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The fact that inflation remains subdued rather reflects constraints operating at the third stage of transmission – from activity to prices – that are often outside the control of monetary policy. Before I conclude I would like to illustrate one last point. Bank lending rates are without doubt a key variable in explaining output movements in the euro area. The evidence I provided today further emphasises this point. At the same time, the financial conditions that are ultimately relevant for firms and households may be broader than that. One of them – the exchange rate – I discussed in more detail earlier in my remarks.16 Other factors may include equity prices or long-term interest rates that are often relevant for household mortgages.17 One way to summarise these factors is to use financial conditions indexes (FCIs). My colleague 10 / 14 BIS central bankers' speeches Peter Praet gave a detailed speech on such indices earlier this year, which I strongly recommend reading.18 Here I would like to focus on the relevance of these broad measures for economic activity. As you can see in column 9 of slide 7, FCIs are highly statistically significant when used in a New Keynesian IS curve. This is unlikely to be a statistical artefact. | But the world is complex and people don’t have endless time to devote to understanding monetary policy. In practice, therefore, guidance can be useful in providing people with information about how the MPC sets policy and, over time, in improving understanding of how monetary policy will adjust to news. Guidance thus helps people to think along with the Committee so that their expectations about the path of policy adapt with ours as economic circumstances change. This can make monetary policy more effective by reducing unwarranted volatility in interest rate expectations and the extent to which the MPC has to move Bank Rate to meet the inflation target. The more those expectations are aligned with the policy path necessary to achieve the inflation target, the higher the probability that policy objective will be achieved. Guidance is not a promise of the future path of policy. And its use will not mean that all observers will agree on the likely path of policy for the simple reason that not everyone will agree on the likely path for the economy. However, with guidance, someone who has a different outlook can better anticipate how the MPC will adjust once the scales fall from the Committee’s eyes. Again it is the combination of the economy and the primacy of the inflation target, not the MPC, that ultimately determines that path of policy. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 The MPC’s guidance speaks first and foremost to UK households and businesses. | 0 |
And in response, the Bank of England had to intervene on financial stability grounds through temporary purchases of long-dated UK government bonds. While these new risks and vulnerabilities are evident, the non-bank financial sector has remained largely stable in recent months, despite the stress in the banking sector that emerged in March. Fund investors shifted their exposure from higher to lower risk assets, especially from high-yield corporate to government bond funds. Portfolio de-risking has also been evident in insurance corporations and pension funds, as higher interest rates have reduced incentives for the non-bank financial sector to search for yield. But there are no grounds for complacency here. Structural vulnerabilities from liquidity mismatches and leverage remain elevated despite recent de-risking. Moreover, bank and non-bank financial institutions can be closely interconnected through funding channels, ownership linkages and common risk exposures. The non-bank financial sector remains particularly exposed to asset price corrections and credit risk should corporate sector fundamentals deteriorate substantially. In addition, non-banks’ exposure to property markets has increased markedly in recent years, rendering institutions vulnerable to ongoing price corrections in real estate markets. Fragile risk sentiment and elevated vulnerabilities in parts of the non-bank financial sector could amplify negative shocks. Strengthening the resilience of non-bank financial intermediation Given the vulnerabilities in the non-bank financial sector, it is vital to further enhance its resilience, also from a systemic perspective. To date, the macroprudential policy framework has mainly focused on the banking sector, while the policy framework for non-bank financial institutions still needs to be enhanced. | Macroprudential authorities should coordinate their actions in order to mitigate these risks and seek ways to balance the protection of customers' interests and financial institution risks with specific policy objectives, a level-playing field being one of them. The initiatives taken by the European Commission, such as the digital finance package, that captures – among others - the proposal for digital operational resilience act (DORA6), and the revision of the second Payment Services Directive, are steps towards mitigating the identified risks. 3/4 BIS - Central bankers' speeches The increasing number of Cyber-attacks in Europe indicates that a lot more needs to be done. The growth of the Fintech sector has raised the need for regulators to adjust their role within the perimeter of prudential regulation. Extending the perimeter of bank regulation to all financial service providers could possibly constrain financial innovation. But keeping the new entrants completely out of the perimeter will tilt the playing field in their favour and leave consumers unprotected. A balance must be found to allow the regulatory perimeter to cover all activities that have systemic risk potential, while allowing for innovation. Finally, Data protection is important in order to safeguard confidence in the banking sector. As a result, Cyber security should be further enhanced and prioritised and Cyber-risk incidents need to be included in financial institutions' business continuity and disaster recovery plans and be tested frequently. Given the cross-border activities of Fintech and BigTech, authorities across jurisdictions should cooperate in regulating them. THANK YOU. | 0 |
The most recent surveys show that expectations five years ahead are now at around 1.9 per cent a year. Inflation expectations two years ahead have been below those five years ahead ever since 2012. The most recent surveys show that expectations two years ahead are now at 1.3–1.4 per cent a year. Together with measurements five years ahead, the picture is that the credibility of the inflation target on the whole has increased thus far this year. Expansionary monetary policy to stimulate inflation The Riksbank’s aim is to bring the rate of inflation back towards the target of 2 per cent. Monetary policy is therefore very expansionary today in the sense that the Riksbank’s policy rate, the repo rate, has been cut in several stages and is currently at –0.25 per cent. The repo rate is expected to remain at this level at least until the second half of 2016. Furthermore, the Riksbank decided in February and March this year to purchase government bonds to a value of SEK 40 billion. The repo-rate cuts and bond purchases contribute to pushing down market rates. Figure 6 shows how the repo rate has developed since 2010. The purpose of cutting the repo rate and buying bonds is thus to bring up inflation. Lower interest rates contribute to increasing demand in the economy. It becomes more attractive for households to consume and for companies to invest. Higher demand also makes it possible for companies to raise their prices. | In recent decades, the sectors exposed to international competition have led the way and set the standard, as it were, for the rest of the labour market. I firmly believe that the outcome of this system has been positive. The Industrial Agreement has played an important role. In other words, the inflation target and the Industrial Agreement have worked well together. The inflation target contributes to smoothly-functioning price-setting and wage formation The role of the Riksbank is and always has been to be responsible for monetary policy. Monetary policy is conducted with the aim of ensuring that the annual rate of inflation is 2 per cent. It is important to have a benchmark for expectations in the economy and thereby lay the foundations for efficient price-setting and wage formation. Its purpose is to enable economic agents to plan long-term, for instance, with regard to wage negotiations. In other words, the inflation target makes it easier for households and companies to make good economic decisions. It creates the conditions for good economic development with long-term economic growth. The benchmark of an inflation target of 2 per cent was established in 1993. Prior to that, a fixed exchange rate acted as the anchor for wage formation and price-setting. At that time, inflation in Sweden was linked to that in competitor countries. However, increases in wages and prices in Sweden became too high, at the same time as real purchasing power hardly increased at all. These were the problems that a new inflation-targeting policy would remedy. | 1 |
Foreign exchange market intervention and capital controls, followed by the special reserve requirement on capital inflows into the bond market and high-yielding deposits, insulated the exchange rate from the effects of volatile capital movements, allowing it to develop relatively unhindered and in line with underlying economic conditions. The advantages of a flexible exchange rate therefore prevailed, while the disadvantages were mitigated. This did not make for an uneventful journey, however, because even though the equilibrium exchange rate had clearly risen, it is always subject to considerable uncertainty at any given time, and the risk of overshooting was genuine. This risk may have materialised to some degree, but had the above-mentioned policy instruments not been applied, it would have materialised much more strongly, 1 with the associated risk of an abrupt correction later on, which could have had adverse consequences for economic and financial stability. This economic turning point stems from a turnaround in some of the factors that contributed to the upswing. The global economic situation is not as favourable to us. Terms of trade are deteriorating and not improving. The rise in tourist visits to Iceland has slowed markedly. Therefore, as compared with the last three years, growth in export revenues will ease considerably this year and in the years to come. GDP growth will be lower, as will the rise in our real income as a nation, no matter what we may decide about nominal pay increases in wage negotiations or about how we distribute such increases. | Of significance is that the global insurance industry on the whole has remained resilient throughout the current financial crisis. The overall aggregate financial position of insurers in the crisis affected countries have continued to be strong, and generally not severely affected by liquidity pressures or exposures in the credit derivatives markets. Earlier losses by insurers in financial market activities had resulted in a shift to "back-to-basics" models, focusing on core underwriting business instead of heavily relying on investments as the main source of earnings. The industry had also benefited from the subsequent upturn in the pricing cycle which has fortified the capital position of insurers and provided the support to maintaining sound underwriting standards. These conditions have placed the industry on a much stronger position to withstand the challenges emanating from this global financial turmoil. BIS Review 131/2009 1 Domestic and external conditions are however expected to remain volatile for some time. Significant uncertainties will persist in the international financial markets and the broader global economic conditions. These conditions will continue to pose significant challenges to the insurance industry. In this environment, maintaining strong capital buffers and sound risk management is even more imperative to ensuring the continued resilience of the insurance industry. With the adoption of Solvency II in Europe and its influence on solvency regimes in other jurisdictions, more countries, including Malaysia, have now moved to adopt more riskaligned capital regimes. | 0 |
In all these occasions, once the asset prices reversed down, there was an abrupt relaxation of the monetary policy. 2 This implicit insurance, popularly known as the Greenspan put, certainly makes the creation of bubbles more likely. This strategy, which worked in some earlier episodes, failed miserably during the biggest collapse in decades. A monetary policy strategy that used to provide insurance to speculation in episodes of limited financial turbulence proved incapable of confronting a financial crisis of systemic proportions. This strategy to deal with bubbles is a prescription derived not from inflation targeting, but from a need to insure financial stability. In my view, financial stability must be addressed first with appropriate regulation of the financial system that limits the excesses we saw before the crisis. There may be situations in which it might be appropriate to deviate transitorily from an inflation targeting regime in order to ensure financial stability, but this must be an exception, which in normal times should not arise. I think a first lesson for the conduct of monetary policy is to avoid providing insurance to speculators, which creates enormous moral hazard problems. In emerging countries we have lived this, with much milder consequences, when we attempted to manage exchange rates disconnected from fundamentals for a prolonged period of time. Therefore, an examination of monetary policy and financial dislocations around the world suggests that the culprit of the current crisis was related more closely with the functioning of financial systems than with monetary policy. | Based on the most recent reading in September 2022, about a quarter of respondents have deflation expectations five years in the future, nearly as large as the share expecting inflation above 4 percent at the five-year horizon. Following the onset of the pandemic, aggregate uncertainty—which combines disagreement and individual uncertainty—increased but has also become more symmetric. Figure 4 shows the aggregate distributions of inflation three years in the future based on the SCE.14 Two-thirds of the widening of distributions reflect greater dispersion across respondents, and the remainder is due to greater uncertainty reported by individuals.15 Interestingly, the distribution of aggregate uncertainty before and during the first year of the pandemic was skewed to the upside, as seen in Figure 4. Since then, the rising share of those who report deflation expectations has caused the overall distribution to become more symmetric relative to the median. In terms of the uncertainty criterion, uncertainty does not increase linearly with the forecast horizon in the SCE. Figure 5 shows the distributions of aggregate uncertainty for one-, three-, and five-year-ahead inflation forecasts from September 2022. As Figure 5 shows, the distributions are very similar for the different forecast horizons. This seems consistent with the evidence that many respondents view the inflation surge as reflecting a unique set of developments.16 An additional, albeit indirect, measure of inflation uncertainty is provided by the distribution of expectations of interest rates from options.17 Although future interest rates depend on a variety of factors, the expectations about inflation are a key determinant. | 0 |
However, the upward pressure on the equilibrium interest rate will lessen as the creation effect takes hold. 36 The experience of past episodes suggests that, in the first instance, the returns from the Fourth Industrial Revolution are likely to flow more to the owners of the new capital than to the workers who use it – leading to Engels’ pause in real wages. Owners of capital tend to be wealthier to begin with and evidence suggests that those with higher wealth have a higher propensity to save increases in income (this idea goes back to Kalecki (1954) and Marx before him). Increases in job polarisation and skills premia, which also shift income towards the top of the distribution, are likely to add to this effect. Globally, inequality could also increase as a result of the Fourth Industrial Revolution, which would further lower the equilibrium rate in open economies like the UK and Ireland. 37 Summers (2016) has argued that rising market concentration may also have been an important cause for the fall in the equilibrium interest rate over recent decades. See http://larrysummers.com/2016/03/30/corporate-profits-are-near-record-highs-heres-why-thats-aproblem/. 38 Measured as the proportion of people working part-time would who prefer a full-time job. 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 This excess supply of labour available to work on non-automated tasks represents a shift along the Phillips Curve, imparting modest disinflationary pressures. For the UK, each additional percentage point of labour market slack is estimated to reduce annual wage growth by one third of a percentage point. | News conference 15 December 2022, 10.00 am Introductory remarks by Andréa M. Maechler In my remarks, I will talk in more detail about the implementation of today’s monetary policy decision, which Thomas Jordan has already touched on. I will start, however, by giving you an overview of how we have steered interest rates since the switch to a positive SNB policy rate in September. The switch from a negative to a positive SNB policy rate required us to make an adjustment to the implementation of our monetary policy in the money market. The new approach comprises two elements: reserve tiering – that is, tiered remuneration of the sight deposits that banks and other financial market participants hold at the SNB – and reserve absorption. This approach has proved successful. Following our monetary policy decision on 22 September, secured short-term Swiss franc money market rates moved quickly towards the new SNB policy rate (cf. chart 1). We are also continuing to see solid activity among participants in the money market, which ensures a robust basis for the calculation of SARON. From the outset, the market responded favourably to the deployment of our monetary policy instruments to absorb liquidity. On the very day of the monetary policy assessment in September, we started conducting repo transactions on a daily basis and issuing SNB bills on a weekly basis (cf. chart 2). In this way, we were able to reduce the liquidity supply in the money market sufficiently to allow us to steer interest rates effectively. | 0 |
Figure 7 shows model simulations of the effects on the CPIF and unemployment, according to the main scenario’s repo rate path and according to the repo rate path I voted for, under the assumption that foreign interest rates will be lower BIS central bankers’ speeches 9 than in the forecast, particularly towards the end of the forecast period.14 My preferred repo rate path, which goes up to 3.25 per cent at the end of the forecast period, gives a lower unemployment forecast than does the main scenario’s repo rate path. It may seem that the target fulfilment of the CPIF forecast is worse, as it lies above 2 per cent towards the end of the forecast period. However, my assessment is that this is an overestimate of inflation. Inflationary pressures are influenced by resource utilisation, and it can probably be expected that the level of resource utilisation that is consistent with unchanged inflationary pressures will actually rise during the forecast period. In deep recessions, it is usual for the functioning of the labour market to be impaired initially, as typically the jobs that have disappeared differ from those arising once the economy has recovered. However, eventually it does start to function normally. In that case, perhaps inflationary pressures will be significantly lower towards the end of the forecast period than is shown by these simulations. | (2001), “Independent Review of the Operation of Monetary Policy in New Zealand: Report to the Minister of Finance”. Sveriges Riksbank (2001), Inflation Report 2001:3. Sveriges Riksbank (2004), Inflation Report 2004:2. 12 BIS central bankers’ speeches | 1 |
Indeed, in the aforementioned article, the German Minister of Finance also refers to the need to have a common insolvency framework for all euro area banks, while acknowledging the existence of national barriers, which would have to be eliminated to avoid a fragmented financial market. Financial union Allow me in the final part of my address to look beyond the Banking Union and refer to the Financial Union. I earlier signalled the importance of introducing a genuine deposit guarantee scheme, eliminating national barriers and harmonising specific regulatory areas. But other elements are also needed to further progress towards a true Financial Union. In this respect, developing deep and integrated capital markets will undoubtedly help strengthen the euro area’s capacity to cushion itself against macrofinancial shocks. Naturally, I am talking about the Capital Markets Union (CMU). This is a project that will complement the Banking Union, promoting a cross-border financial sector enabling economic agents to mitigate national asymmetric shocks. The Capital Markets Union project was launched in 2015 with the aim of “unlocking funding for European growth”, i.e. promoting not only the development but also the integration of European capital markets with a view to diversifying the funding sources available. However, the project has languished until recently. Testifying to this is the fact that the year scheduled for its launch was, originally, 2019. Evidently, this goal has not been achieved. That said, the importance of this project has but increased since 2015, particularly in the context of Brexit. | In this respect, we do not think there is any risk of deflation in the euro area, or inflation for that matter. Furthermore, the United States may be substantially below its long-term growth potential, whereas the euro area is relatively close. Le Figaro – Nonetheless, the dollar is sliding and we seem to be moving away from the close cooperation seen between central banks during the crisis... Christian Noyer – First, everything does not come down to the dollar. For example, there are emerging countries that, by not being sufficiently flexible in their exchange rate policy, have monetary policies that are inappropriate and create risks to inflation and growth. Moreover, while each central bank is pursuing a policy appropriate to its country’s situation, nobody wants to move away from the goal of consistency. We are all committed to ensure a framework for balanced growth, and that commitment remains just as strong. As reiterated at the last meeting of G20 finance ministers and central bank Governors, no one should or can manipulate their currency. Le Figaro – Is the euro not the real victim of recent foreign exchange developments? Christian Noyer – The euro is not the only currency that floats against all other currencies. Let’s not be so self-centred! The idea that the euro is arguably the adjustment variable for the rest of the world seems strange to me. Le Figaro – Will the G20 be able to make headway on monetary policy issues given that the climate is, to say the least, tense? | 0 |
Let me first explore some features that make financial market infrastructures different from other financial institutions: • Service continuation (“critical services”) is more important in the case of FMIs. They are utilities at the heart of the financial system. Their smooth operation is essential for all other types of financial service. • In most cases, there are only a few, if any, substitutes or alternative providers. • Unlike banks, FMIs have ex ante loss allocation rules that they can draw on for the purpose of recovery. • Not all FMIs are exposed to credit risk (but they are still systemically important). • The size and composition of their balance sheets (e.g. rarely subordinated debt instruments) is different, which makes bail-in as a recovery or resolution tool difficult. • To the extent that the use of a CCP is mandatory, it is absolutely essential that the relevant clearing services are preserved regardless of the circumstances. In conclusion, the recovery of CCPs in order to maintain service continuation is much more important for CCPs than for other financial institutions. That’s why the PFMIs require CCPs to be able to allocate any losses that are not already covered by regular risk management. [slide 8] So if the recovery of CCPs is so vital, is there any scope for resolution at all? I think there is, for a number of reasons: First of all, the attempt to recover may simply fail: the ex-ante recovery plans may prove inadequate ex post. | The regulatory approach by CPSS-IOSCO is therefore non-prescriptive and aims to provide guidance that should help FMIs to choose the appropriate (mix of) recovery tools. This approach, however, might need to be adapted over time. Evolution of global clearing structures [slide 11] Let me now turn to the fourth known unknown, which is the optimal design of the global clearing structure. 2 See Financial Stability Board. “Consultation Paper: Feasibility Study on Approaches to Aggregate OTC Derivatives Data”, 4 February 2014. 4 BIS central bankers’ speeches [slide 12] Such a design depends on numerous factors and questions: • How many CCPs do we need at global level? • How many markets should a CCP serve? • What are the implications of competitive clearing where there are several CCPs serving the same trading venue? • Should CCPs be linked and how? Should links be limited to cash-market CCPs or also apply to derivatives and commodities CCPs? • What degree of tiering is optimal and how should participants get access to CCPs when needed? This question has gained in importance with the establishment of the clearing obligation. [slide 13] What we see today is a globalisation process that has triggered a trend towards global clearing with increasingly large global CCPs. Moreover, it appears that many banks prefer indirect access to clearing services so as to comply with the clearing obligation. Client clearing seems thus to be dominated by a few large global intermediaries. | 1 |
Ardian Fullani: Recent developments in the Albanian banking system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at a meeting organised by Raiffeisen Bank with business representatives and its major clients, Tirana, 14 June 2011. * * * Dear Minister of Finances, Dear Mr. Lennkh and Mr. Hodell, Dear Mr. Canacaris, Dear Ladies and Gentlemen, Today’s meeting organised by the Raiffeisen Bank with the business community is very significant. Firstly, it shows a well-defined strategy of the Raiffeisen group to increase its market share in Albania through dialogue with business partners. Secondly, such forums serve also as a platform to generate development ideas and projects of national, and why not, regional importance. Thirdly, I think that today’s meeting is indicative of the maturity and rising awareness of the banking system and the business community. Personally, I would wish that such meetings be intensified in the future: they should also be more structured, oriented towards a constructive debate, and involve the entire system and all sectors of the economy. In short, banks and businesses need to sit together for the best. Dear Ladies and Gentlemen, We are in mid-2011 now, which is a complex year in terms of its challenges for objective reasons owing to the international financial dynamics of the past 3–4 years. Whilst our economy has posted positive growth, it continues to operate below its potential. The international setting is filled with uncertainty for a group of advanced economies, while agricultural products and raw materials prices remain high. | Additionally, some firms are considering how to expand analysis to more indirectly impacted sectors, such as transportation and industrials, or to move beyond lending exposures to trading positions. Finally, firms are evaluating how to best execute on public commitments to transparency in the climate space. Nearly all global systemically important banks, including all eight U.S. G-SIBS, have signed onto the Task-Force for Climate-Related Financial Disclosures (TCFD), and many of these have started disclosing under this framework to various extents.5 Firms continue to be challenged in the identification and measurement of climate risk embedded in their portfolios, however, so these disclosures may take some time to develop as the industry considers how to 2/4 BIS central bankers' speeches establish common standards. Role of Supervision I’ll turn now to the perspective of a bank supervisor.6 In the context of climate change, in my view, bank supervision should focus on ensuring that appropriate risk management frameworks are in place, rather than using supervisory tools for broader objectives. That is, supervisors can focus on identifying and managing risks, both microprudential and macroprudential, that emerge along a transition path to a more sustainable economy. Bank supervisors, however, are not in the position to advocate for, or provide incentives for, a particular policy outcome. Those broader policy goals are the purview of elected officials and governments, and policymakers. Supervisors can and should use our oversight tools to ensure financial institutions are prepared for and resilient to all types of relevant risks, including climate-related events. | 0 |
The ECB was requested by ECOFIN to provide the necessary analytical, statistical, administrative and logistical support, and to draw on technical advice from the national central banks and supervisors. This is a clear recognition of the important role that central banks have gained over time in monitoring financial stability. The Commission proposals specify in detail the new institutional arrangements concerning the establishment of the ESRB and the involvement of the ECB. The ECB/Eurosystem will provide its views when formally consulted according to the Treaty provisions. Indeed, further work is needed to clarify and optimise the details of the institutional framework for the ESRB as well as for the new European Supervisory Authorities for micro-prudential supervision. Sound institutional arrangements are a crucial pre-condition for the effectiveness of these supervisory reforms in general and the establishment of the Risk Board in particular. In this context, let me mention two key elements to be defined by the forthcoming legislation. One is the arrangements for the exchange of micro-prudential information among national supervisors, the new European Supervisory Authorities and the ESRB (subject to specific confidentiality agreements). In order for the ESRB to perform its functions, it should have the power to request any information it deems necessary (for example, exposures of large and complex financial institutions to structured products). 3 The other key element is that a risk warning needs to be translated into appropriate supervisory action. | Final remarks While the ESRB has a better chance of achieving its mandate now than it would have had earlier this decade, its tasks will be difficult and its challenges considerable. In particular regarding the issuance of risk warnings, the credibility of the ESRB will rest upon the minimisation and balancing of so-called type I errors and type II errors. Type I errors entail the possibility of identifying those risks that subsequently do not materialise, while type II errors relate to the possibility of failing to identify risks that subsequently do materialise. Identifying a long list of potential systemic risks to financial stability could minimise the BIS Review 115/2009 11 probability of making type II errors but may lead to accusations of “crying wolf”. The opposite could lead to an important risk to the EU financial system being overlooked, which if it materialised, could harm the ESRB’s reputation. Both the rigour of the checks for potential sources of risk and vulnerability, and the quality of the risk assessments (based on the information made available to the ESRB) should have a substantive influence on the credibility and effectiveness of the Board’s work. Addressing the type I-type II error trade-off by selecting which risks merit risk warnings can only be done by combining a comprehensive and strict monitoring of all potential sources of risk with a well-informed and detailed risk assessment. | 1 |
The temptation to go back on it is extremely dangerous and would increase the risk of another financial crisis. In this respect, the current situation in the United States is worrying. Generally speaking, the measures that will be effectively adopted and implemented by the new administration and the competent government agencies regarding financial and banking regulation still have to be clarified. There is a possibility that the regulations already finalised in Basel such as the Fundamental Review of the Trading Book (FRTB) or the Net Stable Funding Ratio (NSFR) could be called into question. Unilateral deregulation would be nothing less than a lose-lose scenario with serious consequences for the stability of the global financial system as well as the competitive landscape for US and European banks. In view of this, the integration of a possible agreement on Basel III into European standards should be finalised while keeping a close eye on what the other major countries will do, starting, as you will have understood, with the United States. We must also avoid regulatory arbitrage. For non-bank players, significant progress is required on liquidity management by funds and asset management companies, on fintechs and more generally on the major digital platforms, which, if they carry out financial activities, will have to comply with similar regulations sooner or later. As for the financial markets, the decrease in market liquidity must be explained, and in doing so we must also consider the role of high frequency trading and its highly debatable social utility. | Caleb M Fundanga: Broadening access to mortgage financing in Zambia Opening speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the re-launch of the Pan African Building Society (PABS), Lusaka, 24 July 2007. * * * • The Shareholders of PABS; • The Board of Directors of PABS; • Senior Government Officials present; • The Deputy Governor-Operations and Registrar of Banks and Financial Institutions; • The General Manager of PABS; • Distinguished Ladies and Gentlemen. It gives me great pleasure and gratitude for having been invited to speak on this occasion of the re-launch of the Pan African Building Society. Ladies and Gentlemen: Today marks an important day in the calendar of Pan African Building Society which brings on board new shareholders. The Bank of Zambia is happy to note that this development has turned around the financial condition of Pan African Building Society. Ladies and Gentlemen, as you are aware, there is shortage of housing in Zambia and therefore the demand for housing finance is increasing. It follows therefore, that the primary challenge of housing finance institutions in Zambia is the broadening of access to mortgage finance particularly to many people in urban areas. Due to the prevailing macro-economic stability that the country is experiencing, we have seen substantial growth in the housing finance industry in recent years. For instance, in the last four (4) years to December 2006, the mortgage portfolio of the building society industry has grown five fold. | 0 |
