moved quickly and sharply.
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In the following years the starting point for the monetary programme was the expected development of both real GDP and the inflation rate with the corrections for the envisaged changes in income velocity of money (in the Czech terminology the relevant aggregate M2 consists of currency and demand deposits, time and savings deposits and deposits in foreign currency). To be up-to-date, in 1997 we are targeting the increase of money supply by 8-12 per cent. The philosophy behind money supply targeting is well known. Without a deep reflection upon this theme I recall the message of famous equation of exchange: Total monetary expenditures have to increase proportionally, if the velocity is constant, to nominally expressed GDP. Nothing more and nothing less is required from monetary policy. Monetary policy should serve one goal only: to repress high inflation and provide for a stable currency. As a rule of thumb this reasoning is both understandable and acceptable but a more profound discussion must draw our attention to several points: Neglecting at this moment the different versions of the equation of exchange what can we understand under the heading “total physical volume of transactions” on the right side of this equation? For the economies in transition the difference between the total volume of transactions and transactions counted in national income accounting is important. A part of the transactions is used for intermediate-good or inter-business expenditures and is not counted in the GDP accounts.
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A version of the equation of exchange suitable for transforming economies should therefore take into account on the left side not only money in the narrow and broader sense but also estimates of different kinds of quasi-credit. Textbook knowledge says that the constancy, or at least the predictability of velocity either in income or in transaction terms, turns the equation of exchange into the quantity theory of money. At this point, last year’s speaker, Dr Tietmeyer, had again a more favourable position, because he could rely on the predictable and the longer-term change in the income velocity of the German mark. In the Czech Republic the velocity is neither constant nor reliably predictable yet. In the first stage of economic transformation the income velocity declined in line with the increasing transaction demand for money. Only later on did velocity start to stabilise and recently we have observed some increase in velocity. Last but not least, one must point out that, even in the quantity theory applied in advanced market economies, there is a certain “black box” connecting the quantity of money on the one hand and its effect on prices and quantities on the other. Between a change in monetary aggregates and offsetting changes in other variables, there is a transmission mechanism, with its specific features determined by the institutional framework in which it operates.
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I confess that I then felt the need to go to the vault and feel with my own hands the gold bars – Romania’s last tangible reserve in those days (in December 1990, gold reserves stood at 68.7 tonnes, amounting to approximately USD 850 million) – for a boost of confidence that the rather complex economic situation might be successfully tackled. It is hard to believe that this really happened, especially now, when Romania’s international reserves amount to approximately 38 billion euros. I will now move on to less amusing memories of those times. The avatars of economic transition rendered difficult the mission of Romania’s central bank. Monetary policy, a fundamental task of the National Bank of Romania, was facing numerous difficulties and constraints, as the process of lowering inflation was often undermined by the need to pursue conflicting macroeconomic objectives or avert a full-blown banking system crisis. This was because Romania’s path towards a functional market economy was anything but smooth. Quite on the contrary, the process often shifted between step-ups and slowdowns, that is when it did not stall altogether. A major feature of the domestic economy’s reform was the priority given, at the onset of the process, to ensuring the country’s social and political stability. In this context, the preferred choice was a gradual strategy, with reforms spread over many years, so as not to spark major social tensions.
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Evidently, traditional banking has a series of tried and tested protocols that help fend off or allow for a prompt response to situations of fraud, which are well-suited to the current needs of these population segments. In any event, it is an inescapable fact that, going forward, digital customers will continue to grow in importance. And so too is the emergence of new competitors, known as BigTech and FinTech. Allow me to turn to these now. It is widely known that these new players generally do not try to offer a full range of financial services. Instead they harness the possibilities that new technologies afford to target very specific niches, while steering clear of other activities, such as the business of taking deposits, which entail more stringent regulatory and supervisory requirements. As the report indicates, this can prompt a disintegration of the value chain. We have shifted from a situation in which many users interacted exclusively with a single financial institution to one in which, for example, a user can have an account at a bank, order payments through another provider’s interface and use a third party’s payment instrument. This situation could potentially lead to some banks losing touch with customers, one of the main strengths of their business model, and being relegated to performing back-office tasks that generate scant value. This is detrimental for the bank in two ways: first, the relationship with the customer is weakened and becomes less stable.
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6 Jan in’t Veld, Fiscal consolidations and spillovers in the Euro area periphery and core, European Commission Economic Paper 506, October 2013. 7 Dawn Holland and Jonathan Portes, Self Defeating Austerity, National Institute Economic Review No. 222 October 2012. 4 BIS central bankers’ speeches I could elaborate on the financial dimension of EMU. The Banking Union, when completed, has the potential to move up to the highest level of institutional integration. Similarly, the Juncker Plan is a useful integrated instrument, although too weak and slow at present. I have stressed elsewhere the need for and the benefits of moving ahead with a much stronger “Financing and Investment Union”, incorporating these steps forward and going well beyond the proposed Capital Markets Union. Yet, today I prefer to focus on the fiscal and structural policy dimensions of EMU. In practice, our fiscal framework has been implemented as a fairly weak monitoring framework. Likewise, on the structural front, the MIP (Macroeconomic Imbalance Procedure) is clearly lacking teeth. An institution is clearly missing to develop a mandatory and, hence, full coordination of national policies in the fiscal and structural areas, an idea I will elaborate upon in a few moments. The highly political nature of the debate should not hide the strong economic rationale for such a reform. 15 years ago Peter Kenen 8 argued that a fiscal integration could make currency areas thrive, even though they did not meet all the features of an optimal currency area.
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There are differences in economic, lending and asset price cycles, and there are also differences in economic history, crisis experience and institutional arrangements. The developments in recent years have exacerbated these dissimilarities and perhaps even created new ones. It appears to me that the success in combining the positive aspects of diversity and integration in the Nordic-Baltic region may serve as a model for the European Union. If cooperation and coordination has been possible in this region, there is reason to hope for the same in the European Union as a whole. Cooperation between the institutions responsible for financial stability in the region has a history of over 10 years. This cooperation has become considerably closer since the outbreak of the global financial crisis and the reversal of capital flows in our countries. Routine work is done in supervisory colleges, and there are high-level multilateral groups for coordinating macro-prudential supervision and crisis management. It has been very important that trust and open communication as well as mutual support and a willingness to take responsibility have remained in place when the financial stability of a Nordic-Baltic country is really at stake. A shared understanding of the need to deal with macroeconomic and financial stability risks at a national level has provided a solid foundation for Nordic-Baltic cooperation. 2014 will bring new challenges for Europe The year 2014 will bring new challenges.
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7 The launch of the new ICO (Official Credit Institute) line of guarantees, recently announced by the Government and worth € billion, will significantly reinforce at a most timely juncture this important instrument for combating the economic effects of the pandemic. Against this backdrop, the findings of the latest Bank Lending Survey anticipate the possibility of a tightening of credit standards for European firms in Q3 this year. Should this be confirmed, prolonged or increased support measures for the financing of firms would be advisable, in order to sustain the recovery. In any event, in this second phase of the economic policy response, credit support mechanisms should focus on prioritising access to these funds for firms with sound viability prospects, with a view to providing for the necessary cross-firm and cross-sector reallocation of productive resources. Likewise, it is admittedly highly likely that a significant number of firms will emerge from this crisis with high debt levels and with diminished demand prospects, at least for some time. In this respect, it is also a pressing concern to review corporate restructuring and insolvency processes, with the aim of establishing pre-emptive, flexible and simplified administrative procedures enabling firms to pursue their business activity while they are still viable. The second decisive contribution of economic policies to alleviating the consequences of the crisis has been the use of furlough arrangements (ERTEs). This has also been a very important instrument for mitigating firms’ liquidity needs.
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At this time, it may not be possible to move towards this system as there is not enough political support and many operational hurdles remain to be overcome. Nevertheless, it is important for the IMF to continue its work on how to broaden the use of SDR in all aspects of an international currency (i.e. store of value, medium of exchange and unit of account). Ladies and Gentlemen, 10. In closing, I would like to stress that the international monetary system is certainly in a period of transition. I do not expect a big bang, but a long and gradual process arising from macroeconomic and structural adjustments. Policy dialogue and cooperation between current and prospective reserve-issuing countries will play an important role in ensuring this smooth transition. As there are so many uncertainties along the way, it would take great leadership from some advanced and major emerging market economies to move the world forward towards a more stable international monetary system. Thank you 1 The Triffin dilemma is the conflict between domestic and international objectives of reserve issuing country. This is due to its duty to supply the world with extra currency, which may cause a loss of confidence in its currency. 2 BIS central bankers’ speeches
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Indeed, there is no “one size fits all” solution, and individual countries must tailor their approach to their own conditions. Moreover, crises typically evolve in unpredictable ways, and policy must be sufficiently fluid to adjust to changing conditions. Nonetheless, past crises have taught us important lessons applicable to the current situation worldwide. First, it is imperative that bankers and authorities be realistic about the size of the problems they face. While it is often difficult to accurately gauge the scale of problems at the outset of the crisis, history shows that problems usually are much larger than they first appear, and estimates often are subject to frequent and significant upward revision. While pressures to muddle through may, at times, be almost irresistible, policymakers and bankers must realize that the costs of inaction and denial are substantial and that problems left unaddressed grow rapidly over time. Second, it is important to recognize that financial system distress typically encompasses weaknesses in many individual areas, and effective solutions need to be comprehensive BIS Review 64/1998 -3- and multidimensional. Solutions usually involve complex tensions and trade-offs: improving the condition of the banking sector, for example, may have the effect of worsening the condition of the corporate and household sectors, which may, in turn, negatively affect the banks. Similarly, liquidating problem banking assets may put additional downward pressure on a broader range of asset markets and further exacerbate banking sector problems. However, asset retention more often than not erodes values and freezes market liquidity.
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In view of the extent and risks of the current crisis, fiscal policy will need to consider and prepare the deployment of additional stabilisation measures alongside the automatic stabilisers. In addition to the increased focus on economic policy, business practitioners within the Swiss economy are also challenged. In the case of banks, it is essential that credit shortages for companies and private households be avoided. Moreover, interbank business needs to be strengthened in order to smooth out liquidity imbalances. Companies must enhance their innovativeness and use opportunities for opening up new markets. The Swiss economy has many structural strengths and this prompts confidence that Switzerland will overcome the crisis. BIS Review 5/2009 1
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This benefits not only the participants but the CCP and the system as a whole; with a larger and more diversified pool of participants, the impact on the CCP due to a default of any single particular participant would be reduced. Self-clearing can also widen CCP access on cost-effective terms and allow proprietary derivatives trading firms, such as buy-side players, to join CCPs as members and thereby reduce their counterparty and fellow customer risks. CCPs will have the flexibility to design suitable self-clearing models, taking into account the risks and needs of self-clearing members. We have seen recent innovations by Eurex and CME to allow certain market participants which are not allowed to take part in the CCP risk mutualisation as a result of their mandates, to selfclear on the CCP. Remote clearing will allow offshore participants, which do not currently have a presence in Singapore, to join our CCPs, thus bringing about new, additional liquidity to local markets. The increased breadth and depth of the markets in turn benefits onshore members which will continue to be key players in our domestic markets. At the same time, such memberships allow offshore firms to gain familiarity with the local market and to deepen their participation. There are some understandable concerns if remote or self-clearing can undermine financial stability in domestic markets. In Singapore, our regulatory standards and expectations will not change. We will only allow CCPs to admit self-clearing or remote clearing members if they have put in place adequate admission, ongoing monitoring and risk management frameworks.
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Beyond equivalence assessments, we will consider the formation of supervisory colleges for our CCPs should they be deemed as internationally active. Putting recovery and resolution plans in place Allow me to share a final set of remarks on recovery and resolution plans. Even as we continue to strengthen the resilience and accessibility of CCPs, we must continue our efforts to ensure that recovery and resolution plans for CCPs are in place. There have been greater focus and thought given to arrangements to deal with default risks but it should also be recognised that other risks such as custody and investment risks can also pose a threat to a CCP's viability. Hence, in line with the CPMI-IOSCO report on Recovery of Financial Market Infrastructures, MAS expects and will place priority to ensure our CCPs have clear arrangements to enable custody and investment losses to be allocated in a way which allows CCPs to be solvent and can continue to provide its critical services. At the same time, there must be appropriate governance arrangements and incentive structures to promote prudent risk management on the part of the CCP. Such arrangements can include providing transparency to member firms, having “Skin-InThe-Game” (SITG) contributions from the CCP, and putting in place oversight structures to oversee such safeguards.
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Third, technology has advanced enormously in terms of both the capacity as well as sophistication. Countries have benefited immensely from these developments and, as a result, wide choices are available to savers & investors, borrowers & lenders together with greater flexibility & efficiency in the allocation of capital. Many institutions have sprung up in both money and capital markets. Similarly, the financial world has become more complicated with closer interconnectedness within and between individual firms, institutions and markets. In the meantime, the regulatory authorities have begun to focus on the achievement of specific objectives and found that they have to react to action by the financial markets by putting breaks to halt the rapid expansion, which would otherwise threaten the stability objectives. So, they brought in financial regulations to deal with the situations. Unabated by the tightening of financial regulation, financial markets continued to grow rapidly and ended up in crises and the world has learnt many lessons from financial crises. The outcome of the Mexican crisis in 1994, the Russian crisis from 1992 to 1995 and the Asian crisis from 1997 to 1998 was the further tightening of financial regulations and introduction of new ones. They were more reactionary and intrusive after the Enron and World Com failures in the USA. The Sarbanes Oxley regulations, which are considered somewhat draconian have come to stay, but may be with modifications.
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The balance financial intermediaries are regulated by various authorities while some are not regulated at all. Banking companies in Sri Lanka come under several jurisdictions, but the Banking Act is the centrepiece for financial regulations. It sets out all necessary regulatory provisions for capital requirements, shareholder limits, credit operations, provisioning requirements, consolidation, acquisition and mergers, suspension, winding up of banking companies, etc. Sri Lanka’s banking sector is currently operating on Basel I, but getting ready to implement Basel II Capital Adequacy Ratios from early 2008. Basel II is basically risk mitigation in banking operations and, it allows supervisors and regulators to encourage or require banks to build up capital buffers in good times. Financial regulations have thus been set taking into consideration the cyclical situation which banking firms face in home and host countries. In addition to the provisions in the Banking Act, the Monetary Law Act which governs the operations of the Central Bank, also provide for regulation of banking companies. However, in recent times, through various amendments, most of the provisions of the Monetary Law Act have been incorporated in the Banking Act. Their stock market operations come under the purview of the SEC Act. In addition to the banks, the Central Bank regulates the finance companies under Finance Companies Act and the leasing companies under the Leasing Act. The primary dealers who deal in the government securities market irrespective of whether they are banks or not, are under the supervision of the Central Bank.
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Suppose that price and cost inflation in Norway were allowed to be higher than in the euro countries. The nominal exchange rate would then have to depreciate in order to keep the real exchange rate constant over time. Thus, stabilising inflation at around the level aimed at by the ECB is a means of achieving exchange rate stability against the euro. In a situation with the prospect of increased inflationary pressure and a depreciating exchange rate, an increase in the interest rate may at the same time bring the exchange rate back towards its initial range and reduce inflationary pressure through lower demand and lower imported goods inflation. This in turn will contribute to long-run stability in the exchange rate. Similarly, with an appreciating exchange rate and a low inflation and activity level in the economy, a lower interest rate will contribute to stabilising the exchange rate in both the short run and the long run through a stable inflation level. On the other hand, we can think of situations where we would need to set a high interest rate in order to keep the exchange rate close to the initial range in the short run, creating a deflationary recession in the economy. Normally, a deflationary recession will lead to a weakened krone exchange rate, which means that the high interest rate set to keep the level of the exchange rate unchanged in the short run in itself will induce exchange rate instability in the long run.
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Chart 1 300 300 Projections 250 250 200 200 150 150 100 100 50 50 0 0 1970 1980 1990 2000 2010 2020 2030 Source: NB 2000 Legg inn filadresse her Chart 2 Export value of oil as a share of total exports excluding ships and oil rigs. Per cent 50 50 40 40 30 30 20 20 10 10 0 0 73 75 77 79 81 83 85 87 89 91 93 95 97 99 Source: Norges Bank Legg inn filadresse her BIS Review 121/1999 2 Chart 3 Government net cash flow from the petroleum sector as a share of GDP. Per cent 10 10 8 8 Projections 6 6 4 4 2 2 0 0 1980 1990 2000 2010 2020 2030 Source: NB 2000 and Norges Bank Legg inn filadresse her Chart 4 Government budget surplus and Petroleum Fund surplus. In billions of NOK Ex.
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But I would urge you instead to look at the reports of our annual medical check-ups conducted by the IMF since 1990 in the form of what are known as the Article IV Consultations. The IMF team was in fact in Hong Kong for this year’s Consultation in the second half of October, when the short-lived but somewhat intense attack on our currency occurred. It was the best time for any diagnosis of financial problems. But after observing us closely over the period the team again gave us a clean bill of health. Let me give you a few relevant quotes from the Concluding Statement of the Consultation, which has already been published.
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The global financial crisis that erupted in late 2008 had its influence on our economy by stiffening this cooperation. On the one hand, the system found itself in a difficult liquidity situation, while on the other hand businesses found it difficult to access markets. With some additional subjective reasons, the outcome of this was a deterioration of the system’s loan portfolio and companies’ liquidating capacity. Consequently, 2009–2010 marked a slowdown of lending growth to the economy, reflecting the increased prudence, fully justified by the system, and BIS central bankers’ speeches 1 business inability to earn a meritable new loan. The period coincided with a review of balances and portfolio restructuring, when possible with provisions, directly affecting the system’s financial performance. The Bank of Albania has played a major role as a guardian of the country’s macroeconomic and financial stability. Macroprudence has been the prevalent word in our communication with the market, authorities and the public. We have translated macroprudence as a need for more capital and liquidity, and increased banking system payment capacity. Consequently, the Albanian banking sector did not experience contracting. The Bank of Albania has provided and continues to provide the necessary liquidity to the banking system, to stimulate not only to the market but also to the entire economy. Prudent policies and timely legal regulations guaranteed effective banking supervision and enabled satisfactory businesses’ access to bank loans.
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Within this range, the FPC judged that a structural level of capital requirements and buffers of 11% would allow it to meet its financial stability target, and maximise the longer-term level of expected GDP.25 Chart 17: FPC’s benchmark for optimal capital requirements is 11% Estimated cost/benefit of capital 11% optimum Annual GDP cost of moving away from the appropriate capital ratio (in % of GDP) 0.02 0 -0.02 -0.04 -0.06 -0.08 -0.1 Optimal range -0.12 7 8 9 10 11 12 13 14 System capital ratio (% of RWAs) 15 16 17 In addition to this structural capital requirement, UK banks are required to hold a Countercyclical Capital Buffer (CCyB) that varies over the financial cycle, matching the level of banking system resilience to the level of risk. The CCyB was introduced internationally following the crisis, as part of the Basel III package of measures in 2011. It better optimises the balance between the primary macroprudential policy objective to reduce GDPat-risk, and the secondary objective to support economic growth, compared to a fixed capital requirement that does not vary with the level of risk.
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Even in the USA after the FED lift-off, interest rates still qualify as historically low and the tightening cycle has been announced as “gradual”. Now why should we, as central bankers, care about ultra-low rates? For many reasons, notably because they can lead to a misallocation of resources or bubbles, and because they are currently associated with persistently low inflation or “lowflation” – shall I even say “noflation”? The latter is of particular concern given the costs resulting from price or wage rigidities and distortions, as well as the risk that we might fall into deflation. My role as “opening speaker” is modestly to stress some puzzles and challenges we face. You will then have the whole day to provide the best answers. To kick off, I’ll focus on where we stand, with two puzzles, and then on what monetary policy should/can do, with four challenges. I. Where do we stand? And to start with, what is ultra-low? A lot of what matters for CBs is low or ultra-low compared to history, notably in advanced economies (AEs): first, inflation, be it headline or core, realized or expected; second, interest rates on safe assets, whether short or long, nominal or real, ex post or ex ante; third, term premia in spite of measurement uncertainties. And all variables have been decreasing and are now low at the same time which is new.
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MAS’ monetary policy stance since 2010 has underpinned the gradual improvement that we are seeing in Singapore’s inflation-growth trade-off. • MAS is committed to ensuring that recent improvements in inflation are sustained. • The current policy stance of modest appreciation of the Singapore dollar is appropriate in containing the re-emergence of strong cost and price pressures in a restructuring economy. Strong Singapore Dollar impacts MAS profits despite good investment returns Let me now move on to MAS’ financial results. MAS made investment gains of $ billion for the FY ended March 2013. • This is lower than the $ billion earned in the previous FY, due primarily to lower interest income as interest rates continued to decline in FY 2012/13. 2 BIS central bankers’ speeches But MAS recorded an overall loss of $ billion after taking into account translation effects from an appreciating Singapore dollar. • In FY 2012/13, the Singapore dollar appreciated against all major currencies • In particular, the Singapore dollar strengthened 5% against the Euro, 6% against the Sterling, and 14% against the Yen during FY. • It also appreciated against traditionally strong currencies like the Aussie Dollar and the Canadian Dollar. In short, we made good investment returns, but when measured in Singapore dollars, these gains more than offset by strength of the currency. • This is an issue of reporting currency. If we had reported our profit and loss in international currency, it would show healthy profit.
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As a result, dealers were, it is true, able to carry high levels of inventory and to accommodate easily shifts in the demand for market-making. But they were also vulnerable to falls in asset prices and tightening in wholesale markets conditions. When faced with severe stress, they were forced to withdraw from market-making altogether. In short, when conditions became really testing, market liquidity, like bank capital, proved to be an illusion. With regulation tighter, it may well be harder for market-makers to absorb inventory when end investors wish to off-load assets; market liquidity may start to fall away at an earlier point. The risk of another complete failure of market liquidity should be much reduced. But market participants will not always be able to sell what they want, where they want and when they want. BIS central bankers’ speeches 5 Investors need to recognize this change in market structure and adjust accordingly. In this respect it is perhaps worth observing that it is currently quite puzzling that, when market participants seem to be worried about market liquidity and the impact of regulation on market making, liquidity risk premia seem to be so compressed. It does raise questions over whether liquidity risks have been properly priced. Central bankers are, of course, supposed to worry about new risks. But I would not want to leave you with the impression that nothing has improved in the financial stability world.
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But the crisis revealed something about the relationship between the state and industry at the end of the nineteenth century. Indeed, the institutional set-up explains quite a lot about the approach taken towards the oversight of financial institutions at this time. The Bank of England was still a private entity. The leading partners from each trading house sat on the Bank’s Court of Directors. This was a world of gentlemen’s agreements and moral suasion, or “what a later 6 generation would know by shorthand as the Governor of the day raising his eyebrows” . One reason the Bank developed a supervisory interest in the clearing banks was to protect its balance sheet given its role as banker to the banks but it was, at most, primus inter pares, and banks were largely self-regulating. Indeed, the crisis at Barings was ultimately one of solvency not liquidity and so the Bank would not devote its own resources to a recapitalisation. Instead, the rescue of Barings Bank relied on the collective action of its industry peers and some co-ordination by the Bank rather than any formal supervisory role. This is in contrast to later crises of liquidity during which, in line with Bagehot’s theory, the Bank extended credit at a penal rate to solvent but illiquid banks and became lender of last resort.
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The Bank of England and Public Policy: 1941 -1958, Cambridge, Cambridge University Press, 1992, p.750 10 A short-term debt instrument issued by a company that is guaranteed by a commercial bank, often used to facilitate trade. 11 Fforde, p.755 8 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 And yet, as in the 1890 Barings episode, you can see in this activity elements which persist in supervision today. For instance, while I do not wish to offer any formal comment on the state of Mark Carney’s eyebrows, in my experience a meeting with Mark is always a useful way to focus the mind. It is worth remarking that during this period there was a genuine window of opportunity to extend the 12 boundaries of banking supervision undertaken by the Bank and legislate accordingly . However, after a year’s negotiation, it came to nothing and instead of a Banking Act 1957, the banking sector would have to wait until 1979 before the Bank involved itself more formally in the affairs of firms and, crucially, on a statutory basis. In the period up to the 1970s, there had been ‘no recent case of depositors losing their money. There was little public interest in the subject and there had been no troubles that might have led to a demand for the 13 Bank’s help’ . This set of circumstances changed abruptly when the secondary banking crisis engulfed the City in the period 1973-5.
