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In such contest bank of Albania has been working together with important Albanian institutions, first and foremost with fiscal authorities, different European Central Banks, international financial advisories and academia to identify the new regime of monetary policy. The new regime must be efficient in the light of recent changes in financial markets and most importantly must provide good anchors for monetary policy and its sovereignty. Please allow me to briefly describe the major characteristics of what we think will become the new regime. A. Monetary policy regime As I already mentioned we have been working on the new regime for more than two years. During this period we have been tossing ideas and scrupulously studying the details of a fully fledged inflation targeting regime. As you might well understand, we are getting ready to launch the new regime at the beginning of 2009. Our analyses show that, considering the current features and expected developments of the financial markets, inflation targeting provides the best policy choice for the future. A relatively long history of low and stable inflation, efficient monetary policy, sound banking system, free floating exchange rate, fiscal consolidation and last but not the least a suitable and reliable institutional framework, are important factors that have convinced us on the potential success of inflation targeting regime. 4 BIS Review 119/2007 B. Institutional framework The harmonization of monetary and fiscal policy will continue to be a challenge.
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However, increasing credit to GDP ratio in all countries, ranging from 23 percent in Macedonia to 76 percent in Croatia also raises the concerns for a possible credit boom. There are some important trends worth being noted: Credit composition is dominated by consumer credit and less oriented to enterprises; Credit/deposit ratio has steadily increased indicating banks willingness to extend their lending activity at a faster pace than the growth of savings. However, the average of credit/deposit ratio of the region is still below the level of the new EU member; Lending is mostly in foreign currency as a result of high euroization of the economies and lower interest rates in foreign currency; Another structural change in credit portfolio relates to the upward trend towards longer-term lending, which at least in three countries of the region (Albania, Macedonia and Bosnia & Herzegovina) consisted of 50 percent or more than total lending; The spread between interest rates of deposits and credits remains high. There are several explanations to this such as lack of efficiency and competitiveness among banks, high premium risks of the economies in the transition period, collateral problems, legal system obstacles etc. However, it’s worth mentioning that the spread between deposit interests and credits has declined in the recent years, as a result of increased competition in the banking system. Despite these characteristics must be admitted that the share of the banking system in the economy is relatively small by European standards.
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We have heard an interesting discussion on the legal initiatives currently being undertaken at EU level to remove the barriers that are hindering the single market objectives. MiFID is being revised to increase investor protection and improve the functioning of EU capital markets. EMIR entered into force in summer 2012, requiring standard derivative contracts to be cleared through central counterparties and establishing stringent organisational, business conduct and prudential requirements for central counterparties. The European Commission’s BIS central bankers’ speeches 1 proposal for a CSD Regulation improving securities settlement is under scrutiny by the EU legislators; it will enhance the legal and operational conditions for cross-border settlement in the Union in general, and a strong emphasis has been placed today on the importance of its timely adoption. I noted that the majority of the audience saw the need to adopt the CSD Regulation at the latest by the start of 2014, also with a view to allowing sufficient time for the technical standards. The representatives from the Parliament and the Commission have highlighted the importance and feasibility of this objective. Finally, another initiative is in the pipeline to harmonise the securities law legislation, establishing an EU-wide framework for the ownership of securities and increasing legal certainty in cross-border environments. Combined, the review of MiFID, the EMIR, the CSD Regulation and the securities law legislation are consistently building a harmonised legal framework for the whole securities transaction chain – from trading to clearing to settlement.
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Important progress is also being made at the operational and business levels. The most notable example mentioned by many today is T2S, a project with huge potential for market integration. T2S will enable the participating CSDs to focus on value-added services while the basic settlement service is provided via the single T2S platform. T2S will thereby make it easier for business to move from one CSD to another. The actors that harmonise in T2S have a greater chance of reaping the full benefits of T2S and widening their business. Conversely, the European CSDs that do not harmonise may see the securities issued via their CSD being settled predominantly in another CSD participating in T2S. An area of opportunities mentioned several times by speakers today is collateral management. Some of the regulatory initiatives I mentioned before, aiming to enhance safety in financial markets, are generating greater demand for high-quality collateral. At the same time, the crisis is making this collateral scarcer: there has been a shift from unsecured to secured funding and greater recourse to central bank liquidity. The increased demand for collateral is prompting market participants as well as the Eurosystem to develop innovative ways to make better use of existing collateral, i.e. to make assets more easily available, when and where they are needed. Harmonisation in this area is crucial to facilitate the efficient mobilisation of collateral across Europe. Examples are the auto-collateralisation functionality that will be offered by the T2S platform and the several initiatives underway to establish tri-party settlement interoperability.
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Gent Sejko: Albania’s economy and its interaction with monetary and fiscal policies Statement by Mr Gent Sejko, Governor of the Bank of Albania, to the hearing session of the Parliamentary Committee on Economy and Finance, about the draft-budget 2017, Tirana, 22 November 2016. * * * Honourable Chairman, Honourable Members of the Committee, The steady and long-term development of Albania has been and is a constant priority of Bank of Albania’s work. Therefore, accomplishing this objective requires not only applying prudent monetary and fiscal policies, but also their constant and efficient coordination. The approval of the budget and the accompanying fiscal package is decisive for the country’s economic development. The budget and the relevant fiscal package outline the short and medium-term priorities for public finance, contribute to the long-term profile of growth and development by supporting with funds the structural reforms, and orientate the private sector development by determining the incentives on consumption and investments. Therefore, the Bank of Albania appreciates the opportunity to be able to present to this hearing session our opinion on the draft-budget 2017. In compliance with our legal mandate and the scope of our expertise, the opinion of the Bank of Albania on the draft-budget 2017 will focus on the following: Albania’s development perspectives, intertwined with the monetary and fiscal policies; Fiscal projections and public finance stability; and, Effects of projected public borrowing on the domestic financial markets. At the end, there are some suggestions on possible measures to boost the effectiveness and stability of public finances. 1.
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Public sector borrowing and domestic financial market The draft-budget 2017 envisages domestic borrowing amounting to ALL 19.8 billion. The liquidity situation in the domestic financial market and the low interest rates provide the premises for accommodating the aimed borrowing level. However, the Ministry of Finance and the Government of Albania should give due attention to the even distribution of borrowing and budget expenditures, in order to reduce domestic markets’ volatility. Also, the Ministry of Finance should constantly monitor the absorption of borrowing in domestic financial markets, in order to enable the constant re-calibration of debt instruments with market requirements. *** Concluding, the Bank of Albania would like to present some suggestions, which – in our opinion – would contribute to the process of drafting and implementing the Budget in the future. 4. Suggestions and recommendations 4.1 Forecasting, Uncertainty and Risk Management The forecast on the revenue of the budget – like any other economic forecast – is surrounded by uncertainties and risks. The proper acknowledgment and understanding of this fact necessitates measures to identify and quantify them, and paves the way to effectively manage the possible consequences. 3/5 BIS central bankers' speeches In line with our previous suggestions, Bank of Albania deems that the drafting and implementation process of Budget would benefit from the establishment of alternative budget scenarios, which would be implemented in the event of large deviations from the forecast.
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However, if we scale it to the country’s GDP, it was in the range between 6.1 to 6.9% over the past five years. Thus, despite the headway we have made in advancing e-payments, the persistency of cash among the public and small and medium sized businesses remains high. This opens up the economy to risks as cash is still being used by criminals to launder illegal proceeds, as we 3/5 BIS central bankers' speeches have seen from some high-profile cases over the past year or so. Similarly, this is the preferred mode to finance terrorist activities, which will involve transacting in cash. Therefore, it is timely for us to look at ways to strengthen the controls to mitigate financial crime; namely the cash threshold reporting requirement. When we compare Malaysia with other countries, our current threshold is too high and disconnected from the size of our economy, especially relative to our purchasing power. Hence, it needs to be updated. In this regard, we would like to announce that we will be lowering the daily cash threshold report to RM25,000 effective 1 January 2019. This will bring the cash threshold report in Malaysia to be more at par with other countries. We do not anticipate any impact in terms of economic activity but an increase in effectiveness in taming the black economy that is still heavily reliant on cash transactions.
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Conclusion I spoke at length today about the responsibility that we have to combat crime and the ways to do so. Let me end by saying that eradicating financial crime makes good business sense. Financial crime is a cost and burden to all of society. Robust governance and greater transparency is good for business. It creates an environment of trust and a level-playing field for businesses to flourish. This is important as we seek to ensure longevity and continuity of businesses and the health of the economy as a whole. Therefore, let us be united in working for a better and brighter future for Malaysia. Greater governance and transparency will get us there. Thank you. 5/5 BIS central bankers' speeches
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The media accentuated the exuberant mood, with reports of rapidly rising share prices, and the notion that quick money could be earned in the so-called new economy became the conventional wisdom. From the recent years’ experience I can identify some important and interesting issues. Although time does not allow me to expand on them, allow me nevertheless to mention some briefly. What can be done to make the stock market function better? What can be done to provide more support in the future for long-term saving by households? How could more education and knowledge be provided so that the inexperienced investor becomes experienced and well-educated instead. I’m sure that shareholders associations all over the world have an important role to play in this respect. Further, it goes without saying that prompt, up-to-date, correct and relevant information is crucial. However, we must remember that more information is not the same as better information. Quality is not the same as quantity. The inexperienced investor must be helped to interpret the information and pick out what matters most. An important role could be played by independent analysts, not to mention media. There have to be agents in society that can see through and criticise corporate managements that are unduly optimistic or provide information selectively. The argument for this is that international studies indicate that in the second half of the 1990s firms, banks and analysts had incentives to talk inexperienced people into investing in new enterprises on grounds that were not entirely sound.
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Many new technology companies were not generating a profit and had to rely instead on paying for wages and equipment by issuing shares. For this to be feasible, stock market valuation needs to be high. In this sense there were incentives for managements to trim reports and statements about their firm’s future profits. At the same time, analysts and investment banks, with potential earnings from launching share issues, lacked incentives to take a critical look at these reports, so inexperienced investors did not get the assistance and support they needed. In order to reduce the risk of financial market imbalances, it is important that we have a well thought-out legislative, regulatory and supervisory infrastructure that functions properly and follows changes in the rest of the world. This is a never-ending task that requires the participation of all concerned. Today, households face what are sometimes very difficult risk-management decisions that were not called for or even possible before. Many people still lack the relevant knowledge for this and it may be asked whether people in general can be expected to have such knowledge in the future. Everyone cannot be a specialist in risk management and financial theory. Therefore, I think banks and other financial institutions should become more consumer-oriented, instead of today’s greater focus on products. The increased exposure of households to the stock market calls for tailor-made plans for the life cycle that take all important risks into account.
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2 For a survey on the literature on speculators and their impact on price developments in the oil market, see Weiner, R, (2002): “Sheep in wolves’ clothing? Speculators and price volatility in petroleum futures”, Quarterly Review of Economics and Finance, 42 (2), 391-400. 2 BIS Review 69/2004 at 35 USD per barrel for WTI delivery in 5 years (see Figure 7). Moreover, despite the most recent sharp correction in spot prices from 55 to 46 USD per barrel WTI, long-dated futures prices have receded only marginally. Since 2002, prices of oil futures are generally quoted below expected spot prices - a state labeled backwardation. Backwardation implies uncertainty about production and supplies and effectively favors further inventory draw downs (see Figure 8). Price information extracted from the market appears to confirm that at least for the time being, average oil prices are likely to remain elevated compared to historical price ranges. Forecasting market prices is an inherently difficult endeavor. Immense uncertainties on the supply side make oil price forecasts particularly challenging. Reserve figures can be increased rapidly by the discovery of new oil fields or by exploitation at greater margins due to new technologies. Proven oil reserves in the Middle East, for example, increased from 16 billion barrels in 1944 to 116 billion barrels of meanwhile extracted or still available reserves in 1975.
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In this period, countries with relatively stable financial markets and lower deterioration in risk premia had more room for maneuver in their monetary policy implementations enabling them to make larger policy rate reductions. Raised awareness regarding the relative soundness of Turkey’s financial system in this period, coupled with the expected decline in inflation, set the ground for rapid and bold rate cuts. Acting accordingly, the Central Bank of the Republic of Turkey lowered policy rates more than any other emerging market central bank operating within an inflation targeting framework (Figure 12). BIS Review 103/2009 7 Figure 12: Change in Policy Rates of Developing Countries and the Relationship between Policy Rates and Risk Premium Change in Policy Rates (Percent, 1 Sep 08 - 24 July 09) 0.5 Change in Risk Premium and Policy Rates 2 (1 Sep 08- 24 July 09) -0.5 0 1.5 Macaristan Change in Policy Rates (Percent) -1.5 -2 -2.5 -3.5 -4 -4.5 -5.5 Rusya Romanya Malezya Çek Endonezy Cumh. Tayland a Peru Polonya G.Kore Meksika Brezilya G.Afrika Kolombiya -6 -6.5 -8 -7.5 Turkey Chile Columbia South Brazil Israel Mexico South Peru Poland Thailand Iceland Taiwan Indonesi China Czech Malaysia Romania Ukraine Russia Hungary -8.5 -10 -100 Şili Türkiye -50 0 50 100 150 Change in CDS (basis points) 200 Source: Bloomberg and CBRT.
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Some temporary retrenchment is probably not undesirable at this point, as cross-border banking – and perhaps financial globalisation more generally – far outpaced developments in public frameworks. The issue of global liquidity provision to banks needs further exploration. And finally, if countries are increasingly taking unilateral action to protect themselves, someone – probably the IMF – must monitor the process. Going forward, some ground rules might have to be considered so that we are not faced with too serious unintended consequences for the global system. Thank you very much. BIS central bankers’ speeches 5
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2/8 BIS - Central bankers' speeches Meanwhile, the high levels of government debt following the pandemic, alongside the tightening of financial conditions, represent a vulnerability and limit the space to adopt fiscal expansion measures. This setting is also subject to an extremely high level of uncertainty, stemming, above all, from the course of the war in Ukraine and its economic repercussions, which are hard to predict. However, inflationary pressures also pose a genuine risk. Whether they increase further depends not only on the course of the war, but also on internal factors, such as a possible persistent rise in inflation expectations, or higher-thanexpected increases in wages or mark-ups. More persistent inflation would require a sharper tightening of monetary policy, which would render those public or private agents in a less sound economic and financial position more vulnerable. This could have a greater-than-expected impact on their spending levels. 1. The economic policy response Against this backdrop, I would like to share my opinion on how economic policy should respond. First, I would like to underscore that the current situation is far different from that triggered by the pandemic. We then faced a temporary but highly adverse shock, in a setting free of inflationary pressures. That environment warranted a forceful monetary policy response, in order to create conditions that were conducive to an equally extraordinary fiscal expansion which would guarantee the income of households and firms and thus minimise the crisis-induced structural damage to employment, productive capacity and growth.
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In principle, these policy guidelines are just as appropriate for coping with favourable periods as with adverse periods. We will face another test of the macroeconomic framework when the terms-of-trade change is reversed and the gains either fully or partly dissipate. 4 BIS Review 50/2006 Structural policies aimed at maintaining flexibility in labour, capital and goods markets are, however, probably more important than stabilisation policy to sustain both high growth and economic stability in the future. Developments in labour productivity over the last two decades may be an indication of the importance of structural policies. Norway has managed to sustain productivity growth at a high level. Restructuring in the Norwegian economy in the 1990s, changes in the tax system, broader and deeper financial markets, and deregulation in trade and service markets appear to have resulted in a more efficient use of resources. Many of these changes were advocated by Victor Norman in the 1980s and early 1990s. For example, in 1991 he chaired an official committee 5 exploring possible efficiency gains in the government sector. In the report, high possible efficiency gains were envisaged as a consequence of the committee’s proposals, including a better functioning labour market. Victor’s conviction as to what economic policy can accomplish can be illustrated by the following quote from the committee’s report: "We believe that in principle it should be possible to once again reduce unemployment in Norway to one per cent without creating permanent pressures and restructuring problems in the economy." Thank you for your attention!
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The real exchange rate appreciated, and manufacturing industry was scaled back. Frequent devaluations from 1976 were unable in the long term to prevent a decline in the manufacturing sector. On the contrary, they proved to be selfreinforcing. The absence of a nominal anchor was one of the main reasons behind the pronounced swings in the Norwegian economy in the 1970s and 1980s. With a policy of low interest rates and devaluations, inflation took root. Nominal interest rates were kept at a low level even though inflation rose. The wide fluctuations culminated in a credit boom in the mid-1980s. Victor Norman recognized this mechanism. In 1986, he argued in a newspaper article 4 that: “We are again treading a path where monetary and fiscal policies amplify cyclical fluctuations instead of moderating them. We saw this clearly in 1982/1983 and again last year.” The value of petroleum exports can be quite volatile and uncertain. Petroleum exports rose rapidly until the oil price declined markedly in 1986. The recession after the credit bubble burst and after oil prices fell was deep. The recession was more severe than would have been the case if we had maintained a larger, competitive manufacturing sector. Norwegian manufacturing lost export market shares in the late 1980s in spite of booming conditions abroad and substantial capacity slack at home. The value of petroleum exports rose again to historically high levels in 2000. High petroleum revenues to the government made it increasingly challenging to smooth cyclical fluctuations by means of fiscal policy.
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After several years’ moderate growth, the euro area has arrived at a favourable cyclical juncture. On the latest available figures, annual output growth is currently running at almost 2%. This rate exceeds the European Commission’s estimates of potential growth, which stand at around 1%. The soundness of the economic recovery is beginning to be reflected in the more dynamic behaviour of private investment. That breaks with a long period over which companies’ plans to increase capital were checked by uncertainty over future growth and the need to reduce their high levels of debt. Moreover, the recovery is extensive to the entire euro area, since all countries, including Greece, have attained positive growth rates. The improvement in economic activity has also enabled unemployment levels to be reduced to rates close to 9%, down from the levels of 13% observed at the worst points of the crisis. Significantly, this improvement in activity has come about against a difficult political background, marked by the start of the Brexit process and the rise in certain trends that are against free trade and the free circulation of people, freedoms that are the bedrock of the European project, and this without forgetting the permanent threat of terrorism. Returning to the positive economic developments, we should not forget two central matters. Firstly, these developments are largely the consequence of the extraordinary stimulus received from monetary policy.
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Likewise, further headway would be needed in reducing sovereign-banking links, which contributed notably, as is known, to heightening the severity of the crisis in the euro area. In this connection, the banking union requires supranational support that would increase the financial capacity of the Single Resolution Fund in the event of a systemic crisis and which would afford it greater power during the transition process established for its full constitution. The European Commission’s proposal that the European Stability Mechanism should provide this support might be an appropriate solution. It is also necessary to create a common deposit guarantee scheme whereby depositors’ confidence in banks is irrespective of the health of their Public Treasuries. Progress on the set of initiatives encompassing the Capital Markets Union would also contribute to achieving greater financial integration, diversifying sources of financing and empowering to a greater extent private mechanisms geared to sharing the risks that originate through these markets. Conclusions In any event, it should be stressed that, although the recovery is providing for the correction of some imbalances, some fallout from the crisis remains at large. The high levels of unemployment and of public and private debt, low productivity growth and the weakness of the capitalisation process pose challenges that require greater reformminded ambition.
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BIS central bankers’ speeches 3 MAS will therefore introduce a “regulatory sandbox” approach that aims to give FIs more confidence to experiment and launch their innovative products or services within controlled boundaries. • The idea is not to remove all risk. Failure is an inherent part of innovation. • Rather, we want to create an environment where if an experiment fails, it fails safely and cheaply, without larger adverse consequences. • MAS will soon issue guidelines for public consultation on how the regulatory sandbox will work. Three, we promote greater inter-operability within the industry to harness the full potential of technology. An innovative environment proliferates a wide range of technologies and solutions. • But if the solutions cannot interact with one another, we sub-optimise efficiency gains or customer experience. • While we should allow a hundred flowers to bloom, we should also take care we create a garden. Greater inter-operability across data systems is therefore a key priority. Let me give two examples of what MAS is doing together with the industry. • • One, common standards for payments systems to realise more seamless payments across a range of platforms. – We are working towards a unified Point of Sales (POS) terminal – a single terminal that can read all kinds of cards at retail and hospitality outlets.
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While regulation must not front-run innovation, regulators must run alongside innovation • We must know what’s going on and be ready: either to promote or to restrain. There are three ways in which MAS does this. One, we actively engage FinTech firms to better understand emerging innovations and help them design their solutions for financial services. Take for example cloud computing. • • Our traditional approach was to deal only with regulated FIs, not their service providers – But with cloud solutions proliferating, we changed tack – Many of these solutions offered strong efficiencies and cost savings but not all models met our regulatory requirements for data integrity and protection. So we engaged in dialogue directly with cloud service providers to explain our concerns and at the same time understand the technology – The service providers then came up with solutions that met our concerns – And we modified our requirements to take account of new business models and technological capabilities. Two, we allow our FIs to experiment with new technologies in a safe environment. FIs do not have to seek MAS’ permission to try new things. • Responsibility lies with boards and management to assess the risks and put in place adequate safeguards • But with many innovations, it is not always possible to anticipate every vulnerability or whether there is a risk of breaching regulation. • Sometimes, as Nike puts it, you have to “just do it”.
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This is slightly higher than the national average of 3.9 per cent. Even though the region has somewhat higher unemployment than the national average, the rise in unemployment in Northern Norway has been relatively low in the last year. Finnmark is one of the four counties in Norway to record the sharpest fall in unemployment over the past year. This snapshot report on the current situation in this part of the country and similar reports from the other regions provide information that is important to interest-rate setting. The labour market has improved. The number of persons employed in Norway began to increase in summer 2003 and unemployment stabilised. Employment in distributive trades has increased. There are also signs that employment is rising in service sectors such as education, the public sector and health and social services, from the weak levels recorded in the first six months of last year. Manufacturing employment remained well below the level one year earlier in the fourth quarter of 2003, but is falling at a slower pace. Unemployment has been fairly stable. Adjusted for seasonal variations, LFS unemployment stood at 4.4 per cent of the labour force in January. Growth in household demand, petroleum investment and increased activity in the business sector are paving the way for a rise in employment in the period ahead. On the other hand, intensified competition and continued rationalisation in the business sector may have a dampening impact on labour demand.
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However, due to the increase in household net debt, net interest expenses will fall considerably less than this. The impact of the interest rate decline also depends on how long interest rates are expected to remain low. When the sight deposit rate was reduced last autumn, longer interest rates showed relatively little change. The interest rate reductions in December and January, combined with the decline in inflation, have had a stronger impact on long-term interest rates. This indicates that financial market participants expect interest rates to remain low for a longer period. The rise in inflation from February to March, however, gave rise to somewhat higher interest rate expectations and a stronger krone exchange rate. The outlook for the business sector is brighter now. The fall in the value of the krone over the past year has strengthened Norwegian business and industry. The business sector is, however, still feeling the effects of the sharp rise in labour costs over a period of several years. Relative labour costs measured in a common currency are in line with the level prevailing in 1990, but approximately 10 per cent higher than in the mid-1990s. The internationally exposed sector has been scaled back. Companies that are still in operation may be in a better position to cope with the high wage level. In 2003, employment and investment both fell, although investment picked up somewhat towards the end of the year. Efficiency-enhancing measures are expected to continue to characterise the business sector in 2004.
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Price stability itself has coincided with – some would say produced – a prolonged period of strong growth and low output volatility, which, as you know, has been dubbed the “great moderation". One major disappointment however, has been that price stability has not led to financial stability. On the contrary, it seems that, over the last two decades, financial crises have become more frequent, with increasingly serious consequences for growth and welfare. To get a sense of this puzzle, it may be useful to look at the intrinsic dynamics of the financial system. Both in normal times and times of stress, amplification mechanisms are at work, which exacerbate the impact of any specific shock. These mechanisms act through changes in leverage, liquidity, and risk aversion. These three factors interact in a complex and sometimes unpredictable way. For instance, growth in leverage may be fuelled by an increase in risk appetite. In turn, larger balance sheets of financial intermediaries give rise to liquidity expansion and growing risk appetite. It is easy to see how these dynamics can create strong procyclicality in the evolution of asset prices and credit aggregates. It is also likely that procyclicality is partly created, or accentuated, by our accounting and prudential regimes. If financial procyclicality was a short-term, mean-reverting, phenomenon, there would be little cause for concern. Unfortunately, those same mechanisms allow for the progressive buildup, over a long period of time, of significant imbalances and deviations in asset prices. At some stage, the correction becomes unavoidable, and is generally abrupt.
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They would state that that the ultimate responsibility for the crisis rests with monetary policy. Specifically, according to this view, by keeping interest rates too low for too long a time, central banks have tolerated – or even condoned – the build-up in risk and financial imbalances. They “created”, so to speak, the credit bubble which burst in 2007. Let me state clearly that I don’t share this view. It is very apparent that some features of recent financial innovation – including securitisation – have contributed to excessive risk taking and increased financial fragility. They explain why the crisis has been so severe. It is also striking that real – not only nominal – interest rates have stayed at low levels for an extended period of time. Over the medium run, long term real interest rates are beyond the control of monetary authorities. They have been driven by the continuous increase in saving rates which occurred over the last decade, especially in emerging economies. This created a demand for safe and liquid assets which could not be met by equivalent supply in those countries. Because of this “asset shortage”, saving flows were directed towards industrialized countries, first of all the USA. At the same time the financial system in those industrialized countries worked to produce “complex” assets which looked safe and liquid – and were rated as such. Apparently, supply matched demand. But we know now that this was an illusion. Complex assets were neither safe nor liquid.
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Lars Heikensten: The Swedish krona and monetary policy Speech by Mr Lars Heikensten, First Deputy Governor of Sveriges Riksbank, at a seminar of Crédit Agricole Indosuez, held in Stockholm on 5 September 2001. * * * Over the past year the Swedish krona has weakened markedly. Both we at the Riksbank and other players in the currency market have been surprised by this. In that the exchange rate is an important factor in our assessments of future inflation, it also plays a part in the direction of monetary policy. The fact that, for the first time in years, the Riksbank has intervened in the currency market has also contributed to the recent heightening of attention on the exchange rate. Today I shall first endeavour to clarify the krona’s role in the Riksbank’s intellectual framework for monetary policy. A policy that targets inflation requires us to forecast the exchange rate, which is my next theme and by no means an easy task. In that context I shall also say something about the Riksbank’s view of the krona’s long-term real equilibrium exchange rate and its course in the past year. Another question I shall be considering is how exchange rate movements affect inflation. Before concluding, I will also talk a bit about interventions and transparency - a topic that has featured in the debate since we took the decision in June.