We look forward to engaging with our oversight bodies and those appointed under the CARES Act to ensure that the American people understand the steps we are taking on their behalf as faithful stewards of the public trust. 4/4 BIS central bankers' speeches | It should not be assumed that the central bank might take action beyond the limits outlined. But this does not mean that it cannot assist in the search for solutions, as far as they do not involve extending further credit. If the problems of individual banks multiply, there is a danger that liquidity may dry out throughout the entire system. In such a case, the central bank would basically be able to supply the market with the necessary liquidity. However, it may then come into conflict with the requirements of a policy geared to economic stability. Consequently, the short-term benefits of an easing of monetary policy should be weighed against the longer-term risks. I would like to sum up my thoughts as follows: 1. Three factors are of prime importance to the competitiveness of a financial centre: economic stability, political stability and the “human factor” (i.e. professionalism, motivation and mentality). Although these factors can each be viewed separately, it is the interaction between them that really counts. 2. Economic stability, in the sense of a balanced development of the economy as a whole, is made possible by the existence of an appropriate economic framework. This is created first and foremost by monetary policy, fiscal policy and competition policy. Economic stability provides the financial services industry with a favourable climate in terms of low inflation and interest rates, moderate tax levels and appropriate exchange rates. 3. Favourable economic conditions are planned and implemented as part of the process of social coexistence. | 0 |
As has been discussed before by many of my MPC colleagues (see, for example, Bean (2011), Broadbent (2011), Fisher (2013)), to not have done so would have meant presiding over an even deeper recession and an even greater rise in unemployment. Rather than a constraint as some claimed, the inflation target and the credibility it afforded were essential in allowing the MPC to respond as forcefully as we did. The much vaunted flexibility offered by inflation targeting frameworks – to set policy in such a way that mitigates damaging booms and busts in activity as well as controlling inflation – can be exercised only if policymakers’ commitment to their target remains credible. Without credibility, there can be no flexibility. The experience of the UK economy over the past 5 years has provided a real-time examination as to how long inflation can remain above an explicit policy target without the credibility of that target being undermined. Thus far, the UK’s inflation target has passed this test with flying colours. And, in so doing, it has enabled the MPC to provide vital support to our economy. But although inflation targeting scored highly against its primary objective – anchoring people’s inflation expectations – there was, as my teachers used to say, some room for improvement. For me it was speling. For inflation targeting, at least as operated in the UK, it was in addressing some of the communications challenges posed by the sustained period of weak demand and elevated inflation. | With inflation well above target and the level of output still depressed, the Committee has to balance the speed BIS central bankers’ speeches 3 with which it returns inflation to target and the support it provides to output and employment. If we attempt to return inflation to target too quickly, by withdrawing monetary stimulus, we risk undermining the fledgling recovery. But returning inflation to the target too slowly might cause people to question the MPC’s commitment to keep inflation close to 2% in the medium term. Again, the issue here is to do with the transparency and accountability of policy, rather than its actual setting. The need to juggle these two challenges – returning inflation to target and supporting growth – has been the single most important determinant of our monetary policy decisions over recent years. But an inflation target, on its own, is not well suited to explaining the judgements and rationale underlying the Committee’s approach. Put bluntly, it speaks to only one half of the trade-off. The stakes are high. Our management of the trade-off between returning inflation rapidly to target and supporting the recovery directly affects businesses and families up and down the country. It is only right that the Committee be clear about its view of the appropriate trade-off so that we can be challenged and held to account. | 1 |
12 10 11 Source: Reuters EcoWin BIS Review 56/2010 Unit labour costs compared to the euro area Percentage points 35 35 Portugal Ireland Italy Greece Spain Germany 30 25 20 15 30 25 20 15 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 -20 -20 00 02 04 06 08 10 Note. Broken line represents OECD’s forecast Source: OECD Current account deficits Percentage of GDP 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 Portugal -8 -10 Ireland -10 -12 Italy -12 Greece -14 -14 Spain -16 -16 90 92 94 96 98 Note. | This deterioration in competitiveness can be illustrated by the fact that unit labour costs have increased by between 10 to 20 per cent more than in the euro area as a whole since 2000, and even more in relation to unit labour costs in Germany. The deterioration in competitiveness entails less chance of a boost from exports and thus poorer opportunities for a rapid recovery as international demand increases. (Slide: Unit labour costs compared to the euro area). The strong growth in domestic demand in recent years and the weaker competitiveness have resulted in a current account deficit and thus rising foreign debts. (Slide: Current account deficits). In the case of countries with their own currencies one would expect a depreciation of the currency to restore competitiveness. This opportunity is not available to the countries in the euro area. Here, it is instead necessary for wages and prices to fall in relation to other countries. One difficulty in this context is that both public and private debts and the interest payable grow in real terms – that is, a larger part of production goes to meeting the costs of the debts. Developments in Germany show that such internal cost-cutting in relation to other countries is fully possible. The combination of a muted growth in nominal wages and productivity improvements has led to unit labour costs in Germany falling by 15 per cent since 2000, compared with the euro area as a whole. | 1 |
But I will leave the Bank of England in the good hands of my successor, Mervyn King, when I step down in June, and I have every confidence that he will, by the time of your next dinner, have a positive story to tell. | Over the past few years the NBR has used all its available instruments to fulfil its tasks in the area of achieving price stability, seeking to ensure a low volatility of the exchange rate – an exchange rate which is set by the market. In short, all our steps have focused on maintaining stability and rebuilding confidence. In conclusion, over the past 10–15 years most economists have discovered good governance – with its four pillars: transparency, accountability, predictability and participation – as a major determinant of economic growth. Thus, economic governance implies the need to ensure stable, transparent and predictable rules that encourage competition and fair access to public services. It is achieved through a country’s public and private sector institutions and the civil society. Moreover, the recent crisis, which today wreaks havoc given the structural interdependencies worldwide, has underscored the need for an in-depth reform of economic governance at global levels. As Mr. Jean-Claude Trichet, the former ECB President, said, in light of the global crisis, “International interdependencies are too large for purely national or regional rules to be optimal and there is a clear need to strengthen global governance, in particular in the financial field.” I would also like to share with you a few thoughts about corporate governance. I’m sure the debates on this topic will be comprehensive during all these days and you, as specialists, will be able to unveil its very generous facets. | 0 |
And these were compounded by the factors that had emerged during the crisis, such as the high unemployment rate and the burgeoning budget deficit. The main imbalances accumulated in the phase of strong growth were attributable to a sharp expansion in demand that gave rise to a substantial increase in private-sector debt, excesses in the real estate sector, and price and cost increases that tended to crowd out domestic output in favour of imports, systematically raising the external deficit. The unfolding of the economic crisis further complicated the situation. Firstly, because it gave rise to severe job destruction, as a result of shortcomings in the workings of the labour market. At 21%, the unemployment level has not only highlighted the need to reform the institutional framework of this market; the figure also raises doubts about the Spanish economy’s capacity to restore its potential growth and ensure the sustainability of its public finances. In this respect, the rapid fiscal deterioration has been one of the factors that has increased our country’s exposure to the euro area debt crisis. Our starting point was a healthy one, with a budget surplus in 2007 and a low public debt ratio. But the deterioration was so sharp that, in the space of scarcely two years, the deficit climbed above 11% of GDP and debt moved into a delicate dynamic just as the financial markets began to worry about the expansionary deviation of public finances in other countries. | The next step inevitably is the correction to the real economy, interest rates and/or the exchange rate, that can sharply worsen asset quality and expose the accumulated weaknesses in the financial system. Role of central banks in promoting stability and growth A central bank’s most important role in achieving stable, long-term growth involves promoting price stability. Achieving long-run price stability is a difficult and continuous challenge, as it requires constant efforts first to detect, and then to correct the building up of internal and external imbalances. Moreover, because of time lags in policy effectiveness, authorities often have to take action based only on partial evidence, well before adverse symptoms are fully evident. The principal reward for forward-looking policy is that changes in policy, and the associated stresses they engender, are generally smaller and more easily assimilated by markets. The effectiveness of monetary policy naturally brings us to the question of monetary and exchange rate regimes. A great deal has been said in various forums about the choice of monetary and exchange rate regimes. I believe it is crucial that there be consistency between a country’s choice of currency regime and its other policies. There is no "right" regime that applies to all cases and all points in time. Experience has shown that no currency arrangement can compensate indefinitely for imperfections elsewhere in an economy, such as weaknesses in financial supervision, an excessively loose fiscal stance, or inflexible wages and prices. | 0 |
The size of ASEAN local currency bond markets is now five times larger than the total USD-denominated bonds issued by ASEAN entities, indicates the growing maturity, resilience and the important role of domestic bond markets in each economy. The compounded annual growth rate in ASEAN local currency bond issuance has been 12.9% since 2003. The regional individual markets have experienced growth rates ranging from 5.3% to 42.2%. These figures are very encouraging. The potential is enormous. A relatively new area of growth for ASEAN bond market is infrastructure financing. Infrastructure investments in Asia, by some estimates, will amount to a staggering USD8 trillion, over the next decade. ASEAN bond markets can play a big role in bridging this long term financing needs given that most economies within the region are bank-dependence for long term financing. Not only the BIS central bankers’ speeches 1 economy would be better served by a new source of funds, but the risks of depending on the banking sector for long term financing would be greatly reduced. However, formidable challenges still exist. The financial linkages between ASEAN fixed income markets are insignificant and intra-regional investments by ASEAN investors are still small. Malaysia, the largest fixed income market in ASEAN, has seen a fair share of nonresidents participation and investment. Despite the growth of our fixed income market and the substantial non-residents investment, the participation from other ASEAN countries is limited. It would be a fair guesstimate that this is similar in other ASEAN fixed income markets. | Going forward, ASEAN with a sizeable population of 618 million offers vast investment prospects as the economy is expected to grow strongly for the next few years. ASEAN leaders have also embarked on an ambitious vision to create a single “common market”. Realisation of this vision will lead to a freer flow of goods and services, capital investment and skilled labour across the region. Many initiatives and measures have been implemented under the ASEAN Economic Community Blueprint since its launch in 2007 and many more areas of importance are being discussed and negotiated. Like most regional economic community, ASEAN aims to promote greater regional connectivity in which lessons of history in economic development had shown, would expand economic growth potential. Data has also shown that intra-regional trade flows have already grown substantially among ASEAN-10 members countries reflecting the increasing phenomenon of freer trade with its neighbouring countries in recent years. Consequently, the share of intra-regional trade has also increased, from 22.5% in 1999 to 25% in 2011. Against this backdrop, ASEAN financial markets had also grown significantly in tandem. In particular, the ASEAN fixed income markets, are instrumental to support the growth of intraregional trade, financing and investment in infrastructure. ASEAN fixed income markets have expanded by more than six folds since 2000, and now stand impressively at USD1.1 trillion. | 1 |
Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate. Inflation expectations for the euro area remain firmly in line with the Governing Council’s aim of maintaining annual inflation rates below, but close to, 2%. Our monetary analysis is consistent with price stability. The underlying pace of monetary expansion and loan dynamics remain subdued. The annual growth rate of loans to the private sector remains negative. To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the continuing process of deleveraging. Overall, inflationary pressures should remain contained over the policy-relevant horizon. Taking the evidence together, this allows our monetary policy stance to remain accommodative. The impact of a low interest rate environment Let me turn to the first topic that you have chosen for our meeting today, namely the implications of a low interest rate environment. The impact of the global financial crisis on the economy and, potentially, on price developments has been unprecedented. We have taken unprecedented measures in response, aiming pre-emptively and forcefully to avert risks to price stability, in accordance with our primary mandate. First, we have reduced our key interest rate to 0.75%, a level previously unseen in virtually all euro area countries. | Thomas Jordan: Government debt and the independence of monetary policy Summary of a speech by Mr Thomas Jordan, Vice-Chairman of the Governing Board of the Swiss National Bank, at the 21st Internationales Europa Forum Luzern, 8 November 2011. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Monetary policymakers are not responsible for fiscal policy, yet they still have to take an active interest in government finances. The current financial and debt crisis reminds us that unsound government budgets can compromise independent monetary policy in the long term. Excessive debt carries the risk that fiscal policy can no longer be effectively implemented. It is therefore no surprise that this responsibility gets passed to the central bank, which is thought to be able to solve all manner of problems by simply printing more money. Faced with this situation, the central bank must – either under political pressure or by having to weigh up all the relevant factors – contribute to state financing or take quasi-fiscal policy measures. This can lead to a gradual loss of its effective independence and – in an extreme case – to it losing its statutory independence. Only an independent central bank, however, can pursue its goal of ensuring price stability in a credible way. The debt situation in Switzerland is much better than that of other comparable countries. | 0 |
However, some problems remain with regard to the institutional settings of the labour market, which may have to some extent inhibited the full realisation of employment gains from greater competition and innovation as illustrated by the still relatively high unemployment rate 7.7% in 2006 3 . All in all, the rise in employment did not cancel out structural weaknesses of labour markets and there is still considerable room to increase the level of labour resource utilisation in Europe. - Productivity is the other major factor determining growth. Over the last decade, the diverging trend in hourly labour productivity growth has been the main reason explaining the growth differential between the euro area and the US. During the 1980’s and the first half of the 1990s, hourly labour productivity in the euro area grew on average by 2.4%, then it decelerated to 1.3% between 1996 and 2006. By contrast, US hourly labour productivity growth rose from 1.3% to 2.1% over the same period. At the sectoral level, the gap in labour productivity growth between the euro area and the US has been mainly driven by some market service sectors intensively using Information and Communication Technologies (ICTs) namely the wholesale and retail trade sectors as well as the financial sectors. In contrast to the US, in these two sectors, labour productivity growth significantly decelerated in the euro area over the last 15 years. | Would you like to be able to inspect Member States’ budgets prior to their adoption by national parliaments as the Commission proposes to do? Each institution has its own responsibilities. The ECB is very closely involved in the work of the Commission and the Eurogroup. I support the Commission’s proposal, which I consider to be perfectly aligned with the goal of improving governance in the euro area. I have noticed some negative reactions, in particular in France, and I don’t understand this, especially in a country that has a tradition of favouring a strong “economic governance”. 2 BIS Review 76/2010 Can non-democratically elected bodies grant themselves a supranational inspection right? The governments of the Eurogroup all stem from a democratic process! They are the ones who, following any clarifications from the Commission – and where necessary from the ECB – take the decisions. Economic and Monetary Union includes a very close supervision and, when necessary, injunctions and sanctions imposed collectively by the governments participating in the Union. We are interdependent, which means that bad management on the part of a single member leads to problems for all of the others. Austerity plans are multiplying in Europe but certain economists are warning against an overzealousness that could jeopardise growth. What is your view on this? When a household systematically spends more than it earns, so that its debt rises exponentially, its situation is clearly untenable. Correcting this situation demonstrates both wise and sound judgment. | 0 |
Aurelian exchanged good money for bad, and ordered the destruction of accounts drawn up in the devalued currency. In the long run the operation restored the value of money. But in the short run it caused hardship. Gibbon, in his Decline and Fall of the Roman Empire, observed that “a temporary grievance of such a nature can scarcely excite and support a serious civil war”. Unfortunately, taking a different and more Keynesian view that in the long run we are all dead, the population at the time rose in insurrection. Many of them found that they were dead in the short run as well, with seven thousand soldiers and countless civilians perishing during the suppression of the uprising. So let us consider the costs of wealth redistributions arising from unanticipated deflation. Such redistributions can lower aggregate demand. Why? Since it is difficult either to borrow or insure against uncertain future employment and earnings opportunities, current assets act as a buffer stock to make it possible to smooth consumption in the face of shocks to future prospects. When net worth is small it is risky to run down the buffer stock even further, and so the marginal propensity to spend out of wealth is much higher for households with low net worth than for families whose assets comfortably exceed their liabilities. If significant numbers of debtors have little net worth - recent firsttime house-buyers with high debt-to-value ratios are a prime example - then an unanticipated deflation could cause a sharp fall in aggregate consumption spending. | We would also like to reaffirm our unwavering commitment to the financial inclusion cause and look forward to deepening our cooperation with all stakeholders to fulfil the promise of greater financial inclusion, thereby bringing hope and better opportunities to our communities. Thank you. BIS central bankers’ speeches 3 | 0 |
That influence tempted 1 See Tobin (1972), “Inflation and unemployment”, American Economic Review, 62. Inflation can have large redistributive effects. Volatile inflation arbitrarily re-distributes wealth across borrowers and savers. And most recently, there has been a debate about how the stance of monetary policy has affected the distribution of wealth and income. In a series of recent analysis and speeches, members of the MPC have shown that, while distribution is not an objective of monetary policy, the evidence strongly suggests that policy since the crisis has been associated with better outcomes. 2 2 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches 2 authorities to promise low inflation in the future, but then to renege in order to boost activity. Electoral cycles 3 reinforced this predisposition. Firms and households began to anticipate these incentives, however, and eventually pre-empt them. The economy ended up in a worse equilibrium with higher inflation and 4 unemployment. Such time-inconsistent policies contributed to excessive inflation and higher structural unemployment in the UK during the 1970s and 1980s (when inflation averaged 9.5% and unemployment over 7.5%). In light of similar experiences, many societies came to recognise that macro outcomes can be improved by having society first choose the preferred rate of inflation and then delegate operational responsibility to the 5 monetary authority to take the necessary monetary actions to achieve that objective. By “tying the hands” of authorities, time inconsistency is resolved and better outcomes for both inflation and unemployment become possible. | Successful organizations depend on "open doors" to maintain transparency and build trust. But what will "open doors" mean to people in future digital work environments? How will the culture of a workplace change if we don't see each other face-to-face as often? In particular, how will we effectively train and mentor junior employees? Finally, current events demand that we be honest about the times we have not lived up to our own standards of equal justice under law and equal opportunity in our economy. Each of us needs to question our role in allowing systemic racism to persist. Our colleagues, stakeholders, and the public in general will ask how we will do better in the near term and the long term—and then they will hold us to it. Thank you for your kind attention, and thank you again to the Union of Arab Banks for hosting this discussion. 1 Lisa Kraidin, Thomas M. Noone, Sean O'Malley, and summer intern Gabe Rosen contributed to the preparation of these remarks. 2 Board of Governors, "Federal Reserve announces extensive new measures to support the economy," Press release (Mar. 23, 2020). 3 Federal Open Market Committee Statement (Mar. 15, 2020). 4 See supra n.2. See also Nicola Cetorelli, Linda S. Goldberg, and Fabiola Ravazzolo, "How Fed Swap Lines Supported U.S. Corporate Credit Market amid COVID-19 Strains," Liberty Street Economics (June 12, 2020). 5 "Agencies encourage financial institutions to meet financial needs of customers and members affected by coronavirus," Joint press release (Mar. 9, 2020). | 0 |
Continuing financial disintermediation also involves increased competition for credit institutions. It is well known that, if trade credit is excluded, the bulk of borrowing by Spanish non-financial corporations has traditionally been in the form of bank loans. This funding structure is similar to that observed in other European countries, such as Germany or Italy, but contrasts with the greater weight of financial markets in other economies such as the United States and the United Kingdom. Following the outbreak of the most recent crisis, a gradual increase in the weight of business funding raised on financial markets through the issuance of fixed-income securities has been observed in Spain and in other developed countries. This phenomenon especially affects large corporations. Among the factors potentially contributing to this development are the regulatory changes in the financial arena, imposing stricter requirements on banking activity, as mentioned earlier, and the corporate sector purchase programmes by central banks, which has reduced the cost of issuing these assets. Looking ahead, this trend towards the expansion of capital markets might continue if progress can made on the European project to create a capital markets union. Also, a potential increase in long-term savings linked to the ageing of our society could also contribute in the same direction. Although a greater diversification of financing sources could potentially be positive for nonfinancial corporations, making them less vulnerable to adverse shocks affecting a specific financing channel, for credit institutions it could entail a reduction in business volume and income. | Comparing this set of conditions to that in 2010, the recent slowing of inflation has been less widespread across core goods and core services, and inflation expectations so far have declined less appreciably than they did in 2010. Thus, my best guess is that core goods prices will begin to firm in the months ahead as global demand begins to strengthen and inventories get into better alignment with sales. 1 2 CoreLogic Report Shows Home Prices Rise by 12.1 Percent Year Over Year in April. BIS central bankers’ speeches As is always the case, there is substantial uncertainty surrounding this forecast. Moreover, there is always the possibility of some unforeseen shock. Thus, we will be monitoring U.S. and global economic conditions very carefully and will adjust our views on the likely path for growth, inflation and the unemployment rate accordingly in response to new information. At its meeting last week, the FOMC decided to continue its accommodative policy stance. It reaffirmed its expectation that the current low range for the federal funds rate target will be appropriate at least as long as the unemployment rate remains above 6.5 percent, so long as inflation and inflation expectations remain well-behaved. It is important to remember that these conditions are thresholds, not triggers. The FOMC also maintained its purchases of $ billion per month in agency MBS and $ billion per month in Treasury securities, with a stated goal of promoting a substantial improvement in the labor market outlook in a context of price stability. | 0 |
22, No. 3, pp 265–290. Bank of England (2012), “Record of the interim Financial Policy Committee, 16 March 2012”, available at http://www.bankofengland.co.uk/publications/Documents/records/ fpc/pdf/2012/record1203.pdf. Bank of England (2011), “UK banks’ assets and the allocation of regulatory capital”, Financial Stability Report, December, pp 26–27, available at http://www.bankofengland.co.uk /publications/Documents/fsr/2011/fsrfull1112.pdf. Bank of England and Financial Services Authority (2011), “Our approach to banking supervision”, available at http://www.bankofengland.co.uk/publications/other/financialstability/ uk_reg_framework/pra_approach.pdf. Barclays Capital (2012), “Bye Bye Basel”, May. Basel Committee on Banking Supervision (2012), “Consultative document: Fundamental review of the trading book”, available at http://www.bis.org/publ/bcbs219.pdf. Basel Committee on Banking Supervision (2011), “Global systemically important banks: Assessment methodology and the additional loss absorbency requirement”, available at http://www.bis.org/publ/bcbs207.pdf. Basel Committee on Banking Supervision (2010), “Basel III: A global regulatory framework for more resilient banks and banking systems”, available at http://www.bis.org/publ/bcbs189_dec2010.htm. Basel Committee on Banking Supervision (2004), “International Convergence of Capital Measurement and Capital Standards: a Revised Framework”, available at http://www.bis.org/publ/bcbs107.pdf. Basel Committee on Banking Supervision (1996), “Overview of the amendment to the capital accord to incorporate market risks”, available at http://www.bis.org/publ/bcbs23.pdf. Basel Committee on Banking Supervision (1988), “International convergence of capital measurement and capital standards”, available at http://www.bis.org/publ/bcbs04a.pdf. Berlin, I (1953), “The Hedgehog and the Fox”, Simon and Schuster, New York. Bollerslev, T (1987), “A conditionally heteroscedastic time series model for speculative prices and rates of return”, The Review of Economics and Statistics, 69(3), pp 542–547. Calomiris, C W and Herring, R J (2011), “Why and How To Design a Contingent Convertible Debt Requirement”, Columbia Business School Working Paper, February. | As a result, funding costs for households and businesses in the major economies have risen as banks continue to tighten credit standards, which is not positive for growth. On account of this, global growth prospects seem to have further weakened, while the decline in oil price have helped ease concerns about global inflation. Future direction of the oil price, however, is still very much uncertain. The global economy and conditions in the global financial markets, therefore, have become more challenging, and they are likely to have important implications for emerging markets through the usual trade and financial channels. This is, therefore, an important area that we need to pay close attention to in the next few months. Under the current global setting, a decline in oil price will be positive for emerging markets like Thailand, and as a group, the growth prospect of emerging markets should remain satisfactory given their abilities to support domestic demand. But questions remain about individual economies on how resilient they would be in the face of such shocks, including the banking sector. In the Thai case, our assessment is that the Thai banking sector is strong enough to weather the current turmoil. This conclusion is supported by the following five important reasons. First and foremost is the low direct exposure that the Thai banking sector has to sub-prime credit and CDO. CDO exposure of Thai banks at the second quarter of last year was less than 0.3 percent of total asset. | 0 |
And now some central banks may need to consider the implications for price stability if the process of globalisation were to slow or go into reverse. These issues are particularly relevant to the Bank of England as the UK inflation outlook will be importantly influenced for some time by a process of de-integration under Brexit. Today, I would like to draw on this example to illustrate how global factors influence domestic inflation dynamics and the ability of central banks to achieve price stability. II. Globalisation and Inflation While the global Phillips Curve appears alive and well (Chart 1), globalisation has been accompanied by a 1 weakening in the relationship between domestic slack and domestic inflation (Chart 2), and by a corresponding strengthening in the relationship between global forces and domestic prices. 1 As summarised by the slope coefficients in price and wage Phillips curves. The wage and price Phillips curves had already flattened during the 1970s and ‘80s, most likely linked – as Rogoff argued – to the institutional reforms made to monetary policy during that period. The finding of flattening Phillips curves has been widely documented. For example, Blanchard, O, Cerutti, E and Summers, L (2015), ‘Inflation and Activity – Two Explorations and their Monetary Policy Implications’, NBER Working Paper No. 21762, find that the median Phillips curve slope of 20 advanced and emerging economies fell by more than half between the mid-1970s and the mid-1990s, from around 1 to around 0.3. | Thus far, this disinflationary effect has mostly affected the 9 prices of goods (Chart 5), as trade in goods has been liberalised to a much greater extent than services. 10 Monetary policy makers in advanced economies have responded by accommodating relatively higher services price inflation in order to meet their inflation objectives. For example, in the UK core goods prices fell an average of 0.3% over the past two decades, services prices rose by an average of 3.4% and total CPI inflation was on average at target. 11 7 The slowing of trade growth since the financial crisis largely reflects the rotation of global growth to countries with less import intensive demand, notably the US and EMEs, as well as the declining import intensity of final domestic demand in China as the composition of growth there rotates towards consumption and services. 8 This positive supply shock comes about because the availability of cheap imports improves advanced economies’ terms of trade – the price of exports relative to that of imports. For more detail on this channel, see ‘Globalisation and Inflation’, speech given by Charles Bean at the LSE, 24 October 2006. 9 Abdih, Y, Balakrishnan, R and Shang, B (2016) ‘What is keeping US core inflation low?’, IMF Working Paper No. 16/124. 10 For example, barriers to services trade are estimated currently to be up to three times higher than those for goods trade. See ‘A fine balance’, speech by Mark Carney at the Mansion House, 20 June 2017. | 1 |
