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When considering the favourable economic outlook for Switzerland, we must not lose sight of the fact that the latest tensions on the financial markets have increased the downside risks. Should these downside risks materialise and, via an appreciation of the Swiss franc, lead to a renewed threat of deflation, the SNB would take all the measures necessary to ensure price stability. In other words, the SNB would do whatever it takes to fight deflation and safeguard price stability in the medium- and longer-term. Switzerland has an obvious and enormous interest in Europe’s ability to manage through this public debt crisis decisively and ultimately successfully. Europe’s ability to navigate out of the current crisis is also very much in the interest of the United States and indeed the world. When I say this, I don’t mean to refer solely to the potential economic strains as a result of Europe’s public debt concerns. What is ultimately at stake is the vision of the founding fathers of the EU; the vision of a continent living in peace and prosperity and thereby contributing to a stable world order. 1 See Gerfin, Michael and Boris Kaiser (2010), “Auswirkungen der Immigration der Jahre 2002 bis 2008 auf die Löhne in der Schweiz”, in: Die Volkswirtschaft, No. 6. 2 In 2009, annual growth of private consumption amounted to 1.2% in Switzerland, while in the euro area, it contracted by 1.2%. 2 BIS Review 87/2010 Merely upholding this vision will not, however, resolve the debt situation. | Gent Sejko: The importance of media in analysing Albania’s monetary policy Address by Mr Gent Sejko, Governor of the Bank of Albania, at the end-of-year meeting with the media, Tirana, 20 December 2018. * * * Dear ladies and gentlemen, Welcome to our end-of-year meeting with the media. I would like to thank you for your readiness, objectivity, and seriousness in covering the activities of the Bank of Albania and informing the public about them, throughout 2018. Thanks to you, our analyses and decision-making have been communicated in a thorough manner, mindfully tailored and styled in accordance with the age and profession of the targeted audience. I must note that, in addition to broad geographic coverage, your comments and analyses on the economic and financial developments in Albania have been very professional. At the Bank of Albania, my colleagues and I maintain that the current media reality is an important part of our activity. Our decision-making could not be considered complete without your contribution. Communication is a vital and delicate process for a central bank. I must emphasize that, without your help and objectivity, realisation of Bank of Albania’s decision-making regarding monetary policy and financial stability would have been an impossible mission. Figuratively, I would point out that you are the ones that enable the translation of our analyses and conclusions into an adequate and easy-to-understand message for the general public. | 0 |
I’d like to discuss this morning why the Basel Committee believes that applying transparency and market discipline approaches in the New Capital Accord will help us achieve our objectives to reinforce the safety and soundness of the banking system. My first point will be that, despite its name, the New Capital Accord is about much more than just capital. It is also about maintaining a level playing field and about strengthening incentives to foster sound risk management through three pillars: risk sensitive minimum capital requirements, coordinated supervisory review and - importantly, given the theme of this conference - enhanced market discipline through greater transparency. The New Accord is therefore much more comprehensive than its 1988 forerunner. Second, I’ll comment on the rationale behind the compound approach followed by the Basel Committee that blends rules, discretion, and market-based incentives. It could be viewed as a portfolio of different policy approaches that allow supervisors to achieve or at least draw close to a kind of efficient frontier. Third, I’ll share with you key issues that the Committee faced in drafting the market discipline component of the New Accord and, specifically, I will mention some of the concerns that arose in our public consultations. | Points in the upper right and lower left quadrants signal monetary and macro-prudential policy operating in the same direction; points in the upper left and lower right, these policies operating in opposite directions. The points are fairly evenly scattered across all four quadrants. This tells us that the right macroprudential/monetary policy mix depends critically on the relative needs of the economy and the financial system. But two arms beat one, hands-down. Institutional arrangements and macro-prudential policy Finally, if macro-prudential policy is a useful addition to the policy toolkit, who should have control over it? Here, a comparison with monetary policy experience is illustrative. Macro-prudential policy faces many of the same dilemmas as monetary policy. The most serious of these is the time-consistency dilemma [Kydland and Prescott, 1979; Chari and Kehoe, 2013]. In the monetary policy sphere, this manifests as a desire to loosen policy today to support the economy when tightening to control inflation tomorrow would be more appropriate. In the macro-prudential sphere, it manifests as a desire to loosen regulation to support today’s growth when tightening to counter tomorrow’s crisis would be more appropriate. In both cases, policy faces an inter-temporal trade-off in its objectives – a myopia trap. The time-consistency dilemma is likely, if anything, to be even more acute when fighting crises than when fighting inflation [Haldane, 2013]. The reason is that credit cycles last at least twice as long as business cycles. The myopia trap for macro-prudential policy is even more painful than for monetary policy. | 0 |
Conversely, institutions that performed better or were able to weather the crisis were those with a reputation for prudence, sound corporate governance and risk management practices. At the international level, the Basel Committee on Banking Supervision updated its guidance on Principles for Enhancing Corporate Governance in 2010. This update followed the Committee’s decision to revisit the 2006 guidelines in the wake of the financial crisis. The updated guidance reaffirmed the continued relevance and critical importance of the existing principles and highlighted the key areas which merit the most focus. These include the BIS central bankers’ speeches 1 monitoring of risks on a firm-wide and individual entity basis. The guidance also emphasised the board’s oversight of compensation structures. Earlier this year, the OECD launched a review of its Principles of Corporate Governance. The review, the first since the standards were updated in 2004, was commissioned to take into account developments that have taken place in the corporate sector and capital markets. In Malaysia, the Securities Commission launched the Corporate Governance Blueprint in 2011 which outlined the strategic objectives for strengthening market discipline among capital market participants. One of the deliverables of the Blueprint was the publication of a revised Malaysian Code on Corporate Governance in 2012. A key feature of the Code is the emphasis on the role of directors and the need for a strong board composition. | The monetary reserves and Swiss franc assets combine to make up the monetary assets, which are required for monetary policy. In addition to these assets, the National Bank also manages the proceeds from the sale of the surplus gold reserves. The portfolio of these so-called free assets amounts to slightly more than CHF 20 billion. In the management of the monetary assets, monetary policy objectives and restrictions have priority. In compliance with the primacy of monetary policy, the investments are optimised according to security, liquidity and return. Important in this regard are the concentration on liquid investments, in other words readily marketable investments, and on the greatest possible risk diversification by holding different currencies and investment categories. The National Bank’s leeway for investment has extended considerably since the entry into force of the new National Bank Act in May 2004. Risk diversification options in particular were also increased as a result. The concrete investment structure of the different portfolios and their yields are published quarterly in an updated appendix to the Investment Policy Guidelines of the Swiss National Bank. The current investment structure and the risk/earnings profile of the National Bank’s assets, in particular the foreign currency reserves and free assets, can be summarised as follows: The portfolio adjustments made under the new Act aim to increase diversification in terms of currency and investment category. Within the context of the 2004 strategy, the dollar share was reduced in favour of the pound sterling and the yen. | 0 |
29 All speeches are available online at www.bankofengland.co.uk/speeches 29 Chart 24: Distribution of pay packets Percentage of employees 50 40 30 2018 20 2017 10 0 <0 0 >0 & <1 1 >1 to <=2 >2 to <= 3 >3 to <=4 >4 to <=5 >5 Settlement by bucket (per cent) Sources: Bank of England, Incomes Data Research, XpertHR, Incomes Data Service, Labour Research Department and Bank calculations. | Conclusion Pay prospects are determined in part by employment, in part by productivity and in part by power. All three have been important in explaining the weakness of pay during its recent “lost decade”. And each is likely to continue to be important for pay in the period ahead. Monetary policy can support the first piece of the pay jigsaw – employment. It has done so significantly over recent years, perhaps to the tune of creating 1 ½ million new jobs. But it can do little over the medium term to support productivity or to reshape the structural forces influencing pay power, the second and third pieces of the pay jigsaw. Doing so relies on policies which shift the supply side of the economy. Longer-term, it is through improved skills, productivity and structural reform and regeneration that pay power for workers can be restored. This underlines the importance of the Government’s Industrial Strategy, whose objectives are to do just that. In its White Paper on Industrial Strategy published last year, the Government proposed setting up an Industrial Strategy Council. 31 This independent body of experts was designed to monitor, and report publically, on progress towards meeting the objectives of the industrial strategy. Earlier this week, I was delighted to be appointed, in a personal capacity, to Chair the Industrial Strategy Council. I believe it can play an important role in supporting the Government’s industrial strategy, which seeks to increase living standards across the UK, help industry to thrive and boost workers’ pay power. | 1 |
Tarisa Watanagase: Risk-focused supervision and risk assessment Opening address by Dr Tarisa Watanagase, Deputy Governor of the Bank of Thailand, at the APEC Financial Regulators Training Initiative Regional Seminar on Risk-Focused Supervision and Risk Assessment, Bangkok, 6 September 2004. * * * Distinguished Guests, Ladies und Gentlemen, lt is a pleasure for me to be here at the opening of the APEC Financial Regulators Training Initiative on Risk-Focused Supervision und Risk Assessment. In making this opening address, I would like to personally extend a warm welcome to all the participants and to express my appreciation to the Federal Reserve experts who have kindly agreed to share with us their knowledge und experience on risk-based supervision. This regional seminar is held at an opportune time, about two months after the Basel Committee on Banking Supervision released the Basel II capital framework. As you all are undoubtedly aware of, Basel II aims to strengthen financial stability by encouraging sound risk management practices at banking organizations. The tools uscd are a more risk-sensitive capital regime (Pillar 1); the application of risk-based supervision (Pillar 2); und improved public disclosures to enhance market discipline (Pillar 3). Of the three pillars, one of the most formidable challenges for emerging market supervisors will be to properly implement the Pillar II risk-based supervisory framework. Since risk-based supervision is the main topic of this seminar, it may be useful to provide a few thoughts on some of the broader regulatory und supervisory implications associated with implementing this framework. | Wc are increasingly moving towards more principles based prudential standards; in addition, we have revamped our supervisory framework to provide a more structured and risk-oriented approach to the on and off-site examination process, while encouraging our front-only supervisors to think analytically. Despite these achievements, we still have substantial work ahead of us. Above all, our experience with risk-based supervision indicates that there is no going back to the mles-based approach of supervision given the dynamic nature of the banking business. And second, building a robust risk-based supervisory regime requires substantial time and resources and it will necessitate a material shift in the way both supervisors and bank managcment think about risk and risk management. I must therefore, commend APEC for this initiative in bringing together bank supervisors from the AsiaPacific region to learn and to share views on this very important topic. It is my sincere hope that all of you take this opportunity to gain insights from our highly experienced and knowledgeable experts as well as from each other on the practical aspects of risk-focused supervision. BIS Review 56/2004 1 Ladies and Gentlemen, I am pleased to declare open the APEC Pinancial Regulators Training Initiative Regional Seminar on Risk-Focused Supervision and Risk Assessment. I wish you all stimulating discussions in the week ahead and a very pleasant stay in Bangkok. Thank you. 2 BIS Review 56/2004 | 1 |