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In a cash pre-funding world, settlement banks will only be able to accept further payment instructions if they have sufficient funds in their account with us. Given the changes coming to our retail systems, and recognising that a number of other central banks have moved away from a traditional daylight business day, we have recently decided to review the pros and cons of extending the operating hours for the RTGS infrastructure in the UK. This is not a review with a preferred end in sight: it is entirely plausible we will conclude that no changes are warranted, but we do want to understand if a longer RTGS hours would permit beneficial change in the various wholesale and retail payments systems which connect into it, and so to the wider financial system operating in the UK. The review is a form of sensible housekeeping, being an issue that the core infrastructure provider should periodically address. My presumption is that we will draw our initial conclusions within a year, with a further implementation lag following that, were we to conclude that significant change were appropriate. The final area of focus is country specific: last month, the UK government introduced draft legislation to create a new regulator for UK payments focused on competition, innovation, and the interests of end-users. This will replace the previous regime which had relied on a self-regulatory body, the Payments Council, to achieve these public policy goals.
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The slowdown in global growth has been more pronounced and spanned a longer period than we had expected. The Norwegian economy has also felt the effects of this. Norges Bank has therefore lowered the sight deposit rate from 7 to 5.5 per cent since 11 December, most recently on 5 March. The interest rate differential has narrowed. Since mid-January, the krone has depreciated, partly reflecting expectations of lower interest rates. Monetary policy has been relaxed. There is uncertainty associated with developments in many of the factors that will influence inflation ahead, among others the exchange rate. This implies a gradual approach to the conduct of monetary policy. Increased spending of petroleum revenues will have implications for Norway’s industry structure. High demand for goods and services that require domestic resources, necessitates higher employment in the sheltered sector. This labour has to be recruited from the exposed sector, or through the natural increase in the labour force finding its way to the sheltered sector. Even if employment and output in Norwegian manufacturing industry fall, developments for Norwegian enterprises may not necessarily be only negative. Some enterprises may be at the cutting edge of technology, and increase their efficiency in pace with the rise in costs in Norway. Others may relocate labour-intensive activities abroad. The scaling back of manufacturing still involves a risk. It makes the economy more vulnerable; the foundation for learning, innovation and development may be undermined when a smaller share of the business sector is exposed to intense international competition.
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These have had the aim of supporting the economy during the outbreak, and in so doing to minimise the potential for longer-term damage or scarring to the economy’s potential. On the monetary side the MPC likewise deployed its full range of monetary tools in March as the pandemic intensified. In March the Committee cut Bank Rate in two steps to a new low of 10 basis points and launched a new Term Funding Scheme with additional incentives for SME lending (TFSME for short). And against a backdrop of accelerating market dysfunction – brought on by the “dash for cash” – the MPC announced an additional £ of gilt and corporate bond purchases, to be carried out at a record pace of £ of gilt purchases per week (Figure 4).3 In June the Committee voted for a further £ of gilt purchases. And in August we gave new forward guidance. The size and pace of the asset purchase programme launched in March reflected its twin objectives – both to provide stimulus to the economy by lowering longer term interest rates, and to counteract any tightening of monetary and financial conditions that might result from the deterioration in gilt market conditions.4 Those twin objectives were successfully met. Orderly functioning was quickly restored to the market – market functioning indicators, which had been flashing increasingly red, rapidly turned back to green as pricing and liquidity metrics like bid-ask spreads returned to normal levels (Figure 5).
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With conventional tools having reached their limits, policy makers enhanced their toolkits, developing what were dubbed unconventional monetary policy tools. These took the form of: quantitative easing or asset purchase programmes, designed to lower longer-term interest rates rather than short-term ones; new funding operations; forward guidance; and, in some jurisdictions, negative policy rates. I’m going to leave funding operations such as the TFSME and also lending programmes mostly to one side in my remarks today. That’s not to downplay their importance – they’ve played a key role in aiding the effectiveness of monetary policy and supporting the flow of credit to the private sector. Unconventional tools are not perfect substitutes for policy rates. The effects of many of them were, and indeed remain, uncertain compared to the relatively well-understood effects of rate cuts. And at least as much if not more so than with policy rates, their effects were and are state contingent, with the transmission through to the real economy determined both by the characteristics of the financial system in which they operate and by the economic situation in which they are applied. Nevertheless, from a starting point of a single tool approaching the limits of its usefulness, central banks came out of the great recession and the years which followed with new, much fuller sets of tools, as well as a much better understanding of how to apply them. This expanded toolkit was put to effective use in the MPC’s response to the 2016 referendum result on membership of the EU. 2 2.
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Then, I hope, it will become quite clear even to the public at large who has in fact defended the public interest and who has acted against it. This multi-month campaign against the central bank (which by the way is still going on) has consumed impressively large financial, media and political resources. All of you have also observed the biased attempt of nationally representative organisations to misrepresent the BNB’s actions and, ostensibly by accident, to divert the attention of the Bulgarian public from those who has abused people’s trust and deposits. But all along while it was solving the case of KTB and CB Victoria, the BNB did not allow to be misled and deviate from the letter and spirit of the law. If somebody believed that by using Jimmy Hoffa’s1 methods they would force a strong institution like the BNB, with an earned reputation nationally and internationally, to circumvent the law or to obey personal or group interests, they were obviously mistaken. In this regard please let me share a few general observations relating to the topic of frauds in KTB, the responsibility of the banking supervision, and the role of the central bank. The KTB case can be compared with a series of cases in other countries. Over the last years alone in the EU and USA there were dozens of failed banks and banks in which frauds for billions of euros were discovered.
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Elvira Nabiullina: Review of recent inflation developments in Russia and economic outlook Statement by Ms Elvira Nabiullina, Governor of the Bank of Russia, in the follow-up to the Board of Directors meeting, Moscow, 13 December 2019. * * * Today, the Board of Directors has decided to cut the key rate by 25 bp down to 6.25% per annum. We will consider the necessity of further key rate reduction in the first half of 2020. Let me dwell on the main factors behind the decision. First. Annual inflation continues to decline faster than we expected. Our revised inflation forecast for the end of this year is 2.9–3.2%. Meanwhile, average 2019 inflation will stand at 4.5%, which reflects the high price growth rate in late 2018 and the first months of 2019. This significant slowdown in inflation in the second half of the year was caused by a joint action of a number of disinflationary factors, both temporary and more persistent. These factors include an increased supply of individual food products due to a bumper harvest. Also, price growth of imported goods is still limited due to the ruble appreciation and inflation deceleration amongst Russia’s trading partners. At the same time, moderate demand, both external and internal, is a more persistent factor. The proportion of temporary and persistent factors has yet to be estimated. Most indicators that we analyse reflect low inflationary pressure. Annual core inflation is declining at the same rate as the headline consumer price index.
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However, owing to the effects of tax hikes, increases in food and energy prices, and base effects, the inflation rate is hovering significantly above the target, which is having an adverse impact on inflation expectations, and leading to risks regarding pricing behavior. Therefore, the revised forecasts are based on the assumption of gradually withdrawing the excessive amount of liquidity provided to the market, and increasing policy rates at a measured pace starting in the last quarter of 2010. However, based on the prediction that resource utilization will likely remain at low levels for sometime, the baseline scenario envisages that the increases in interest rates would be limited with policy rates remaining at single-digit levels throughout the forecast horizon. As shown in the slide, inflation will follow a volatile path throughout 2010 owing to the base effects driven by the temporary tax cuts and unprocessed food price fluctuations that occurred during 2009 (Figure 34). The temporary tax cuts implemented in March 2009, which were withdrawn partly in June and fully in October, would cause headline inflation to increase during March and April, and to decrease during June, July and October of 2010. Accordingly, inflation is expected to increase slightly during the second quarter and then fluctuate at around 10 percent in the third quarter (Figure 34). Inflation is expected to drop significantly in the last quarter of 2010 and the first quarter of 2011 (Figure 34).
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Then, I will outline the Central Bank’s inflation forecasts presented in the Inflation Report that will be posted on our website shortly. In the first quarter of 2010, as perceptions regarding recovery in the global economy became more pronounced, the trend of increase in risk appetite in global financial markets continued. Accordingly, as had been the case since the second half of 2009, emerging markets attracted more capital through increased portfolio movements. On the other hand, risk premium indicators in most developing countries remained below those of pre-crisis levels. In this period, Turkey’s risk premium indicators continued their positive trend and did not differentiate from the general trend except for short periods when developments specific to our country were pronounced (Figure 21). The improvement in global risk perceptions in the first quarter led the currency of many developing countries to appreciate. In terms of changes in currency values, the Turkish lira did not significantly differ from currencies of other emerging markets in this period and the relatively stable course of the Turkish lira in the crisis period continued throughout the postcrisis process as well (Figure 22). National income data of the last quarter of 2009 were consistent with the outlook we presented in the January Inflation Report. In this period, while the mild recovery in private sector demand continued, public sector consumption expenditures increased more than envisaged due to temporary factors. Meanwhile, persisting problems in the global economy restricted foreign demand, whereas stock accumulation started, albeit slowly, along with the improvement in domestic demand.
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In some cases, they may choose to adopt standards first articulated by our committees as part of their frameworks. 22 Conclusion Market participants have a responsibility to themselves, their clients, and the financial markets in which they transact to implement best practices within their own institutions and to encourage their clients and other counterparties to do the same. Broad adoption of best practices can strengthen each market participant’s existing controls, help reduce market disruptions, and ultimately foster greater confidence in the broader financial system. Raising standards of behavior begins with creating a culture in which people are motivated to follow good market practices. The primary responsibility for improving the culture in the financial services industry rests with you, your firms, and every other financial institution participating in global financial markets. Best practices can play a role in building a strong ethical culture that improves the behavior of market participants and strengthens the public’s trust in the industry. Central banks have an interest in ensuring that financial markets sustain a healthy and robust economy. As active market participants and for the transmission of monetary policy, we support best practices that promote the integrity and effectiveness of the financial markets. We recognize the usefulness of establishing a collaborative process for identifying and affirming standards of good market practice. We also recognize that the success of best practices relies on the contributions and undeniable support of market participants and primary dealers in particular.
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However, no market participant wanted to be the first to begin charging margin out of 10 Several examples in the FX and fixed income markets illustrate that best practices would not be successful without the undeniable support of market participants. For instance, reduction is settlement risk due to the adoption of payment-versus-payment mechanisms, drop in settlement fails in U.S. Treasury markets after the implementation of the fails charge, and improvements in the derivatives markets infrastructure are just a few examples. 11 The BIS effort to develop an FX Global Code and the Bank of England’s leadership of the Fair and Effective Markets Review are two examples of this public-private partnership. 12 Automated trading has also been the focus of significant regulatory attention in the United States and elsewhere over the last several years. See, for example, the Commodities Futures Trading Commission’s proposed rules on “Regulation Automated Trading,” the recent Financial Industry Regulatory Authority (FINRA) amendment to the National Association of Securities Dealers Rule 1032, and the proposed amendments to the U.S. Securities and Exchange Commission’s Rule 15b9-1. 4 BIS central bankers’ speeches fear that their counterparties would stop trading with them and move their business to a counterparty that did not require margin. The TMPG addressed this problem with a recommended practice that all market participants exchange two-way variation margin on a regular basis. 13, 14 Best practices can also encourage market participants to question long-established trading practices and advocate for change.
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Muhammad bin Ibrahim: Banknotes exhibition in Malaysia Opening remarks by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the launching of “Works on Paper: Art Inside the Wallet”, Kuala Lumpur, 4 August 2016. * * * If you consider yourself to be a typical person , chances are you would never take the trouble to look at your banknotes closely unless you are in a situation where your banknote are rejected by the cash deposit machine. A typical response in a situation like this is to check your money more thoroughly to see if it is a genuine, fit and useable. Otherwise, the interest of typical person in banknotes does not go beyond their wallet. This attitude towards banknotes is not surprising and even understandable, but I hope this exhibition of World Banknotes at Bank Negara Museum and Art Gallery today will spur some interest among members of the public on the intricacies of banknotes of our country and the world over. Today we are presenting, what we thought, the 30 most innovative banknotes from around the world, printed in the past two centuries, to show why there is more to banknotes than meets the eyes. Banknotes of any nations are unique and represent the identity of the issuing country - and not surprisingly, to most people banknotes are only second to the national flag as the most identifiable and recognisable icon of the country.
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They have a lot of stories and messages to tell, waiting for us to look up close and decipher their meanings and symbolism. Therefore, I urge all of you to take your time to marvel at the wonders of banknotes on exhibit today. I hope this exhibition will open our eyes to view banknotes from a different perspective, to have a greater understanding why banknotes have always exuded a strong sense of pride, prestige and sovereignty of the issuing country. Thank you. 2 BIS central bankers’ speeches
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The first is that central banks have become increasingly aware that monetary stability and financial stability are closely linked. It used to be said that the reason why central banks were concerned about banking system soundness was that the banks were the main transmission mechanism for monetary policy. This still remains largely true, but central bankers have come to recognise that other aspects of financial stability also matter from the point of view of being able to meet monetary policy goals. For example, as the bond market has become an increasingly important as a transmission mechanism for monetary policy, market conditions, the soundness of intermediaries, and the transparency and integrity of pricing have all become relevant issues for the central bank to consider. The debate that 8 BIS Review 106/2006 took place a few years back on whether central banks should also target asset price inflation as well as consumer price inflation is another example. A third factor has been the changing responsibilities of central banks. The recent emphasis given to macro prudential policy has coincided with the move, in some countries, to establish regulatory agencies separate from the central bank. The statutory responsibility for ensuring bank soundness has moved to these agencies, but the central bank has kept its traditional concern for the overall soundness of the financial system. This has led to a clearer distinction between the micro- and macroperspectives that had become blurred in the second half of the last century.
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According to our model, a rise in house prices has a strong and prolonged effect on household debt, as it takes time before all dwellings have been traded at the new higher price level. Growth in credit to households can therefore remain high for quite some time, even if the increase in house prices should start to subside. What then is driving house prices? In our empirical model, house prices are determined by household income, banks’ lending rates after tax, the housing stock, unemployment, and an indicator of household expectations of their future financial situation and of the Norwegian economy as a whole. 3 Household income has contributed most to the rise in house prices in the last two years. Interest rates 3 D. H Jacobsen and B.E. Naug (2005): “What drives house prices?”, Norges Bank Economic Bulletin, no. 1/05, pp. 29-42. BIS Review 106/2006 5 have increased since the summer of 2005. Given the lags involved, the cumulative contribution from interest rates to house prices is still positive. Nevertheless, in the period ahead, the normalisation of interest rates in Norway may moderate the rise in house prices. Observations from other countries, such as the UK and Australia, indicate that a rise in the key interest rate by the central bank has been followed by slowdown in house prices. Growth in household debt has been higher than growth in disposable income for several years now.
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On the other hand, we expect to see weak developments in exports and for example in investment in commercial buildings. The Norwegian krone has appreciated markedly this year. Developments in wage settlements have probably been an important driving force. High wage growth leads to high interest rates, making it attractive to take krone positions. As a result, the Norwegian krone appreciates. We must be prepared for fluctuations in the krone exchange rate in line with that observed in other countries. There is free trade in goods and services and free capital movements. The krone is floating. This means that economic agents cannot assume that the krone will be stable against the euro, against the dollar or against a weighted average of foreign currencies. The krone does not fluctuate any more or less than other currencies. A large share of petroleum revenues is invested in foreign equities and bonds through the Petroleum Fund. Changes in oil prices influence the size of the Fund, but have little effect on the domestic use of petroleum revenues. The Petroleum Fund thus serves as a buffer against fluctuations in oil prices and shields the krone exchange rate. Nevertheless, we have been prepared for fluctuations in the krone exchange rate on a par with changes in other countries. Over the last two years, the appreciation of the krone has been driven by the wide and increased interest rate differential between Norway and other countries, which reflects the relatively high level of wage growth in Norway.
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Without these measures, the euro area would have been in outright deflation last year and prices would have fallen at an even quicker pace this year. Growth would have been significantly lower. BIS central bankers’ speeches 1 Second, while our measures were deemed effective, they were also judged to be insufficient in view of the deteriorating outlook for price stability. There was a concrete risk that without increasing the quantitative stimulus, the date by which inflation would settle around levels below, but close to, 2% would once more be pushed back beyond any relevant definition of medium term. Therefore we decided to recalibrate our monetary policy stance. We cut the deposit facility rate further to –0.3%, we extended the envisaged end-date for our monthly purchases to the end of March 2017, while maintaining its conditionality on the inflation outlook, and we announced that we will reinvest the principal payments of our purchased assets once they mature, for as long as necessary. We also decided to continue conducting the main refinancing operations and three-month longer-term refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2017. Since our meeting in early December, conditions have once more changed. A moderate recovery of the euro area economy is under way, driven mainly by domestic demand. But downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks.
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In maintaining the soundness of the financial system in Singapore, MAS’ approach is centred on establishing sensible rules appropriate to our circumstances, strengthening prudential and market conduct supervision, and working in partnership with the industry to develop a shared ownership of supervisory outcomes. 9. This approach has served us well. As global reforms reshape the financial landscape, we will continue to strengthen our supervisory and regulatory regimes and market infrastructure, consistent with new international standards and best practices. As we have done in the past, we will calibrate these changes to take into account our environment and regulatory objectives. 10. MAS is supportive of global reform efforts to strengthen capital and liquidity frameworks. We have always considered capital adequacy and effectiveness of a bank’s risk management and capital planning processes as important parts of overall prudential management of banks. As a member of the Basel Committee on Banking Supervision, we participated actively in international discussions that helped shape the broad agreement reached earlier this week on the main design elements of the new capital and liquidity reform package. Other design details such as calibration, and phase-in arrangements as well as the framework for regulatory buffers will be determined later in the year. We would like to see a set of final proposals that can be implemented globally in a meaningful manner to promote the long term stability of the banking system.
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History is littered with examples of similar speculative assets that have made a very large amount of money for those that got out in time -- and that have cost those who did not an equally large amount. Technology does not make assets with no intrinsic value a safe or a one-way bet. A second example is the need for a commonly accepted settlement asset or means of transaction – aka “money” – to have a stable value under stress. If confidence breaks down in the “money“ used as a means of transaction, stress can be transmitted extremely quickly through any system using that form of money. The settlement asset used in the majority of crypto transactions is a so called ‘stablecoin’, digitally native crypto-assets that purport to peg their value to a fiat currency, almost always the US dollar. They are used to buy and sell crypto assets on platforms as they avoid the costly ‘off-ramps’ and ‘on- ramps’ from fiat to crypto, can be integrated into smart contract protocols and can be held as a store of value within the crypto eco-system. The purported peg can be effected in a variety of way – by backing with real economy assets, by backing with crypto assets or by an algorithm intended to guarantee stable value. Last year, 75% of all trades on crypto-asset trading platforms involved a stablecoin[2]. They are integral to the functioning of crypto-markets. In recent months we have seen two of the three largest stablecoins break away from their dollar pegs.
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Caleb M Fundanga: Campaign to keep Zambia clean and healthy Opening remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the review walk of the “Keep Lusaka clean, green and healthy campaign project”, Lusaka, 17 September 2009. * * * The Acting Minister of Local Government and Housing, Hon Bradford Machila His Worship the Mayor of Lusaka, His Worship Robert Chikwelete The Chairman of the BAZ, Mr Saviour Chibiya Chief Executive Officers of Commercial Banks Distinguished Invited Guests Members of the Press Ladies and Gentlemen I am honored to officiate at this important occasion at which banks have undertaken to conduct a review of the “Keep Lusaka Clean, Green and Healthy Campaign”. Hon Minister, as you are aware, the “Make Zambia Clean and Healthy” campaign was launched by the Government in 2007 and was aimed at keeping our surroundings clean and green in order to improve the health standards throughout the country. You may wish to know that the banking sector through the Bankers Association of Zambia and the Bank of Zambia commenced work immediately after the national launch. A project committee was formed and each bank including the BoZ embarked on implementing the campaign by making financial contributions. To ensure a uniform landscape on all islands along Cairo Road, a single company was employed to carry out landscaping and maintenance works including maintaining and keeping the pavements and gardens clean and green.
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The programme also included placing dustbins along the pavements and ensuring that the street lights were repaired and lit. It is highly gratifying to see how much work has been accomplished and I am sure that the results are clear for all of us to see today. This initiative, Ladies and Gentlemen, is one sure way of inculcating and promoting a culture of cleanliness amongst our people. It is also an effective way of expressing our Corporate Social Responsibility. Beautiful and clean surroundings also go a long way in complementing Government’s efforts of developing tourism. In fact another dimension of the initiative required that all banks including the BoZ maintain and keep their offices and surroundings clean at all times. In this regard, we at the Bank of Zambia have introduced regular inspections of offices while ensuring that all staff are aware of their responsibilities towards the clean campaign. Furthermore, by keeping their premises or business environment clean, banks provide the satisfaction that customer need. You would all agree with me that a business done in a clean environment leave the customer totally relaxed and in good spirit, prompting another visit in future. Ladies and Gentlemen, in line with “Goal 8” of the Millennium Development Goals on “Environmental Sustainability”, we are all expected to work together and reverse the losses of environmental resources. I am glad to report that the financial sector has taken the bold step and has become one of, if not the first, to contribute positively towards achieving this goal.
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Particularly, the role of media is vital in this campaign, which through the transmission power to the public, has the skill to affect the mentality and communication pattern of the public at large. School, is another key factor for the establishment and cultivation of a new mentality. School may help for disrupting this 55-year chain and not transmitting it to the young generation. On behalf of the Bank of Albania, I invite all the participating institutions, and more broadly, to join us in this meaningful and demanding commitment to educate the Albanian public, with a view to abandoning forever the use of these outdated terms in the economic and financial interactions, and definitely turning it into a linguistic relict. I warmly thank you for the insofar contribution and allow me to recall once again that our currency is neither “old” nor “new”, but simply Lek! 2/2 BIS central bankers' speeches
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By slicing and dicing the data in different ways, it is possible to assess how different segments, sectors and regions of the UK have performed during the recovery. That means looking at aggregate metrics of economic health, such as income, employment and wealth. But a different lens is provided by looking at these metrics on a disaggregated basis and at non-standard measures of societal well-being. Taken together, these disaggregated data tell a rather more nuanced story about the UK’s recovery: a recovery which for most has been slow and low, for many partial and patchy and for some invisible and incomplete. This uneven economic surface helps reconcile the macro data and the micro stories from my regional visits – the “recovery puzzle”. It also has implications for what happens next to the economy in the light of the referendum, including monetary policy, on which I will conclude. Why it matters Before turning to the data, it is worth spending a moment on why this matters. Why look at the distributional pattern of activity when monitoring the economy as a whole and when setting monetary policy? This might seem like a strange question. Surely the fortunes of different sectors and segments of society are important? Yet, at least viewed from one angle, the distribution of gains and losses across the economy and across society ought not to much matter, at least when it comes to setting monetary policy. Here is why. The tools available to monetary policymakers, like the Bank of England, are small in number.
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In addition, frameworks for enhanced regional risk management, crisis management and resolution are also being put in place. With greater financial integration, the region will be able to leverage on the advantages of economies of scale, innovation and more importantly place greater reliance on the cumulative strengths that resides within the region including our financial resources, skills and knowledge. It will also better position the region to collectively address emerging issues and challenges faced by the region taking into consideration the region's socio-economic context. Ladies and Gentlemen: While Islamic finance is gaining global interest and acceptance, the world's most populated Muslim region in the world, the New Nusantara offers opportunities for the accelerated expansion of Islamic finance. The intrinsic nature of Islamic financial structures encourages stability. Islamic principles require that the financial transaction be supported by genuine economic transactions. To further reinforce this, the governing Shariah principles also serve as a built-in self-regulatory mechanism that insulate Islamic instrument issuers from unproductive, speculative and unethical elements and thereby contributes to the stability of the financial system. Historically, capital financing and investment flows into the Nusantara region have generally been sourced from the developed financial markets. While we may see continued growth in short term capital inflows from these traditional sources, the more competitive global environment provides no assurance of the sustainability of such longer term investment flows.
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It already provides for an automatic revision of the situation in the event that the National Bank's earnings should permanently exceed the expected level. Inflation Forecast December 2002 with Libor at 0.75% Annual average inflation in % BIS Review 73/2002 2002 2003 2004 2005 0.7 0.7 0.9 1.6 3
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François Villeroy de Galhau: Monetary policy in uncertain times Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the London School of Economics, London, 15 February 2022. * * * Introduction I am very grateful to Iain Begg for the invitation to speak to you today, more than two years after my first intervention at the LSE. So many things have happened since then, and the Ukrainian crisis shows that uncertainty isn’t going away any time soon. The euro area, like many other economies in the world, is entering a crucial phase in the recovery from the covid-19 crisis. There is good news, there is bad news and the two are very much related to each other. Unemployment has fallen to its lowest level in the history of the euro area and real GDP surpassed its pre-crisis level in the final quarter of 2021. On the less positive side, shortages of materials, equipment and labour persist in some sectors whilst others still operate below capacity. This lopsided economy plus sharply higher energy and food prices caused headline inflation in the euro zone to accelerate to 5.1% in January. Core inflation is only at 2.3% but significantly higher than one year ago (1.4%).