A fixed-rate, full allotment overnight reverse repo facility is a facility in which the Federal Reserve posts a fixed interest rate and accepts cash from counterparties, which include banks, dealers, money market funds, and some government sponsored enterprises (GSEs), 5 The Desk has been conducting operational readiness exercises for the use of reverse repurchase agreements since late 2009. At the most recent FOMC meeting last week, the FOMC authorized the Desk to begin another testing program which begins today. See the Desk’s September 20 announcement of the next round of testing. 6 BIS central bankers’ speeches on an overnight basis in return for a security. If implemented, the facility would be “full allotment” – that means the facility would have no cap on the amount of funds accepted from any of its counterparties at the posted overnight interest rate.6 The repo facility is “reverse” because the direction in which the funds and securities move – participants are lending funds to the Fed rather than vice versa. Users of the facility are making the economic equivalent of an overnight collateralized loan of cash to the Federal Reserve. The amount of funds invested in the facility is likely to be sensitive to the posted interest rate. The higher the interest rate relative to comparable money market rates, the greater the participation is likely to be and vice versa. There are several reasons motivating our interest in developing such a facility. | Before he does so, I would like to share with you my assessment of economic conditions on the mainland and in Puerto Rico. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. National economic conditions The mainland U.S. economy has continued to slowly recover from the after-effects of the housing boom and bust and the financial crisis. But the recovery has been disappointing. Despite a monetary policy that has been extraordinarily accommodative by historical standards, the economy has grown only about 2 percent over the past year. After a brighter start to the year, economic momentum has slowed in the last few months. (This may partly be a payback for the mild winter, which brought forward some spending.) Employment growth remains positive, but has slowed considerably of late as the economy has lost forward momentum, and the unemployment rate remains elevated. The headwinds retarding recovery are well known. Many consumers have been deleveraging in response to the large losses in wealth generated mainly by the collapse in home prices. The supply of credit – particularly mortgage credit – to many families remains constrained, limiting the degree to which many households can fully benefit from low interest rates. Although there have been some positive signs in the housing market recently, housing activity nevertheless remains at very low levels. | 0 |
5 This is discussed in detail by my former MPC colleague, Stephen Nickell in ‘Why Has Inflation Been So Low Since 1999?’ 6 Estimates from Kenneth Rogoff, ‘Globalization and Global Disinflation’, paper prepared for the Federal Reserve Bank of Kansas City conference on ‘Monetary Policy and Uncertainty: Adapting to a Changing Economy’ Jackson Hole, WY, August 2 BIS Review 70/2006 decline has been particularly marked in Africa, Latin America and the transition economies but is also significant in the UK and other developed countries. None of this makes monetary policy any less important. Ultimately inflation in the UK is a product of our monetary policy. Inflation would certainly reappear if we relaxed. But the disinflationary pressures from the Far East and elsewhere have made our job easier. In the UK, interest rates are set to deliver the inflation target. If there is disinflationary pressure from the rest of the world then that allows us to set lower interest rates (and accommodate a higher rate of price increases in services) than would otherwise have been the case. Thus the consequence is lower interest rates as well as low inflation. Prospects for UK inflation That leaves the question whether that benign trend is likely to continue in the future. Over the past year, the downward trend in the prices of imported goods has stopped and import prices have started to rise, even after excluding oil and erratic items (Chart 4). | In other words, they have taken account of the effect of higher import prices in depressing the real incomes of their customers and curtailed price increases on their own products to avoid losing sales. This all suggests that in an economy with well-anchored inflation expectations, relative prices adjust quickly to maintain the overall rate near target; with domestic price inflation, for example, moving in the opposite direction to import price inflation. In effect, where the target is credible, the market adjustments to relative prices will do most of our work. That is another reason for paying very close attention to inflation expectations. The MPC has been successful over the years in maintaining inflation expectations at a rate broadly consistent with the inflation target. Anchoring expectations in this way is important because it prevents the wage-price spirals that were a key part of the inflation process in the past. If wage and price setters believed that inflation was going to rise above the target, then they would make some allowance for this in setting 28-30, 2003. The Bank for International Settlements has also emphasised the ‘increasing global character of the inflation process’, see BIS Annual Report 2006. BIS Review 70/2006 3 current wages and prices. That would add to current inflationary pressure, requiring higher interest rates to control it. | 1 |
Michael Gondwe: Facilitating trade and building economies on the African continent Opening remarks by Dr Michael Gondwe, Governor of the Bank of Zambia, at the African Trade Insurance Agency Workshop for Bankers, Lusaka, 10 September 2013. * * * The Secretary General of COMESA, H.E Sindiso Ngwenya; The Director General of Zambia Development Agency, Mr Andrew Chipwende; The ATI Chief Investor Relations Manager, Mr Cyprien Sakubu; The Representative for Zambia, Mr Pizzaro Lukhanda; Resource Persons; Distinguished Invited Guests; Members of the Press; Ladies and Gentlemen. It is my honour and privilege to be amongst you all this morning. I wish to express my appreciation to the African Trade Insurance Agency for extending an invitation to me to deliver a keynote address on this important Workshop. Let me begin by commending the African Trade and Insurance Agency (ATI) for the important role they continue to play in facilitating trade not only in this Country but in the entire Region and indeed the Continent at large. I am no stranger to the role that ATI plays in helping to build economies in the countries that it operates as I have been a client and a supporter of ATI’s products and services in particular in my previous life as Head of the PTA Bank. I have seen first-hand, the impact that ATI has had in many countries, including in Zambia, where ATI has facilitated trade and investments worth more than $ million since its inception. | The Bank of Zambia therefore welcomes this Workshop as it bodes well with our strategic objective of increasing access to financial services to 50% of the population by 2015 from the current level of 37.3%. As I conclude, I want to assure ATI that the proposal for the Bank of Zambia and all Central Banks in the COMESA Region to relax the capital reserve rules, by considering applying a lower risk weight on transactions that banks and financial institutions have insured with ATI is receiving active consideration within the organs of the COMESA Central Bank Governors. Let me commend ATI for coming up with this innovative initiative which seeks to deepen our financial markets. Finally, I challenge all of you this morning, especially participants from commercial banks to explore ways on how you can improve your products and services to better serve the entire Zambian population with the products that ATI will present to you this morning. Distinguished Guests, Ladies and Gentlemen, it is now my pleasure to declare the African Trade Insurance Agency’s workshop for bankers officially opened and I wish you fruitful deliberations. I thank you for your attention. 2 BIS central bankers’ speeches | 1 |
A shift from the public sector to the private sector most probably entails an increase in productivity throughout the economy. One complication in this context is that, for technical reasons, it is difficult to measure productivity growth in the public sector in the National Accounts. The studies that have been carried out indicate that it is lower in the public sector than in the private sector.1 So far, the statistics are quite simply based on the assumption that there is no productivity increase in the public sector at all. Another important change in the significance of different sectors in the economy was the rapid expansion in the information and communications technology sector, particularly during the second half of the 1990s. There has been lively discussion of the actual significance of information technology for productivity growth in this period. What we can see, is that a large part of the productivity growth during the latter part of the 1990s originated from the sectors producing information and telecom products. Compared with this IT-producing sector, developments in the IT-using sectors was not at all as impressive, despite large investments in IT during the period. 1 SOU 2004:19, Long-term Planning Commission Report 2003/04, Ministry of Finance, Fritzes, Stockholm. BIS Review 64/2004 3 What does all this mean for future long-term productivity growth? | The model-based predictions can be interpreted as the probability that the economy is in a precrisis period. The chart shows estimated crisis probabilities for the US, Spain, Norway and the UK. The band reflects various combinations of explanatory variables and trend estimation methods. 3 The dataset covers the period from 1970 to 2013, with a total of 27 events defined as crises, of which 11 are associated with the financial turmoil in 2008–2009. As you can see from the chart, the estimated probability of a crisis increased markedly in the years ahead of the financial crisis in 2008–2009, although the UK is the exception in that context. Crisis probabilities also increased in the US ahead of the US Savings and Loan crisis, in the UK ahead of the UK’s small-bank crisis and in Norway ahead of the banking crisis in the late 1980s and early 1990s. All these episodes featured rapid growth in credit and rising real estate prices. 2 See Anundsen, A.K., F. Hansen, K. Gerdrup and K. Kragh-Sørensen (2014): «Bubbles and crises: The role of house prices and credit», Norges Bank Working Papers 14/2014. 3 The indicators are incorporated in growth form or as deviations from estimated long-term trends. 2 BIS central bankers’ speeches The empirical results support our choice of key indicators of financial imbalances. Household and corporate credit, house prices and banks’ wholesale funding ratio are statistically significant in the models and clearly influence the estimated probability of a crisis. | 0 |
Why does this historical detour matter? The five or six years since the outbreak of the financial crisis have seen signs of a reversal of some aspects of the greater openness we had seen in the 1980s and 1990s. And probably none more so than the decline in crossborder bank lending. Moreover, the UK experience in terms of lending has been amongst the more pronounced. But again, does this matter? My answer is yes. First, because many of us do believe in the economic benefits of free trade and capital flows, as well as the contribution of migration to balancing supply and demand in the economy. Second, and closer to home, the City of London and its financial markets benefit hugely from, and are at the hub of, the open world economy. For example, whatever you think about the more troublesome recent innovations of banking, basic trade finance remains a core, simple and essential service provided by banks, and the City has for a very long time been a leading centre for providing this finance to support world trade. International wholesale banking is therefore an important part of maintaining and developing the world economy, just as it was in the nineteenth century. Yet, we have to recognise that in the last five or six years of the crisis we have gone backwards. Cross-border bank lending has declined more sharply than overall lending – home preference has set in. | If the problem is supply we know for sure one thing: fewer firms will have access to credit, some will be in trouble and will fail due to this fact; after many of these firms fail one can naturally state that there is no demand for credit. That is why it is so important to take care of supply problems. In doing so, policy mistakes should be avoided. It would be a mistake to simply state that a major policy target is to restart funding. That would be relatively easy to achieve, by the way: by funding expensive projects with public funds, independently of their quality. It would also be a mistake to try to boost artificially any specific financial instrument. Instead, the route towards a better financial system is one characterized by a level playing field for all types of finance, with specific choices left to borrowers and savers. The tax system should also not discriminate, i.e., it should treat symmetrically equity and debt, so that firms decide on the funding source regardless of the tax advantage of one over the other. Creating this level playing field will most likely lead to a more balanced and diversified financial system, i.e., with more options for savers and borrowers. This competitive environment is key to maintaining financial markets in constant improvement, characterized by innovation that responds to the insufficiencies of the existing instruments. Ideally, restrictions to the development of any type of finance should always be clearly justified on efficiency grounds. | 0 |
That is a perfectly fair argument. The Committee’s mandate, as given to us by the Government, is an inflation target of 2% at all times. The onus is on us to explain why, in the face of persistently above target inflation, we are not tightening policy. My current approach to policy is based on the judgement that as long as these price level shocks aren’t repeated, and aren’t reflected in medium-term inflation expectations or wage setting, they are unlikely to have implications for inflation in the medium term. They lead to an increase in the level of prices, not to a persistent increase in inflation. If a significant degree of spare capacity persists in the medium term, inflation is likely to fall below target. The current focus of monetary policy is on providing the stimulus necessary to support the recovery so the degree of spare capacity in our economy is gradually reduced. That is critical if we are to hit the inflation target in the medium term. To have tried to have used monetary policy to offset the impact of these price level shocks on headline inflation would have required us to have tightened monetary policy in the depths of the recession. That would have led to an even bigger fall in output, an even bigger rise in unemployment, and an even bigger risk of materially undershooting the inflation target in the medium term. But there are clearly significant risks to this strategy of looking through the temporary impact of price level shocks on inflation. | The first years of our democracy were marked by economic difficulties, partly resulting from the international crises linked to sharp oil price increases and the lack of an anchor for inflation expectations in most developed countries. Nevertheless, this new Spain, democratic and integrated into Europe, never stopped looking outwards. Trade and financial flows and the movement of capital increased, and exports and imports rose from accounting for roughly 35% of GDP in 1986 to 66% in 2017. These steps towards modernisation would never have been possible without a society that was convinced of the fact that Europe represented prosperity and the future. The pro-European nature of civil society united Spaniards more strongly than their ideologies or political affiliations, and this sentiment has held firm despite the difficulties people experienced during the financial crisis. A recent survey by the Elcano Royal Institute shows that eight out of ten Spaniards believe that opening up markets provides Spanish businesses with good opportunities2. This is resounding proof that Spain benefits from the European Union in general, and the Economic and Monetary Union created by the euro area in particular. The annual growth in per capita income between 1977 and 1985, one year before Spain joined the EU, was 0.7%, well below the 1.8% enjoyed by the countries that would go on to form the euro area. However, between 1986 and 1998, before the euro was introduced, Spain’s per capita income grew at an extraordinary annual rate of 2.7%, above the average for future euro area countries of 2.1%. | 0 |
One way of answering this question is to look at the macro picture and determine the trend rate of GDP growth that would be commensurate with such a strong increase in corporate earnings. This is also pertinent in the context of the current discussion about a “new economy” that is perceived as being capable of higher productivity growth and thereby an upward shift in potential GDP growth. A simple growth model shows that in order to justify a P/E ratio between 30 and 35, the growth trend for total factor productivity would have to move up almost 3 percentage points.4 That in turn implies 4 The feasibility of a higher future increase in corporate earnings can be analysed with a simple model where GDP growth is determined by the inputs of capital and labour together with the efficiency with which these resources are utilised in production. Using a simple Cobb-Douglas function, the rate of increase in the return to capital can be derived as gR=gA+(1-a)(gL-gK), where gA, gL and gK are the growth rates for total factor productivity, labour and capital, respectively. The relevant factor in the present context is the return to capital (the flow of income to owners of the capital stock in relation to the value of the stock) because this should be linked to the growth of corporate earnings. | Today, however, the situation in Sweden does not resemble what happened in the second half of the 1980s. Asset prices have certainly risen strongly in recent years but credit has not grown to the same extent. It seems that, at least to date in the present upswing, Swedish banks and their customers have taken a different line on the provision of credit and borrowing. Everyone is hopefully more accustomed to a deregulated credit market than was the case in the late 1980s. Still, it is important to be alert to the future path of asset prices and credit aggregates, as well as to the underlying forces at work in the Swedish economy. Real assets prices and total lending 270 1,6 240 1,4 210 180 1,2 150 1,0 120 0,8 90 1970 1975 1980 1985 1990 1995 Ass et p rice in d ex: 1980= 10 0 (left scale) L en d in g in p e r c en t o f G D P (rig h t s cale) S ource : R iksbanke n capital in an economy is dependent on the level of output and how this income is shared between labour and the owners of capital. | 1 |
The Banque de France played a central role in setting this agenda, notably through the creation of the Network for Greening the Financial System (NGFS) and its global secretariat. 3. The ECB also intends to step up its communication. As I often stress, communication is 1/5 BIS central bankers' speeches fundamental for economic efficacy and for the transmission of monetary policy to all economic agents. Better-informed households and firms will also make better economic decisions. Our inflation targeting policy will be much more effective if economic agents understand it, adhere to it and believe in it, thus helping to better anchor inflation expectations. To this aim, a first step is our new Monetary Policy Statement, which is shorter and provides a clearer narrative of why we took our monetary policy decisions. Since effective speaking also means active listening, the Banque de France organised 17 listening events this year, both at national and regional levels, reaching out more than 300 000 French citizens. We discussed our mandate, the principles of monetary policy, and the effect of monetary policy on their daily lives. I have decided to make this an annual event. II. The current and future courses of inflation Let me now turn to the economic outlook. The robust euro area recovery has been helped by a successful combination of accommodative monetary and fiscal policies, both at national and EU levels. | Last but not least, in July the Governing Council updated its forward guidance on interest rates to bring it into line with the new definition of price stability. We agreed to reflect later – that is to say in December - on whether to adjust our forward guidance on the APP. 3. The lessons of TLTRO III and the two-tier system My last point concerns the articulation of long-term liquidity provision and negative interest rates. The third round of targeted long-term refinancing operations (TLTRO III) has proved to be a powerful tool during the Covid crisis to avoid a credit crunch to the private sector. As the euro area financial system is mainly bank-based, our future actions must continue to support bank lending to businesses and households as the recovery evolves. I am therefore in favour of keeping this funding instrument as a liquidity backstop in some form in the future, also to avoid possible cliff effects related to future repayments. However, I think that a careful recalibration of its pricing is required. Now that the recovery is well underway, the generous pricing of TLTRO - lending rates can be up to 50 basis points below the average deposit facility rate since April 2020 - is no longer justified. The present calibration of TLTRO pricing clearly provides riskless arbitrage opportunities for banks. | 1 |
The importance that the dynamising effect of the external sector acquires in the current circumstances highlights the relevance of competitiveness in the future. The foreseeable trend of inflation points to increasingly more moderate average price increases during the rest of the year, owing largely to the baseline effects of the energy and processed food price increases late last year and to the recent declines in crude oil prices, provided these are sustained. This trajectory should extend over the coming year, further supported by the sluggishness of demand. However, to attain fuller and more sustainable convergence with the euro area, the upside risks stemming from the indirect and secondround effects of cost and price increases this year must be prevented from materialising. The macroeconomic basis on which the government has drawn up the State Budget for 2009 includes, in its main outline, the trajectory of the macroeconomic adjustment I referred to earlier. But it is subject to major downside risks, especially as regards the course of domestic demand and, in particular, of residential investment. It should further be borne in mind that BIS Review 122/2008 5 the global economic situation and the impact of the international financial turmoil tend to heighten these risks. The design of the Budget should take into consideration the pronounced change in the economy’s cyclical situation, and bear in mind the speed at which public finances are being affected. | As I was able to explain to you here before the summer, the change in cycle in Spain had started before the episode of financial turmoil, making itself felt mainly in the real estate sector, which set in train a correction of the excesses that had built up during the long expansionary phase. These excesses had largely arisen owing to the global environment of financial laxity and undervaluation of risk, and to monetary and financial conditions that were particularly accommodative for Spain following EMU membership. These conditions were based on interest rates that held at low levels over a very extensive period and which were conducive to rapid indebtedness by households and by firms, mainly those related to the real estate sector. In any event, the adjustment of the real estate sector began slowly, mirroring the gradualism with which the determinants of residential investment changed. Hence, as the change in monetary policy stance that began in late 2005 progressively passed through to household and corporate borrowing costs and as the overpricing of housing became more patent, the dynamism of the sector eased off. However, this gradual pattern was altered when the international financial crisis raised credit risk premiums across the board, blocked a most significant part of banks' wholesale funding mechanisms and spread uncertainty and mistrust, most particularly in respect of economies subject to real estate adjustments. Against this background, the demand for housing fell off BIS Review 122/2008 3 drastically, when the production of houses was still at a very high volume. | 1 |
On the plus side, the crucial and unique economic advantage of monetary union is nominal exchange rate certainty within the Eurozone - which takes over half UK exports. I’m not talking just about reasonable exchange rate stability - which might result over time from each country pursuing disciplined macro-economic policies in parallel. I’m talking about nominal exchange rate certainty for the indefinite future. That very real economic advantage is well understood in the UK. It is particularly well understood by those businesses in the UK that export to, or compete with, businesses in the Eurozone, especially given the euro’s unexpected - and puzzlingly persistent - weakness since its inception at the beginning of last year. On that ground alone many of them, who are under intense competitive pressure as a result of sterling’s excessive strength against the euro, though not against other major currencies, would see our joining the single currency as an advantage - provided, of course, the exchange rate at which we joined was fixed at an appropriate level, which most of them - and indeed most analysts looking at the economic fundamentals - think should be substantially lower than at present. At a broader macro-economic level the potential benefit of joining - as a result of greater transparency of costs and prices and lower transaction costs - leading to greater competition and more efficient economic resource allocation is well understood. | Exchange rate certainty within Europe - even though only within Europe, and even though it is nominal exchange rate certainty rather than real exchange rate certainty, which is what matters in terms of competitiveness - would potentially enhance the benefits to be derived from the European Single Market. The euro’s second very powerful advantage is the possibility it opens up for much broader and more liquid financial markets. It will mean a progressive narrowing of spreads between borrowers and lenders, which is good news for the users of those markets - and that will be good news too for financial intermediaries as a group, because it will lead to higher volumes of financial activity. Not every individual intermediary will benefit, of course, in the more competitive environment, but those who survive will thrive! The City of London is already making an important contribution to this process of euro financial market integration. It is in fact the greatest contribution that the UK can make to the success of the 1 BIS Review 71/2000 euro while we remain outside. (It runs alongside the conceptually distinct, but closely related, pressure for broader international integration of financial markets, currently reflected in a spate of initiatives to unify trading platforms, and both clearing mechanisms and settlement systems, in which London, of course, is also very much involved.) These then - nominal exchange rate certainty throughout the Eurozone and integrated euro financial markets - are potentially powerful economic arguments in favour of UK membership. | 1 |
At the same time, the rising importance of services has impinged on the inflation process. Services prices tend to be more rigid than goods prices because they embody a larger share of labor input, and wages tend to be sticky. This may have contributed to inflation having become more persistent. At the same time, the digital revolution has driven the prices of many modern services, such as telephone calls, news, and entertainment to essentially zero. 4 The upshot is that the link between inflation and domestic measure of economic slack, as traditionally captured in the Phillips curve, has weakened and disappeared altogether in some cases. In terms of growth, slowing global trade and the rise of services implies slower and less capital intensive economic growth. For highly open economies, slowing world trade has undermined export as a growth engine. At the same time, the transition to services has also contributed to the growth headwinds given that modern services is less labor and capital intensive than manufacturing. Think of Google’s 40,000 workforce compared to General Motors’ 800,000. Or the fact that Uber is the world’s largest provider of auto transport without owning any cars. Or that AirBNB is one of the world’s biggest provider of accommodation without owning a single hotel. Given that investment is a relatively interest rate sensitive activity, to the extent that the transition to services has dampened investment, it may have also made the economy less responsive to monetary policy. | The result can be disruption to the financial intermediation function with resulting constraints on the availability of credit for households and businesses. This, in turn, can lead to further reductions in aggregate demand that put additional stress on the weakened financial system. Obviously, this is not a favorable dynamic. Financial instability can impact the conduct of monetary policy via three major channels. First, financial instability can generate a sufficiently large shock to aggregate demand that the central bank may encounter the zero lower bound constraint – the constraint that the monetary policy instrument, for example, the federal funds rate – cannot easily be pushed below zero. In such circumstances, it may not be easy to fully offset the shock through the pursuit of a more stimulative monetary policy. At the zero bound, the central bank is not powerless, and may turn to other monetary policy tools such as forward guidance and large scale asset purchases. But these tools may not be as effective as lowering the short-term rate instrument. In particular, the central bank may not be willing to use these nonconventional tools to the full extent necessary to provide the same degree of stimulus as it would provide if it could set interest rates at negative levels. That might be because of uncertainty about how nonconventional tools will work or because of the potential costs associated with the use of such tools in terms of market functioning and the risks of future financial instability. | 0 |
The agreement being drafted by global regulators is now under fire from banks who say it is convoluted, expensive, heavy-handed and poorly tested, and who now seek to stall or derail it. Not devoid of a dry sense of humour and with a shy smile, Caruana is known as a diligent and rigorous technocrat, a fan of teamwork who avoids showiness. “The core of the issue is whether Caruana will be able to demonstrate his leadership in the next couple of months,” said one committee member who works directly with Caruana, who spoke under the condition of anonymity. “It's not easy to guide such a group of self-confident people,” the committee member said. “He's just trying to fight his way.” Part of the problem is that Caruana's predecessor, New York Federal Reserve Chairman William McDonough, left large shoes to fill. McDonough's unexpected retirement in June left critics wondering whether his successor would be able to hold together a global project. “There were definitely advantages in having a superpower in charge of this committee,” said the Basel Committee member. Karel Lannoo, head of the Brussels-based think tank Center for European Policy Studies, said Caruana is a strong player with anti-establishment nuances who should be able to push through the 4 BIS Review 39/2003 accord and even impart some Spanish character to it. “Caruana is, in the Spanish context, very well regarded,” said Lannoo, a frequent adviser to the European Commission and a member of the academic European Shadow Regulatory Commission. “He was a broker. | Money and credit, the universal instruments of commerce, could not exist without this most fundamental of financial technologies, which allows debits and credits to be netted off; debt to circulate as currency; money to replace memory; and with it, trade to expand exponentially. How much have we progressed since Keynes’ bed-ridden globalisation? Replace “telephone” with a “tablet” and “tea” with a “soy latteccino” and you have not the start of the Twentieth Century but the Twenty First, a century in which opportunities are no longer limited to men or denizens of the City. Nonetheless, finance continues to be arranged around a series of hubs like brokers, clearing houses and exchanges; whereas, in other domains, people form connections directly, instantaneously and openly, and this is revolutionising how they consume, work, and communicate. The extent to which finance continues democratising and transforming depends on superficially arcane, but fundamentally vital, enabling technologies. The emergence of mobile telephony, the ubiquity of the internet, availability of high-speed computing, advances in cryptography, and innovations in machine learning could combine to enable rapid changes in finance – just as they have in other areas of the economy. The ledger, once stone, wood, or paper – and always centralised – is now digital and may become distributed. FinTech has the potential to deliver more resilient financial infrastructure, more effective trade and settlement, and new ways to encode, share and analyse data. For the financial sector, these could offer shorter, speedier transaction chains; greater capital efficiency; and stronger operational resilience. | 0 |
In formulating policies to safeguard consumers' interests, adequate consideration needs to be given to ensure the appropriate level of consumer regulation without imposing excessive regulatory costs and burden on both financial institutions and consumers, and thus avoid compromising the benefits that the policies are designed to achieve. In this process, ethics and integrity cannot be legislated. Regulators, therefore, need to consider other approaches in preventing market abuses or misconduct and in promoting consumer confidence. Of importance is to evolve an appropriate incentive structure for financial institutions so that they recognise that it is in their best interests to foster fair and equitable business practices as part of good governance, corporate social responsibility and brand building. Good business practices need to be instilled and embedded in all aspects of the operations and at all levels within the institutions. On consumer education, it is recognised that with more well-informed and financially astute consumers making better financial decisions, competition is promoted among the financial service providers. Moreover, market efficiency would improve with the creation of new products and services that are more responsive to the requirements of consumers. In relation to this, financial literacy has become a vital skill in this increasingly more complex financial world, characterised by increasingly sophisticated financial products and services and growing diversity in financial service providers and distribution channels. While the overarching objective of consumer education is to impart knowledge that will improve consumers' financial decisions, it cannot be assumed that equipping consumers with more information will automatically lead to improved financial behaviour. | Zeti Akhtar Aziz: Empowering consumers for a progressive and sustainable financial system Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Third International Forum on Financial Consumer Protection and Education "Fostering Greater Consumer Protection and Education", Kuala Lumpur, 14 December 2005. * * * Let me first of all extend a warm welcome to all of you to this Third International Forum on Financial Consumer Protection and Education. Malaysia is most honoured to host this conference. I understand that we have participants from across the globe, including for the first time, delegates from the Middle East and Africa. A forum such as this not only allows for greater engagement among regulators and brings about a better understanding on the issues confronting us but also contributes towards advancing forward the development agenda. Promoting a sound and progressive financial system is a vital and key pre-requisite to achieving sustainable economic growth and development. This recent decade has seen a significant transformation of the financial landscape shaped by the forces of globalisation, advances in technology, the trend towards greater market orientation and financial innovation. In this more dynamic environment, the maintenance of financial stability has become increasingly more complex and challenging. The requirements and expectations of consumers are also changing rapidly in tandem with the increased education levels, growing wealth and greater affluence. | 1 |