The global crisis actually emphasized the main weaknesses of the Macedonian economy, such as the high concentration of the export in non-propulsive activities, completely dependant on the movements on the international market and, of course, the trade deficit financing through vulnerable and hardly predictable private transfers. The blow these two components suffered from the decrease in the world economy meant significant widening of the deficit on the current account, which reached 13.1% of the GDP in 2008. These trends continued also in the first part of 2009 and together with the decrease in the capital inflows created serious pressures on the foreign reserves. It reflected directly on the confidence in the stability of the national currency. Thus in the first quarter of 2009, the demand for foreign exchange went up by 77% compared to the supply of foreign exchange. The increased misbalance on the foreign exchange market was equilibrated with the National Bank interventions on the foreign exchange market, in the amount of Euro 230 million, only during the first quarter. Moreover, we were forced to undertake measures to adjust the monetary instruments in function of foreign exchange rate stability maintenance. At the end of March, we adopted a decision on increasing the interest rate on the core monetary instrument – the CB bills from 7% to 9%. | The conference Nearly twenty years ago, Jacob Frenkel made the following observation about the international monetary system: “academics and policymakers have made numerous proposals for reform while, at the same time, the monetary system itself has been in a constant state of change”. This points to another problem that any attempt to reform the international monetary system faces: the world economy and financial markets, and therefore the international monetary system never cease to evolve. Today’s conference is organized around four panel discussions. They will focus on issues that are at the forefront of the current debate on shortcomings of the international monetary system. The first panel, chaired by Axel Weber, will discuss the predominant concerns about the present system. Large global imbalances, volatile capital flows, and rapid reserve accumulation give rise to concerns about vulnerabilities. Are they possible sources of instability, and what reforms, if any, should be considered? As I pointed out earlier, one recurring theme in the debate has been the question of reserve assets. Our second panel, chaired by George Soros, will examine ways to improve the supply of reserve assets. Is a diversification of reserve assets desirable, and if so, should it be actively promoted? Is there a greater role for SDRs in the international monetary system, and if so, what reforms would be required to give SDRs a greater role? Over the past decades, private capital flows have greatly increased. Although capital account liberalization is clearly beneficial in the long run, it entails significant short-run vulnerabilities. | 0 |
First we need to clear up the misconception that has become widespread, particularly in our country – that the weapon to achieve lasting victory over inflation is not fiscal: it is primarily monetary, and then structural, so as to increase the supply of goods and services. Tariff and fiscal shields can be useful in the short term, but they do not lead to a durable reduction in inflation. And, as we strongly emphasised following our last Governing Council meeting, it is time for national governments to start reducing their support measures rapidly, by making them more targeted, as soon as energy prices start to recede. I shall therefore focus on two subjects here today: (I) what are the channels of transmission of monetary policy today? (II) what are the pointers for our future monetary policy and, to continue with the image of channels and waterways, what navigation locks do we need to go through? 2 Page 3 of 19 I. The channels of transmission of monetary policy today One “historical” channel is less relevant today: monetary aggregates. The monetary aggregates channel is based on the idea that strong money growth fuels inflation: we have all more or less learned Irving Fisher’s money quantity equation (1911)1 and the monetarist theories that have dominated since Milton Friedman (1956).2 However, this channel has gradually become less relevant. | Speech by François Villeroy de Galhau, Governor of the Banque de France, Centre des professions financières Paris, 17 February 2023 How monetary policy will defeat inflation: channels and locks Page 2 of 19 Introduction Inflation is currently the number one concern for our fellow citizens and for us. Admittedly it has started to fall back slightly, to around 8.5% in the euro area, and it could have halved by the end of this year. But that will still be too high. Inflation that becomes entrenched at above 2% would be the worst enemy of confidence and therefore growth. The initial causes of this return of inflation are well known, and are primarily external to the euro area: disruptions to global supply chains with the exit from the pandemic, energy prices, Russia’s war against Ukraine... Their indirect repercussions have been felt gradually, first in manufactured goods prices, then in services prices. To sum up, inflation has not only become higher but also more widespread; not just imported but also domestic; not just linked to a transitory supply shock but also potentially persistent. In light of this, no one can seriously deny that monetary policy must respond. Today, therefore, I shall not talk about why the central bank must combat inflation but about how, in the current context, it needs to act to be effective. | 1 |
Government bond yields 10 year maturity, per cent 20 20 Germany 18 Greece 18 16 Ireland 16 Italy 14 14 Spain 12 12 Portugal 10 10 8 8 6 6 4 4 2 2 0 0 06 07 08 09 10 11 Source: Reuters 12. Government bond yields 10 year maturity, per cent 6.0 6.0 5.5 5.5 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 USA 2.0 2.0 1.5 Germany 1.5 1.0 Sweden 1.0 0.5 0.5 0.0 0.0 06 07 08 09 10 11 Source: Reuters BIS central bankers’ speeches 13 13. Stock market developments Index, 1 January 2006 =100 180 180 Sweden (OMXS) Euro area (Euro Stoxx) USA (S& P 500) Emerging markets (MSCI) 160 160 140 140 120 120 100 100 80 80 60 60 40 40 04 05 06 07 08 09 10 11 Source: Reuters 14. | It is also a common pattern that a financial crisis is followed by several years of weak growth.2 I also noted at the July meeting that there was a tendency in the United States and Europe towards stagflation, with low growth and high inflation at the same time. Developments over the summer reinforce this image, but this does not mean that things will necessarily continue in the same way. …but developments in Sweden largely in line with the forecasts In Sweden we have received the first preliminary national accounts figures for the second quarter of this year, and new statistics for the labour market and inflation, for instance. GDP growth was slightly higher in the second quarter than we were counting on in July. Seasonally-adjusted quarterly growth came out at 1.0 per cent, against an expected 0.6 per cent. Although both domestic demand and exports were marginally weaker than the Riksbank had forecast, imports, which are a deduction item when calculating GDP, were even weaker. This means that GDP growth was slightly higher than expected. I expressed some concern at the monetary policy meeting in July that the second quarter would be weaker than our forecast in the Monetary Policy Report. This was not the case, which in itself is a good thing. But at the same time, more forward-looking indicators such as the purchasing managers’ index and the National Institute of Economic Research’s economic tendency surveys point to economic activity slowing down. This is something that we have already counted on. | 1 |
Other countries with a flexible exchange rate and an inflation target have had similar experiences, for example Australia, Canada and New Zealand. It not only complicates assessments of the future path but also probably entails costs in the form of a poorer real economic trend. Conclusion Monetary policy in Sweden has been conducted with an inflation target and a flexible exchange rate since January 1993. The results have been good in many respects. Since the upturn in the summer of 1993, growth has been good compared with, for example, the years of high activity in the late 1980s. In contrast with that period, moreover, inflation has been low. Another point worth noting is the good real wage trend. With the low price rise, the annual real wage increases have averaged 2.5 per cent since 1994, which is more than in the 1980s, for example, when nominal wages rose rapidly but what households actually gained in real terms was very modest. BIS Review 81/1998 -7Monetary policy also seems to be better understood. Presumably this is mainly because, in spite of everything, economic development in recent years has been relatively good. The change in attitudes is evident in surveys of how people perceive the Riksbank and monetary policy. A similar picture is obtained from the treatment of the Bank and monetary policy in the Swedish press. Our basic line of thought has been broadly accepted, though from time to time there has naturally (and sometimes perhaps even rightly) been criticism of what we do. | First, the major public financial institutions were at the forefront of this movement. This is the case for the European Bank for Reconstruction and Development or the Caisse des Dépôts, with its subsidiary CDC-Climat. The European Investment Bank estimates that it currently grants 25% of its loans – over EUR 20 billion per year – to “green” projects. Second, under the aegis of the United Nations, projects were launched such as the UNEP finance initiative, a partnership between the United Nations Environment Programme and 200 financial sector institutions, which make environmental sustainability a collective responsibility, share best practices and establish principles for green financing. Thanks to the Montreal climate change protocol, or to the Portfolio Decarbonization Coalition, signatory investors commit to measuring and disclosing the carbon footprint of their portfolios. The objective is ambitious: reduce investment in carbon-intensive projects by several hundred billion dollars. Lastly, financial institutions are now making more direct commitments. French banks and insurance companies have recently announced that they have withdrawn their support for the coal industry and increased their financing of renewable energies. Paris Europlace called for the creation of an energy transition fund, which would be invested in by French banks, insurers and asset management companies, and which could in turn invest EUR 10 billion by 2020, with a view to financing projects to improve energy efficiency or promote renewable energies. This is a commendable initiative. II/ To best align these private initiatives with the fight against global warming, which is a public good, public intervention is nevertheless necessary. | 0 |
Subdued inflation expectations and restrained wage demands pointed in the same direction. In view of a weak development of international activity, it was foreseen that full capacity utilisation in the Swedish economy would not be reached until the end of the forecast period, when inflation was assumed to be marginally above the target. This called for a readiness to undertake some cautious tightening of the monetary stance later in the year. At the same time, the spectrum of risks had shifted, with less risk of inflation exceeding its expected path but a continued risk of development being weaker than in the main scenario. In view of the uncertainty, the Riksbank chose to await future developments. • BIS Review 81/1998 At the beginning of the summer we observed that inflation was following a lower path than we had assumed in the main scenario in March. Weaker import prices were contributing to this but so were other factors. Transitory effects - lower interest rates and changes in indirect taxes and subsidies - were particularly prominent. Moreover, on account of lower wage increases and stronger productivity growth than expected earlier, it seemed that inflation in the longer run would be somewhat lower than the Riksbank had predicted. With the outlook for productivity, it was likely that some surplus capacity would continue to exist during the whole period. -3All in all, inflation prospects one to two years ahead were accordingly more subdued than before and predicted inflation was below the target throughout the forecast period. | Against this background I shall be discussing the current monetary policy appraisal of the Swedish economy, together with some factors of importance for the final assessment. First, however, I shall briefly outline monetary policy’s line of thought. Forecasts and probabilities Monetary policy’s overriding objective is to safeguard the value of money. The annual rate of inflation, measured as the change in the consumer price index, is to be kept at 2 per cent. As it takes time for the Riksbank’s monetary measures to work in full, our actions have to be based primarily on an assessment of inflation’s future path. The policy horizon - the period in which most of the impact of monetary policy materialises - is around twelve to twenty-four months. The Riksbank’s assessment of future inflation is presented continuously in our Inflation Reports. Since the first Report was presented in October 1993, the content has been developed and the Riksbank has, for example, become increasingly explicit in its assessments. In the first two years the Report contained a more general account of how the inflation indicators and inflationary pressure in the economy were developing. From November 1995 onwards the Riksbank has been attaching numbers to its inflation assessments. In the June 1996 Report the inflation assessment was underpinned for the first time with an overall picture of the cyclical position. A further step was taken in September 1997, when the inflation assessment was supplemented with a path for inflation in the forecast period. | 1 |
Therefore, the Central Bank cannot make any commitments related to the level of exchange rates in an implicit or explicit manner, nor use the exchange rate as a policy instrument. It is out of the question and is impossible. Under these circumstances, the value of the Turkish lira is determined in the short term by short-term expectations, developments related to foreign exchange supply and demand and the behaviors of market players, while the said value is determined in the medium and long-term by economic fundamentals, the course of structural reforms and the medium and long-term expectations. However, the fact that exchange rates are determined under market conditions does not imply that the Central Bank will not conduct any transactions in the foreign exchange markets. The Central Bank basically conducts transactions with two different aims. The first of these transactions comprises foreign exchange purchase auctions that are held with the aim of building up reserves. These transactions are conducted via daily, transparent and exchange rate-dependent mechanisms in the periods where the foreign exchange supply increases in the market and with no intention of affecting the level of exchange rates. As a result of these transactions, Turkey’s foreign exchange reserves increased by 181 percent in the last four years and reached USD 57 billion as of 25 August 2006. Nevertheless, due to the decline in foreign exchange supply, foreign exchange purchase auctions were suspended on 16 May 2006. | The probable continuation of the current upswing on the mortgage and real estate markets means that risks to financial stability are likely to remain in the spotlight. Containing these risks will continue to require the participation and support of all market players: the authorities, the lenders, and the borrowers. Thank you for your attention. | 0 |