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Cash cards have not been successful (fig. 6). Chip cards with e-money function may be used in transactions of low value and for acceptance at smaller points of sale. This, however, is the part of the market where cash is most appreciated. The national roll out of the so-called Cash card occurred in Sweden in the latter part of the 1990s. Three of the four largest banks in Sweden, that together comprise the lion share of the card payment market, stand behind a common technology. The introduction has not been a success. Up to now, the growth in the use of the new product has been very modest and recently even negative in terms of number of transactions. However, the development of card based e-money is still in a very embryonic stage of development. Caution ought to be applied in drawing too rapid conclusions on its future evolution. In conclusion, although the growth of the card payment market during the last decade has been large, there seems still to be considerable potential for expansion, mostly through displacement of cash payments, and most obviously in Sweden (fig. 7). Why are Swedes so suspicious of cards and such lovers of cash? We do not know for certain. I can just assure you that it is not due to successful marketing of cash by the Riksbank, even though we issue the currency and live on the seignorage. Cash has many advantages, no doubt about that.
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Of course, besides the influence of monetary policy, this development of the real economy also reflects structural factors such as the strong resilience of the well-diversified Swiss economy and the flexible labour market. Companies had to make considerable efforts to adapt to the difficult conditions after each appreciation surge, which may have enhanced the flexibility and efficiency of the Swiss economy even further. The increase in the population as a result of immigration made a positive contribution to growth as well. Furthermore, during the pandemic in particular, there was also a rapid and targeted fiscal policy response. II. New constraints The pandemic and the war in Ukraine have fundamentally changed the constraints on central banks. In particular, inflation has risen strongly in many countries over the past year, and uncertainty has also increased markedly in many respects. The SNB, too, is at present confronted with an inflation rate that is significantly above the range we equate with price stability. As in recent years, inflation in Switzerland is currently lower than in many other countries. Besides the strong Swiss franc, the energy mix in Switzerland has thus far also helped to keep inflation comparatively low. Nevertheless, the current level of 3.4% is still the highest inflation our country has seen since the 1990s. Furthermore, there are signs that inflation is increasingly spreading to goods and services that are not directly affected by the pandemic or the war in Ukraine.
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Furthermore, the SNB is obliged to give full account of its actions. This serves to make its decisions readily understandable for the general public, and to show whether and to what extent the targets have been met. The phrase ‘the overall interests of the country’ means that monetary policy is to be focused on the economy as a whole, rather than individual interests. It does not provide a basis for pursuing other objectives with monetary policy, even if the desired goals – as in the case of climate protection – are right and important for society. The SNB will remain committed to maintaining the current institutional framework in the future. Price stability is the most important contribution monetary policy can make with regard to growth and prosperity. This can also be seen in the current situation. High inflation has quickly pushed other important problems down the list of societal and political priorities. Ensuring price stability is thus also a prerequisite for successfully tackling other challenges facing society. Page 11/16 V. Concluding remarks The environment in which we conduct our monetary policy has changed. In recent years we have been concerned about inflation being too low; now we are concerned about it being too high. In this difficult and changing environment, a narrow mandate and a definition of price stability that anchors inflation expectations at a low level while at the same time allowing a certain amount of leeway with regard to the accepted level of inflation are important factors for a successful monetary policy.
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During the spring the turmoil reaped its most startling victim so far. Bear Stearns, the fifth largest investment bank in the US, was forced to suspend payments after being unable to arrange short-term financing. It hardly needs to be said that Bear Stearns was heavily exposed to the subprime market. Conditions on the credit markets temporarily eased after Bear Stearns. Although tensions continued, the market began to slowly return to more normal conditions and credit risk BIS Review 125/2008 1 premiums decreased sharply for a while. Confidence seemed to be returning to the financial markets. However, the turmoil gained renewed strength during the late summer when Lehman Brothers was forced to apply for bankruptcy protection. Since then a number of banks in Europe and the United States have experienced severe problems. Banks and financial institutions that were forced into being sold or nationalised include heavyweights such as Fortis in Belgium, Merrill Lynch and AIG in the United States, and Hypo Real Estate in Germany. The financial crisis had progressed from being a subprime crisis in the United States into a global confidence and liquidity crisis. Where can we find the explanations? In light of current events, the obvious question is how do we explain the situation? What we see is largely the result of an extended period of vast expansion of credit and growth of the financial industry's assets, which with hindsight has proven to be unsustainable.
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And just for the sake of clarity, let me add that this view is in no way related to any such situation being present in Sweden. This is something that the Riksbank has advocated for a long time. In light of what happened in the United States we should also consider regulation of institutions that do not take deposits from the public. Such institutions are often the subject to weaker supervision and regulation, which has been justified because they are not as important for financial stability. But as the developments in the US investment banks clearly illustrate, even such institutions can substantially shake up the financial system. Given the global scope of the crisis it is important to coordinate both short-term and longterm measures among countries. If nations try to find separate solutions in this type of situation, the costs for handling the turmoil could become even greater than what they otherwise would have been, even for individual countries. Therefore, in all of the issues mentioned here, much can be won through international coordination and harmonisation. Yet another example of an issue that requires international coordination is how to organise supervision and crisis management within the EU. Today several banks engage in significant operations in several EU countries, while the responsibility for supervision and crisis management is still national. Under such circumstances there is a risk that coordination problems and conflicts of interest could arise between countries, which obviously does not benefit financial stability.
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The major uncertainty, of course, relates to the situation in the United States - the world's largest economy - which had experienced a period of exceptionally strong economic growth with relatively low inflation until the latter part of last year, which itself played a vital part in buoying up the whole world economy through the Asian financial crisis. Briefly - and no doubt oversimply - this very strong performance was made possible by developments on the supply side of the US economy in the form of exceptional productivity gains, as the application of new information and communications technologies spread through the economy. This development - though extremely difficult to quantify promised a higher sustainable rate of growth in the US economy and higher corporate earnings growth. That expectation in turn contributed to a rapid rise in equity prices, especially in the "high tech" sectors, which helped stimulate both business investment in the US and consumer demand causing the private sector to move into financial deficit. It also attracted massive direct and portfolio investment inflows from abroad which over-financed an increasing current account deficit in the US and caused the dollar to strengthen against other currencies. But by the first half of last year the US economy was expanding at a rate of around 5%, which even on the most optimistic view of underlying productivity growth was clearly unsustainable.
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That criticism in my view was wholly unjustified. It was a classic example of expecting too much from monetary policy. The role of a central bank is - as I said earlier - essentially to maintain overall macroeconomic stability, and the measure of its success is consistently low inflation. On that criterion the ECB has been substantially successful. The Euro area economy grew at above trend with core inflation nevertheless remaining within the ECB's tolerance range of 0-2%, even though the headline measure of inflation, influenced by rising energy and food prices which were essentially shocks on the supply side, and by the weakness of the exchange rate, moved above that range. Had the ECB attempted during this period to target the exchange rate, presumably by raising interest rates, it is not at all obvious to me that it would have succeeded; and even if it had, the likelihood is that it would have put the internal stability of the euro-zone economy at risk. More recently the ECB has sometimes been criticised as slow to respond to the weakening of the US economy. Implicit in that criticism no doubt is a strong conviction about the extent and duration of the US slowdown and its likely impact on the euro area. As I have said there is in fact a great deal of uncertainty about that.
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Zeti Akhtar Aziz: Basel II implementation and the development of Asia's financial system – experiences, challenges and regional cooperation Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 4th SEACEN/ABAC/ABA/PECC Public-Private Dialogue for the Asia Pacific Region, Kuala Lumpur, 18 August 2008. * * * It is my pleasure to be here today, to speak on the occasion of this Public-Private Dialogue organised by the SEACEN Centre in collaboration with the APEC Business Advisory Council (ABAC), the Asian Bankers Association (ABA) and the Pacific Economic Cooperation Council (PECC) on the development of Asia's financial systems and the implementation of Basel II. The implementation of Basel II across the Asia Pacific region is occurring at a time of heightened risks, during a time in which our economies and financial systems are confronted with significant challenges and increased uncertainties. As the underpinnings of Basel II are concerned with enhancing the responsiveness to risk by banking institutions, there are enormous expectations that Basel II will stand up to the test of capturing the complexities and the more uncertain direction of risk in the current environment. There is also enormous interest in assessing the pre-emptive capabilities of the framework to anticipate the direction of risk and thus ensure the provision of adequate capital buffers for such risk. The sharing of experience on the implementation of Basel II in this region and the greater engagement between the supervisory and financial communities will provide further insights to these issues.
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Boards BIS Review 99/2008 3 and senior management must have a sound understanding of the risk profile of the respective banking institution and ensure that it holds sufficient capital that is commensurate with that profile. This is reinforced by the greater attention being accorded by supervisors to the risk management control functions within the banking institutions and how they are effectively governed. Improved market disclosures under the third pillar of the framework further subjects the banking institutions governance practices to closer market scrutiny. These developments have challenged governance practices that may have been tolerated in the past, but which would be grossly inadequate to provide the oversight that is demanded in today's far more complex business environment. Such practices have included vague reporting of risks to the board, boards that are disengaged, and boards that have no or little expertise in risk and financial matters. Boards and supervisors need to confront these issues with firm resolve. This will entail the more rigorous scrutiny of board members and senior management, both prior to their appointments and on an ongoing basis. Boards need to also assert themselves more actively in advocating and driving risk reforms, and demanding the appropriate level and amount of information from management that would enable the oversight responsibility to be discharged effectively. In many respects, Basel II remains a work in progress.
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Avoiding Economic Anxiety Speech given by Andy Haldane Chief Economist and Member of the Monetary Policy Committee (MPC) Cheshire and Warrington LEP Economic Summit Webinar 30 September 2020 The views expressed here are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Jack Meaning and Andre Moreira for their help in preparing the text. I would like to thank Andrew Bailey, Frances Cassidy, Alan Castle, Shiv Chowla, Liam Crowley-Reidy, Jon Cunliffe, Harvey Daniell, Pavandeep Dhami, Simon Hayes, Saurav Kamath, Zaar Khan, Simon Kirby, Nick Mclaren, Becky Maule, Shahid Nazir, Mette Nielsen, Douglas Rendle, Michael Saunders, Michal Stelmach and Jan Vlieghe for their comments. 1 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice Thank you for the invitation to speak at this Cheshire and Warrington Local Enterprise Partnership (LEP) Economic Summit. Through my colleague on the Industrial Strategy Council and former Chair of the LEP, Christine Gaskell, I know the excellent work the LEP does in supporting the local economy and community. That support has never been more important given the risks facing individuals, businesses and communities. Given those risks, I thought I would focus today on the economic outlook in the UK, updated in the light of events since the publication of the Bank’s Monetary Policy Report in August. Plenty has since happened. But one factor has remained the same: the extra-ordinary degree of uncertainty about the economic outlook.
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A more recent example is the people fleeing from the war in Syria, and we are now seeing a similar development in connection with the war in Ukraine. Depending on the circumstances, war may also give rise to a period of sharply increased geopolitical uncertainty. This may mean that countries that are not directly involved in the war choose to arm themselves and thus increase public spending. However, greater uncertainty about the future may also mean that the private sector chooses to postpone investment and increases its precautionary saving. There are thus counteracting effects on aggregate demand and thereby on inflation. All in all, there are thus a number of different ways in which war can lead to inflation rising, both in individual countries and in the world economy as a whole. Four periods of high inflation since 1900 This is something that is quite clear when studying a longer time series for inflation. Figure 1 shows inflation in Sweden from 1900 onwards. Figure 1.
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But the only entity with sufficient financial and managerial resource to absorb a large asset or liability portfolio, without suffering chronic indigestion, is another big bank. So it was during the crisis – for example, Bear Stearns was swallowed by JP Morgan Chase, Merrill Lynch by Bank of America and Washington Mutual by Citigroup. This makes for a rather uncomfortable evolutionary trajectory, with rising levels of banking concentration and ever-larger too-big-to-fail banks. Levels of banking concentration have risen in many countries since 2007, precisely because of such shot-gun marriages by oversized partners. In other words, resolving big banks may have helped yesterday’s too-big-tofail problem, but at the expense of worsening tomorrow’s. One way of avoiding this problem is to re-capitalise a bank by bailing-in its creditors, rather than transferring its assets. But resolution rules of this type are not problem-free either. Like all policy rules, they face what economists call a time-consistency problem. Whether a rule is followed in practice depends on the balance of costs and benefits at the time crisis strikes, not at the time the rule is written. That is why policy might in practice lack consistency over time – hence time-inconsistency. Consider that trade-off when a big, complex bank hits the rocks. On the one side is a simple, but certain, option – state bail-out. On the other is a complex, and less certain, option – resolution.
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New Estimates of Returns to Scale for U.S. Banks.” Journal of Money, Credit, and Banking, 44(1), 171–199. 14 BIS central bankers’ speeches
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And even if they could replicate them, humans might still prefer humans to carry them out. The future could see a world of work in which EQ rivals IQ for skill supremacy. Professions involving high degrees of personal and social interaction – such as health, caring, education and leisure – could see demand rise. Indeed, it is possible the balance between cognitive and social skills might alter significantly even among jobs which traditionally have been cognitively-intense. Take medicine. The doctor of the future might be valued far less for their clinical competence in diagnosing illness and prescribing solutions. In a world of individual medical records and data-hungry diagnostic algorithms, much of the process of diagnosis and prescription might fall to machine rather than human. Indeed, the UK Prime Minister has recently suggested a strategy to deliver just that. 60 But that is unlikely by itself to eradicate the need for doctors. Patients are still likely to want to discuss their diagnosis and prescription. And they will want this advice delivered personally and empathetically. In surveys of patient satisfaction it is a doctor’s bedside manner, rather than clinical competence, that matters most. 61 In future, that balance between social and clinical skills may shift further. And, most likely, those social skills will be demanded from flesh-and-blood rather than robo-doctors. If both the nature of a career and the skills it requires are changing, does this carry implications for educational institutions? That seems likely.
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Indeed, one of the key benefits of globalisation over the past several decades is that the freer flow of goods and services, people and capital, ideas and information, has served as a vehicle for the transmission and diffusion of new technologies across borders. Other things equal, this should have accelerated catch-up between countries operating at and inside the technological frontier. 65 Other things, however, have not been equal. Penetration rates of new technologies, once adopted, tell a different tale. They suggest that, over time, there has been a divergence between frontier and non-frontier countries. In other words, the intensity with which new technologies have been used has expanded more rapidly in frontier (especially Western) economies than in non-frontier (non-Western) ones. This will have retarded catch-up between the two blocs. It is a less encouraging story about the diffusion of innovation. With the intensive and extensive margins of diffusion pushing in opposite directions, which has won out? It seems to have been the forces of divergence: slower rates of penetration of new technologies have more than counter-balanced faster rates of adoption across countries. This has shown up in levels of productivity between frontier and non-frontier which, since around 1980, have if anything diverged. Chart 7 illustrates that. It compares levels of productivity across 44 countries since 1950 relative to the frontier country (the US). Convergence prior to 1980 has given way to divergence subsequently.
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Over time, our regulatory and supervisory framework would rely more on market discipline through increased disclosure and transparency. In this respect, shareholders are expected to play a more active role in overseeing the performance of banking institutions and the effectiveness of management in conducting the business in an efficient and professional manner. As we advance into the second phase of the FSMP or the Financial Sector Masterplan Plan, progressive liberalisation will take place to level the playing field for domestic and foreign banking institutions. To this end, greater operational flexibility will be accorded to the existing foreign banking institutions. Bank Negara Malaysia has, in addition, granted three new full-fledged Islamic banking licences to foreign financial institutions. Additionally, foreign direct investment of up to 49 per cent has been allowed in the equity holding of the Islamic subsidiary of a commercial bank. The overall market shares of local and foreign banking institutions have not changed drastically, but there has been qualitative improvements in operational efficiency, service levels, risk management and corporate governance standards. Over time, as the industry further evolves, Bank Negara Malaysia will reassess the environment before deciding on further liberalisation measures. Ladies and Gentlemen, Macroeconomic and financial conditions are evolving swiftly, posing more significant challenges and lending urgency to accelerating efforts towards realising our vision of a more progressive and dynamic financial system. Greater commitment towards enhancing strategic competence and organisational effectiveness are critical as we strive for higher standards of performance and greater efficiency in the banking system.
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In response to the unfolding crisis, Governments and central banks adopted aggressive measures, including fiscal stimulus packages, bank recapitalisations and the provision of government guarantees, and injections of huge amounts of liquidity. It was also important to critically review the legislative and regulatory framework in order to pre-empt the recurrence of, or at least better manage, similar situations. The de Larosière Report, mandated by the European Commission (EC) and published in February 2009, set the scenario for reforms at a European level. Similar work was undertaken at the global level by the Financial Stability Board (FSB) and by the Basel Committee on Banking Supervision (BCBS). This work has clearly showed that the Basel II capital requirements did not ensure an adequate buffer to sustain an institution on a going concern basis. Confidence in regulatory capital waned and the market started to assess bank robustness using other tools. Liquidity measurement, for example, had been largely excluded from Basel II. Some internal risk models were based on short-term statistical horizons that failed to capture periods of stress. The potential of the regime to exert a strong pro-cyclical bias also became manifest. In its efforts to address identified weaknesses, the BCBS issued two consultation documents in December 2009, one on “Strengthening the resilience of the banking sector” and another on an “International framework for liquidity risk measurement, standards and monitoring”. Concurrently, the EC is proposing amendments to the Capital Requirements Directive (CRD) in order to align it with the recommendations of the BCBS.
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Though the initial effect of credit contraction was similar in the United States and the European Union (EU), its propagation was considerably different owing to the EU’s predominantly bankbased system of financing. The first banks to be hit in 2007 were obviously the ones that invested the most in related financial products that had by then lost much of their value. These banks were mostly located in Germany, France and Netherlands, countries with comparably strong fiscal positions. Then, starting in 2008, it was the turn of several Spanish and Irish banks, which were overexposed to the collapsing domestic real estate market. Governments across the globe stepped in to shore up their banking systems. The European Commission estimates that in the EU, public sector aid provided in 2008 was around 5% and in 2009 around 9% of EU GDP. 5 The direct net fiscal costs of financial sector support in the United States between 2007 and 2009 are estimated to be at around 5% of GDP.6 Up until that point, sovereign debt had been considered as effectively risk free, regardless of the rating of the sovereign. The Greek crisis destroyed that illusion, and induced a general repricing of risk in the EU. This repricing of sovereign and other risks, combined with the drying up of funding markets, in turn affected other countries’ banks which, having little exposure to either toxic financial products or to real estate, had been immune up until that point. Banks in, for example, Italy and Portugal were overly exposed to their fragile sovereigns.
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It has probably not been since the 1970s that we find such widespread reports of purely physical production constraints, for example now in the form of shortages of rigs and other equipment in the petroleum industry or shortages of plank, concrete and insulation in the construction industry. 2 BIS Review 28/2007 Unemployment has fallen markedly over the past year. The pace of decline and the level of unemployment are reminiscent of two earlier cyclical peaks, one in the mid-1980s and the one that began at the end of the 1990s and continued into the present decade. Both booms culminated in sharply accelerating cost and wage inflation. Supply-side shocks to the Norwegian economy The combination of strong growth, high capacity utilisation and low inflation is a reflection of favourable global developments and a number of positive supply-side shocks to the Norwegian economy. The global expansion of recent years has resulted in strong growth in Norwegian export industries. Employment has increased and unemployment has declined. The favourable labour market has boosted household optimism and supported private consumption. Strong demand growth and solid profitability have also paved the way for growth in business fixed investment in Norway. So far, the weakening of the US housing market has not had pronounced spill over effects. Growth in China and India is strong and the euro area is experiencing a broad-based upturn. Global growth is probably less dependent on demand for goods and services in the US than was the case earlier.
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And, of course, there could be further shocks in either direction. So it is important to use whatever cross-checks on our projections that we can. One way to do that is to look for any nominal indicators that might signal risks of persistently above target inflation in the medium term, such as money or wage growth. Underlying money growth is currently just over 1% on an annual basis. And underlying wage growth is around 2%. There are some tentative signs that money and wage growth are rising, but neither of these figures are even close to being consistent with above-target inflation in the medium term. Taking these indicators together with the degree of slack in the economy – and given some of the factors likely to restrain growth in the UK and in Europe – the economics of the situation does suggest that inflation should fall back from its current high point. But there are risks on both sides. BIS Review 91/2010 7 On the one hand we need to be sensitive to the risk of tightening policy prematurely, stifling the nascent recovery. In that case, some of the flexible response to the recession could be swept away, delivering higher unemployment, more company failures and the risk of inflation significantly undershooting the target. The risk of deflation – which prompted the start of the MPC’s asset purchases in 2009 – may have faded, but it hasn’t gone away and would require greater efforts to deal with, if it materialised now.
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Following this workshop, the results of these research works will feed into the decision making process and help the Bank of Albania to make more informed decisions and improve its models and the efficiency of policy-making. For this reason, I encourage and invite you all to ask questions, to comment and to assess our work with your opinions and academic proficiency, to challenge our findings and methodologies. The nature of our research is undoubtedly influenced by our main mission and prevailing concerns. It is for that reason that the majority of our research focuses on monetary policy, price and financial stability, models related to them and the economic events that affect them the most. Some of the trends that we will discuss today are global and fundamental in nature. They may not have reached our economies, yet, but they will definitely have a significant impact on our real economy and financial system in the future. For example, new technologies, such as crypto currencies, Artificial Intelligence and machine learning, which represent a major challenge, not only for central banks, will have various implications for monetary and financial stability. Research related to these new technologies will be beneficial for both advanced and developing countries. Unexpected, sometimes new, global or regional events can shock a domestic economy such that authorities need to intervene with what they already know and have experienced. It is important to understand the short and long-term implications of the adopted policies in these new environments.
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This fault-line lies at the heart of the imbalance between privatised returns and socialised risks. Only in banking do control rights and incentive wrongs combine so uncomfortably. That calls for fundamental reform. Post-crisis that has been recognised, as regulatory reform has come thick and fast. These reforms are unquestionably a step in the right direction. But if they are not to reappear, deep-rooted incentive problems in banking need to be tackled at 1 US Treasury (2011). BIS central bankers’ speeches 1 source. I wish to argue there is unfinished business before these incentives are properly aligned with the public good. Limited liability In the first half of the 19th century, the business and governance of banking was relatively simple. By the mid-19th century, the United Kingdom had around 500 banks and 700 building societies. Most of the former operated as unlimited liability partnerships, the latter as mutually-owned co-operatives.2 Financial sector assets represented less than 50% of annual GDP and the largest banks had assets of less than 5% of GDP. Bank balance sheets were heavily cushioned. Equity capital often accounted for as much as a half of all liabilities, while cash and liquid securities frequently accounted for as much as 30% of banks’ assets. Banking was a low-concentration, low-leverage, high-liquidity business. A broadly-similar pattern was evident across banking systems in the United States and in Europe. This governance and balance sheet structure was mutually compatible.
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Ladies and Gentlemen, it is in this regard that the Bank of Zambia and Professor Collier with the support of the UK Department for International Development partnered to hold this international symposium whose objectives include: (i) enhancing understanding of advantages of central bank independence among central bankers, Government, banks, non-bank financial institutions, the business community, academics and other stakeholders; (ii) drawing lessons and sharing experiences of central bank independence in developed, emerging and developing countries; (iii) appreciating the political, economic and legal aspects of operationalising greater independence for central banks; and (iv) exploring ways of enhancing fiscal and monetary coordination. Ladies and Gentlemen, the selection of papers to be presented and discussed at this Symposium will provide a platform for sharing ideas required for practical solutions aimed at improving the Bank’s service delivery. As we tackle issues of inflation, exchange rates, and other key macroeconomic indicators, let us use this forum to outline some of the past developments and challenges that lie ahead of us as we aim to taking Zambia’s financial sector to higher heights. Lastly, let me say that while we can all learn from what other central banks have done, each country should establish the legal framework for its central bank, and allow for its evolution, in ways which best fit that country’s own history and institutions. I have no doubt that the symposium will be thought-provoking and highly participatory.
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From 1986 to 1992 Norway had a fixed exchange rate system with a defined central rate with fluctuation margins. This system was abandoned in 1992 after extensive speculation against the krone during the period of unrest in European exchange markets. Following the decision to allow the krone to float on 10 December 1992, the guidelines for monetary policy were revised. Monetary policy was subsequently oriented towards exchange rate stability, but without stipulating a central rate with fluctuation margins. The krone depreciated slightly immediately after the crisis, but then remained stable without extensive use of Norges Bank’s instruments. Since 1996, the exchange rate has fluctuated more widely. There may be several reasons for this. During part of this period, the government budget has not contributed sufficiently to smoothing growth in domestic demand and production. Wage inflation in 1997 and BIS Review 121/1999 6 1998 was higher than in other countries. Turbulence in international financial markets has also had an important contagion effect on the krone. In addition, oil revenues have fluctuated, which may have affected investors’ expectations regarding future developments in the Norwegian economy.
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We are issuing new guidelines on compensation practices so that financial sector employees are rewarded for long-term performance and discouraged from excessive risk-taking. And we are working with foreign regulators to develop more robust international standards for bank liquidity. We are working to make the tri-party repo system more robust and reducing settlement risk by facilitating the settlement of over-the-counter derivatives trades on central counterparties (CCPs). But more needs to be done and much of this requires action by Congress. Congress is now considering several proposals for comprehensive regulatory reform, proposals that merit careful study and debate. Let me offer some general thoughts on the principles that should guide how we approach reform. First, it’s important to take a clear-eyed and comprehensive view of the financial system we have today. As I’ve already suggested, if there is one overriding lesson to be drawn from the events of the past 18 months, it is that the financial system is just that: a system, and a very complex one at that. The operational, liquidity and credit interdependencies that characterize contemporary financial markets and institutions mean that the well-being of any one segment of the system is inextricably linked to the well-being of the system as a whole. Because of this, our approach to reform must be guided by a coherent sense of the system as a whole, not merely by a focus on some of its component parts, as important as they may be.