Villy Bergström: Monetary policy and wage formation in Sweden Speech by Mr Villy Bergström, Deputy Governor of Sveriges Riksbank, at the HSB Bank’s Finansdag, Stockholm, 13 November 2002. * * * Let me begin by thanking you for the invitation to come to HSB and for giving me the opportunity to discuss wage formation. As you know, the Riksbank's objective is an inflation rate - measured against the annual change in the consumer price index (CPI) - limited to 2 per cent, with a tolerance interval of +/- 1 percentage point. As interest rate decisions affect price pressure, partly through resource utilisation, with a certain time lag, monetary policy needs to be based on the total assessment of the rate of price increase one to two years ahead. Payroll expense accounts for approximately 70 per cent of the total value added in the economy and is thus crucial to the development of costs and prices. Wage formation has also gained increased topicality since the Swedish Municipal Workers' Union decided to terminate its collective wage agreement before the third year. The Riksbank's assessment in the October Inflation Report also pointed to high wage increases as a potential risk factor for domestic inflation. New conditions for wage formation in the 1990s New conditions for wage formation were created at the beginning of the 1990s. Monetary policy became more clearly focussed on maintaining low inflation and tighter fiscal policy was necessary to consolidate public finances. | In general, blue-collar workers' wages have increased more slowly that those of white-collar workers and wages in the local government sector have increased more slowly than those in the private sector, while wages in central government and regional government have developed relatively well. Relative wage changes are perhaps the most difficult wage formation issue in a low inflation economy, as the social partners must be able to manage wage imbalances between different groups' wage situations without generating a wage spiral. Employees do not merely watch real wages, but also their relative wages, which were previously institutionalised with earnings development guarantees built into the agreements. Previously, high inflation facilitated relative wage changes, but in a low inflation regime it is more difficult for a group to raise its wages as it must entail other groups receiving lower nominal rises and perhaps no real increase. At the same time, one must be aware that relative wage changes are a necessary element in a market economy. There is currently a shortage of labour in health and welfare, so from a labour market perspective it is natural that this shortage will be expressed in higher relative wages in these areas. Larger retirement pensions combined with a greater need for care services over a longer period due to demographic developments will aggravate this labour shortage in future. | 1 |
It needs to be enough to withstand extreme but plausible events for long enough to allow an assessment of whether the firm can be rescued as a going concern – or whether changes in the external world have holed the business model below the water line: no amount of capital can keep a broken business model afloat for ever. Rather, capital is like the bulkheads in the sinking ship: they don’t necessarily need to hold back the water forever, but must slow down its ingress for long enough to get the passengers and crew safely into the lifeboats. How long the defences are needed depends on the design of the ship – where are the lifeboats, are they clearly signposted, how many stairwells are there from the lower decks, and so on. So ease of exit is a crucial factor in capital adequacy too: how confident are we that policyholders can be protected in a worst case scenario, i.e. that if the firm is closed to new business the run off will be a solvent one. Do existing concentrations get worse or new ones arise during run off? Do new liabilities or exposures appear e.g. through higher collateral requirements or even forced close out by derivatives counterparties? The less confident we are that the firm can exit in an orderly way, the more remote we need to make the prospect of failure and the larger the cushion of financial resources we will need to see at the point of intervention. | The bears may have seen their bargain flat pack furniture in a different light when they discovered how easily the chairs were broken by a little girl. Similarly, financial services supplied by undercapitalized firms are poor value as they cannot be relied on. And if policyholders cannot reliably distinguish the sound firms from the others, the whole sector is tainted – to the cost of us all as economic activity that relies on being able to lay off unsupportable risks is depressed. On the other hand, if prices are unnecessarily high that can also reduce or prevent risk transfer, and this can have a knock-on effect on economic activity and long-term investment. There is a balance to be struck. As I said in my opening remarks, I do not believe that we have that balance badly wrong at the moment. I hope that I have convinced you that, like Goldilocks in the more familiar version of the story, regulators do want to get it just right: we aren’t continually hankering after the largest chair, the softest bed, or the hottest porridge. And we are as open to evidence about what constitutes ‘just right’ as we are to how best to correct the distortions introduced by the current design and calibration of specific measures in the regime. | 1 |
For Phillips Curve to work, the loss of welfare from a negative cumulative real wage gap has to be fully compensated first – as a stock measure, not as a flow. The policy implication from this finding is that, for those countries which have not closed their cumulative real wage gap (most of the developed economies), inflation will remain subdued until they close their cumulative wage gap. Distinguished guests, I would like to thank the organizers, Central Banking, for inviting me to speak about a very topical issue: subdued inflation. Inflation has been subdued in the post-crisis years, and the Phillips Curve has failed to explain it. It is probably the greatest mystery of the economic science in the last decade: where has the Phillips Curve gone? There are multiple references to the fact that the Phillips Curve has flattened over the last decade, if not earlier (to mention just a few: Forder (2014), Leduc and Wilson (2017), Borio (2017), Carney (2017), Cunliffe (2017), Praet (2016, 2018), Spencer (2017), Murphy (2018), Bullard (2018)). The flattened Phillips Curve and the lesser link between inflation and unemployment, inflation and output gaps, or inflation and wages, have multiple explanations. | For each wage adjustment episode in a country, the data sample starts at year T0 (the peak year) and it ends when a new peak is detected (at year T0 new – 1). We apply this only if the cumulative real wage gap has been closed before reaching the new peak. If the cumulative wage gap has not been closed, then we continue to consider the new peak as part of the same adjustment episode. A wage adjustment episode within a larger wage adjustment episode is not considered. This approach prevents data overlapping and it secures research consistency and integrity. In the analysed period, there were three historical episodes of wage adjustments. Data shows that the cumulative real wage gap was closed in all countries which experienced the first wage adjustment episode, with the exception of two countries (Japan and Korea). In the case of the second wage adjustment episode, the cumulative real wage gap has not yet been closed, with the exception of other two countries (Mexico and Latvia). These latter two countries entered a new wage adjustment episode, the third one. For simplicity reasons, the wage adjustment episodes are numbered with reference to the time periods and not to the country-specific episodes. We considered as the first wage adjustment 5 episode any episode which started in the last decade of last century (1990-1999) and the second wage adjustment episode any episode which started after the year 2000. | 1 |
It is important for mobile payments to use the same underlying solutions, such as the industry’s own instant payment solution or an enhanced BankAxept system. This will provide cheap and accessible solutions for customers, regardless where they hold an account, and entails economies of scale. In some cases, this will also result in faster payments. Norges Bank will seek to initiate a dialogue with the industry on this matter. I have also noted that there are many operators that are now working to develop common terminal solutions for mobile payments. Time will show what the concrete solution will be. For the system to work efficiently, users must have good information about the services. Optimally, the prices charged to users should reflect costs. 2 BIS central bankers’ speeches A more decentralised financial infrastructure? Today’s financial infrastructure is largely centralised. Transactions pass through one or several intermediaries before final approval and settlement in a central bank or a central securities depository. At the core of a centralised payment system is the account system in the central bank. Each bank holds an account with the central bank and settlement between banks is effected by moving funds between these accounts. At the level below the central bank, the payment system consists of several layers of accounts. Banks that hold an account with the central bank have their own account system for customers. A payment between customers in different banks therefore passes through many stages, and they are verified at each stage. | Cyber security The consequences of cyberattacks can be considerable. What we are now witnessing is probably just the beginning. We must find a suitable way to mitigate risk, without making our systems needlessly expensive. Cyber-security challenges are among the most significant challenges to our payment system. Without an efficient defence system, trust in the system can be undermined over time. For its part, Norges Bank is devoting considerable resources to securing its systems, oversight of activities and implementing measures to protect against cyber attacks. As part of oversight and supervision, we will increase our monitoring of cyber-security risks in the payment system. This requires cooperation, both nationally and internationally, to identify and combat cyberattacks. Nationally, this takes place through, for example NorCERT, part of the Norwegian National Security Authority (NSM), and for the financial sector through the Norwegian Financial Sector Cyber Security Center (FinansCERT) under Bits. The Nordic financial sector has established 3/5 BIS central bankers' speeches Nordic Financial CERT as an extension of the Norwegian FinansCERT. The need for cooperation does not stop at a Nordic level. The challenges are international, and are shared by private financial undertakings, their service providers and subcontractors and authorities in many countries. Measures to promote cyber security are technically complicated and require specialist expertise. But it is management and boards of directors in institutions and companies that have the final responsibility and decide strategy and resource use. This responsibility cannot be delegated or outsourced to others. Owners and managers must be aware of their ultimate responsibility. | 0 |
In first discussing the causes of the turmoil, I shall argue that individual jurisdictions, no matter how sound their economic fundamentals, no matter how effective their financial management, are finding it more and more difficult to cope on their own with an increasingly global and volatile financial system. And I shall sketch out Hong Kong’s recent experience as a striking illustration of this problem. I shall then focus on what I see as the solutions to the crisis, emphasising that they should not simply address current problems: they should also aim at fostering the conditions that will help to minimize the extreme volatility that we have seen in our region over the last eighteen months. The causes of the turmoil Poring over the various commentaries week after week, and matching them against the initiatives that are being taken within the region and beyond, I have been struck by the way in which changing perceptions of the causes of the crisis have had an important influence on the solutions that are put forward. Over the last eighteen months the description of the problem has moved from being local to regional to international. As our own regional turmoil, in combination with other crises elsewhere in the world, threatens the stability of the whole global financial system, the focus is more and more on finding international solutions rather than on merely writing out prescriptions for individual economies. | The current turmoil has interrupted some of this progress, and has reminded us that rapid economic expansion is not without its risks. The damage to some economies has been severe. But the foundations remain strong, and the prospects for the next half-century are, in my view, favourable ones. The signs of economic revival are already with us. Recovery may be a BIS Review 2/1999 – 10 – longer and more difficult process than some of us had expected a year or more ago. But there is no doubt that it will come. It is now up to us, as partners in this large and diverse region, to seize the initiative, and turn that recovery into an enterprise that will make us stronger, more cohesive, and more capable of managing the stresses and uncertainties that a global financial system must inevitably produce. * BIS Review 2/1999 * * | 1 |
The extreme example is of course the collapse of communism but the global spread of privatisation, for example, is part of the same phenomenon. This change may have less to do with a sudden dramatic shift in philosophical conviction than with a broadly-based, pragmatic, recognition that the incentives of private ownership within a market economy make for greater productive efficiency and greater sensitivity to changing consumer demands. In other words, whether we like it or not, the market economy is seen as the most effective mechanism we have for allocating scarce resources to where they can be most productively employed in meeting the needs of consumers as a whole - and in that sense raising the underlying productive potential of the economy. But of course that presumption is not absolute. No one questions the role of government in meeting the collective needs of society as a whole, in relation to defence or law and order, for example, or in providing public heath and education services or social security protection. Nor do many people seriously question the need to constrain purely free market behaviour through some degree of regulation of employment practices, health and safety standards, or competition or consumer protection law. The debate is about questions of degree. All forms of government intervention involve costs - direct expenditures have to be paid for through taxation and the costs of complying with regulation are born directly by the private sector, which is why of course we hear so much about “red tape”. | The net effect of particular forms of intervention may enhance the capacity of the private sector to create wealth and employment - I imagine that most people would generally regard public health and education services, for example, in this way, or forms of regulation that enable markets to function more effectively. But even then there are questions of degree. And other forms of intervention may be more likely to reduce the wealth-creating capacity of the private sector by, for example, blunting incentives either to provide or to take up employment. That is not, of course, to say that they are in any sense necessarily wrong, merely to point out that here again choices to be made, the difficulty often being to know where to strike the balance between conflicting objectives. The question of relieving poverty needs to be addressed within this framework. Our social conscience may say that we should lean more towards redistribution in favour of the poorer sectors of our community generally, or in favour of those who are particularly disadvantaged in one way or another and goodness knows there are endless causes that in themselves are worthy of our collective support. 3 BIS Review 110/2000 But it is important to recognise that in doing so, we could reduce the wealth and income generating capacity of the economy as a whole, and so reduce our ability to provide rising living standards to all sectors of society, including rising absolute living standards of the poorer sectors we were seeking to help. | 1 |
The progressive lifting of these restrictions in Q2 allowed a gradual recovery in activity to ensue. Indeed, in Q3 as a whole, GDP is estimated to have risen by 16.7% on the previous quarter, according to INE’s flash QNA estimate released last Friday. Notably, in any event, this high quarter-on-quarter rate is largely a statistical consequence of the marked fall-off in output in the two previous quarters. Hence, and returning to the incomplete nature of the current recovery I referred to earlier, it is important to bear in mind that Spanish GDP in Q3 was still 8.7% down on the same period a year earlier and 9.1% below the end-2019 figure. Moreover, as I shall set out in detail later, the intensity of this recovery will have been adversely affected since early July by the fresh outbreaks of the virus in our country, which have prompted a fresh deterioration in the epidemiological situation. 3 GDP aside, the pandemic has also had a very significant negative impact on the labour market. Part of this impact has been through the decline in social security registrations, which at end-September were 2.3% below their level in the same period in 2019 (almost 440,000 fewer registrations) and 2.7% down on the end-2019 figure (532,000 fewer registrations). An even greater part of the negative impact of the pandemic on employment has taken the form of the recourse to furlough schemes (ERTEs by their Spanish abbreviation). Thus, at end-September, the employment of almost 730,000 workers had been fully or partly suspended. | The fiscal adjustment drive has been most significant, as shown by the structural primary balance (the cyclically adjusted balance, excluding interest payments), which posted a correction of 1.2 pp of GDP. 2013 was the first full year of application of the mechanisms of the Budgetary Stability and Financial Sustainability Law approved in 2012. Moreover, measures were taken to improve the sustainability of public pensions (the sustainability factor and revaluation index). Private-sector deleveraging and bank lending To conclude this section, I will refer to the correction of private-sector overindebtedness. The Spanish economy’s cyclical position suggests, along with past experience, that several quarters of economic growth will still be necessary before lending at the aggregate level resumes positive growth rates. However, there were actually signs of an improvement in this connection in 2013. Since mid-year, lending to companies has been shrinking at increasingly lower rates, a change which has begun to be discernible also in the case of households since early 2014. The more disaggregated analyses conducted by the Banco de España support the idea that the contraction in debt at the aggregate level is proving compatible with a shift in the mix of BIS central bankers’ speeches 3 debt towards those companies in a sound position which are, therefore, better placed to channel funds to new investments that translate into more growth and more employment. Spanish banking sector I will now refer to the position of and outlook for our banking sector. | 0 |
I said I would come back to Simple, Transparent and Comparable (STC) securitisation. Unfortunately, we have done our best to confuse people by using a bewildering range of acronyms and terms for this project – STC, SST, STS, qualifying, high quality etc. Today I 1 The case for a better functioning securitisation market in the European Union: a discussion paper, European Central Bank and Bank of England, May 2014. 2 Joint response from the Bank of England and the European Central Bank to the Consultation Document of the European Commission: ‘An EU framework for simple, transparent and standardised securitisation’, March 2015. BIS central bankers’ speeches 1 am using the STC term developed by the taskforce of global banking and securities regulators that I co-chair. But I can reassure you that these will be brought together into a single set of criteria in European legislation. I believe the intention is that they will then be applied consistently across different sectors – for example, banks, insurers and funds – and different regulations – for example capital and liquidity. I see the aims of the STC criteria as threefold. First, to help investors. An STC securitisation should meet the “What You See Is What You Get” principle. The structure should not have hidden traps or complications, allowing investors to focus on analysing the credit quality of the underlying assets. But, importantly, the STC criteria are not a credit opinion on those assets and STC will certainly not mean “risk free”. Second, to help issuers. | As well as potentially helping to broaden the range of investors, the STC criteria should make risk transfer more robust. And third, to help regulators. Setting risk sensitive capital requirements for securitisation tranches is challenging. One solution is to use credit ratings but the shortcomings of that approach were exposed during the crisis. Another is to use a regulatory formula capturing dimensions of risk such as the credit quality of the underlying pool, tranche seniority and maturity. In our view, including a differentiation based on STC in that capital calculation helps to capture other important dimensions of risk related to structure, transparency and governance. Because one of our objectives is to broaden the investor base, it is important that the STC designation makes things simpler for investors, particularly non-banks. For example, they should be able to place greater reliance on it when conducting their own due diligence on matters covered by the STC criteria, such as risk retention. Investors would thus be in a position to concentrate with more confidence on other, existing due diligence requirements, such as in relation to the creditworthiness of the underlying assets and cash flows characteristics. The implementation process for the STC designation is therefore important. In our view, the primary obligation should be on the originator to attest compliance with the criteria. But this needs to be in the context of a regulatory regime with effective supervisory oversight and sanctions. We must also be careful not to label all non-STC transactions as “bad”. | 1 |
To conclude the first part of my remarks, the crisis has revealed the need for economic policies, and monetary policy in particular, to have a largely medium-term orientation, rather than supporting the procyclical behaviour of agents. To this end, central banks must pay considerable attention to developments in the financial markets, both domestic and global, in order to identify potential imbalances and forestall their effect on monetary and financial stability. The analysis that I have just conducted with regard to monetary policy clearly needs to be extended to other policy areas, such as fiscal policy or financial regulation. It is essential to conduct an in-depth analysis of these subjects in order to fully understand which problems caused this crisis and how to rectify them in order to prevent them from happening again. An interesting aspect, in some ways worrying, is that despite the consensus that has developed with regard to the analysis of the past, and the causes of the crisis, there does not seem to be a great deal of willingness to incorporate the lessons learned into present and future behaviour. To paraphrase St Augustine, give economic policy-makers more chastity and continence, but not yet. It is this apparent contradiction that leads to the view that this level of analysis is insufficient. I believe that we need to ask an additional series of “why” questions in order to understand thoroughly what induced economic policy-makers to make certain choices. A traditional response to this question is the short-sightedness of politics, which also applies to economic policy. | The baseline scenario reflects the developments that the Board believes to be the most likely to occur with the information at hand at the statistical closing of the Report. However, there are risk scenarios that, if materialized, might change the macroeconomic outlook and, therefore, the course of monetary policy. On this occasion, after evaluating the alternative scenarios, the Board estimates that the risk balance is downward biased for output and unbiased for inflation. On the global front, a first risk comes from China, namely the fragility of its financial system, among other factors. As I said at the beginning, the banks’ off-balance-sheet financial intermediation has been increasing and credit has accumulated enormous growth in the past few years, with a substantial portion going to local governments. In other economies, episodes of rapid credit growth have resulted a few years down the line in a deterioration of the quality of banking assets and financial intermediaries’ balance sheets, and in a slowdown in domestic demand. Although the Chinese financial system has some features that differentiate it from others, there is no denying that any difficulties in this field could have negative effects on China’s growth for a longer period. If so, it would hurt world growth and commodity prices, particularly for copper. A second risk coming from abroad has to do with the way emerging economies will accommodate the withdrawal of monetary stimulus packages in developed countries. | 0 |
If a situation arises where Norges Bank is not able to return the krone to its initial range without such consequences, as already mentioned, the Bank will inform the government authorities that measures BIS Review 105/2000 10 other than those available to the Bank are required. This may involve recommendations concerning fiscal measures that make it possible to return the krone exchange rate to its initial range and to stabilise it. In the event of pronounced and prolonged shifts in the economy, fiscal policy and wage determination must contribute to restoring balance in the economy. However, if fundamental and permanent changes have taken place in the framework conditions for the Norwegian economy, it may also be appropriate to consider a revision of the guidelines for monetary policy. Monetary policy instruments In theory, Norges Bank conducts its monetary policy through two main instruments: the interest rate and exchange market interventions. However, in Norges Bank’s experience, extensive and sustained interventions to influence exchange rates have yielded poor results. Interventions can often lead to game situations in which market operators regard the central bank’s attempts to influence the exchange rate as an interesting opportunity to make a profit. Events in autumn 1992, at the start of 1997 and in autumn 1998 show that exchange market interventions cannot stem the pressure on the krone. This is why Norges Bank’s primary instrument of monetary policy is the interest rate. The interest rate is a powerful instrument for influencing cyclical trends, and thus inflation, in Norway. | This is due in part to the weakness of the euro, not least against the US dollar and the Japanese yen. On the other hand, the effective krone exchange rate - the krone exchange rate measured against an average of our trading partners’ currencies - has not been particularly strong. If Norges Bank were to respond to this situation by using the interest rate to attempt to fine-tune the krone exchange rate against the euro in the short term, this would lead to higher price and cost inflation. This would lay the foundation for subsequent instability in the krone exchange rate. 13 BIS Review 105/2000 The orientation of monetary policy in the past year (and in the future) Projections of future inflation and macroeconomic developments play an important part in the orientation of monetary policy. Norges Bank’s projections are published in quarterly Inflation Reports, which provide an overview of recent price trends and factors influencing price and cost inflation. These Inflation Reports contain a review of the outlook for the Norwegian economy, and the Bank’s projections of inflation with a two-year horizon. Norges Bank’s assessments are summarised in a leader in each report. If the Bank’s inflation projections, for a given interest rate scenario, do not approach the level of inflation aimed at by the euro area countries at a two to three-year horizon, this will constitute grounds for adjusting interest rates. This system has similarities with what Lars Svensson terms “inflation forecast targeting”. | 1 |
There are two ongoing initiatives to enhance financial infrastructure that I would like to draw attention to today. Both demonstrate the Bank’s willingness to define ourselves in terms of best practice of governance and transparency, and our ongoing commitment to working closely with end users of this infrastructure. The first is the reform of the SONIA overnight interest rate benchmark. In April next year the Bank will take on end-to-end administration of this key market benchmark, which is also a critical input to the MPC and FPC’s assessment of conditions in sterling money markets. The key outcome of the reforms will be to improve the sustainability and representativeness of this piece of infrastructure by using a broader dataset covering both brokered and bilateral transactions, collected as part of the Bank’s Sterling Money Market data collection. Following the implementation of SONIA reforms the Bank will publish an assessment of its compliance with IOSCO Principles for Financial Benchmarks, alongside an external assurance report. Consistent with those principles, a SONIA Oversight Committee comprising of a mix of Bank and independent members will provide scrutiny on all aspects of the benchmark. A more robust SONIA provides markets with a credible alternative to sterling Libor as a key reference rate and benchmark. Indeed SONIA has recently been confirmed as the market’s preferred alternative rate by the Sterling Risk Free Rate Working Group. That is a necessary step in ending the current over-reliance on Libor. | The increase may be a way of safeguarding the real economy in the long term A common reaction to the decision to increase the interest rate was that the Riksbank pays too much attention to inflation and too little attention to the real economy. I would like to comment on this claim. One reason for increasing the interest rate was that an increase was needed to prevent the high level of inflation from becoming entrenched. This could happen if the price increases for energy and food begin to spread to other areas. This could ultimately lead to a risk of the Riksbank's ability to hold inflation in check being called into question and of inflation expectations remaining at a consistently high level. This is what happened in the 1970s in many parts of the world, although inflation at that time became entrenched at much higher levels than would be the case today. But even though the levels are much lower today, it could still be relatively costly to get inflation back to the target. It cannot be ruled out that this could require quite a long period with high interest rates and restricted demand. There is thus a risk that conducting too expansionary a policy today would sooner or later give rise to costs in the real economy that, furthermore, could be quite considerable. I do not feel, therefore, that it is correct to say that the increase in the interest rate is an indication that the Riksbank does not care about the real economy. | 0 |
Bank governance would be a wealth-weighted democracy, a hybrid of the mutual and joint-stock models. This would help put risk incentives in the right place, while enhancing diversity within the financial system.16 (d) Performance and remuneration The behaviour of the financial system would be improved by an alternative set of performance metrics. The ideal metric would be less focussed on a narrow subset of the balance sheet (such as equity) and do a better job of adjusting for risk (than ROE). One metric satisfying those criteria would be return on assets (ROA). This covers the whole balance sheet and, because it is not flattered by leverage, does a better job of adjusting for risk. It would be a relatively small step for banks to switch from ROE to ROA targets in their capital planning and compensation. Yet the effects on risk-taking and remuneration could be large. Imagine if the CEOs of the seven largest US banks had in 1989 agreed to index their salaries not to ROE, but to ROA. By 2007, their compensation would not have grown tenfold. Instead it would have risen from $ million to $ million. Rather than rising to 500 times median US household income, it would have fallen to around 68 times.17 Conclusion The words “bank” and “bankrupt” have common etymological roots, dating from the 13th century. In the 13th century, it was bankers bankrupting banks. In the 21st century, bankers are still bankrupting banks. But it is no longer just banks. | This was followed with the establishment of other institutions, which included the Securities Commission and the domestic rating agencies. The Bank also put in place a comprehensive and modern depository, delivery and settlement system to facilitate the issuance, trading and settlement of debt securities in the market. Mechanisms to increase liquidity in the market to enhance the overall price discovery process were also introduced through the provision of updated market information. In addition, measures were also introduced to release the captive holdings and to facilitate the efficient borrowing and lending of securities. More flexible foreign exchange policies was also implemented to facilitate capital raising and investment by non-residents to further accelerate the development of our domestic bond market. Today, the Malaysian bond market is the largest in the ASEAN region, accounting for nearly 90 percent of our gross domestic product. Corporations now have access to more innovative and sophisticated financing solutions through the bond market to meet their diverse funding requirements. Financing through the bond market by the corporate sector now accounts for 58 percent of their total financing compared to 33 percent prior to the Asian financial crisis, when there was greater reliance on the banking system for financing. With the advent of new financing instruments and supporting infrastructure, trading activity in the secondary market have also increased by more than three fold, with the trading volume now amounting to RM516 billion. A key development of the Malaysian financial market is the enormous growth of the sukuk market. | 0 |