The clause in the law dealing with the transfer to the Treasury makes some for provision for whether the Bank’s capital has reached a specified minimum relative to the size of the domestic credit system. The Central Bank Act states that an amount equal to two-thirds of the Central Bank’s profit shall be paid annually to the Treasury. However, the Bank pays only one-third of its profit to the Treasury if its capital is equivalent to less than of 2.25% of the amount of lending and domestic securities in the credit system. At present the Bank’s capital is still a long way short of this legal reference level, and its annual profit will not suffice to strengthen it markedly anyway. Growth has not only soared in the Icelandic credit system, but on an increasing scale each year has also been associated with foreign markets, where credit institutions’ activities have expanded enormously. These changes also give grounds for considering other terms of reference for foreign reserves than import levels alone. As the Prime Minister stated in his speech earlier, the government responded positively to the points raised by Central Bank and authorised it to borrow abroad in the name of the Treasury in order to strengthen its foreign reserve substantially, while the government was also mandated by parliament to strengthen the Bank’s capital position. The Board of Governors would like to thank the government for such a good, firm response. | In 1972, Irving Janis called this tendency for groups to act cohesively “groupthink”. 32 Janis focused on a number of US political decisions to motivate this concept, the most celebrated of which was President Kennedy’s decision to invade the Bay of Pigs in 1961. More recently, groupthink was used to explain the Challenger space shuttle disaster. 33 Groupthink is the collective manifestation of confirmation bias – the tendency to search and synthesize information in ways which confirm prior beliefs. This, rather than alcohol, is why drunks search for lost keys under the lamppost. 34 Confirmation bias is prevalent in uncertain environments, where popular narratives are used to filter uncertainties. 35 Psychologists such as Janis have identified a number of ways to mitigate groupthink or confirmation bias. Actively encouraging dissent in groups is one. Seeking alternative perspectives from outside experts is a second. And having the group chair state their preferences last is a third. 36 Evolution of Bank of England’s policy framework Let me now describe the evolution of the UK’s macro-economic policy framework over the past half-century or so. This is a journey whose starting point was a rules-based regime over which the Bank had little discretion and whose finishing line is a regime over which the Bank exercises significant discretion. For much of its 320-year history, the Bank of England’s role in UK economic policy was as operational agent. The role of policy principal was played by government. | 0 |
Empirical studies indicate that companies only change the price of goods once or so a year, on average. 2 This could be due to various costs linked to changing the price, for example, printing new price-lists. It could also be due to a fear of losing market shares if the price is raised. 3 If the prices are not changed at all, the effect of the weaker SEK/EUR exchange rate will be that the profit margins for the Swedish cheese importer fall. 4 In this case, sales can be maintained, but profits will fall. The company can also choose something in between these two cases, that is, raise the selling price by between 0 and 15 per cent. The outcome of this will depend on several different factors, such as the currency in which the purchase price is set, to what extent similar substitutes whose purchase price is not affected are available and whether the change in the exchange rate is expected to be lasting or temporary. These factors affect the pass-through of the exchange rate to inflation. What effects can a change in the exchange rate be expected to have on the economy as a whole? The pass-through of the nominal exchange rate on prices is a large area for research. In particular, researchers have studied how much a change in the nominal exchange rate will affect import prices. | But everything is relative and I believe it’s not difficult to spot black holes, mistaken notions and errors of understanding on both sides. While these Tertulias are usually an opportunity to overcome some of these problems, they most importantly allow us to understand our respective stances on current, important or pressing issues. And we also enjoy ourselves. Because, unlike other meetings, the Tertulias are, from my experience, a rather entertaining event. I still have fond memories of the meetings I attended and the discussions we had in the now distant 1990s in Santiago de Compostela, in Seville, in Santander and also in Oxford and in Edinburgh. The Tertulias were instituted at what was a key time in recent European history: the disappearance of the Berlin Wall, German reunification, the collapse of the Soviet Union and the start of the European Monetary Union project. Next came the great economic expansion at the onset of the 21st century, the international financial crisis and the serious economic problems that have affected all of us, Spain and the United Kingdom included. The European Union and the Monetary Union are today at a difficult crossroads. They face a problem which, when the Maastricht Treaty was negotiated, we knew might arise: that the Monetary Union without fiscal integration would be an edifice with weak foundations. And although attempts were made to head off the risk with public deficit and debt rules, it was known that these were merely shoring up the building and that they could not resolve its fundamental weakness. | 0 |
In the June addendum, the FOMC noted that reducing the Fed’s securities holdings will result in a declining supply of reserve balances, and that it anticipates reducing the quantity of reserve balances to a level “appreciably below that seen in recent years but larger than before the financial crisis.” New York Fed staff projections for possible paths of the Fed’s securities portfolio—constructed using a distribution of market participants’ surveyed expectations for the future size of the Fed’s balance sheet (conditional on not moving to the zero lower bound at any point between now and 2025), along with some staff modeling to fill in details—suggest it will take at least several years for the balance sheet to reach its “normal” size.14 Uncertainty about the time of normalization arises from numerous sources, including future levels and variability of demand for different types of Fed liabilities, the pace at which the agency MBS portfolio will pay down, and of course the economic outlook. Assuming that balance sheet normalization continues uninterrupted, it seems likely that the future balance sheet size will be driven largely by changes in longer-run demand for Fed liabilities —in contrast to the asset-driven balance sheet of the past decade. The FOMC explains in the June addendum that reserve balances will be driven by the banking system’s demand for reserves and the Committee’s decisions about how to implement monetary policy in the future. | Constantinos Herodotou: The Significance of being financially literate and national strategies for achieving it Introduction (virtual) by Mr Constantinos Herodotou, Governor of the Central Bank of Cyprus, in the Cyprus Economic Society seminar, 21 October 2021. *** Introduction I would like to thank the Cyprus Economic Society for offering me the opportunity to introduce today's seminar, which I believe timely addresses an extremely important economic and social theme. The issue of promoting financial literacy and the role of National Strategies to achieve it are of course, relevant not only to Cyprus but also globally. Dr Chiara Monticone, a senior policy analyst of the OECD and a practitioner in the field of financial literacy with global expertise and Professor Dennis Philip, who teaches Finance at Durham University Business School, an acclaimed academic in financial literacy and close collaborator of the Central Bank of Cyprus, will have, I am sure, excellent contributions on the subject. According to a definition associated with the OECD, financial literacy is the ability of an individual to combine appropriate knowledge and skills, rational behaviour and attitudes necessary to make sound economic and financial decisions and ultimately achieve individual financial wellbeing. As more individuals operate prudently and comprehend the workings and functioning of the financial system, including how to use its services and products appropriately and efficiently, the broader economic system and society, as a whole, benefit. | 0 |
In particular, the annual growth rate of compensation per employee fell to 1.9% in 2009Q1, down from 2.8% in the fourth quarter. 12 Similarly, the rally in commodity prices will help to offset downward pressures on consumer prices. For instance, since the beginning of 2009 oil prices have more than doubled even when measured in euro. 3. Monetary indicators While economic analyses already provide a clear indication of the short to medium-term risks of a deflationary scenario, it might be helpful to compare them with the signals emanating from the monetary analysis. This notion is explicitly recognised in the ECB’s monetary policy strategy, where monetary trends provide information on price developments over the medium to longer term and serve as a means of cross-checking the short to medium-term indications for risks to price stability coming from economic analyses. The positive and often almost one-to-one relationship between inflation and monetary growth over longer horizons is perhaps one of the best documented results in economics and has been confirmed in a variety of empirical studies, both across time and across countries. 13 However, a critical test for any kind of analysis is whether an assessment of the data against the principles of the strategy can be translated into practical and relevant policy advice. As regards monetary analysis, this boils down to whether it is possible to separate in real time the important signal for future inflation embedded in the trends of monetary developments from the inevitable noise in the actual monetary data. | Implementation is now being regularly assessed and transparently reported by the FSB and the IMF. This second pillar is deep supervisory cooperation. To manage cross-border challenges to financial stability, international authorities must share relevant information and work together. As the home to four, and host to the other 26, globally systemically important banks, the Bank of England participates actively in all major supervisory colleges, sharing information and expertise gained from overseeing the multitude of complex risks unique to London. We expect the same from those whose firms operate and take on large risks here. The PRA’s open, cooperative approach to supervision means wholesale activity in London can remain globally-integrated and highly efficient, without compromising resilience. 12 The third pillar of responsible openness is ending ”too big to fail”. With enhanced resolution powers and planning, the Bank of England now has the ability to resolve failing banks. The UK’s major banks are on track to complete this year the ring-fencing of their critical domestic high-street businesses from their riskier wholesale activities. And they already hold loss absorbing resources of 25% of their risk-weighted assets against a 2022 requirement of 29%. As a consequence of this progress, market discipline is returning, with the public subsidy enjoyed by the largest banks having fallen by 90%. Now is the time to reap the benefits of these enormous efforts. Platforms are being created for deference to each other’s approaches when they achieve similar outcomes. With the three pillars in place, an open, resilient global financial system is possible. | 0 |
With no reciprocity, although 𝜙𝑠𝐻 = −6, the foreign banks’ market share and leakage are calibrated jointly as 𝜙𝐹 𝑓 1 𝑠 ( 𝐻 (1−𝑓) = − ), a leakage of one-third, in line with the estimate of Aiyar et al (2014). And 𝑘1𝐹 = 0, so that the 𝜙𝑠 3 13 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 13 increase in resilience is proportional to the amount of domestic credit provided by domestic banks: this is set as 𝑓 = 0.11, also in line with Aiyar et al (2014). Both channels make the CCyB less effective without reciprocity. The credit leakage makes the leaning channel one-third smaller, while the assumption that resilience is lower when foreign banks hold less capital against domestic credit makes the resilience channel 11% smaller. In both the models with and without reciprocity, both countries are assumed to minimise loss functions analogous to those in appendix 2, containing only their own national objectives of inflation and output deviations, and the domestic crisis probability. 1 9) 𝐿 = (𝜋12 + 𝜆𝑦12 ) + (1 − 𝛾1 )𝛽𝐸1 𝐿2,𝑁𝐶 + 𝛾1 (1 + 𝜁)𝛽𝐸1 𝐿2,𝐶 10) 𝐿∗ = (𝜋1∗2 + 𝜆𝑦1∗2 ) + (1 − 𝛾1∗ )𝛽𝐸1 𝐿∗2,𝑁𝐶 + 𝛾1∗ (1 + 𝜁)𝛽𝐸1 𝐿∗2,𝐶 2 1 2 Domestic loss function Foreign loss function Each policymaker takes the setting of the other’s policy as given when optimising according to their own individual loss function. | It came care of fixing the exchange rate – first to gold under the Gold Standard and latterly in the post war period to the dollar. With the demise of the dollar standard in the early 1970s, however, the exchange rate anchor had been tossed overboard. At the Bank of England, as elsewhere, the search was on for a new nominal anchor. Into this vacuum stepped Andrew Duncan Crockett. Crockett joined the Bank in 1966 as a graduate entrant, just before the break-up of the Bretton Woods dollar standard. He set to work on the biggest problem of the day, locating a new nominal anchor. In so doing, he began working alongside another young(ish) new Bank entrant, Charles Goodhart. The result was a joint paper published in the Bank’s Quarterly Bulletin in June 1970. It was titled “The Importance of Money”.11 Re-reading it now, it was a prophetic piece of work. In the UK, it laid some of the analytical foundations for what, during the late 1970s and 1980s, became monetarism. More than that, the paper placed commercial bank money and credit at the centre of the macro-economy. It could as well have been titled “The Importance of Credit” or indeed “The Importance of Banks”. After a successful spell at the IMF, Crockett returned to the Bank of England in 1989. In 1994, he then became General Manager of the Bank for International Settlements, the central banks’ central bank. In central bank circles, change was in the air. | 0 |