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This involves imposing a levy on the incomes of the working population and transferring these funds to pensioners, either through redistribution in the present (pay-as-you-go system) or via a capital funding system which benefits future generations of senior citizens. Thus, demographic ageing means that the working population is obliged to shoulder ever greater levies. If, at the same time, the global creation of wealth progresses slowly, the responsibility of financing old age pensions is going to impose an increasing social burden. Thus, it is not only necessary to improve our economic efficiency, we also need to be careful not to impede these efforts through inappropriate measures. We must allow the invisible hand of competition to bring about the most efficient allocation of our resources possible in both the domestic and the foreign arenas. Consequently, we need to do more with the resources at our disposal. At the same time, we need to make sure we have access to better quality resources. This means taking a longer-term approach to our system of education. The conditions within which our economy operates also play an important role. Growth in investment activity not only allows us to create new jobs but also, and above all, to accelerate productivity advances – both of these factors encourage growth and help to achieve a better financial basis for our old age pension scheme. There are three reasons why the Swiss National Bank is concerned about demographic developments and growth.
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Jean-Pierre Roth: The population is ageing - we cannot wait any longer! Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the Association suisse des actuaires, Basel, 17 June 2005. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). * * * Like other developed countries, Switzerland has been hard hit by the phenomenon of demographic ageing. It is putting our old age pension scheme to a severe test. The ageing of the population is also impacting on our ability to innovate, our potential to achieve productivity gains and our competitive dynamism in a globalised and demographically diversified world. This is why measures need to be put in place quickly. At the heart of this demographic challenge lies the need to enhance the productivity of our economy as well as our productive capacity. It is all the more important to secure favourable growth conditions because the ageing of the population in itself could impact negatively upon our capacity for growth – which is under strain already now. Increasing the productivity of our economy and the pace of growth is essential if we wish to maintain our system of social security. At the macroeconomic level, the financing of old age pensions works according to a simple principle.
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We had to abandon our fixed exchange rate policy in December 1992. One important reason for this was the inherent weaknesses in the fixed exchange rate system in an environment of free capital flows and deep financial markets. When the fixed exchange rate policy was formally abandoned, there was a risk that the Norwegian economy could again lose its nominal anchor. However, the krone exchange rate showed little movement and soon found a new range. Fiscal policy had a stabilising effect. The exchange rate remained stable until autumn 1996. This was partly due to low wage growth and a level of total demand that did not generate pressures in the economy. After a period, the krone began to show wider fluctuations. The experience of the latter half of the 1990s demonstrated that monetary policy cannot fine-tune the exchange rate. Developments in the international financial markets led to greater fluctuations. And more fundamentally – exchange rate developments no longer sent signals back to wage formation and fiscal policy when labour market pressures mounted and incomes policy failed. High petroleum revenues, fiscal slippage and expectations of increased use of petroleum revenues contributed to this. The exchange rate was therefore no longer suitable as a nominal anchor. As a result, Norges Bank gradually placed increasing emphasis on low and stable inflation. In 2001, the Norwegian authorities decided that monetary policy in Norway was to be oriented towards low and stable inflation through a numerical target for inflation, as was the case in many other countries later in the 1990s.
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As a blunt banning of crypto-asset activities is not seen as an option for most, for a number of reasons, starting for instance with the belief in France that it would most likely lead to regulatory arbitrages between jurisdictions, most of the attention at national and international level has been put on "what?" (what activities and what risks) and "how?" (by which means) to regulate. In my short introductory remarks today, I would like to share with you my perspective, as the organisers of this Global Payments Week Conference have kindly suggested, speaking from the standpoint of a central bank in charge of ensuring financial stability, on the types of risks associated with crypto-activities that particularly need to be considered for regulation and supervision, and the importance of a convergent and coordinated regulatory approach on crypto-assets at the international level. I. What risks to consider for regulation and supervision in the crypto ecosystem 1) Traditional and new risks associated with the development of the crypto ecosystem The bankruptcy of FTX in November 2022, one of the largest crypto exchanges, and the resulting knock-on effects on its users and other market participants, have 1/4 BIS - Central bankers' speeches spectacularly shown the instability of the crypto-assets ecosystem. Within the regulatory and supervisory community, a root cause of this instability is well recognised. At present, crypto-asset infrastructures and activities generate risks which are similar to those of mainstream finance services, and inherent to the provision of financial services, including credit, liquidity and market risks.
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A rapid and pronounced change in the interest rate may be appropriate in cases where there is a risk that inflation may deviate considerably from the target over a longer period, or where heightening turbulence in financial markets or a cost- push shock resulting from wage negotiations indicates that confidence in monetary policy is in jeopardy. Financial market confidence in the inflation target provides Norges Bank with greater scope for promoting stability in output and employment through monetary policy. This scope will also increase as the inflation target is incorporated as an anchor for wage formation. We have also indicated that in the event of runaway overall credit growth and a sharp rise in property and house prices as well as equity prices, it may be necessary to reassess the time horizon. It would in general have been possible to achieve the inflation target at a horizon shorter than two years by changing the interest rate more rapidly and more markedly. This might, however, have a greater impact on output and employment. BIS Review 53/2003 1 Norges Bank has based its monetary policy on flexible inflation targeting, where variability in output, employment and inflation are given weight. How do changes in the interest rate affect the economy? Norges Bank’s monetary policy instrument is the key rate. Norges Bank’s key rate affects short-term money market rates, and expectations concerning future developments in the key rate are decisive for banks’ deposit and lending rates and bond yields.
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Work is in train on stress testing, on loss allocation and on disclosure requirements, as well as on ensuring consistent application of the Principles for Financial Market Infrastructures (PFMIs) which set regulatory expectations for CCPs at a global level. All of this is important not only in its own right, but also to provide the market – the users of CCPs – with the tools and incentives to monitor resilience and drive effective risk management in CCPs themselves. To encourage competition between CCPs on resilience, not cost. • At the same time, the first line of defence for a CCP lies in the resilience of its members. Ongoing work to raise the prudential standards for banks on capital and liquidity, among other areas, should greatly reduce the risk of CCPs having to deal with a failing clearing member. And the progress I mentioned before on G-SIB resolution should help to ensure that, where a firm does fail, its payment and delivery obligations to the CCP continue to be met. I should add as an aside that there is more still to be done internationally in terms of removing technical and other obstacles to maintaining continuity of access to CCPs and other FMIs in the context of bank resolution. That continuity is not just essential to the bank in resolution but may also be critical for clients. If there is doubt about continued access to clearing services from a bank in resolution, clients may look to migrate rapidly to another provider.
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Adequate investment in infrastructure is crucial to promoting the further growth of the region, spreading the fruit of economic developments and raising the living standards of people in Asia. Given the region’s huge infrastructure needs, mobilising private sector investments is important. Governments and ADB have a key role to play in promoting an enabling environment for private investment. Making this right will enable the region’s vast savings to be efficiently channelled to fund its own investment needs, thus helping the region to realise its full growth potential. Thank you. 2 BIS central bankers’ speeches
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This initiative has been applauded by local and regional stakeholders, as it will be providing a regular and up to date assessment of the business-cycle, helping adjust and draw economic initiatives by both the public and private sectors that can be more precisely tailored to changing local realities. This initiative was possible because of the maturing relationship through the protocolization of anonymized information exchange between the Central Bank and the Chilean Internal Tax Service. The use of existing administrative records, allowing the identification of the location of economic transactions, has been much more efficient than the traditional recourse to large surveys, both in the timeliness of access as well as the possibility to backward estimate up to a decade of information. Following that, in July, by the joint effort of several institutions, we broadened data availability by gender and regions. Additionally, we managed to facilitate access and data analysis by combining data from different sources in one location using our public Statistics Database platform. We have now begun to publish an “experimental statistics” section that brings together indicators in various areas of interest. The indicators include mobility indexes, based on the number of electronic invoicing issued by a sample of gas stations; a daily retail sales index, which anticipates the activity of the retail trade sector; and the Internet Job Ads Index, first published in 2019, based on the ads posted at the leading web employment portals in Chile.
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At the same time, there has to be a global understanding of what regulation means, since regulations could otherwise, given the global interconnectedness of financial markets, be easily leveraged and since fair competition can only be assured when the rules of the game are the same. • I remain convinced that regulation and supervision must be sensitive to risks. This means that the bank that takes greater risks and poses a greater threat to financial stability must also be subject to stricter rules and/or limitations on its business 2 BIS central bankers’ speeches activities. If our set of rules was to treat different risk profiles in the same way, then we would subject conservative, low-risk banking business with low yields to the same requirements as high-risk business activities, thereby making the former uneconomical. In my view, that would be creating the wrong incentive. • We need a shrewd supervisory authority that monitors compliance with the rules and supervises banks in a consistent and tough but fair way. It needs to be shrewd because it must be able to use its discretionary powers correctly when regulating matters and weigh different arguments on a case-by-case basis. In this role, supervision must be able to act across national borders, because that is the only way to ensure that large, internationally active institutions, too, are subject to consistent and comprehensive control.
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When the Riksbank did not want to do this, Heckscher decided to do something about it. The right to exchange notes for gold had ceased in connection with the outbreak of the war in 1914, but was reintroduced in 1916. However, since an export ban on gold had been introduced in 1914, this did not mean in practice that the gold standard had been re-established. The export ban allowed the gold price to differ between countries and the value of the krona to change against other currencies. This was also the case as the krona depreciated against the dollar. At the US Federal Reserve, the price of one kilogram of gold in the depreciated Swedish currency was SEK 3,600 at the beginning of 1920. At the Riksbank, the price of one kilo of gold was instead SEK 2,480. If the export ban were to be lifted, then a considerable arbitrage gain could be made. Heckscher decided to draw the general public's attention to this fact and did so through an article entitled “The new price revolution” (Den nya prisrevolutionen), published in the daily newspaper Stockholms Dagblad on 11 March 1920.
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In a world of low growth, the political rhetoric in some major economies has tended to focus more on the costs and less on the benefits. That is unfortunate, because given the current circumstances of the global economy, it is likely that we need deeper and fairer integration. For emerging economies in Asia and Latin America, the question for us is whether deeper economic and financial integration offers a feasible path towards unlocking sustainable growth of our economies? How do we mitigate the costs and maximise the benefits? The World Bank theme paper for this conference provides a useful starting point for thinking about these issues. I will leave it to the learned speakers today to ponder on that. I will just briefly share my perspective on this issue with respect to ASEAN and Malaysia. Asian regional economic and financial integration The ASEAN Economic Community Blueprint 2025 contains ASEAN’s vision of regional economic and financial integration over the next 10 years. When it came to formulating the 2025 Blueprint, the issue of the nature of integration has always been central. The fundamental challenge remains on how to use regional integration to leverage on ASEAN’s diversity in terms of economic size and structure, income levels, resource endowments and stage of financial sector development. Here, in the interest of time, l will just focus on ASEAN financial integration. I remember that soon after the Asian Financial Crisis, there was a lot of interest in looking at the European model of a single currency.
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Preferential arrangements such as Trans-Pacific Partnership Agreement, the Regional Comprehensive Economic Partnership and ASEAN Free Trade Agreements have a critical role in spurring productivity growth, accelerating structural reforms and creating a diversified, competitive and resilient Malaysian economy. Once again, welcome to this Conference, and thank you. BIS central bankers’ speeches 3
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Mario Draghi: Hearing at the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement by Mr Mario Draghi, President of the European Central Bank, for the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament, Strasbourg, 14 July 2014. * * * Mr Chairman, Honourable Members, Allow me to start by congratulating all of you on your election to this House, and you, Mr Chairman, on your appointment as Chair of the committee in the new legislative period. The architects of Monetary Union conceived the ECB as a central bank with a clear mandate and with strong provisions for its independence. But for a public institution in a democratic society, independence can never come without being commensurately transparent and accountable to the elected representatives of the people. Our regular exchanges of views are a key channel for the ECB to discharge its duty of central bank accountability; hence, they plays an essential role in providing the ECB with the necessary legitimacy to fulfil the tasks assigned to it by the Treaties. To underscore our commitment to transparency, the ECB has recently decided to go a step further by publishing regular accounts of the monetary policy meetings of the Governing Council, which is intended to start in January next year. It is in this spirit that I am looking forward to our exchange of views over the next five years.
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900 Broadbent, B (2012), “Productivity and the allocation of resources” Chartered Institute of Personnel and Development (2020), “Home working set to more than double compared to pre-pandemic levels once crisis is over” Cominetti, N, Henehan, K, Slaughter, H and Thwaites, G (2021), “Long Covid in the labour market: The impact on the labour market of Covid-19 a year into the crisis, and how to secure a strong recovery”, Resolution Foundation, February 2021 Decision Maker Panel (2021), Panel data – February 2021 Felstead, A and Reuschke, R (2020), “Homeworking in the UK: Before and During the 2020 Lockdown”, WISERD Report, Cardiff: Wales Institute of Social and Economic Research Haldane, A (2020), “Is home working good for you?” Haldane, A (2021), “Inflation: a tiger by the tail?” Kim, H and Kung, H (2017), “The Asset Redeployability Channel: How Uncertainty Affects Corporate Investment”, The Review of Financial Studies, vol. 30(1), pages 245–280 Ramsden, D (2020), “The potential long term effects of Covid” Tenreyro, S (2020), “Monetary policy during pandemics: inflation before, during and after Covid-19” Vlieghe G, (2020), “Assessing the Health of the Economy” 14 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 14
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The Relation Between a Central Bank’s Degree of Independence and Inflation 14 ITA 12 SP NZLD 8 UK FRA SWE DEN CDA 6 BEL 4 NLD 10 AUS USA JPN GER SWZ 2 0 0 1 2 3 Degree of independence 4 5 Source: SOU (Govt official reports) 1993:20 It should be stressed that an independent position for the Riksbank is not the same thing as a monetary policy conducted without democratic control. The monetary policy objective has been made law by those who are popularly elected. It is making the objective operational BIS Review 14/1998 -6- and the ongoing work to secure the goal decided by the Riksdag that has been delegated to the Riksbank. Question 4: Why 2 per cent? The question of how the monetary policy objective should be made operational has several dimensions. By selecting a clear objective for monetary policy, it is possible to monitor and evaluate it in an effective way. This is especially important when the Riksbank is being given an independent status. A clearly defined inflation objective also has the advantage of being able to function as an “anchor” for households’ and businesses’ expectations. This function alone can be an important feature, not least when a regime of low inflation is being established. The objective for the Riksbank’s monetary policy is inflation of 2 per cent annually, as measured by the consumer price index.
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In spite of the fact that knowledge and understanding of the Riksbank’s policy have gradually increased, I believe that from time to time there is a need to explain the basis for the policy and some of the principles that guide it today. The purpose of today’s speech is just that. I will endeavour to answer seven of the questions that I have encountered most often in recent years at meetings and in editorials and commentaries and that seem to permeate the discussion of monetary policy continually. By way of conclusion I will comment on an eighth question. Question 1: Why is low inflation good? The experiences of previous decades in Sweden and a number of international examples show that high inflation is associated with economic costs. Moreover significant costs ensue when one is compelled to gear down from high to low inflation – something that sooner or later always happens. It has been shown that high inflation is often associated with sharp fluctuations in the relative prices of goods. Rapid and abrupt price changes create uncertainty about the future for all the actors in the economy. It simply becomes more difficult to make long-range decisions. Households and businesses are compelled in practice to take greater risks and both then demand higher interest and profits. This reasoning is supported by research, which indicates that the growth rate of the economy may be lower, because the increased uncertainty reduces investment activity. In addition the risk of making erroneous investments increases. (Diagram 1.
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Our current forecast assumes, for instance, that there will be gradual increases in the repo rate over the coming period. This new assumption does not in itself have any significance for the policy conducted. However, it makes it easier to evaluate our forecasts as they become more realistic and it is easier to compare them with others’ forecasts. It is also important to know this assessment to understand our communication. If the forecast shows inflation as being lower than two per cent a couple of years ahead, this is no longer a reason to cut the repo rate. It may instead mean that there is reason to raise the interest rate at a slightly slower pace than the market is expecting. A further step in our method of making forecasts could be to make our own forecasts for interest rates, instead of using market expectations as a basis. This would require a number of changes in working methods, both for those making forecasts and for us Executive Board members. Personally, I think this would be a natural progression and it is a possibility we are considering. It is not only the inflation forecasts we examine when formulating monetary policy and considering how to set the interest rate in future. Our policy is flexible in the sense that we also look at how the economy as a whole is developing. We have the ambition, within the framework of our price stability task, of also contributing to stable development in production and employment. How do we do this?
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There are, of course, areas where developments have not been so positive. This applies in particular to employment. However, the insight that employment in the long term depends on how well the labour market functions is beginning to gain ground. This is where efforts should be made to obtain a longterm solution to the employment problem. The decisive factor is not how the Riksbank sets the interest rate or how expansive fiscal policy is conducted. The idea that there is no conflict in the long term between objectives for good employment and low inflation is otherwise one of the reasons why Edmund Phelps is this year being awarded the Riksbank’s prize in economic sciences in memory of Alfred Nobel. Now, I do not wish to claim that everything positive that has happened is due to better thought out economic policy. There have also been significant changes in other areas that have contributed to the favourable developments. However, it can be observed that the changeover of monetary policy has given a steadiness and stability to economic policy that was previously lacking. This should be a fairly important factor. BIS Review 101/2006 1 …and a little closer Let me now say something in more detail regarding the developments over the past 3-4 years, as these have been rather special in some ways. At least at first glance, growth, inflation and employment have developed in a slightly contradictory manner in relation to one another during this period.
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In some Member States, wage increases significantly exceeded productivity gains and this, in turn, caused unit labour costs to rise substantially. When the global financial crisis hit the real economy in 2009, the budgetary effects of automatic stabilisers in the tax and benefit systems, the fiscal stimulus packages introduced by governments and the support provided to the financial sector led to a sharp deterioration in the fiscal positions of all euro area countries. External and domestic imbalances mounted, especially in weaker euro area countries. This led to severe tensions in financial markets and to the emergence of risks of adverse spillovers to the rest of the euro area. 2 BIS central bankers’ speeches One could divide into four categories the ways in which countries could have addressed sovereign debt problems in the past. First, and most naturally, governments pursue a course of fiscal consolidation. Second, as tended to be the case in some countries, central banks can monetise public debt, i.e. finance government debt and deficits by issuing additional money. Third, governments can decide not to honour their obligations and simply default on their outstanding debt. Finally, as occurred in a few exceptional cases, third parties can decide to assume the debt and deficits of their vulnerable counterparts, thus typically transferring resources from economically stronger to weaker entities. European Union legislation clearly rules out the monetisation and bail-out options.
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Our governance framework has lost much credibility that must now be carefully reacquired. BIS central bankers’ speeches 5 Here, particular responsibility rests with the national authorities. In particular, the European governance framework will function best if national finance ministries conscientiously perform their role with respect to multilateral surveillance. The sovereign debt crisis has taught us unequivocally that – in spite of the no-bail-out clause in Article 125 of the Treaty – the euro area countries are not insulated from one another. In an integrated single European market with a single European currency, spillover effects from one Member State to the other should make us all take a strong interest in the pursuit of sound fiscal and structural policies by our European partners. Because of the close integration of the European economies, governments have also set up a European crisis resolution mechanism, the European Stability Mechanism. Its purpose is not, as some have argued, to bail out euro area countries that have failed to pursue sound economic policies. Its stated purpose is to safeguard financial stability if one or more countries endanger the euro area as a whole. Conclusion To conclude, the ECB’s policies have been guided by price stability considerations, with policies targeted at those elements of the crisis that threatened to prevent it from fulfilling its mandate. Responsibility for the resolution of the sovereign debt crisis rests with the governments of the euro area Member States.
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Improving our market intelligence, refocusing our financial stability role, and making central services more professional, are examples of ways in which the Bank aims, in all its activities, to pursue standards of excellence, as it has in monetary policy. There is one additional area where change could prove beneficial. After the Monetary Policy Committee decides on the level of interest rates, that decision must be implemented in the money markets. The Bank will be carrying out a review of its money market operations with a view to improving and simplifying them, and reducing overnight volatility in those markets. The Bank’s Markets Director, Paul Tucker, will be consulting the market shortly. For the United Kingdom as a whole, pressing on with reforms to raise productivity is essential to future prosperity. The strategy which the MPC has pursued in recent years - stimulating domestic demand to compensate for weak external demand in the face of a strong exchange rate - carries the risk that there could be a sharp correction to the level of consumer spending at some point in the future. That risk is exacerbated by the continued strength of the housing market and associated borrowing that we have seen in recent weeks. It is possible that such weakness of domestic demand might be offset by an improvement in productivity, although as yet few signs of that are observable. Three lessons from past monetary policy experience are relevant to the present position. First, monetary policy can target only the aggregate price level.
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And output has risen in every single quarter since the middle of 1992, something that is true of no other G7 economy. Why were the 1990s so successful? And can that success continue? Four features of our economy lie behind this improved performance. First, the new monetary framework - based on an explicit target for inflation, a high degree of transparency, and, since 1997, independence of the Bank of England made it clear to everyone that monetary policy was, and would continue to be, targeted on maintaining low and stable inflation. Second, a substantial fiscal consolidation turned a deficit of 8% of GDP in 1993 into a sustainable position for the public finances based on a set of clear rules for government debt. Third, a continuing programme of supply-side reforms, over a period of 20 years, made it possible to reduce unemployment without generating higher inflation. Fourth, although the unexpected twists and turns of the world economy did pose real challenges to monetary policy, especially in the latter half of the decade, those shocks tended to average out over time rather than cumulate in either an upward or downward spiral. In other words, the economic surprises alternated between good one year and bad the next, rather than adding up to “one damn thing after another”. In that sense, Lady Luck smiled on us. Of course, we were not alone in enjoying the 1990s.
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When the agreement was officially signed at the Hofburg Palace here in Vienna this summer, with the Austrian president in attendance, I was reminded that it would perhaps have been impossible to achieve such an outcome on such a delicate and sensitive issue without this foremost mental closeness and some similarity of thought. However over the top it might seem to some, we are indeed very close mentally as well as geographically – perhaps more so than we would care to admit and more than we would like to admit, I should add. So, if you want to know a bit about the future of our economic, civic and other relationships and want to know how the other country is going to respond/react, all you need to do is look in the mirror. As really, you look at your neighbour in the Czech Republic or Austria, you will see something of yourself. Our relationships are sometimes like those within a broad family. Needless to say, we don’t always get along swimmingly. Besides many positive emotions, there is sometimes envy, spite, bickering, lack of understanding. Again, how typical are all these emotions for broader families. As a result, issues can arise between us. But that feeling of closeness in my eyes remains and should remain. It is a feeling I firmly believe we might share.
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One possible way to cut through Too-Big-To-Fail is to adjust our sense of what “Fail” involves. Perhaps it does not have to involve liquidation or administration. Perhaps it does not have to involve a binary shift from “going concern” to “gone concern”. But it does have to involve loss for equity holders and uninsured creditors. It does have to rekindle market discipline. It does have to preserve the flow of financial services. Those are, surely, the essential components of the resolution leg of the regulation, structure, resolution triangle that make up the reform debate. Individual countries or economic areas such as the EU can get only so far on their own. To cope with distress in global banking, we need to decide whether or not we want international collaboration in the resolution of cross-border banking groups. That is a question which, one way or another, the highest reaches of the authorities should answer as part of the reform debate. Once that is clear, some of the questions about structure and regulation might become clearer. A lot rests on whether we can resolve distressed LCFIs. We need to answer the big questions. 6 Examples of such safeguards include: creditors left no worse of than in liquidation; netting and set-off agreements respected; secured creditor claims and collateral kept together; and capital market arrangements, such as covered bond programmes and securitisations, protected. 6 BIS Review 33/2010
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In particular, there is unease that the current approach to crisis management that has evolved out of the experiences in Mexico and Asia, notwithstanding its successes in some cases, entails solutions that: • are potentially too costly, given the repeated reliance on large-scale financial support packages, • introduce adverse incentives, or moral hazard, and • are in themselves a source of uncertainty, and potentially of instability. 4 BIS Review 35/2001 But the alternatives look even more unpalatable in their implications. Notwithstanding considerable efforts at the public and private level to search for a better way, no magic bullet or formula has been found. Nor is one likely to be available. Experience and a reading of the historical record suggest that the seductive allure of grand solutions must be resisted. Cases differ greatly with respect to what is possible and desirable in terms of their implications for the interests of the public and private sectors. Moreover, if history is any guide, new developments in markets and practices quickly will render obsolete those measures that might seem well attuned to today’s circumstances. Then what is the right path? The solution is neither a single piece of financial engineering nor a compact between the official lenders and private creditors. Rather, it is a process incorporating a number of elements. Essentially, I would suggest that our current case-by-case approach to crisis management needs to evolve in ways that are market-based and adaptive, yet strategic, creative, and principled. Allow me to explain.
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When supervisors engage in a more active dialogue about those processes, we expect that banks will apply greater resources to identify and analyze more comprehensively the risks that they face, seek more accurate measures of the potential costs of those risks to their businesses, and develop more sophisticated mechanisms to mitigate those risks, including maintaining sufficient capital funds. I must emphasize that the supervisory review of capital is intended neither to replace the judgement and expertise of bank management nor to shift responsibility for capital adequacy to supervisors. On the contrary, the Committee recognizes that bank managers are in the best position to understand and react to the particular risks that their institutions face. Supervisory review seeks to evaluate the quality of management’s judgement. As an added benefit, better dialogue through supervisory review will strengthen supervisors’ understanding of the risks that banks face. When problems do occur, having greater insight into the risk profiles and the control mechanisms in place will help supervisors to understand which institutions are most exposed and enable more rapid corrective action to protect systemic financial stability. Market discipline The third pillar of the new capital adequacy framework, market discipline, is an important ally of official supervision and can create powerful incentives for banks to manage their risks appropriately. Marketplace participants, including investors, creditors, and other financial counterparties, can reward sound management or penalize weak management through their influence on the value of a bank’s equity and debt and on its access to credit.