At the top is the head of the business groups, again of different job sizes. The next level is four kinds of work units reporting in a hierarchy or directly reporting to the head of business groups depending on the best way the work can be undertaken. This is in place of the previous system where there were six management levels and only one level of operation, which made for lengthy approval processes and inadequate delineation of responsibility. Personnel systems have also been totally redesigned with career development, performance and potential evaluation, as well as succession and replacement plans being already effective or soon to be implemented. A cornerstone of this may well be that at certain levels promotion is by examination rather than selection allowing capability to be a key determinant rather than just the traditional ability to get on well with people, primarily young superiors. In the more difficult areas of manpower, recruitment and pay structure, work has just begun or will begin early next year as this requires that the restructure of organization and work processes be rather complete. The restructure has still to be extended into a fully bank-wide process, whereas at present re-engineering of work processes and organization has begun at only four of the 25 businesses groups. Pay schedule will also have to be redesigned and here probably lies the biggest single difficulty, as in the lower-ranking jobs under the present scale, some people are paid five times more than another doing the same job. | The ceiling, being the average in the last decade of our 22 competitor countries, reflects our determination to be internationally competitive with them for the years to come. Our inflation targeting model, although linear-quadratic, shows the zone or banding features by exhibiting a fan-shaped prediction both for the GDP and inflation. The Inflation Report that we issue at the end of each quarter shows an advanced feature in that it gives a sensitivity analysis around a band of exchange rate and a range of oil prices, something countries more advanced than us have hitherto been unwilling to enter into. But as I have said, we are trying to be transparent and trying to get our people and investors to be able to act as accurately as possible and to form a view as to what the future of the economy might look like. We believe entirely that the better the estimates, the lower will be the costs one puts or has to put for taking the risk of investing in the economy and that, in the long run, the country will be more competitive using less resources to produce the same goods other countries are producing. For this reason, we are constantly trying to improve our techniques. | 1 |
W A Wijewardena: John Exter – central banker for all times Article by Mr W A Wijewardena, Deputy Governor, Central Bank of Sri Lanka, on the first anniversary of the death of Mr John Exter (Founder Governor of the Central Bank of Ceylon/Sri Lanka), issued to Sri Lankan newspapers, 28 February 2007. * * * The first death anniversary of John Exter, Founder Governor of the Central Bank, falls on 28th of February. He died in 2006 after living a very productive life for 95 long years. John Exter can be regarded as one of the history makers in modern Sri Lanka. He lent his wisdom, intellect and experience, without any reservation, for the establishment of the Central Bank of Ceylon, the name of the Bank at that time. The Bank was established in 1950 on the basis of the recommendations made by him as a one man committee, the report of which is now known as the Exter Report. He made history once again by becoming the governor of that maiden bank at the young age of 39, an age normally considered as too low for that prestigious and demanding position. His task was to establish the bank, staff it and lead it in the first few formative years, so that it could eventually be taken over by a Sri Lankan management. His history making did not end there. | However, Exter did not expect this arrangement to be effective at all times. Hence, he made the proviso that “it would depend on the men occupying the key positions” and not on any legal formula. He argued quite correctly that such complex and delicate relationships cannot be established full-blown by a piece of legislation. It must be the result of years of experience and the slow growth of political conventions. The writer has been questioned on this point on many occasions at numerous public fora. The position taken by him agrees fully with that of Exter. This position requires the critics to compare central bank’s independence with the relationship within a family unit. Both spouses have their personal interests, but work together for the well-being of the family unit. There are at times occasions where one spouse overrides the other. But, as a normal rule, the family unit moves forward without publicizing those internal family debates and sometimes family fights. This is the main lesson which Exter has left for us in the twenty first century. That is, both the Governor of the Central Bank and the Secretary to the Ministry of Finance should know their rights and responsibilities well and act on an ethical platform in which they continue to appreciate the distinctive roles to be played by them for the well being of the country. John Exter, in his wisdom, firmly believed that when laws fail, human beings working with moral consciousness could do wonders. BIS Review 20/2007 3 | 1 |
The MPC has used that flexibility to the full in recent years: it has been at the forefront of providing support to our economy in the aftermath of the financial crisis and it will continue to be so. But we must remember our mistakes of the past. Without credibility there can be no flexibility. And ultimately, the best contribution that monetary policy can make to sustainable growth and long-run prosperity is to deliver enduring price stability. That is important to remember in the face of suggestions that inflation is somehow yesterday’s battle and that the focus of monetary policy should be turned even more firmly towards growth. It should also be remembered when making difficult judgements about the likely trade-off between growth and inflation and about how far to push the MPC’s flexibility. 9 This consensus is a reflection of the belief that the long-run Phillips curve is vertical. Taken literally, the suggestion that it is possible for monetary policy to stimulate increased output with little or no increase in inflation points to a near horizontal long-run Phillips curve, at least over some range of output expansion. | And ultimately delivering low and stable inflation is the best contribution monetary policy can make to achieving a robust and sustainable recovery. The trade off between growth and inflation Let me turn now to the second issue I wanted to discuss today which concerns the operation of monetary policy and, in particular, the likely trade-off between growth and inflation in the current environment. As I said, in February the MPC made clear that we thought it appropriate to bring inflation back to target more slowly than usual in order to support the nascent recovery. But is there a case for monetary policy going even further? What if, as some commentators have claimed, it were possible for the MPC to inject additional monetary stimulus, thereby providing even greater support to growth, with relatively little consequence for inflation. Stronger growth with little or no higher inflation: surely that would be a good use of the MPC’s flexibility? There are two strands of argument put forward as to why the current trade-off between growth and inflation may be unusually favourable. The first is that cost and price pressures in the current environment may be relatively insensitive to the degree of slack in our economy. If that were the case, the economy could grow relatively rapidly, absorbing spare resources and capacity, without putting much upward pressure on wages and prices. In economists’ speak, the so-called Phillips curve – which sketches out the relationship between spare capacity and cost and price pressures – may be relatively flat at the moment. | 1 |
People experiencing such issues can go to the local branch network of Banque de France all over the country. Along with other stakeholders, we help them finding solutions to their financial difficulties. In 2018, more than 180.000 such situations were examined. Also, through our financial institutions supervisory arm, the ACPR, and in relation with the financial markets authority AMF, we make sure that banks and insurers have effective procedures in place to detect fragile clients and provide adequate solutions to them. This means for them proposing the specific banking offer I mentioned earlier to all those who might need it. But also ensuring that financial products are not sold to people who do not understand or cannot afford them – it can be a new consumer loan that would lead to overindebtedness, or an insurance policy that clearly does not fit the clients’ needs. In an ageing world, we need to make sure that older customers are not taken advantage of by abusive or deceptive practices. This part of our market conduct role is increasingly important for us and other authorities internationally – the 2019 Japan G20 Presidency has put it forward. Finally, to help improving financial literacy, Banque de France is the national coordinator of the involved stakeholders in that area. This is of course especially important for those at risk of financial exclusion. In that role, we notably provide specific tools, resources and training for social workers who are in touch with these people. | And they can also bring new risks: for instance, of leaving out those who are not at ease with digitalization, of creating unforeseen bias via automation of processes, or of leading to security issues for personal data that is not handled properly. So is the digital age a blessing or a curse for financial inclusion? To help us answer that question, there was a very interesting session this morning in the plenary on “a macro view on financial inclusion”. And this afternoon, you will have the opportunity to listen to a wide range of speakers, who will share their experience around many more topics: what is financial inclusion 2.0? Can blockchain play a role? what can regulators do? And where are we standing in developing economies where inclusion is the most needed, in particular in Africa? To contribute to these forthcoming discussions, let me share with you the perspective of a central banker and a supervisor, whose institution has been entrusted by law to support financial inclusion. I would like to highlight the different ways we currently support financial inclusion and how we intend to adapt them to the digital age and to improve them building on digital tools. 1/ What BDF does to support inclusion by the financial sector In the last decades, Banque de France has been entrusted with different tasks to support financial inclusion. Our contributions in that area are today quite diverse and is a major part of our mission to provide services to the public. | 1 |
Muhammad bin Ibrahim: The resurgence of payments in a digital world Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Malaysian E-Payments Excellence Awards (MEEA) 2018 "The resurgence of payments in a digital world", Kuala Lumpur, 11 April 2018. * * * Thank you for inviting me to speak today. Ten years ago, the word “payments” was only heard in small and exclusive circles. Those in banking understand the importance and criticality of the payment system. Huge resources are devoted to this function. Understandably so. Payment services are the bread and butter of banking and the lubricant for the economy. It is at the heart of all economic activities. Its services are indispensable. Yet, only a few took an interest in payments, except maybe those in the financial services community. Today, this situation has reversed. Payments is now at the top of everyone’s minds. Globalisation of the financial markets and the consequent flows of funds across borders necessitates modernisation and strengthening of the financial system. Huge investments are being put in place. Technological advancements accelerate this process. Out of the $ billion raised globally for fintech funding in 2017, 30% of the funds went to payment companies. In the third and fourth quarter of last year, 4 out of the top 10 global fintech deals were for payment services. A few factors have driven changes in the payments sphere; digitisation, competition and innovation. | Background slides BIS Review 51/2010 9 10 BIS Review 51/2010 | 0 |
Central Bank of Sri Lanka – ROAD MAP 2017 At the same time, we will continue to actively engage in liquidity management operations in the money market to guide 14 the short-term interest rates within the economic analyses for the purpose of desired path. formulating effective policies, while In order to ensure the effective implementation of monetary policy, we improving the transparency of monetary policy and policy communication. expect to introduce certain measures At the same time, in the process of with regard to OMOs, such as making more informed policy decisions, introducing fixed rate and variable rate we look forward to enhancing statistical auctions, and fine tuning auctions after inputs by introducing new indices on examining their need and feasibility in property prices as well as modifying line with other country experiences and wage indices, while improving the market needs. We will evaluate coverage of existing surveys to better alternative instruments to strengthen track developments in the private OMOs. sector. Reflecting these measures, inflation is The Central Bank will continue to expected to remain at mid-single digit communicate policy decisions among levels in the medium-term. | During the more extreme periods of the Asian crisis, however, one of the main concerns of market participants was the high level of uncertainty in the market about whether and to what extent lender of last resort support would be forthcoming should it be required. In fact, the liquidity shortages experienced during the more volatile periods may have been in part attributable to this market uncertainty. Arguably, this uncertainty may also have aggravated the credit crunch during the crisis periods. The introduction of the Discount Window in September 1998 has helped to ease this problem. A greater knowledge and awareness of the availability of a lender of last resort facility will, we hope, further help to reduce uncertainty, and will, in turn help to improve overall market liquidity in the event of future crises, should they arise. A formalised policy framework will also help the HKMA itself to ensure speed and consistency in considering whether or not to extend lender of last resort support. A quick response in an uncertain environment could be of vital importance in helping to restore stability and confidence to the banking system. But it must be acknowledged that there are also good arguments for not saying too much on the subject. The HKAB, while expressing general support for clarification, has rightly observed that the HKMA must be able to maintain sufficient flexibility to be able to handle widely differing situations, to deal with abrupt changes, and to take action in a timely way. | 0 |
In Sweden, the Riksbank has regularly highlighted many of the risks in the financial system. We did so most recently in our Financial Stability Report. There we pointed out, for instance, that the financial turbulence might worsen and that the banks' access to funding could deteriorate. At the same time, we have all along made the assessment that financial stability in Sweden has been satisfactory. We make the same assessment now, and the Swedish banks are financially strong. 2 BIS Review 115/2008 As we have seen, a lot has happened on the financial markets recently. We are following developments closely, constantly updating our analyses and we are prepared to take action if necessary. We have regular contacts with banks, market participants and other government agencies, as well as our central bank colleagues in other countries. There is a generally high level of uncertainty in the world economy at present and this will probably persist for a good while to come. I would therefore like to return now to what I mentioned at the beginning – the inflation target and the stability it offers to the economy, particularly when storms are raging all around us. Monetary policy – focus on the inflation target The objective of monetary policy is to maintain price stability and this has been established by law since 1999. To be more precise, inflation measured in terms of the consumer price index, CPI, is to be held at 2 per cent, with a tolerance interval of +/- 1 percentage point. | However, this is not a convincing argument. Swedish conditions also affect the prices of the goods we import. The world market price of a product is not the price that Swedish households see in the shops. The value of the krona in relation to other currencies for example plays a part. Demand and factors such as transport, mark-ups in the wholesale and retail channels are also significant. What the Riksbank can do is to conduct well-balanced monetary policy so that consumer prices on average rise by 2 per cent a year. When the Riksbank raises the repo rate, demand is dampened, which reduces the scope for price increases in all areas, including energy and food. It is important that monetary policy is aimed at keeping down the general price increases and that the inflation target is not redefined merely because some prices are rising more than others. Households’ total purchasing power is affected when prices of imported goods change, and this would be the case even if we had an inflation target that excluded these prices. When, for instance, the price of oil rises over a longer period of time there is a risk that price increases will spread to other areas of the economy. This risk would hardly decline if the inflation target was formulated differently. Of course one must be open to change that could improve the current monetary policy regime. But it is important to think things over very carefully. And we shouldn't fix something that isn't broken. | 1 |
Part of the initiative must begin at home, since without effective domestic management international initiatives will lack a sound foundation. The Asian crisis has demonstrated that the approach towards capital account liberalization in some Asian economies was clearly inappropriate, given the weaknesses in domestic financial sectors. Poor supervision, lax accounting standards, close relationships between lenders and borrowers, and inadequate prudential safeguards all conspired with “hot” capital inflows to fuel the crisis. Again, it is worth pointing out that this is not purely an Asian problem, as the LTCM episode revealed. Prudential regulation begins at home, but it must also be extended into a global prudential and regulatory framework, which would be an aid, not a hindrance, in the general trend towards a more liberal financial environment. A third part of the reform must address cross-border manipulative practices in financial markets. Rules exist against the cornering of domestic financial markets. The blatant collusion and coordination in the various recent attacks on Hong Kong’s markets, and the phenomenal financial resources the manipulators have been able to muster, underscore the need for domestic anti-trust principles to be applied to cross-border financial speculation. These are matters of some urgency, and there is already a clear international consensus that they are necessary. Measures of the kind that I have just outlined are under active discussion in various international forums, including, at the latest count, the IMF, BIS, APEC, EMEAP, G7, G10 and G22 or G26. | Margin call clearly and inevitably puts pressure on those on the wrong side of derivatives contracts. Given its importance in the system, we need to be as sure as we can that margin call, both between CCPs and clearing members and between clearing members and their clients, is both prudent and justified. In particular we should look at whether under-calibration of margin in normal times led to ‘catch-up’ margin calls in the stress. We should also revisit whether there is more that can be done to reduce procyclicality of margin call under stress by building larger buffers in normal times. Some jurisdictions have, for example, introduced specific measures to mitigate procyclicality in margin requirements and we should examine how these performed in the March stress. But given that clearing and margining are important risk mitigants in the system, the answers may lie more in ensuring that that financial market participants, be they hedge funds or pension funds, understand how margin call can evolve in a stress and have the resilience to manage the consequent liquidity pressures. As the search for liquidity intensified, money market funds (MMFs) came under pressure. Post crisis reforms in the US and in other jurisdictions had sought to make MMFs stable under stress, to reduce ‘first mover’ advantages and incentives for investors to ‘run’. However, under the recent stress, MMFs appear again to have been a source of vulnerability in the system. As the demand for liquidity grew and market participants drew down their investments in money markets, MMFs saw substantial withdrawals. | 0 |
Across the banking book, a large bank might need to estimate several thousand default probability and loss-given-default parameters (Table 1). To turn these into regulatory capital requirements, the number of parameters increases by another order of magnitude. It is close to impossible to determine with complete precision the size of the parameter space for a large international bank’s banking book. That, by itself, is revealing. But a rough guess would put it at thousands, perhaps tens of thousands, of estimated and calibrated parameters. That is three, perhaps four, orders of magnitude greater than Basel I. If that sounds large, the parameter set for the trading book is almost certainly larger still. To give some sense of scale, consider model-based estimates of portfolio Value at Risk (VaR), a commonly-used technique for measuring risk and regulatory capital in the trading book. A large firm would typically have several thousand risk factors in its VaR model. Estimating the covariance matrix for all of the risk factors means estimating several million individual risk parameters. Multiple pricing models are then typically used to map from these risk factors to the valuation of individual instruments, each with several estimated pricing parameters. Taking all of this together, the parameter space of a large bank’s banking and trading books could easily run to several millions. These parameters are typically estimated from limited 10 Basel Committee on Banking Supervision (2004). 11 Basel Committee on Banking Supervision (2010). | Yet the regulatory response to the crisis has largely been based on the level of thinking that created it. The Tower of Basel, like its near-namesake the Tower of Babel, continues to rise. An alternative point of reference when regulating a complex system would be to simplify and streamline the control framework. Based on the evidence here, this might be achieved through a combination of five, mutually-supporting policy measures: de-layering the Basel structure; placing leverage on a stronger regulatory footing; strengthening supervisory discretion and market discipline; regulating complexity explicitly; and structurally re-configuring the financial system. (a) Reconstructing the Tower of Basel The quest for risk-sensitivity in the Basel framework, while sensible in principle, has generated problems in practice. It has spawned startling degrees of complexity and an 14 BIS central bankers’ speeches over-reliance on probably unreliable models. The Tower of Basel is at risk of over-fitting – and over-balancing. It may be time to rethink its architecture. A useful starting point might be to take a more sceptical view of the role and robustness of internal risk models in the regulatory framework. These are the main source of opacity and complexity. With thousands of parameters calibrated from short samples, these models are unlikely to be robust for many decades, perhaps centuries, to come. It is close to impossible to tell whether results from them are prudent. One simple response to that concern may be to impose strict limits, or floors, on model outputs. These would provide a binding regulatory backstop. | 1 |
Rather they “own” least, as residual claimants. Associating “shareholding” with “ownership” thus makes little substantive sense, despite its widespread use in popular discourse. Indeed, it is precisely because shareholders own least, not most, that justifies granting them control rights over management in the first place. By vesting control rights in the stakeholder whose claim is riskiest, the firm is immunised against taking too much risk in the first place. The shareholder model is thus, in principle, incentive-compatible, as it properly aligns risks and rights within a company. 19 10 Research with Peter Richardson and Matthew Willison casts these results in a theoretical model (Haldane, Richardson and Willison (forthcoming). BIS central bankers’ speeches The problem with this line of argument, as Martin Wolf of the Financial Times has articulated brilliantly, is that it confuses diversifiable and un-diversifiable risk (Wolf (2014)). While shareholders hold the residual risk in a company, this risk can easily be diversified away by holding a broad portfolio of assets. Shareholders are hence likely to be rather risk-insensitive and unlikely to discipline risk-taking by management. Interestingly, the situation is different for other stakeholders in the company – for example, employees, customers and clients. Typically, the company risk they face is not easily diversifiable. They cannot easily invest in a portfolio of jobs, or products or supply lines. So their incentives to restrict excessive risk-taking are likely to be, if anything, sharper and more acute than among shareholders. | Today, that fraction is less than 15%. There has also been a sharp fall in the fraction of shares held directly by individuals, from more than 50% in the 1960s to little more than 10% today. Today, these individual holdings tend to be indirect, operating through investment intermediaries of various types. That means the beneficial owners of shares – individuals – tend to have little direct communication with, involvement in, or indeed knowledge of, the firms in which they are investing. One consequence of a more dispersed and disinterested ownership structure is that it becomes harder to exert influence over management, increasing the risk of sub-optimal decision-making. 17 There is some empirical support for this hypothesis. For example, companies tend to have higher valuations when institutional shareholders are a large share of cashflow, perhaps reflecting their stewardship role in protecting the firm from excessive risk-taking (La Porta et al (2002), Claessens et al (2002)). (c) Short-termism A third friction in the manager/shareholder relationship, distinct but related, arises when different classes of shareholder have different rates of time preference. In particular, there have been concerns about the rising share of investors with excessively high discount rates and low holding periods – in other words, about “short-termism” (Kay (2012)). There is clear evidence of the investor scales having rebalanced in this direction over time. Average holding periods of shares have been in secular decline in a large number of countries for a number of decades (Chart 1). | 1 |
Two obvious examples: we need to make it much more difficult for institutions with little capital and little supervision to underwrite mortgages, and we need to look more comprehensively how to improve the incentives for institutions that structure and sell assetbacked securities and CDOs of ABS. And supervision will have to focus more attention on the extent of maturity transformation taking place outside the banking system. Second, risk-management practices and supervisory oversight has to focus much more attention on strengthening shock absorbers within institutions and across the infrastructure against very bad macroeconomic and financial outcomes, however implausible they may seem in good times. After we get through this crisis and the process of stabilization and financial repair is complete, we will put in place more exacting expectations on capital, liquidity and risk management for the largest institutions that play a central role in intermediation and market functioning. This is important for reasons that go beyond the implications of excess leverage for the fate of any particular financial institution. As we have seen, the process of de-leveraging by large but relatively strong institutions can cause significant collateral damage for market functioning and for other financial institutions. Inducing institutions to hold stronger cushions of capital and liquidity in periods of calm may be the best way to reduce the amplitude of financial shocks on the way up, and to contain the damage on the way down. | Once the investors in these financing arrangements – many conservatively managed money funds – withdrew or threatened to withdraw their funds from these markets, the system became vulnerable to a self-reinforcing cycle of forced liquidation of assets, which further increased volatility and lowered prices across a variety of asset classes. In response, margin requirements were increased, or financing was withdrawn altogether from some customers, forcing more de-leveraging. Capital cushions eroded as assets were sold into distressed markets. The force of this dynamic was exacerbated by the poor quality of assets – particularly mortgage-related assets – that had been spread across the system. This helps explain how a relatively small quantity of risky assets was able to undermine the confidence of investors and other market participants across a much broader range of assets and markets. Banks could not fully absorb and offset the effects of the pullback in investor participation – or the "run" – on this non-bank system, in part because they themselves had sponsored many of these off-balance-sheet vehicles. They had written very large contingent commitments to provide liquidity support to many of the funding vehicles that were under pressure. They had retained substantial economic exposure to the risk of a deterioration in house prices and to a broader economic downturn, and as a result, many suffered a sharp increase in their cost of borrowing. The funding and balance sheet pressures on banks were intensified by the rapid breakdown of securitization and structured finance markets. | 1 |
Graduates under the age of 35 were close to 6 times more likely to move region and employer than non-graduates in the 1990s but are now just 3 times more likely. And mobility has decreased for both groups. 20 Clarke (2017). 18 All speeches are available online at www.bankofengland.co.uk/speeches 18 Charts 21 and 22 look at rates of worker transition between different industries and occupations. These moves are grouped into “rungs” on the ladder, where the rungs for the 9-rung occupation ladder are ordered by the standard ONS classification, which itself reflects differences in skills used within each occupational group. For the 21-rung industry ladder, the rungs are ordered by the mean hourly gross pay of workers within each industry, across the whole sample period. The blue zone defines zero rung movements. The red zone defines large upward rung movements and the grey zone large downwards movements. Chart 21: Industry job ladder 100% 11+ 90% 8-10 80% 4-7 70% 1-3 60% 0 50% 40% -1 to -3 30% -4 to -7 20% -8 to -10 10% 0% 1990 -11+ 1995 2000 2005 2010 2015 Sources: ONS and Bank of England calculations. Notes: Chart shows percentage of jobs moves based on extent of upward or downward movement along the industry job ladder. | Assume also, in that event, that monetary policy followed a simple Taylor Rule and that inflation was unaffected.29 These are clearly very stylised assumptions. Nonetheless, on those assumptions, a Taylor Rule would suggest interest rates would need to be cut sharply to their zero bound, to cushion the hit to growth. If we do the same thought-experiment under the “deal” scenario, again using a simple Taylor Rule, we get instead an upwards-sloped trajectory for expected interest rates, on average 25-50 basis points higher than the slightly upward-sloped market path for interest rates prevailing in May. Clearly, these are two very different interest rate trajectories, reflecting two quite different Brexit economic outcomes.30 In the event of a ‘deal’, upward pressure on demand would also likely be accompanied with a stronger exchange rate, so the ex-ante impact on inflation is ambiguous. 30 My MPC colleague, Jan Vlieghe, made a similar point in his recent speech (Vlieghe (2019)). 29 29 All speeches are available online at www.bankofengland.co.uk/speeches 29 The market-implied path for interest rates is a probability-weighted mix of these two paths. With a 30% probability of “no deal”, this expected path would have interest rates falling in the near term before rising gently thereafter. Despite our scenarios being highly stylised and simplified, this expected path broadly mirrors the current market yield curve. | 1 |