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Furthermore, the logic of sequencing is closely linked to the use of the APP as a stance measure that reinforces the effect of forward guidance on short-term interest rates; if we wish to withdraw monetary accommodation, we should first release the accelerator pedal by stopping adding stimulus. By the way, if we started to raise rates before the end of net purchases, the risk would be to excessively flatten or even invert the yield curve. The fact that the reduction of the balance sheet occurs only in a third step is intended to avoid a brutal impact of the withdrawal of accommodation: the presence of the ECB in the markets, via reinvestments, allows us to contain these destabilising risks including on fragmentation. Hence, the direction of the navigation is clear. But as I have already said recently, we will retain our full optionality about its pace: its calendar will remain gradual, state-dependent and open in moving from one stage to the other. The second compass is our forward guidance on interest rates, as adopted last July. Before coming to it, let me in the order of our sequencing, starting with some considerations on our APP guidance.
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While some degree of forbearance may be unavoidable and even appropriate under the right conditions, it is at best a temporary measure. It is critical that forbearance not become institutionalized, 2 BIS Review 10/2001 but be tied directly to actions by both bankers and supervisors to address underlying problems. • Governments are not good long-term asset managers. Prolonged government holding of impaired assets is not likely to enhance their value, nor aid in the restoration of market liquidity. • Governments are not good commercial bankers. Delayed privatization of nationalized banks always means higher future costs, and usually inhibits fundamental reform. • Government-directed lending means future fiscal losses. Similarly, efforts to stimulate credit growth by nonmarket forces in the context of a banking crisis at best buy additional time, and usually dig a deeper hole. • Foreign investment in domestic financial sectors can yield important benefits. Foreign direct investment in the banking sector can provide much-needed capital resources, technology and knowledge transfer, and a more diversified capital and funding base in the event of future economic instability. • Financial sectors are only as healthy as their borrowers. Without corresponding corporate sector restructuring, financial sector rescue efforts are likely to be necessary in the future. • Strong financial systems depend on a reliable and credible legal system. In the absence of a strong legal system, borrowers lack appropriate incentives to repay. • There are no "quick fixes" to financial sector problems.
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Furthermore, no exchange rate regime can offer full insulation from cross-market spillovers, particularly where the free movement of capital is allowed. Nevertheless, certain policy combinations can make things far more dangerous. Fixed, but adjustable, regimes look to be particularly fraught with perils when combined with shortcomings elsewhere, not the least of which are the severe after-effects that always seem to follow their forced abandonment. As you are aware, much of the emerging world has moved toward floating rates in recent years. For Thailand and the other countries that have made the change in East Asia, it would appear that the new monetary/exchange regimes, despite their very difficult starts under the most inauspicious of circumstances, now appear to be serving countries well. Inflation is in the very low single-digit range in most of the newly floating economies, and in many instances the successful effort to bolster monetary credibility has been reflected in short-term interest rates that have declined to historically low levels. 4 BIS Review 10/2001 Moreover, authorities have gained new degrees of freedom to manage their economies and to respond to changing internal and external circumstances. But if the promised benefits of monetary discretion are to be fully realized going forward, markets need to understand the objectives and the framework by which the monetary authorities will decide future policy actions. In this regard, I would note that some countries, including Thailand, have looked to inflation targeting as a framework to accomplish that end.
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2.2 TO CONSOLIDATE THE RESILIENCE OF THE RESILIENCE OF THE FINANCIAL SYSTEM, WE THEREFORE NEED TO COMPLETE THE PROGRAMME OF REFORMS AND ADAPT IT TO THE NEW RISKS 2.2.1. “Finish the job”: complete the programme of reforms and ensure its coordinated implementation at the global level. (a) Finish the implementation of Basel III. On 7 December 2017, the Basel Committee adopted an important accord finalising the Basel III framework. The text completes the overhaul of the international prudential framework begun in 2009, by notably allowing financial institutions to continue using internal models, subject to strict conditions. This accord will gradually be rolled out as of 2022 with full implementation scheduled for 2027. In the EU, the transposition of the Basel accords will result in a modification of the Capital Requirements Regulation and Directive (CRR3/CDR6). The Commission has already begun this legal work by asking the EBA to analyse the impact of the reforms on the European banking industry and economy. The Banque de France and ACPR support the principle of a full and faithful application of the Basel accords within the EU. This implementation has to be reciprocal and must be harmonised at the international level. This is a prerequisite for ensuring the stability of the global banking system, and for guaranteeing a level playing field among banks. The implementation will also need to take account of the specificities of the European economic and financial environment.
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The FinTechs and BigTechs (especially the big US and Asian companies that are driving the digitalisation of the economy) offer new opportunities (new cyber security solutions, reduction in the cost of internal management for client entities, increase in financial inclusion, etc. ), but are equally a source of additional vulnerabilities, notably in terms of cyber risk, the weakening of financial ecosystems and the development of questionable practices in the use of data. The Banque de France is working actively on these issues within international and European fora, to promote the sharing of experiences and harmonisation of rules and practices, and encourage efforts to make financial sector agents more resilient. We also need to continue assessing the reforms already put in place, to check that they deliver the expected effects and to identify any unintended consequences. The FSB’s assessment shows that although certain measures have largely been implemented requirements for systemically important institutions, clearing – other aspects still have to be finalised, notably with regard to the monitoring of non-banking financial institutions. Only when these reforms are fully implemented will the financial system be effectively protected. T h e European integration projects are also essential for increasing the EU’s macroeconomic resilience. First we need to finalise Banking Union on an institutional level. One positive contribution would be to work towards a European deposit guarantee scheme. This could be based, at least initially, on covering liquidity requirements, with no permanent transfers between Member States.
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Robert Ophèle: Diversity and harmonisation of deposit insurance Closing speech by Mr Robert Ophèle, Deputy Governor of the Bank of France, at the International Association of Deposit Insurers (IADI) International ERC Conference, Paris, 26 May 2016. * * * I wish to thank the IADI and the FGDR for inviting me to deliver this closing speech. Bruno Bezard opened the conference for the French Treasury, and a central banker will close it. This is a perfect arrangement. Deposit insurance or deposit guaranty is a fascinating tool. History and geography have demonstrated the variety of schemes and how they are a powerful force for the better, or perhaps for the worse. I can’t indeed refrain from quoting the American Bankers Association, in 1933, i.e. more than 100 years after the introduction in the US of the first deposit insurance scheme, by the State of New York in 1829: “these historical experiences show that the guaranty plan is inherently fallacious and based on erroneous premises and assumptions. It has proved to be one of those plausible, but deceptive, human plans that in actual application only serve to render worse the very evils they seek to cure.” Today 113 Deposit Insurance Funds are in place, but I should stress that the jury is still out as to their effectiveness. Indeed, recent history shows how tricky deposit insurance can be. Just remember a few years ago, when schemes avoiding moral hazard by not providing a 100 percent coverage of even the smallest deposits were favoured.
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Practice and model diversity is a challenge, but not an obstacle for implementing efficient resolution strategies We have heard today that DGSs may still be very diverse in terms of their status, functions, design, size, etc. This is also the case for supervisory and resolution regimes even though the international standards-setters have made considerable progress in terms of harmonisation. Let me take the example of banking resolution: one of the (many) remaining challenges is to make sure that the adopted resolution strategies will be recognised and applied cross-border. Under the aegis of the FSB, several initiatives have been taken (e.g. ISDA protocol for financial contracts) but this is not the end of the story and many further discussions will be necessary to remove all the obstacles to implementing, inter alia, a single point of entry resolution of a GSIB. In the EU we have now a common legal resolution regime and even a common resolution authority for the Banking Union but resolution measures continue to be implemented at the national level because insolvency regimes within Europe are not unified. Being optimistic, I would say that these difficulties are not an impediment to resolution, because the most important thing is to be mindful of such a difficulty and to deal with it.
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The capital adequacy frameworks also made it cheaper in many areas for the banks to expand off their balance sheets. After the event, we can also note that the regulatory frameworks focused too little on liquidity risks. Many of these gaps in the frameworks are now being closed. However, the eternal problem is of course that the markets are always faster at finding new ways of circumventing the regulations than the authorities are at closing the gaps. Perhaps a more fundamental problem was that there was too weak a link between financial supervision and macro factors and other factors that affect the risk of shocks in the financial system as a whole. There was quite simply too much focus on individual companies and too little focus on broader development trends. Nor did the supervisory arrangements adequately reflect the increased internationalisation of the financial sector. In recent decades, the financial markets have become increasingly interlinked and very large sums change hands around the world every day. Large, complex banks and other financial institutions now conduct extensive operations in several countries. At the same time, supervision was mainly conducted on the basis of national mandates and focused on companies within individual, national jurisdictions. Supervision thus lacked the oversight required. Many factors interacted A number of interacting factors thus lay behind the situation that arose.
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At the same time, we have seen the risks in this development in no uncertain terms. The flows in the financial system have increased substantially while the system has become increasingly complex and difficult to survey. The mutual dependence of the various markets has increased. This means that crises can more quickly and more forcefully hit an increasing number of economies at the same time. The important thing now is to find the right tools for managing these new risks; to find instruments for a better-balanced development. We need a better insight into the build-up of global risks. This requires increased cooperation between public authorities around the world. It requires greater harmonisation of regulations and supervision. It requires a better readiness to manage cross-border crises. And to find the means to counteract the build-up of large imbalances we must begin to think along new lines. At present the functioning of the financial system is being maintained with the aid of the measures implemented by public authorities. One sign that the crisis is no longer as acute is that the TED spreads have fallen in Sweden, as well as the United States and the euro area. These spreads are now back to around the same levels that prevailed immediately prior to the worsening of the crisis in autumn 2008. But the financial markets are still functioning much less efficiently than normal. It is also still difficult for companies to finance themselves in the capital market.
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By contrast, the outstanding volume in SNB USD Bills – launched in February 2009 to refinance the SNB loan to the StabFund – is already at USD 15 billion. In addition to these short-term financing operations, the SNB concluded long-term deposit transactions amounting to USD 4 billion. We plan to further reduce the use of the swap facility with the Federal Reserve. Risks The risks facing the SNB as a result of its commitment in the StabFund are substantial, yet owing to the bank’s strong balance sheet, these risks can be absorbed. I would particularly like to emphasise that the SNB’s commitment is actually considerably lower than the USD 60 billion which still gets quoted by the public quite often. The SNB does not consider its loan to the stabilisation fund as a hindrance – either to its risk capability or its monetary policy latitude. The unconventional measures also pose additional risks to the SNB’s balance sheet in the form of interest rate, currency and credit risks. However, our analyses show that, in terms of the consolidated balance sheet, these risks are relatively low. BIS Review 77/2009 3 The SNB is well aware of the fact that the unconventional monetary policy measures pose not only balance sheet risks, but also a whole series of other risks, including the difficulties connected with correctly assessing the monetary policy impact and with finding the best way to phase out the unconventional measures.
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Purchase of foreign currency The aim of our buying foreign currency is to prevent an appreciation of the Swiss franc against the euro. This is the key component of our unconventional monetary policy. It is important to emphasise that we do not engage in foreign exchange interventions in order to BIS Review 77/2009 1 bring about a depreciation of the Swiss franc, but to prevent any further appreciation of the franc in its role as a safe haven currency. Therefore, the reproach we occasionally hear that the SNB’s policy is encouraging an international depreciation race is unjustified. A look at exchange rate movements shows a clear appreciation of the Swiss franc during the course of the financial market crisis (cf. chart 1). So there can be no question of the SNB conducting a beggar-thy-neighbour policy. We give ourselves a great deal of latitude with regard to our foreign exchange interventions. There is no fixed threshold beyond which we become active; we simply decide in accordance with the situation at hand. And markets should not become used to a certain level of intervention. We feel that this approach promises the highest possible impact, which in turn will allow us to phase out the strategy more easily when the time comes. Furthermore, we do not comment on the volume of our foreign currency purchases. The purchases of foreign currency have fulfilled their purpose – and with these I am referring to our first unilateral interventions in the foreign exchange market since 1992.
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9 The ARRC Selects a Broad Repo Rate as its Preferred Alternative Reference Rate 10 Information about SOFR can be found at apps.newyorkfed.org/markets/autorates/sofr. 11 In addition to the London Interbank Offered Rates, the other major interbank offered rates (IBORs) are the Euro Interbank Offered Rate (EURIBOR) and the Tokyo Interbank Offered Rate (TIBOR).
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In my view, these last two factors have probably pushed up the NAIRU by 0.5 to 1 percentage point on top of the about 1 percentage point effect of extended unemployment benefits, which is likely to be a temporary effect. Taken together, this suggests that the current NAIRU might be between 6 percent and 7 percent. Although undesirable, this rise should not create concern about the medium-term inflation outlook. First, even the higher estimate of NAIRU is still far below the current unemployment rate of 9 percent. Second, as discussed above, much of this rise is likely to be temporary rather than permanent. As the labor market improves, the extension of unemployment claims benefits will almost certainly be allowed to lapse. When this occurs, the NAIRU is likely to drop back to somewhere in the region of 5 percent to 6 percent. Third, some of the evidence that the NAIRU has increased is not particularly compelling. For example, the loop in the Beveridge curve that is evident now has been seen in past business 4 BIS central bankers’ speeches cycles – cycles in which there was no persistent rise in the NAIRU. This strongly suggests that the rise in job mismatch has a cyclical component. Fourth, the 9 percent unemployment rate may understate the amount of labor market slack. That is because the labor participation rate has fallen sharply.
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As a central bank and regulator, MAS has been focused on two broad areas: enhancing environmental risk management in our financial institutions; and promoting high-quality sustainability-related disclosures. MAS has issued guidelines on environmental risk management to all financial institutions. The guidelines set out MAS’ expectations for financial institutions to assess, monitor, mitigate and disclose environmental risks. They apply to all financial institutions across banking, insurance, and asset management. They cover environmental risks besides climate change – such as pollution, loss of biodiversity, and changes in land use. An industry task force on green finance, convened by MAS, has issued an implementation handbook, providing guidance on best practices in environmental risk management. MAS will conduct later this year a review of financial institutions’ progress in implementing the guidelines, with a view to publish an information paper to share best practices and areas for improvement. MAS plays an active role in international efforts to align supervisory frameworks for environmental risks. MAS is leading the workstream on micro-prudential supervision under the Network for Greening the Financial System (NGFS), which provides guidance for supervisors in incorporating environmental risk management. MAS is supporting the Climate Training Alliance, a portal for training on climate risks for central banks and supervisors, established by COP 26. Financial supervisors need to better understand how climate risks can potentially impact financial systems. MAS is leading an effort under the NGFS to study potential financial risk differentials between green and other assets and reviewing methodologies for climate and environmental risk analysis.
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BIS Review 128/2009 5 Chairperson, Distinguished Participants, In conclusion, let me simply state that I believe that we in Africa have an opportunity and an obligation to consolidate reform and ensure that we can return to and surpass the high growth rates, of above 5%, witnessed in the new millennium. This is important not just for Africa and the challenge of reducing poverty, but also the world, as demographic changes shift the burden of production onto the younger generation – which is concentrated in the developing economies, including Africa. I am happy to note that my invitation for colleagues to visit Zambia and see the wonderful opportunities for investment and progress that exist have been heeded as I did receive a delegation from Italy early this year. I cannot therefore end without encouraging all of you to visit Zambia when you have the opportunity – I can assure you that you will not be disappointed. I thank you for your kind attention. 6 BIS Review 128/2009
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There should be a policy and procedure in place to manage the risks. Internal control: The financial institutions should set up preventive, detective and corrective control mechanisms that may be built in the operating procedure or programmed in the system involving new product and service delivery. Contingency plan: The financial institutions should formulate the contingency plan to carry on the business under unexpected events. Staff development: The financial institutions should establish a staff development plan to enhance personnel capabilities to conduct new product and service operations. Last topic of presentation is new challenges for BOT supervision and ways to overcome. 5. New challenges for BOT's IT supervision and ways to overcome (1) While the financial industry is moving fast with innovations and new developments, supervision needs to ensure the stability of the financial system. Supervisors need to encourage financial institutions to operate their businesses in a safe and sound manner as new delivery channels or services could exacerbate some of the same risks inherent in traditional banking. However, the prudential regulatory framework has to be congruent to the evolution of the e-banking business. Therefore, we need to strike a balance between the need to maintain the stability of the financial system and to foster developments, competition, and a level playing field. There are ways to overcome this challenge. BIS Review 35/2005 7 - Regulators need to keep up with the development of the market while being proactive in formulating the regulatory framework.
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We anticipate a financial institution's policy to cover all necessary areas pertaining to IT activities including contingency plan, security, and out/in-sourcing. In addition, the policy should cover new product issuance such as internet banking and e-money. The process of formulating, implementing and maintaining of such policies should be considered. A continuous risk assessment and monitoring should also be part of an area of examination. Management support and oversight It is ultimately a responsibility of a financial institution's board and management to extend governance to IT and provide the leadership, organizational structures and processes to direct and control the enterprise. Management must monitor to ensure that IT resources are properly managed to promote business objectives. 4 BIS Review 35/2005 IT governance During the last few years, financial institutions have increasingly invested in technology infrastructure to improve their internal processes and servicing capabilities. Investment in technology infrastructure normally involves huge amount of funds and other resources. Technology also carries risks, which can adversely affect financial institutions if not properly managed. Financial institutions need to understand the strategic importance of IT, manage IT to effectively deliver value to business, and mitigate risks arisen from the use of IT. IT governance focuses on how financial institutions make the best use of their invested technologies. It is a high-level IT control framework related to the formulation of IT strategies, the management of IT processes to deliver value, the performance measurement, and the management of IT-related risks.
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Last Orders: Calling Time on LIBOR Speech given by Dave Ramsden, Deputy Governor for Markets & Banking Bank of England “Last Orders: Calling Time on LIBOR” event 5 June 2019 1 All speeches are available online at www.bankofengland.co.uk/news/speeches Authorities, internationally, led by Andrew Bailey, have been calling time on Libor for a while. Panel banks have agreed to continue to submit to Libor until end 2021 securing its future until then, but not beyond. This event focusses on the transition to our future without Libor, and the critical point we find ourselves at today – what we refer to in the conference title as ‘last orders’ for new exposures to Libor. This is a global issue – affecting multiple currencies. However, as you may expect and consistent with the UK origins of the phrase “last orders”, I’m going to choose to focus on sterling Libor and its successor, SONIA, in my remarks today. First, before turning to that transition, a reminder of why, informed by our recent Dear CEO exercise and with 30 months to go, time is being called on Libor. Libor prices in fluctuations in the perceived credit quality of banks, whereas for many users, alternative risk free reference rates are better reflections of the general level of interest rates. Beyond this, although Libor’s methodology and governance has been reformed and improved, an underlying issue remains – the way banks fund themselves has changed. There are very few transactions in the markets that Libor purports to measure.
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And it is key to the 1 2 www.bankofengland.co.uk/-/media/boe/files/record/2017/financial-policy-committee-meeting-september-2017.pdf www.bankofengland.co.uk/financial-stability-report/2018/june-2018 2 All speeches are available online at www.bankofengland.co.uk/news/speeches 2 Bank’s objectives – risk free rate transition is a core part of the Bank’s strategic goal to catalyse reforms in financial markets to make them fairer and more effective. The good news is, transition is happening. There has been real progress in establishing SONIA as the successor to sterling Libor. In the past 6 months there have been a number of positive developments in the sterling cash market. From a zero base this time last year, SONIA linked floating rate note (‘FRN’) issuance now dominates sterling floating rate financials issuance and there is clear momentum towards using the compounded SONIA rate across bond markets. The first 5 months of 2019, have seen 21 different banks, sovereigns, and supranationals issue FRNs referencing compounded SONIA, with a total value of about £ We’ve also now seen the first move by a bond issuer to switch their outstanding Libor linked bond to reference compounded SONIA instead. They are currently going through a bondholder Consent Solicitation process, with the deadline next week. This is a development which is being closely watched. We have also seen the first SONIA linked securitisations issued. In other areas, we are seeing progress. One UK firm has announced it has switched the basis of its balance sheet over to SONIA.
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Financial institutions which book prescribed OTC derivatives in Singapore are required to report such trades to a trade repository licensed by MAS. The reporting framework will be up and running next month, starting with interest rate and credit derivatives. The degree of standardisation of contracts in these asset classes is higher, so starting with these contracts will provide for a smoother phase-in. We have received feedback from the industry on operational difficulties in obtaining customer consent in order to report counterparty information to trade repositories. We are looking to amending legislation to address this issue. Ending too-big-to-fail The high-profile, public rescue of many large, systemically important financial institutions in the last crisis has galvanised a powerful resolve to end the “too-big-to-fail” problem. But this has proven to be one of the most challenging tasks facing global regulators. To be sure, the FSB and Basel Committee have made good progress on several fronts. • First, they have identified a list of global systemically important banks (G-SIBs). • Second, they have set out additional loss absorbency requirements for G-SIBs to reduce the probability of these institutions failing. • Third, there is ongoing work on a resolution framework to minimise the cross-border negative externalities that can be created by their failure. At the same time, major jurisdictions are embarking on plans to reform banking structures in a bid to end “too-big-to-fail”.
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Chart 30: Simulation of Bank rate and CPI inflation, if the starting level of slack is 2% Path for Bank rate Per cent 1.5 Per cent 3 CPI inflation 2.5 1 2 1.5 0.5 1 0 0.5 2013 2014 2015 2016 2017 -0.5 2013 2018 February IR Simulation with a lower bound at 0% Simulation with a lower bound at 0.5% 2014 2015 2016 2017 0 2018 February IR Simulation with a lower bound at 0% Simulation with a lower bound at 0.5% Source: ONS and Bank Calculations. Simulations show optimal policy under full commitment. Of course, there are good reasons why monetary policy is not set by algorithm. These simulations ignore a number of important practical uncertainties. For example, they assume that this policy path is fully credible and effective in stimulating demand and inflation expectations. In practice, the effects of a policy easing cannot be known with certainty and 18 BIS central bankers’ speeches policy credibility cannot be guaranteed. Moreover, there are upside as well as downside risks to the inflation outlook. Nonetheless, these experiments are in my view the right baseline when assessing the appropriate policy stance today. Conclusion Inflation has dropped like a stone over the past year, to close to zero. This largely, but not wholly, reflects external forces.
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Like households, companies repaired their balance sheets following the crisis but unlike households, corporates then went back to the well. Relative to earnings, aggregate corporate debt in the US and UK is 16 Germany, France, Italy, Spain and the Netherlands. Household credit growth has been subdued, rising at an annual rate of less than 5% in each of the UK, US and euro area for the past decade, compared to rates of over 12% in the US and UK pre-crisis. 18 Highly indebted households are defined as those with debt servicing ratios of more than 40%. 17 10 All speeches are available online at www.bankofengland.co.uk/speeches 10 nearing pre-crisis peaks,19 and the distribution is worsening. In the UK, the share of highly levered companies is above pre-crisis levels. This is despite the very modest growth in investment. Globally, the average quality of corporate borrowers has deteriorated materially. The share of lower-rated debt in global corporate bond markets has increased significantly over the last 10 years, with BBB-rated bonds now about half of the market compared to just a quarter in 2007. The global leveraged lending market grew by 21% in 2018, faster than the rate of growth in US subprime mortgages in the run up to the crisis. At $ trillion, the stock of outstanding leveraged loans is double that of subprime in 2007. Leverage of the most indebted issuers has been increasing rapidly (Chart 8).
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The Financial Cycle The global financial crisis was a painful reminder that the business cycle is not the only source of imbalances. Indeed, imbalances at the heart of the financial cycle have been the best predictors of downturns in recent decades. The financial cycle tracks the rise and fall in leverage and financial conditions around their sustainable levels. Compared to the business cycle, the financial cycle is greater in amplitude, slower moving and longer lasting, sometimes taking up to 20 years between peaks. As an economy expands, risk taking increases and lending constraints are relaxed. Debt and asset prices rise, reinforcing each other. Towards the top of the cycle balance sheets appear strong but are increasingly fragile. Equity and asset valuations are flattered by mark-to-market profits. Debt sustainability is vulnerable to shocks. At the very top irrationality sets in. Current conditions are assumed to continue forever. “House prices can only go up.” “Financial innovation reduces risk.” “Markets always clear.” People fall for the old lies and unknowingly take great risks secure in the belief that this time is different. To find a silver lining in the storm clouds of the financial crisis, there has been an explosion of work into how best to track the financial cycle and avoid its damaging extremes. 8 All speeches are available online at www.bankofengland.co.uk/speeches 8 A range of indicators are now monitored routinely by bodies, such as the Financial Policy Committee (FPC), tasked with maintaining financial stability.