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08.07.2019 The Banco de España and its promotion of economic history research Presentation of the “Guide to Historical Banking Archives in Spain” Pablo Hernández de Cos Governor Good morning, ladies and gentlemen. It is a pleasure for me to close this conference, which has presented the “Guide to Historical Banking Archives in Spain”. This publication, both for the quality of its information and the wealth of data it contains, will no doubt contribute to increasing knowledge on the historical development of the Spanish banking system. I would like to thank all those who have participated in this project for their efforts. My gratitude in particular to the academic historian, Pedro Tedde, to Professor María del Carmen Angulo, and to all those institutions and individuals who have enthusiastically collaborated in the publication of the guides to their respective archives. And naturally, too, to the Banco de España teams behind this initiative. The value of the initiative lies in the very value of the Spanish banking and Banco de España archive collections. These archives are fundamental to the study of our history and the development of Spain’s banking system. In this respect, I wish to highlight the importance of having historical archives that allow documents to be held and conserved and that guarantee their traceability and integrity. Without these archives, our knowledge of the past would no doubt be limited. Indeed, their subject matter provides for well-founded historical analysis and for a better understanding of the reasons that led to specific financial decisions.
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And it is this tradition that has enabled the Banco de España to continue promoting economic history research. Many of these figures were my predecessors as governors or directors general of what was then known as the Research Department. 3/5 Others, who collaborated with them, then went on, in many cases, to pursue brilliant careers in academia and research. Indeed, some are here with us today. For the sake of brevity, and so as not to run the risk of missing anybody out, I will not mention in detail those who continued the work of the pioneers Mariano Rubio, Ángel Madroñero and Joan Sardà back in the 1960s. As a tribute to their work and following in their wake, I shall, without being exhaustive, set out some of the projects that our Bank currently has under way or on the drawing board in terms of promoting economic history studies. Firstly, the Banco de España regularly organises conferences focusing on the discussion of aspects relating to economic history. This year, for example, on the occasion of the sixtieth anniversary of the Stabilisation Plan, the Banco de España will, next October, be organising a conference in Barcelona focusing on the analysis of the Plan. It will likewise pay tribute to the figure of Joan Sardà. I trust you will be able to join us at this conference. Also, since 2015 the Bank has organised annually a top-level international economic history conference aimed at academia.
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We would experience a Minsky Moment for monetary policy, a taper tantrum without the taper.10 This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected. Even if this scenario is a risk rather than a central view, it is a risk that is rising fast and which is best managed ex-ante rather than responded to ex-post. If this risk were to be realised, everyone would lose – central banks with missed mandates needing to execute an economic hand-brake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs. As in the past, avoiding that inflation surprise is one of the central tasks of central banks. These near-term inflation concerns also have a bearing on the medium-term risks facing central banks. After the Global Financial Crisis, central banks went in large and fast with QE, I believe rightly, to support the economy. They then withdrew that stimulus slowly, if at all, to protect the fragile recovery – again, I believe rightly. As a result of these actions, central banks’ balance sheets, including the Bank’s, inflated quickly and never subsequently deflated. When the Covid crisis struck, central banks again went in large and fast to protect a collapsing economy, I believe rightly. Balance sheets ratcheted higher. On current expectations, central bank balance sheets are unlikely to deflate any faster than after the Global Financial Crisis. But this time that policy script feels stretched.
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UK inflation expectations ratcheted down by a further 50 basis points on announcement, as credibility stepped-up.5 The Monetary Policy Committee (MPC) was soon formed and met for the first time in June 1997. Internally, a new machine and procedures were developed to service and support the MPC. The centrepiece of this support was a meeting called “Pre-MPC”. This was a full day of briefing presentations by Bank staff to the MPC. It is, and remains, the closest you will ever get to economic theatre at the Bank of England. Bank Staff sit on one side of the amphitheatre armed with Powerpoint presentations, the MPC sit on the other armed with tricky questions. As luck would have it, I gave the first-ever pre-MPC presentation at the first-ever pre-MPC. The room was rammed with banks of screens, crowds of people and clouds of cigarette smoke – three of the MPC were smokers, including the Chair Eddie George. I was a bag of nerves. Eddie gave me the nod, I pressed the button on my PC to start the presentation – and all the screens went blank and an ear-piecing noise let out around the room, the type of which instantly causes teeth to grind. 3 Haldane (1995). Briault, Haldane and King (1997). 5 King (2002). 4 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 With my bag of nerves now full to overflowing, I peered through the fug of Rothmans to see Eddie staring back at me.
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These pairs of possible clearing rates can be derived from the bids, and the resulting “frontier” can be converted into a “demand schedule” mapping the difference between the two clearing rates (known as the stop-out spread) against the proportion of the auction that would be allocated to wider collateral (and hence by implication, narrow collateral) in each case. This concept is best understood using a simple example. Consider Table 1 below, which shows hypothetical bids from six counterparties. Three of the bids are against the narrow collateral set (N) and the remaining three are against the wider set (W). At the end of the auction, the bids within each set are ranked from those with the highest spread to those with the lowest spread, as shown. For simplicity of exposition, assume that there are no paired bids, and that the Bank has committed to supply £ in this operation. The most systematic way to construct the demand curve is to start at the top left corner solution where all the funds are allocated against narrow collateral (bidders 4, 5 and 6 all have their bids filled). The clearing spread would be the lowest accepted bid on the narrow collateral: 10bps and that would dictate the uniform price.16 Now assume that 99% is allocated to narrow (conveniently 1% is equal to £ in this example), and 1% to wider collateral.
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Gertrude Tumpel-Gugerell: Elements for intervention on accounting issues Speaking notes by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European Central Bank, at the colloquium “La juste valeur dans tous ses Etats”, organised by the Académie des Sciences et Techniques Comptables et Financières, Paris, 27 April 2010. * * * Which are the issues related to the fair value for companies? Fair value is an appropriate measurement for certain financial instruments, notably those that are held for trading (i.e. business model is to generate profits by buying/selling in the short term) and for which reliable market prices are readily available, as well as for derivatives. Indeed, given that many derivative contracts have a zero cost at inception, fair value accounting is crucial as it recognises the potential leveraged exposure on the balance sheet. Fair value accounting mainly raises two issues: first, when to apply fair value measurement (conceptual considerations) and second, how to apply fair value measurement (operational challenges). First, in our view fair value accounting does not provide decision-useful information to investors if the intention of an entity is to hold the assets until maturity or to settle the liabilities at their nominal amount at maturity. In these cases, recognising interim fair value changes simply heightens the volatility of the financial accounts, without providing actual “information content”. This is typically the case for the loan book of commercial banks.
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This is money we could have used for consumption and welfare. And let us remember that this is just one of the effects. Add to this the reduction in wealth in the form of falling values of companies, financial instruments and other assets. Contagion effects in a globalised financial market The origins of the crisis lay in US subprime mortgages. Although Swedish banks had very little exposure to this type of asset, the crisis nevertheless affected them. Like the Swedish economy as a whole, the Swedish financial system is very dependent on other countries. For example, only half of the banks’ funding is deposits from private individuals, companies and institutions in Sweden. The rest is borrowed on the market, and a large part of this on international markets. Moreover, most of the funding is relatively short term. This is not unique to Sweden. The advantage is that it reduces the banks’ funding costs, which in turn 2 BIS Review 159/2010 makes it cheaper for households and companies to borrow money. But there are also disadvantages. As the banks have made themselves more dependent on the outside world, they have of course become more vulnerable to problems arising abroad. When the international money markets slammed on the brakes in autumn 2008 the Swedish banks’ funding was immediately affected. Not least because they had borrowed money in the short term. So unlike the crisis of the 1990s the crisis we have just experienced is largely an imported one.
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But the role of capital is primarily to reduce the risk of a bank failing at all. When the bank suffers losses it should have a capital buffer to meet them and thereby be able to continue its operations. What this means for the banks in the end, as for the rest of us, is that they must try to earn more money than they spend and have sufficient reserves to cope with the periods when they don’t. The banks manage this by constantly assessing the risk that a borrower will experience difficulties in meeting interest payments or paying off the loan. If this risk increases, the bank leaves a good margin for it by adjusting its lending or allocating reserves for potential losses. But as borrowers are affected by so many factors that are difficult to judge – for instance, economic recessions have very different impacts on different sectors and geographical areas – it is easy for the bank’s losses to become larger than expected. The minimum capital required by the regulations should act as a buffer against such unexpected losses. It is necessary for everyone to be convinced the bank will survive in order for it to survive. If the bank is perceived as unsteady, the supply of money will be cut off. A lack of sufficient capital buffers can easily shake confidence in the bank. And this was exactly what happened when the crisis loomed large. People were uncertain how badly off the banks were.
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There are also common efforts to fully open our economies and to attract foreign capital. As we are in the process of fully opening our markets, we are benefiting from increased competition, improved productivity and efficiency, and increasing quality of services for our citizens. But, we are also facing several uncertainties and risks. Markets remain segmented and their infrastructure faces difficulties in supporting new and imposed developments. Market infrastructure deficiencies exacerbate their shallowness and make it difficult for various market participants to act in order to meet their business objectives and manage their risks. The technological improvements have to fully show their effect in meaningfully reducing costs of financial services. Regulatory gaps in different areas of local financial markets create the conditions for regulatory arbitrage and may adversely affect the supervisory work. BIS Review 103/2006 1 Therefore, erroneous and costly decisions are unavoidable. The financial situation of single market participants, due to market segmentation, is highly affected by their capacity to find financial support in the international financial markets. In reality, this leads to an increasing gap among so called “big” and “small” or among foreign and locally owned financial institutions. Real economy development is an additional source of risk for financial markets. Such interaction should be carefully watched to better understand financial market trend in the future and identify financial imbalances in a country and regional level. Indeed, we are all experiencing a construction “boom”, where residential house prices have increased considerably.
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The inherent difficulty of assessing the short-term costs of structural reforms in real time creates significant moral hazard problems, with governments having an incentive to overestimate the costs of reforms they are implementing to mask additional spending or shortfalls in consolidation efforts unrelated to reforms. Having said that, it is clear that the recent reform of the Stability and Growth Pact allows fiscal policy to mitigate the possible short-term cost of structural reforms, if these are clearly specified and can be quantified. It is, however, crucial that fiscal authorities create the necessary room for manoeuvre regarding their possible support for the implementation of reforms beforehand. Otherwise, there is a risk of significant policy mistakes, with reforms eventually leading to persistent increases in deficit and debt ratios. Employment rates in the euro area and the US Source: Eurostat. 4 BIS Review 31/2008
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Jaime Caruana: Making diligent preparations for Basel II Opening remarks by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the Thirteenth International Conference of Banking Supervisors (ICBS), Madrid, 22-23 September 2004. * 1. * * Welcome and overview Distinguished guests and friends: as the Governor of the Bank of Spain, it is my pleasure to serve as your host at the Thirteenth International Conference of Banking Supervisors here in Madrid. I am also privileged to serve in a second capacity at this event as chairman of the Basel Committee on Banking Supervision. In that regard, it is my honour to launch our dialogue on the two main themes selected for this conference. As you know, the Committee reached agreement on an historic revision of the international capital framework just this past June. So naturally an important focus for this conference will be on preparing for its implementation. In addition, because Basel II relies increasingly on the quantification of risk exposures to understand a bank’s risk profile, it is more important than ever before to look behind the numbers and into the rules that define how exposures are measured. The second day of our conference will be devoted to the emerging issues in accounting and their relevance to banking supervision.
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The majority of global consumer transactions still take place through cash. As previous Currency Conferences have affirmed, we expect physical cash to remain necessary and relevant. Digital media has significantly transformed the way we experience the world. However, it has not brought us to the closing pages for physical media – including notes and coins. This may appear strange, if one considers the fact that much of our communication, planning and transportation revolve around the internet. As a recent McKinsey report puts it, mobile devices have become the “digital container” of our daily lives. This marks a profound cultural shift. The smartphone is fast becoming an extension of ourselves. Indeed, this digitalisation is altering the way payments are being made. We are not only spending more time online, we are spending more money through online channels. Our familiarity with and dependence on mobile devices is unprecedented. I believe that this attachment has made us increasingly comfortable with digital payments. They now appear more intuitive, more reliable and more convenient than ever before. This trend is evident in the findings of a recent international survey by ING. Most of the respondents are using less cash now compared to a year ago. A third of Europeans surveyed were even willing to go completely cashless if it were possible. We have seen a similar shift here in Malaysia. When internet banking was first introduced in Malaysia back in 2000, most people were sceptical about its safety and reluctant to learn how to use it.
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20 [30] However, the interdependence between monetary and fiscal policy is not reflected in the monetary and fiscal policy frameworks. The frameworks are designed so that the two policy areas function independently of each other. The Riksbank has a high degree of autonomy and a mandate that prioritises price stability. The budgetary policy objective of fiscal policy is to ensure that fiscal policy is stable over time, which in practice means that government debt should be sustainable in the long term. This approach is based on the view that fiscal policy has little impact on inflation; that monetary policy has negligible fiscal consequences; and that a fiscal policy mandate that stabilises government debt and budget deficits is sufficient to support the central bank's inflation target.38 Central banks' difficulties in bringing inflation up to target without relatively drastic measures after the financial crisis may indicate that this view has been too simple. A fiscal policy that is expansionary when inflation is too low and contractionary when it is too high makes it easier to achieve the inflation target.39 It may of course be politically easier to conduct an expansionary fiscal policy, but it is important that it is symmetrical so that the national debt does not risk becoming too large.
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Purchases of private assets and assets other than government securities are primarily relevant when markets that are important to the financial system are threatened, and we risk an acute financial crisis, such as at the start of the pandemic. Under the new Sveriges Riksbank Act, the Riksbank can – under certain conditions – buy and sell Swedish securities issued by the government and private actors. Our monetary policy toolbox in this respect remains the same as before. However, the new act has a more restrictive view of when it may be relevant to purchase private securities. The Riksbank may only buy and sell such securities if there are exceptional reasons. This means in practice that, from a monetary policy perspective, we can only buy and sell private securities when we cannot achieve the desired effect on the economy by using other measures. The new act also gives the Riksbank a more explicit mandate than before to trade in securities, also within the scope of our task of contributing to a stable and efficient financial system. To counter serious disruptions in the financial system, the Riksbank may if there are exceptional reasons buy and sell financial instruments at predetermined prices to temporarily support the functioning of systemically important financial markets. An important task for the Riksbank is to be the lender of last resort for important credit institutions that have problems, but also, under certain conditions, to act to keep markets that are critical to the financial system going.
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If monetary policy can be made expansionary without this causing economic actors to fear that inflation will rise sharply, their expectations of what inflation will be in the longer term will not be affected either. However, if fears of sharply rising inflation arise as a result of the expansionary policy, long-term inflation expectations may also begin to creep upwards. If the anchor comes loose completely, the long-term consequence may be that inflation continues to rise in a price and wage spiral. And, just as it may take a great deal of effort to restore confidence in public finances that have begun to erode, it may be difficult and costly to bring inflation back under control. As I mentioned at the start, in Sweden we have some experience of price and wage spirals of this type, even though this was some decades ago. Too low inflation is also a problem… However, it is not only an anchor that is drifting ‘upwards’ that is a cause for concern. Monetary policy can also have major problems if it drifts ‘downwards’ and inflation becomes persistently very low. In this case, monetary policy becomes less effective because the main instrument, the policy rate, becomes more difficult to use.
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If public investments, which, sooner or later, may still need to be made, can be financed at a historically low cost, this would seem like a good opportunity to implement them. Ultimately, fiscal policy aims to increase the well-being of citizens. The development of deficits and public debt may be the means to achieve this, but it is not obvious from an economic point of view that it should be seen as an end in itself. A comparison with monetary policy can be made here: the target is formulated in terms of the outcome, that is, mainly how well the inflation target has been achieved, rather than the means, that is, the monetary policy tools. I think it would be useful if we were to start thinking more along these lines in fiscal policy as well.14 The conclusion of this reasoning is not that public borrowing is never problematic. For example, if the policy becomes too extensive or if it is not sufficiently explained and followed up, investors may nevertheless begin to fear that the government will not be able to manage its debt and may therefore demand a higher risk compensation for lending. This, in turn, may make the commitments even more difficult to meet – there is a risk that we will find ourselves in a bad equilibrium, expressed in economic terms.
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This proposal will enhance worker remittances into the country and help to finance the widening trade deficit and maintain a positive balance of payment position. The budget reiterates the need for permitting professionals to earn in foreign currency and retain such funds in foreign currency accounts within the country. The budget also allows expenditure incurred on acquiring international accreditation as a deductible expenditure from taxation. These measures are expected to enhance foreign currency earnings and further facilitate the management of foreign reserves. The down-side risks Effective policy coordination is certainly the way forward as set out in the budget 2007 and it is interdependent on action by all policy-making authorities. If one or two policy areas lag behind, then the sustainability of achievements over the long term will become an issue. The monetary policy has to play its part to bring down inflationary expectations, while the investment policy has to attract FDIs and BIS Review 7/2007 3 other investment flows. The reserve management policy should attempt to enhance foreign reserves through increased worker remittances and other flows. Pushing all these policy fronts to work within the open economic policy framework and keeping pace with each other is critical to the success of the medium term development plan. Very close coordination is essential for it and it is certainly a challenge. At the same time, the fiscal policy should make all attempts to stick to its revenue and expenditure targets.
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A broad-based analysis of the data, taking the appropriate medium-term perspective and allowing for these considerations, confirms the underlying strength of money growth. In particular, the pace, maturity and sectoral composition of borrowing from banks suggest that, at the level of the euro area as a whole, the availability of bank credit has, as yet, not been significantly affected by the ongoing financial tensions. This notwithstanding, growth in loans now shows signs of moderation, as previously anticipated, with corporate demand for credit slowing. At the same time, the growth of loans to households continues to follow the downward trend observed over the past few years, as a result of higher short-term interest rates and housing market weakness in several parts of the euro area. To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment of upside risks to price stability over the medium term. The information that has become available since the last meeting of the Governing Council has confirmed that annual inflation rates are likely to remain well above levels consistent with price stability for a protracted period of time. The growth of broad money and credit aggregates is now showing some signs of moderation, but the still strong underlying pace of monetary expansion points to continued risks to price stability over the medium term. The latest economic data also confirm the weakening of real GDP growth in mid-2008.
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Durmuş Yilmaz: Central Bank monetary and exchange rate policies and economic outlook Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at a meeting organised by the Aegean Industrialists and Businessmen Association, İzmir, 8 June 2006. * * * Distinguished Guests, Ladies and Gentlemen, It is, indeed, a great pleasure for me to address another information meeting – yet another one in a series held since 2003 – organized in cooperation with Dünya Newspaper with a view to informing the business world. Today’s meeting is the first meeting of 2006. I would like to take this opportunity to thank the Aegean Industrialists and Businessmen Association for their organization. Considering recent inflation figures, I am sure you are all expecting me to inform you of developments in the economy, especially those regarding inflation. However, before moving on to topical subjects, at this very first meeting of 2006, I would like to briefly touch on what the transformation process the Turkish economy has been undergoing since 2001 means to us. I also want to give you a framework of the macroeconomic outlook. My speech will cover the developments in inflation, the Central Bank’s interest rate and exchange rate policies, the developments in financial markets, growth, employment and the current account deficit. As I have mentioned earlier, the Turkish economy has been undergoing a structural transformation process.
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There was thus no scope for stabilising monetary and fiscal policies. Since then the pendulum has swung back a little with the neo-Keynesianism, which has reintroduced some of the elements of the classical Keynesian analysis. Due to different reasons it can take time before the economy returns to its long run equilibrium after a shock. Monopolistic competition and sticky wages are a few examples. The participants’ expectations can play a major role according to these theories. Monetary and fiscal policy can therefore be used to stabilise the economy. Macroeconomic analysis is often carried out with the aid of general equilibrium models (DSGE models, Dynamic Stochastic General Equilibrium). 5 The Riksbank, like a number of other central banks, uses one of these models for forecasts and simulations. The Riksbank’s model is called Ramses (Riksbank’s aggregate macromodel for studies of the economy in Sweden). In Ramses, goods and labour markets are assumed to be in monopolistic competition and wages and prices are sticky. However, the Ramses model analysis is only part of the forecasting process, which is also based on other statistical analyses and of course assessments. In the short term, that is to say the current quarter and one quarter ahead – what is usually called “now-casting” – we use different statistical models and indicators to make an assessment of the current situation. This analysis strives for the best possible accuracy in the forecasts and is often only vaguely anchored in economic theory.
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This is also why exchanges with fellow regulators during supervisory colleges are very helpful and important too. 13 I have earlier mentioned that rules and regulations should be risk proportionate. This is true as well for banking supervision. It is impossible for supervisors to review and inspect all the 2/5 BIS central bankers' speeches financial institutions under our charge to a wide and deep extent given finite resources and time. This is neither feasible nor desirable. 14 It is more logical and effective to differentiate our supervisory intensity according to the risk profiles of each bank. In recent years, MAS has also moved towards greater use of thematic reviews and inspections. This means that we inspect a peer group of institutions at a time in a specific risk area. We find that such a peer group approach also facilitates better identification of vulnerabilities, and allow for industry benchmarking as well as the sharing of best practices. 15 An effective supervisory process should also involve a preparedness to take tough enforcement actions. It is a practical reality that no amount of regulations and supervisory reviews can catch all possible potential misdemeanours or excessive risk-taking. To do so, a financial regulator would have to be regularly and extensively intrusive to a point that a bank would find it hard to function. Ultimately, a bank’s Board and Management must be responsible for its business conduct and risk management.
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Given the considerable attention on the Basel III reforms, it is easy to forget that a core mandate of the Basel Committee is with respect to its work on supervisory practices. 4 So this morning, allow me to share some thoughts on three areas with respect to banking supervision: i. The Next Phase – beyond the review on Capital and Liquidity rules; ii. Banking Supervision as a Craft; and iii. Supervisory Challenges and Opportunities. The next phase 5 As many of us will be familiar, the Basel III framework has a second Pillar that pertains to risk management and supervision including accounting for risks not captured under Pillar 1. Indeed, the Basel Committee devotes considerable attention to various pieces of work under this Pillar, such as on stress testing, accounting standards, corporate governance and supervisory colleges. Disclosure requirements are further reviewed under Pillar 3 to foster market discipline. 6 Following the recent finalisation of Basel III, the next phase will be centred on a “full, timely and consistent” implementation globally. This is important to reduce risk of regulatory arbitrage. Every jurisdiction or region will of course be different in the degree of openness, internationalisation, and the maturity and sophistication of their banking systems. The Basel Committee has been 1/5 BIS central bankers' speeches mindful that its standards are calibrated as minimum requirements, and in limited situations, some supervisory discretions have been provided including the use of Pillar 2. 7 Risk proportionality is not a new concept in international banking rules.
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José De Gregorio: Exchange rate, macroeconomic policies, and the global scenario Speech by Mr José De Gregorio, Governor of the Central Bank of Chile, before the Senate at a special session on the exchange rate, Valparaíso, 14 December 2010. * I. * * Introduction I am grateful for the Senate’s invitation to analyze exchange rate issues, some of the most complex ones facing our country, as well as Latin American and most emerging market economies. We are thus obligated to carefully evaluate the current economic environment, its implications on the performance of our economy, and the measures that can be taken if deemed necessary. In addition, these instances for analysis are important opportunities to communicate in a very transparent fashion the vision of the Central Bank of Chile. Along the last few decades, Chile has benefited enormously from being open and globally integrated. This has been one of the cornerstones of our economic growth. However, the international economy is at the same time a source of volatility for our economy. The prices of our exports, the economic activity of our trading partners, foreign interest rates and international investors’ appetite for risk fluctuate substantially. These variables affect our national income, fiscal accounts, external demand for our products, and the availability and cost of external financing and, indirectly, expenditure, output, the interest rate and the exchange rate in Chile. It is impossible to eliminate this volatility without sacrificing the benefits of our international openness.
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At the country level, however, it must be said that production, employment, wages and investment are growing strongly. Our economy is totally back on its feet after the global recession and the outlook is good. 5 I am convinced that our country must grow in a harmonious way and the benefits of progress must spread to all the country. Economic growth and global integration generate sectoral and regional adjustments; some economic activities expand and some contract, with all the associated tensions. This is what progress is all about. To mitigate the costs of sectoral adjustments – and, above all, the social costs involved – without hurting economic growth, public policies face a tremendous challenge, but the instruments with macroeconomic reach such as the exchange rate are ineffective when it comes to resolving sectoral difficulties. Next week we will be presenting our Monetary Policy Report. We hope that our economy will continue dynamic over the next 24 months, boosting higher income and employment for our people. Our role is to ensure that the process is sustainable in an environment of stable prices. We will watch over it taking every measure necessary. In this presentation I have shown all the factors that may explain parity adjustments. However, many of the elements now pressuring the exchange rate may be reversed in the long term. As a matter of fact, today the real exchange rate is around the minimum levels believed to be consistent with its long-term fundamentals, hence the importance we assign to this issue.
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17.06.2019 The Spanish banking system: transformations and challenges Opening of the seminar “Sustainable finances and their importance in the future of the economy”, Universidad Internacional Menéndez Pelayo, organised by the Spanish Association of Economics Journalists Pablo Hernández de Cos Governor Ladies and gentlemen, good morning: It is an honour and a pleasure to be able to participate in the opening of this seminar, organised by the Spanish Association of Economics Journalists (APIE) as part of the Universidad Internacional Menéndez Pelayo’s summer programme of seminars, being held, once again, on this Santander soil, of which I am so fond. I should like to begin by recalling, here in this historic Magdalena palace, that 2019 is particularly rich in anniversaries relating to the opening up and liberalisation of the Spanish economy. The process began with the Stabilisation Plan 60 years ago, while one of the most important milestones was passed 20 years ago, when Spain adopted the single European currency, the euro. And, exactly 25 years ago, in order to reach that stage, it was necessary for the Spanish parliament to approve the Law of Autonomy of the Banco de España, which confirmed the Spanish central bank’s autonomy and independence. By means of this law, moreover, Spain established an institutional framework in line with the requirements for adopting the single currency, and also put in place a fundamental pillar for a culture of stability in the conduct of economic policy.