Philipp Hildebrand: Setting the course for the Swiss economy – challenges for the Swiss financial centre and outlook for the future Summary of a speech by Mr Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, to the Zürcher Volkswirtschaftliche Gesellschaft, Zurich, 17 May 2010. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * The Swiss banks face two major challenges. First, sooner or later, they will have to carry out their core business – asset management for foreign customers – in a tax-conform environment. Second, the big banks will be required to operate under more stringent regulatory requirements. These challenges are likely to lead to structural changes in the financial centre. How are such changes likely to affect the Swiss economy? An empirical analysis shows that, although the financial centre plays an important role in the Swiss economy, it also entails considerable risks. In the case of cross-border asset management, the relationship between the risk to the economy and the income earned is acceptable. However, this is hardly the case for the banks’ own trading activities. Consequently, current regulatory efforts could not only improve the stability of the financial sector, but also increase both the profitability of banks and the benefit which the Swiss economy derives from the financial sector over the long-term period. | Ladies and gentlemen, Non-bank financial institutions are a significant component of the financial sector as their assets constitute a significant proportion of the total financial sector assets in most countries in the region. Similarly, microfinance institutions play a critical role in poverty alleviation and economic empowerment of marginalized communities in our region. As such these institutions are systemically important as they can exacerbate the fragility of the financial system particularly where there is lack of effective regulation. Over the past few years, we have seen a trend where these institutions have increased in numbers in our region; some have been established as part of financial conglomerates while others are on a standalone basis. Sadly, our supervisory and regulatory structures for this sector in the MEFMI region have remained rather incoherent and somewhat underdeveloped to handle the challenges that have been identified with this sector. The trend makes it more important than ever for supervisors in the region to get together and talk about matters of common interest. I am pleased to note that over the past few years, the region has taken a proactive stance towards promoting harmonisation of regulatory and supervisory frameworks and the integration of financial systems. Through MEFMI, SADC, COMESA, the East African Community (EAC) and the West African bloc, member central banks are working together to promote effective supervisory standards geared towards achieving long term goals of financial inclusion and financial stability. | 0 |
Such a prudential regulatory design would further complement concurrent efforts that are underway to develop Islamic financial markets and Islamic financial instruments. This architecture will contribute towards the development of a robust and resilient Islamic financial system that can effectively preserve financial stability and contribute to balanced growth and development. Ladies and Gentlemen: In recognition of this need, a proposal was made two years ago to establish an organization to spearhead the development of a uniform set of prudential, supervisory and disclosure standards for the Islamic financial services industry internationally. This proposal was crystallized and endorsed during a consultative meeting of a group of Central Bank Governors, and officials from the Islamic Development Bank (1DB), the Accounting and. Auditing Organization for Islamic Financial Institutions (AAOIFI) and the International Monetary Fund (IMF) in Prague in September 2000 during the occasion BIS Review 64/2002 1 of the lMF-World Bank Annual Meetings. The endorsement set in motion the formation of a preparatory committee, with officials from Bahrain, Iran, Malaysia and Sudan, and representatives from the IMF, IDB and AAOIFI, to develop the terms of reference and operational structure for the Islamic Financial Services Board. In a meeting of Governors in April this year, Malaysia was mandated to lead a Steering Committee for the establishment and inauguration of the Islamic Financial Services Board in Kuala Lumpur. Today's historic event is the culmination of this extensive two-year consultative process. | Ladies and Gentlemen: A greater understanding of Islamic banking and finance on the international front would contribute towards our efforts to reinforce the on-going international initiatives towards fostering greater global financial stability. In this regard, the participation of other financial supervisory and regulatory authorities, and other international standard setting organizations would facilitate this process to achieve our shared interest of preserving the soundness and stability of the Islamic financial system. Ladies and Gentlemen: It has been said that Islamic banking and finance is a "mirror of the sea" for until and unless we have the courage to explore its depth, we would never be able to uncover the treasures that reside within. Islamic banking as a new sphere of finance promises vast opportunities and benefits for all. Its integration into the global financial system will contribute towards achieving our shared aspirations for financial stability to ensure balanced growth in the global economy. BIS Review 64/2002 3 | 1 |
We appreciate your accepting of our request to share with the participants your knowledge and experience in this field of your Ministry’s work, which reflects your regulatory role towards preventing and/or detecting criminals offences, including money laundering. This is the first Workshop of its kind on this important topic, with emphasis on the role of the NPOs to detect and prevent the offences of money laundering or terrorist financing activities. Money laundering and the financing of terrorists are problems that should concern us all. They are not problems for only the Government and the law enforcement agencies to worry about. Rather, the public sector, the business community, the private sector and even ordinary citizens must play a role in combating these illegal activities. This Workshop is therefore opportune, as it covers one of the important sectors, other than financial institutions. I am referring of course to yourselves, the Non-profit Organization Sector. Non-profit organization sector There is a strong belief internationally that the non-profit organizations sector is one of the more vulnerable sectors, which criminals would try and exploit to conduct their illegal activities without attracting much attention. And, some of the reasons for such vulnerability relate to generally weak management structures and the lack of regulatory supervision over NPOs operation. Many jurisdictions BIS Review 85/2009 1 have relatively low institutional capacity to monitor NPOs and detect their being used for money laundering and by terrorist. Some jurisdictions even indicate their unwillingness to impose a regulatory requirement on this Sector. | The Riksbank cut its repo rate by 0.5 percentage points, to 3.75 per cent. Now, just over six months later, we can conclude that the impact of the attacks on the global economy was less than feared, although certain sectors were hard hit. In addition, there are more and more signs of an imminent improvement in activity in both the USA and Europe. The stocks that had been built up during the downturn in activity appear to have been largely phased out and according to a number of indicators, production has begun to increase. A cautious optimism has begun to spread. There is also the additional impetus that comes from the expansionary economic policy in many countries and strengthens confidence in an impending upturn. However, for the global recovery to really take off and become stronger, it is necessary that it is accompanied by a broad and sustained increase in demand. If production increases because stocks are too small and need to be refilled, there is a risk that the upturn will be short-lived. We have been receiving both positive and negative signals regarding the situation in the US economy. The positive signals come from an unusually strong growth in productivity during the slowdown in activity, which indicates that the US industry has managed to adapt its production structure in an impressive manner. Private consumption, which is important in all countries, but particularly in the USA, has also remained strong during the whole of 2001 and early 2002. | 0 |
Chart: Marked fall in oil prices 1/4 BIS central bankers' speeches On top of this, there has been a substantial fall in oil prices as a result of a sharp fall in global oil consumption. Despite production cuts, total oil production is substantially higher than consumption, with little spare storage capacity. Against this background, oil prices are likely to remain low in the coming period. Futures prices indicate that oil prices will pick up, but to a markedly lower level than the level we have been used to seeing in recent years. There were already prospects at the beginning of the year that petroleum investment would decline. Owing to the fall in oil prices, oil companies have cut their investment plans. Low oil prices affect the outlook for the Norwegian economy. Chart: Substantial krone depreciation The fall in oil prices and general uncertainty in the wake of the coronavirus outbreak have weakened the krone exchange rate. On 19 March, the krone hit record-weak levels against a number of currencies. At that time, uncertainty in the NOK market was particularly high, and limited liquidity contributed to amplifying NOK movements. Against this background, Norges Bank announced that there could be a need to intervene in the NOK market. In order to support a wellfunctioning NOK market, Norges Bank has made extraordinary NOK purchases totalling NOK 3.5 billion in the foreign exchange market. Chart: Money market turbulence Financial market volatility also led to high credit premiums. | Øystein Olsen: The conduct of monetary policy Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 19 May 2020. * * * Accompanying slides of the speech. Please note that the text below may differ from the actual presentation. When I appeared at the hearing before this Committee this time last year, the Norwegian economy was growing at a solid pace and the policy rate was on the rise. The policy rate was raised three times in 2019, from 0.75 percent to 1.50 percent. There was no longer any need for low interest rates to support economic activity. After several years of solid economic growth and falling unemployment, capacity utilisation was assessed to be somewhat above a normal level in 2019. Inflation was close to the 2 percent target. GDP growth slowed through autumn, and towards the end of 2019 the Norwegian economy was assessed to be close to the peak of the business cycle. There were prospects that the policy rate would remain close to 1.50 percent ahead, inflation would continue to be close to the inflation target and unemployment would remain low. We envisaged that growth would slow in the years ahead, partly as a result of weaker prospects for petroleum investment. | 1 |
BIS Review 99/2008 1 In line with this mission statement, the BoZ is responsible for regulating and supervising banks and the following types of NBFIs: • Leasing and finance companies; • Housing financial institutions (building societies); • Savings and credit institutions; • Development finance institutions; • Microfinance institutions; and • Bureaux de change. As at June 30, 2008 there were 14 commercial banks and 71 NBFIs (see Appendix I). Currently, commercial banks dominate Zambia’s financial system with total assets and liabilities amounting to K14,465,045 million as at June 30, 2008 (about 31.8% of GDP). The reference NBFIs, notably, the leasing and finance companies (11, two of which are under statutory management of the Bank of Zambia 2 ), building societies (3), microfinance institutions licensed under the BFSA (15), development finance institutions (1) and savings and credit institutions (2). The combined balance sheet of these institutions, as at June 30, 2008 amounted to about 7.9% of the aggregated balance sheet of the commercial banks (see Table 1). 4.0 Access to financial services In May 2007, here in Livingstone, the World Bank organized a Southern Africa roundtable discussion on the launch of their new report entitled, “Making Finance Work for Africa”. A common understanding arising from this debate was that financial exclusion has negative economic and social effects on society. These include the following: i. | The Board of directors shall consist of not less than 5 members (Section 30(2); iii. Every financial service provider must have a Chief Executive Officer and Chief Financial Officer who shall not qualify to hold office unless it is shown that they are fit and proper persons, above 21 years old, have not been convicted of a felony or offence involving dishonesty, are not mentally incompetent, have never been removed from office under the BFSA, have not managed a company that has gone into liquidation or entered into a composition with creditors (Section 31); iv. The majority of directors must be from outside the bank (Section 32(1); v. Directors, Chief Executive Officers and Chief Financial Officers are expected to act honestly, in good faith and in the interest of the company whilst exercising due care, diligence and skill (Section 33); vi. A director is required to declare in writing to the board annually, the names and addresses of the director’s associates and full particulars of every material interest (Section 35); vii. | 1 |