Moreover, not everyone has a floating exchange rate and an inflation target, and countries that try to prevent adjustment of their real exchange rates have exacerbated the problem of spillover effects. Businesses in every country are conscious of how quickly their plans can be disrupted by unpredictable swings in exchange rates, asset prices and commodity prices. When those spillovers are sufficiently large and widespread, countries will want to engage with each other in a multilateral setting to discuss how they should be resolved. (b) What commitments are needed? Before the collapse of the Bretton Woods system, the specific commitments made by countries to each other were very clear: fixed exchange rates and capital controls. In the wake of the collapse of Bretton Woods, the members of the IMF attempted to re-define their commitments. But the exercise of defining what practical commitments were needed focussed primarily on exchange rates and had rather little effect in practice. Two broad commitments are particularly important. First, countries should make public commitments about their targets for macroeconomic policies – fiscal, monetary and financial. That still allows countries considerable discretion in their choice of policy framework – for example, whether to adopt a fixed or floating exchange rate. Second, policy frameworks must be consistent across countries. Policies which try to prevent changes in real exchange rates in response to changes in fundamentals, or lead to an unsustainable build-up of external debt, are properly the concern of the international community. (c) What tools are needed? | In my view, there are five principles that should be followed. First, create international institutions only when there is a need to do so. International institutions should focus on those areas of global governance where we need to tackle problems collectively – whether on trade, the environment, or large spillover effects of changes in macroeconomic policy. Second, ensure that the commitments countries enter into are clear. The job of institutions is to support those commitments. In many cases, like an umpire, their job will be to uphold them. That will only be possible if the players – countries – are very clear about the agreed rules of the game. Without that, any further design is pointless. Third, provide institutions with the necessary tools to umpire the commitments of nation states. But, just as umpires are accountable for their performance to the whole community of cricket-playing nations through the International Cricket Council, the staff and management of the international institution should be accountable to the whole community of nation states for their performance in upholding the rules. Fourth, recognise that we do not start with a blank sheet of paper. We must accept the constraints of history. Existing institutions have an institutional memory, talented staff and much of the infrastructure that will be needed in the future. But that is not to say reform will be easy – there are far too many vested interests for that to be the case. Fifth, avoid unnecessary duplication. | 1 |
15 [30] sitive when interest rates rise. Although public debt is low, which in itself is positive, it is a questionable combination, as not only the government but also households and companies need to have buffers. The debts of property companies have grown when interest rates have been low. Property companies obtain funding both via the banks and via the capital market. When there is a shortage of market funding at the same time as companies' funding costs rise, the profitability and liquidity of property companies can deteriorate and this can ultimately have a negative impact on financial stability. An excessively high level of private indebtedness that increases the risks in the financial system can limit the ability of monetary policy to act, known as financial dominance.25, 26 This could mean that the policy rate cannot be raised at the pace needed to bring down inflation. I do not consider us to be in a situation with financial dominance at present, but one cannot rule out the possibility of such a situation arising at some point in the future. We therefore need to continuously monitor developments and take measures to prevent this from happening. Responsibility for financial stability is shared between different authorities Monetary policy and financial stability are interdependent. Without a stable financial system, price stability is threatened and without monetary stability, financial stability can be jeopardised. Historically, financial regulation has primarily focused on individual banks. | Bank collapses in the USA and Switzerland The bank collapses in the United States and Switzerland in March created uncertainty in the global financial markets. To understand these developments, it is important to analyse the underlying problems. They are largely well known. However, there are also a number of new elements that may exacerbate the wellknown problems and that need to be analysed further. We want to avoid problems in the banking sector in one area spreading to other parts of the financial system or to other countries. At the same time, it must be possible to wind down banks with serious problems in an orderly manner. It is important to learn from crises. What we have now seen means that I think we will have to change some regulations. The financial regulatory framework is governed to a very large extent by global standards, so that is where the analysis must begin. Any future agreements reached at global level will also clearly affect the rules in the EU and thus in Sweden. Let me first focus on the more familiar problems and then return to what I see as new ones. In a sense, you can probably talk about the financial sector before and 2 See, for example, the discussion in Federal Reserve Bank of St. Louis (2022). 4 [30] after the Silicon Valley Bank crash. I think it can be a watershed in the way we think about the design of some financial regulation. | 1 |
Our definition of price stability is particularly beneficial for a small, open country such as Switzerland that is exposed to strong external shocks. Other approaches would have often required more drastic and disproportionate monetary policy responses in recent years. Given the openness of our economy, fine-tuning inflation is unrealistic. Our strategy has thus also made a significant contribution to the credibility of our monetary policy. The SNB’s mandate is clearly focused and should remain so, regardless of important societal problems such as climate change and the financing of pension provision. A narrow mandate allows a central bank to concentrate on the essential task of ensuring price stability, but is also of fundamental importance in safeguarding its independence. Independence seeks to achieve and requires distance from politics. This distance is therefore not something to be given up lightly. Page 12/16 Chart 1 Chart 2 Page 13/16 Chart 3 Chart 4 Page 14/16 Chart 5 Chart 6 Page 15/16 Chart 7 Chart 8 Page 16/16 | The HKMA BIS central bankers’ speeches 3 takes the view that an overseas bank that wishes to undertake retail business in Hong Kong should operate in the form of a locally incorporated subsidiary. This is to offer appropriate protection to the retail depositors in Hong Kong and to do that the HKMA needs to have an effective supervisory handle on every aspect of a retail bank’s operation, especially its capital adequacy ratio. We cannot achieve this if the bank operates as a branch in Hong Kong. 17. However, we also recognise that subsidiaries may not necessarily be an efficient model of operation if an overseas bank intends to undertake only corporate or private banking in Hong Kong. For example, a branch can leverage on the capital of the entire bank to finance a loan for a large corporate, which would otherwise be impossible if it operated as a subsidiary with rather limited capital in Hong Kong. Likewise, some private banking clients may prefer to deal with or book their investments with a branch of an overseas private bank rather than a subsidiary of that bank. So the HKMA keeps an open mind on whether an overseas bank operating in Hong Kong should take the form of a subsidiary or a branch. It all depends on the business model of the bank concerned. | 0 |
Smaller firms have been the most vulnerable to the shock and, despite the mitigating measures put in place, are more likely to be affected by solvency problems. Naturally, differences in credit risks across sectors of activity (besides the most directly affected sectors) and in the geographical distribution of the exposures may also contribute to the possible future heterogeneity of the impact of the crisis on banks. As regards the geographical aspect, the high impact of the pandemic in 2020 H1 in some foreign countries that are material to Spanish banks suggests that the benefits of geographical diversification could be lesser in this crisis than during the global financial crisis. However, the contribution of foreign business to Spanish banks’ return on ordinary activities increased in 2020 as a whole, and the growth in impairment allowances was relatively contained in various material countries. In any event, the potential uneven performance of the banking business in the different geographical areas needs to be monitored. Moreover, in view of the possible materialisation 9 Indeed, the distribution among banks of the percentage of credit exposure to the sectors hit hardest by the pandemic (e.g. hospitality and transportation and storage) is very concentrated, at values of close to 20%. 9 of permanent damage to some sectors of economic activity with asymmetric recovery paths, it is important to continue monitoring changes in credit quality. | NPLs to the resident private sector continued to decrease, albeit to a lesser extent than in previous years. In 2020, the stock of NPLs fell by 3.8% year-on-year (down 4% in March 2021), compared with steep declines in 2019 (-19.1%) and 2018 (-29.1%). The NPL ratio also continued to decrease, again more moderately than in recent years, to stand at 4.4% in December 2020 (the same rate as in March 2021), down 0.4 percentage points (pp) on the previous year. The public support measures for firms and households would largely explain the lower sensitivity of NPL rates to changes in activity during this crisis. These measures appear capable of absorbing a significant share of the potential impact of the crisis on banks’ solvency, thus limiting solvency risks.2 2 For instance, according to the FLESB stress tests published in the Financial Stability Report (Autumn 2020), the volume of public guarantees considered in the exercise could absorb approximately 30% of the expected credit loss, improving the CET1 capital ratio by between 1.5 pp and 1.75 pp in the period 2020-2022 under the different scenarios envisaged. It should also be noted that the exercise identified a wide confidence interval around these figures. 4 Third, the impact of the pandemic has also squeezed the Spanish banking sector’s profitability. In 2020, the consolidated net profit of Spanish deposit institutions as a whole was negative (around € billion). This translated into a return on assets (ROA) of -0.21% and a return on equity (ROE) of -3.1%. | 1 |
Internationally, we have contributed expertise and advice to the standard setting process via bodies such as the Basle Committee and the International Accounting Standards Board. And we contribute actively in the work of official international bodies like the Financial Stability Forum, the Group of Twenty and the G10 central banks’ Committee on the Global Financial System. On a separate tack, we have also increased our focus on insurance, where the FSA is developing a prudential approach along the lines of Basel II for insurance companies. We recently led work in the CGFS to better understand techniques of credit risk transfer and their implications - particularly important for reinsurance. We also wanted to obtain better data on who was shedding and who was taking on what risk. This should in due course allow more effective monitoring of the transfer and accumulation of risk. And earlier this year, I was myself heavily involved in drawing up the Group of Thirty study “Global Clearing and Settlement: A Plan of Action”. It detailed 20 recommendations in relation to interoperability, risk management and governance that once implemented should improve efficiency and reduce risk in securities clearing and settlement. The task now is to get them implemented: and we are involved in that process too. So in these areas we try to help to influence standards that are being set at a global level. Standards which of course also bear directly on much UK-based activity. | In the first analysis there is comfort from the improved risk management and supervisory processes that have been developed over the past decade. But we need vigilance in terms of the possible knock-on implications for the financial systems. Moving to a more specific, and very topical, example I would like to mention complex financial instruments. We have all read alarmist stories. But Alan Greenspan often makes the point that one may over estimate some of the risks and under estimate the benefits. Shocks such as the Asian crisis, LTCM, 9/11 have been successfully absorbed by the financial system. The fact is that they have not triggered a systemic financial crisis and the instruments themselves contribute to flexibility and resilience in the system. They enable financial institutions such as banks to transfer or diversify risk to a wide variety of participants including mutual funds and insurance companies, and hence reduce concentration. My own view is that this may be true but equally we would be unwise to take too much comfort for granted. At the Bank, we certainly feel the need for vigilance. We need to understand the implications and threats of these instruments. We start by breaking down the whole area of complex instruments into a more granular form. We focus specifically on four key aspects. Firstly there is the question of opacity and data. It is very hard to know both where risks have been transferred from and who is now on the receiving end. | 1 |
Capital regulations will have to be complemented with prudent banking that includes enhanced underwriting standards, effective internal controls and risk management, as well as strong corporate governance. In achieving your future goals and aspirations, significant benefits can be derived from Basel II provided that your institutions undertake the necessary efforts to align your strategy and business orientation with the new standards. Your interest, participation and decisive actions on the new accord are therefore important in positioning your institution in this increasingly competitive and more dynamic environment. Thank you. BIS Review 21/2004 5 | The work done by the BNB in this area is the logical extension of the reforms in the banking sector that started in 2015 and is expected to continue throughout 2019 with the following focal points: • Development of an efficient organization for cooperation with the ECB within the supervisory colleges and joint supervisory teams; • Streamlining the supervisory strategy to match the new institutional reality resulting from the close cooperation arrangements; • Dividing the supervisory focus among important and less important institutions; • Organisation of collection of supervisory and statistical data for supervisory purposes and validation of supervisory reporting; • Development of information systems consistent with the new stage in the supervisory activities. The third working block relates to the organisation and carrying out of the asset quality review and the stress test. The process is under way for the selected six banks and is conducted by ECB in line with an ECB-adopted methodology and macroeconomic scenarios for the purposes of the stress test. The bulk of the assumptions and parameters are determined by the Central Project Steering Committee at the ECB with an established working communication between the BNB, ECB and SSM in this process. The Banking Supervision activities will continue through implementing the European regulatory framework applicable to the credit institutions with a focus on the consistent implementation of the technical standards and regulations, the Guidelines of the European Banking Authority and the recommendations of the European Systemic Risk Board. | 0 |
And our White Paper MAP breaks down this process into five key areas — Under “M”, the white paper lays out new developments in Regtech, and explores their importance to Hong Kong’s banking industry Under “A”, the white paper assesses prevailing practice, and attempts to define and evaluate existing barriers to Regtech adoption As for “P”, there are three elements involved. The first element is about laying out a common practice framework for implementing Regtech in Hong Kong; the second element involves making practical recommendations for initiatives that can contribute towards the wider adoption of Regtech; and the third element is about delivering a practical roadmap of the HKMA’s plans for promoting Regtech adoption. 20. The White Paper is actually based on findings from a survey of banks and Regtech providers, interviews with industry stakeholders, benchmarking against other jurisdictions, and an analysis of Hong Kong’s Regtech progress so far. Some of you may have offered your valuable contributions to it. So, taking this opportunity, I thank those of you who have done so for your generous help and support. 21. The White Paper will be available for public download through our official website later today. Here, let me give you a quick snapshot of some of its key contents. 2/6 BIS central bankers' speeches Regtech adoption barriers 22. First and foremost, about Regtech adoption barriers. 23. We note that Regtech adoption in Hong Kong has made significant progress in recent years. | • Fabrication demand for gold, by contrast, for jewellery as well as for industrial uses, has contracted in recent months. In the industrialised countries, this decline has been mainly brought about by the economic slowdown. The high gold price, however, has also played a role, especially in developing countries. In countries such as India, which accounts for a quarter of gold demand, the precious metal is held in the first place for saving purposes. Investors use a more or less fixed portion of their disposable income to purchase gold. In times of rising gold prices, investors buy correspondingly less gold. From these developments we can draw two conclusions: • In the long term, the main elements influencing gold price expectations are changes in private investors' demand, mines' production costs as well as the central banks' fundamental attitude towards their gold reserves. • In the short and medium term, any change in producers' hedging policies and in the central banks' gold holdings, as well as speculative demand can trigger noticeable shifts in the gold price. These price movements, both upward and downward, may be relatively significant because the gold market is not very liquid, as experience has shown. Under this point of view, the central bank gold sales agreement of September 1999 has had a stabilising effect, since it has made the operations of central banks transparent and eliminated an important source of uncertainty. Our sales will continue until we have completed our programme, i.e. until we have sold 1,300 tonnes of gold. | 0 |
As a result, an inflationary bias may be generated. This inflationary bias is ultimately anticipated and incorporated into agents’ expectations, and, therefore, into price-setting and wage bargaining. The upshot is higher inflation without hardly improving the level of output and employment in the economy. This means monetary policy loses its effectiveness and the commitments to price stability cease to be credible. 2/9 Figure 1 INFLATION RATES 1970-1994 25 1994-1998 % 5 20 4 15 3 10 2 5 1 0 70 72 74 76 78 80 82 84 86 88 90 92 94 EURO AREA % 0 94 95 96 97 98 SPAIN The independence of the Banco de España, along with the new monetary policy framework based on direct inflation targets, was decisive in bringing inflation down and in fulfilling the Maastricht requirements in a short period of time.2 In this regard, the Spanish experience in relation to EMU accession meant a qualitative leap forward in terms of credibility, communication and transparency, which facilitated the anchoring of inflation expectations to a new regime of price stability, providing a focal point for collective wage bargaining, the setting of regulated prices, etc. The task of taming inflation did not fall entirely on the shoulders of the Banco de España, as Spain showed a strong and credible political will to lower inflation that helped bring about the anchoring role of the whole European institutional setting. | This cooperation has also included active participation in public-private partnership initiatives, including the National Scams Response Centre. As a member of the Financial Action Taskforce or FATF, Malaysia will once again be undergoing a Mutual Evaluations Exercise in 2024 and 2025. For the uninitiated, this is an in-depth assessment of the country's measures to combat ML/TF risks and its compliance with the international standards set by the FATF. This will be the fourth time for us and the last one was done in 2014. It is my hope that the stride made in Malaysia's AML/CFT ecosystem, strong commitment of all institutions towards a highintegrity financial system, and effective cooperation between the industry and public authorities will be reflected in the eventual outcomes of the Evaluation Exercise. In particular, it is paramount for all staff of reporting institutions to maintain high professional standards, adhere to existing confidentiality requirements, and undergo adequate AML/CFT trainings. Ladies and gentlemen, I would like to leave you with a line that is often quoted when speaking about integrity: "Integrity is doing the right thing even when no one is watching". While the quote may have been over-used, it has not dimmed its truth one bit. It is much easier to do the right thing under other watchful eyes, the safety barriers of procedures, or even the instruction of prescriptive rules. But oftentimes, the decisions that will matter most are what we choose to do when nobody, but our conscience is watching. | 0 |
The labour market is also expected to strengthen, with the unemployment situation improving for the rest of the year. Against this backdrop, MAS shifted to a policy of modest and gradual appreciation of the $ in April 2004. This policy stance was assessed to be supportive of economic growth, while ensuring low and stable inflation over the medium term. Let me now turn to other aspects of MAS’ work during the past year. II Regulation and supervision First, in the area of regulation and supervision, we issued the “Objectives and Principles of Financial Supervision in Singapore” monograph earlier this year. This will help the financial institutions we regulate and supervise better understand the desired outcomes of our supervision. Let me say a few words specifically on risk-based capital. We issued details of changes to the capital adequacy requirements for Singapore-incorporated banks in May 2004. We believe the new requirements are prudent but competitive, and more sensitive to the banks’ actual risk profiles. These changes will give the banks greater flexibility to manage their capital while maintaining a prudent buffer against future shocks. The Basel Committee on Banking Supervision finalised the New Basel Capital Framework last month. We intend to adopt the New Framework at the same time as the G10 countries. We will continue to work closely with the Singapore-incorporated banks to assess the impact of the New Framework and determine how best to adapt the proposals for Singapore. | In the international regulatory front, we recently assumed the chair of the Asia Pacific Regional Committee (APRC) of the International Organisation of Securities Commissions (IOSCO), and sit on the IOSCO Executive Committee. We have also assumed the chair of the EMEAP Working Group on Banking Supervision, which will facilitate the region’s discussion on implementation of Basle II. We are committed to regional and international co-operative efforts that help to foster a stable global financial system. In that regard, we contributed actively to initiatives of other forums such as BIS, FSF, IAIS and FATF, in the areas of financial stability, regulation and supervision, corporate governance and antimoney laundering. VI Ensuring business continuity In the area of Business Continuity Management (BCM), MAS conducted several exercises last year to ensure the effectiveness of our BCM plans. We also inspected BCM plans of major financial institutions (FIs) and found that FIs are generally prepared. For example, during the recent blackout, affected FIs continued operations smoothly on back-up power and activated their incident management process to verify that their buildings and operations were functioning normally. The blackout had minimal impact on the financial sector. VII Accounts Let me now move on to the MAS’ financial statements. MAS’ total assets grew 16.8% during the year ended 31 March 2004 to $ 179.7 billion. The Currency Fund’s assets, at the financial year-end, exceeded the $ 14.6b currency in circulation, providing 110% asset backing. | 1 |
The worst-in-a-lifetime financial crisis of the past few years is exhibit one. It is unlikely to be the last. Yet the history of political and economic progress offers a clue to solving these problems. This has relied heavily on long-lived, far-sighted institutions which are able to tackle the problems complex, integrated, information-rich societies throw up. Post-crisis financial reform has recognised that, giving system-wide regulatory responsibilities to a set of arms-length, long-lived institutions. There are many other areas of public policy where long-tailed risks loom large – pandemics, cyber risks, trade disputes, carbon emissions. Left to their own devices, societies may underinsure against these tail risks too. That is why institutions matter, now more than ever. They explain why nations failed in the past. They may be even more important in helping them succeed in the future. 5 See FSB (2011), “Macroprudential policy tools and frameworks”. BIS central bankers’ speeches 9 10 BIS central bankers’ speeches References Acemoglu, D and Robinson J (2012), “Why nationals fail. The origins or power, prosperity and poverty”. Profile Books. Acemoglu, D, Ozdaglar, A and Tahbaz-Salehi, A (2013), “Systemic risk and stability in financial networks”. NBER Working Paper No. 18727. Aikman, D, Haldane, A and Nelson, B (2010), “Curing the Credit Cycle”, Columbia University Centre on Capitalism and Society Annual Conference “Micro foundations for Modern Macroeconomics” New York. | Available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2010/speech463.pdf Alloy, B and Ahrens, A (1987), “Depression and pessimism for the future: Biased use of statistically relevant information in predictions for self versus others” Journal of Personality and Social Psychology, Vol 52(2), pp. 366–378. Arthur, W B (2009) “The nature of technology: what it is and how its evolves”, Penguin. Banerjee, A and Duflo, E (2011), “Poor economics”, PublicAffairs. Barro, R and Gordon, J (1983), “A positive theory of monetary policy in a natural rate model”, Journal of Political Economy, Vol. 91, No.4 pp 589–610. Barton, D (2011), “Capitalism for the long term”, Harvard Business Review, March. Bernanke, B (2004), “The great moderation”, remarks at the Eastern Economic Association, Washington, DC, 20 February. Carr, N (2011), “The shallows: what the internet is doing to our brains”, Atlantic Books. Claessens, S, Kose, M A and Terrones, E M (2008), “What happens during recessions, crunches and busts?”, IMF Working Paper, WP/08/274. Coase, R (1960), “The problem of social cost” Journal of Law and Economics Vol. 3 pp. 1–44. Coase, R (1990), “The firm, the market and the law” University of Chicago Press. Coase, R (1995), “Essays on economics and economists”, University of Chicago Press. Coffey, S F, Gudleski, G D, Saladin, M E and Brady, K T (2003), “Impulsivity and rapid discounting of delayed hypothetical rewards in cocaine-dependent individuals”, Experimental and Clinical Psychopharmacology, Vol. 11, No. 1, 18–25. Crockett, A (2000), “Marrying the micro- and macroprudential dimensions of financial stability”, BIS Speeches, September. | 1 |
As observed earlier, credit volume has gone from around 150% to around 170% of GDP in the past few years. This is the result of an average growth of credit of nearly 4%, while nominal GDP growth has averaged slightly above 1% over the same period. For this movement to be fully reversed, credit growth would have to significantly undershoot nominal GDP growth. The critical question is: could such a reversal happen smoothly, or in other words, is a soft landing possible? International experience (Figure 3) suggests this is a significant challenge. Credit-to-GDP ratios often fall in the wake of a severe crash, with pronounced falls in property prices and large increases in credit default rates; but this is exactly what we aim to avoid. While the diagnosis cannot be totally certain until history has run its course, the lessons from the analysis are, in my mind, crystal clear. The large increase in leverage, presumably of a 10 Reinhart, C. and Rogoff, K. (2009) 11 According to SNB survey data, about 20% of new mortgages are granted for investments with a loan-to-value ratio above 80%, and 25% of newly originated mortgages are granted to lever existing mortgages. Moreover, in the case of 40% of new mortgages the imputed costs would exceed one-third of gross income at a mortgage interest rate of 5%. | However, the very fact that interest rates must – eventually – rise again implies that credit expansion based on low interest rates cannot be viewed as a shift to a permanent higher credit level. At higher interest rates, credit demand will decline once again. To the extent that the credit expansion was driven by miscalculations on credit affordability, this may even lead to a crisis. 3.4. Behavioral biases The latter remark leads to a fourth potential explanation, that is, credit expansion driven by behavioral biases. As highlighted by Hyman Minsky7, the credit cycle appears to be driven by “waves of optimistic and pessimistic sentiment”8. In an upswing, expectations about future developments may turn erratically exuberant. Observing a long period of price increases, investors tend to believe that new circumstances justify the perpetuation of the upward trend and act on this belief. Overconfident lenders and borrowers are increasingly ready to take higher risks. Ever increasing prices become a necessary condition to enable borrowers to service their debts. Then the tide turns. A few investors fail to meet their obligations, confidence crumbles, asset prices stop increasing or begin to fall and optimism turns into a wave of pessimism. Clearly, credit expansion driven by such erratic beliefs is a cyclical phenomenon and no viable explanation for a sustainable increase in the credit-to-GDP ratio. As we have seen, there are various potential explanations for an increase in the credit-toGDP ratio, some suggesting a permanent, structural increase in this ratio, others hinting at a temporary, cyclical upswing. | 1 |
History has shown that the countries that devalued in 1931 weathered the depression better than those which did not. 12 Following the British lead was a decision that produced a good outcome. In 1949 there was a new sterling devaluation, this time 30 per cent against the US dollar. As in 1931, the Norwegian government announced that the value of the krone would be lowered correspondingly 13 . But unlike at that time, the level of activity in Norway was now high, and 9 The letter from the British Academy to the Queen is available at: http://media.ft.com/cms/3e3b6ca8-7a08-11de-b86f-00144feabdc0.pdf. 10 See Frank H. Knight (1921): Risk, uncertainty, and profit, Hart, Schaffner & Marx; Houghton Mifflin Co, Boston. 11 See the article “Fotspor med historie” [Footsteps with history], Aftenposten, 8 July 1989 and Rod Pyle (2007): Destination Moon: The Apollo Missions in the Astronauts’ Own Words, Harper Paperbacks. For further discussion and additional examples, see Thomas Gilovich, Dale Griffin and Daniel Kahneman (2002): Heuristics and biases. The psychology of intuitive judgment, Cambridge University Press. 12 See the discussion in Tore Jørgen Hanisch, Espen Søilen and Gunhild Ecklund (1999): Norsk økonomisk politikk i det 20. århundre. Verdivalg i en åpen økonomi, [Norwegian economic history in the 20th century. Ethical choices in an open economy] Høyskoleforlaget, Kristiansand. 13 The government had discussed how Norway should respond to a British devaluation. However, they had not reached a final conclusion and the government was split. | 3 See inter alia Report No. 29 (2000–2001) to the Storting, Guidelines for economic policy, Ministry of Finance, and the Regulation on Monetary Policy of 29 March 2001. BIS Review 147/2010 1 That it is tempting, but dangerous, for a government to focus on short-term gains was a lesson Greek politicians learned this spring. Government spending exceeded revenues over a long period. Accounts and official statistics were fudged. Politicians may have hoped to secure a quick admission for Greece into the euro area, with the advantages this would bring. They may have also believed that high government spending and low taxes might help their re-election prospects. Instead, they now have to steer the country through harsh reforms and substantial cuts. 4 The Norwegian economist Finn Kydland received the Nobel Prize for economics in 2004 for having shown that on the whole, monetary policy decisions are better if policymakers delegate interest rate setting to an independent central bank under a clear mandate. 5 As a central bank we must adhere to the mandate we have been given and be able to set the key rate based on a professional assessment. 6 This is a system that lays a solid foundation for making good decisions. 3. We make decisions under uncertainty Independence alone does not guarantee good decisions. Even if an independent central bank is better positioned to avoid having short-term expediency and changing preferences dictate interest rate policy, its decisions must be made under considerable uncertainty. | 1 |
Fixing the Fault Lines of the Global Financial Crisis Let me begin with the regulatory and supervisory responses to the Global Financial Crisis. The advances over the last 20 years can be broken down into three broad phases. The era of regulatory reform (2008 to 2016) The first eight years following the Global Financial Crisis of 2008 saw the most wide-ranging set of reforms ever in the history of financial regulation. The destruction that the Global Financial Crisis had unleashed on our economies and societies galvanised action on an unprecedented scale. The Global Financial Crisis revealed some deep fault lines in the financial system that had been masked by fortuitous growth. Many financial institutions had leveraged themselves to the hilt – some of them by as much as 40 dollars of debt to 1 dollar of equity – unthinkable these days. Many banks had severe mismatches in liquidity. An opaque OTC derivatives market led to rapid contagion when liquidity suddenly dried up. Moral hazard grew as some financial institutions were seen as too-big-to-fail. 1/9 BIS central bankers' speeches The Financial Stability Board, or FSB, was strengthened and tasked to oversee reforms to address each of these vulnerabilities. The way the international regulatory community came together and forged a consensus on the necessary reforms was exemplary. Between 2008 and 2016, the FSB, working closely with the Basel Committee, IOSCO, and other standard-setting bodies, put in place the basic building blocks for a new regulatory architecture that continues to serve us today. | 15 In a letter of 27 June 2008, the Ministry of Finance has asked the Financial Supervisory Authority of Norway to assess the need for regulatory revisions to the Norwegian Banks’ Guarantee Fund. BIS Review 110/2008 7 Conclusion The experience so far is that inflation targeting has provided a good basis for stabilising inflation and inflation expectations. Interest rate setting and interest rate forecasts have also contributed to stabilising output and employment and prices in property markets. In some areas, regulations and frameworks can result in amplifications of fluctuations in asset prices and credit flows. For example, tax subsidisation of homeownership can be a source of recurrent instability in house prices and credit. The turbulence in financial markets has prompted many countries to consider measures to improve regulation and the functioning of markets. In Norway, the authorities can also strengthen the work on preventing systemic risk. With our cross-border banks, broader Nordic cooperation, particularly between finance ministries and supervisory authorities, would be appropriate. But there is also work to be done at home. Norges Bank is proposing, for example, revisions to the Norwegian Banks’ Guarantee Fund with a view to reducing moral hazard. Thank you for your attention. 8 BIS Review 110/2008 BIS Review 110/2008 9 10 BIS Review 110/2008 BIS Review 110/2008 11 12 BIS Review 110/2008 BIS Review 110/2008 13 14 BIS Review 110/2008 BIS Review 110/2008 15 16 BIS Review 110/2008 | 0 |