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31.10.2019 Opening address Decarbonising the Economy Forum/El Confidencial Margarita Delgado Deputy Governor Good morning. Let me thank the digital daily newspaper El Confidencial and Acciona for its kind invitation to me to open this forum on decarbonising the economy. Introduction Evidently, the consequences arising from climate change, associated with global warming, have in recent years come to the forefront of society’s main concerns. It is a transversal concern that is translating into initiatives ranging from the most supranational scope possible down to the most local level. To offer a specific example, we can see every day in the newspaper headlines how matters such as the quality of the air we breathe in cities are polarising much of the political debate, mainly at the municipal level but also regionally and even nationwide. If we raise our sights a little it is clear that these air quality policies are also in response to various European regulations, at least since 1996.1 In turn, the European regulations are part of a more global response to pollution, which is reflected in various international agreements. The general public also share this concern. Testifying to this is a recent survey by the Real Instituto Elcano2 in which 97% of Spaniards agree that climate change is a reality and 92% believe that humans are chiefly responsible. This movement is underpinned by a wealth of scientific evidence. It shows that global warming is associated with economic (and therefore human) activity and, more specifically, with the emission of greenhouse gases.
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But at the same time, there is on the other hand, a need to be clear and transparent with regard to the objective for monetary policy. I have shown obvious examples of this conflict from recent years. Another thing that it is important to realise is that what I have presented here are different types of decomposition of the development of inflation. Decomposition can occur in different ways, I have talked about two main methods here, but they both concern decomposition. It is not a question of basic explanations of the development of inflation. Inflation is the result of a very large number of economic agents’ individual 16 [19] decisions to change prices. This can be a businessman altering a price list, or negotiation between a buyer and a seller, it can be a public procurement, it can be an employee setting prices with the aid of software that compares competitors’ prices on-line, etc. Exactly what lies behind these decisions, what explains them, is not something we can learn from decomposition. 17 [19] References Apel, M and Jansson, P (1999), “A parametric approach for estimating core inflation and interpreting the inflation process,” Working Paper No. 80, Sveriges Riksbank, April. Andersson, K and Berg, C (1995), ”The Inflation Target in Sweden”, in Haldane, A G (red), Targeting Inflation, Bank of England, pp. 207–223.
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Ong Chong Tee: Combating financial crime – international and national efforts Keynote address by Mr Ong Chong Tee, Deputy Managing Director (Financial Supervision) of the Monetary Authority of Singapore, at the ABS Financial Crime Seminar, Singapore, 2 July 2014. * * * 1 Distinguished guests, ladies and gentlemen, thank you for inviting me here this morning. The annual ABS Financial Crime Seminar has become a key event on Singapore’s antimoney laundering and counter-terrorism financing (AML/CFT) calendar. It is a good opportunity for our banking industry at large to take stock of the current challenges and trends, as well as to discuss priorities. As the diverse programme of this conference shows, money laundering and terrorist financing (ML/TF) is a complex global issue, and I am heartened to see the number of experienced professionals and experts gathered here today to share perspectives and insights. The international environment 2 Financial crime is a serious global threat. According to some UN estimates, the amount of money laundered globally is between 2% and 5% of global GDP annually, or to put this in US dollar terms, between $ billion and $ trillion a year. The challenge before us – as is often noted – is that the fight against money laundering and financing of terrorism is never done.
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I understand that attendance at this seminar and related AML/CFT courses has been growing each year, and I hope this positive trend continues. Attention to AML/CFT has certainly been increasing, with certification providers like the International Compliance Training Academy and the Association of Certified Anti-Money Laundering Specialists (ACAMS) seeing more sign-ups. ACAMS had also set up a Singapore Chapter late last year. In all, the resources and training avenues are there, so it is for all of you to tap on them. An effective culture of AML/CFT cannot be created by hiring a few experts from elsewhere. Instead, it is about raising awareness throughout the firm; so do focus on “growing your own timber” alongside importing relevant expertise. Strengthening the framework further 23 Before I close this morning, I would like to announce two further measures that MAS will undertake to strengthen our AML/CFT regime: a. First, MAS has been progressively increasing the level of disclosure on supervisory actions taken for breaches of AML/CFT requirements. At this seminar last year, we disclosed aggregated figures of sanctions imposed for the preceding three years. While a gross picture can give an indication of how well the industry has implemented AML/CFT measures, they do not sufficiently highlight any common or severe issue. Building on this, MAS will be looking to publish details of more severe penalties imposed on financial institutions for such breaches.
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4/7 BIS central bankers' speeches MAS’ view is that early readiness is an essential ingredient in achieving a smooth transition. Early readiness on the part of the banking industry and markets will in turn encourage early readiness from their customers. A bank that adopts a “wait and see” attitude and leaves things till next year, is likely to find itself with too much on its plate before the end-2021 deadline. This is something which we must avoid. Banks that do not keep pace with industry transition timelines potentially expose themselves to additional market, liquidity, operational, technology and legal risk, and can expect to have more intensive supervisory engagement at the senior management level. 17 Second, at the industry-level, the focus must be on achieving a smooth and wellcoordinated transition. The key challenge, is how to encourage market participants to shift from a SOR-based market which is still deep and liquid, to the nascent but developing SORAbased market. 18 We need to take deliberate steps to catalyse additional liquidity in SORA derivatives market, and engineer early and progressive shifts of activity from SOR to SORA to achieve greater transition momentum. We will address this in two ways: Following the strong market response to MAS’ inaugural $ million SORA FRN issuance, we will expand this programme, through increasing the issuance sizes and lengthening the range of tenors. We will announce more details before the end of this year.
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One of the distinguishing features of the Brazilian economy is its prudential regulatory framework. The vigilant stance of the Central Bank prevented the development of 1 2 See http://www.oecd.org/document/59/0,3343,en_2649_34349_41966331_1_1_1_1,00.html, 2009. January 12, BIS Review 8/2009 disequilibria and excesses that emerged in several other economies. We did not let the markets adopt risk taking attitudes that led to the losses and problems that many countries are facing today. In fact, the Brazilian framework is considered a model for prudential regulation and regarded as an example to be followed by other regulatory authorities. That does not mean that Brazil is not being hit or suffering the impacts of the financial turmoil. But the Brazilian government is prepared to react and take all the necessary measures to tackle the crisis. In conclusion, a floating exchange rate is no cure-all remedy for all economic ills. But it is certainly the best regime for a large, relatively closed, economy like ours. If Brazil had not floated the BRL in 1999, it would surely have done so since then, and possibly in more adverse conditions. For all the above, this 10th anniversary is worth celebrating. Thank you very much. BIS Review 8/2009 3
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But there are signs that the matching of job-seekers to vacancies is not working well. The decrease in unemployment in recent years has, above all, been among those born in Sweden. For this group, unemployment is now on a very low level. Unemployment among those born abroad, on the other hand, has not decreased to the same extent and is significantly higher to begin with. A greater supply of foreign-born labour creates the conditions for long-term higher employment, but it is important that the labour market functions efficiently so that the supply of labour can be fully utilised. With a greying population, this will also become increasingly urgent as the demand for labour in areas such as health and social care rises. Despite the economic situation continuing to be strong and both the labour force and employment being expected to increase further in the future, it is the Riksbank’s assessment that unemployment is not expected to fall much more in the years ahead. So, to keep unemployment down – and above all to bring it down significantly below its current level – measures are needed within policy areas other than monetary policy. I do not mean by this that monetary policy has been exhausted. There is scope to make it even more expansionary if need be. But monetary policy cannot be expected to be able to solve structural problems on the labour market.
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We are encouraging innovative thinking through our Research Hub, where people have collaborated with colleagues across the Bank and externally on over 50 projects. Meanwhile, our Research Away Days and One Bank Flagship Seminar series expose policy and decision makers to different ideas; from sportspersons to philosophers, and economists to psychologists. Our seminars are broadcast externally so that others can benefit from this diverse knowledge. To empower colleagues, we have implemented an ‘author in the room’ policy so that expert staff can attend senior-level meetings and explain their papers in person and challenge conventional wisdom. Our Bank Underground blog, launched in 2015, enables colleagues to share their diverse opinions outside the Bank’s four walls. 400,000 people viewed the blog last year. Over the same period, its followers and subscribers increased by 60%. Our staff are reaping the benefits of these inclusion and transparency initiatives. Two thirds feel encouraged to try new ideas, three quarters believe that their manager acts on people’s suggestions and ideas, and 60% feel comfortable speaking up on important issues. We have improved on all of these measures since just a year ago. xxiii But we also need to do more. To get the most out of a diverse workforce, we also need to ensure people can bring their best to work and feel supported. Our wellbeing programme promotes mental and physical wellbeing with staff counsellors, discounted gym-memberships, a Cycle to Work scheme, working life seminars and flexible leave options.
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This behaviour has been observed in the recent financial turmoil both as regards investors’ attitude vis-à-vis emerging economies and certainly also vis-à-vis markets in industrialised countries themselves. One of the most effective recipes for countering this behaviour is full transparency of each particular entity, of each particular country, of each particular borrower, of each particular signature. Full and reliable transparency for all, both public and private sector entities, is needed to allow a proper judgement of the merits of each case. In particular, more transparency between market players is necessary for proper risk management. In a recent report by the Basel Committee on Banking Supervision, recommendations are made to strengthen prudent management of banks’ exposures to highly leveraged institutions (HLIs). Just like any other financial institution, HLIs should comply with minimal transparency, disclosure and regulation requirements anti overall leverages should be monitored to avoid risks of systemic crisis or disruptions in the international markets; í Secondly the decision to introduce a new capital adequacy framework to replace the 1988 Accord is an important step towards a more comprehensive approach to addressing risks and should, in particular, focus on internationally active banks. The new framework should significantly improve the way regulatory capital requirements reflect underlying risks; í Thirdly the design and implementation of internationally agreed standards is of utmost importance for ensuring effective transparency at the international level. For instance, there is evidence that in some cases discretionary accounting practices are instrumental in enabling banks to comply with international capital regulation.
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The EMU will reinforce monetary and financial stability The international role of the euro With regard to the international role of the euro, let me say that the Eurosystem does not regard it as part of a zero sum game in an atmosphere of confrontation. On the contrary, I view it as a positive sum game, based upon close international cooperation and certainly not on confrontation. The international role of a currency is a complex matter. A currency can be used by different groups of economic agents for different purposes, as an anchor and reserve currency on the official side, as an invoicing and payment currency for international trade, as well as a currency of denomination for financial assets, on the private side. BIS Review 81/1999 6 My understanding of the process towards internationalisation of the euro is based on the following observations: í firstly the euro , as I said before, has the full legacy of the most credible currencies in Europe, taking into account the fact that the European monetary convergence process has been based upon a benchmarking principle. The euro is not starting from scratch but from the solid soil of currencies having proved their solidity over time like the franc, the DM, the guilder, and so forth; í secondly, the policy which is pursued by the European Central Bank is a policy of stability, credibility, low inflation so that the euro will be an excellent store of value. This is called upon us by the Treaty.
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My point of departure will be the monetary policy instrument, which is typically a short-term interest rate. In light of the close links between monetary policy and financial markets, I will then explain the benefits of central bank transparency. My comments will end with a note of caution concerning the information value of financial market prices in a world of increasingly market oriented and transparent central banks. 1. How does monetary policy affect financial markets? Monetary policy is aimed at preserving price stability. In some countries, central banks operate under mandates that refer to additional objectives such as full employment, maximum sustainable growth, stable interest rates or stable exchange rates. To meet their objectives, central banks intervene in financial markets. It is through the financial markets that monetary policy affects the real economy. In other words, financial markets are the connecting link in the transmission mechanism between monetary policy and the real economy. I will focus on the first part of the transmission mechanism only, i.e. the transmission from the monetary policy instrument to financial markets. Monetary policy affects financial markets through various channels. However, the transmission process from monetary policy to financial markets and finally to the real economy has a single source: the monetary policy instrument. Typically, the monetary policy instrument is a financial market price which is directly set or closely controlled by the central bank. For most central banks with floating exchange rates today, the monetary policy instrument is a short-term interest rate.
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To be more precise, it is the yield curve of both the home and the foreign country, and thus the monetary policies of both the home and the foreign country which affect the exchange rate between two currencies. In practice, exchange rate movements often deviate significantly from what interest rate differentials would suggest. In light of the practical uncertainties about the effects of monetary policy on exchange rates, the exchange rate transmission channel for monetary policy is also not easily exploitable. Other assets Apart from bonds and exchange rates, monetary policy also affects the stock market. The relationship between monetary policy and stock prices is complex, because stocks are influenced by monetary policy through several channels. First, if stocks are priced using the dividend discount model, then monetary policy affects stock prices via the interest rate which is used to discount future dividends. Interest rates may also affect the value of domestic assets of a company, and the exchange rate affects the value of its foreign assets and foreign profits. In addition, monetary policy influences the financing cost of a company as well as the availability of loans. Moreover, the medium-term effects of monetary policy on the real economy can influence a firm's profits. Monetary policy can also affect commodity prices. Expansionary or restrictive monetary policy supports or weakens real activity in the medium run and can thus influence the demand and the price for commodities. Obviously, this dynamic can only occur in economies large enough to impact the global demand for commodities.
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But the recent experience already provides us with important lessons both for banks and for public authorities and points to a clear need for action by both. 7 Basel Committee on Banking Supervision: “Liquidity Risk: Management and Supervisory Challenges”. February 2008. 8 Financial Services Authority: “Review of the liquidity requirements for banks and building societies” Discussion Paper 07/7. December 2007. BIS Review 50/2008 7 Chart 1: Major UK Banks Customer Chart 2: Decomposition of sterling high-yield Funding Gap(a) corporate bond spreads(a) R es id ual (includ ing co mp ens at io n fo r illiq uid it y) Customer funding gap adjusted for securitisation(b) Basis point s C o mp ens at io n fo r uncert aint y ab o ut d efault lo s s es £ billions 700 Customer funding gap 1,200 C o mp ens at io n fo r exp ect ed d efault lo s s es To t al 1,000 600 500 800 400 600 300 400 200 200 + 0 200 100 + 0 100 200 01 02 03 04 05 06 07 08 98 99 00 01 02 03 04 05 06 07 08 Sources: Dealogic, published accounts and Bank calculations. Sources: Bloomberg, Merrill Lynch, Thomson Datastream and Bank calculations. (a) Data exclude Nationwide.
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Above all, the monetary policy models used must better capture the roles in the economy of credit markets and asset prices, so that the consequences of financial imbalances can be analysed. Not only the price, but also the availability of credit has been discovered to be relevant. However, these assertions do not mean that the present models need to be scrapped. They serve us well in periods in which financial imbalances are not a major problem and intensive work is currently under way around the world to develop these models to better incorporate financial factors. Neither can it be required that the models capture serious financial crises. This would probably require the development of special analytical tools and models. The role of monetary policy must be developed and clarified. Even if improved supervision and regulation enable us to reduce the risk of serious financial imbalances accumulating, monetary policy will still face difficult dilemmas. The financial markets have a remarkable capacity to develop continually and to find ways past regulation. Consequently, we cannot rely on supervision and regulation always succeeding in preventing financial imbalances from arising. In the future, we will certainly continue to see various forms of bubbles, in which asset prices increase in a manner that is not sustainable over the long term, together with a rapid growth in credit. In such cases, the central banks must take a position regarding whether and to which extent monetary policy should consider this phenomenon.
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Del Negro, Giannone and Patterson (2015) ‘The forward guidance puzzle’. Federal Reserve Bank of New York Staff Report n.574. 12. Lagarde (2021), Press conference on the ECB monetary policy statement on 22 July 2021. 13. ‘Norges Bank’s monetary policy handbook’, 2022. Other examples are from the Riksbank: “The publication of repo rate forecasts has given the general public greater insight into monetary policy and improved possibilities for evaluation and accountability.” (‘The Riksbank’s experiences of publishing repo rate forecasts’, 2017). And from the Reserve Bank of New Zealand: “Published forecasts help markets assess the economic environment and understand our policy strategy.” (John McDermott (2013) ‘The role of forecasting in monetary policy’). 14. In a speech in 2012, while still Governor of the Bank of Canada, Mark Carney put this well: “Today, to achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. Market participants may doubt the willingness of an inflationtargeting central bank to respect this commitment if inflation goes temporarily above target. These doubts reduce the effective stimulus of the commitment and delay the recovery.” 15. Haberis, Harrison and Waldron (2019) ‘Uncertain policy promises’, European Economic Review, Vol 111, pages 459-474. 16. More formal, written constitutions, which usually can’t be altered except by super-majorities in the legislature, and therefore evolve more slowly than the electoral cycle, could be seen as a commitment device to allow for (otherwise) time-inconsistent but optimal government policies. 17.
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I said the simple pre-crisis pattern in Chart 1 was the appropriate way to set interest rates if you’re in an environment where swings in economic growth are driven predominantly by shocks to demand, things that push output and inflation in the same direction, and if there are few other enduring shocks to inflation. But if that was a reasonable view of the world in the years before the financial crisis – a period some now call the “the Great Moderation” – it’s clearly been much less of one since. Productivity growth is less predictable and it’s harder to count on a single rate of “trend growth”. (Nor can we be assured of a fixed, “neutral” rate of interest, below which policy is necessarily expansionary and contractionary only above it. In particular, it became clear even before the crisis, and increasingly so after it, that this “neutral rate” had over many years been declining.) And if we’d forgotten during the Great Moderation that domestic output isn’t the only thing that affects inflation we’ve certainly been reminded of it since. In the UK, the two big exchange-rate depreciations in 2008 and 2016 pushed up inflation for a protracted period, independently of activity at home. The strains in global goods markets caused by the pandemic, and the substantial impact on commodity prices of Russia’s invasion of Ukraine, have done the same, to an even greater extent.
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The organisational structure for the regulatory and supervisory functions within the Bank were realigned in November 2006 to move from the previous institutional based approach, to one that integrates the Bank's regulatory functions for the different financial sectors under its purview along functional lines. The new functional based, cross-sector regulatory structure allows us to modernise the regulatory framework for both the insurance and banking sectors at a more equal pace. The increased synergies created will enable the Bank to apply the best regulatory practices in both the banking sector to the insurance sectors. Under the new structure, the Bank is able to leverage on the more advanced developments in either sector to enhance the regulatory framework for both sectors, simultaneously if possible. At the same time, it allows us to develop and train our personnel to be better equipped in the constantly changing operating environment. These efforts, will promote a more consistent regulatory regime for both the banking and insurance sectors. A positive side effect that can accrue from this move is the enhancement of public confidence on the insurance sector which augurs well towards increasing the level of insurance penetration. Achieving a more integrated approach to cross-sector regulation was relatively easy in Malaysia as Bank Negara is the single regulator for both the banking and insurance industries. In other countries, greater coordination and collaboration between separate regulatory agencies can similarly contribute towards a more consistent approach to regulation and supervision across sectors in dealing with similar risks.
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Mohd Razif bin Abd Kadir: Unlocking opportunities Opening address by Mr Mohd Razif bin Abd Kadir, Deputy Governor of the Central Bank of Malaysia, at the 10th ASEAN Insurance Regulators Meeting and 33rd ASEAN Insurance Council Meeting, Kuala Lumpur, 15 November 2007. * * * It is my great pleasure to be here today at the 10th ASEAN Insurance Regulators meeting and the 33rd ASEAN Insurance Council Meeting in Kuala Lumpur. Let me first extend a warm welcome and "Selamat Datang" to all the delegates from abroad as well as to fellow Malaysians here today. During this “˜Visit Malaysia Year” which is also the year of Malaysia's 50th Anniversary celebrations of our independence, I do hope that our foreign delegates will make time to enjoy Malaysia's diverse culture and the many unique sights, sounds and flavours. I am indeed honoured to be officiating the opening of the 10th ASEAN Insurance Regulators Meeting and the 33rd ASEAN Insurance Council Meeting. I understand that several fruitful meetings and exchange of ideas have already taken place yesterday, and several meetings have been outlined over the next two days to discuss various matters, revolving around the theme towards moving the ASEAN insurance industry forward. The ASEAN region has recorded significant growth with member countries growing at an average rate of 6% in 2006. ASEAN countries have grown stronger and our trade and cooperation have expanded further.
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The fact that the banks are not equipped to manage this type of risk became evident when Lehman Brothers collapsed in the autumn of 2008 and the financial problems spread like wildfire between the market agents. A fourth and final example is that Basel II has in many cases overlooked the risks that have developed off the banks’ balance sheets, and this is something that many banks have taken advantage of. By selling their mortgages to special companies that they have set up themselves off their own balance sheets, the banks have been able to sell their own credit risks and thus reduce their capital requirements. The problem with this is that the banks have not been entirely separated from these special companies. During the crisis, the risks therefore moved directly back onto the banks’ balance sheets where there was no capital to cover the losses that arose. This problem was particularly evident in the United States. 3 The term macroprudential indicates that something – for example regulation, supervision or inspection – aims to limit the risk of serious disruptions to the financial system as a whole. BIS central bankers’ speeches 3 Inadequate standards for liquidity management Another important lesson from the crisis is that the regulations have paid far too little attention to the banks’ liquidity management. In the present Basel regulations, there are no binding regulations on how banks should manage their liquidity risks.
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6 The counter-cyclical capital buffer may consist of Core Tier 1 capital or other capital than can completely absorb losses. The Basel Committee will specify what types of capital the banks can include at a later date. 7 Issuing bond is a less costly alternative for acquiring capital than issuing shares for tax reasons. Interest rate payments for bonds are made pre-tax while share dividends are paid from post-tax profits. 6 BIS central bankers’ speeches The sum of the new capital regulations There are many new regulations and levels and it may be difficult to estimate what the banks’ total capital requirement will ultimately amount to. It we limit ourselves to looking at Core Tier 1 capital we can see that the new regulations mean that all banks will need to hold share capital and retained earnings amounting to at least 4.5 per cent of their risk-weighted assets. In addition there is the capital conservation buffer of 2.5 per cent and the counter-cyclical capital buffer of a maximum of 2.5 per cent. This means that in a situation where the countercyclical capital buffer is fully activated the banks will need Core Tier 1 capital amounting to at least 9.5 per cent, and this applies to all banks. There are also discussions about whether additional capital requirements should be placed on those banks that are considered to be systemically important. At present, no decision has been made on which banks this would be, nor on the levels that could apply.
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Rodrigo Vergara: Chile’s March 2015 Monetary Policy Report Presentation by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, of the Monetary Policy Report before the Finance Committee of the Honorable Senate of the Republic, Santiago de Chile, 30 March 2015. * * * The Monetary Policy Report of March 2015 can be found at http://www.bcentral.cl. Accompanying charts can be found on the Central Bank of Chile’ website. Introduction Mr. President of the Finance Committee of the Senate, senator Andrés Zaldívar, senators members of this Committee, ladies, gentlemen, I am grateful for your invitation to present the vision of the Board of the Central Bank of Chile about the recent macroeconomic developments, their prospects and implications for monetary policy. This vision is detailed in our Monetary Policy Report (IPoM) of March 2015. But first and foremost, a few words of solidarity towards my fellow citizens that have recently suffered Nature’s wrath. The images and stories we have been receiving of the catastrophe that has swept across our country’s north are devastating and fill us with concern. In the past few months, inflation has exceeded December’s forecasts, and it is stubbornly above 4 percent. This Report’s baseline scenario also estimates a slower return to the target range than foreseen at the end of 2014. The depreciation of the peso continues to be the main factor behind the price dynamics, which, coupled with widespread indexation and a tighter than expected labor market, has pushed the core measure, i.e.
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By countries, the biggest correction goes to the Brazilian forecast, which the market expects to post a GDP drop of 0.7 in 2015, its worst in several years. The greater relative strength of the United States, plus the ever closer beginning of its monetary policy normalization, has prompted a substantial appreciation of the dollar in recent quarters. For sure, news about the situation of the US economy plus the Fed’s statement has caused important swings in the dollar price in the past few weeks. This has reflected in large movements in most currencies around the world. As for the Chilean peso, in the middle of March it was trading above 640 units to the dollar, to later drop to near 620 pesos per dollar at the statistical cutoff of this Report (figure 3). The peso depreciation cycle that began in 2013 stands out as the longest in the last decade and it occurs in the context of a gradual economic slowdown and not a sharp recession. This is one of the main reasons behind inflation remaining above 4 percent. The data indicate that the pass-through coefficient from the exchange rate to inflation has been in line with historic patterns, although in the upper part of available estimates. Besides, the peso depreciation has had different timing than most emerging or commodity exporting economies.
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Nonetheless, it is difficult to identify how much of this decline is due to a lower external stimulus, how much is accounted for by a natural slowdown in each economy, and what part is explained by particular events. All these elements add up to a situation in which, although the external scenario is not worsening, the belief that risks have disappeared is far off. It is possible to think that the likelihood of extreme scenarios is low, but, in my opinion, it is still there. More challenges for monetary policy As already mentioned, the change in how the global panorama was perceived led many emerging economies to change their views on their future economic policies. This made them halt their processes of lowering expansiveness and/or made them resume impulse. However, the new change of mood brought about by the greater calm of the beginning of the year, coupled with geopolitical factors, has again put us in a dilemma. On one hand, probably as a result of the recent memory of the late 2008 and early 2009 global confidence crisis, most economic authorities quickly set up a close monitoring system and prepared a batch of instruments to implement a quick offsetting of the adverse effects of a global crisis. However, time has shown that the effects of the crisis of the Eurozone area have been fairly limited so far. Financial markets have suffered the biggest impacts, but trade, output and employment have not been greatly affected.