As regards public finances, euro area fiscal deficits exceeded 6% at the peak of the crisis in 2009 and 2010, but are expected to fall below 3% this year, while primary budgets are even expected to post a surplus of 0.2%.4 This adjustment strategy has brought with it painful cuts in our social models and has not been without controversy. In fact, some commentators and academics suggest that governments should continue increasing deficits to support aggregate demand while the private sector is deleveraging. They argue that parts of the private sector are debt-constraint and need to reduce their leverage, while parts that are unconstrained are not increasing their leverage sufficiently.5 In such an environment the role for government spending is to expand demand for funds, and especially so when the nominal interest rate is constrained by the zero lower bound.6 I would agree to this approach if the fiscal budget allowed for room for manoeuvre. But the recent sovereign debt crisis has shown that fiscal space is very limited for many European countries. In Japan, the strategy of fiscal expansion has led to a situation in which gross government debt levels now exceed 200% of GDP. The continued favourable financing conditions appear to also be owed to the fact that more than 90% of Japanese government bonds are held domestically. This situation can be seen as a special privilege for the government. | Factors such as indirect taxes have effects on consumer prices that are transitory; they normally disappear after a time unless long-term inflation expectations have been affected. Conclusion The CPI is the target variable for monetary policy. Measured with the CPI, inflation is to be 2 per cent in a longer, annual perspective. There are grounds, however, for sometimes departing from this target. Short-run deviations from the target should not be attributed automatically to a faulty formulation of monetary policy. This presupposes, however, that clearly identifiable, transitory price movements are involved that monetary policy neither can nor should aim to counter. It is therefore important to look at the factors behind the CPI figures when appraising monetary policy. 7KHUHDVRQIRUOHWWLQJGHYLDWLRQVRFFXULVWKDWRWKHUZLVHWKHHFRQRP\ZRXOGEHGHVWDELOLVHG OHDGLQJVRRQHURUODWHUWRXQQHFHVVDU\HFRQRPLFFRVWVWKDWLVWRVD\H[DJJHUDWHGIOXFWXDWLRQV LQERWKWKHUHDOHFRQRP\DQGWKHILQDQFLDOPDUNHWV 11 BIS Review 61/1999 | 0 |
The problems concerning how measures of resource utilisation relate to the normal level are, however, greater. It is difficult enough to measure resource utilisation, but it is even more difficult to measure what its normal level is. Instead we have to weigh together different measures and indicators in a reasonable way. This of course provides greater scope for a wider range of assessments. The financial crisis has, not least, also raised the question of to what extent monetary policy should take financial stability into account. This is an important question that should be analysed further. Let me conclude by saying that it appears that the fiscal policy and monetary policy stimulation measures that are being implemented throughout the world are beginning to have the desired effects. The situation in the financial sector has improved and an economic recovery is now discernable. But it is still uncertain whether the recovery is stable or whether there is a risk that it will come to a halt as soon as the fiscal policy and monetary policy stimulation measures are phased out. Deciding the appropriate time to begin the phase-out of the now very extensive monetary policy stimulation measures is a major challenge. If the phase-out begins too early there is a risk that the recovery will come to a halt. If we wait too long, there is a risk that we will need to increase the repo rate very quickly in order to meet the inflation target. | This task has, for example, been the reason for the crisis measures that the Riksbank has taken since the autumn. However, we need to discuss whether situations can arise in which flexible inflation targeting conflicts with the aim of promoting financial stability. If so, should interest-rate policy be modified or is it more appropriate to use other instruments to, for example, counteract the development of financial bubbles? I have no ready answers to these questions today. They partly relate to the question of the causes of the current financial crisis. Has monetary policy contributed to the crisis through low interest rates or do the causes lie in entirely different factors, such as global imbalances and/or inadequate regulation and supervision of the financial markets? The analysis of the causes of the crisis has begun, but it is still far too soon to draw any clear conclusions about the contribution of different factors. The current economic situation But what are the prospects for the economy in the period ahead and what challenges are we facing now? The financial crisis reinforced the international economic downturn. It is therefore natural to expect that a recovery will only come when the situation on the international financial markets has normalised. Stabilisation of the financial sector The situation on the financial markets has continued to improve during the summer. | 1 |
Six years later, Michael Kremer, an economist at Harvard University, formulated the O-ring theory of economic development 1. According to him, if strategic complementarity is sufficiently strong within a system, O-ring effects can create low-production traps. Financial Times columnist Tim Hartford relates Kremer’s theory to the concept of weak links 2. When systems have a strong element of interdependence, weak links begin to have a more multiplicative effect, rather than an additive effect, on the overall outcomes of the system. A musical band is only as good as its least experienced player. A dance troupe is only as synchronised as its worst dancer. Today’s economies and financial systems have undoubtedly become more intricately interlinked across agents, markets and nations. This progression brings benefits as it unlocks new synergies and uncovers diverse sources of growth. However, the increased interdependence also increases the potential for O-ring type effects. Any single component within this complex web of economic and financial relationships can become the weak link of the system, with highly detrimental effects on the system’s stability and on economic growth. The financial crisis of 2008–2009 in the advanced economies was a good illustration of an O-ring weak link, whereby a seemingly small segment of the US financial system – the subprime mortgage market – triggered an economic crisis that reverberated around the world and the effects of which are still being felt today. | Meanwhile, AIG Financial Products compensated its employees, including risk officers, on the basis of revenues brought in rather than profits. At Lloyds, incentive schemes which pressured sales staff to meet targets or face demotion also encouraged misselling of payment protection insurance. In all these instances, executives were inclined to focus on immediate outcomes such as revenues and sales targets in order to deliver visible results quickly, without much regard for the risks assumed. Major efforts have since been undertaken internationally to address these issues. The essence of these reforms is twopronged: the first is a greater emphasis on the governance of the compensation framework by the board and senior management; the second is a greater alignment of compensation practices with prudent risk-taking. As risks undertaken today may materialise much later in the future, the latter entails deferring portions of compensation and subjecting them to adjustments, such as bonus-malus and clawbacks. Finally, a strengthened role of market discipline can also shape the governance of finance for the better by reducing information asymmetries between the market and financial institutions. Again, regulations can play a part by enhancing the scope and quality of mandatory disclosures, such as in respect of key information relating to risk exposures, risk management policies and capital ratios. A relevant emerging trend among investors and consumers has been an increasing focus on more sustainable approaches to finance, including those which consider environmental, social and governance concerns. | 1 |
The recovery has been broad-based. The easing of monetary policy contributed to a sharp rise in private consumption and housing investment. Activity has picked up considerably in service industries and the construction sector. High petroleum investment, the global economic recovery, a weaker krone and lower wage growth contributed to boosting activity in manufacturing industry. Profitability has improved for mainland enterprises. Mainland fixed investment has also gradually increased. Thus, it may appear that growth in the Norwegian economy has become more self-driven. Even with a pronounced upswing in output, the increase in the number employed has been limited so far in this cyclical upturn. Measured in terms of the number of person-hours worked, however, employment growth was high last year. Registered unemployment has shown a small decline over the past year. Productivity probably increased more than normally in some industries in the early phase of the recovery. A marked fall in sickness absence may have reduced the need for new employees. Capacity utilisation in the Norwegian economy has increased, notwithstanding the decline in sickness absence and efficiency gains in the business sector. The output gap is a measure of capacity utilisation in the economy. We interpret a positive output gap to mean that output and capacity utilisation are higher than the level consistent with stable inflation over time. High domestic interest rates in 2002 and fiscal policy management contributed to substantially lower cost inflation in the private and public sectors over the past two years. | Profitability will be depressed both by increased competition and by rising wage costs. Investment will be held back and the transformation will proceed too slowly or not at all. There will then be no quick renewal of capital stocks. Firms will not make good use of the new information technology. I have cited wage formation as a conceivable factor that may hamper a transformation, but of course there are other factors as well, for example the tax system, the educational system, etc. It is not a function of the Riksbank to point out specific factors that can affect the pace of structural change. But perhaps we can contribute to a broader discussion of the new economy. Various factors that hamper or check an adjustment could thus result in the Swedish economy following a lower, not a higher, path for long-term growth, with a stronger, not a weaker, inflation propensity and a continuation of high unemployment instead of a reduction to the low level that most people want. These risks seldom feature in the general discussion about the new economy. The changes that many people refer to as the new economy unquestionably present a number of challenges to the Swedish economy in the present situation. My comments have indicated, moreover, that the notion of a new economy is not correct; that is not what it is all about. | 0 |
Standard economic theory dictates that, in such circumstances, exogenous changes in money demand should indeed be accommodated. In a seminal article going back to 1970 1 , William Poole showed that, when there is uncertainty about money demand, the optimal response is to stabilize the interest rate, thus letting money supply adjust. Since short-term interest rates are, for all Central Banks, the main policy tool, an increase in interbank rates over and above the official rate would indeed be tantamount to a shift in monetary policy. In contrast, liquidity provision by Central Banks has ensured that the overall policy stance has remained unchanged. A clear distinction has been – and will be – maintained between temporary liquidity provision, on the one hand, and medium term oriented monetary policy, on the other. Should liquidity be provided at a penalty rate, as some have argued, to avoid moral hazard? The answer is clearly positive if and when liquidity assistance is targeted at specific institutions. But there is no reason, for Central Banks, to significantly depart from prevailing policy rates if their main objective is to respond to an exogenous and general increase in demand for central bank balances. In the future, monetary policy may have to be adjusted, not for the purpose of easing financial tensions, but according to its own objective and in view of the state of the economy. | But as the Chinese saying goes, "A thousand miles begins with a single step" (). We are grateful that you have all chosen to join us to take important first step in this meaningful e-HKD journey. I know you're all eagerly waiting to hear about the potential use cases, so I'll give the floor to each pilot group to share their creative ideas. Thank you. 3/3 BIS - Central bankers' speeches | 0 |
The federal guarantees for the COVID-19 loans and the liquidity provided at favourable conditions by the SNB have contributed towards Switzerland being able to avoid a credit crunch in the past few months. Page 3/4 Zurich, 17 December 2020 Thomas Jordan News conference It will take some time yet before the economy recovers, and uncertainty will remain high for the time being. We will therefore be seeking to do our utmost with our monetary policy to ensure price stability and to contribute to the economic recovery. Climate change and the SNB I would now like to talk about the significance of climate change for the SNB. We have been working intensively on this topic for some time now. We want to properly assess possible consequences of climate change for the economy, for financial stability, and for the management of our foreign exchange reserves in order to ensure that we can fulfil our statutory mandate at all times. To this end, we also collaborate with other central banks, in particular in the Network for Greening the Financial System (NGFS), and we work together closely with FINMA. As regards monetary policy, we are continuously deepening our analysis into how climate change could affect economic growth and inflation. The dialogue with other central banks is particularly important in this area. When it comes to financial stability, the SNB focuses its efforts on determining the impact of climate risks on the stability of the Swiss banking system. | We strongly support the endeavors of the experts and leaders of this institution to improve their work and we join the requests of the State Statistical Office to the competent state institutions to make efforts to provide better and more stimulating work conditions of this institution that is vitally important for the country. Improvement of the statistics Ladies and gentlemen, Econometric modeling and econometric analyses are worldwide developed practices, in which the National Bank and our country, in general, are still taking the first steps. Given the fact that econometrics is based on statistics, having adequate and consistent statistical data at disposal is of key importance for the development of this type of contemporary analyses. Therefore, again we call for making greater efforts in the area of statistics and for increased awareness of all competent institutions in the country about its vital importance for the national economy. The employees of the State Statistical Office are best aware of how important it is to have detailed statistical databases which are public and easily accessible for the users. They know how important it is to improve the statistics in the area of gross domestic product on a quarterly basis, which is very important for regular and updated monitoring of the economic activity. They have our full support and cooperation for the purpose of providing that statistics, too. | 0 |