The service of electronic transactions (e-banking) as a banking product began four years ago, although it may be said that it has not reached satisfying levels as far as its introduction and the use by the public is concerned. So far, two banks have been providing this service to particular clients (mainly businesses) for the carrying out of transfers, different payments etc. Over the present year, other banks have planned to provide this service. Table 1: Number of cards and ATM/POS 2004 2005 2006 Cash cards 26,736 173,161.00 220,657.00 Debit cards 6,552 50,066.00 70,176.00 Credit cards 806 2,550.00 4,245.00 136.00 169.00 Pre-paid cards Total 34,094 225,913.00 295,247.00 ATM 93 205.00 266.00 EF/POS terminals 155 779.00 1,073.00 4. The network and services expansion through the bank offices Over 2005 the banking system continued to expand its network rapidly within the Republic of Albania territory. It expanded with more than 50 branches and agencies throughout the country, although most of them were established in Tirana. A considerable number of branches and agencies have been opening in small towns, indicating that a large share of the population is now being provided with banking services. Almost all banks have established new branches and agencies, but just like in 2004, the opening of 29 branches and agencies by the small banks (G1 group) makes an impact. | Since student loans are currently receiving a huge amount of attention, and since the New York Fed has been a leader in providing information about the sector, I’d like to spend the rest of my time discussing what I see as the main issues with student debt and what to do about them. 2 BIS central bankers’ speeches Issues with student debt Student loans seem like a good part of the solution, but over the past decade our reliance on loans for funding higher education has increased and we are learning that they have many problems and implications we had not sufficiently understood or considered. As shown in Chart 1, between 2004 and 2014, the total student debt in the US tripled from $ billion in 2004 to $ trillion in 2014. Expressed in annual terms, this means student debt increased by an average of 13 percent per year. As shown in the chart, among the various types of household debt, student debt is unique. While balances on all forms of household debt – including mortgages, credit cards, auto loans, and home equity lines of credit – declined during and after the Great Recession, student debt has steadily risen. In 2010, student debt surpassed credit cards to become the second largest form of household debt after mortgages whereas prior to 2008, student debt was the smallest form of household debt. | 0 |
It is only within such a framework, that they can really flourish and that the benefits of technological change can be secured. The views expressed here are not necessarily those of the Bank of England or the Financial Policy Committee. I would like to thank Jennifer Enwezor, Bernat Gual-Ricart, Akeel Hansraj, and Cormac Sullivan for their help in preparing the text. I would like to thank Kushal Balluck, Stephen Fishbourne, Amy Lee, Matthew Osbourne and Magda Rutkowska for their helpful comments. 1. Bloomberg Data and BoE Staff Calculations. 2. Share of Trade Volume by Pair Denomination, The Block. Exchanges included in calculation: Binance, Poloniex, Bitfinex, Huobi, OKEx, Bittrex, Coinbase, Kraken, Bitstamp. 3. Figures from CoinMarketCap.com 4. This is illustrated by the recent fall in Coinbase’s share value, which has been linked, in part, to a statement in its regulatory disclosures that “the crypto assets held in custody on behalf of customers could be subject to bankruptcy proceedings and that such customers could be treated as general unsecured creditors”. 5. Speech at SIBOS by Jon Cunliffe - ‘Is ‘crypto’ a financial stability risk?’ (13 October 2021) 6. Prudential treatment of cryptoasset exposures - second consultation 7. IOSCO Crypto-Asset Roadmap for 2022-2023 (30 June 2022) (7 July 2022) 8. FSB Statement on International Regulation and Supervision of Crypto-asset Activities (11 July 2022) Page 9 9. | Mario Draghi: The path to recovery and the ECB’s role Speech by Mr Mario Draghi, President of the European Central Bank, at the Symposium on Financial Stability and the Role of Central Banks, organised by the Deutsche Bundesbank, Frankfurt am Main, 27 February 2014. * * * Summary The euro area has made considerable progress on its reform agenda, says ECB President Mario Draghi. Speaking at a conference organised by Germany’s Bundesbank in Frankfurt he emphasises that euro area governments have improved their fiscal positions despite recessionary headwinds and stressed euro area countries have become more competitive. “In parallel, the architecture of EMU has been strengthened in ways that many would have considered inconceivable two years ago”, says Mr Draghi. The move towards a banking union is crucial not only for the functioning of the financial system, but also for the conduct of monetary policy. Since the beginning of the crisis the ECB’s Governing Council has taken decisive steps to engineer a monetary policy stance that is commensurate with the subdued medium-term inflation outlook. But standard monetary policy in the form of rate cuts was not enough to ensure an appropriate monetary policy stance, because unwarranted fears of euro break-up impaired the monetary transmission, he says. Against this background the ECB announced Outright Monetary Transactions (OMT). Like all the ECB’s monetary policy measures, OMT served, says Mr Draghi, to ensure compliance with the bank’s price stability mandate. | 0 |
In the really long term, the recent level is more normal than the relatively low figures in the 1970s and 1980s. This accordingly means that the potential annual growth rate could be between 2 and 2.5%. A feature of the picture in the United States that I touched on earlier is the combination of high productivity growth and an investment boom. One factor behind the investment activity appears to have been the high profit expectations associated with the new technology. The massive investment has paved the way in turn for good productivity growth in that it has introduced new technology and led to a higher capital input per employee. No corresponding pattern is discernible in Sweden. It was mainly in connection with rapidly rising capacity utilisation in 1992-94 that industrial productivity improved. Productivity growth since then has been more normal. Manufacturing investment has risen but not as markedly as in the United States. It should be borne in mind, however, that compared with the United States, resource utilisation in Sweden was considerably lower in the 1990s. This can explain a part of the upswing for productivity, particularly in 1992-94, at the same time as it implies a weaker propensity to invest, either to save labour or to expand capacity in response to growing demand. Against this background it will be interesting to see how the Swedish economy performs when resource utilisation is high again. Briefly, then, it looks as though the inflation process in Sweden has been modified in recent years. | In addition, changes in labor markets made it harder to allocate workers to new jobs BIS central bankers’ speeches 3 in quick order. As a consequence of these structural shifts in the functioning of the economy, the Fed policymakers failed to realize that output was higher than they thought relative to its potential. As a result, additional monetary stimulus couldn’t bring about stronger growth and lower unemployment, but only exacerbated inflation, higher inflationary expectations and an accelerating wage – price spiral. In fact, inflation rose to double digits, wages chased these prices higher in order to minimize reductions in living standards, and unemployment remained high. The Burns-Miller Fed failed, but where was the failure greatest? With regard to my earlier description of the policymaking process, the Burns-Miller Fed did not properly understand the changing evolution of the U.S. economy in the 1970s, nor how monetary policy interacted with the new structure. To be fair, the Burns-Miller Fed was not alone – other experts at that time made the same mistakes. These common misunderstandings meant that the credibility loss over being slow to understand the changing environment probably was not large. Far more damaging to the Burns-Miller Fed’s credibility was the failure to adjust policy when it later saw rising and high inflation and inflation expectations. Surely, those developments were major evidence of a change in the structure of the economy, and the Burns-Miller Fed’s failure to adjust its thinking and policy in light of them had huge implications for credibility. | 0 |
However, these downside pressures were not the only challenge to policy. Oil prices which had been pushed up by the rapid growth in emerging markets took another dramatic jump and food prices began rising more quickly too. Between 2007 and mid-2008 oil more than doubled in price, while food prices rose by around 80%. At the same time sterling which had climbed to $ in November 2007, fell back. The result was that consumer price inflation in the UK rose well above target to 3% in April and over 5% in September, its highest rate since 1992 (while RPI inflation has been over 4% for all but 4 months out of the past two years). Not surprisingly expectations of inflation also rose sharply (Chart 4), raising the risk that higher inflation would become embedded in decisions on the prices for other goods and services and on pay. Of course commodity prices and inflation more generally have now begun to come down but I believe the risk of dislodging expectations was a real one, not a mirage. Certainly I felt that to reduce rates during months when inflation was not only rising rapidly, but was rising faster than we had forecast, would be confusing and might weaken confidence in our resolution and the credibility of the inflation target . On similar grounds, despite the appreciation of the euro, the ECB raised rates in July this year. | However, this is not an easy task by any mean. Rating agencies should satisfy several criteria in order to be eligible. These criteria, as you might already be aware of comprise experience, freedom from external influence, publicly available assessments, requirements to disclose assessment models and approaches, sufficient resources and finally validation or recognition by supervisory authorities in our countries. Third but certainly not the least, the new system poses a challenge to all banks to improve their capacities in order to comply with the new framework to successfully compete and survive. Banks should start adopting a more dynamic and forward looking approach to the evaluation of risk and provisions since under a risk sensitive approach there is always the risk of pro-cyclicality1, which means bank capital ratios are likely to fluctuate more over the course of business cycles. In spite of the above challenges, in Albania we have already started addressing some of these issues. First, by making sure that we have consolidated the achievements of our supervisory function by completing the requirements of Basel I. We are glad that the good progress has been confirmed also by the FSAP assessment during their mission in February-March, this year. Certain recommendations related with requirements about consolidated supervision, will be followed very attentively; Second, we have been pushing already our supervisory process and the banks, toward a more risk oriented attitude. | 0 |
This period of strong growth in the US peaked in 2000, and the following rapid deterioration in the economy prompted the Federal Reserve to reduce the interest rate from 6½ per cent in May 2000 to today’s record low 1¼ per cent. Weak developments are reflected in expectations of low interest rates ahead. Interest rate expectations in the US have been lowered considerably since summer 2002. In the summer, market participants expected interest rates to rise fairly rapidly. In the autumn, there were expectations of a gradual increase in interest rates. Now, the federal funds rate is expected to remain below 1¼ per cent throughout 2003. Expectations concerning future interest rates are also considerably lower now in Europe. The period of strong economic expansion in the US was driven by strong growth in investment. With low interest rates, households had less incentive to save in banks (and they chose instead to invest in the equity market). At the same time, costs related to corporate investment were reduced, leading to a sharp rise in lending and credit-driven investment growth. This resulted in over-capacity, particularly perhaps in the telecommunications and IT sectors. With the absence of accelerating inflation, the level of activity in the economy remained high, and low interest rates at the end of the 1990s may have contributed to maintaining a high level of investment. When share prices fell in autumn 2000 and spring 2001, investment came to a halt. | In 1997 and 1998 the economy shifted from an upturn with high growth rates to an expansion with lower growth but low unemployment, labour shortages in many sectors and strong growth in labour costs. The period of strong expansion has ebbed away in the course of the past year. Winter 2002 marked the turnaround in the Norwegian economy. Growth in the mainland economy is now lower. Unemployment is approaching the average for the 1990s. Industrial leaders are pessimistic. Companies report a decline in production, employment and orders for both the export and domestic markets. Many companies have relocated or have plans to relocate all or some of their production operations abroad. In particular, enterprises producing capital goods are experiencing problems. The number of bankruptcies has increased sharply. The number of bankruptcy petitions is the highest in nine years. If we disregard personal bankruptcies, there has been an increase of 32 per cent from the first quarter of 2002 to the first quarter of 2003 - 200 more than a year ago. The largest increase in the first quarter is in retail trade and the property management and commercial services sector, while manufacturing and the construction sector accounted for the largest increase in the previous quarter. The number of bankruptcies increased in all counties compared with 2002, with the sharpest increase in Hordaland, Buskerud and Oslo (161, 111 and 18 per cent respectively from 2001 to 2002). Oslo accounted for most bankruptcy petitions, with 249 in the first quarter. | 1 |
While this represents a large gap in insurance protection in the region, this also points to significant opportunities for rapid growth and developments in the near future. The ASEAN insurance market hosts a diverse group of foreign players. Many have strong presence in the region and even pioneered the development of the insurance market in some member states. Similar to most ASEAN countries, Malaysia welcomes their participation. In 1/4 BIS central bankers' speeches 2017, foreign players represent almost half of the ASEAN insurance market participants, including via participation in domestic companies. These players have brought in sound business models. Their strengths and expertise have contributed to the development of the regional insurance industry. They have been given greater market access through liberalisation measures undertaken by ASEAN countries over the years, such as that in the marine, aviation and transit insurance segment. Nevertheless, comparing against the speed of expansion of foreign insurers in the region, one can argue that the pace at which the full translation of the corresponding benefits to the development of the local insurance markets remains uneven. I would like to share three observations of their presence that could be relevant: First, we can acknowledge that foreign insurers have contributed positively and extensively towards the more pragmatic and contemporary regulatory enhancements. However, this also means that regulatory design is heavily influenced by them. In other words, there could be risks of regulatory capture where policies and decisions could favour the foreign players at the expense of the local industry and public. | Encik Adnan Zaylani Mohamad Zahid: The ASEAN insurance industry - current state Keynote address by Mr Encik Adnan Zaylani Mohamad Zahid, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 21st ASEAN Insurance Regulators’ Meeting, 44th ASEAN Insurance Council and 3rd ASEAN Insurance Summit, Kuala Lumpur, 28 November 2018. * * * Bank Negara Malaysia is honoured to host the 21st ASEAN Insurance Regulators’ Meeting and the 44th ASEAN Insurance Council Meeting again after eleven years. It is also our privilege to be part of the 3rd ASEAN Insurance Summit. I trust that the exchange of ideas and knowledge during these events will further strengthen the long tradition of close cooperation among ASEAN insurance regulators and industry players, interventions, and initiatives to build resiliency and liquidity for our market. Introduction Since its formation in 1967, ASEAN has achieved significant strides in advancing regional economic and financial cooperation and integration. This has contributed to sustained social development and stability that we see in the region over the last five decades. Economic improvement has seen member states grow at an average rate of over 5.3% and expanded over 100-fold, supported by significant intra-regional trade. In 2017, the ten-member states recorded a combined gross domestic product of close to USD3 trillion. Together, the regional bloc is currently the sixth-largest economy in the world and by 2020 is forecasted to become the fifthlargest economy after the United States of America, China, Japan and Germany. | 1 |
The country’s trade activity continues to ensure the majority of sales, and to record significant annual growth rates. It is estimated that construction sector has performed almost at the same level with that of the previous year. Direct and indirect indexes of this sector impose the necessity for a BIS Review 80/2007 1 broader attention, particularly to a better allocation of private or public financial resources. Construction developments over the recent years, and particularly the extreme concentration of constructions on certain territories, prove the lack of efficient urban development policies, without guaranteeing long-term sustainability of the branch. Furthermore, construction continues to be dominated by housing buildings, lagging behind other strategic items, such as investments in road infrastructure, in industrial constructions, in land improvement and in agricultural infrastructure, as well as other investments directly related to the standard of living of small urban and rural communities. Agricultural production during 2006 partly recovered the growth rate decline noticed in 2005. The sector growth projection stands at 2.5 per cent for 2006, higher than the growth of 2005, but lower than the average growth rate noticed over five latest years. Investments in agricultural sector and financing by the banking system will increase in accordance with the potential of this branch, providing that hurdles arising from various structural problems are eliminated. Agricultural land is not used at maximum, because of external and internal migration and the problems with ownership titles. The relatively underdeveloped rural infrastructure makes more difficult the emerging of products in the market. | During two latest years, commercial banks have better met the increasing demand for ALL loans, which at end of 2006 constituted 29 percent of the loans portfolio, thus evidencing a moderate extension of its share. 6 BIS Review 80/2007 Corporate credit constitutes the main share of banks’ portfolio, amounting to 66.5 percent of the total at end 2006. In annual terms, corporate credit increased by 52 percent. The credit distribution structure by use has tended to be more uniform in comparison with the previous year. Most of corporate loans (34.5 percent) have been used for purchasing machinery and equipment, while 23.2 percent of corporate loans portfolio has been used for financing investments in activity area expansion. In 2006 the household credit was 7 percent of GDP, or 33.5 percent of the total loans portfolio. More than half of loans to households (59.3 percent) have been extended for financing real estate purchases, while the financing of consumer goods purchases has also increased. The ratio of consumer loans to total household portfolio is 27.3 percent, from 20 percent in the previous year. In particular, consumer loans increased obviously during the summer holidays and during the end-year celebrations. Concerning lending to specific sectors, it should be underlined that trade remains the sector mostly credited by the banking system, by 22.4 percent of the loans portfolio. The growth rate of credit to construction has been inhibited during 2006. This sector presented temporary improvement signs during the summer, then turned back to the downward trend. | 1 |
Consumer goods price inflation hovered around zero for most of the last ten years, until the recent rise in oil prices. As a result, the purchasing power of UK consumers has risen with higher real wages achieved without any cost to employers. In other words, for a period the beneficial tailwind allowed the economy to run at a higher level of activity than would otherwise have been the case, without generating additional inflationary pressures. But the economic environment overseas has taken a turn for the worse. In many ways it is a tale of two cycles. The financial cycle The first cycle has been in the financial sector in the West. A banking cycle is not a new phenomenon but the scale of the expansion of cheap credit for some years and speed of the downswing in the last year has been exceptional. It started in the US with a real downturn in the housing market and rising default rates on sub-prime mortgages in particular. That led to a freeze in the structured credit markets built on those loans as investors lost confidence in the credit ratings they depend on. In finance at least, it is still true that when America sneezes the rest of the world catches a cold and the sub-prime crisis swiftly spread to financial institutions across the world. They became uncertain about the value of the financial positions they held, let alone what their counterparties held. | Ardian Fullani: The development of the financial market and money market in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the General Assembly of the Dealers Association, Tirana, 25 October 2007. * * * Mr. Chairman Distinguished Guests, It is a great pleasure to be here amongst old and new friends and colleagues. I have dearly welcomed the reorganization and reactivation of the Albanian Association of Dealers, and the attempts made by its new board to affiliate ACI-Financial Market Association. I am confident that this reactivation will promote, above all, the market development, education and professional training of new members. I deem that the meetings of the Dealers Association is a good opportunity to share with you some thoughts and concerns regarding the development of the Albanian financial market in general and the money market in particular. I would like to emphasize that the interbank money market is the starting point to the transmission mechanism, driven by base interest rate change. Currently it is the most important channel of transmitting monetary policy decisions to the economy. I have to remind you that where you realize the profit, the Bank of Albania implements the monetary policy, whose efficiency depends directly on your capability to maximize profit in this market. This policy is based on the assumption that market participants are rational and their primary purpose is profit maximization under the conditions of a competitive environment. | 0 |
In fact, the GIC has exceeded that mandate and has generated an average return of 9.5 per cent in US dollar terms since inception. The size of the assets managed by the GIC is not publicly known. The GIC has stated that it manages more than USD 100 billion but some estimates have put their assets under management at over USD 300 billion. The assets of the GIC are invested in ten asset classes – developed market public equities, emerging market public equities, private equity, infrastructure, nominal bonds, inflation-linked bonds, real estate, commodities, hedge funds and short-term assets including currency overlay. Geographically, its investments are concentrated in the US, Europe and Japan, but span almost 50 countries. Based on what is known about the GIC, and judging by the reasoning I have outlined in my lecture this evening, there is little cause for concern about the UBS equity stake the GIC will likely acquire. Over the past quarter century, the GIC has gained a solid reputation as a 28 The original idea of setting up a dedicated government investment institution separate from the MAS was conceived by the then Deputy Prime Minister Dr Goh Keng Swee and endorsed by the then Prime Minister Lee Kuan Yew, who continues to serve as the GIC’s Chairman of the Board. BIS Review 150/2007 7 global investor. | First, a number of European politicians are calling for increased transparency requirements relating to actual portfolio positions of SWFs. 19 A more far-reaching development are the calls for legislation that would block SWFs from taking major stakes in companies in any strategic sectors. 20 Second, a number of politicians have proposed the principle of reciprocity as a guiding principle for granting market access to SWFs. 21 For example, Jean-Claude Juncker, the Luxembourg Prime Minister and Euro-group president, has stated, "Countries that protect their own markets cannot expect to be allowed to make unimpeded investments in Europe." 22 In a strict sense, the principle of reciprocity means that SWFs are only allowed to invest in a foreign country if companies in that country are allowed to invest freely in the home country of the SWF. Since many SWFs are located in countries which are financially less open than a typical OECD country, a strict application of the reciprocity principle would place strong limitations on SWF investments. Third, Larry Summers has suggested that if SWFs were to invest through intermediary asset managers, most risks associated with SWFs would be mitigated, if not avoided. 23 Incidentally, Summers argues that the added benefit of such an indirect investment philosophy is that it generates a better risk-return profile. Fourth, there is now considerable political momentum behind the idea of a code of conduct or a set of guidelines for SWFs. | 1 |
To help prevent strains in dollar funding markets from intensifying and spreading, and hence creating more widespread pressure on financial markets, the Federal Reserve established liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan. These arrangements provide foreign central banks with the capacity to deliver US dollar funding to institutions in their jurisdictions. The credit is extended by the foreign central bank against the collateral that each accepts, and the interest generated from those transactions is returned to the Federal Reserve. From the perspective of the Federal Reserve, the liquidity swap arrangements are safe. After all, the Federal Reserve is extending credit to the foreign central bank and not to the financial institutions that obtain dollar funding. The credit we extend to the foreign central bank is collateralized by foreign currency deposited with the Federal Reserve. Moreover, the operations do not involve any exchange rate risk for the Federal Reserve, because the swap transactions are unwound at the same exchange rate at which they are established. There is currently only a very small amount of outstanding credit extended through the liquidity swap arrangements, in contrast to the dramatic usage that was observed during the financial crisis. The reason is that the circumstances surrounding the recent establishment of the swap lines differed from those in the middle of the financial crisis. During that earlier period, the need for dollar funding was more severe, and funding markets had become completely dysfunctional. | Both of these programs provide important insights into the role of the central bank as a provider of liquidity, leading to a few observations and to a few questions that I believe warrant further exploration in considering future policy actions. 1 Liquidity swaps with foreign central banks The second half of 2009 and the early part of 2010 were marked by substantial improvements in financial markets, ranging from short-term funding to longer term risk assets. There was good reason for those improvements: Efforts by the government to stabilize markets and support financial institutions were successful, and a virtuous circle appeared to be under way in which increasing optimism about the economic outlook and improving conditions in financial markets fed upon one another. The gains in asset prices were dramatic, with broad equity indexes reversing most of the declines experienced in late2008 and early 2009 and with some measures of short-term funding spreads returning to pre-crisis levels. However, more recent developments have demonstrated that conditions in financial markets can change abruptly. These developments have been widely discussed at this point, and I will not go through them in detail, except to highlight the two broad themes in play. First, investors have become concerned about the fiscal positions of some European countries, leading them to re-price sovereign risk for those countries and to question whether austerity measures and other supporting efforts will prove sufficient to restore market confidence. | 1 |
Likewise, the progressive re-opening of commercial establishments deemed non-essential since early May prompted a pick-up in retail sales that month, more markedly so in the case of products whose sales were more affected during the lockdown, such as personal equipment goods, home equipment and motor fuel. This improvement in consumer spending is expected to have run into June, according to the information available on payments made using cards. Throughout Q2, the labour market moved on a path of recovery similar to that described for economic activity. Consequently, the fall in Social Security registrations eased in May and, especially in June, following the heavy declines recorded in the second half of March and in April. In any event, registrations provide a partial picture of the scale of the labour market adjustment since the start of the crisis, insofar as the workers affected by furlough-like schemes (ERTEs) continue to be considered as registered, despite the fact they are not contributing to production. For a truer assessment of changes in the labour force since the onset of the crisis, regard is had to the series of registrations after having stripped out workers subject to ERTEs. This series, which might be dubbed “actual registrations”, is estimated to have shown a year-on-year decline of 22% at end-April, with much sharper reductions in some of the services segments most affected by the restrictions on movement 2 associated with the state of alert, such as the hospitality sector. | 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. | 1 |
As Englund (2011) shows in the Riksbank’s inquiry into the risks in the Swedish housing market, the fundamental value of housing is largely determined by the long real mortgage rate after tax and the value of the housing services provided by the housing. The value of the housing services in turn has a stable relationship to disposable income (housing costs comprise 25–30 per cent of disposable income).7 Put simply, the after-tax mortgage rate determines how much a homeowner is prepared to pay for his or her home for the housing costs to be 25 to 30 per cent of the homeowner’s disposable income. This means that the relationship between housing prices and disposable income is largely determined by the long real mortgage rate after tax, including the effects of wealth and property taxes. As Englund goals of maximum employment and stable prices”. In this case too, maximum employment means maximum sustainable employment. The Federal Reserve Board (2012) also emphasises the longer-run normal rate of unemployment. 7 Statistics Sweden (2012, table 9.1.8). BIS central bankers’ speeches 3 demonstrates, developments in Swedish housing prices in relation to disposable income are largely explained by a strongly negative trend in long real mortgage rates after tax since the mid-1990s. The established view of monetary policy is that it is not able to affect short and long real interest rates in the long run. | The US sub-prime mortgage market, while small compared to the entire global financial system, could deliver a large impact on the back of US housing concerns, credit crunch and global liquidity squeeze. It made for a bad prognosis especially as last year’s growth momentum relied heavily on net exports. When all is said and done, however, the Thai economy managed to grow at the rate of 5.7 per cent for the fourth quarter and 4.8 per cent for the whole year. Government pump-priming contributed to this favorable growth outcome. But most importantly, it turned out that net exports contributed to almost 60 per cent of the overall GDP growth. Indeed, exports grew at a remarkable rate of 18 per cent in US dollar terms in 2007. The robust expansion was due BIS Review 33/2008 1 to the ability of exporters to adjust through quality improvement and search of new markets. But exceptional export performance was due no less to healthy global growth, which translated into strong trading partners’ demand. Another factor that contributed to the success of exports was our ability to preserve overall price competitiveness in the face of sharp dollar decline. I will come back to this point in a few minutes. I would like to turn briefly now to economic stability. Monetary policy has been accommodative to growth since the beginning of 2007 with an aim to shore up domestic demand while keeping inflation in check. | 0 |