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Accountability and transparency are essential counterparts of independence, and the media play a fundamental role in ensuring that they are put into practice, which is why our participation in events such as this one is so important. So I should like to thank the APIE for organising this event and inviting us to participate. This look back reminds us that, more than 10 years ago now, an international financial crisis hit Spain particularly strongly, arriving at a time when the economy was suffering from significant domestic and external macro-financial imbalances. Spain’s banking system was clearly excessively large at the time, over-concentrated on lending funds to real estate and residential construction activities and highly dependent on international wholesale financing. These significant vulnerabilities meant that the cost of the crisis in terms of GDP and – even more importantly for society – unemployment, was very high and much larger than for our main competitors. In fact, Spain’s GDP returned to its pre-crisis level only two years ago. As regards the labour market, the unemployment rate is still five percentage points higher than in 2008 and more than 10 percentage points higher than in countries like the United States and Germany. And that is a reminder of the importance of strengthening mechanisms to analyse and diagnose promptly the risks and vulnerabilities facing the economy and, in particular, the financial system.
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But in the limit monetary policy can be a backstop – as booms and busts increase the likelihood that inflation will be volatile in the future. Overall, the Committee’s Forward Guidance can forestall avoidable uncertainty about its “reaction function”, about how policy will be set. But it does not affect the greater uncertainty about the evolution of the recovery. Uncertainties about the economic outlook Of course, financial markets inevitably transform the Committee’s state-contingent guidance into predictions of when the Committee will begin to withdraw monetary stimulus; the markets trade instruments with different maturities, ie with time-contingent features not with statecontingent contractual triggers. But the MPC provided state-contingent guidance for a reason. We cannot wave away the uncertainties surrounding the performance of the real economy. If we only understood why productivity growth has been so weak, we could be more confident about whether or not it will recover in tandem with a recovery in spending. If that does happen, the fall in unemployment could be slow, and monetary stimulus might not need to be withdrawn for some time. If, on the other hand, productivity growth remains weak, job creation as the economy recovers could be strong, as it has been on average over the past couple of years. That is why there is a wide band of uncertainty around the MPC’s August forecast for unemployment. My own probability distribution for unemployment is broadly “flat” in the sense that I do not regard one of those scenarios as materially more likely than the other.
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3 This is consistent with Bean (2013), “Global aspects of unconventional monetary policy”, the Monetary Policy Committee’s Forward Guidance document (op cit); and with the Governor’s remarks during the August Inflation Report Press conference: “guidance is not a change in the reaction function, but it gives a better sense of the MPC’s reaction function to financial market participants”. 4 See remarks at the Treasury Select Committee hearing to discuss the Inflation Report on 28 June 2011, and 2012 and 2013 Annual Reports on Monetary Policy to the Treasury Select Committee. 2 BIS central bankers’ speeches by-quarter. The threshold is not a target. Indeed, a monetary authority cannot have a target for unemployment; it can have a target only for price stability, as Paul Volcker recently stressed.5 That is why the Committee’s Forward Guidance incorporates, crucially, a “knockout” for inflation expectations, where individual members will have to judge whether they are “sufficiently well anchored”. Beyond that, I am glad that in its “financial stability knockout”, the Committee has in effect recognised that monetary policy influences risk-taking behaviour in the financial system.6 This does not mean that the MPC will suddenly lurch towards a supplementary goal of trying to control excesses in markets. The UK’s new architecture gives the Financial Policy Committee some tools to do that where there is a threat to the stability of the financial system.
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Leif Veggum, director of Norges Bank’s Cashier’s Department, is soon going to tell us about the security features that make the banknotes almost impossible to counterfeit. However, if these features are to work as intended, it is important that, as users, we should familiarise ourselves with them. If you feel that you need to brush up your knowledge, I would encourage you to visit Norge Bank’s webpage newnotes.no, Norge Bank’s Facebook page or order the banknote brochure from Norges Bank. You will still be able to use the old 50-krone and 500-krone banknotes for one year after the launch of the new banknotes, ie until 18 October 2019. So use your old banknotes when you are out shopping or take them to your bank well before the deadline to help make the withdrawal of the old banknotes as smooth and efficient as possible. Good luck with the new banknotes! 2/2 BIS central bankers' speeches
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SPEECHES & INTERVIEWS Governor's Speech at the Launching of Financial Crime Exhibition Speaker: Tan Sri Nor Shamsiah Mohd Yunus / Venue: Kuala Lumpur / Language: English / Speech/Interview Date: 26 Sep 2022 / Welcome to the launch of the Financial Crime Exhibition. First of all, I would like to express my appreciation and gratitude to the Inspector- General of the Police for joining us at the launch of this virtual exhibition. Scams and cybercrimes have been on the rise of late, not just in Malaysia but all around the world. This is a concerning development which Bank Negara Malaysia (BNM) takes seriously. This is especially so where these cases concern financial scams. We have been and will continue to step up efforts to combat financial scams, and in doing so collaborate with other stakeholders. These include rolling out preventive measures, pursuing more effective and coordinated enforcement actions, and raising public awareness. BNM requires banks in Malaysia to adopt high standards of security, especially for Internet and mobile banking services. From time to time, BNM also issues security advisories to the financial industry highlighting the latest modus operandi (tactics) of scammers and additional security measures that banks need to implement to protect their customers' savings. The reality, however, is that methods used by criminals will continue to evolve. BNM therefore continuously intensifies efforts and take steps to combat scams by introducing additional controls and safeguards from time to time.
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Clearly, greater use of the local system for real-time settlement of Hong Kong dollar versus US dollar transactions would bring real benefits in terms of reduction and diversification of risk. Banks in Hong Kong will no doubt be looking seriously at their existing settlement arrangements for such transactions, and at the greater use they can make of local services to achieve finality of settlement for the currencies simultaneously in our time zone. For our own part, the HKMA will continue to develop and reinforce our local financial infrastructure and to link it more efficiently with global systems. We have, for example, started on the development of a two-way linkage with Euroclear, one of the world's largest central securities depositories. The two-way linkage, which will be highly automated for heavy usage, will enable investors in the Asian region to gain trading access to securities lodged with Euroclear. The infrastructure providing for payment and settlement form the essential roads and bridges that connect banks and other institutions with each other. What of the banks themselves? In Hong Kong, they have seen declining profits at a time of increasing competition. Yet the banking sector remains remarkably strong, with an average capital adequacy ratio of 18%. With good reason, the general public, and the international financial community, have a very high degree of confidence in Hong Kong's banks.
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The impetus to growth will therefore increasingly need to shift to domestic demand, which is already enormous, and which has been growing quickly in recent years. For the medium and longer terms, dynamic and far-reaching economic transformations will be set in motion by China's accession later this year to the World Trade Organisation. As a result of accession, China's trade flows are projected to double between now and 2005. There will be profound changes in the financial landscape, including an increased presence of financial institutions. BIS Review 88/2001 1 All this is, as I have pointed out before, good news for Hong Kong. It will, we estimate, increase our annual GDP by around half to one per cent, just through the resulting increase in re-export trade. It should additionally provide a great boost to our professional, mediatory and service industries. Those who despair about Hong Kong's future viability should perhaps reflect on the opportunities that our position as China's international city will bring post-WTO accession. Yet it is understandable that the focus of attention should currently be on immediate problems rather than on future benefits. The rapid deterioration of the external environment now threatens to prolong the cyclical downturn in Hong Kong, engulfing the vigorous, but all too brief, resurgence last year. Growth this year is likely to be in negative territory again, and price deflation is expected to persist. Such a prolonged downturn is unprecedented in Hong Kong's recent economic history.
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8 All speeches are available online at www.bankofengland.co.uk/speeches 8 8 backed by a government indemnity . The Bank’s exposure then consists simply of an overnight loan to that subsidiary, matched against its primarily short-term liabilities (Table 2 illustrates this using the last published accounts), and the government has a natural hedge for its indemnity in that changes in interest rates have partly offsetting effects on the value of the indemnity and the cost of new debt issuance. The other task for the second line financial risk function is to ensure that there is adequate transparency for policymakers, government and the public over how the exposures can change over time, under different scenarios, so that future decisions are made with full information. That is done – as it has been since the onset of quantitative easing – through multiple channels, including periodic internal reports to the Bank’s Court and HM Treasury, and external analysis and data, including in the Bank’s Quarterly Bulletin and the 9 BEAPFF annual accounts. As of January 2017, the fund had generated about £ in net interest income, sufficient to cover the mark-to-market impact of a material increase in interest rates. Table 2: 2015/16 Bank of England and BEAPFF balance sheets 10 8 For more details, see the Bank of England Asset Purchase Facility Fund Limited Annual Report at http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1606.pdf. 9 Not including unrealised mark to market profits. Data available in Appendix A of https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/jan2017. 10 See http://www.bankofengland.co.uk/publications/Documents/annualreport/2016/boereport.pdf and http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1606.pdf.
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Central banks instituted huge asset purchase programs and brought short-term interest rates to near zero—in some cases below zero—to stimulate economic recovery. The good news is that, for the most part, monetary policy did its job. Advanced economies have seen steady growth and significant declines in unemployment. But the recovery has been slow. And despite low unemployment, inflation rates have been running persistently below central banks’ goals. The Federal Reserve, like many central banks, has a goal of keeping inflation at 2 percent. In the pre-2008 era, inflation was a major concern for the public and central banks alike. And, while I will always be vigilant about inflation that’s too high, inflation that’s too low is now a more pressing problem. The experience of a slow recovery and persistently low inflation is a symptom of deeper problems afflicting advanced economies. Two changes, unrelated to the crisis, have been taking place, causing a shift in economic conditions and quietly shaping the trajectories of advanced economies. These are the “the facts” that have changed. Today I’m going to discuss them in more detail, and explore our options for dealing with the challenges they present. “The Facts” Shifts in demographics and productivity growth have fundamentally altered the economic environment in which we operate. 1/3 BIS central bankers' speeches Starting with demographics, two changes have taken place: People are generally living longer, and population growth is slowing. Dwindling birth rates are bringing population growth to a standstill.
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Mugur Isărescu: The future of central banking Address by Mr Mugur Isărescu, Governor of the National Bank of Romania, during the plenary session “The future of central banking”, 8th World Policy Conference, Montreux, 20 November 2015. * * * Parts of this address have been presented by Governor Mugur Isărescu during the plenary session “The future of central banking”, which also featured as speakers: • Jean-Claude Trichet – former President of the European Central Bank • Jacob Frenkel – Chairman of JPMorgan Chase International, former Governor of the Bank of Israel • Marek Belka – President of the National Bank of Poland Ladies and gentlemen, It is a great honour to address the audience during this symposium on the future of central banking, although I must confess from the very beginning that the topic itself is not easy to tackle. We all know that economists seldom reach a consensus when analysing the past. It is all the more difficult for them to agree on the future, especially when we refer to central bankers, who are known to be among the most cautious economists... Personally, I think I have enough reasons to be wary of any predictions of what is in store for us, particularly over the medium and long term. I started my career as an economist in a research institute back in August 1971, when the Bretton Woods System was just collapsing.
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If the importance of macro-prudential instruments was revealed by the global crisis and the forex interventions of central banks went back in fashion during the same period, there is a fact well known from the conventional economic wisdom, but highlighted once again by the crisis: the countercyclical stance of both monetary and fiscal policies is essential for ensuring a smooth trajectory of the economy. We all saw how unsustainable public finances and high levels of debt have impeded the effectiveness of a stability-oriented monetary policy. This was also the case of Romania, where the fiscal impulse was positive during the period of rapid growth before the financial crisis, contributing to the overheating of the economy and fuelling the imbalances accumulated in the economy. Moreover, the pro-cyclicality of the fiscal policy during the pre-crisis period exhausted the fiscal space needed to stimulate the economy in recession, leading to the need to reduce the budget deficit during the crisis (primarily due to financing constraints) and to perpetuating the pro-cyclicality of fiscal policy. As stated by Fritz Zurbrügg (2012), successful monetary policy is predicated on healthy fiscal policy, and vice versa, and to achieve stability and prosperity in the long term, fiscal and monetary policies must both focus on sustainability. In the past, the high fiscal deficit has resulted in the fiscal dominance of monetary policy with its inevitable monetisation of the government debt, but nowadays most central banks no longer directly finance government expenditure.
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As the concerns about the U.S. housing market escalated in 2007, participants in the tri-party repo market became increasingly concerned about the liquidity and credit risks that they faced. The clearing banks became uncomfortable with their large intraday exposures to their tri-party securities firm customers. After all, if a securities firm were to fail suddenly, the clearing banks could be stuck with huge loans to these counterparties, secured by securities that were not necessarily high quality and liquid. Thus, as the condition of the most troubled securities firms deteriorated, there was a risk that one morning a clearing bank might decide not to unwind a firm’s tri-party transactions in order to avoid a large intraday exposure. 6 The problem was particularly acute for those firms with large securities trading and over-the-counter derivative businesses operated outside of depository institutions. In the United States, even those securities firms that were part of bank holding companies were vulnerable because Section 23A restrictions in the Federal Reserve Act that govern transactions between the bank and the nonbank affiliates as part of a bank holding company complex sharply limited what assets the securities firm could pass through to the bank and on to the Fed’s discount window facility. 7 In the unwind, cash was transmitted back from securities firms to wholesale investors each morning, to hopefully be reinvested and returned back to the securities firms by the end of the day to finance their inventories of securities.
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The securities in asset-backed commercial paper (ABCP) conduits serve as collateral for the issuance of asset-backed commercial paper, while repo conduits fund in the repo market. Most conduits are so-called single-seller conduits that only serve individual banks or finance companies. Multi-seller conduits provide funding for asset pools of multiple institutions. Conduits are backed by credit lines from commercial banks, which allow the conduits to have a credit rating. Asset-backed commercial paper conduits are also defined in “Shadow Banking: A Review of the Literature”. Federal Reserve Bank of New York Staff Reports, no. 580, (October) 2011. www.newyorkfed.org/research/staff_reports/sr580.pdf. 2 BIS central bankers’ speeches Because the boom years resulted in strong earnings, low price volatility and few credit losses, firms were able to operate at extreme levels of leverage. When the housing bubble started to deflate, the vulnerabilities of this type of business model soon became apparent. Heavy reliance on short-term wholesale funding exposed the system to a series of intertwined downward spirals in asset and funding markets. This spread in waves, beginning in the market for asset-backed commercial paper (ABCP) issued by off-balance-sheet conduits, and spreading via auction-rate securities, to the repo, money market and financial commercial paper markets that formed the core financing for market-based financial intermediation. Initial declines in asset prices forced leveraged holders with maturity mismatches to sell assets. This increased price volatility and reduced the value of the assets that collateralized other firms’ borrowings.
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The crucial factor to succeed in the global knowledge economy is the country’s ability to develop intellectual capital. Only those who understand the importance of innovations for growth will thrive and prosper in the coming decades. Unfortunately, CEE region lags badly behind the leaders in terms of its current and future ability to generate innovation. One of indicators measuring current ability to innovate is the number of researchers. In the mid-1990s CEE-4 (the Czech Republic, Hungary, Poland and Slovakia) and Asian NIEs had similar number of researchers per million people, while two years ago NIEs had almost twice as many persons employed in R&D per million people in comparison with CEE-4. Future knowledge potential of particular country or region can be measured by tertiary enrolment ratio. Tertiary enrolment ratio in the CEE-4 countries improved to 50 percent in 2004, but still remains well below 62 percent in the EU-15 and 82 percent in the United States.. Because of a relatively small population and a number of structural deficiencies it is very unlikely, that increase in the number of students in CEE-4 that have occurred in recent decade will translate into higher innovation potential in the coming years, unless a dramatic change in policies in CEE-4 is made. This is also confirmed by a dramatically low number of patents registered in the CEE countries and extremely low number of scientific publications.
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Spiegel online on 26th September 2007 described a research led by the Nobel-price winning chemist Paul Crutzen which had found that biofuels emit even 70 percent more greenhouse gases than fossil fuels. In effect, global warming may accelerate and lead to further increase in frequency of disasters such as floods, droughts, and unexpected weather changes that may have negative 1 Views presented today are my own and do not necessarily represent the official position of the National Bank of Poland and the Polish Financial Supervision Authority. 2 Rybinski K. (2007) “The Role of the EURO for the Future of Poland”, speech by Krzysztof Rybinski, Deputy Governor of the National Bank of Poland, 15 June 2007, http://www.nbp.pl/publikacje/wyklady/rybinskiadesti.pdf BIS Review 138/2007 1 effects on crops. Secondly, food prices will be lifted up by an increasing demand for agriculture products in the emerging markets, especially in Asia, as the catching-up process progresses. It is worth keeping in mind that the share of food in the CPI basket is some 10 pp. higher in Poland than in the eurozone, so agflation, if it materializes, will lead to inflation divergence. 2. One cannot exclude a possibility that other commodities prices may continue to rise as well. Demand for commodities has already substantially risen in recent years. The “problem” lies again in the emerging markets. Fast growing economies create still growing demand for all sorts of commodities, especially metals and fuels (for example: oil consumption in China has doubled within last 10 years).
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The second risk unfortunately follows from the first, namely that increasing pressure on interest margins can tempt lenders to seek higher returns on assets through riskier loans, and to concentrate more on short-term funding thereby increasing the mismatch. We saw this before the financial crisis broke in 2007 as lenders ventured into higher LTV, sub-prime and commercial property lending without having adequate risk management in place. We also saw this in the late 1980s and early 1990s. This diversification was generally not successful, and in some cases fatal. Since the height of the crisis societies have generally reduced their commercial property loans, and non-prime has declined too. The main area of growth has been buy-to-let lending, which is true not just for societies but for lenders in general. Now, I don’t want to demonise buy-to-let lending. We are watching carefully, and for the societies we see no evidence today that BTL loans are of poorer quality than prime owner-occupier, and we see a fair amount of stability over time in maximum LTV and minimum rental cover. But, we are watching carefully, and of course applying stress testing across all loans. Looked at more broadly, we are not seeing an upward surge in high LTV lending of the sort that was so damaging in the past, but there is an upward direction to the – admittedly small – share of lending at high LTV and high loan-to-income (ie the two together).
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Of course, I am now going to go on to talk about risks, but before I do let me say that this sort of performance doesn’t happen by accident. But it does show that there is a role for mutuals and one that can succeed. Of course, a lot of hard work goes into achieving these results. On our side, I can also say that Martin Stewart and his colleagues put a lot of hard work into our role, which is founded on sensible forward-looking judgement consistent with our objectives in statute. So, what can go wrong – the risks? The first area that I would highlight is the potential for margin pressure. Most forecasters see continued growth in the mortgage market as the most likely development, but at a lesser pace than in recent years, which is consistent with actions taken by the Bank of England last summer to limit the growth of borrowing by highly indebted households. Competition in the mortgage market is growing, and for instance rates on two year fixed rate mortgages are at a record low. On the liability side, wholesale funding costs are low, and on much of the evidence they are below retail funding costs on average, and that tends to benefit lenders with greater access to wholesale funding. Therefore, BIS central bankers’ speeches 1 notwithstanding the news on interest margins over the last two years, we are watching this story carefully to see what happens next.
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Capital adequacy and liquidity regulation are thus two sides of the same coin. Just as it would be impossible or uneconomic to require banks to operate without risk to provide total certainty of solvency, so liquidity regulation is needed as a form of insurance. The issue is discussed in an article in the December edition of the Bank's Financial Stability Review. The Basel Supervisors' Committee has done valuable work in examining issues and techniques in liquidity management and this work deserves to be carried forward further. For those of you who have already digested the 500 pages of the new Basel Accord we are discussing today and are looking for some more recreational reading, over the Easter holiday, I thoroughly recommend a re-read of the update the Basel Committee published last year of its sound practices for managing liquidity risk. In the meantime, thank you for allowing me to address you this morning. BIS Review 29/2001 5
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5 April 2018 Speech Már Gudmundsson, Governor of the Central Bank, delivered at the 57th Annual Meeting of the Central Bank of Iceland, 5 April 2018. Mr. President; Prime Minister, other Ministers, Speaker of Parliament, Directors and Ambassadors; Ladies and Gentlemen! The Icelandic economy has been in fine fettle recently, with full employment, to say the least, as we have had to import a large number of workers to support economic activity. The risk of overheating has receded somewhat in the past year, however; the positive output gap has narrowed, and the residential housing market is less stretched than it was a year ago. Until last month, inflation had been close to target but below it for four years running. Inflation expectations have been at target by most measures in the recent past. It is this that has enabled the Bank to lower its policy interest rate by 0.75 percentage points since our last Annual General Meeting. Inflation expectations have fallen to the target and have become more firmly anchored there, reflecting the success of monetary policy in the recent term. The Bank’s Chief Economist recently published a Working Paper explaining this success, noting as well that the decline in inflation to the target between 2012 and early 2014 was virtually costless, partly because of increased credibility of monetary policy.1 If changes are made to the monetary policy framework in the coming term, it is important to preserve this success.
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The message is that the MPC makes interest rate decisions one at a time, and that it has not made up its mind about what future path of rates will be consistent with the inflation target. The market interest rate path too is a conditioning assumption, not the MPC’s prediction about future rates. The difference is that, to the extent that the market rate curve embodies the market’s guess about where the MPC will take rates, forecasts predicated on the market rate are more easily interpreted as a comment on that view. So how much significance should be read into our change of conditioning assumption? Did the switch to market rates represent a tentative step towards providing more guidance on the future direction of policy? The fact that interest rates were historically very low in 2003 and early 2004 has some bearing on the matter. Many academics, notably Lars Svensson, have argued persuasively that the use of an unrealistic conditioning assumption makes it more difficult for the public to interpret the MPC’s reading of the economic outlook. As Charlie Bean has pointed out,17 this is certainly true if interest rates are some way off ‘normal’ levels or if for other reasons, they are expected to increase or decrease substantially over the forecast horizon – and the longer the time horizon of the forecast, the more force this argument has.
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This is specially so in emerging markets, where regulatory and political risks heighten the likelihood of default, transaction lead times are long, projects require prohibitively large amounts of start-up capital, and there is limited access to expertise in project development and financing. Second, we need to reduce the risks in marginally bankable transition projects to attract private capital. The return profile on many such projects is not commensurate with the risks facing private financiers or investors. To reduce overall risk and improve bankability, we need more catalytic and concessional funding from the public sector, multilateral development banks, and philanthropic sources. Such funding can be in the form of grants, risk-sharing arrangements, debt at below-market rates, technical assistance, and structuring advice. They can help crowd in additional multiples of private sector funding. But while public capital can potentially do more to mitigate risk, private capital must still bear a fair share of project risk and exercise the appropriate due diligence on project viability and performance. Third, we need to make the financial ecosystem work more synergistically. Banks play a key role as lead managers for financing sustainability projects. However, with limited balance sheets and regulatory capital and liquidity requirements, banks need to offload these loans to institutional investors who have more absorptive capacity. But institutional investors prefer larger deal sizes with a diversified pool of assets to reduce concentration risk. We need to shift towards a portfolio approach to blended finance deals, through the structuring and securitisation of typically illiquid green and transition assets.
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Even in developed countries, there remains minorities that have limited access to basic financial services. For instance, a study conducted in the United Kingdom for the period 2002-2003 found that 2.8 million adults in households had no access to a bank account. In relation to this, regulators have to balance between the need for financial institutions to operate efficiently and the need to ensure access to basic financial services for both individuals and small businesses. In addition, rural communities have also tended to be underserved. The challenge confronting regulators is to ensure that all communities have access to financial services. This greater inclusion is vital to bring the lower income groups into the economic mainstream. An important aspect in the development of a consumer protection framework is to ensure that the framework remains relevant despite changes in economic and financial environment. Changes in the profile of consumers following changes in the demographic structure for example needs to be taken into account. In most communities, the ratio of retired population relative to working adults is expected to rise more steeply in the next decade. In countries with growing ageing populations, there is an increasing demand for financial planning, life insurance, wealth management and mutual fund investment services. Consumers' interests in these areas would need to be adequately safeguarded while financial literacy among the various target groups need to be actively promoted.
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The consumer education efforts are also complemented by initiatives to promote a higher level of disclosure and transparency so as to ensure that consumers have access to relevant, comparable and timely information on products and services. A significant focus has been on the insurance sector, given that a significant segment of the Malaysian consumers do not have good understanding of insurance products. In particular, guidelines on medical and health insurance and the requirements for marketing of life insurance policies, have been strengthened while rules for independent financial advisers have been introduced. In meeting socio-economic objectives, there is also a need to ensure that the welfare and interests of all segments of society are protected and that no target group is excluded or marginalised. Indeed, an important component of our consumer protection framework is to ensure that all consumers continue to have access to basic banking services at reasonable costs. In this connection, a more interventionist approach has been pursued to require banking institutions to offer a list of basic banking services to all Malaysians and to set guiding principles for the imposition of fees and charges for these retail products and services for individuals and small and medium sized enterprises. Efforts have also been taken by the Central Bank in collaboration with the financial services industry to enhance the integrity of the payments systems and instruments, aimed at promoting confidence and ensuring that consumers' interests are safeguarded.
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The important role of emerging economies. The world economy is now more balanced between advanced and emerging economies. Measured in PPP terms, China is the world´s first economy, representing 18% of global GDP, and Russia the 6th (3% of world GDP). We share the same world economy but our respective economic structures and cycles differ. We need a shared analysis, to learn from our respective experiences, and it is crucial that international coordination and regulation take into account our realities. 6/6
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The goal of this Regulation is to ensure a more rigorous regulatory treatment of issuance and transactions with some types of crypto-assets and the crypto-asset service providers will be subject to authorisation and control. The long-term trends in Europe are related to achieving a greater integration and autonomy of the European payment system. In its centre are positioned the instant payments and application of common technical and business standards across Europe. Bulgaria is an active participant in these processes. EU initiatives for development of retail payments are in the process of implementation on our domestic payments market. A still open question is whether the changes in the people’s payment habits will stay as a permanent feature and will set a direction for the forthcoming technical developments in the payments sector. In this very dynamic area the EU regulators will continue playing an active role. I wish interesting and productive work to all the participants in today’s financial forum. 2/2 BIS central bankers' speeches
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On the other hand, problems remain on the housing market, which are dampening household demand and restraining the recovery. Many households have seen the value of their homes decrease sharply, with homes now being worth less than mortgages in many cases. In such a situation, many households are choosing to strengthen their balance sheets by restraining consumption in favour of saving. Furthermore, house sales entail a serious risk of incurring losses. In turn, this may mean that the unemployed are less willing to move to regions in which there exist job opportunities. The labour market may thus have become less flexible, and long-term unemployment in the United States may have risen as a consequence of the crisis. Happily, in Sweden, the level of GDP seems to have returned to about the same level as prevailed before the crisis erupted. Our overall assessment is that resource utilisation is on the way to becoming normalised. However, I would like to point out that it is very difficult to measure resource utilisation, as this cannot be directly observed. Different measures also provide somewhat different pictures. While a number of measures indicate that resource utilisation has already returned to normal, other measures continue to point to a certain degree of spare capacity. There are many indications that unemployment has the potential to 4 BIS central bankers’ speeches decrease a bit more before any “bottleneck problems” arise in the labour market (see Slide 9).