(1) Latin America: Brazil, Mexico, Chile, Colombia y Peru. (2) Asia EM: China, India, Indonesia, South Korea, Malaysia, Singapore, Taiwan and Thailand. (3) Europe EM: Czech Republic, Hungary, Poland, Russia andTurkey. (4) G3: US, Euro area and Japan. Source: CEIC Data. BIS Review 124/2008 13 Figure 11 Inflation forecast for 2008 (*) (percentage) 9 8 7 6 5 4 3 2 1 0 G3 Latin America Emerging Asia Emerging Europe (*) Geometric average of inflation forecast. For Latin America and Russia, end of the year inflation data. Source: Consensus Forecasts. Figure 12 Inflation forecast for 2009 (*) (percentage) 7 6 5 4 3 2 1 0 G3 Latin America Emerging Asia Emerging Europe (*) Geometric average of inflation forecast. For Latin America and Russia, end of the year inflation data. Source: Consensus Forecasts. 14 BIS Review 124/2008 Figure 13 Monetary policy rates in the world (percentage) 8,75 4,50 8,50 4,25 8,25 4,00 8,00 3,75 7,75 3,50 7,50 3,25 7,25 Jun.07 Sep.07 Dec.07 Mar.08 3,00 Sep.08 Jun.08 Developing (1) Developed (2) (1) Average of reference rates for: Brazil, Colombia, Korea, Chile, China, Hungary, India, Israel, Mexico, Peru, Poland, Czech Republic, South Africa and Turkey. (2) Average of reference rates for: Canada, US, Japan, Norway, UK, Switzerland, Sweden, Euro area. Source: Central Bank of Chile and Bloomberg. | China is maybe the most emblematic example, but growth has been present in the majority of emerging economies, in particular in Asia and Latin America. One of the reasons why in the ten years before 2006 inflation was low, especially in developed economies, was the supply of goods from emerging markets. 5 Inflation is dependent on the monetary policy decisions and in the extreme, under total inflation control, it could be pegged to the target regardless of the import prices of imports or other factors. However, what globalization permitted was a period of low inflation and high growth (table 1). There was a change in relative prices, with a significant drop in prices of goods from emerging economies going global and, as we see today, with an increase in the relative prices of foodstuff and energy. It can be said, then, that globalization was a productivity shock that allowed for transitory reductions in inflation. However, the phenomenon could not last forever, and is now reversing. The accelerated growth of the past several years finally showed on prices. This can be interpreted as we would analyze inflation in just any country. When potential GDP grows fast, inflation remains constant or may even fall. However, if actual GDP growth runs above its potential or trend, price pressures result. The world economy grew fast, and although China contributed to world potential output growth, inflationary pressures have emerged in those sectors where the demand grew faster than supply, namely oil and foods (figure 9). | 1 |
The CBC is willing to take all the necessary measures to include the CLP into CLS, such as extending the opening hours of its RTGS system. Page 17 of 20 Central Bank of Chile September 2019 Related to Financial Markets Infrastructures, I would like to mention that last June the CBC issued a new regulation framework which will implement the first Trade Repository (TR) of the country. This TR, called Integrated System of Derivatives Information (SIID, in Spanish), will be owned and operated by the central and, after a transition process, will be in full operation by 2021. The SIID will collect, store and disseminate information of OTC derivatives trades, following the Principles for Financial Market Infrastructures (PFMIs) and international standards for reporting. This infrastructure should promote transparency and market conduct, improve decision-making of market participants, and contribute to the supervision processes of the Financial Market Commission. It is important to note that the Minister of Finance has just announced that a bill to regulate Trade Repositories will be sent to Congress. The SIID is perfectly compatible with the existence of private-owned trade repositories. Page 18 of 20 Central Bank of Chile September 2019 According to the latest BIS Triennial Review of foreign exchange and OTC derivatives, the Chilean Peso represents 0.2% of the global FX turnover. We strongly believe that this share should increase in the future. | There are also signs that the strong growth in productivity that has been evident in other countries – for example in the US – is moderating somewhat. And we may see a similar trend in Norway. Second, even without a reversal, profits may fall and unemployment rise. The implications of this will depend on how far businesses, in their search for qualified labour, will go in bidding up wages. It will also depend on how wage-earners react and on their ability to adapt to change. Furthermore, it must be expected that the strong krone will shave profits in some enterprises and industries at the moment, even though many have used currency hedging to safeguard their income. Even though demand for labour is strong, there is a risk that outflows from the labour market to various social security schemes will remain high. Sickness absence is high, and the share of the working-age population on rehabilitation schemes or receiving disability pensions is rising. Many workers choose to take early retirement under the AFP scheme (contractual early retirement) when they reach 62 years of age, and – because this age group is expanding sharply – this number will probably increase in the years ahead. In Norway, close to 600 000 persons of working age receive social security benefits or pensions. This is equivalent to 25 per cent of the labour force. This is the Norwegian economy’s Achilles’ heel. A particularly disturbing aspect is that disability is increasing among young people. | 0 |
On the other, in a climate of buoyant sales, the widening of business margins continued, albeit at a lesser rate than in previous years. All these factors, combined with the rise in oil prices in the first half of the year, meant that inflation rose in 2006 and that the inflation differential with the euro area stood at 1.4 pp. Inflation began to perform more favourably in the closing months of 2006, a trend that has run into 2007, with the related differential being cut to 0.5 pp. Foreseeably, these inflation dynamics will remain in place for several months. But it should not be forgotten that the improvement has a temporary component, linked to the path of oil prices, and that core inflation remains at 2.5%, despite the continuing restraint of import prices. Price and cost increases in 2006 once again outpaced those of our competitors, prolonging the deteriorating trend of the indices that measure relative prices and costs. Insofar as this difference is not warranted by quality improvements, the trend of these indices reflects a loss in competitiveness, whose adverse consequences for growth will become patent once domestic demand moves back onto a normal footing. The outlook for the Spanish economy points to the continuation of the main features recently observed, namely: the restructuring of spending, thanks to a gradual easing in domestic demand, particularly in consumption and residential investment, and an improvement in the contribution of net external demand. | I would not wish to conclude these considerations on the growing importance of the European component of our financial system without referring in particular to the euro area financial market. Indeed, financial integration is even greater for the European countries making up the euro area: their banking systems draw on a common pool for their funds, through bank loans, medium-term financing BIS Review 67/2007 7 (whether subordinated or not), securitisations and mortgage covered bonds. The existence of this integrated market for the euro area has allowed certain financial systems in the area to finance their economy’s upturn with the funds from other financial systems operating with less pronounced cycles. This is a most favourable development as it allows financial institutions with surplus funds to earn more efficient and higher returns, thereby sustaining the profitability of their business, while providing demanders of funds with more stable financing for their most profitable lending business. Evidently, the outcome for the euro area economies is a more efficient use of financial resources, which are routed towards the most productive activities. Let me now analyse in greater detail the situation of Spanish deposit institutions. As earlier stated, their banking activity grew notably in 2006 both as regards lending to corporations and to households. This sizeable increase in activity is one of the reasons behind the highly favourable earnings performance of Spanish institutions. However, if activity were to slow in the future, income statement margins might suffer. | 1 |
In other words, depositors believe that they need very high nominal interest rates in Denars, in order to have a real return on savings, which leads to high interest rates on loans. This phenomenon was not and is not a result of the mistrust in the banking system. Mistrust of depositors comes from the fear that due to possible devaluation followed by inflationary transmission effects, saving in Denars would be insufficiently compensated if interest rates on savings deposits in Denars come too close to the interest rates on deposits in Euros. The stability of the exchange rate which established the idea that price stability is a public good one cannot live without, is the reason why depositors are no longer so much under the 2 BIS central bankers’ speeches influence of this phenomenon. The latest data on the increased saving in Denars, compared to saving in Euros, point to this conclusion. The expectation that the stable exchange rate level will be maintained simultaneously indicates that the difference between real interest rates in Denars and real interest rates in Euros continues to decrease gradually, certainly without any of them remaining on negative territory for a longer time. The National Bank will continue not to hesitate to intervene in the foreign exchange market and increase the interest rate on the main instrument which represents an operational signal. Through these policies the National Bank confirms its capacity and institutional determination. | Finally, I would add that we, at the National Bank, have learned a lot from the mistakes that economic policy-makers have done in the past. But, as confirmed by the history of our institution, monetary independence is perhaps the decision that best helped us to contribute to the improvement of the efficiency of the economic policies, and thus improve the living standard generally, in a state-making, institutional, economic and practical way. Long live this great anniversary! BIS central bankers’ speeches 3 | 1 |
Why diverse markets need diverse talent Opening remarks given by Andrew Hauser, Executive Director, Markets At Next Step FX: Promoting Career Opportunities for Women in FX, London 27 June 2019 I am very grateful to Michelle Kearns for helping prepare these remarks, and to Grigoria Christodoulou, Rohan Churm, Amber Evans, Sumita Ghosh, Amy Lee and Ben Martin for their advice and comments. 1 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx Introduction Thank you very much for the invitation to open this event today. Promoting greater diversity in capital markets is a subject of great importance to me, to the Bank of England, and – I believe – to the continued prosperity of the financial markets and economy as a whole. Let me say why. The foreign exchange market is the nerve centre of the global financial system – settling some $ trillion of transactions every day, supporting trade, travel and investment. And its heart is here in London, which has nearly 40% of the global market. That’s a big responsibility, and one we at the Bank of England take very seriously. We are active ourselves in the market every day, buying and selling currencies on behalf of the UK Government and other central banks, and managing the UK’s foreign exchange reserves. I and my staff speak regularly to a wide range of market participants to gather insights on developments for the Bank’s monetary and financial policy committees. I chair the London Foreign Exchange Joint Standing Committee. | Lucy Kellaway, writing in the FT, described the toxic male environment she experienced on an FX trading floor early in her career. 4 Though many men were (and are) equally 1 https://www.globalfxc.org/membership.htm https://www.globalfxc.org/global_index.htm https://www.ft.com/content/62001b10-90de-11e8-9609-3d3b945e78cf 4 https://www.ft.com/content/511ad09e-6be2-11e4-b939-00144feabdc0 2 3 2 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 2 disgusted by such behaviour, it is unlikely to have been helped by the gender balance in the market. The 2016 Gadhia review5 showed that, whilst women actually outnumbered men 60/40 in financial services as a whole, they were much less likely to be the managers or leaders who shaped the culture (Figure 1). And even when they were leaders, they were three times more likely to be running HR, communications or other support functions than serving in C-suite positions (Figure 2). Figure 1: Average representation of women in Financial Services in 20 global markets Figure 2: Proportion of Executive Committee functions held by women 5 https://uk.virginmoney.com/virgin/assets/pdf/Virgin-Money-Empowering-Productivity-Report.pdf 3 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 3 Diversity is good for the bottom line Disparities of this kind are unfair. They also make terrible business sense. Diversity improves financial performance: across the economy as a whole, firms with top-quartile executive-level diversity are 20-30% more likely to outperform their peers (Figure 3). And diversity reduces risk. | 1 |