As it happens the UK has moved slightly in this direction of this “model” (if that’s not too grand a word) over the past few years. One of the reasons mortgage debt is lower than a decade ago, relative to income, is that the share of owner-occupiers has fallen and more people rent (it’s also true that the share of equity in the housing market has risen a little). But that hasn’t made for cheaper housing overall. While the share of income going on mortgage interest has declined, the share going on rents has risen. Overall, in the data, the combined spending on rents and mortgage interest is more stable than either on its own. 13 All speeches are available online at www.bankofengland.co.uk/speeches 13 that level but to insure against the risk of faster growth and the deterioration in credit quality that would probably have accompanied it. Corporate debt: risks from the surge in leveraged loans Most corporate debt too is used to finance productive capital, not to pay day-to-day bills. The main alternative is equity, and the main question in the field of corporate finance is why some firms might choose one form of funding over another. Economists now have a reasonably well developed understanding of this. The starting point for the literature – which is vast – is the celebrated result of Modigliani and Miller (1958). This says that, under perfect market conditions (defined in a particular way), the choice is irrelevant. | In other words, people might implicitly be assuming that less debt would necessarily mean greater net wealth. If that’s really what’s being asked – would we be better off if we were all better off? – then the answer’s obvious. But most debt, including the significant majority of household debt, is used to buy or finance assets. It’s true that, in principle, easier credit conditions could result in higher consumer spending, a lower rate of saving and therefore a slower rate of accumulation of net wealth. “Debt-fuelled consumption” is certainly possible. It’s just that, taken in isolation, the numbers on household debt don’t really tell you that much about that process. At least excluding car and student loans, unsecured household debt is no higher than it was 25 years ago, relative to income. Mortgage debt is still well above those levels. This is the inevitable result of the boom in house prices in the early years in the last decade, itself caused by the preceding decline in the neutral rate of interest. The counterpart to the faster mortgage growth wasn’t higher consumption but a transfer of financial wealth to those trading down the housing market (largely from younger to older people). And, to complete the circle, the decline in the neutral rate of interest, from extremely high levels in the early 1990s, makes a given quantity of debt more affordable. I’m not claiming that higher debt involves no extra risk at all. | 1 |
Tarisa Watanagase: Bank of Thailand’s perspective on the retail banking industry Keynote address by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the Excellence in Retail Financial Services Convention 2008, Bangkok, 15-16 May 2008. * * * Distinguished Guests, Ladies and Gentlemen, I am pleased to be invited to give the keynote address for this prestigious convention organized by the Asian Banker. It gives me the opportunity to share with you the Bank of Thailand’s perspective on the retail banking industry, which I hope would help both service providers and consumers alike to better understand our regulatory objectives and priorities. Retail banking business in Thailand has enjoyed rapid growth since after the Asian financial crisis, as banks – having learned the lesson of risk concentration – began to shift their strategies to diversify their portfolios and revenues by making inroads into the retail market segments. Over the past five years, bank consumer loans have grown at an average annual rate of 20 percent, outpacing the corporate loans which have increased three percent annually. As a result, consumer loans now constitute almost a quarter of total loan portfolio of the banking system in Thailand, compared with 16 percent in 2003. Housing loans continue to account for the largest share, followed by personal loans and credit card loans. Competition in the retail banking business has been intense, with more variety of product offerings and new delivery channels introduced to satisfy customer needs. | The second challenge is maintaining high standards of credit underwriting and risk management in the face of more intense competition. It may be tempting for service 2 BIS Review 64/2008 providers to lower underwriting standards in order to compete for market share in the face of greater competitive pressures. In view of the severe consequences of the current global market turmoil that originated from poor underwriting standards in the US subprime market; this temptation should be resisted at all costs. Let me assure you that the Bank of Thailand, as prudential supervisor of banks, will remain vigilant to ensure that similar problems will not happen here. The third challenge is managing security risks associated with the use of new technology. Advances in IT and communications technology have enabled banks to provide faster, cheaper, and safer electronic banking services to an increasingly larger group of customers. However, proliferation of internet banking, mobile banking, and e-payment also increases the risks of IT fraud, network security breach, and identity theft, etc. If these risks are not properly managed, they could have severe financial and reputational consequences for the banks. In this regard, I urge banks to pay close attention to the best-practice guidance on IT and e-banking security risk management that we issued some time ago. | 1 |
In 1933, Section 14(g) was added to the Federal Reserve Act to empower the Board to prescribe specific regulations regarding a Federal Reserve Bank’s foreign relationships, and in that same year the Board issued Regulation N – Relations with Foreign Banks and Bankers – which specifically addresses the Board’s “special supervision” over this area that is required by the Act. As originally drafted in 1933, Regulation N required, among other things, the consent of the Board prior to entering into any negotiation or agreement with any “foreign bank or banker.” In 1941, Congress expanded the Reserve Banks’ 14(e) authority to include holding foreign accounts for institutions other than its own foreign correspondents and agencies; this was done by adding “foreign banks or bankers, or foreign states” to the account eligibility list. The Board subsequently amended Regulation N to cover relationships with “foreign states” as well. Overall, the regulation provides a basis for the Board’s role in 6/8 BIS central bankers' speeches overseeing the New York Fed’s foreign official account activities. 8 Economic historians have cited several factors for this situation, including regulatory restrictions on foreign branching by U.S. banks, prohibitions on U.S. banks from offering dollar trade financing, and until 1914 the absence of a central bank with market making authority. Inertia from the long-standing dominance of London banks and the pound sterling under the gold standard is also cited. | It should also be noted that the New York Fed’s long experience as the FOMC’s selected bank for 4/8 BIS central bankers' speeches open market operations on behalf of the Federal Reserve System confers on it a trusted level of competence, experience, and reliability with foreign official account holders. The same New York Fed front office personnel that purchase and sell Treasuries for the Federal Reserve’s own portfolio also execute trades on behalf of foreign official account holders. Moreover, the same New York Fed personnel that perform back office operations for the Federal Reserve’s own portfolio also perform back office operations for the transactions of foreign official account holders. This consolidated transactional platform used by both the Federal Reserve and its foreign official account holders means that the global official community can be assured that the quality of the services it receives from the Federal Reserve meets the same standards as the Federal Reserve sets for the servicing of its own portfolio. Choreographers of central bank operations Let me now spend a moment discussing the people behind our account services. In doing so, I wish to recognize staff past and present who have played and continue to play a vital role every day in processing critical transactions on behalf of the global official community. Your experience in the daily management of the accounts of other central banks produces unique operational knowledge and expertise. | 1 |
For good reasons, the Chilean economy is open commercially and financially to the world, and, because of the nature of its exports, is strongly affected by shocks coming from abroad. In the past we have benefited from the external situation. We have also felt the consequences when the external situation has deteriorated. We cannot isolate ourselves from these external impulses, and it would not be a good idea to do so. The important thing, however, is that we have developed a policy framework that allows us to absorb and mitigate these shocks in the best way possible. Chile needs to keep a robust macroeconomic and financial policy scheme that helps it overcome effectively these external disturbances at the lowest possible cost for the country. BIS central bankers’ speeches 1 Part of this scheme is the autonomous central bank with clear-cut objectives: low, stable inflation, and the normal operation of internal and external payments. Our monetary policy is oriented at attaining an explicit inflation target over a medium-term horizon, by applying an independent monetary policy that contributes to stabilize the business cycle. Its complement is a floating exchange rate regime. Another important element is responsible and predictable fiscal policy making, as reflected in its governing rule. Add a sound financial system, with proper regulation and supervision. Plus ever growing commercial and financial integration. The fact that the deterioration of the developed economies has not hit our exports so hard is the result of this diversification of external markets, among other factors. | The reserves accumulation carried out by the Bank in the past few years, as well as management thereof – details are provided in an Appendix – should suffice to confront extreme episodes. Chile also has sovereign wealth funds that could help alleviate the financing needs in case of increased external tensions as well. The foreign funds of institutional investors can also act as stabilizing agents in this sense. On the other hand, we must always bear in mind that any intervention has associated costs. First, it can blur the objective of the Central Bank: inflation or exchange rate target. In our case, we have dealt with this problem by carrying out transparent, sterilized interventions, with a publicly known timetable that does not conflict with the formulation of monetary policy. In addition, our communication has been straightforward in stating that the objective of our monetary policy is price stability. Second, an intervention entails a significant financial cost for the Central Bank and the country. International reserves are invested in highly liquid assets abroad, whose yield is lower than the interest paid on the debt securities in pesos that are used to sterilize the purchase. In the current scenario, in which external-domestic interest rate differentials are significant and expected to remain so for some time, the financial cost of holding reserves is substantial and negatively affects the Bank’s balance sheet continually. | 1 |
Yet, such practices contribute to rapidly pushing up property prices. Thus, having observed that liquidity can disappear very rapidly, that central bank intervention must remain exceptional and that excessive maturity transformation increases systemic risk, a preventive approach is called for. Such an approach should take into account two aspects: – I will start by discussing Basel III liquidity regulation, while stressing the fundamental goal: reducing liquidity risk and limiting maturity transformation. – Nevertheless, whatever changes are made to the regulatory framework, this necessary but one-size-fits-all approach will still be inadequate if it is not accompanied, or even preceded, by new policies to manage maturity transformation by banks. BIS central bankers’ speeches 1 I. An overview of Basel III liquidity regulation 1. A fundamental goal: preventing excessive maturity transformation risks Since banks are in the best position to reduce information asymmetries in credit markets, select and monitor loans and diversify their asset portfolios, they are at the heart of maturity transformation activities. In traditional financial intermediation, banks collect savings and provide liquidity to the whole economy through transactions on their balance sheets. To do this, they transform liquid short-term liabilities into medium- to long-term assets with poor liquidity. This activity generates well-known risks, in particular in terms of interest rates and liquidity. Maturity transformation is therefore subject to prudential regulation to ensure that basic security rules are followed. At the Seoul Summit in November 2010, the G20 leaders endorsed the Basel III framework that overhauls the current prudential regulatory regime. | On one hand, the United States, central and eastern Europe and - until the recent SARS epidemic - East Asia have been showing greater vigour. On the other hand, there has been economic stagnation in Japan, very modest growth in the euro-zone and a very disappointing performance in Latin America. Second, in contrast with the usual pattern in recovery phases, certain variables are showing no signs of improvement. Let me mention two: first, investment, despite the low level of interest rates, perhaps because of overcapacity in certain sectors, but mainly because of an overall lack of confidence in the recovery; and second, employment, which, particularly in the case of the US, continues showing signs of weakness. Third, macroeconomic policies have generally been more expansionary. Interest rates are at historically low levels, both in nominal and real terms, in most countries, and this applies also to the longer segments of the yield curve. Overall, fiscal policies are clearly expansionary, although the room for manoeuvre available to different countries in this regard varies greatly. Fourth, the current-account imbalances among the largest economies were exacerbated during the recession and the early stages of the recovery and their geographical distribution does not bode well for their correction. One particular reason for concern is that the huge US current-account deficit coincides with the role of the US as the only locomotive of the world economy in recent years. | 0 |
See Panetta, F. (2022), “A digital euro that serves the needs of the public: striking the right balance”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 30 March and ECB (2022), “Digital euro – Privacy options”, presentation to the Eurogroup, 4 April. 4. Panetta, F. (2022), op. cit. 5. Consumers are already increasingly turning to non-cash payments. Only 20% of the cash stock is now used for payments, down from 35% 15 years ago. See Zamora-Pérez, A. (2021), “The paradox of banknotes: understanding the demand for cash beyond transactional use”, Economic Bulletin, Issue 2, ECB, Frankfurt am Main. 6. We are accustomed to using private and public forms of money interchangeably. Euro banknotes and coins are legal tender in the euro area, and cash is the only form of public money to which everyone can have direct access. Confidence in private money – bank deposits, credit cards and e-payment solutions – rests on the ability to convert it, at par, into public money. This allows payment systems to run smoothly and commerce to flow. 7. Panetta, F. (2021), “Central bank digital currencies: a monetary anchor for digital innovation”, speech at the Elcano Royal Institute, Madrid, 5 November. 8. Panetta, F. (2021), “The present and future of money in the digital age”, lecture at Federcasse’s Lectiones cooperativae, Rome, 10 December. 9. | Speech The digital euro and the evolution of the financial system Introductory statement by Fabio Panetta, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament Brussels, 15 June 2022 I am pleased to join you here today to discuss the progress we have made in our digital euro project. A digital euro would enable Europeans to use public money for digital payments throughout the euro area – just like they can use cash for physical payments. Bringing central bank money into the digital era is a logical step as payments become increasingly digitalised. And this is critical for two main reasons. First, we need to preserve the role of public money as the anchor of the payments system in order to ensure the smooth coexistence, the convertibility and the complementarity of the various forms that money takes. A strong anchor is needed to protect the singleness of money, monetary sovereignty and the integrity of the financial system. Second, a digital euro would contribute to our strategic autonomy and economic efficiency by offering a European means of payment that could be used for any digital payment, would meet Europe’s societal objectives and would be based on a European infrastructure. We will design the digital euro in a way that makes it attractive to users, who would like to use it to pay anywhere. | 1 |
Our monetary policy has to navigate these obstacles in order to ensure appropriate monetary conditions for the Swiss economy. At our September monetary policy assessment, we decided to leave our expansionary monetary policy stance unchanged. The SNB policy rate is unchanged at –0.75% and we remain willing to intervene in the foreign exchange market as necessary. At our quarterly monetary policy assessment, we also adjusted the method we use to calculate the negative interest rate we charge on banks’ sight deposits at the SNB. This adjustment takes into account the fact that interest rates could remain low around the world for a long time to come. We want to limit the burden our negative interest rate represents for banks and the economy, as long as this is compatible with steering monetary conditions in Switzerland. Climate change: a major economic challenge In addition to these economic and political uncertainties, the global environment faces other longer-term challenges, such as those relating to climate change. This evening, I’d like to focus on the economic and financial risks that emanate from global warming and associated climatic events on the one hand, and from measures implemented to support the transition to a low-carbon economy on the other. I shall also explain how, within the scope of its monetary policy mandate, the SNB factors these risks into its deliberations and actions. Economists began to view climate change as a major challenge in the 1970s and this topic has since been the subject of numerous studies. | For banks, this would erode the creditworthiness of debtors. In the area of mortgage lending, the adoption of stricter environmental standards could also diminish the collateral value of non-compliant real estate. 7 As you can see, climate risks may be of interest to central banks on a number of fronts. Each central bank tackles these challenges in its own way, depending on the profile of the economy in question and the institutional framework within which it operates. Countries are affected differently by climate risks due to their geographic location and economic structure. I am thinking in particular of countries that are partially below sea level (e.g. the Netherlands), those that are highly exposed to extreme weather events (e.g. droughts, storms, floods) and economies in which carbon-intensive industries (e.g. steel and cement) are strongly represented. Similarly, the institutional framework of each central bank will determine its room for manoeuvre in discussions on climate change. Some, for example, are responsible for microprudential supervision and also function as bank resolution authorities. They have to evaluate the soundness of each bank’s balance sheet, and this includes assessing banks’ exposure to climate risks. In Switzerland, this role is assigned to the Financial Market Supervisory Authority (FINMA). Other central banks advise the government and are expected to take a position on issues that go beyond pure monetary policy (e.g. fiscal or energy policy). This is not the case at the SNB. The SNB’s mandate is clearly defined. | 1 |
Regarding the international reserve management, regulatory amendments have been made to clarify the function of international reserve management and the responsibilities of decisionmaking structures, as well as to broaden the range of investment instruments in compliance with the adopted policies. As at end-2017, the international reserve was around EUR 3 billion, sufficient to cover 6.7 months of imports of goods and services, and 178% of the short-term external debt. The yield on its investment was slightly negative, due to the low interest rates of euro in international markets. The economic and financial analyses and the decisions of the Bank of Albania are based on a broad research work within the institution. The Bank of Albania deems that the investment in human resources and in research techniques is always rewarding, taking into account the rapid structural changes in the economy and in the financial markets. The monetary policy transmission, the safeguarding of financial stability, the banking supervision and the coordination among these objectives were the main focus of working papers during 2017. The results are shared with national and international experts in scientific panels and are published in working papers. Also, the international experts have continued to assist to improve the macro-economic and statistical models, which support Bank of Albania projections. Public communication is an important pillar in Bank of Albania’s activity for enhancing the transparency and public confidence in the institution. The classic channels of communication are supplemented with digital platforms, such as Twitter (information), YouTube (video) and Flicker (photos). | In 2017, the Bank of Albania, in cooperation with the Ministry of Finance and Economy and the World Bank explored options for developing the secondary market of Government securities and improving the functioning of the primary market. This project will help in the Government securities trading, increasing the investors’ base, and forming a yield curve that is a representative one for the economy. Such a curve enables a better management of liquidity for all the financial agents, as well as a better monetary policy transmission to financial markets. I would like, however, to underline that the development of markets is a long process, which requires cooperation by all economic and financial agents in the economy. *** Turning to the contribution of the Bank of Albania in the overall improvement of the financial and economic context, I would like to present now our work with regard to safeguarding and promoting financial stability. The main aspects of our work consisted in strengthening the stability 5/9 BIS central bankers' speeches of the banking system, enhancing its resilience to shocks and adoption of international standards. 3. Financial stability and banking system performance In 2017, the activity of the banking system was stable and supported the safeguarding of the financial stability. As at the end of 2017, the share of its assets stood at 92.5% of the Gross Domestic Product (GDP). The main financial indicators of the banking sector activity improved, and the net financial result of the banking sector grew considerably in 2017. | 1 |
It also suggests that if the Treasury were to take steps to shrink the illiquidity premium by, for example, improving secondary market trading in TIPS, this would shift the cost-benefit analysis more firmly in TIPS direction. A change in the TIPS illiquidity premium can have a notable impact on ex-ante cost analysis. For example, at the time this speech was written, the 10-year TIPS breakeven rate was approximately 1.10 percent, compared to the SPF forecast of 2.50 percent. This is in contrast to the end of our sample period, which showed them to be about equal. This means that today TIPS issuance is not very compelling. But it is important to emphasize that this shift has occurred at a time when the preference for liquidity is especially strong, benefitting nominal Treasuries versus TIPS. When the market turmoil subsides and this illiquidity premium shrinks, one might expect TIPS to again move ahead on an ex-ante basis. So, at this point, the TIPS versus nominal issuance debate is inconclusive. But that’s before we have included some of the other considerable – although more difficult to quantify – benefits associated with TIPS issuance. Let me now discuss some of these other benefits. Inflation hedge for households First, TIPS offer a benefit to investors because they have less risk than any other asset class. With virtually no credit risk or inflation risk, TIPS are one of the safest of investments. 4 For investors that want such safety, TIPS offer significant benefits. | As the title of my speech suggests, today I am going to lay out the reasons why I, along with my colleagues Jennifer Roush and Michelle Steinberg Ezer, believe that the benefits of the TIPS program exceed the costs of the program. Before saying anything more, let me emphasize that the views I express today are my own and those of my co-authors and, therefore, may not represent the views of my colleagues on the Federal Open Market Committee. Also, let me note that Jennifer and Michelle are the main authors of this paper. I have ridden along on their coattails. My main contribution was to slow down completion as I had to fit in my very modest contributions around the unfolding financial crisis! Finally, you may be wondering why this is my first speech since I have become president – an odd subject to choose, perhaps, given the ongoing financial crisis? The answer is a simple one, our paper and this conference have been in train for a long time. It is just a coincidence that the conference and my becoming president of the New York Fed have happened to arrive at about the same time. The logic of issuing inflation-protected securities is straightforward. Wouldn’t some investors pay a premium – that is, accept a lower expected return – in exchange for guaranteed, full compensation for inflation? Because the United States and a number of other countries decided that the answer was likely to be “yes,” they developed an inflation-indexed government debt market. | 1 |
It is obvious that, even after so many years of operating the exchange rate link under the currency board arrangement, the rationale behind the HKMA’s occasional presence in the foreign exchange and money markets, whether or not involving the exercise of discretion in the use of its monetary armoury, does not seem to be clearly understood. Certain of its actions in the markets have been subject to all sorts of interpretations. Yet there is a practical need for the HKMA to be in the markets performing its other functions which do not have any implications on the management of the exchange rate. One example is the investment management of the fiscal reserves. When fiscal surpluses are transferred from the Government’s accounts with the banking system to the HKMA, a shortage of interbank liquidity would be created if the money is not somehow recycled into the banking system. This is sometimes misinterpreted as the HKMA conducting open market operations of a discretionary nature, akin to a central bank engaging in discretionary monetary management, whilst the intention of the HKMA’s presence in the market in the performance of these other functions is, as a rule, to ensure that the monetary base is not affected. There is a need, therefore, to have the circumstances in which the clearing balance of the bank system, the crucial part of the monetary base, will be affected clearly set out for all concerned to see. These are outlined as an annex to this speech. Conclusion 46. | Mr. Erçel considers the European financial markets and their implications for Turkish institutions Speech given by the Governor of the Central Bank of the Republic of Turkey, Mr. Gazi Erçel, in Istanbul on 23/10/97. The EMU will be the most important change in the international monetary system since the creation of the IMF at Bretton Woods. The creation of a new currency, the Euro, is in fact a historical event for the European Union (EU). It marks a new quality in the process of European unification because it is the final point and coronation of efforts since 1958 to create one big market in Europe. The success of the Euro area will, of course, depend on the future development of the value of the Euro. The Euro, as we all know, has to compete with two strong international currencies: the US dollar and the Japanese yen. According to one school of thought, the Euro will have a stable value. That is because the high stock of assets in Euro, held by official or private foreign holders and which were converted from national currencies, in particular from Deutsche Mark, will not be switched into other currencies. Besides, once the Euro is introduced, there could be a significant switch of foreign exchange reserves out of US dollars and into Euro. This could give a boost to the exchange rate of the Euro against the US dollar over time. | 0 |
Figure 4 GDP growth in selected regions and countries (1) Monetary policy rates in the world (annual change, percent) (percent) 15 15 10 10 10 10 8 8 5 5 6 6 0 0 4 4 -5 -5 2 2 -10 -10 0 0 07 06 08 09 10 Latin America Asia exc. Japan U.S. Eurozone Japan Jan.07 Jan.09 Jan.11 Chile Emerging ec. (2) Developed ec. (3) Survey for emerging ec. (4) Survey for developed ec. (4) Survey for Chile (4) (1) Regions weighted by PPP as in April 2010's WEO. (2) Simple average of reference rates of Brazil, Chile, China, India, Israel, the Korean Rep. Mexico, Peru, Poland and Turkey. (3) Simple average of reference rates of Canada, the Eurozone, Japan, Norway, Sweden, Switzerland, the U.K. and the U.S. (4) Averaged responses of analysts surveyed by Bloomberg during May of 2010, indicating expectations for September and December of 2010, and March and June of 2011. Sources: Central Bank of Chile based on respective country's statistics bureau, Bloomberg and IMF. | But the monetary policy of the Banque de France was backed by the people. Historically, what matters is that all future euro area countries, including France and Germany, cooperated very closely from the very outset to ensure convergence. Today, people throughout Europe are convinced of the importance of price stability. And they are also aware of the fact that being addicted to inflation is like being addicted to a drug that over time has extremely negative effects: stagnation and the destruction of jobs. FOCUS: Nevertheless, many experts are expecting prices to rise significantly again in the near future ... Trichet: We have made it very clear that we always take the decisions necessary to guarantee price stability over the medium term: an inflation rate below, but close to, 2%. Observers and market participants are fully aware of this. It is precisely because of the challenges posed by price stability that we stand ready for action at all times. I call that “credible alertness”. FOCUS: At the moment, the markets are addicted to cheap money – to low interest rates. Politicians, bankers and stock market traders have already become too used to this situation, and as a result the risk of inflation is on the rise. How do you intend to change this? Trichet: You can be sure that the European Central Bank will continue, as before, to maintain price stability. Keeping inflation expectations solidly anchored – in line with our definition of price stability – protects us against the materialisation of both inflationary and deflationary risks. | 0 |
changes in the relative prices of exports compared to imports: this is the theme of today’s conference. The subject chosen is highly topical, following the very sharp drop in commodity prices, in particular oil prices, between mid-2014 and early 2016, the effects of which on exporting countries had been underestimated, both by the countries themselves, but also by the international financial community. Thus, the economic growth forecasts for sub-Saharan Africa made by the main international organisations were revised downwards only very late. In January 2016, the IMF still expected Sub-Saharan Africa to grow by 4% in 2016 and by 4.7% in 2017, but the forecasts in the October 2016 global economic outlook were only 1.4% for 2016 and 2.9% for 2017, almost solely as a result of the recession in the oil economies. The Ivorian economy is another illustration of the importance of the terms of trade for economies focused on commodities. After experiencing exceptional growth over the last three years, partly driven by the good performance of cocoa prices, contrary to that of other commodities, activity appears to have slowed down, in the wake of the downturn in prices. The subject is also of major importance for central banks because the challenge here is to find how to implement appropriate counter-cyclical policies in the face of large-scale shocks that monetary policy cannot deal with either on its own or in the long run. | To this end, the functions of the Asian office have evolved and expanded over time – from organisation of meetings and seminars to conducting research, to providing dealing and banking services. And the office has grown from a start-up staff of six to its current 33. We are celebrating this occasion in this lovely restaurant above the Star Ferry – which is an icon in Hong Kong and a symbol of quality and value-for-money service. The BIS Asian office is also a "STAR" entity. The word "STAR" has been chosen carefully and with good reason – each letter of the word symbolises and embodies the excellence of BIS' activities: S: Surveillance – The Asian office is clearly a star performer in its surveillance work on regional economic and financial developments. This is self-evident from reading the background notes prepared on the region for various BIS and regional central bank meetings. T: Topical studies and research – The Asian office, with its pool of economists and financial experts, is well placed to conduct research. Under the auspices of the Asian research programme initiated in 2006, many topics that are of interest and relevance to Asian central banks have been, and continue to be, explored and developed. The BIS has made important contributions in this area, with its research providing useful information and insight for policymakers in the region. | 0 |
These include, for example, commercial real estate. Risk premiums on these securities have been pointing in a clear upward direction of late (cf. graph 2). The same development can be observed for US corporate bonds. However, by historical standards, the delinquency rate on credit card loans remains at a very low level, even though it rose in the third quarter (cf. graph 3). 2 BIS Review 150/2007 Graph 2: Risk yield premiums on commercial mortgage-backed securities 2 Graph 3: Delinquency rate on credit card loans 3 6% 5% 4% 3% 2% 1% 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 07 20 20 20 20 20 20 20 20 19 19 19 19 19 19 19 19 19 91 0% The second risk is that the excellent economic environment in which we have operated until now might deteriorate. Of particular note here is the global economy, which so far has proved to be extremely resistant to the sub-prime crisis. The same applies to the stock markets. Save for a few corrections, they have held up fairly well since the middle of the year. | In this respect, the measures announced by UBS, which are aimed at strengthening its capital base, are to be welcomed. The fact that UBS has been able to attract a large and internationally recognised Asian investor for this purpose serves 4 BIS Review 150/2007 as an illustration of one of the ways in which globalisation of financial markets has been to our advantage. BIS Review 150/2007 5 | 1 |
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