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8), which will be published in May. Discussion of the timetable for a potential Swedish EMU membership The timetable for a potential full Swedish membership of EMU will be determined by the political process. The Government Bill "Sweden and the Economic and Monetary Union" from 1997 states that if the government later finds that Sweden should participate in the monetary union, the matter should be put before the Swedish people. Pronouncements by, for instance, Prime Minister Göran Persson indicate that a referendum will be held next year. Other political leaders have expressed similar opinions. If the result is a "yes", then Sweden would put forward an application to the European Commission and the ECB for an examination of whether we fulfil the legal and economic convergence criteria. The economic criteria assessed are the inflation rate, long-term interest rates, exchange rate stability and the public sector's budget and central government debt. Following this scrutiny, the European Parliament and the European Council shall present their views on the reports made by the Commission and the ECB and after this the ECOFIN Council will decide on the Commission's proposal to allow Sweden to participate in the union. If Sweden is accepted, there will be negotiations on when entry will occur and at what exchange rate the krona will be fixed against the euro, which is decided by the ECOFIN Council. After this a national changeover plan will need to be drawn up.
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Fiscal policy and monetary policy – mutually dependent Sweden and other countries that came through the acute financial crisis of 2008 – 2009 relatively well are characterised not only by an efficient regulatory framework for central bank operations but also by the fact that they have been implementing reforms for a long time that have improved the functioning of the economy, not least as regards how fiscal policy is conducted. The fact that Sweden has, over the last twenty years, managed to reconcile low and stable inflation with good economic growth and sound public finances depends to a large degree on fiscal policy reforms implemented in the wake of the crisis in the 1990s. But experience gained from the latest financial crisis shows that both these sides of the economic policy coin are intimately intertwined and cannot be entirely decoupled from one another. My interpretation of the research situation is that increasing importance is being attached to how dependent monetary and fiscal policy are on each other. 31 It is difficult to believe that it might be possible for a central bank to independently guarantee low and stable inflation, and financial stability, irrespective of how fiscal policy is designed. By the same token, it will be easier to maintain sound and sustainable fiscal policy if there is price stability and financial stability. The difficulties of many countries in countering the economic downturn after the financial crisis via an active fiscal policy has increased the pressure on central banks to stimulate economic activity.
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11 As a result of this arrangement and by pledging its foreign currency reserve, the Riksbank could lend a total of approximately SEK 200 billion in US dollars. Conversely, swap agreements were also established between the Riksbank and two of the Baltic central banks. 12 These experiences indicate that, in the future, even tougher requirements will be placed on international cooperation between central banks. How should we organise this in the best way? Can we expect other countries’ central banks to always be able to assist with currency in a crisis situation or must special agreements be drawn up? The development also raises the issue of whether an international ‘lender of last resort’ is needed. 13 These questions are particularly important for Sweden, which has its own small currency. And they will become even more relevant if the major Swedish bank Nordea carries out its plan to change from a subsidiary to a branch structure. With the current subsidiary structure, the central banks in the countries where Nordea has subsidiaries are responsible for providing ELA to them. After the transformation into a branch structure, the Riksbank will take on the main responsibility for providing ELA, should it be needed. This means that the Riksbank will have a greater need of being able to obtain foreign currency in a crisis situation.
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Summing up, our assessment of the macroeconomic scenario, beyond the recent data and the adjustment in the GDP range and the inflation projection for 2018, is not very different when viewed from a longer perspective, that is, considering the period 2018/2020. For all the above we believe that our economy still needs a positive monetary impulse over the next two years. Certainly this impulse will be withdrawn as the gaps close and inflation converges to 3%, but when will this withdrawal begin will depend on the evolution of our macroeconomy, which we do not see happening before the end of this year. It is important to bear in mind that although we see a balance of risks biased upwards on domestic activity, on the negative side the main risks come from abroad. The smaller slack for monetary policy making in the United States, the renewed divergence with other developed economies and its pressure on currencies; the political tensions in the Eurozone; the oil price increase and associated geopolitical risks configure a complex scenario for the emerging world. This is especially true for economies that are seen as more vulnerable, either because their macroeconomic fundamentals are weak and/or because they do not possess the institutional characteristics that allow them to deal with external shocks and implement counter-cyclical policies. The link between institutional characteristics and macroeconomic fundamentals with the financial results when facing a stressful episode has been widely documented.
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The necessary reforms will call for short-term sacrifices from all walks of life, such as the relinquishment of protection and privileges. However, the long-term gains in wealth for the country at large will more than compensate for these short-term difficulties. BIS Review 42/2005 1
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The Islamic financial system in Malaysia operates in parallel with the conventional system. Following the establishment of Islamic banking was the establishment of takaful or Islamic insurance to provide the coverage for Islamic housing mortgages. As these two segments progressed, Malaysia expanded its implementation approach by allowing the conventional banking institutions to offer Islamic banking products and services on a window basis. To preserve the integrity of the system, BIS Review 3/2004 5 firewalls between the conventional and Islamic funds were put in place. It was made mandatory for the Islamic banking operations in these institutions to be separated from the conventional banking operations, either electronically or through other designated means. This move created more players in the Islamic financial system and provided the platform for the establishment of a vibrant Islamic money market. The Islamic money market served as a platform for the Islamic financial institutions to manage their short-term portfolio adjustments. Recognising the importance of the capital market, Malaysia initiated the development of a private Islamic financial securities market in the early nineties. The Islamic financial system today has emerged as an important component of the overall Malaysian financial system that contributes to the growth and development of the Malaysian economy. Malaysia has also adopted legal reform, self-regulation and measures to encourage market-based regulation. New measures have been introduced to further improve the level of governance among banking institutions.
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My address this morning will focus on these initiatives. Allow me to also take this opportunity to share with you Malaysia’s experience in this endeavor. II. Current trends in the international financial landscape The international financial landscape is constantly being reshaped and transformed by the rapid pace of globalisation, financial liberalisation and the advances in technology. Globalisation has manifested itself with the geographic expansion and consolidation of financial establishments beyond national boundaries and the massive flow of financial resources across borders. This has unleashed a greater volume of resources through the financial system, increasing the importance of the financial sector. These trends have been reinforced by the advances in technology, which has radically changed the way we do business and the structure of markets and their dynamics in the national and global economy. This has resulted in an environment in which businesses, markets and economies are becoming internationally more integrated and inter-dependent. Financial liberalisation and deregulation of the financial services industry has also resulted in increased competition and the proliferation of new financial products and services. Also, the business operations of global financial conglomerates now span over multiple jurisdictions. Against these developments, regulators have reassessed existing prudential rules and have adopted a consolidated supervision framework to prevent regulatory gaps that could become a source of systemic concern. While deregulation of the financial sector has expanded the range of opportunities, it has also increased the incidence of instability in the financial markets.
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The Rt Hon Sir Edward George: A broad brush picture of the UK economy Speech by The Rt Hon Sir Edward George, Governor of the Bank of England, at the Asian Business Association Dinner, London, 19 March 2002. * * * Thank you, Mr President, for that kind introduction. I'm delighted to be here. In fact it's the second time this year that I've had the pleasure of dining with representatives of the Asian Business Community in the UK. Just a couple of months ago, in Glasgow, I joined the Association of Business Community in paying tribute to Mr Yaqub Ali for the remarkable contribution that he has made to Scottish commercial and community life since he arrived here from Pakistan some 50 years ago. It was a very poignant occasion, coming as it did when the terrorist attacks of 11th September in New York and Washington were still fresh in our minds. Those events sadly have been sometimes represented - or misrepresented - as having something to do with ethnic or religious differences. But, as the universal condemnation of terrorism which followed the events of 11th September showed, they had nothing to do with ethnic or religious differences; they were a reflection of a fanaticism which has no place in any civilised society. Nevertheless they clearly had the capacity to accentuate perceived differences, and to provoke unwanted tensions within our international, national and local communities.
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Policy actions may turn out to be ill-timed or miscalibrated in the face of these uncertainties. There is thus an inevitable short-term volatility in UK inflation, which monetary policy makers have Page 6 to live with. And when the shocks driving that short-term volatility are large, then the amplitude of this short-term volatility in inflation can be large. This story remains an important part of what the UK has experienced of late. Recognising the impossibility of fine tuning inflation developments on a month-to-month basis, the MPC has long emphasised its focus on achieving the inflation target over the medium term. This medium-term orientation of monetary policy is crucial if the inflation target is to be met in a sustainable manner and monetary policy is not to become a source of inflation volatility itself. At present, the desirability of adopting this medium-term orientation is bolstered by the nature of the underlying drivers of UK inflation. The large rises in the prices of international goods and energy not only directly raise UK inflation, but will also weigh on domestic incomes and demand through the terms of trade channel. [10] As a result, in taking monetary policy decisions today, the MPC needs to take account not just of the immediate inflationary impact of higher energy prices in the coming months, but also the potential disinflationary impact of higher energy prices through weaker incomes and demand at longer horizons. This distinguishes the situation we face from that in other jurisdictions – notably from the US.
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For Sweden the Riksbank hopes that the changeover can be arranged in an appreciably shorter time than the allotted six months. It should be underscored, finally, that EMU is likely to bring about notable changes in the financial landscape. Some products will simply disappear: currencies, as well as forward and option instruments derived from them. With a single monetary policy and no exchange risk, interest rate differentials between national treasury papers will arise only from credit risk. The market for Swedish treasury paper will be more or less integrated in a market for treasury paper in euro. Provided the debt situation in the countries concerned is under control and reasonably similar, national T-bonds will become close substitutes. That will also do away with a number of national forward and option products. Certainly there will be new financial products; there has been no lack of creativity in this field in the past decade. There will clearly be increased competition between financial institutions as well as between financial markets in different locations. There is nothing new about the globalisation and integration of the world’s financial markets but it is reasonable to suppose that EMU will accelerate the process. BIS Review 14/1997 -7- Summary and conclusions Today it looks for the most part as though economic and monetary union will start as planned on 1st January 1999. For Sweden the question is whether we are to participate from the start, wait a while or try to remain outside for ever.
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If adequate measures have not been taken within ten months, the country will be required to deposit a no-interest fee with the EU Commission. If the deficit is still excessive after two years, the fee is transformed into a fine. At most the fine can amount to the equivalent of 0.5 per cent of GDP. If the deficit is due to exceptional circumstances, sanctions are not to be imposed. If GDP falls by 2 per cent, no sanctions are to be levied for an excessively large budget deficit. The Council can also decide not to impose sanctions if GDP falls by between 0.75 and 2 per cent and other “special circumstances” apply. While the point of a system for preventing the abuse of fiscal policy in EMU has always been clear, one cannot turn a blind eye to the risks inherent in rules such as those in the stability pact. It is thus a matter of striking a reasonable balance between different interests, which is why the discussion has been so protracted. The risks are mainly of two kinds: - One has to do with the need of adjustment mechanisms. With no possibility of using monetary and exchange rate policy at the national level, it may be important for the system to provide other “buffers”. Therefore the pact ought not to be so strict that it might in practice have a destabilising effect in a particular country with problems. - The other concerns credibility.
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In particular, Spanish unit labour costs relative to the rest of the euro area fell by 14% from 2008 to 2018, thereby offsetting practically all the losses in competitiveness, measured by this indicator, built up during the previous expansion. This has been conducive both to across-the-board gains in share in international markets and to greater geographical diversification towards markets with high growth potential. As a result, goods exports rose from accounting, in real terms, for 19% of GDP in 2009 to 28% in 2018; exporting firms as a proportion of total Spanish companies grew sharply as from 2009; and the number of regular exporting firms has increased in the past five years by 31%, with a notable increase in destinations such as Asia and North America. Likewise of note is that this period of growth has been accompanied by significantly buoyant investment in equipment. Specifically, from 2013 to 2018, this aggregate increased in real terms by almost 34%, compared with the cumulative 14.4% increase in GDP over the same period. Hence, the weight of this component in GDP stood in 2018 above 10%, the highest figure for the past three decades. Further, this improvement in productive investment has been across the board in terms of productive branches, and notably sharper than that recorded in the euro area as a whole, a development closely linked to the competitive gains and to the intensification of Spanish firms’ export orientation in recent years to which I referred.
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That requires measures in various areas. In addition to the above-mentioned labour market reforms, human and technological capital improvements must also be made. In this connection, it is essential to improve the quality of the education system, adapting it to the challenges posed by globalisation, technological progress and the automation of tasks. Moreover, the presence of high and persistent profit margins in some sectors advises lowering the potential barriers to competition in such sectors. It would also be worth mitigating the effects of those factors that prevent growth of the most productive firms (chiefly, the regulatory thresholds linked to size). Finally, despite the progress made in recent years, the banking sector continues to face farreaching challenges, largely shared with other European financial systems. Spanish banks must firstly speed up the sale of their non-earning assets. These weigh down not only their profitability, but also their capacity to allocate resources to those economic activities that most contribute to growth. In addition, the reduction in non-earning assets originated before the European single supervisory and resolution mechanisms were established may bring us closer to culminating a Banking Union. Such a Union would then 6/7 allow us to address the need to pool macrofinancial risks within the euro area and to strengthen its governance mechanisms. That would make the European financial system – and therefore the single currency – sounder and more resilient to future financial shocks.
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Their website lists a variety of organisations that have well-established schemes ranging from the big supermarkets to local councils. 35 Within the private sector, around 70% of FTSE 100 companies already have some kind of employer-sponsored volunteering programme. 36 Perhaps unsurprisingly, that percentage is much lower for small and medium-sized businesses. This is a decent starting point. Yet my suspicion is that many companies are still not close to recognising fully the benefits from volunteering. And let me illustrate that with one startling fact courtesy of Lynne Berry, a PBE trustee and expert on the sector. Among those FTSE 100 companies, how many Board members are drawn explicitly from the voluntary sector? Precisely one. That is not consistent with volunteering having entered the corporate bloodstream. Nor is the fact that 30% of the UK’s largest companies still do not have a volunteering programme. My hunch is that, over time, more companies will need to recognise the benefits of volunteering, not just among Board members but among employees. Why? The two Rs – recruitment and retention. Generation Y, born from the 1980s onwards, place a much greater weight on a diverse career experience, with a strong social dimension, than their predecessors. And Generation Z, the Millennials, are unlikely to buck that trend. Where they lead, companies will surely need to follow. Shifting social norms Given the quasi-public good nature of volunteering, it is possible to conceive of more ambitious proposals still through which the state could encourage volunteering.
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A greater understanding of these stands to benefit funders of charities in deciding where best to allocate funds; charities themselves when deciding where best to allocate their energies; and policymakers to the extent they wish to encourage the creation of these quasi-public goods. To give one example from the funding side, through joint research with Oxford Economics the homelessness charity CRISIS found that for every £ invested there was a saving to society of £ 31 On the back of this, CRISIS began offering “investment units” as a way of emphasizing the social return on a donation. A more formal way of linking funding to social returns is through Social Impact Bonds (SIBs). These allow socially-minded investors to fund the provision of a service delivered by a social enterprise or charity, with a return on their investment from government if the service delivers the results specified. In fact, last year’s Rybczynski prize, awarded by SBE, was on work looking at the use of payment by results in the criminal justice system. So far, 14 SIBs have been issued. But social impact measurement remains the exception, not the rule. And SIBs remain a fledgling asset class. Underlying this is not so much an information gap as a chasm. It is puzzling that a sector whose core contribution is to societal well-being does not do a better job of measuring that contribution. Charities like PBE are seeking, on a small scale, to bridge that chasm through our measurement work.
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Exchange rates SEK per EUR and per USD respectively 12 12 SEK/ EUR SEK/ USD 11 11 10 10 9 9 8 8 7 7 6 6 5 5 04 05 06 07 08 09 Source: Reuters EcoWin 16 BIS Review 98/2009 19. Unit labour costs Annual percentage change 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 Unit labour costs Labour costs per hour Productivity -2 -2 -3 -3 94 96 98 00 02 04 06 08 10 Sources: Statistics Sweden and the Riksbank Note. Broken lines and columns represent the Riksbank’ s forecasts. 20. Inflation expectations Annual percentage change 4.0 4.0 5 years 2 years 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 96 98 00 02 04 06 08 10 Sources: The NIER and Prospera Research AB BIS Review 98/2009 17 21.
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GDP in Sweden Annual percentage change 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 -6 00 01 02 03 04 05 Note. Broken columns represent the Riksbank’s forecasts. BIS Review 98/2009 06 07 08 09 10 11 Sources: Statistics Sweden and the Riksbank 13 13. Survey indicator Index 120 120 Survey indicator Meanvalue +/ - one standard deviation 115 115 110 110 105 105 100 100 95 95 90 90 85 85 80 80 75 75 70 70 00 01 02 03 04 05 06 07 08 09 10 Source: National Institute of Economic Research (NIER) 14.
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The social partners can apply a low and stable rate of inflation when they negotiate the share of economic growth to be taken out as real wages and set their ambitions with regard to employment. The guidelines and the financial crisis The financial crisis in 2008 put the economic policy guidelines to a severe test. The interest rate cuts that followed from the inflation target led to a reduction in households’ annual interest expenses of around NOK 40 billion. The krone acted as a buffer. The burden on leveraged companies was eased and many investment projects became profitable in an environment of lower interest rates. Monetary policy made a substantial overall contribution to Norway’s resilience to the crisis. 3 Speech delivered at the Petroleum Seminar at the Norwegian Association of Economists on 2 November 1988. 4 BIS central bankers’ speeches Chart 6: Real interest rate. Per cent. August 1987 – February 1990 and June 2008 – December 2010 Chart 7: Registered unemployment. Per cent. August 1987 – February 1990 and June 2008 – December 2010 Well anchored inflation expectations made monetary policy effective – the reduction in Norges Bank’s key policy rate was perceived as a decline in the real interest rate. Other central banks experienced that there was little scope for reducing the real interest rate to a sufficiently low level. This downturn contrasts sharply with the downturn in the 1980s when the interest rate had to be maintained at a high level to defend the krone exchange rate.
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Developments over the past 40 years illustrate that the most important contribution monetary policy can make to sound economic developments in the long term is low and stable inflation. This provides the economy with a nominal anchor. Low and stable inflation makes it easier for economic agents to distinguish changes in relative prices from changes in the general price level. Prices become a more accurate information vehicle. Through the 1990s, inflation generally remained in the interval 1½ – 3½ per cent. When there is confidence in the inflation target, monetary policy can also contribute to stabilising output and employment. Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment in interest-rate setting. In order to make forecasts for inflation and output, we must also judge how interest rates will develop in the future. If inflation deviates substantially from the target for a period, the interest rate will be set with a view to returning it gradually to the target, so that we avoid substantial variations in output and employment. This chart illustrates the judgement as published in the latest Inflation Report. Past experience indicates that expectations as to future inflation remain stable even if inflation varies somewhat as long as the interest rate is used actively to curb the effects. Monetary policy cannot finetune economic developments, but it can prevent the largest effects from occurring when the economy is exposed to disturbances.
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In addition to a set of principles or guidelines on effective supervisory practices for assessing climate-related financial risks, the Committee will explore whether any policy measures under the regulatory framework should be taken, and how the Basel Committee could support international efforts related to the development of globally consistently sustainability reporting requirements. Importantly, any changes proposed by the Basel Committee to its regulatory framework would be in pursuit of its mandate to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. Climate Change and the Conduct of Monetary Policy Let me now turn briefly to the second topic: the implications of climate change for monetary policy, an issue that is also being analysed in the ongoing review of the ECB’s monetary policy strategy. As you know, the EU Treaty sets price stability as the single primary objective for the ECB. At the same time, the treaties also establish that, without prejudice to the primary goal of price stability, the ECB shall support the general economic policies of the Union, among which the fight against climate change has become a priority. Indeed, it can be argued that given the long-reaching implications in so many economic and financial domains of climate change, in our pursuit of price stability, monetary-policy makers cannot ignore the transition and physical risks that I mentioned before.
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And this, together with climate-related disclosure requirements, can decisively contribute to the correct pricing of climate-related risks by financial markets. Moreover, central banks can – and probably should – use their non-monetary policy portfolios, within the natural remit of their mandates, with a view to contributing towards the goal of addressing climate change. Actually, the Banco de España has led by example in recent years in adopting these considerations. Since 2019, we have applied sustainability and responsibility investment principles to our non-monetary policy portfolios, which has effectively led to an increase in the share of green bonds in these portfolios. More recently, the Eurosystem has agreed on a common stance on this issue, aimed at contributing to the transition to a low-carbon economy and to EU climate goals by increasing the awareness and understanding of climate risks while promoting climate-related disclosure. To conclude, we, central bankers and financial regulatory and supervisory authorities, within our mandates of guaranteeing price and/or financial stability, can and should actively contribute to global action to fight against climate change. Thank you. 3 The natural interest rate is the level of real interest rates consistent with aggregate output being at its potential level and inflation stable at its target. 3
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In other words, monetary policy is always implemented under conditions of uncertainty – to varying degrees, of course. This is why we consider a large number of economic indicators and use several models. Furthermore, we do not put a single economist in front of a computer and assign that person the task of determining the monetary stance; instead, we have a committee that exchanges opinions and assesses the current situation and outlook at the time in question. The observations I have just made are general in nature and apply to large and small countries alike. But we know that monetary policy in small, open economies is accompanied by particular challenges – challenges that we must take into consideration when developing a monetary policy framework for Iceland. In this context, it should be noted, first of all, that smaller economies generally have a tendency to be more volatile than larger ones, owing both to less economic diversity and the greater relative weight of individual shocks. Second, the relative weight of the tradable sector is often greater than in larger economies. Because of this, economic developments are more dependent on the exchange rate, and pass-through from the exchange rate to inflation is generally stronger. Third, financial markets are shallower than in larger economies, other things being equal, and this contributes to greater volatility of financial prices. Fourth, in an environment of unrestricted capital flows and increasing international financial integration, the possibility for small economies to affect their own financial conditions through monetary policy diminishes.
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At the same time, the exchange rate target took the form of a target zone, which was then widened over the course of the decade, in part because capital movements increased exchange rate volatility and it was considered risky to eliminate investors’ exchange rate risk entirely. When growing economic imbalances were added to increased movement of capital, exchange rate targeting became even more difficult, until the dam was about to burst right before the inflation target was adopted and the króna floated in March 2001. The monetary policy framework adopted in 2001 was based on foreign models that were in the ascendant at the time. But it also reflected the broader ideas about economic policy, prudential regulation, and supervision that had gained currency but have proven in retrospect to be flawed. To simplify, it can be said that these ideas were based on separation and independence of individual aspects of economic and prudential policies, but without sufficient attention to their interactions. Monetary policy was to focus primarily on the inflation outlook, and it was largely to be implemented through a single tool: interest rates. Intervention in the foreign exchange market was to be avoided. Supervision was supposed to ensure that individual financial institutions were sound. Fiscal policy was supposed to be neutral over the business cycle. And the markets would take care of the rest. This did not turn out to be the case. Apart from the question of interactions, insufficient attention was paid to risks in the financial system as a whole.
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The problems have been manageable so far, but the larger share the Riksbank owns, the greater the problems are likely to be. It may also be the case that the expansionary effect of each further purchase gradually declines. Of course, the Riksbank will eventually taper its holdings, but probably at a slow pace. 17 The Riksbank will therefore most probably have a substantial holding of government bonds for a long time to come. All in all, this means that there are limits with regard to the opportunities to use purchases of government bonds as a monetary policy tool going forward. My assessment is that it will probably be possible to increase the purchases a little further but, as I said, there is a limit. Buying government securities is not a completely unnatural step for a central bank that normally tries to affect the economy by adjusting a short-term risk-free interest rate, the monetary policy rate. Buying government bonds means that one 14 The Federal Reserve and the Bank of England have on different occasions used conditional forward guidance. I myself applied this strategy a few years ago when I emphasised in the monetary policy discussion that I did not intend to vote in favour of raising the repo rate as long as CPIF inflation did not accelerate and exceed 1.5 per cent (see, for instance, Sveriges Riksbank, 2014). As is well known, this did not happen for some time.
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The date refers to the day the forecast was published. Sources: Respective analysts 21 [24] Figure 3. Development of the repo rate during inflation-targeting regime Note. Per cent. Source: The Riksbank Figure 4. Desired policy rate path and path with lower bound Policy rate Lower bound Preferred path Path with lower bound Time Note. Constructed example. Source: The Riksbank 22 [24] Figure 5. Difficult to forecast the policy rate The Riksbank The Market 6 6 6 4 4 4 4 2 2 2 2 0 0 0 0 -2 -2 6 -2 05 08 11 14 17 20 05 08 11 14 17 20 -2 Note. Per cent. The Riksbank's forecasts for the repo rate and market forward rates. Forward rates are a measure of the market agents’ expected repo rate according to different derivative contracts. They are estimated around the same time as the repo rate forecasts. Sources: Thomson Reuters and the Riksbank. Figure 6. Yield differential in relation to Germany Note. Percentage points. Yield differentials refer to 10-year benchmark bonds. Source: Macrobond 23 [24] Figure 7.