It’s important that this monitor be insulated from the direct influence of politics, giving it freedom to deliver objective analysis that may at times be very unpopular. In Washington, D.C., this took the form of the Office of the Chief Financial Officer; in New York City it is the Independent Budget Office, which is modeled after the Congressional Budget Office. These monitors have proven invaluable in keeping policymakers and the public informed on budgetary matters, and in providing apolitical expertise to assist in keeping budgets on a sustainable course. The second major component is a successful completion of the economic transformation, which is a critical factor for reversing―rather than simply halting―a city’s decline, establishing a virtuous cycle of rising growth and strengthening fiscal outcomes. New York City had the huge benefit of its comparative advantage in finance—an industry that was poised for sustained growth in the post-fiscal-crisis period of the 1980s through the 2000s. Still, the city weathered a lot of shocks during that period, including the 9/11 terrorist attacks, the financial crisis and Hurricane Sandy. It’s also worth pointing out that New York City is still prospering, even though employment in its finance sector has stagnated. This illustrates the need for cities to continually look for new areas of growth, such as health care, technology, and leisure and hospitality services. This is why PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act) emphasizes long-term growth, and why the New York Fed has been focused on identifying impediments to the Commonwealth’s growth. | So gilt price movements necessarily all wash out once the public accounts are compiled on a consistent basis, at least so long as the assets are retained within the public sector 3 . We do not, however, expect to retain all the purchased assets in the Asset Purchase Facility to maturity. At some stage, as the recovery proceeds, the Monetary Policy Committee will need gradually to remove the large monetary stimulus that we have imparted to the economy, otherwise we will be in danger of overshooting our 2% inflation target. That monetary tightening will take the form of some combination of a higher level of Bank Rate and asset sales from the Asset Purchase Facility to the private sector. The process of selling off the gilts can then be expected to push gilt yields back up towards where they would have been in the absence of the Quantitative Easing programme. When the Asset Purchase Facility is finally run down, won’t the closing accounts tell us about the benefits or costs of the programme? The answer to this is: No. The first point to make is that the aim of Quantitative Easing and the Asset Purchase Facility is to help the Monetary Policy Committee achieve its macroeconomic objective, namely hitting the Government’s inflation target without generating undue volatility in output. The accounts of the Asset Purchase Facility are not designed to address these overall macroeconomic costs or benefits, which instead requires an assessment of the impact of Quantitative Easing on demand and inflation. | 0 |
This risk is tempered in part because the stagnant creation of private salaried jobs and weaker growth in nominal wages continue to be causes for concern. In any case, different surveys show that the companies have improved their prospects for employment and investment in recent months, reflecting their better growth expectations (figure 10). About inflation, the Board estimates that risks are unbiased. The threats to its convergence to 3% are milder, primarily due to the way the improved economic outlook affects the closure of capacity gaps. However, the evolution of the exchange rate over the coming months will pull inflation down below the December expectations, a situation that the Board will continue to monitor with special care, given that it could have negative implications on the convergence of inflation to the target in the policy horizon. In short, as I noted at the beginning, this Report clearly shows a turning point in the business cycle that translates into an upward revision of the growth projections for 2018, giving way to lower risks for both activity and inflation. Anyway, in the baseline scenario that we have just presented, we consider that the risks for inflation and an economy that has yet to consolidate its greater dynamism make it necessary for the monetary stimulus to persist further. Therefore, we will only begin to raise the MPR when we are certain that the process of inflation converging to 3% is consolidating. | Plus, some short-term elements, for example in January and February the exchange 1 As stated in a box in this Report, from now on, and with the purpose of enhancing the transparency the Board’s vision about the economy and the path of monetary policy, it has been decided to add a third year in the projections published on each opportunity. Thus, starting in March 2018, every Report will include the growth and inflation forecasts for the next three years: the current year and the next two. These forecasts will continue to be reported in two ways; the estimated variable in the baseline scenario. For inflation, it will remain a specific number, while for growth it will be a range, as it is now done for the present year and next. This change adds to those adopted in March 2016, when the Board decided to extend by one year the growth forecast for activity. 2 rate decrease coincided with carry trade operations, foreign flows for company acquisitions, pension fund portfolio adjustments and the entry into the market of the funds from the issuance of public debt. All this has led the peso to appreciate more than other comparable currencies (figure 6). However, some of these factors have a transitory impact, with rapid trend shifts over a few days, making it difficult to establish a clear direction. Therefore, the peso has been very volatile in recent quarters, with peaks of over CLP650 in December and lows of less than CLP590 in February. | 1 |
The only way to restore market confidence and the proper transmission of our monetary policy was a fully credible backstop against disaster scenarios. Our new programme of Outright Monetary Transactions provides this backstop by allowing for unlimited interventions in government bond markets. This commitment has generated a lot of debate. But we have to understand how markets work. Our actions have to send a clear signal to markets that their fears about the euro area are baseless. It is important to stress that “unlimited” does not mean uncontrolled. Most importantly, to qualify for interventions, countries must have agreed a European Stability Mechanism (ESM) programme with strict conditionality and IMF involvement. The ECB will only intervene if the policy conditions under that programme continue to be met. BIS central bankers’ speeches 3 Conditionality is very important. It ensures that countries continue to reform while the ECB is active. It provides a clear basis for us to terminate our operations if the programme is not complied with in full. And it also protects the ECB’s independence, as we will not be forced to substitute for a lack of actions by governments. Consequences of the ECB’s actions So what can citizens expect will be the consequences of the new programme? Let me emphasise three key points. First, our actions will not lead to disguised financing of governments. Interventions will take place solely on the secondary market, where bonds already issued are traded. This is fully consistent with the Treaty’s prohibition on monetary financing. | Financial union is essential in a single currency area where cross-border capital flows can lead to credit booms and other imbalances – and where the negative effects of a bust can spread rapidly to other members. One essential part of financial union is a single banking supervisor. As you know, the European Commission has recently proposed that the new supervisor should be based at the ECB. This is important to ensure consistency across the euro area and to prevent regulatory capture. Day-to-day tasks, however, would remain with national supervisors who have the competence and resources to implement them. But financial union does not have to imply the pooling of deposit guarantee schemes, an issue that I know is of concern in this country. Organising and funding deposit guarantee schemes can remain a national responsibility, with comparable effectiveness. In the longer term, all four pillars are equally important. They are the bedrock for the enormous potential of the single currency for Europe’s citizens. Completing economic and monetary union would give citizens greater security against any future crisis. It would create the foundations for sustainable growth and employment. For all citizens of the euro area, it is therefore essential that Europe’s leaders stay on course. Thank you for your attention. BIS central bankers’ speeches 5 | 1 |
Chart 3: Paths for policy rates implied by forward market interest rates UK EA US Japan Per 3.5 Chart 4: International policy rates over time Higher than 5% Between 1% and 3% Less than zero Between 3% and 5% Between 0% and 1% Proportion of regions 100% 3.0 2.5 80% 2.0 60% 1.5 1.0 40% 0.5 0.0 20% -0.5 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 2000 Sources: Bloomberg and Bank Calculations. Notes: Instantaneous forward rates based on OIS contracts for the UK and euro area and government bonds for the US and Japan. 2005 2010 0% 2015 Sources: Thomson Reuters Datastream, CEIC and Bank calculations. Notes: Included regions are: Australia, Brazil, Canada, China, Euro area, Hong Kong, India, Indonesia, Malaysia, New Zealand, Norway, Philippines, Singapore, South Korea, Sweden, Switzerland, Taiwan, Thailand, UK and US. Together these countries account for approximately 70% of PPP-weighted world GDP. Of course, what goes down can also bounce back up. Recently, there has been some upwards movement in UK and US yield curves. But yields elsewhere, especially in Europe, have continued to fall. And the longer-term trend is clear: a persistent ratcheting-down in interest rates across all maturities and virtually all countries, to reach unprecedentedly low levels. As a recent example of that, Chart 5 plots the UK forward curve at monthly intervals over the past 9 months. | Chart 15: Actual and estimated UK wage growth Actual Estimated Percent change on a year ealier 8 6 4 2 The first is simply that the lags from lower unemployment to wage growth 0 are a little longer than in the past. That might be the case because job-to-job -2 flows in the labour market have been 2004 2006 2008 2010 2012 2014 low by historical standards, only recently picking up towards pre- Sources: ONS and Bank calculations. Notes: Dashed line shows inrecession levels. If so, we might sample fitted values from an estimated wage equation. expect the recent undershoot in wages to course-correct in the period ahead, as labour market activity picks up. In essence, this is the judgement underpinning the MPC’s central view of wages in the February Inflation Report. Wage growth is projected to rise, reaching 3.4% by end-2015. In effect, wages error-correct. There is some tentative evidence of wage growth picking up over the past few months, although yesterday’s wage data were notably weaker. If this pick-up were to continue, the wage puzzle would have been benign. Indeed, with slack eroding, we might then be concerned that wage pressures could overshoot, posing upside risks to the inflation target.7 But there are other explanations of the wage puzzle which pose downside inflation risks. One is that the Phillips curve has become less steep than in the past. This would mean that a fall in unemployment might have a lower impact on wage pressures than in the past. | 1 |
Today, we central bankers are responsible for trust: we “produce” it, and we stand accountable for it. Such a responsibility entails a strong personal component: our behaviour has to be flawless, and driven by real functional requirements and high ethical Page 3 sur 10 standards. But let me today focus on the institutional and collective foundations of trust. II. The golden triangle of trust Trust relies on three key elements, which together form the golden triangle of trust: independence, mandate and accountability of central banks. They cover different notions but they closely intertwine. Some may take them for granted, but they are actually the result of a long historical progress, and each of them is being challenged today. Independence Mandate Accountability 1. The long quest for the independence of the issuer, and its current calling into question As early as in the 4th century B.C., Aristotle famously identified the three functions fulfilled by money: medium of exchange, unit of account, and store of value. He complemented this brilliant theoretical approach with ethical guidelines,i opposing “unnatural” chrematistics – or personal enrichment – and virtuous economics – oikonomia, literally household management, to the benefit of the entire community. Aristotle had a strong influence on the European Middle Ages, but his ethics of currency progressively faded into the background. | The context of the Russian war in Ukraine challenges us to reinvent the dialogue with political authorities, for at least three reasons: because geopolitics are today a major determinant of the economy; because the energy markets, their regulation and pricing are key for inflation; and lastly because fiscal choices regarding subsidies to households or even to firms are far from neutral for monetary authorities. Another challenge, and a much more tough one, is that the populist ideology creates an atmosphere of general mistrust of institutions – and still more of independent ones. In the name of popular sovereignty, we would return to a power of elected sovereign that would be absolute – and not relative anymore. At worst, this would call into question our democracy and its necessary checks and balances. At the very least, it is imperative for us to be efficient in our mandate, and to increase our accountability. 2. Efficiency of our mandate Price stability, which is a prerequisite for long-term growth, is the primary objective of most central banks. Broader mandates nevertheless apply to some, notably the Federal Reserve with its dual objective on employment and inflation. Other central banks have expressed sensitivity to inequalities, or to other issues, and have therefore contemplated a broadening of their mandate. Some observers questioned this alleged “mission creep”, and wondered whether central banks have lost sight of their primary responsibility. | 1 |