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The years before the financial crisis – the calm before the storm From about the middle of the 1990s until the outbreak of the financial crisis, economic development both in Sweden and abroad was characterised by positive growth and low inflation. Fluctuations in production and inflation decreased, at the same time as productivity growth in Sweden and elsewhere increased. There are many ways of illustrating this development, but one way would be to examine government bond rates in Sweden, the euro area and the United States (see Slide 1). Certain clear patterns can be detected. These include decreased interest rate levels and a reduction of fluctuation in these over time. In addition, from the mid-1990s, interest rates in various countries developed in a strikingly similar manner. This strong development can be further illustrated by growth in the world economy, which fluctuated between 2 and 5 per cent and averaged almost 4 per cent (see Slide 2). All in all, developments from the mid-1990s until the start of the financial crisis can be compared to a voyage through relatively calm waters, to return to our nautical analogy. But then the storm broke. Sweden’s economy during the financial crisis – what happened? Happily, we can now start talking about the financial crisis as something we have left behind us.
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One example is data on the size of 2 BIS Review 19/2007 daily variations in net asset value, VAR, or profit and loss over the previous quarter. This type of information would not reveal proprietary information about trading strategies or otherwise create substantial disincentives to risk taking. Although these would provide some information on the overall risk profile of the fund, they would be lagging indicators, and they would carry the usual risk of providing false comfort in some circumstances and excessive concern in others. Adopting such measures would give the institutions that provide financing and leverage to hedge funds a somewhat greater capacity to judge their direct risk to those funds. But that is not their principal challenge. The institutions already know the positions they are financing, and they can use the usual range of tools to measure the potential exposure, net of collateral, in those positions. And where they do not feel they have adequate information to evaluate the overall risk profile of the fund, they can manage that risk by taking less exposure, by requiring more margin, or by building a greater cushion of protection against overall risk. So the potential gains from a disclosure regime of this type would be limited, at least as compared with the cost of trying to put such a regime in place on the global scale that would be necessary to make it effective.
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And yet many of the observations made about liquidity and market conditions over recent years have potential implications for monetary policy. Changes in risk premia, the level of asset prices, credit spreads, and interest rates, and in realized and expected volatility of asset prices – these can all affect the pace at which overall demand grows, and can therefore potentially affect future inflation. In discharging their responsibilities for the maintenance of price stability, central bankers need to be eclectic in looking at a range of different ways of measuring the stance of monetary policy, and its effects on the future path of growth and inflation. No indicators of liquidity or overall financial conditions provide a ready guide to judgments about monetary policy. But all these indicators merit careful attention, and they strengthen the argument against narrow or mechanistic approaches to thinking about the monetary and broader economic outlook. BIS Review 19/2007 3 Ultimately, though, ex ante judgments about leverage, concentrations and liquidity risk will continue to prove elusive. Our principal focus should therefore be not in the search for the capacity to preemptively diffuse conditions of excess leverage or liquidity, but in improving the capacity of the core of the financial system to withstand shocks and on mitigating the impact of those shocks. And, as always, central banks need to stand prepared to make appropriate monetary policy adjustments if changes in financial conditions would otherwise threaten the achievement of the goals of price stability and sustainable economic growth. Thank you.
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We do this through issuing guidelines that lay down the minimum standards that institutions should incorporate in their anti-money laundering systems. We then carry out on-site examinations to check that these standards are being adhered to. This year we introduced a two-tier, risk-based approach towards examinations. In cases where AIs may be at higher risk of money laundering, we conduct more in-depth examinations using specialist teams. This may involve sample testing and visits to branches to look at how controls actually work in practice and to ascertain at first hand the knowledge and awareness of staff. In more routine cases, higher level review of anti-money laundering controls is conducted, generally as part of our normal risk-based examinations. We intend to supplement our own examinations with a system of self-assessment by compliance officers of AIs on risk indicators of money laundering within their own institutions and the quality of BIS Review 47/2002 1 controls. This will be done using a structured self-assessment framework that we aim to release to the industry later this year. This should help the HKMA to conserve its own resources and direct them where they are most needed. But it should also serve to remind AIs that they have the primary responsibility for making sure that their own house is in order. The HKMA guideline Checking that standards are being observed is obviously important. But it is necessary to ensure that the standards themselves remain effective in dealing with risks.
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Use of instruments that diminish the risk associated with floating exchange rates is also gaining ground in Norway. The operational target of monetary policy in Norway is low and stable inflation. Developments in the krone exchange rate are nonetheless important when Norges Bank sets the interest rate. There are several reasons for this. First, changes in the krone exchange rate affect prices in krone terms for imported consumer goods and services. Second, exchange rate changes have an impact on competitiveness in Norwegian business and industry and on market opportunities at home and abroad. This affects the level of activity in the economy and, in turn, price and cost developments. In the period between Inflation Report 3/06, presented in November 2006, and Monetary Policy Report 1/07, presented in March this year, the krone appreciated more markedly than we had assumed. As a result, Monetary Policy Report 1/07 was based on the assumption that the krone would be somewhat stronger throughout the projection period. The exchange rate assumption in Inflation Report 3/06 is shown by the broken blue line in the chart on the left, while the broken red line denotes the exchange rate assumption in Monetary Policy Report 1/07. The isolated effect on the interest rate path of a stronger krone is illustrated in a box in Monetary Policy Report 1/07. As shown in the chart on the right, the stronger krone pointed to a somewhat lower path for the interest rate.
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Disturbances can be temporary, such as a winter with little rain reducing the water level in reservoirs at the power stations, or more lasting - for instance, a new production technique can affect capital stock and industrial structure. Many of the disturbances that occur affect both the supply and the demand in the economy. According to some calculations, which were presented in the Inflation Report, production capacity during the slowdown could have declined from approximately 3 per cent at the beginning of 2000 to 1 per cent at the end of 2001. At the same time, it is important to emphasise that production capacity cannot be measured in a reliable and simple manner, which means that this type of calculation is characterised by uncertainty. GDP growth in Sweden is estimated to amount to 1.5 per cent this year, 2.7 per cent in 2003 and 2.6 per cent in 2004. An important issue is whether production capacity will increase when the economy picks up. After all, it is the long-term production capacity that determines whether growth is compatible with low inflation and can thereby provide a sustainable positive development in income and welfare in the economy. The most important factors with regard to developments in the near future are the labour supply and productivity. The labour force has increased considerably in recent years, mainly thanks to increased employment in trade and industry. At the same time, a reduction in the average working hours has had a counteractive effect.
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Petar Goshev: Alleviating the negative effects of the financial crisis Welcome address by Mr Petar Goshev, Governor of the National Bank of the Republic of Macedonia, at the World Bank event, Skopje, 15 March 2010. * * * Distinguished ladies and gentlemen, It is my honor to give a welcome address at this important World Bank event that it is taking place at a critical transitional stage when it seems that the strongest impact of the severest crisis since the Great Depression is behind us and the global economy is beginning to grow again. Still, although we believe the worst is behind us, the global crisis has had strong negative effects that will continue to be felt in the years to come. Because of that, the efforts of the national authorities and international financial institutions for mitigating the negative effects have to continue. In this regard, the enhanced role of the international financial institutions, including the World Bank, is vital. The economic, social and human implications of the global crisis have further emphasized the World Bank’s mission of eliminating poverty, enhancing growth and providing inclusive and sustainable development. Achieving Millennium Development Goals (MDGs), as a set of priorities for the World Bank, is becoming more challenging.
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2/3 BIS central bankers' speeches Both the Banking Union and the Capital Markets Union are the key components of what we call with Jens Weidmann a genuine “Financing Union for Investment and Innovation”: this idea is a way of better channeling our abundant resources – our EUR 340 billion savings surplus in 2018 – towards the concrete needs of the European economy: the energy transition, SMEs’ equity or digital innovation. This unified branding has the merit of highlighting the purposes of this Union to the general public: investment and innovation, or in other words the financing of the future. III. Some pillars of a European financial sovereignty In the longer run, we should build three key pillars of the future European financial sovereignty. First of all, the EU needs to strengthen its position as rule maker through enhanced equivalence regimes. Brexit has given new momentum to this topic: a comprehensive reassessment of current equivalence regimes is essential given the scope of the relationships between the EU and the UK. Beyond the issue of Brexit, the review of equivalence regimes also provides an opportunity to improve them. There is a need for greater transparency in the procedure for granting equivalences, within a comprehensive institutional framework. The monitoring and control of equivalence decisions could also be improved by granting more power to ESAs, and by providing the European Commission with more gradual options through flexible tools in the case of regulatory divergence: for example, temporary, partial or conditional lifting of equivalences.
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Supervisors both at national and European levels have encouraged and monitored the implementation of contingency plans. Up until now, most major players have taken the necessary steps, but some concerns linger regarding the preparedness level of the smaller players, particularly electronic money and payment institutions. On the other hand, public measures have been taken to deal with the specific risks of a no-deal Brexit that could threaten financial stability or consumer protection. The temporary and conditional recognition of British CCPs should prevent cliff-edge effects, as well as temporary waivers on mandatory clearing and bilateral margin exchange for a limited category of products. Member states have also adapted their domestic regulations or are planning to do so. In France, legislation has been enacted ensuring contract continuity for cross border activities and an extended access to UK settlement systems. II. Building a financial Eurosystem Let me now turn to the heart of my topic. The unfortunate reality is that Brexit leaves us no other choice: we must now reshape the European financial system and develop its autonomy. The euro area can already build on strong assets: an effective monetary Eurosystem, the legal framework for a single financial market and essential components of a Banking Union. However we do not, as yet, have a “financial Eurosystem”, made up of stronger pan-European financial institutions and market infrastructure. Let’s be clear: there will not be a single City for the continent, but rather an integrated polycentric network of financial centres, with specialisations based on areas of expertise.
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Lars Nyberg: The ESRB – reflections after 9 months of operation Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at Norges Bank (Central Bank of Norway), Oslo, 27 September 2011. * * * The financial crisis that started in 2007–8 exposed serious weaknesses in the regulatory system. Firstly, it turned out that the banks had too little capital and that the quality of that capital was not good enough. Furthermore, issues of liquidity had largely been neglected by regulators. All this has been addressed by the Basel III compromise, which is to be slowly implemented over the years to come – too slowly in the view of some countries, too quickly according to others. Secondly, the crisis revealed some embarrassing weaknesses in the EU framework for financial stability. The quality of supervision varied substantially between countries and coordination within Europe was insufficient, to say the least. Perhaps even more importantly, the concept of macro-prudential supervision (I will return to this concept in a while) was largely unheard of. To address these issues, the Commission, in late 2008, set up a group (where I had the honour of being a member) led by Jacques de Larosière with the mandate of presenting a roadmap for strengthening the European supervisory framework. The group delivered its report in March 2009. One of the main ideas was the creation of a new institution, which eventually came to be called the European Systemic Risk Board and which is my subject for today.
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Countries are expected to anchor fiscal prudence in national rules, creating a much more “vertically integrated” concept of governance. All these measures were unthinkable four years ago. If we look at the conclusions of Euro Summit on 26 October – dismissed by some observers as insufficient – we see even more radical steps envisaged for the future. Euro area countries have committed to adopt balanced budget rules. They have agreed to base their budgets on independent growth forecasts. They have agreed to stick to the recommendations of the Commission when implementing the Stability and Growth Pact. Countries in the Excessive Deficit Procedure – which is currently 14 out of 17 euro area countries – will allow the Commission to examine draft national budgets and monitor budget execution. Although some of the recent governance reforms, like those that formed part of the so-called “Six-pack” proposed by the European Commission, fall short of the “quantum leap” that the ECB had long advocated for the euro area, they still represent significant progress relative to the situation prevailing before the crisis. The creation of the European Financial Stability Facility and future European Stability Mechanism could also not have been imagined in 2007. The euro area has institutionalised the provision of sovereign liquidity and agreed to a Treaty change to ensure its legality. As the new facilities have developed, they have acquired a range of tools.
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M R Pridiyathorn Devakula: Commercial Banking and Financial Services - our Vision for Thailand Speech by M R Pridiyathorn Devakula, Governor of the Bank of Thailand, at the Conference on “Modernizing our Financial System: Challenges for the New Millennium”, Bangkok, 23 January 2002. * * * Your Excellencies Distinguished Guests Ladies and Gentlemen, I would like to take this opportunity to welcome all of you to our conference on "Modernizing our Financial System: Challenges for the new Millennium". I would also like to express our deep appreciation for the distinguished speakers who came all the way from Australia, Canada, Hong Kong, and South Africa to share with us their expertise and knowledge on this very important topic. And, of course, to the World Bank, our co-host, for help organizing the conference. Our financial crisis in 1997 and its subsequent impacts highlighted the lesson of critical importance that dynamic and strong domestic financial institutions are vital to sustainability of development and growth. Over the past 20 years, financial sector has been one of the major forces that support our progress and financial services share in our GDP has grown from a mere 3 percent to roughly 8 percent. It is the fifth largest industry in term of value added to our GDP, and currently employing more than 300,000 of our workforce. Nevertheless, despite such favorable development, there are some concerns: - First, in term of competitiveness of our financial institutions, there is room for improvement.
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Norges Bank has been given an operational target for monetary policy, which means that monetary policy instruments shall be used with a view to maintaining low and stable inflation. The inflation target is set at 2½ per cent. Low and stable inflation is probably the best contribution monetary policy can 9 make to financial stability. This is also supported by empirical studies. However, there have been episodes where bubbles have accumulated in the form of sharp increases in asset prices in the property and financial markets while inflation has been low. Developments in Japan in the 1980s and in the US in the 1990s may be examples of this. When the bubbles burst, the result may be an economic downturn. Thus, developments in the financial and property markets may also fuel more unstable inflation. In principle, it might be appropriate to use the interest rate to counter this. In practice, however, it is difficult to assess whether developments in prices for property and financial assets are sustainable. When Norges Bank concludes that the key rate should be changed, the change will in most cases be made gradually. If special emphasis is placed on developments in financial or property markets when the key rate is changed, Norges Bank will provide an assessment of this. It is Norges Bank’s responsibility to present its view on the risks facing the financial system from a macroeconomic perspective. This is the purpose of Financial Stability, a report published twice a year. Second, the international financial infrastructure must be strengthened.
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BIS Review 7/2003 1 To respond to these challenges, the Committee has sought to develop a more flexible and forwardlooking capital adequacy framework - one that better reflects the risks facing banks and encourages them to make ongoing improvements in their risk assessment capabilities. The Committee believes that all banks should be subject to a capital adequacy framework comprising minimum capital requirements, supervisory review, and market discipline. As you know, these are the three "pillars" of the New Accord. Each is an essential element for ensuring the safety and soundness of banks worldwide. In contrast, the current Accord only has one pillar - minimum capital requirements. As we all agree, risk management is a dynamic process and one that will continue to evolve. Consequently, the New Accord is designed to accommodate future changes in the way banks measure and manage their risks by giving banks a range of options for calculating capital charges and incentives for using best practices. Banks will be expected to apply the option most appropriate to the complexity of their own operations and risk management capabilities. For credit risk, the range of options begins with the standardized approach and extends to the internal ratings based (IRB) approach. The standardized approach, as you know, is structurally similar to the 1988 Accord, where banks are required to differentiate their exposures into broad categories, such as loans they have made to corporate and sovereign borrowers or banks.
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It improves on the 1988 Accord by aligning risk weights with a borrower’s creditworthiness as indicated by an external credit rating. The IRB approach goes further and is one of the most innovative features of the New Accord. It has been constructed to build upon and further encourage investments banks are already making in their internal risk management systems. As you know, these systems have been developed and further refined to promote a bank’s competitiveness and to protect it against loss - and not just to respond to a regulatory mandate. Banks using the IRB approach will be permitted to quantify key measures of a borrower’s creditworthiness in determining the corresponding capital requirement. This will include estimating the likelihood that the borrower will default. Many banks will also be able to provide internal estimates of other key variables, such as the recovery rate if a borrower were to default and the likelihood of a credit line being drawn upon. While banks adopting the IRB approach will have the flexibility to rely on their own estimates of key risk parameters, those estimates will be subject to a set of minimum operational requirements. The aim of these standards is to ensure that these critical inputs have integrity and are the product of a system the bank relies upon to perform its day-to-day operations. Further, through pillars two and three, the new framework builds in additional checks and balances to ensure that banks’ systems will generate accurate and timely credit assessments.
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Cecchetti, Stephen, Hans Genberg, and Sushil Wadhwani (2002). “Asset Prices in a Flexible Inflation Targeting Framework”, in William Hunter, George Kaufman and Michael Pomerleano, eds., Asset Price Bubbles: The Implications for Monetary, Regulatory and International Policies, 427–444. MIT Press: Cambridge, MA. Coenen, Günter, Athanasios Orphanides and Volker Wieland (2004). “Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero”, Advances in Macroeconomics, 4(1). Cúrdia, Vasco, and Michael Woodford (2009). “Credit Spreads and Monetary Policy”, NBER Working Paper 15289. Cúrdia, Vasco, and Michael Woodford (2010). “The Central Bank Balance Sheet as an Instrument of Monetary Policy”, paper prepared for Carnegie-Rochester Conference on Public Policy, “The Future of Central Banking,” April 16–17. Eggertsson, Gauti B., and Michael Woodford (2003). “The Zero Bound on Interest Rates and Optimal Monetary Policy”, Brookings Papers on Economic Activity, 1, 139–211. Edge, Rochelle M. (2003). “A Utility-Based Welfare Criterion in a Model with Endogenous Capital Accumulation”, Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series, No.2003-66. Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack (2010). “Large-scale Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve Bank of New York, Staff Report No.441. Gertler, Mark, and Peter Karadi (2009). “A Model of Unconventional Monetary Policy”, mimeo, New York University. Greenspan, Alan (2002) “Opening Remarks” in Rethinking Stabilization Policy, 1–10. Federal Reserve Bank of Kansas: Kansas City. Gruen, David, Michael Plumb and Andrew Stone (2003).
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Our task now is to ensure that liberalization and globalization remain productive processes, that our energies are devoted not just to short-term cures, but also to long-term preventive health. There are a number of initiatives that we might pursue, and I mention only a few of them with the aim of stimulating discussion. The first, and most urgent, is the reform of the international financial architecture to better regulate the volatile capital flows that contribute to market instability. This must include improved information and disclosure. The recent experience in this region has shown that problems were allowed to build up because of a lack of information about the full financial picture, both in terms of the destination and the source of the funds. Important steps are being taken in many Asian countries towards greater transparency in the public sector, and I am pleased to report that Hong Kong is playing a leading role in these efforts. But greater transparency among the regulators means that a serious asymmetry of information is emerging between the public and private sectors. We must now consider the need for greater disclosure on the investor side, since the virtual complete lack of information about the activities of huge global institutional investors poses risks to all participants in the markets - to other investors, to lenders, and to borrowers. A second part of this architectural reform must be improved prudential oversight of capital flows, since mere disclosure is no guarantee that behaviour will be prudent.
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The goal is a situation in which economic slack has disappeared, economic growth is in line with growth in potential output, inflation is at the target, and the external position of the economy is sustainable. Second, we must establish a financial system that serves Icelandic households and domestic business activities and is both efficient and relatively secure. The third challenge is that of re-establishing confidence abroad in Iceland’s institutional framework, economy, and financial system; repairing the connections with foreign financial markets; and ensuring that the Icelandic Government and Icelandic companies have access to foreign credit markets once again. The economic recovery was just about to begin when the 2010 meeting was held. It then gained enough momentum that, in five years’ time, we have returned to pre-crisis GDP levels and have eliminated virtually all of the spare capacity in the economy. At the same time, the unemployment rate has fallen sharply and is now close to its equilibrium value. Structural reforms could reduce the equilibrium unemployment rate still further in the future, however. Inflation is below the inflation target at present, and inflation expectations had subsided to target by the turn of the year. Treasury debt has declined steadily since 2011, and the outlook is for this trend to continue in the years to come. Household and corporate debt levels have also declined markedly. The ratio of household debt to disposable income is now roughly at 2005 levels, and the ratio of corporate debt to GDP is at its lowest since mid-2004.
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Instead, it appears that the consensus on wage differentials has been weakened at the same time that opening of the labour market vis-à-vis abroad has put pressure on wage differentials – in some cases, in the direction opposite to that demanded by labour market organisations. As Monetary Policy Committee member Gylfi Zoëga pointed out recently, the greater the sense of cohesion about wage distribution in society, the lower the unemployment rate that is consistent with low and stable inflation. Conversely, the weaker that sense of cohesion, the less individual worker groups will be willing to participate in creating the public good that is price stability, and the higher the equilibrium unemployment rate will have to be. This theory is based partly on the work of Ezio Tarantelli, one of Italy’s leading economists in the second half of the twentieth century, which shows us that our experience is far from unique. If the theory applies to the current situation in Iceland – and a number of factors indicate that it does – increased cohesion in this sense could create the conditions for lower unemployment and lower interest rates, but without losing control of inflation. Whatever the reason, this situation gives rise to the risk of an outcome that is worse for society as a whole, although some groups may gain at others’ expense. In other words, in this situation as in so many others, a cooperative solution is usually better for the whole than a conflict solution.
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This development has been supported by the development of the derivatives market, in which Pension Funds have been key counterparts as well. Banking regulation, in turn, have result in limited currency mismatches at the bank level, which have made the introduction of new regulation to deal with FX risk unnecessary, as we have observed in many emerging market economies after the Global Financial Crisis (GFC). While may be true that other emerging economies have been increasingly active in the implementation of CBM in their banking systems, in Chile, we have followed a different approach to deal with FX risk at the banking level. This approach has been mainly characterized by limiting banks’ direct FX-currency exposure (limited currency mismatches) as part of our overall capital requirements for market risk purposes. Also, by acknowledging the potential indirect FX risk through the credit provisioning requirements. In fact, in Chile, the main regulatory changes introduced has been the recent modification of the General Banking Law (GBL), which constitutes a major step forward for the local banking industry, in that it will contribute to reducing the gap with international regulatory standards established under Basel III. The new regulatory Page 2 of 12 Central Bank of Chile September 2019 framework raises important challenges for the industry in terms of compliance with the new, more demanding solvency requirements, especially for entities with a smaller capital cushion. High-level Policy Seminar on Integration or Fragmentation?
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Well-trained directors can be firm hands in steering companies through pitfalls which may appear. In such an uncertain environment, it will be critical to reinforce the confidence of stakeholders in how our companies are run. This will require both the government and the private sector to play our part. 6. On the regulators’ end, we will continue to make sensible rules that are practical and outcome focused. We will also continue to keep our rules up to date. The Corporate Governance Council, established by MAS, is reviewing the Singapore Code of Corporate Governance and will submit its recommendations to MAS. On its part, the private sector must nurture a pool of well-trained and ethical directors. 7. Being a director will become increasingly demanding. Companies’ operations are getting more international, and the markets for raising capital becoming more complex. Expectations of directors by stakeholders are also growing. 8. Directors are now exposed to substantial legal and reputational risk if they do not, or are perceived not to have, discharged their fiduciary duties for the company. For example, directors of BP have been sued by shareholders over the costs associated with the oil spill in the Gulf of Mexico. Directors of AIG were also sued for not adequately monitoring the firm’s exposure to the subprime mortgage market. BIS Review 164/2010 1 9. Directors should not become defensive or legalistic in face of these challenges.
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The significance of these achievements can be demonstrated by the resilience shown by the accession countries to the Asian and Russian crises in 1997-1998 and, more recently, to the adverse developments in Argentina and other emerging market economies. However, a number of important challenges remain. The years to come will be crucial to ensure that the current significant momentum of the accession process is maintained, and that the remaining difficulties are dealt with effectively in order to permit the smooth integration of accession countries into the EU and, later on, into the euro area. The forthcoming enlargement of the EU will, no doubt, increase the diversity and complexity within the Union in an unprecedented way. In economic terms, the discrepancies in real per capita income and price levels between the accession countries and the euro area are of a magnitude that has never been observed in previous enlargement rounds. In this regard, however, it should be borne in mind that the combined GDP of all the accession countries accounts for only around 5% of that of the EU. The enlargement also confronts European policy-makers with enormous challenges in political and institutional terms. The sheer increase in the number of Member States that the current enlargement represents renders the functioning of decision-making bodies more difficult. As we all know, substantial institutional reforms are needed to ensure that the EU can continue to function effectively after enlargement.
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Instead, it should be regarded as a meaningful and flexible framework for increasing nominal and real convergence with the euro area, and for tackling the challenges faced by the accession countries as they progress towards the adoption of the euro. Indeed, the experience of current euro area member countries in the fields of inflation and exchange rate developments strongly suggests that the existing institutional framework for accession to the euro area, including the convergence criteria as defined in the Maastricht Treaty, is sound. Furthermore, this framework should be sufficiently flexible to accommodate most of the challenges that accession countries will face on their path to the eventual adoption of the euro. 4. Capital account liberalisation Ladies and gentlemen, the fourth economic issue I would like to refer to is capital account liberalisation. In several accession countries, capital movements are still subject to a number of restrictions. The most relevant restrictions, from a monetary policy perspective, apply to short-term portfolio investments. Although transitional periods may be allowed under the Treaty in the early years of EU membership, as well as prior to accession under the Europe Agreements, thus far, only a few countries have requested them. In those few cases, transitional periods mainly relate to areas that are not particularly relevant from a monetary policy point of view (e.g. real estate purchases).