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I believe that Asia-9’s experience of growth, or more specifically, intra-regional trade and production, can provide an interesting case study for our South Asian counterparts. The emergence of the Asia-9 economies To bring this perspective even closer to home to this audience, let us look at these developments from India’s perspective. Traditionally, India’s trading partners have been the G3 countries, with the US, the EU and Japan accounting for 52% of India’s total trade with the world in 1990. At that time, India’s trade with Asia-9 accounted for only 8.3% of India’s total trade. Fifteen years later, the structure has changed remarkably. The share of trade with the G3 countries, in terms of India’s total trade, has fallen to 33.9%. During the same period of time, India’s trade with Asia-9 has risen from 8.3% to 23.3% - an almost three-fold rise. From the perspective of Asia-9 themselves, intra-regional trade among themselves has risen from 29.1% of their total trade in 1990 to 41.4% in 2005. More striking, the share of intra-regional trade BIS Review 7/2006 1 among the Asia-9 economies has outgrown the share of their trade with the G3 countries over the same period, which has in fact fallen from 52.6% to 39.2%. In terms of growth, trade among Asia-9 economies has grown at an average 23% in the past 3 years, exceeding the average 17% growth in trade with G3 countries. What message can we draw from these developments?
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Rather peculiarly, the UK economy appears to be writhing in both agony and ecstasy. It is twin-peaked. Short-lived or secular? So which of these twin forces is likely to win out? This is an issue on which a global debate is currently raging. For some, the world is experiencing a fairly conventional recovery – perhaps slower and lower than usual, but with normal service resuming. For others, the world is instead facing a more protracted period of sub-par growth – an era of “secular stagnation” (Summers (2014)). The MPC’s central view, as contained in its August Inflation Report, is a mix of the two views, but with a stronger flavour of the first. It envisages a slower and lower recovery than in the past, but which builds in momentum over time. For example, according to the Inflation Report projections, productivity and real wage growth are expected to enter positive territory during the first half of next year and real interest rates by 2016 (Chart 6). Thereafter, all three are forecast to continue rising. By the end of 2017, productivity growth and real wage growth are back to around 2% and real household deposit rates are in positive territory (Chart 6). The agony index would then be back in line with its historical average. In other words, on the MPC’s central view the sun will come out tomorrow. The experience of past recessions supports this weather forecast.
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It is more important than ever that we make concrete headway, notably on harmonising bankruptcy regimes and strengthening the role of ESMA as a supervisory authority. More broadly, I can only express my regret that the reinforcement of the ESAs proposed by the Commission has been blocked by the Council. The Banking Union and Capital Markets Union are the key components for a genuine “Financing Union for Investment and Innovation”: I have put forward this idea as a way of better channelling our abundant resources – our EUR 350 billion private savings surplus – towards the concrete needs of the economy: the energy transition, SMEs or digital innovation. Jean-Claude Juncker’s investment plan was a first successful step towards this. With regard to the ESM, it’s not just about managing crises ex post, but about preventing them from happening in the first place by reinforcing our precautionary tools: the principle of ex ante criteria and the absence of an assistance programme are both welcome elements. However, we need to avoid having ex ante criteria that are so strict that in practice they prevent the ESM from being used preventively, as is the case today. Beyond these institutional reforms, and with the United States and China increasingly asserting their dominance, it is vital that the European Union be given genuine strategic autonomy. Our currency, the euro, already plays a significant role at the international level, and this could be expanded even further [slide 6].
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Despite being the world’s second most important currency, it is still used to a far lesser extent than the dollar. It accounts for 20% of global currency reserves compared with 63% for the dollar; by contrast, 36% of the total value of payments (including intraeuro area payments) is settled in euro, compared with 40% for the dollar. This is why the European Commission’s communiqué in December was particularly opportune. The initiatives promoting the role of the euro, notably in the energy sector, need to be examined carefully. Europe has built its monetary sovereignty thanks to the euro; it needs to preserve its sovereignty with regard to trade; and we still have a long way to go to build our economic sovereignty, so that we can meet the challenges of innovation in artificial intelligence or of the energy transition. ** I would like to conclude my speech with this almost prescient quote from Pierre Werner in 1965: “Any economic union involves periods of flagging, of disaffection, of misunderstandings [...]. But we are also aware that, in these situations, we need to hold onto the progress made, [...] to concentrate firmly on the formal commitments already entered into [...], in other words, to persevere.”9 Far from discouraging us, the scale of the challenges and uncertainties facing 5/6 BIS central bankers' speeches Europe at the start of this year should motivate us to persevere in our ambitions. That is my wish for Europe for 2019. Thank you for your attention.
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Moreover, many firms have been able to raise their profit margins in sectors faced with constrained supply and resurgent demand. The energy price shock implies a hit to the domestic economy, which should be absorbed by both firms and workers in order to ensure that it does not lead to a spiral of upward price and wage adjustments. In the baseline of our latest staff projections, headline inflation has been revised down, mainly reflecting a smaller contribution from energy prices than previously expected. We now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong. Inflation excluding energy and food is expected to average 4.6% in 2023, which is higher than foreseen in the December projections. Subsequently, it is projected to come down to 2.5% in 2024 and 2.2% in 2025, as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand. As inflation is projected to remain too high for too long, the Governing Council last week decided to increase the three key ECB interest rates by 50 basis points, in line with our determination to ensure the timely return of inflation to our 2% medium-term target.
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For us at the ECB, this means continuing to make progress on our climate roadmap.2 This week we will publish the first climate-related financial disclosures of the Eurosystem's corporate sector assets held for monetary policy purposes, and of the ECB's own funds and the staff pension fund. We will be joined in the coming weeks by all Eurosystem central banks, which will disclose climate information on their own eurodenominated non-monetary policy portfolios. Besides helping us be more transparent about our climate impact, these disclosures help us track our progress towards supporting, within our mandate, a decarbonisation path in line with the goals of the Paris Agreement and EU climate neutrality objectives. They will show, for example, that our corporate sector portfolio is becoming less carbon intensive, partly thanks to our efforts to tilt purchases towards issuers with a better climate performance. Over time – as more and better-quality data become available – we will improve the level of detail and expand reporting to include other portfolios and asset classes. Better and harmonised climate disclosures for all asset classes would help not only the ECB, but also the entire financial sector, to better account for climate-related risks.3 Thank you for your attention, I now look forward to your questions. 1 Gil-Robles, J.M. (1999), "Speech to the European Council", 3 June. 2 ECB (2021), "ECB presents action plan to include climate change considerations in its monetary policy strategy", 8 July. 3 https://www.ecb.europa.eu/pub/pdf/other/ecb.ESA_ECB_joint_statement~c1f96d353b. en.pdf. 3/3 BIS - Central bankers' speeches
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But to restrain household indebtedness, we would actually need an “extra policy rate”, aimed at households and able to be set at a higher level than the usual policy rate. However, as the Riksbank can only steer the general level of interest rates and a part of the transmission is that households borrow more when interest rates are low, we now have to turn to other policy areas to manage household indebtedness. 5 For a more in-depth description of the development of housing prices in Sweden, see, for example, Financial Stability Report 2015:1, pp. 11–12. BIS central bankers’ speeches 5 ... but assumes measures will be taken on the housing market for success in the longer term One condition for our monetary policy trade-offs to be successful is for measures against indebtedness to be taken elsewhere. If this does not happen, we may encounter major problems later on, both for the economy in general and for monetary policy. Let us assume that no measures are taken. The housing rally could then potentially continue. In the worst case, international confidence in the Swedish housing market would start to collapse. As covered bonds are largely held by foreign investors, we would risk having these investors remove a large part of the banks’ funding, which could have effects not only on financial stability but also on inflation. In that case we could describe a very bad scenario: The banks would encounter funding problems, which in turn would lead to higher lending rates and lower demand.
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We are now seeing annual rates of increase in housing prices of between 15 and 20 per cent, at the same time as household indebtedness has started to accelerate upwards again (see Figure 6). 5 There is a connection between the development of housing prices and household indebtedness because housing purchases are largely funded by loans and large parts of households’ debts are made up of mortgages. Monetary policy faces a choice between, on one hand, the development of the exchange rate, inflation and inflation expectations and, on the other, the development of household indebtedness. My assessment is that, at present, it would be difficult to maintain a higher repo rate to manage the risks linked with household indebtedness. The krona would then risk appreciating and demand in Sweden could become too low – inflation may not reach the target as planned and inflation expectations may not become anchored around the target. Figure 6 Housing prices and household indebtedness in Sweden Sources: Statistics Sweden and Valueguard. The expansionary monetary policy is contributing to stable inflation... Our assessment is that the monetary policy being conducted will allow us to safeguard the credibility of the inflation target, which is vital for achieving price stability. However, household indebtedness risks threatening both price stability and financial stability. You could put it like this: Monetary policy is the policy area that has the best conditions for influencing the exchange rate and inflation.
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Companies’ investment remains strikingly and significantly subdued. Business sentiment is weak. And UK growth for the year as a whole, at less than 1.5%, is expected to lie below potential. My personal view, though, is that I would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn. First, despite some Brexit-related volatility quarter-to-quarter, underlying UK growth remains fairly steady, if not spectacular, at a fraction below its cruising altitude. Consumer confidence and spending remain robust, underpinned by a still-strong jobs market and rising real pay. The UK housing market may be bottoming-out. When British consumers have more money in their pockets, it takes a lot to persuade them not to spend it. Nothing so far has dissuaded them. And they are three-quarters of all spending in the economy. Second, the starting position for both the economy and monetary policy need importantly to be borne in mind. As best we can tell, there is little, if any, slack left in the UK economy. That is why pay is picking up at pace. UK inflation, meanwhile, is already at target and the monetary stance remains accommodative, with short-term real interest rates still negative, augmented by almost £ trillion of asset purchases. 30 All speeches are available online at www.bankofengland.co.uk/speeches 30 Third, there is sometimes a tendency in the current environment to extrapolate from international experience, or recent historical experience, to the current stance of UK monetary policy.
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To the extent size is a proxy for productivity, this is also as we would expect.18 During expansions, more productive firms hire more, and lose fewer, of their workers than less productive firms (Charts 14a and 14b). Other patterns in the data less obviously fit the facts, however. Despite jobs flows picking up, pay growth has until reasonably recently remained slow and low. Meanwhile, productivity growth has remained 18 For example, Bernard et al (2014) and Wales et al (2018). 13 All speeches are available online at www.bankofengland.co.uk/speeches 13 stubbornly subdued despite a seven-year jobs recovery. So has the jobs ladder broken? Have its rungs been removed? To understand these developments, it is useful to break the decade down into phases. Charts 14a and 14b: Hire and quit rates by firm size Hire rate Quit rate 7% 2.5% 1.0% Small firms (< 50 workers) Medium firms (50-499 workers) Large firms (500+ workers) 0.9% 6% 2.0% 0.8% 5% 0.7% 4% 0.6% 1.5% 0.5% 3% 2% 1% 0.4% Small firms (< 50 workers) - LHS 0.3% Medium firms (50-499 workers) - RHS 0.2% Large firms (500+ workers) - RHS 0.1% 0% 1.0% 0.5% 0.0% 0.0% Sources: ONS LFS and Bank of England calculations. Notes: Charts show four-quarter moving average of hire and quit rates.
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While the current precept of risk-based supervision, as implemented by many, is still a robust and valid concept, there are many weaknesses when it comes to putting the precept into practice, as shown by the lesson of this crisis. These weaknesses include the inability to deal with complexity arising from such mechanism as securtisation, OTC derivatives, as well as the problem of procyclicality and systemic risk associated with valuation and performance management issues. Nevertheless, risk-base principle remains the key anchor to coherent BIS Review 131/2009 1 risk management and supervision, even more so given the increasing complexity of the financial market. So, we must remain anchored to its principles. What then needs to be done is to strengthen risk measurement, management, and supervision, so that we can truly capture risk of individual institutions, overtime, and risk arising from interconnectedness of key components of the system, to safeguard financial stability. In short, we need to strengthen both micro- and macro-prudential regulations. The shift in policy paradigm from this crisis has been the increasing acceptance of the concept of macroprudential policy, which takes into account the interconnectedness within the financial systems as well as between the financial system and the real economy, that is, the issue of systemic risk and procyclicality. The proposals by G20, the BCBS, as well as international accounting standards are in line with the risk-based principle.
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Indeed, I find it hard to understand how an earnest rating agency might assess sovereign risk without even referring to that country’s level of public debt and international reserves. As a professor, I can safely assume that the “subject is not treated”, hence the conclusion is unsubstantiated. As concerns these assessments, I must say however that things are not in the least that simple. Of course, we could assert that at present our economy is in a better position than those of other countries in the region rated within the “investment grade” range. But those countries have at least adopted austerity measures at domestic level. How do things stand in our country? After two consecutive years of wage increases in a range from 20 percent to 25 percent per year – i.e. more than twice the labour productivity gains – the wage rises envisaged for 2009 ranged between 50 percent and 60 percent, whereas the agreements with the trade unions, whenever struck, do not provide for hikes lower than 35 percent. Such an approach reveals a dangerous decoupling between aspirations and reality. In the current international context and given the already dangerously high level of external deficit, we must not aim at further increases in domestic consumption above labour productivity gains, since there are no more financing sources for something like that. And unless we understand this state of affairs ourselves, rating agencies are going to warn us.
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This trajectory is all the more significant when compared with events in other developed economies and, in general, in the euro area as a whole, where export shares fell during the crisis. Our sound export performance has been underpinned both by gains in competitiveness and the pick-up in external demand, as well as by more structural factors, allowing us to expect this potential to continue and become more entrenched in the long run. The structural factors include the geographical diversification of exports of Spanish goods and services to emerging markets and the more export-oriented gearing of our companies, which is reflected in the increase over recent years in the number of Spanish companies competing on international markets. The re-directing of exports towards emerging markets has contributed significantly to these developments, thanks to the substantial dynamism of the demand for imports in those BIS central bankers’ speeches 1 countries. Indeed, their dynamism has compensated for the cyclical weakness in the developed countries, particularly in the euro area. The relative weight of goods exports to emerging countries has increased since 2007, coming to account for 30% of the total. The increases have been across the board, although particular mention may be made of Latin America, China and North Africa. However, the share of the developed countries has fallen on the same scale, owing to the loss in the weight of sales to the euro area, which at end-2013 stood slightly below 50%.
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This means that while banks will, where needed, have to hold some capital above the Basel III transaction path for the reason that I 4 BIS central bankers’ speeches set out earlier, the FSA is allowing those banks that increase lending to a lower Pillar 2 capital buffer to recognise the benefits of such lending. I should add that the FSA has also altered its guidance to banks on the liquid asset buffers they need to maintain. This reflects the Bank of England’s stance on the potential access of banks to liquidity from the Bank, and a wider desire to reduce the incentives for banks to hold excessive liquid asset buffers for precautionary reasons. This action, too, has been endorsed by the FPC, and I hope it will support credit availability. In conclusion, I have tried this morning to set out how we are thinking about and then applying macro-prudential policy, going back to first principles. This is a new field, and as I said earlier, please bear in mind that in the early days of the low inflation monetary policy regime in many countries, it took time to refine the communication. But, beyond that, we also need to fill in what for me is the big gap at present, namely how we explain and calibrate the resilience objective in terms of capital. The FPC will focus on this at its next meeting.
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Our welldeveloped social security system also fulfilled its role as an automatic stabiliser. Discretionary fiscal policy, by contrast, played a relatively minor role. One reason for this is that we have a federal system with extensive decision-making powers in the hands of the people. Another is the extensive global integration and openness of the Swiss economy. This means that much of the impact of any fiscal programmes designed to stimulate the economy would have been felt abroad rather than in Switzerland. There are certainly positive sides to the fact that fiscal policy in Switzerland was not used actively, or to a large extent, for crisis management – as is evident if we think of the problems of sovereign debt currently afflicting other countries. Yet we should not forget that monetary policy had to bear the lion’s share of the adjustment burden in its place. As I mentioned before, article 6 of the National Bank Act constitutes the foundation stone of our independence. However, the principle that the SNB should be an independent central bank is actually established at the highest level of all, in article 99 of the Swiss Constitution. This shows the importance attached to the independence of the SNB by the constitutional 2 These findings were taken into account when the European Monetary Union was founded. Under the Maastricht Treaty, a country planning to join the union must have an independent national central bank.
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Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £ per worker per year, and 1.5 million more people would have been out of work. In short, monetary policy has been highly effective. 12 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 12 Financial outcomes So monetary policy has been highly effective in doing its job, but what have been the distributional effects on financial outcomes? Has monetary policy robbed savers to pay borrowers? Has the MPC been Robin Hood in reverse? In a word, no. Chart 15: … as have all income quintiles Chart 14: The poorest have gained the most while all wealth quintiles have gained since 2006-8… Lowest wealth Second lowest wealth Middle wealth Second highest wealth Highest wealth Total net wealth (% change since 2006-8) 60 Lowest income Second-lowest income Middle income Second-highest income Highest income % change since 2006 12 10 50 8 40 6 4 30 2 20 0 10 -2 -4 0 2006-8 2008-10 2010-12 2012-14 Source: Wealth and Assets Survey (WAS, ONS) and Bank Calculations. 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Family Resources Survey (FRS) and Bank Calculations. Income deflated by the consumption deflator.
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But it is worth highlighting that the litigiousness and uncertainty associated therewith may ultimately harm the end-customer too. Banks may react to legal uncertainty in two ways: first, by limiting or reducing the number of transactions, which ultimately restricts access to credit; and further, by making newly arranged transactions dearer in order to cover the legal risk-related contingencies. Applied to the real estate market, legal uncertainty ultimately results in greater housing affordability difficulties, paradoxically something it is sought to protect against. The financial crisis has given rise to more demanding legislation which requires that banks not only report but also act impartially, transparently and professionally, taking into account the rights, interests and needs of their customers and going beyond mere formal transparency. Clearly, the Law on Real Estate Lending is a good example of this change. It is a little over 18 months ago that this legislation was approved. The Banco de España views it most favourably, although it is too soon to draw firm conclusions. By introducing various bank-customer safeguard and protection measures, the Law restores and ensures legal certainty. As I have said, such certainty is vital for the proper functioning of the mortgage market. In this connection, I wish to stress that customer protection, far from being a disadvantage for the functioning and profitability of banks, is a centrepiece of any banking business model that is to be viable and sustainable in the long run.
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With their technical support, the Government, through the Balance of Payments Statistical Committee, comprising representatives from the Ministry of Commerce, Trade and Industry, Ministry of Tourism and Natural Resources, Zambia Development Agency, Central Statistical Office and Bank of Zambia, was able to undertake this very important survey. Distinguished Participants, As you are aware, the Zambian economy has recorded significant positive developments in the recent past, owing to the economic reforms the Government has been implementing since 1992. These reforms have facilitated foreign investments in various sectors of the economy. These reforms have also resulted in Zambia recording tremendous improvement in world ranking with regard to the ease of doing business. The favourable investment climate created has raised investor confidence in the Zambian economy thereby attracting both local and foreign investments. Ladies and Gentlemen, the survey findings we are disseminating today show that the overall Foreign Private Investment inflows in 2009, declined to US $ million from US $ million recorded in 2007. This was explained mainly by the notable reduction in re-invested earnings, due to lower profits recorded by enterprises during the year. The overall reduction in foreign investment inflows is also consistent with global developments. In fact, at a global level, foreign direct Investment inflows drastically declined to US $ billion in 2009 from US $ billion in 2008 and US $ billion in 2007. Nonetheless, new equity investment inflows in Zambia surged to US $ million in 2009 from US $ million recorded in 2007.
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Figure 8 and 9 show developments in GDP and employment during the recession and subsequent recovery in Iceland, with predictions extending into 2017 for GDP and 2016 for employment. For comparison, it shows the distribution of the same for 30 other European countries, with Ireland highlighted. It shows that Iceland’s recession, as well as Ireland’s, was deeper than the median in Europe, but both countries have been doing better than the average during the recovery, especially lately and in the forecasts. Actually, there is relatively little difference between Iceland and Ireland by both measures, except that Iceland seems to be doing somewhat better lately in terms of employment growth. Iceland’s performance would be even better if we looked at the unemployment rate, as labour supply is rather elastic, both internally and because of cross-border mobility. Iceland lost just over 11% of output during the recession that ended in the first quarter of 2010. It will have probably more than gained that back by the first quarter of this year. Given developments in the supply side of the economy, the Central Bank’s assessment is that almost all of the slack in the economy has been absorbed. Unlike the pre-crisis peak, the current level of output is therefore associated with a relatively well-balanced economy both internally and externally. In recent months, inflation has been below the target because of international developments, and there is a current account surplus, which allows the Central Bank to accumulate reserves without undermining the exchange rate. So is Iceland out of the woods?
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The double-digit deficits in the years before the crisis have been replaced by sizeable surpluses from 2009 to this day. Iceland had significant fiscal surpluses in the years leading up to the crisis. As expected, the crisis had a big impact on government finances: through the direct fiscal costs of the banking crisis, the loss of tax revenue, and higher unemployment expenditures as the economy went into recession. This impact was big as can be seen on Figure 6 showing the direct and indirect impact of selected banking crises on government debt and fiscal balance. But yours was bigger! A deficit on the central government amounting to 8% of GDP opened up in 2009. It had to be financed domestically. Capital controls helped in that respect. To build confidence and open external market access, a medium-term fiscal consolidation plan was implemented as a part of the programme with the IMF. In 2009, automatic stabilisers were mostly allowed to do their work, but in 2010 a phased deficit reduction plan set in, with a primary surplus targeted for 2012 and an overall surplus for 2014. This fiscal consolidation was sizeable in international comparison, as can be seen from Figure 7, but it did not derail the recovery that began around the middle of 2010. It helped that monetary policy could be relaxed over the course of 2010, as the closure of loopholes in the capital controls in late 2009 contributed to the stabilisation of the exchange rate.
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Some of the potential costs of home-working, including the loss of social engagement, are only now being felt and may grow with time, in ways which affect both our well-being and productivity at work. In what follows, I will try to navigate through some of these issues, drawing on evidence where possible. There are both positives and negatives from the shift in working practices that has taken place this year and the balance of these is likely itself to shift over time. If you’ll forgive the indulgence, I’ll try and weave in some of my own work experiences to add some personal colour. The Changing World of Work Even before the Covid crisis struck, there was evidence of a secular shift towards more flexible forms of working. Analysis of working trends by the Association of Professional Staffing Companies in 2019 found 1 Engaging Business (2020). 2 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 2 that, over the past two decades, the number of people working ‘flexible hours’ has increased five-fold, from less than 10% to more than half the workforce.2 As with many other things, the Covid crisis brought about an overnight transformation and acceleration of those trends. ONS data suggests that, prior to the pandemic, around 5% of people worked from home as their main location.
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Survey evidence for Japan suggests around a 7% hit to labour productivity from home-working.8 Similar evidence can be found in studies of the UK.9 Survey data from the ONS paints a similar picture, with almost a quarter of workers believing their productivity has been negatively affected by home-working, compared with only 12% saying it has improved.10 These differences in the productivity effects of home-working, pre and post-Covid, are perhaps unsurprising. Mandatory home-working thrust large numbers of workers into an alien working environment – their kitchens, bedrooms and attics. There was no option of self-selecting. That meant, for many, not only a worse working environment but a steep learning curve as they adapted to new ways of working. Productivity, predictably, was hardest hit among those with least prior experience of home-working.11 5 These shifts are also likely to affect other labour market and economic behaviour, such as labour market participation and wage growth. See, for example, Mas and Pallais (2017) 6 Bartik et al (2020) 7 Dutcher (2012). 8 Morikawa (2020). 9 See Felstead and Reuschke (2020). 10 ONS (2020b). 11 Morikawa (2020). 4 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 4 At the same time, we should be cautious about jumping to too negative a conclusion when assessing the economic costs of the shift to home-working. Even if the amount workers produce each hour has fallen, as evidence and anecdote tentatively suggests, this need not imply workers’ overall economic contribution has fallen.
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If people came to believe 6 BIS Review 91/2010 that inflation was not going to be brought back to the 2% target, then Bank Rate would have to change by a potentially much larger amount in order to ensure that inflation is, in fact, returned to target. The recent high rate of CPI inflation can be largely attributed to a number of temporary factors, combined with weak downwards pressure on inflation from the subdued level of demand. Nevertheless, given the expected degree of spare capacity in the economy over the next few years, and that the temporary factors should wear off, the most likely outcome is that inflation falls back to below target over the next couple of years as shown in the May Inflation Report (Chart 12). On that basis it was sensible not to try and offset the recent rise in inflation by tightening policy. But let me be clear about the risks. Our central expectations could be wrong. Certainly the inflation data have tended to consistently surprise on the upside, month-by-month. What if spare capacity continues to exert much less restraint on inflation than anticipated? Or perhaps current data estimates have significantly underestimated demand and output growth? Or the exchange rate effect is bigger than incorporated in the projections? We could also be wrong in the other direction: downside pressures on UK output growth (Chart 13) could yet lead to an even bigger fall in inflation than the central case.