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An issue touched on earlier in the day was reporting and accounting, and one of the things the industry has done is to come up with something called the Enhanced Disclosure 2 BIS central bankers’ speeches Task Force. The Taskforce proposed a set of recommendations for banks to develop highquality, transparent disclosures that clearly communicate banks’ business models and the key risks that arise from them, so that people who supply capital to the banks can follow how they make money, how they think about managing risk, and make judgments on the basis of that. The important point was that this was industry-led, and co-chaired by a London-based bank. There was some input from the authorities, but the industry led the initiative, and it’s a model we may use in other areas of finance. I mentioned Total Loss Absorbing Capacity earlier – I won’t use the acronym! I’m aware the full name doesn’t necessarily make it any more intelligible, but this is basically another layer of capital, and the ability to absorb losses in the event that a firm fails. It is more cost effective – so the cost is not passed on to borrowers. And the technology behind this was developed by the private sector, with the authorities contributing to ensure it could work effectively and on a global basis. But it was the industry, once again, that came up with the solution.
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A major infrastructure issue for the Treasury market has been the clearing and settlement practices of the cash market. This can be opaque, with a majority of trades cleared away from central counterparties (CCPs). While central clearing is more uniformly used in other segments of the Treasury market—such as futures—many market participants elect to clear and settle cash Treasury transactions in a bilateral fashion. This process includes many market participants: trading venues, clearing agents, and clearing banks. No single participant has a view of the entire clearing and settlement system. The Treasury Market Practices Group (TMPG), a New York Fed-sponsored group of market professionals working to support the integrity and efficiency of the Treasury market, has concentrated its recent efforts on this topic. Preliminary findings include an increasing volume of linked trades that clear centrally on one side and bilaterally on the other. This work has also uncovered information asymmetries in clearance and settlement risk management, which potentially could lead to a mispricing of these risks. Moreover, increased understanding about the depth, breadth, and durability of credit arrangements that support clearance and settlement seems desirable. This would improve market integrity through greater understanding of risk throughout the clearing and settlement process and how it is affected by different conditions. Since the financial crisis, there has been an effort to strengthen the resiliency of repo market infrastructure, which is another important element of Treasury market plumbing.
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In line with the above-stated overview, the presentation will address the following: (i) activity of the Supervisory Council and strengthening corporate governance; (ii) monetary policy decisions, achieved results and future challenges; (iii) measures taken to enhance financial stability and promote lending; (iv) steps taken to foster internal control and monitoring systems and procedures; and, (v) work carried out to strengthen independence, accountability and transparency. I would like to start with the activity of the Supervisory Council of the Bank of Albania and our work toward good governance. 1. Activity of the Supervisory Council and strengthening institutional governance The Supervisory Council has performed its activity in line with the competences set out in the Law “On the Bank of Albania” and the procedures established in the regulation on its organisation and functioning. During 2016, the Council met 15 times and approved 136 decisions, of which 82 were acts approved for the first time, and 54 were amendments to existing acts. Eight meetings were dedicated to monetary policy decisions, four meetings focused on issues related to supervision and financial stability, and three other meetings were dedicated to control and oversight of the activity of the institution. The decisions have been thoroughly communicated to the public through press conferences, publication of relevant reports and public explanation, on a case by case basis, of various issues. Beyond formulating policies and monitoring their implementation, the vision of the Supervisory Council is to raise the public trust in the Bank of Albania by enhancing the governance of this institution.
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Preparing a plan for reducing euroisation in our economy is a joint commitment by a number of authorities and the Bank of Albania is in the process of identifying measures that may be taken in this regard. Amid a complex and challenging economic and financial environment, the coordination of the monetary, micro and macro-prudential policies assumes primary importance in promoting monetary and financial stability. In 2016, the Bank of Albania has worked with the same intensity in all three aspects, aiming at an optimum calibration for them. Following, is an overview of our work for maintaining and promoting financial stability. 3. Promoting financial stability and sound lending In accordance with its mandate and institutional responsibilities, the Bank of Albania is jointly responsible for safeguarding financial stability in Albania. It communicates its assessment on the financial stability regularly, and coordinates its policies with other institutions, through the Financial Stability Advisory Group (FSAG). With regard to financial stability, during 2016, we continued to work for drafting a comprehensive framework of the macro-prudential policy and constructing macro-prudential instruments. This framework is based on recommendations of the European Systemic Risk Board and standards of the Financial Stability Board. Moreover, in accordance with its institutional mandate and responsibilities, the Bank of Albania is tasked with safeguarding the stability of the banking system and addressing potential risks that may jeopardise it.
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At the end of 2015, in Bulgaria the share of SEPA credit transfers in the total number of customers’ credit transfer orders in euro was 59%, and the migration to the EMV standard for bank payment cards and POS terminals is over 90% and is nearly complete. • With effect from 1 February 2016, Member States must remove settlement-based national reporting obligations on payment service providers for balance of payments statistics relating to payment transactions of their customers. Soon the National Assembly is going to pass amendments to the Currency Law, introduced with the Law on consumers’ real estate loans, and the related changes are going to be made to Ordinance No.27 on the balance of payment statistics. Therefore, payment service providers will no longer be required, for the needs of the balance of payments statistics, to keep registers and provide the BNB with information on transactions and payments between residents and non-residents and on BIS central bankers’ speeches 1 cross-border transfers of over BGN 100 000. We expect that these changes would be passed by the end of July this year. • In relation to the agreement reached between the MoF, BNB and market participants, the BNB as the fiscal agent of the government works on a project for the technical implementation of direct connection of the Government Securities Depository with the EBOND system to the BLOOMBERG PROFESSIONAL platform and the system of the Bulgarian Stock Exchange.
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5 This reduces the return potential of investments and hence also the demand for capital to finance investments. The real rate of interest had to fall in order to balance supply and demand on the capital market. Negative interest – still essential from a monetary policy perspective The decline in long-term interest rates also has implications for monetary policy and thus for short-term rates. What is known as the ‘neutral rate of interest’, i.e. the rate at which monetary policy neither holds back nor stimulates the economy under conditions of price stability, is also lower than it used to be. To achieve the same degree of monetary policy expansion in these circumstances, short-term interest rates must therefore also be lower now. This is one of the reasons why many central banks lowered their policy rates to zero or even into negative territory in the financial and debt crisis. It was because of this that the SNB, too, introduced a negative rate of interest on the sight deposits that banks hold with it. We are aware that the negative interest rate is an unconventional instrument, and one that has side effects. That is why we subject the benefits of this instrument for monetary policy, as well as any resulting costs, to particular scrutiny. We will only maintain the negative interest rate for as long as the benefits outweigh the costs. We undertook the most recent evaluation during our September monetary policy assessment.
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The picture for the petroleum and offshore supply industry is mixed. Operators’ production of oil and gas is high. Some sectors of the offshore supply industry experienced a difficult fourth quarter, but are more optimistic about this year. The maintenance and modification market is showing steady, although moderate, growth. Most companies report stable employment. Extensive rationalisation and restructuring measures are still on the agenda in organisations and enterprises, and so far, growth is being absorbed by excess capacity or by increased productivity. Wholesale and retail trade and the building and construction sectors are increasing their workforces. All industries continue to report that highly qualified labour is in ample supply. Of the Norwegian counties exporting traditional goods, Rogaland is the third largest. The public sector and some private service industries are as important for employment in Rogaland as they are in the rest of Norway, but the share of employment in these sectors is lower than the national average. Manufacturing and oil and gas production are important in Rogaland, but the internationally exposed sector is also relatively large. Employment in Rogaland is mainly concentrated in engineering, shipbuilding and construction of oil platforms. Many are also employed in the food and beverage industry, and Rogaland is an important farming county. The labour market in Norway has improved. The number of persons employed in Norway began to increase in summer 2003 and unemployment stabilised. Employment in distributive trades has increased.
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Projections The central scenario projections contain limited changes with respect to the March Report. Inflation is expected to continue to fall and will converge to the target within the second half of 2024. For December of this year, the annual variation of total CPI is foreseen at 4.2%, compared with the March estimate of 4.6%. Core inflation will end 2023 at 6.5%, which compares with the 6.9% projected in March. Both indicators will converge to 3% during 2024 and will remain in the neighborhood until the end of the policy horizon, that is, the second quarter of 2025 (figure 16). Core inflation will decline more noticeably towards the end of 2023 and the beginning of 2024, as anticipated in the March Report. The projections reiterate that, in the short term, the monthly variation of services inflation will continue to exceed its historical averages. This incorporates the greater rigidities that these prices normally present and the impact of the still-high inflation on the usual repricing mechanisms. Goods inflation, meanwhile, will benefit from a lower than expected trajectory of the real exchange rate (RER) in March. This is consistent with the nominal appreciation of the peso in recent months, in a context where, as I mentioned, local uncertainty has diminished. Looking ahead, the effect of tight external financial conditions continues to be considered. Compared to March, activity projections show minor changes, mainly associated with the mining industry. This year, the annual variation of GDP will be between a 0.5% fall and a 0.25% rise.
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2 BIS Review 35/2006 Globalisation involves both challenges and opportunities The increasing competition from, for instance, China, India and eastern Europe means that there is increasing pressure on the early industrialised nations to transform their trade and industry structure. This structural transformation will affect people, places and regions in different ways. However, history shows that free trade and increased economic integration lead to increased economic welfare for the world as a whole. The international division of labour that follows in the wake of globalisation leads to lower production costs and productivity gains, which in turn means that labour and investment in the industrialised nations can be moved to other sectors with more refined products and services. In that sectors and companies that are not internationally competitive are knocked out, scope is created for new employment in areas where different countries and regions have comparative advantages. However, for an individual country or region to benefit in this process, the “creative destruction” entailed in the structural transformation must lead to new jobs with a higher value added factor being created at the same rate as the old ones disappear. Effects on the labour market China’s and India’s integration into the world economy is sometimes described in the debate as a supply shock in the global labour market, which will result in rapidly-falling wages in the western world.
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Del Negro, Marco, and Christopher Otrok (2007), “99 Luftballons: Monetary Policy and the House Price Boom across U.S. States”, Journal of Monetary Economics 54, 1962–1985. Edge, Rochelle M., Michael T. Kiley, and Jean-Philippe Laforte (2008), “The Sources of Fluctuations in Residential Investment: A View from a Policy-Oriented DSGE Model of the U.S. Economy”, paper presented at the 2009 American Economic Association annual meeting, January 3–5. Greenspan, Alan (2002) “Opening Remarks”, in Rethinking Stabilization Policy, Federal Reserve Bank of Kansas City Jackson Hole Symposium, 1–10. Iacoviello, Matteo, and Stefano Neri (2008) “Housing Market Spillovers: Evidence from an Estimated DSGE Model”, working paper, Boston College. International Monetary Fund (2009), World Economic Outlook, October 2009. Jarocinski, Marek, and Frank R. Smets (2008), “House Prices and the Stance of Monetary Policy”, Federal Reserve Bank of St. Louis Review 90, 339–365. King, Mervyn (1994), “Monetary Policy in the UK”, Fiscal Studies 15(3), 109–128. King, Mervyn, (1997), “Changes in UK Monetary Policy: Rules and Discretion in Practice”, Journal of Monetary Economics 39, 81–97. Kohn, Donald L. (2006), “Monetary Policy and Asset Prices”, speech on March 16, 2006, www.federalreserve.gov. Kohn, Donald L. (2008), “Monetary Policy and Asset Prices Revisited”, speech on November 19, 2008, www.federalreserve.gov. Kohn, Donald L. (2009), “Policy Challenges for the Federal Reserve”, speech on November 16, 2009, www.federalreserve.gov. Miller, Marcus H., Paul A. Weller, and Lei Zhang (2002), “Moral Hazard and the U.S. Stock Market: Analysing the Greenspan Put”, Economic Journal. 112, C171–C186. Nyberg, Lars (2010), “After the Crisis”, speech on February 5, 2010, www.riksbank.se. Svensson, Lars E.O.
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The end of the decades long conflict has resulted in the creation of a significant positive impact, not just in the Northern Province, but also in the entire country. To benefit by this positive outlook, it is crucial that we start new businesses and expand on-going ventures. In this regard, I am happy to note that the HSBC, which brands itself as the “World’s Local Bank”, could now offer both corporate and small customers a full range of financial products and services. In doing so, they, as well as all other banks who are doing business in these emerging areas, will face the challenges of borrowers not possessing long credit histories or not possessing adequate collateral. This situation will certainly pose challenges, but we would like to urge all bankers that they should practice innovative cash flow based lending methods at least for 2 to 3 years, and not to be too constrained by security based lending only. I also urge financial institutions to lend the money mobilized from the region for the development of this region. Finally, let me place on record my appreciation of the presence of the High Commissioner of the UK, Dr. Peter Hayes at this opening ceremony. Your support to this effort would certainly encourage the business community both here in Jaffna and elsewhere in Sri Lanka, and I thank you for your gesture. Let me also congratulate HSBC on this auspicious occasion of opening the first foreign bank branch in Jaffna.
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Small open economies in particular have always needed to keep their currencies relevant domestically to preserve monetary autonomy. The benefits of an independent monetary policy have to be weighed against the efficiency gains from adopting a more widely used currency. Pegging to the US Dollar, the Euro or even a Synthetic Hegemonic Currency is one thing; losing monetary sovereignty to a currency that is the liability of a private entity is another. To sum up, money must ultimately be trusted if it is to fulfil its function in the economy. As public institutions which have built up credibility over time, central banks are best placed to safeguard the trust that underpins sound money and safe payments. This trust is not just about money that is safe, but also about a monetary system that is dynamic and purposeful. As Mark has emphasised, it must continually improve how it serves the people who depend on it daily. The key question on the future of money is this: what is the appropriate division of labour between the public and private sector? There is a continuum that spans, at one extreme, a completely centralised system where there is only central bank money, and at the other extreme a decentralised system where there are only private monies in circulation. Each country will have to choose different positions along the continuum, given its own cultural norms, social compact, and institutional structures.
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John C Williams: The economic outlook Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Foreign Policy Association, New York City, 5 March 2020. * * * As prepared for delivery Thank you so much for this award. It’s a genuine honor to be recognized in this way. And allow me to add my congratulations to all the other organizations and individuals that have been commended this evening. The work that you’re doing—particularly in the area of corporate social responsibility—is so important. On Tuesday, the Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by 1/2 percentage point.1 This action was in response to the evolving risks the coronavirus poses to the U.S. economy. Tonight, I’ll use my remarks to provide more context around that decision and about our response as we look ahead. But before I give this evening’s remarks I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. Economic Outlook To start, let me emphasize that the fundamentals of the U.S. economy remain strong. We’ve seen continued solid job growth, unemployment is at a historically low level, and we entered 2020 with very good momentum. After a year that was characterized by uncertainties, global growth appeared to be stabilizing, and geopolitical risks receding.
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The second dimension is RMB trade settlement. The RMB trade settlement pilot scheme was introduced in July last year. The initial scope of the scheme was rather limited. But in less than a year, the pilot scheme was already expanded to cover enterprises in 20 provinces and cities on the Mainland, and their trade transactions with any parts of the world can now be settled in RMB. The expanded scope has led to a rapid growth in the transaction volume of RMB trade settlement in Hong Kong, which was increased from a monthly average of 4.5 billion yuan in the first half of this year, to more than 26 billion yuan in the third quarter, representing an almost six-fold increase during the period. 23. To date, more than 75% of Mainland’s RMB trade transactions with the world are handled by banks in Hong Kong. This clearly demonstrates the strong preference of market players for making use of Hong Kong’s platform for RMB trade settlement. The highly efficient and reliable RMB Real Time Gross Settlement (RTGS) system in Hong Kong has played a significant role here. We are the first and so far the only place outside Mainland China that has developed a full-fledged RMB RTGS system, enabling us to handle the BIS Review 153/2010 3 settlement of cross-border trade between the Mainland and other economies in a safe and efficient manner. 24.
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It will be equally 2 BIS Review 110/2007 important, in both the private and public sectors, for wage growth to be compatible with productivity growth, labour market conditions and cost developments in competitor countries. The further strengthening of competition in both product and resource markets and the creation of more incentives to work are also necessary in order to raise the participation rate. It also needs to be realized that these reforms are essential for safeguarding our social model. In recent decades we have been successful in reducing income inequality and in securing universal access to all levels of education, to health care and to pensions. These benefits, however, can only continue to be enjoyed by future generations if today’s generation implements the necessary reforms. The next phase in Malta’s economic history, therefore, promises to be a challenging one, but it should also be an exciting time. For a country with a population of 400,000 and a GDP of just four-and-a-half billion euro, having a major reserve unit as its domestic currency is indeed a significant advantage. We thus have good reason to feel encouraged and, as a people that has suffered repeatedly as a consequence of divisions on the European mainland, also reassured that we are about to reinforce our integration in Europe with full economic and monetary union.
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In the European Union, a small-size enterprise has about 50 workers, and the volume of its activity is around 10 million euros. Medium-size enterprises are defined as those which employ about 250 workers and their annual commercial activity is around 50 million euros. In Saudi Arabia, the Saudi Industrial Development Fund adopts the annual sales standard to identify small and medium size enterprises for the purpose of funding by “Kafalah” program. They are defined as enterprises with annual sales not exceeding Rls 30 million. The World Bank has conducted a questionnaire and distributed it to commercial banks to establish a definition for small and medium size enterprises. The result has shown differences between banks in their definitions, but it can be concluded from that survey that small-size enterprises are those whose annual sales range from Rls 100 thousand to Rls 5 million, and employ 2 to 49 workers. The medium-size enterprises are those with a turnover of Rls 5 million to Rls 50 million per annum, and employ from 50 to 200 workers. Ladies and gentlemen, SMEs have various advantages, such as their easy establishment due to low capital required for their establishment and operation, their easy establishment procedures, and low establishment and administrative expenditures due to their simple organizational structures. They are also characterized by management independence by their owners, who seek to achieve the best possible success.
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However, the actual reality emphasizes that small and medium size enterprises play an important role in the economic activity in both the developed and developing countries, through their absorptive capacity in employing the workforce of the different levels of training and education. A study by the Riyadh Economic Forum on “the Saudi Business Sector and Meeting the Economic Challenges” showed that the average number of workers in the Saudi private sector stood at 8.4 workers per one single institution, and, consequently, 90 percent of the institutions in the Kingdom is considered within the scope of small and medium size enterprises. Small and medium size enterprises are considered the best efficient and effective tool for accelerating economic and social development, especially in remote areas with the least opportunities for development. They also provide a fertile field for training workers and developing their skills. To this end, governments have paid great attention to such enterprises and established the basic regulatory framework needed for their growth and development, particularly after having proved their ability to reduce pressure on the government sector in providing job opportunities and training. Governments also helped big enterprises in the marketing process and in providing raw materials and primary commodities at the different production phases. It is noted that most regional and international aid donating agencies and organizations have a growing tendency to provide financial resources and technical assistance aimed at assisting such small and medium size enterprises to depend upon themselves and play their anticipated role in the economy.
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A reasonable and oft-used benchmark of longer-run inflation expectations is to look at inflation five or more years in the future. Such a forecast horizon is sufficiently long enough for typical business cycle dynamics and the effects of monetary policy on inflation to have played out, although under some circumstances, this may fall short of the “long run” implied by theory. Over the past year and a half, measures of longer-run inflation expectations have been insensitive to the rapid rise in inflation. Figure 1 shows the time series of these measures of longer-run inflation expectations. This includes median expectations from the Survey of Professional Forecasters (SPF) for inflation measured by the PCE price index 6-10 years in the future; breakeven inflation rates 6-10 years in the future as implied by nominal and inflation-protected U.S. Treasury securities; and the University of Michigan survey of inflation expected over the next 5-10 years.5 Realized 12-month CPI inflation is also shown in the figure for reference. As seen in Figure 1, SPF longer-run inflation expectations have remained remarkably stable over the past year and a half, while the market-based measure and the Michigan survey rose modestly during 2021 before retracing some of those gains this year. Because the Michigan survey asks about inflation over the next 5-10 years, it is a mixture of short-run and longer-run expectations, which may be related to its modest sensitivity to inflation.
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To quote Mr David Bailey, “data and Regtech go hand-in-hand and data must be at the heart of any Regtech conversation”. Good quality data means Regtech can be used to build effective models and generate decision-making insights. It is vital to build trust with your customers if you want to acquire sufficient quality data. You then need to store and transform that data according to a solid set of data governance rules, identify data which is relevant, and use it in an intelligent and responsible way. Third, proper risk management remains as important as ever. In Hong Kong, we are proud of our banks with their long histories, but we recognise that their legacy infrastructure can potentially hold back Regtech adoption. One key takeaway from today is the reminder that Rome was not built in a day. Banks can start on a small scale, for example by conducting a Proof of Concept (PoC) in a business unit or implementing Regtech in a Cloud-based environment in a newly established part of their business. As a regulator, I must point out that when navigating technologies and determining how to put Regtech to use, it is essential that banks adopt a robust risk assessment framework to evaluate and manage the associated risks. This resonates with Ms Jane Fraser’s suggestions that banks should be mindful of risks such as data security and third-party operational risks that come with new technologies, and that the sandbox provides a valuable means to test new Regtech solutions.
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If economic developments differ from our assumptions, market interest rates can then adjust in a manner consistent with achieving the objectives of monetary policy. By comparison, without predictability, a central bank would have to change the key policy rate more frequently or by larger increments. Monetary policy would be less effective. Norges Bank’s publication of interest rate projections is an important part of achieving predictability in monetary policy in Norway. We also give an account of the criteria on which the interest rate forecast is based and we explain changes in the forecast. Changes in money market rates on the day the Executive Board’s interest rate decision is published are a simple indicator of predictability in monetary policy. Ideally, these changes should be modest. On average, the changes in money market rates in connection with interest rate decisions have been somewhat smaller after we began to publish our interest rate forecast, despite the considerable market unrest we experienced during the financial crisis. One of the main reasons why large central banks in other countries now publish forecasts of future interest rates is that they want to achieve greater clarity in their response pattern. Their objective is to make monetary policy more effective in an environment of very low capacity utilisation and near-zero key rates. To provide extra stimulus to the economy under these conditions, the natural course is to seek to influence longer-term interest rates more directly.
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12 See Eggertsson, G. and M. Woodford (2003): The Zero Bound on Interest Rates and Optimal Monetary Policy. Brookings Papers on Economic Activity 2003:1, pp. 139–211, and Krugman, P. (1998): It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap. Brookings Papers on Economic Activity 1998:2, pp 137–205. 8 BIS central bankers’ speeches I want to reiterate here that monetary policy in Norway will continue to be oriented towards low and stable inflation. This objective provides the economy with a nominal anchor. With firmly anchored inflation expectations, monetary policy can contribute to stable developments in the real economy. Since the inflation target was introduced in 2001, inflation has varied to some extent, but has, on average, remained close to 2.5 percent. And monetary policy has been able to respond rapidly to changes in the economic situation. The monetary policy mandate provides room for flexibility and discretion.In the light of the international debate on the role of monetary policy, Norges Bank, as the country’s central bank, should also conduct a thorough assessment of the framework for flexible inflation targeting within our current mandate. Thank you for your attention. BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches BIS central bankers’ speeches 13 14 BIS central bankers’ speeches
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But it is possible that banks themselves might find such a capital structure in their own best interests. To see why, consider a standard model of optimal capital choice by a value-maximising firm. The firm faces a trade-off. Debt confers the benefits of tax deductibility, while equity offers the benefits of lower expected bankruptcy costs.15 The tradeoff between these two sets of benefits defines an optimal capital ratio for a firm to maximise its expected value (Chart 9).16 Now consider adding CoCos to the mix. They are, in effect, a hybrid of debt and equity whose payoffs depend on the state of nature. When nature is kind and times are good, they offer the upswing (tax-deductibility) benefits of debt. And when nature is cruel and times are bad, they offer the downswing (bankruptcy costs) benefits of equity. They are, in the 14 Commission of Experts for Limiting the Economic Risks Posed by Large Companies (2010). 15 Debt could also provide some incentive benefits in disciplining management (Jensen (1986)). 16 Leland (1994). BIS central bankers’ speeches 7 language of economists, a form of “contingent” contract when the contingency in question is crisis. As Chart 10 illustrates, the optimal fraction of CoCos in banks’ optimal debt structure is likely to be non-zero. In other words, a CDE capital structure might be a smart option for valuemaximising investors and managers, even without the need for regulatory intervention.
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Chart 6: Market capitalisation to book-value of total assets 14.0% 12.0% 10.0% 8.0% 6.0% 'No crisis' banks 'Crisis' banks 5% threshold Lehman failure 15 Sep 08 4.0% 2.0% Nov 08 May 08 Nov 07 May 07 Nov 06 May 06 Nov 05 May 05 Nov 04 May 04 Nov 03 May 03 Nov 02 May 02 0.0% Sources: Capital IQ and Bank calculations (a) 30-day moving average of market capitalisation Other Footnotes as per chart 5 14 BIS central bankers’ speeches Chart 7: Market capitalisation to book-value of debt 15.0% 12.5% 10.0% 7.5% 5.0% 'No crisis' banks 'Crisis' banks 5% threshold Lehman failure 15 Sep 08 2.5% Nov 08 May 08 Nov 07 May 07 Nov 06 May 06 Nov 05 Nov 04 May 05 May 04 Nov 03 May 03 Nov 02 May 02 0.0% Sources: Capital IQ and Bank calculations (a) 30-day moving average of market capitalisation Other Footnotes as per chart 5 Chart 8: Market capitalisation to book-value of equity 2.50 2.00 1.50 1.00 'No crisis' banks 'Crisis' banks 1.20 threshold Lehman failure 15 Sep 08 0.50 Nov 08 May 08 Nov 07 May 07 Nov 06 May 06 Nov 05 May 05 Nov 04 May 04 Nov 03 May 03 Nov 02 May 02 0.00 Sources: Capital IQ and Bank calculations (a) 30-day moving average of market capitalisation Other Footnotes as per chart 5 BIS central bankers’ speeches 15 Chart 9: Optimal capital structure – Debt and Equity Optimal capital structure – D + E Present value of costs Expected costs of financial distress Expected taxes Optimal leverage ratio Debt/Equity Source: Bank of England Chart 10: Optimal capital structure – Debt, Equity and Contingent Capital Optimal capital structure – C + D + E Present value Expected taxes Expected bankruptcy costs Taxes paid due to existing equity 0 Optimal portion of convertible debt 100% Source: Bank of England 16 BIS central bankers’ speeches Chart 11: Major UK banks’ Tier 1 capital ratio % 12 Including bonuses paid as cocos Including dividends paid as cocos 11 Actual Tier 1 capital ratio 10 9 8 7 6 2000 2001 2002 2003 2004 2005 2006 2007 Sources: Annual accounts and Bank calculations (a) Alliance and Leicester, Banco Santander, Barclays, Bradford & Bingley, HBOS, HSBC, Lloyds TSB, Nationwide, Northern Rock and RBS.