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On the other hand, they may lead to creation of bubbles that down the road may burst. Against this background, at the last meeting of G20 finance ministers and central bank governors it was acknowledged that technological innovation may be conducive to higher efficiency and inclusiveness of the financial system. Many risks, however, were also pinpointed with their proliferation – consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. In this changing and challenging environment, staying aside is not an option for the Republic of Macedonia. To tackle the rising challenges, we have already drafted a new Law on payment services and payment systems (in cooperation with the Ministry of Finance) which transposes the PSD2 as well as other European Union relevant directives and regulations in the payments area. The new payment regulation aims to boost the competition in the traditionally bank dominated payments market by opening the entrance for FinTech companies which can provide innovative payment services as well as establish and operate new payment systems. At the same time, we assert our focus on maintaining financial stability by enhancing the resilience of payment market infrastructures which are being assessed against the Principles for Financial Market Infrastructures.
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(3) Allan Greenspan in his latest paper “The Crisis” wrote about the reasons for it: a. “it was the global proliferation of securitized, toxic U.S. subprime mortgages that was the immediate trigger of the current crisis”. But, he says: “the roots of the crisis reach back, as best I can judge, to the aftermath of the Cold War”. Later he explains actually the large increase of the aggregate demand which came from, formerly the third world nations, especially China, which replicated the export-oriented model of the so-called Asian tigers, argumenting it with data that “the savings rate of the developing world soared from 24% of nominal GDP in 1999 to 34% in 2007, far outstripping its investment rate”. b. that “subprime mortgages in the United States for years had been a small appendage to the broader U.S. home mortgage market, comprising only 7% of total originations as recently as 2002”...that “most such loans were fixed-rate mortgages, and only a modest amount had been securitized...” that “..,. starting in late 2003, began to accelerate the pooling and packaging of subprime home mortgages into securities...” that “subprime mortgages securities outstanding in 2007 totaled more than 900 billion USD, a more than sixfold rise since the end of 2001”. c. that “a classic euphoric global bubble took hold”, “that by 2007, yield spreads in the overall debt markets hаd narrowed to a point where there was little room for further under pricing of risk”.
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We will continue to set a high bar on professional integrity and quality of advice, and we welcome your ideas and input on how we can continue to encourage firms to grow within the industry and bring financial advisory services to a wider spectrum of the public. The Association of Financial Advisers has a very important role in this process and has been a focal point for the Bank’s engagements with the industry. I look forward to your continued cooperation in achieving our shared goal of developing a financial advisory industry in Malaysia that truly serves to improve the well-being of financial consumers in this more challenging environment, and one that we can all be proud of. Thank you very much for your attention. 4 BIS central bankers’ speeches
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We are working together with law enforcement agencies and are now focusing on public awareness. About a month ago, we launched a joint project with Yandex – the microfinance organisations on our register are marked with a special symbol in the search results so that it is easier to understand whether a given microfinance institution is legal or not. Moreover, this year saw Mir cards issued on a large scale. In Russia, they are accepted by all payment terminals and ATMs. The issue is proceeding at a good pace: over 10.6 million cards have already been issued. In the last month and a half alone, over 2 million cards were issued. Mir is a competitive system and offers all the services on the domestic market that the public are used to after using international payment systems. Our strategic objective in the coming years is ensuring Mir cards are accepted internationally, firstly within the Eurasian Economic Union. We are making progress in this area with our partners in the Eurasian Economic Union. Last week, the first cross-border transactions using Mir cards were carried out with Armenia’s ArCa payment system. This is the first project we have undertaken to organise equal intersystem interaction. (I believe the citizens of the two countries will benefit from new financial opportunities. I would like to express my gratitude to the Central Bank of Armenia and the management team of the ArCa payment system for their incredibly effective collaboration and promotion of this project).
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Indeed, what we can do together to foster development of the financial sector and what the financial sector can do to foster development of the economy will be the subject of our discussion here at the congress. I look forward to the productive work and successful outcomes we will share. Thank you for your time. 11 / 11 BIS central bankers' speeches
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As outlined in the Financial Sector Master Plan, the strategies to achieve an adequate and effective consumer protection infrastructure involves: • A comprehensive and structured consumer education programme; • Increased transparency by the financial institutions on the products and services being offered; • Legal redress for consumers to deal with grievances arising from the purchase of financial products and services; • Expansion in the role of the Banking Mediation Bureau to cover the full range of retail banking related consumer complaints and educating banking consumers of the ways in dealing with the available courses of action; • The implementation of Anti-Trust regulation to define the process by which abuses that are detrimental to consumers can be addressed; and finally • Establishing a deposit insurance fund to not only create incentives for prudent management by the banking institutions but also to assure protection to small depositors. The objective is to promote a more market oriented consumer protection framework. Ladies and Gentlemen, This new millennium brings with it new opportunities and challenges to both the financial institutions and to the consumers. As we advance forward we can expect an increasing array of choices open to consumers. In making financial decisions, consumers require information on a wide range of matters and details about the processes and documentation involved, the relevant fees and charges to be incurred and the risks and benefits of each type of product or service.
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The Executive Board lays down principles for responsible investment management and is responsible for decisions on the observation and exclusion of companies. Norges Bank has recently issued a consultation response to the report by the Mestad Commission assessing the guidelines for the observation and exclusion of companies. The Bank views the report as a good starting-point for further development of the GPFG as a responsible investor. Norges Bank addresses companies, not political conditions in countries. We remark in our consultation response that the GPFG enjoys the advantages of free and open markets, with no particular restrictions on our investments. The GPFG has today a clear financial objective. A change that blurs the distinction between company and state could raise doubts about the role of the GPFG. A new Central Bank Act entered into force on 1 January 2020. The Act has brought changes in the Bank's governance structure and organisation. A Monetary Policy and Financial Stability Committee was established at the beginning of the year. This has given the Executive Board greater capacity to work on the management of the GPFG. Over the past year, the Executive Board has completed a reorganisation of the administrative support functions at the Bank with the aim of pooling expertise, promoting cost-effective solutions and underpinning the identity of the Bank as a single institution. Another important change is the Executive Board's appointment of a new CEO for the Bank's management of the GPFG.
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The high liquidity helps price discovery, and attracts fund raisers and investors to our market. This is shown by the listing of the large state-owned banks this year, including what is expected to be the largest IPO ever in the world - the listing of the Industrial and Commercial Bank of China. The efficiency of our equity market is underpinned by a combination of fundamental strengths, including a sound legal and regulatory framework and an advanced financial infrastructure. In particular, the high standard of disclosure required in Hong Kong promotes market transparency and good corporate governance. The size of Hong Kong’s debt market is equal to 24% of that of the Mainland, and liquidity is a lot higher. Despite the significant progress made in recent years, the development of the Mainland bond market has been constrained by over-regulation (partly reflecting concerns about corporate governance and credit culture), a narrow investor base, and lack of instruments for pricing and risk management. Hong Kong has built up an efficient financial infrastructure for debt market development over the years. The Exchange Fund Bills and Notes (EFBN) programme has created a yield curve for the Hong Kong dollar of up to 10 years, providing a benchmark for debt issuance by other entities. A multi-currency and multi-product payment and settlement platform serves local and overseas investors to facilitate their fund transfers and delivery versus payments when they buy and sell debt instruments.
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However, and as I discuss below, this may not be enough to ensure macroeconomic stability. Monetary policy in the context of an inflation targeting regime also contributes to stability by leaning against the wind. Capital inflows that lead to an appreciation of the currency reduce inflationary pressures allowing for an interest rate cut. This, in turn, reduces incentives to capital inflows and takes pressure off the currency. This phenomenon has been recently experienced in Chile. In recent weeks, the peso has appreciated significantly. At the same time the economy has been showing a rapid expansion: despite the earthquake we suffered this year growth is expected to be between 5% and 5.5% this year and between 5.5% and 6.5% next year. Although in our latest Monetary Policy Report we said that the bank will keep withdrawing the significant monetary stimulus, without the strengthening of the currency the withdrawal would certainly be faster. However, these macro policy actions may not be enough, in particular because capital inflows may be a source of bubbles in domestic asset prices. Indeed, in emerging markets bubbles normally take the form of an exchange rate appreciation. In this way, all assets become overpriced, not necessarily by higher prices in domestic currency, which may also be happening, but by increasing the value of the currency. A much debated issue in industrial countries has been whether tightening monetary policy could help burst a bubble in asset prices.
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10 BIS central bankers’ speeches (i) TABLE AND CHART ANNEX Table 1: Similarity of industrial structures EA (Core vs VEAPs)(a) EA (17 countries)(b) rUK and Scotland(c) rUK and Scotland (oil on geographic basis)(d) Energy 0.1 1.0 1.8 10.0 11.5 3.1 Construction 0.6 1.3 0.1 0.7 1.3 0.6 Manufacturing 1.3 6.1 0.7 0.5 4.8 4.5 Finance and insurance 0.3 2.5 0.8 1.4 2.2 3.2 Other 0.3 5.6 1.5 7.4 8.5 5.2 Sum 2.6 16.4 4.7 20.1 28.3 16.6 Canada (13 provinces and territories) US (50 states + DC) Sources: Bank calculations; Statistics Canada; US Bureau of Economic Analysis; Eurostat; ONS Regional Gross Value Added. rUK and Scotland data are for 2011; Euro Area (EA), US and Canada data are for 2012. Industrial classifications in the US and Canada are NAICS, in the UK SIC, and in the Euro Area they are NACE Rev2. These were consolidated into the five broader industrial classifications to ensure consistency. Notes: The table shows absolute differences between output industry shares in each region and the monetary union as a whole, which are then averaged for each industry in each monetary union.
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What follows is not an assessment of whether Scotland will be overall better or worse off under independence – that is a multi-faceted judgement for the Scottish people. It does not pass judgement on the relative merits of the different currency options for an independent Scotland, but instead draws attention to the key issues. This is a technocratic assessment of what makes an effective currency union between independent nations. The costs and benefits of currency areas Let me begin by outlining the basic rationale for sharing a currency. BIS central bankers’ speeches 1 Economist Robert Mundell first wrote about what determined an “optimum currency area”1 Spurred by the breakdown of the Bretton Woods system and the move to floating exchange rates as well as by the formation of the European Monetary Union, others have elaborated and extended his work. We now have a fairly comprehensive sense of the costs and benefits of sharing a currency. For Mundell, the main benefit was that it eliminates the transactions costs associated with using, and switching between, different currencies. The European Commission estimated the size of these direct benefits for Europe to be almost 0.5% of GDP every year.2 Sharing a currency can promote investment by reducing uncertainty about currency movements and giving businesses access to deeper, more liquid financial markets.3 It can also reduce borrowing costs for countries with a history of high inflation and currency devaluation. By tying themselves to the mast of the monetary policy of others they can import credibility.
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The analysis focuses on the effect of push and pull shocks on capital flows in the contemporaneous quarter and the subsequent two quarters. In a second specification the role of a set of additional factors (X) in affecting the sensitivity of capital flowsat-risk to global push shocks is considered. This is done by adding an interactive effect to equation (1): 37 KF@R = α + β 𝑃𝑢𝑠ℎ + γ 𝑃𝑢𝑙𝑙 + δ X + θ (𝑃𝑢𝑠ℎ ∗ X) + 𝑢 (2) A series of factors is considered: in one specification the focus is on the share of foreign currencydenominated debt and a measure of reserve adequacy, while in another specification the role of macroprudential policy is analysed. 34 The FCI is the first principal component of the following series: long term government bond yields, term spreads, sovereign spreads, interbank spreads, corporate spreads, equity returns, equity volatility and financials market capitalisation (normalised by the broader market). These indices are based on those presented by the IMF in their April 2017 GFSR. 35 The main difference between this specification and the one proposed by the IMF in their October 2018 GFSR is that they consider capital flows in aggregate across EMs and, consequently, can only look at the effect of push factors. The choice to do this in a panel setting with country-specific series means pull factors can be incorporated into the analysis. The current analysis also broadens the scope from portfolio flows to different types of capital flows.
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This proposal is an important step to encourage a strong corporate and market focus on how Islamic financial institutions are generating value, not just for shareholders, but for the communities which they are a part of. On-going collaboration and active engagement with the industry are currently being undertaken under this initiative to ensure proactive behaviours and sustained momentum towards the creation of a sustainable development. Another precondition for long term sustainable value creations is the availability of top-notch talent to drive and execute innovative business strategies that will realise the full potential of Islamic finance. Based on market assessments, a greater pool of quality professionals are required to sustain the growth of global Islamic finance that is estimated to surpass $ trillion total assets size by 2020. The challenge in meeting this demand however goes beyond the numbers. The next phase of growth and development of Islamic finance calls for a deep talent pool that not only has a strong foundation in the application of Islamic finance principles, but also the much broader set of competencies required to use those applications effectively to provide and implement solutions to real world problems. And such talent must be developed not only within Islamic financial institutions, but also the professional ancillary service providers that are part of the Islamic finance ecosystem. In Malaysia, there are close to 40 professional ancillary services entities under the MIFC Community which play an important role in the development of Islamic finance.
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One of the important pillars of this development has been the construction of benchmark indices. Indeed the launch of Asian Bond Fund 2 is accompanied by the development of benchmark indices that are fully replicated by the fund manager of each individual country sub fund, as well as in the umbrella Pan Asian Index Fund. Meanwhile, the Islamic Sukuk international market's expansion is gaining momentum. Wider acceptance by investors and greater awareness of issuers of this alternative structure has seen increased issuances over the past few years. In the sovereign markets; Malaysia, Qatar and Bahrain have come to the market with Sukuks. Supranational institutions such as the Islamic Development Bank, World Bank and the International Finance Corporation (IFC) have also ventured into issuing Sukuks, with the latter two institutions issuing the ringgit-denominated instruments in our domestic bond market. The first USD1 billion-issue size was launched in 2004 by the Government of Dubai. In 2005, it is estimated that a total of more than USD5 billion of Sukuk is in the pipeline globally in a range of currencies. The market is indeed growing. Ladies and Gentlemen, The introduction of a benchmark index can act as a catalyst for a more rapid pace of development of the financial market and the recognition of a new asset class. The conditions are timely for the crafting of a benchmark index to further spur the growth of the Islamic financial and capital market to meet the needs of a larger pool of Muslim savers and investors.
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Charles Dow himself chose these stocks, nine of them being railroad companies, the key growth industry at the time. Over time, he would revise the index as he saw appropriate to be reflective of ongoing market and industry developments. Ladies and Gentlemen, The construction and use of benchmark market indices today has undergone much advancement since then. Indeed, financial markets have undergone dramatic transformation. Economic, industry, and corporate expansion; the sophistication, proliferation and diversity of instruments; the expanding investment communities are all factors that have led to an increase in the number of benchmark indices and their greater use. Benchmark committees deliberate over the construction of the index and determine the rules of the benchmark. Investors need the benchmark indices to be used as performance indicators of the broad market and for an indication of the market direction and investors' sentiment on the corporate sector and economy. The representative stocks within a benchmark index need to be highly liquid and reflective of the key corporate sectors that drive growth in the economy. At the same time the index should also reflect the underlying changes in the economy incorporating the emergence of new industries. Thus, for an index to be a useful benchmark and to be used as a reference by investors and market players, the index needs to be regularly reviewed and adjusted accordingly in line with market developments and the transformations taking place in the economy. Indeed, benchmark market indices would reflect the broader investor participation and growing maturity of a markets.
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As at year-end 2009, the total number of branches and agencies amounted to 530 from 517 at the year-end 2008. 17 new bank branches were opened while 4 existing branches were closed. 2.2 Banking system supervision The medium-term strategy for banking supervision approved in 2009. The main pillar of this strategy is the adoption of a new philosophy: risk-oriented supervision. The main highlights of this new supervisory policy are: further interaction and harmonization among monetary policy, financial stability and supervision; harmonization of our supervisory framework with the acquis communautaire; interaction between the domestic and foreign supervisory authorities and the Financial Supervisory Authority; harmonization with the third pillar of Basel II, encouraging the process of self-regulation and consumer protection. The Bank of Albania has been constantly engaged in a process of deep analysis and supervision of the legal and regulatory framework compliance and enforcement from the licensed entities. This process has been achieved through on-site inspections, which in 2009 were more frequent and rigorous. Besides the observance of the supervisory cycle, banks were constantly contacted for phenomena that have represented a concern during the year, taking appropriate measures to address potential problems in due time. Overall, the banking system has acted with caution in conducting the operational processes of their activities and in compliance with the regulatory framework of the Bank of Albania.
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The resulting effect on inflation is thus only temporary. Over recent months, inflation has been observed to be edging back up towards the zero mark. Mandate The SNB’s statutory mandate is to ensure price stability while taking due account of economic developments. We equate price stability with a situation in which the inflation rate is below 2%, but still positive. Unlike other central banks, we do not have a percentage inflation target. There are good reasons for this. A small open economy like Switzerland is continuously exposed to powerful outside influences. Monetary policy cannot always entirely offset these influences. It therefore makes sense for us to stabilise inflation within a range over the medium term. In the case of very large or recurrent unfavourable influences from abroad, inflation may temporarily turn negative. Often, this is also part of the process of real economic adjustment. The global economy has been exposed to a series of powerful shocks over the past ten years or so. Central banks worldwide have reacted with interest rate reductions and unconventional measures. We too have resorted to unconventional methods and, as in the past, we will not shy away from using these methods if it is in the interests of the country as a whole. However, any action we take will always be based on careful consideration of the costs and benefits in the short and long term. 2 BIS central bankers’ speeches Outlook Let me conclude the first part of my speech with a brief look into the future.
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Since 2000, and especially in recent months, the picture has changed. The mines have opted for another strategy and have cut back on price hedging. This strategy change can be partly attributed to more positive expectations regarding the gold price. As a result of the central bank agreement on gold sales, producers no longer fear large-scale sales by the central banks. Moreover, it seems that producers have recently become more upbeat in their assessment of private investment demand. It is interesting, in this respect, that gold producers' hedging activity tends to accelerate market trends. When they expect price decreases, prices do in fact decrease faster as a result of hedging, and when they expect price rises, prices do rise faster owing to the decrease in hedging. Such strategy changes, which are always due to changed market expectations, have to be reckoned with in future as well. • Reviving private investment demand in the industrialised countries has also contributed to giving the gold price a boost. This phenomenon has been particularly pronounced in Japan, but Europe and the United States have also seen gold demand booming. Economic imponderables, concern over the financial health of some companies, heightened political tension in different parts of the world, the terror attacks of September 2001 and concomitantly subdued stock markets have caused investors to increase their holdings of the BIS Review 39/2002 1 yellow metal. It seems as if gold is, for the time being, once again assuming its role of a safe haven investment.
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I will not take the risk and predict the development of the gold price, but one thing is certain: it will remain volatile. Our possibilities to actively hedge the gold risk are restricted by the agreement of September 1999. In particular, we may conduct hedging transactions only in the amount of the sales quota allocated to us for the current year. We are therefore all the more convinced that our strategy of regular sales remains appropriate. The principles that have guided our operations for the past two years – namely fulfilment of our commitments under the central bank agreement, transparency in communication and situationadapted handling of day-to-day business – remain relevant. Management of the free assets The market value of the free asset portfolio – consisting of the as yet unsold portion of the 1,300 tonnes of gold and the proceeds from the already effected gold sales – amounted to Sfr 21 billion at the end of May. The free asset portfolio is managed separately from our other reserves, which will facilitate its transfer to the future beneficiaries once the legal framework has been put in place. As I mentioned earlier on, our possibilities of actively hedging the gold risk against an unfavourable development of the gold price are restricted by the agreement on gold sales of September 1999. However, we limited the risks of a weak US dollar that might reduce the value of our future sales by hedging 35% of the future proceeds in US dollars against the Swiss franc.
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It therefore has limited exposure to highly leveraged activities, such as complex derivatives and structured credit instruments. Indeed, Islamic finance emphasises a close link between financial transactions and real economic activity. Islamic finance thus serves the real economy. The recent financial crisis has therefore led to a greater appreciation on the distinct nature of Islamic finance in addition to its explicit in-built strengths that supports financial stability. These foundations have been reinforced by the global efforts taken to strengthen the international financial architecture of Islamic finance to safeguard financial stability and thus its sustainability. In the recent years, the intermediaries have also gained scale and the financial markets have gained depth and maturity. Among the institutional arrangements in the international Islamic financial system, is the establishment of the Islamic Financial Services Board in 2002 to set prudential standards while earlier in 1990, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established to set the accounting standards for the financial industry. Various jurisdictions have now undertaken legal and regulatory reforms to pave the way for the offering of Islamic finance in their respective countries while ensuring attention to sustaining financial stability. These developments have been particularly important to the recent intensification of the internationalisation of Islamic finance which in turn contributes towards building bridges and forging greater linkages among a wider range of economies. Transitioning into the next stage of growth of Islamic finance It is of no doubt that we are now facing the most challenging economic and financial environment in decades.
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There has also been greater international dialogues between global Shariah scholars through several platforms and structured forums. This greater engagement facilitates convergence in interpretation and the greater leverage on technology for the active dissemination of information at real time further facilitates the harmonisation process. The next stage however is the need for more efficient information dissemination that would promote greater market transparency, price discovery and industry insights. The development of the Islamic Financial Knowledge Repository Portal by ISRA that will be launched today will be an important effort that can contribute to meeting this objective. As a knowledge database it centralises Shariah rulings and its justifications, legal and regulatory requirements. This is enriched by the latest collection of research and development in Islamic finance. This database will become an important source of reference and guidance for Shariah and industry practitioners, policy makers, researchers and academicians. This initiative by ISRA will not only promote greater understanding but mutual respect and recognition of Islamic finance. Concluding remarks The global Islamic finance industry is transitioning to its next stage of development and will stand to benefit from an enhanced universal appeal with a wider consumer and business segment, greater financial inclusion and harmonisation through increased research and development and more effective dissemination of information. A strong culture of applied research and development in Islamic finance that promotes innovative financial engineering, through practical and useful applied research findings is an integral part of industry-building efforts to support the industry’s growth.
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Constraints on earnings distributions through dividends, share buybacks and discretionary bonus payments to staff will be imposed on a bank when the conservation buffer is breached. The closer a bank’s regulatory capital ratio approaches the minimum requirement, the greater the constraints on earnings distributions. BIS central bankers’ speeches 3 incorporated banks will have to maintain at least 9% Common Equity Tier 1, compared to the Basel III minimum of 7%. Let me explain the reasons for this. (i) First, the Basel III minimums do not adequately take into account the systemic importance of banks. Each locally-incorporated bank is systemically-important in Singapore and has a substantial retail presence. Together, they account for more than half of the total non-bank resident deposits and loans in Singapore. Hence, higher capital levels are required to strengthen their ability to absorb unexpected losses effectively in a crisis. This is necessary to protect depositors, reduce risks to the real economy, and safeguard our financial stability. The experience of countries at the centre of the crisis in Europe and the U.S. showed that the total cost of a financial crisis to the economy and the public can be substantial. (ii) Second, Common Equity Tier 1 capital requirements that are significantly above Basel III will not result in a large reduction in economic output but would be beneficial in reducing the likelihood and cost of a crisis. Several empirical studies confirm this.
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But of course speculative situations cannot be ruled out either in the present ERM or in ERM 2, as is clear from developments in Finland in recent months. The Swedish position has been to avoid making the new exchange rate arrangement mandatory. Basically, we consider it would be better to achieve coordination in Europe with a single inflation target. We find the present construction of Swedish monetary policy satisfactory. But we can get along with the system that has been chosen. Cooperation will not be mandatory, which means that monetary policy can be conducted with an inflation target as well as with a fixed exchange rate with the euro. Still it is clear that there will be strong pressure on us to participate in ERM 2. It is also conceivable that a period of participation in the exchange rate mechanism will prove to be a condition for EMU membership. In any event, as a EU member state we have undertaken to conduct exchange rate policy as “a matter of common interest”. Changeover plan for the financial sector It is the Riksdag (Sweden’s parliament) that decides if Sweden should join EMU. The Riksbank has the task of helping to ensure that Sweden does in fact have a choice when the time comes to decide, so that Sweden is ready to join if a Riksdag majority so requires. The Ministry of Finance and the Riksbank each have an organisation for the euro’s practical introduction.
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Additionally, in a highly interconnected global economy with greater international financial inter linkages, financial turmoil and stress in national financial systems will have ramifications that transcend borders. Given the high stakes involved, there has been increasing scrutiny of the values, professional norms, educational standards and incentives that drive and shape the behaviour of financial institutions. Much of this scrutiny has aimed at reinforcing the responsibility that financial institutions have to the broader society. The establishment of the Financial Services Professional Board (FSPB), thus marks a significant development towards achieving the highest standards of professional conduct including fair business dealings and ethics in the financial services industry that will be consistent with the long-term growth, stability and integrity of the financial system. It is envisaged that the Financial Services Professional Board will act as an industry-led independent board that will drive the development as well as the advocacy of professional standards, ethics and continuous professional development across the financial services industry. Central to this aim is the development of a culture within the financial services industry which places an unequivocal commitment to professionalism and ethics. In advancing this endeavour, the FSPB will promote, advocate and facilitate the identification, development and the adoption of professional and ethical standards across all sectors of the financial services industry. The primary purpose of such standards will be to clearly define the expected level of performance and ethical conduct that financial services professionals are required to achieve in the service of the public.
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Although I see why it is difficult to define inflation targeting, I consider the definition given by Ben Bernanke as being the appropriate one. Accordingly, inflation targeting is “a framework for monetary policy characterised by the public announcement of official quantitative targets […] for the inflation rate over one or more time horizons, and by explicit acknowledgement that low, stable inflation is monetary policy’s primary long-run goal. Among other important features of inflation targeting are vigorous efforts to communicate with the public about the plans and objectives of the monetary authorities, and, in many cases, mechanisms that strengthen the central bank’s accountability for attaining these objectives.” The definition can be wrapped up by adding instrument independence for the Central Bank and the lack of an explicit intermediate target, as all factors affecting inflation are taken into consideration. An important feature of inflation targeting is the need for accountability of the central bank. Within the inflation targeting framework, this is enhanced by the public announcement and commitment to attain an inflation target. The explicit target and the public and transparent nature of inflation targeting also enable the central bank to withstand political pressures more easily and to overcome the so-called time inconsistency problem. In this sense, as Frederic Mishkin1 argues, central bank independence and inflation targeting are mutually reinforcing. Adopting inflation targeting is not just a matter of choice, but also of fulfilling a number of key requirements.
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More broadly speaking, the RMB is now the seventh most used payment currency according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), and the ninth most actively traded currency according to the Bank for International Settlements (BIS). 4. To me, the extent and pace of the development of offshore RMB business depends on three key factors. The first factor is the relaxation of controls and restrictions by the Mainland authorities. The second factor is the availability of the necessary financial market infrastructure, such as clearing and settlement systems. The third factor is the awareness and willingness of corporates and financial institutions, especially banks, to develop RMB business opportunities. 5. Since the RMB trade settlement pilot scheme was launched back in July 2009, the Mainland authorities have incrementally removed many controls and restrictions on the flow of RMB out of and into the Mainland. Presently all trade and current account BIS central bankers’ speeches 1 transactions between Mainland China and other parts of the world, as well as inward and outward direct investment into and out of China, can be conducted in RMB. Moreover, some cross-border portfolio investment flows, such as investments into China’s bond and equity markets, can also be made in RMB via the RMB Qualified Foreign Institutional Investors (RQFII) scheme. 6. More importantly, in April this year the Mainland and Hong Kong authorities announced a milestone project, i.e. the Shanghai-Hong Kong Stock Connect scheme.
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First, domestic demand, supported by the large and fast-growing middle income and young population in the region, will increasingly have a greater role in driving economic growth in Asia. This would contribute towards a greater balance between domestic and external sources of growth. Second, the diversification of external markets will accelerate, towards greater economic inter-linkages with emerging economies in other parts of the world. Part of this trend includes the creation of the ASEAN Economic Community by 2015 in which ASEAN will transform into a single market with free movement of goods and services. This will include the lifting of restrictions to the flow of capital in the region. And third, is the greater financial integration within Asia that will result in an increased part of the savings in Asia being reinvested in Asia. The new spending patterns as incomes rise in the region will drive the modernisation of the retail sector across the region. Financial services to the household sector will become increasingly important in this new environment. Reforms to pensions and retirement benefit systems will be key to providing a more comprehensive social safety net, thus reducing the need for high precautionary savings and encouraging consumption. In addition, the large trade sector in Asia and large capital investments required to move towards higher valueadded activity will also provide an expanding market for financial services. The more regionally integrated financial system will allow firms and investors increased options in the regional financial markets for financing and investment.
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This is, by the way, of the same order as some calculations of the impact of QE produced by the Pension Corporation late last year.7 There are a couple of conclusions I want to draw from this. The first is that while the change in the deficit is certainly not trivial for a substantially underfunded scheme, the impact of QE is nevertheless small compared to the movement in the deficit associated with other factors, such as the collapse in equity prices as a result of the financial crisis and the 6 This is broadly consistent with the NAPF Annual Survey for 2011, which suggests an average mix of 40% fixed income, 40% equities and 20% other assets, the prices of which I have assumed evolve in line with equities. The bonds are assumed to move in line with 15 year gilts, while the equities are assumed to move in line with the UK FTSE All-share index. 7 See Pension Corporation (2011), “QE’s impact on pension fund liabilities”, December. 4 BIS central bankers’ speeches recession. In particular, it would be an error to attribute the deterioration in pension deficits since the start of the crisis solely to the impact of QE. The second observation is that QE does not inherently raise pension deficits. It all depends on the initial position of the fund, with the movements in liabilities and assets likely to be broadly comparable when a scheme is fully funded.
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Changes also create difficulties It is positive that the market for payments is developing and can meet the new payment requirements that arise. Payments are increasingly based on technology and this trend will probably continue and expand. However, at the same time this development leads to new problems and tensions that need to be overcome. The problems we have identified include the following: Households and companies need even better access to different payment services. The capacity in the mobile network is not always adequate to manage temporary peaks and it may then be difficult, for instance, to make a card payment for a hot dog and soft drink at a sports event attended by several thousand people. Some groups in society, such as the visually impaired and very short people, can face problems as card terminals and ATMs are not always adapted to their specific needs. Other problems concern to a greater extent the tensions that may arise in relation to new payment services. Households may also have access to the technology needed to use a new payment service, but nevertheless prefer to use the old technology. As the latter technology becomes less accessible, tension may arise when the individual feels that his or her needs are not met. For instance, an elderly person may want to continue depositing and withdrawing cash over the counter in a bank or to pay payments there, but as fewer bank branches handle cash manually; this is becoming more difficult in practice.
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• In essence, an API documents how a system operates, what inputs it will accept, and what outputs the system will provide. • APIs allow different systems to interact with one another without the need for human intervention. • In effect, APIs allow users to seamlessly merge multiple data sets from different sources into a single rich data set. Using APIs, systems can be linked to create a system of systems, where the whole is greater than the sum of the parts. Smartphones are a good example. • Every notification you receive from Twitter or Facebook comes through an API and is displayed on your screen by another API. More efficient transactions Financial institutions are already making use of APIs to enhance efficiency in transactions. • SWIFT itself is a good example. Previously, international fund transfers were a manual process. Banks sent telex messages to each other to debit funds from one account and credit it to another. The speed of response depended on whether someone was waiting by the telex machine! • Now, transferring funds only requires banks to send a SWIFT message containing payment instructions to another bank for funds to be moved, at any time in the day. Some banks are selectively opening up their systems to customers, employees, and others. BIS central bankers’ speeches 5 • Silicon Valley Bank plans to offer an API for payments by the end of the year.
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In particular, mashing together diverse data sets offers the possibility of new types of insights. New software algorithms crunch the enlarged Big Data sets to make more reliable predictions on repayment and hence improve performance of loan portfolios. • For example, a lender to small businesses requires access to the company’s bank and credit card accounts, to constantly monitor the company’s cash flow and hence ability to repay the loan. Application programming interfaces Despite the greater availability of data and the possibilities for harnessing this data opened by technology, financial institutions continue to face challenges on the data front. • More data means more cost. • While technology has significantly reduced the unit costs of data gathering, it has ironically also raised the potential total cost of data by opening more possibilities for data mining and analysis. One way to improve access to data without raising costs significantly would be for the industry to pool relevant data together. • The benefits of aggregating data across the industry can be seen from our experience with the credit bureau, which has allowed banks to make better credit underwriting decisions. • However, concerns over confidentiality and market sensitivity have held back data sharing among financial institutions and restricted public access to data. One effective way to achieve seamless data sharing is through the publication of open Application Programming Interfaces, or APIs, by financial institutions for data submission.
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Moreover, while these feedback loops were important in setting into motion self-reinforcing losses and deleveraging, it was also the interactions amongst them, through joint exposure to common risk drivers and network linkages, that contributed to the multiplication of losses. Let me now turn to the second part of my talk which I will focus on the policy approach to deal with procyclicality. 2 BIS Review 160/2009 A good starting point to discuss policy is to recognize that business cycles are a normal feature of market economies and their existence – especially the interaction of the three cycles – can not be eliminated. The best we can do is to recognize the cycles and find ways to manage them in a way that markets continue to function without risking systemic instability. Reflecting this, it is clear that the objective of policy is to reduce the amplification of the cycles and their interactions by limiting the build-up of excesses. A common wisdom at this time is that policy should aim to limit the build-up of excess in the good time and ensure that the system has adequate capacity or buffers to manage the downturn in the bad time. But because the build-up of financial excess tends to be a result of many factors, some of which are not related to financial institutions, therefore, a broader approach to policy is needed so that many measures, both macro and micro, are used to help solve the problem.
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It is only when confidence improves, typically following a major policy intervention, that the downturn both in the business and financial cycles begin to stabilize. With reference to the current crisis, there were at least two specific features of the financial structures in the advanced economies that amplified the procyclical tendencies in the three cycles I have just described, thereby making the situations worse than might have been. First, the duration of the upswing in the financial cycle was made longer by changes in the financial structures that resulted from financial innovation, misplaced incentives, and the way businesses had expanded by circumventing financial regulation which allowed risk to be underrecognized for a long period. A case in point is the originate-to-distribute model, the CDO derivatives, and the use of SIVs as a vehicle for taking risk out of banks’ balance sheets. Second, in this crisis the downturn of the cycles were particularly damaging partly because of the interactions or feedbacks within the financial system, as opposed to the interactions between the financial system and the real economy. These within-the-system interactions took the form of positive feedback loops in various market segments that were set in motion in the downturn as market participants responded to the emerging problems and distress. Such feedback loops included the SIV shutdown and its compounding effects on CDO losses, the asset fire sales driven by risk management response by banks, and heightened concern about counterparty risk that precipitated the hoarding of liquidity.
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Finally, there was an emerging recognition of the potential for conflict between the central bank’s necessary concern with systemic financial stability (you cannot hope to deliver monetary stability if the financial system is crashing about your ears, while monetary stability is itself a primary condition for financial stability) and consumer or depositor protection, which if carried too far can itself undermine the strength of the financial system. These profound changes in underlying philosophy - which, as I say, spread across much of the political spectrum - were in our case fundamentally important in opening the way to a more clearly defined and distinctive role for the Bank of England and a necessary condition, in my view, for the delegation by the Government to the Bank of greater independent, technical, responsibility. Even so, although those changes were a necessary condition, they were not in themselves sufficient, and greater independence did not come all at once. As often happens, sadly, a big step forward came after a major setback. In 1992 after we had been driven unceremoniously out of the European Exchange Rate Mechanism (following the boom and bust of the late 1980s / early 1990s), the Government of the day adopted an explicit inflation target as the nominal anchor for monetary policy. Interest rate decisions in pursuit of that target remained with the Chancellor of the Exchequer after consultation with myself as Governor and my senior monetary policy experts at the Bank. But the really novel feature of the new arrangements was their transparency.
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Short-term interest rates – which are currently at 5½% – actually peaked last year at 7½%. For much of my 37 years at the Bank I’d have given my eye-teeth for them to trough at 7½%. Long-term interest rates, which have recently been at around 4½%, are lower than they’ve been since the late 1950’s. That’s certainly good for the economy as a whole, though I recognise that it does not necessarily feel good to people living on interest on their savings, even though those savings keep their real value far better than during the earlier period of high inflation. The public sector’s balance sheet is in excellent shape compared with most of the rest of the world – and the Government’s borrowing requirement position is strong and sustainable. And 3 BIS Review 19/1999 the same is true of the balance sheets of the banking system, and of both the household and corporate sectors. And on top of all that, England beat the Springboks at rugby – even if our cricketers didn’t do so well down under! Yet all that one reads about – all that anyone wants to talk about apparently – is the bad news. So let me not disappoint you this evening, and now come on to the bad news. Where are we now? By around the beginning of 1997 it was becoming clear that we were once again in danger of having too much of a good thing.
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BIS Review 69/2004 5 Figure 2 Oil price average level and volatility 40 35 30 25 2 8 U SD +/- 4 .5 20 15 18 U SD +/- 3 .5 10 5 86 88 90 92 94 96 98 00 02 Mean [Median] S.D.
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The key challenge for monetary policy authorities - in Switzerland and elsewhere - will be to continue to firmly anchor these longer-term inflation expectations. As I mentioned earlier, notwithstanding high oil prices, circumstances are favorable. Price stability has been all but achieved in much of the developed world. Even developing countries are enjoying relatively low and stable inflation rates. Various forms of credible monetary policy frameworks are anchoring future inflation expectations. Higher oil prices appear to feed through to higher headline inflation more rapidly than in the past but the magnitude of the effect appears to have declined. Finally, the world economy is hardly overheating. Indeed, judging by the OECD’s global leading indicator, the recent growth momentum is abating. Moreover, to the extent that the recent oil price shock is to a significant extent demand driven, dampening global growth will at least to some extent be self-stabilizing with regard to underlying inflation pressure. Compared to the time of the last great oil shock in the late 1970s, monetary authorities operate under a different paradigm to the extent that they can afford to “look through” what are likely to be temporary spikes in headline inflation associated with what is likely to be a demand driven level shift in the equilibrium price range of oil. Indeed, in some cases, monetary policy may find itself in a position to be able to respond to the output loss associated with higher oil prices. “Looking through”, however, must not be confused with being complacent.
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These may lead to significant changes in trade relations between countries in the coming years. On the other hand, the uneven impact of the crisis across different sectors, types of business and population groups is becoming visible in this phase. As the crisis continues, some of the damage may become permanent. In this respect, despite the wide range of measures adopted, there has already been a very significant drop in the number of firms 15 registered for Social Security. Specifically, almost 84,000 fewer firms were registered for Social Security at the end of September, compared with the end of February, a year-onyear decline of 6.1% in September.4 It is very likely that Q3 data will also show an increase in long-term unemployment. And, as I have already mentioned, the crisis is affecting workers on low wages and with more fragile finances more severely, which may increase inequality. We can also expect the public sector and part of the private sector to emerge from this crisis with significantly higher levels of debt. It is crucial that these changes and this structural damage are identified promptly and that their implications for the economy as a whole, as well as for specific sectors, firms and segments of the population are understood. Economic policy cannot indefinitely sustain a sector that is set to undergo a structural reduction in its level of activity.
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In the short term monetary policy can influence developments in the real economy. Norges Bank can do this through two channels. First, Norges Bank will proceed gradually when the krone’s value moves outside the initial range and instruments are oriented to returning it to this range. We seek to avoid a situation whereby monetary policy contributes to abrupt shifts in the economy. Second, 13 BIS Review 20/1999 developments in the labour market and product markets influence wage growth and inflation, and thereby the krone exchange rate. Norges Bank takes this into account when evaluating economic developments and when setting interest rates. However, monetary policy is not a suitable instrument for influencing production and employment in the long term. Nor can it be used to influence the size of the internationally exposed sector over time. It is primarily wage and income determination, the use of oil revenues over the government budget, and the adaptability and efficiency of the economy that determines this. Nor is monetary policy an effective tool of incomes policy. Interest rates cannot be used to influence the negotiating climate of the income settlements. This could act as a highly negative constraint on the freedom of manoeuvre. Long-term fiscal policy challenges The fall in oil prices has obvious and immediate implications for monetary policy. But what about long-term balance in the Norwegian economy? What if oil revenues remain low in the longer term as well? Norway’s government finances are sound thanks to the large surpluses of recent years.
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2 While the form of this policy was “unconventional”, the ultimate goal was identical to any normal reduction in Bank Rate – namely to stimulate nominal demand in the economy, and hence help the MPC achieve its remit of targeting 2% CPI inflation. The UK was not alone in adopting unconventional measures. Both the Federal Reserve Board in the United States, and the European Central Bank undertook a range of alternative measures too. Although the precise nature of the 1 In the central bank community, asset purchases are known as an example of an “unconventional” monetary policy. 2 See Fisher (2010) “The corporate sector and the Bank of England’s Asset Purchases” available at http://www.bankofengland.co.uk/publications/speeches/2010/speech423.pdf . BIS Review 135/2010 1 programmes differed from country to country, all three central banks saw their balance sheets expand, funded by an increase in commercial bank reserves. 3 At the time we started the asset purchases, it was far from clear how successful the policy would be. None of those involved had ever personally experienced a financial crisis as big as this, nor a recession so deep. And no one had direct experience of conducting a major asset purchase programme in the UK. In the press and amongst other economic commentators there was a lot of scepticism expressed about the likely efficacy of the policy.
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Jean-Pierre Roth: Real estate crisis in the United States – similar risks in Switzerland? Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the Banque Cantonale Vaudoise, Lausanne, 9 June 2008. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). * * * In the past few months, developments in the mortgage and real estate markets have attracted increasing attention. Europe, and Switzerland in particular, have been indirectly affected as a result of commercial bank activities in US mortgage markets. Over the past few quarters, the European real estate market has also been affected, with a number of countries experiencing a downturn in prices similar to that in the United States. By contrast, other countries, such as Switzerland, have seen real estate prices rising at a steady pace. In some respects, what the United States went through is a classical property crisis of the type that Switzerland experienced in the early 1990s. However, the US real estate crisis spilled over to encompass the international financial markets, endangering their stability and prompting the intervention of several central banks. These events confirm the importance of sound real estate market developments for the economy. It is important to recognise that the Swiss mortgage and real estate markets are very different from their US counterparts.
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Even under a model that assigns all the relevant functions to the central bank, coordination and communication between it and the government will still be essential because it is the fiscal authority that is responsible for the use of public resources. In a globalized world, it is, moreover, necessary to develop mechanisms for coordination and communication with the authorities of other relevant jurisdictions. In many emerging economies, this is a key issue because of the significant presence of international banks in these markets. In addition, BIS Review 142/2010 5 stronger coordination and communication between authorities is vital for progress towards comprehensive or consolidated supervision of financial groups and for avoiding some of the problems detected in the recent crisis. One recommendation on which there is fairly broad agreement is to periodically review the perimeter of regulation and supervision. The traditional view that this should include only institutions taking deposits from the public has been superseded by events. The consensus view that has emerged from the recent crisis is that all institutions of systemic importance must be regulated and supervised. This also includes the obligation to provide information and disclose positions in order to ensure that markets function properly. The practical implications of this recommendation may vary from country to country, depending on the characteristics of their financial systems. There is also broad consensus that minimum capital requirements, applied on permanent bases, must be raised and strengthened as stated in the recent agreement reached by the Basel Committee.
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Gent Sejko: New normal - challenges and opportunities Keynote speech by Mr Gent Sejko, Governor of the Bank of Albania, at the Conference on “New normal: Challenges & Opportunities”, European University of Tirana, Tirana, 30 April 2021. * * * Honourable Professor Gjuraj, Honourable Professor Xhepa, Dear students and participants, It is a great pleasure for me to greet the proceedings of this Conference on the “New normal”. This topic is both an emergent and unresolved issue of the current economic debate. We altogether: policy makers; academics; and operators in the private sector, are aware that a new reality lies ahead in the post-pandemic world. “What would be the contours of this new reality?”; “What challenges and opportunities lie ahead of the private sector?” and “Which will be the objectives and instruments of the monetary policy”. These questions still lack a thoroughly answer. For this reason, I would like to thank the European University of Tirana, for selecting this topic of an utmost importance. The European University of Tirana is a hearth of knowledge which has succeeded in positioning at the centre of: education; academic discussion; and innovation enhancement. Today, it manifests a consolidated profile in the academic debate. While trying to summarise the Bank of Albania’s opinion on the selected topic, following, I will address in my speech three specific issues: First, I will show briefly the impact of the pandemic on the Albanian economy and the measures taken by the Bank of Albania to minimise its effects.
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The increasing competition in Sri Lanka’s banking industry has widened the scope of the IT infrastructure development to meet diversified demands made by numerous users. Today, customers of some banks enjoy services through Internet banking, Telebanking, Mobile telephone banking and Visa/Master Credit and Debit card facilities. The growing competition and expectations have also increased awareness amongst banks of the role and importance of technology in banking. 3. Worldwide Outsourcing and Service Improvements 3.1 An even more recent area in which the advancement of ICT facilities has had a significant impact is in the outsourcing of financial services. By 2010, it is projected that more than 20 per cent of the global financial services industry might shift offshore. In 2005, 70 per cent of world financial institutions used outsourcing compared to 26 per cent in 2003. For developed countries, outsourcing financial services offer cost reductions, while IT companies in many developing countries, such as India, Sri Lanka, China, South Africa, the Philippines, Singapore and Malaysia got opportunities to use their IT skills and profit from it. Similarly, the outsourcing of business processes, such as call centres, general processing for human resources, finance and accounting, back office services has also taken place. This trend has influenced some banks in Sri Lanka also to form their own subsidiaries to handle IT operations within the group. 4.
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Central Bank initiatives 4.1 In the interest of the wider financial system stability, the Central Bank of Sri Lanka is responsible to ensure smooth, speedy and safe operations of the nation’s payment, clearing and settlement systems. Since 2003, the Central Bank has taken the lead to introduce an efficient and safe payment and settlements for both high value and time critical transactions by introducing the Real Time Gross Settlement (RTGS) system for interbank and third party customers. The RTGS system is a computer-based fund settlement system, which processes and settles each payment instruction individually and irrevocably on a real time basis, using funds in the participants’ RTGS Settlement Accounts or Central Bank funds provided under an intraday liquidity facility. At present, the value of transactions settled in the RTGS system accounts for about 81 per cent of the non-cash high value payments in Sri Lanka. The majority of RTGS transactions are on account of the inter-bank call money market, the government securities market, open market operations, the Rupee leg of transactions in the foreign exchange market, urgent and time critical payments of customers and net obligations under the clearing system operated by LankaClear Ltd, a venture jointly 2 BIS Review 13/2008 owned by the Central Bank and commercial banks. In early 2004, the Central Bank implemented the Scripless Securities Settlement (SSS) System for settlement of government debt instruments in electronic or scripless form and settlement of trades of such scripless securities on a Delivery Vs. Payment (DvP) basis.
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I would also like to recall the unanimous recommendation we submitted on the voting modalities of an enlarged Governing Council, which has been accepted by the EU Council and is about to be ratified within these days by all Member States. This will allow the ECB to maintain efficiency and timeliness of decision-making in an enlarged euro area. Eventually, enlargement of the EU will lead to the extension of the euro area, as the new Member States are expected to adopt the single currency at some point in the future. In fact, upon EU accession, they will be committed to striving towards the eventual adoption of the euro. The main aim of the Eurosystem in the process towards euro adoption is to ensure that the monetary integration of each new Member States proceeds in a smooth manner and in line with Treaty provisions. In view of this challenge, at the end of last year the Governing Council of the ECB adopted a policy position paper on exchange rate issues relating to the acceding countries. The Treaty foresees that at some point following accession, new Member States will join the Exchange Rate Mechanism II (ERM II). To ensure a smooth participation in ERM II, however, it would be necessary that major policy adjustments - for example with regard to price liberalisation and fiscal policy - are undertaken prior to participation in the mechanism and that a credible fiscal consolidation path is being followed.
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[23] For instance, workers may accept some loss in real income as demand softens, costs can no longer be passed on easily to consumers and risks to job security increase. In some euro area countries, wage negotiations focus on core inflation rather than headline inflation. This can be seen as a recognition that the terms of trade loss has to be borne – at least to some extent – rather than retrieved. Also, in this setting, households may choose to reduce consumption – instead of smoothing it and mitigating the hit to spending – because a permanently lower potential output would also permanently reduce their future income and wealth. Recent research using endogenous growth models shows that, if supply shocks cause “scarring”, the prospect of lower potential output reduces investment and productivity growth. By compressing households’ future income and their current spending, it can cause demand to drop by as much as – or even more than – supply. [24] All told, these effects imply that, even in the face of lasting consequences of supply shocks on potential output, the implications for the output gap, inflation dynamics and optimal policy calibration can only be derived over time. And this reinforces the case that, for as long as inflation expectations remain anchored, monetary policy should adjust but not overreact. [25] ECB staff projections published in September 2022, which foresee inflation close to 2% at the end of their horizon, are consistent with a withdrawal of monetary policy accommodation.
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