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But to attain a higher yield and reduce the financial risk, the Executive Board has decided that a limited part of the foreign exchange reserves can be invested in other assets. The condition is that these are assets with a high credit rating and good liquidity, issued by central governments, provinces or intergovernmental organisations. 11 9 In addition, the Riksbank owns 125.7 metric tons of gold (worth almost SEK 60 billion). 10 The government has given the Swedish National Debt Office the task of issuing green bonds. See the Swedish Ministry of Finance (2019) and SOU (2017:115). 11 Our regulations also allow investments in US agencies and in bonds issued by local authorities or state-guaranteed organisations. 5 [7] The Riksbank gives consideration to the climate in its investments Last year we stated in our risk and investment policy that we would also give consideration to sustainability aspects when choosing assets. The Riksbank has not yet fully decided how sustainability aspects should be taken into consideration in the investment decisions. There are two main lines to choose between: either we choose which assets or which issuers we want to have in the foreign exchange reserves. The choice between assets would mean trying to invest some of the foreign exchange reserves in particularly climate-friendly assets, such as green bonds. I have doubts about this type of strategy, primarily as our investments are largely in bonds issued by central and federal governments. It is difficult to earmark money for special projects in government budgets.
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8 It is important that the Riksbank understands these changes, both to be able to conduct an effective monetary policy and to be able to identify risks on the financial markets. In other words: the Riksbank must be able to manage the economic consequences of climate change. 6 Some people talk about central banks’ role being not just “lender of last resort” but also “market-maker of last resort”. See, for example, the Bank for International Settlements (2014). NGFS (2019) talk about physical impacts and transition impacts, respectively. 8 See Cœuré (2018). 7 4 [7] Should the Riksbank buy green bonds? Another question that is sometimes discussed is whether the central banks themselves should try to affect climate change. This usually involves two different directions. The first is regulating the financial markets to steer investments in a more sustainable direction. In many countries it is the central bank that is responsible for this type of regulation, but in Sweden it is the responsibility of Finansinspektionen (the Swedish financial supervisory authority). The Riksbank does not have any of these tools at its disposal. The second direction concerns the central bank’s own investments. After the financial crisis, many central banks, including the Riksbank, built up large balance sheets through asset purchases. Shouldn't these purchases reward sustainable assets, for instance by focusing on green bonds? This is a question faced by central banks today, and the answer is not evident. I shall try to describe my views on this.
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3/3 BIS central bankers' speeches
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In the U.S., for example, on average about 90, mostly smaller, banks per year have been resolved since 2008 and this had no impact on the solvency of the sovereign. Political union can, and shall, develop hand-in-hand with fiscal, economic and financial union. The sharing of powers and of accountability can move in parallel. We should not forget that 60 years of European integration have already created a significant degree of political union. Decisions are made by an EU Council filled by national ministers and by a directly elected European Parliament. The challenge is to further increase the legitimacy of these bodies commensurate with increasing their responsibilities and to seek ways to better anchor European processes at the national level. A more solid political foundation should allow for agreement on a basic principle: that it is neither sustainable nor legitimate for countries to pursue national policies that can cause economic harm for others. This constraint has to be built into how countries design their economic and social models. The only sustainable model is one that is consistent with the terms of a common currency. Countries have to live within their means. Competition and labour markets have to be reinvigorated. Banks have to conform to the highest regulatory standards and focus on serving the real economy. This is not the end, but the renewal of the European social model. From the ECB’s perspective, a strong economic union is an essential complement to the single monetary policy. Building this will require a structured process with correct sequencing.
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To defend the fixed exchange rate, the Riksbank raised the repo rate. During 1990–1991 the major tax reform was implemented, which meant that tax deductions declined significantly. All in all, the real interest rate after tax rose very substantially over a short period of time, which subdued the demand for credit substantially, and property prices took a sharp downturn. The end result of this process was a banking crisis. The banking crisis also led to a dramatic deterioration in public finances. At the same time, there was a currency crisis in Europe. Sweden had abolished currency regulation in 1989 and in 1991 pegged the krona to the ecu, the euro’s predecessor. However, partly as a result of the higher interest rates in Germany, an increasing number of countries in the European Exchange Rate Mechanism, ERM, experienced a depreciation pressure on their currencies. The previous history of devaluations also meant that there was even greater pressure for another Swedish devaluation. In an attempt to defend the fixed exchange rate, the Riksbank raised its policy rate to a massive 500 per cent. Finally, the situation became untenable and the fixed exchange rate was abandoned on 19 November 1992. The route to the 500-per cent interest rate was thus part of a longer sequence of events, with several interacting circumstances. It also provides a clear illustration of what can happen when the confidence in the nominal anchor is lost.
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The stock market and exchange rate crashed. Unlike other countries, Malaysia did not have excessive external borrowing. However, domestic borrowing was very high as banks had lent large sums, often against share collateral and to large property projects. The crash exposed these weaknesses in the private sector. On 1 September 1998, Malaysia decided to impose capital controls. Indonesia Indonesia was also believed to be fundamentally sound, even well after the initial outbreak of the regional currency turmoil. In late 1997, analysts continued to be upbeat on Indonesia’s economic prospects, expecting, on average, a strong 6-7% GDP growth in 1998. But as regional problems stacked up, Indonesia too could not escape the progressive erosion of confidence. The Indonesian economy had two domestic weaknesses: unsound banks and companies that had borrowed excessively abroad in short-term loans unbeknown to the government. These companies started hedging their exposures, sending the rupiah into a downward spiral. The companies became insolvent, badly affecting the banking system. Policy errors by the Suharto government compounded this. Grave social and political difficulties eventually led to a political crisis and a political transition that is still not completed. Korea Korea’s dynamic economy had certain weaknesses, but these were long-standing and well known: chaebols were very highly leveraged and banks often made lending decisions on government direction instead of commercial viability. Like Indonesia, Korea’s short-term foreign debt was high. When the crisis broke, foreign creditors refused to roll-over credit lines. Korean banks which had borrowed heavily overseas came under severe pressure.
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Specifically, the Review identifies: – Market structures which presented specific opportunities for abuse, such as poor benchmark design, and which more generally were vulnerable to conflicts of interest, collusion, and thin markets; – Standards of acceptable market practice that were usually poorly understood, often ignored and always lacked teeth; – Firms’ systems of internal governance and control that were incapable of asserting the interests of firms – let alone the wider market – over those of close-knit trading staff; – Individual incentives that were skewed, with pay packages stressing short-term returns overlong-term value and good conduct; – And personal accountability that was lacking, with a culture of impunity developing in parts of the market. All these factors contributed to an ethical drift. Unethical behaviour went unchecked, proliferated and eventually became the norm. Too many participants neither felt responsible for the system nor recognised the full impact of their actions. For too many, the City stopped at its gates, though its influence extended far beyond. A good start has been made in addressing these deficiencies. The design and regulation of key FICC benchmarks has been overhauled and transparency in FICC markets is being enhanced. Compensation rules have, in the main, been transformed to align better risk and reward. From next year, senior managers of banks and insurers will be held directly accountable for failures in their areas of responsibility. And the best firms are improving the “tone from the top”, launching conduct training and revamping control structures.
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In principle, by relating new information to our most recent forecast, market players are in a good position to form a picture of policy’s direction and we can see that when we compare their forecasts of the repo rate with our own. However, one should be aware that there is a risk that an unduly simple rule or decision-making model will oblige the central bank itself to disregard other relevant information. Monetary policy is not mechanics. For this reason we have elaborated our view in various respects. We have underscored that there are also grounds for considering the periods before as well as beyond the 1–2 year horizon on which we focus. Strictly speaking, it is a matter of optimising over all future time, including both inflation and output. For a long time now we have also declared that there are transitory factors we should disregard; more recently we noted that there can be grounds for weighing a prompt return to inflation’s targeted rate against the risk of avoidable fluctuations in output. Finally, we have said that departures from our simple rule may be warranted by problems with financial stability. What is important, however, is our ambition to provide a clear explanation and motivation for such departures. Given our ambitions in this field we would risk severe criticism if we were to do so without good arguments. I should also say that if our application of the rule would continuously be modified and altered, much of its communicative and educational value would be lost.
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However, the longer the time that passes without the rate of increase in house prices being subdued, the greater the unease that imbalances will build up in the housing market and in households’ debt/equity ratios. So how should monetary policy take this type of risk into consideration? This is a question that has been much discussed in recent years, both between central banks and within the academic world, as house prices have also risen rapidly in many other countries. However, there is unfortunately no common view that we can lean on. We will probably have reason to return to these issues when our and other peoples’ experiences of the fluctuations in asset prices have increased and when progress is made in the academic research in this field. It will also be interesting to see the independent assessment of monetary policy ordered by the Committee on Finance and which is expected to be ready soon. However, it is not possible for decision-makers to sit back and wait to become wiser and more experienced. At the Riksbank we do not consider it to be reasonable to entirely ignore the risks entailed in the rapid increase in borrowing and the house prices rises, although we cannot easily take these risks into account in our usual forecasts of economic developments over a couple of years. If it proves to be the case that economic imbalances are building up, they will sooner or later need to be corrected.
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The continued international price pressure, combined with an expected appreciation in the krona mean that import price increases will remain low throughout the forecast period. The high productivity growth will also contribute to keeping down companies’ labour costs and thereby inflation (Figure 13). However, these inflation-dampening forces are thus expected to lose strength further ahead. All in all, one can say that we see a favourable and not overly dramatic development of the economy before us. Essentially we see an economy where the wheels are turning at a good pace and things are generally going well. It is natural in such an economy for monetary policy to become less expansionary to ensure the good development continues for a long period. It is difficult to say how quickly the interest rate increases should be made. The inflation forecast we publish today shows that inflation is expected to be slightly below target two years ahead. This is partly due to the fact that energy prices are expected to fall slightly and thereby hold down inflation. When the restraining effect of the energy prices abates, inflation will rise. At the same time, the economy is expected to develop strongly during the forecast period. To ensure that inflation is close to the target and to contribute to a balanced development of the real economy, we decided yesterday to raise the repo rate by 0.25 percentage points. It may in conclusion be worth emphasising that forecasts are always uncertain and that many things may occur to change this picture.
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Allow me to briefly remind you of some figures on Spain’s exposure to Latin America as a whole; this exposure is particularly relevant in terms of the stock of direct investment, given that around 31% of all Spanish foreign direct investment assets are located in the region. Particularly prominent are the positions in Brazil and Mexico. Trade is likewise significant, with 4.8% and 7.8% of all Spanish exports of goods and services, respectively, heading to the region. Since the early 1990s, the internationalisation of Spanish banking has largely focused on Latin America, in addition to the European Union, the United States and Turkey. Consequently, the region has taken on considerable significance for the Spanish banking 1 https://www.bde.es/f/webbde/SSICOM/20200115/Plan_Estrategico_2024_en.pdf. 1 system. Indeed, on pre-pandemic data, Spanish banks' exposures2 to Latin America represent nearly one-fifth of the system’s total and around 30% of the exposures located outside of Spain.3 Accordingly, the region’s economic performance has very considerable influence on the balance sheets of Spanish banks, while the risks stemming from these exposures could potentially become systemic. Clearly, the economic situation in Latin America, as in the rest of the world, has been severely affected by the COVID-19 pandemic. The human cost is significant. Since the onset of the pandemic, there have been more than 650,0004 deaths in the region, nearly 26% of the world total, when it accounts for just 8% of the global population.
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These mainly consisted of extraordinary budgetary items to reinforce their health systems and provide liquidity support to households and firms, including guarantees, loan servicing payment deferrals, capital injections, additional public spending and forgone revenue, including temporary tax cuts. Turning to monetary policy, nearly all of the region's central banks have cut interest rates to record lows. Further, they have provided liquidity in local currency and in dollars, conducted banking interventions and some of them have even established asset purchase programmes,6 which have reduced the volatility in longer-term interest rates and in exchange rates. 5 For a description of the pandemic transmission channels in the region, see Banco de España (2020), “Report on the Latin American economy. Second half of 2020”, Analytical Articles, Economic Bulletin, 4/2020. 6 For a description of the asset purchase programmes run by central banks in emerging economies, see Banco de España (2020), “Asset purchase programmes of Latin American central banks”, Box 1, “Report on the Latin American economy. Second half of 2020”, Analytical Articles, Economic Bulletin, 4/2020. 4 Likewise, the corresponding economic authorities adopted a set of macroprudential and supervisory measures to foster the flow of credit, provide liquidity to the banking system and mitigate the adverse impact of the crisis on financial institutions’ capital.7 All of these measures have helped to ensure that the main indicators of the most important Latin American banking systems for Spanish banks have not deteriorated significantly.
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COVID-19 as catalyst for digitalisation and implications for SNB There are two trends of particular relevance to the SNB that I would like to highlight here. The first, most visible move towards a digital economy is the changing payments landscape, with an increasing use of mobile payments. A second apparent trend is big data and automation – particularly involving artificial intelligence. In addition to these two trends, cyber risk is also growing. Let me start with the changing payments landscape. Changing payments landscape The pandemic has boosted online shopping and contactless retail payments. Because of the measures to reduce interpersonal contact, such as shop closures and limited shopping hours, e-commerce has gained in importance. While cash remains important in Switzerland, the use of cashless payment methods has increased. The SNB conducted a survey on payment methods in the autumn of 2020. This will give us more insight into these trends. The details of the survey will be published this summer. Monitoring changing payment habits is important for the SNB because facilitating and securing cashless payments is one of its statutory tasks. Since the creation of the Swiss Interbank Clearing (SIC) payment system, the SNB has fulfilled its mandate as system manager and commissioning party of the SIC system. The SIC system – also referred to as the Page 5/10 ‘strong core’ of the Swiss payments ecosystem – is the central payment system for both interbank and retail payments in Swiss francs.
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The philosophy of prevention: assist banks to govern themselves In developing regulations and practices that help to prevent financial crisis, supervisors must not lose sight of the inherent self-interest that banks have to retain the public’s confidence by maintaining safe and sound operations. No responsible firm seeks to fail, and no responsible bank would willingly engage in practices that would cause the market to doubt its long-term viability. Consequently, our role as regulators is not to limit banks’ opportunities for growth and profit. Instead, it is to help banks to improve continuously their abilities to manage their businesses and their risks, thereby ensuring that, across the financial system, banks can maintain their financial health. At the same time, if we are to encourage responsible behavior, we must not create the illusion that we will rescue every institution that does not succeed. In this regard, you will recall Goethe’s view: "What government is the best? That which teaches us to govern ourselves." Similarly, one of the best ways for supervisors to carry out the duty of prevention is by developing regulatory structures that encourage banks and their managers to govern themselves and control their risks. I believe that three important elements in a supervisory structure can help to create such incentives and thereby promote stability. The first consists of the relatively new "risk-focused" approach to bank supervision that is being adopted in financial centers around the world. It embodies a forward-looking perspective focusing most heavily on the risks that each individual bank faces.
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Mario Draghi: ECB press conference - introductory statement Introductory statement by Mr Mario Draghi, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 7 March 2019. * * * Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis. Based on our regular economic and monetary analyses, we have conducted a thorough assessment of the economic and inflation outlook, also taking into account the latest staff macroeconomic projections for the euro area. As a result, the Governing Council took the following decisions in the pursuit of its price stability objective. First, we decided to keep the key ECB interest rates unchanged. We now expect them to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Second, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
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This assessment is also broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down across the projection horizon, reflecting in particular the more subdued near-term growth outlook. Turning to the monetary analysis, broad money (M3) growth decreased to 3.8% in January 2019, from 4.1% in December 2018. M3 growth continues to be backed by bank credit creation, notwithstanding a recent moderation in credit dynamics. The narrow monetary aggregate M1 remained the main contributor to broad money growth. The annual growth rate of loans to non-financial corporations declined to 3.3% in January 2019, from 3.9% in December 2018, reflecting a base effect but also, in some countries, the typical lagged reaction to the slowdown in economic activity, while the annual growth rate of loans to households remained at 3.2%. Borrowing conditions for firms and households are still favourable, as the monetary policy measures put in place since June 2014 continue to support access to financing, in particular for small and medium-sized enterprises. The policy measures decided today, and in particular the new series of TLTROs, will help to ensure that bank lending conditions remain favourable going forward.
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The paper was designed in the form of fundamental principles of compliance with the regulations, covering a number of areas, the most important of which are the responsibilities of the board of directors and senior management, controls on the independence of compliance function at banks, support of compliance department and its work program, and the relationship of compliance department with internal audit department. In May 2005, SAMA directed banks operating in the Kingdom to adopt the principles stated in this paper and incorporate them with the procedures and programs regarding risks of noncompliance that have already been applied and developed by banks under the instructions of SAMA. Dear audience, You are also dealing in this symposium with an important topic, which is combating money laundering. As you know, money laundering is one of the most serious crimes at the security, economic and moral levels. This heinous crime is carried out by organized networks practicing crime as a profession and having a high potential for coordination, planning and deployment throughout the world. These networks take advantage of the globalization of capital markets and technological developments in the banking industry. Because of the negative impacts of money laundering and the large scale of this activity, which is estimated by the International Monetary Fund (IMF) at 2 to 5 percent of global GDP, there have been international and regional concerted efforts to combat it.
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François Villeroy de Galhau: Parisian momentum Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Bloomberg "Future of Finance" Paris forum, Paris, 9 May 2023. *** Ladies and Gentlemen, It is a great pleasure for me to give this keynote address at the first Future of Finance – Paris forum organised by Michael Bloomberg and his team. After the first panel, which gave precious insights on how Paris can lead the way in the reshaping of financial markets, it will cover the whole range of most topical issues. This first Bloomberg forum in Paris is more broadly a very timely and welcome initiative, which echoes financial players' growing interest for the French capital. Paris has indeed kept asserting itself as a major financial centre over the last few years, and stands out as unique in the network of European financial centres. I can only invite you to read the excellent Bloomberg article published on 18 April, which perfectly captures this multifaceted trend.1 Its title, Banks betting on Paris say there is life after London, should bring definitive reassurance to other banks, and encourage them to make the same winning bet.
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The Banco de España’s confidence in the soundness and competitiveness of the Spanish banking sector is based on the extensive information we have on the situation of each bank, obtained in the exercise of a supervisory function based on in-depth scrutiny and closeness to the supervised party. We also have the results of regular stress tests of the capacity of banks to cope with possible negative changes in the economic conditions in which they operate. At this moment, as the markets and some sectors of international public opinion are expressing distrust and reservations about the situation of several European financial systems, and particularly Spanish savings banks, the Banco de España has announced its decision to publish the results of stress tests in order to ensure the highest possible transparency of the situation of Spanish banks. Since agreement has been reached in Europe to conduct and publish common stress tests, the Banco de España will join this initiative and, therefore, publish the results of the stress tests on Spanish banks as soon as this common framework allows. The restructuring and reform of the financial system, together with the budgetary adjustment and the pension and labour market reform, are the most urgent measures needed to restore confidence in the Spanish economy. They should therefore be implemented immediately. But the agenda of reforms required by our economy to move back to steady growth of economic and social well-being and continue modernisation does not end there.
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Conclusion 17 Asia holds promise for the next phase of growth for ILS given the region’s growing needs, and Singapore can play an important role to facilitate this growth as an ILS domicile. Today’s conference will provide an important platform for the industry to discuss such developments in the ILS market, and explore the key to harnessing the potential in Asia. 1 Schroders: Spotlight on catastrophe bonds 2 Disasters could cost Asia-Pacific region $ billion per year by 2030, UN warns, UNESCAP, 2018 3 High CAT risks, low penetration in Asia – only two ways out, AIR, 2017 4/4 BIS central bankers' speeches
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BIS Review 24/2008 3 rating agencies to expand their scope as widely as possible, and for banks to use off-balance-sheet vehicles; and • improving crisis management arrangements, including the process for providing liquidity to institutions under stress and for restructuring weak and failing banks. Measuring and adjusting for risk The focus of this work is the recent structural changes in banking and credit markets and ways to prevent those making the financial system more prone or less resilient to large cyclical swings. That is important. But we have been here before. It is not so long since a vast amount of work was set in train in the wake of the LTCM crisis in 1998 and again after the dotcom boom blew out. While each crisis has its own idiosyncrasies there are common elements and they too need to be addressed. In my view the key lies in the measurement of risk and the repeated inclination to underprice risks at the top of the cycle and thus take comfort from exaggerated estimates of risk adjusted returns; and the corollary, a tendency to overprice risk as the cycle swings down.
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4 Among the key lessons are: • the critical importance of liquidity, alongside capital, in managing and regulating banks; • the limitations of the models which underpin the valuation and rating of structured products; • the importance of disclosure on risk exposures and valuation practices for the maintenance of confidence and effective market functioning in times of stress; • the need to alter the adverse incentives that had developed in the distribution chain for mortgages including for originators to maximise the volume of loans, for the 2 Arguably the cash flow projection of losses of $ billion comes closest to the sort of provisions banks would be making if the loans had been held on their banking books rather than securitised and sold on. On that basis the losses currently projected would be only 50% of the Savings and Loans losses as a share of US GDP. 3 See “Financial stability and depositor protection: strengthening the framework”, Consultation Document, January 2008. http://www.bankofengland.co.uk/publications/financialstabilityanddepositorprotection080130.pdf 4 Private sector initiatives have also been launched. There are European industry plans to compile information on a variety of instruments including ABCP, ABS and CDO and to disseminate this to investors and other interested parties on a regular basis. See “Summary of European Industry Commitments to the European Commission regarding Transparency in the European Securitisation Market” (www.europeansecuritisation.com/Industry-letter-08Feb08.pdf). The Institute of International Finance (IIF) also has an active agenda of work, covering risk management, liquidity, valuation, ratings, and transparency. (See http://www.iif.com/press/press+releases+2007/press+46.php).
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And also worthy of note is our work, together with the Ministry of Finance, on the initiative for the pension savings formation model through Individual pension capital. By our estimate, the work on this project is now quite advanced. We have undertaken a few rounds of both departmental and expert discussions. I very much hope that these changes will be accepted, as they will provide citizens with better quality of life, and generate a long-term source of funding for the economy, which is vital for investment development. And the last thing I wanted to mention, which I believe to be particularly important – when working on scenarios, on forecasts, on the budget – is our interaction with the Ministry of Finance and the Ministry of Economic Development in preparing a firmly grounded medium-term macroeconomic forecast. Because this forecast provides direction not only for the budget, but also for businesses in our economy and economic subjects, and I hope that this work will also help to ensure consistency of views on macroeconomics and economic policy, because this is also very important. In the last two years we really have been consistently working together, and in our opinion this work has indeed paid off. And to wrap up I would like to extend my thanks once again to all the 3/4 BIS central bankers' speeches staff of the Ministry of Finance for the constructive cooperation that we have developed, for your high professionalism, and for your responsible and involved attitude to work.
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This baseline scenario assumes a policy framework that the measures outlined in our exit strategy are completed by the end of the year, and that policy rates are kept constant at current levels for some time followed by limited increases starting from the last quarter of 2011, with policy rates staying at single digits throughout the forecast horizon (in other words, 3 years). In this respect, noninterest instruments will be actively used in order to address the risks on financial stability stemming from rapid credit expansion and deterioration in the current account balance. The European Central Bank reluctantly joined the ranks of the Federal Reserve, Bank of England and Bank of Japan that have engaged in monetary expansion due to fast-growing debt problems in Europe. As a result, materialization of the first scenario has become more likely, as illustrated in the right-hand part of the chart. In that case, the scenario described in our Inflation Report of October 2009 might come up on the agenda. According to this scenario, on account of the expansionary fiscal and monetary policy on a worldwide scale, coupled with rising risk appetites and the relative improvement of credit risk across emerging markets including Turkey, capital inflows to these countries will continue to hold strong. The low level of resource utilization as well as the strong tendency of cost shocks, which reduce the prices of imported inputs, to reflect upon consumer prices suggests downside risks on inflation in the short term.
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Where a country has transparently been pursuing an unsustainable macro-economic policy, most people find it easy to accept that that country should bear the burden and adjust, painful though that may be. Many people find this harder to accept where, as in the present case, conventional macro-economic policies had, for the most part, been relatively responsible. There were certainly adjustments to macro-economic policy that needed to be made - a more flexible exchange rate regime in some cases, for example, or a somewhat tighter overall macro-economic stance, with perhaps some adjustment between fiscal and monetary policy. And, once the capital outflow had started, macro-economic adjustment had to be harsher than might otherwise have been necessary, in order to re-establish confidence. But there are real dangers in extreme market movements or in excessively severe macro-economic adjustment to contain them. The political and social consequences are all too apparent in parts of Asia; but even without that there is a danger of a vicious circle of domestic default and systemic financial weakness in the affected country. And that could have seriously adverse implications - in terms of both financial and economic knock-on-effects - for the global economy. That, essentially, is why it may be in the self-interest of the international community to attempt to mitigate the market and macro-economic adjustment pressures by providing financial support.
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First, the experience of the Single Supervisory Mechanism shows the advantages of all the players being subject to one leading authority in an integrated banking space, with clearly defined responsibilities and coordination. This single supervision allows for comparisons across a vast sample of comparable institutions, and thematic campaigns of on-site missions. Second, our active supervision features regular and comprehensive stress testing including on interest rate risks, which is also applied to less significant institutions. The 2/3 BIS - Central bankers' speeches European Banking Authority (EBA) conducts an EU-wide banking stress test every two years, taking into account the latest macro-financial developments: in 2023, stress test scenarios are typically based on a sharp rise in short-term and long-term interest rates. Moreover, following the EBA guidelines on Interest Rate Risk of the Banking Book (IRRBB) – as part of the rigorous application of the Pillar 2 process – , published in 2018 and enhanced in 2022, European banks are required to perform regular supervisory tests to measure the impact of interest rate movements on their interest margins and economic value of equity; US regional banks such as SVB are not. III. Resolution: how to make it work Now for our last blessing. Since the global financial crisis, banks and authorities have strengthened their ability to deal with crisis events by developing a resolution framework. However, in the case of Credit Suisse, the Swiss authorities chose the option of a merger.
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