Another highly relevant area of statistical work for central bankers concerns statistics and indicators for financial stability analysis. In the aftermath of the Asian crises, which brought to the fore the importance of financial stability analysis, the related conceptual framework was strengthened and progress in understanding the genesis and propagation of financial instability was made. Central banks have an interest in financial stability issues particularly, but not exclusively, because financial stability supports sustainable price stability in the medium and long run. This implies that financial stability indicators - whether in the form of key balance sheet ratios for monetary financial institutions or leverage indices for non-financial corporations - may acquire an important status in the data set on which the central bank bases its assessment of the risks to price stability over extended horizons. The forward-looking nature of the ECB’s monetary policy strategy allows an extension of the policy-relevant horizon sufficiently into the future to factor in the likely effects of financial imbalances that may be forming. At the same time, obtaining a comprehensive and timely statistical view of the financial system helps to identify the sources of such risks. This is the rationale for central banks’ keen interest in financial stability analysis. But financial stability analysis is complex and, hence, information-intensive. Data are needed not only on the financial situation of banks, but also on that of other financial corporations, such as insurance corporations. Moreover, the financial position of non-financial corporations and households has to be carefully assessed. | Elvira Nabiullina: Speech - OPORA RUS Governor SIA session Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at the OPORA RUS Governor SIA session, 3 December 2020. * * * Good afternoon, I am happy to welcome you, whether you are now in the Kaliningrad Region or are video conferencing — this format is becoming quite common now. I hope that this meeting is attended by a large number of participants. Indeed, I was listening very attentively and I think that the approach the Kaliningrad Region is pursuing to develop small and medium-sized businesses is promising and comprehensive. However, we are all very well aware that a lot of projects depend on how accessible funding is — it would be impossible to implement a project when there is no access to funding. Today’s meeting is very important to me: although the Bank of Russia influences the economy through the financial sector, the ultimate goal of our work is to ensure that the financial sector helps the economy and people overcome hardships and develop. Of course, we have always been concerned about the issues related to the financing of small enterprises. We carry out regular meetings with OPORA RUSSIA President Alexander Kalinin several times a year to discuss the most topical problems and advance in both the regulation and other areas associated with the development of multiple projects. | 0 |
Thomas Jordan: Why a strong education system must be an important concern for the Swiss National Bank Summary of a speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the opening ceremony of the Faculty of Economics and Management at the University of Lucerne, Lucerne, 6 September 2016. * * * The complete speech can be found in German on the Swiss National Bank’s website (http://www.snb.ch/). A strong education system is a cornerstone for a country’s prosperity. Switzerland has a federally structured, flexible, high-quality education system. It stands out for its focus on the goal of employability, which is particularly reflected in the dual vocational training system that is closely aligned to the real needs of companies. The education system contributes to an innovative, flexible and robust Swiss economy which – given structural and technological changes – can continue to be successful in future. The labour market would not work nearly as well without solid education, and the culture of stability would be less well-anchored in society. These strengths allow the Swiss National Bank (SNB) to conduct a monetary policy geared toward long-term stability. Attractive universities are an important component of a good education system. The SNB maintains an intensive exchange of information and ideas with academia, with the focus on topics relevant to central bank policy. For it can only fulfil its mandate optimally if the relevant research results flow adequately into the decision-making process. | Importance of industry collaborative efforts Now I will touch on the third and last point. The payments industry in Malaysia has a history of collaboration in industry-wide infrastructure developments. A notable example is the migration from magnetic stripe to chip-based cards. The migration exercise, which was completed in 2005, successfully eradicated cases of counterfeit fraud and contributed to greater confidence in the use of payment cards in Malaysia. As a result, the investment cost of about RM200 million was recovered in just two and a half years, most of it arising from cost savings from fraud avoidance. Tourist spending via credit cards had also doubled from RM4.3 billion in 2006 to RM8.7 billion in 2014, signifying greater confidence and the ease of use of payment cards in Malaysia. This is a very good illustration on how industry collaboration in the area of payment systems has contributed to the country’s economic growth. A successful payment system is often dependent on the network of payment systems reaching an optimum size, thus enabling its participants to build critical mass and achieve economies of scale. However, building a payment system infrastructure and expanding the network can be costly to an individual market player. Hence, the industry should pool its resources to develop and share infrastructure costs. As a principle, basic payment infrastructure should not be used as a competitive tool but rather as a means to reduce cost, promote inter-operability and support an enlarged network. | 0 |
All of these central bank functions are mutually dependent and, together, highlight the fact that the structure and workings of the banking system are integral to a country’s financial stability and economic growth. Clearly, monetary policy cannot succeed in its mission if the underlying financial system is unstable. The importance of an efficient, safe and sound banking and financial system for a country’s long-term economic prospects cannot be overstated. In any market economy, the banking and financial system plays a central role in mobilizing a society’s savings and in channeling these savings into investment and other productive uses. This intermediation process is one of the core determinants of the pace of a country’s economic development. Moreover, the banking and financial system must facilitate transactions in an economy by ensuring that they can be effected safely and swiftly on an ongoing basis. Both buyers and sellers of goods and services must have confidence that instruments used to make payments will be honored and accepted by all parties. These crucial functions of transforming savings into productive uses and making payments are often taken for granted. But, in fact, it can be difficult to ensure that the legal and institutional framework within which these functions are performed is consistent with the often conflicting goals of free choice, economic efficiency, safety and financial market stability. BIS Review 17/1997 -4- Experience has proven that there is no easy way to shape financial institutions in a manner that appropriately balances these goals under changing economic conditions. | Moreover, while there is no long-run trade-off between unemployment, or output, and inflation, both formal evidence and common sense observation on wage and price rigidities attest to the existence of such a trade-off in the short run. In the long run, however, monetary policy’s impact is only on inflation; potential output primarily is determined by advances in technology, growth in human and physical capital and other real resources. Because of the uncertainty about the timing and significance of short-term monetary policy effects on economic activity, as well as all other uncertainties concerning the economy, there are always differences of view about the speed with which policy should be adjusted, and on the balance of risks in dealing with ongoing economic developments. These conflicts become more marked when an economy confronts supply shocks that drive up prices BIS Review 17/1997 -3- sharply and suddenly -- such as the two oil shocks of the 1970s. In those circumstances, from my perspective, the appropriate course, consistent with maintaining longer term price stability, should be to bring inflation down somewhat gradually, as the economy adjusts to the shift in relative prices. As I see it, monetary policy must be formulated cautiously, and cannot ignore business cycle developments. In establishing price stability as the primary goal of monetary policy, therefore, it is best to recognize that monetary policy does affect output in the short run. | 1 |
Ravi Menon: Singapore's financial sector agile and resilient amid Covid-19 Edited transcript of fireside chat by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at ACI Live Aid: Financial Markets Give Back, 29 May 2020. * * * Operational Resilience The financial sector has been quite remarkably resilient in the face of Covid-19. All financial services have remained open, except those involving face-to-face interactions with customers outside of bank branches. During the circuit breaker1 period, 85% of workers in the financial industry have been able to work from home. MAS itself is close to 90% of staff working from home. I am sure there is some degradation of productivity but, by and large, the sector has been able to function. We are grateful for the strong investments that Singapore’s financial sector has made in digital transformation over the last five to six years. This has put the financial industry in a good place during the circuit breaker. If our financial sector had not made these investments - imagine if there was no retail electronic payment system, or if there were no infrastructure for digital banking or selling insurance online or trading from home - we would be in a much worse situation today. A good part of financial sector activities has moved on to virtual platforms. The current situation is of course not without its challenges. Many financial institutions have had to make significant adjustments to the new environment. | • In financial firms, it is important that these policies and practices dispel the perception of good ethics as a constraint on profitability or hurdle to career advancement. We are beginning to see some progress. BIS central bankers’ speeches 5 • Performance appraisals in some banks now take into account how an employee’s conduct is consistent with the banks’ avowed principles and values. • Others have developed balanced scorecards for remuneration that go beyond traditional measures of financial performance to include indicators relating to culture and controls. • Yet others take into account a business unit’s record on compliance, customer experience, internal audit findings and other relevant considerations to underscore the organisation’s behavioural expectations of staff. Conclusion Let me conclude. The global financial industry’s standing with the public is at an inflection point. It could continue a downward spiral of mistrust with yet more egregious misconduct, or it could seize this opportunity to restore high ethical standards. Thankfully, we are in a better place in Singapore. The financial industry here is generally well regarded and trusted. But we have not been immune to some of the egregious practices in global finance, for example, attempts to manipulate financial benchmarks and the mis-selling of financial products. We must be on our guard, and work to further strengthen ethical standards and a culture of trust in the industry. • We must foster a culture in the industry that looks beyond the question “is this legal?” to the larger question “is this right?”. | 0 |
Diana Sorensen’s dictum One of the most intriguing living thinkers, Diana Sorensen, the dean of arts and humanities at Harvard University, defines a knowledgeable graduate taking wing as follows: “He or she is competent in making discerning judgments with tools derived from science, engineering, social science, the arts and humanities. He or she should be a persuasive speaker who can articulate the reasons for his positions; who can write with clarity, elegance and conceptual power; an innovator who will take risks but first makes sure the limb they go out on is a sturdy one; a creative individual who has faced challenges posed by artistic production and experimentation; a global citizen who can speak, read, write in at least a second language; and who will learn what it takes to negotiate different world views emanating from different cultural traditions, a tolerant yet rigorous thinker whose moral compass is guided by ethical reasoning.”3 Class of 2014, I don’t want to put any pressure on you! But that pretty much summarizes the skill set we all hope you have started to acquire at Bryant and will now go on to hone in life. 2 If memory serves from my days at Oxford University, this observation was noted by Graham Chapman, one of the stalwarts of Monty Python’s Flying Circus. 3 Dean Sorensen’s comments are summarized in “Coming Back, Looking Forward”, Harvard Gazette, Sept. 26, 2012. | It is against this background that the measures adopted to soften the economic and social consequences of the war must be assessed. The National Plan to respond to the economic and social fallout of the war in Ukraine, approved by the Spanish Cabinet on 29 March,5 includes measures that will come at a direct cost of € billion in 2022, according to Government estimates.67 One area of fiscal policy where more resolute action would be desirable is the formulation of a credible commitment to budgetary stability over the medium term. This would help limit the risks of financial market tensions that could be fuelled by the current climate of high uncertainty. This commitment should take the form of a gradual fiscal consolidation programme, to be implemented once the recovery takes hold. A gradual adjustment process minimises the possibility of any abrupt changes in the budgetary policy stance that might hamper the recovery under way. Increasing the economy’s potential output would also help reduce the high level of government debt. This would require reforms that address the economy’s structural shortcomings. NGEU funds could also be particularly useful in implementing these reforms and the investments required to support the changes. 5 See Real Decreto-ley 6/2022 (available in Spanish only). 6 In addition to this amount, there is a contingent liability of € billion linked to the new ICO guarantee facility approved as part of the raft of measures to support business liquidity needs stemming from the temporary increase in energy and fuel costs. | 0 |
This is especially the case if the collateral is lower quality and markets are already illiquid. Moreover, if creditors are left with the collateral instead of being repaid, fear of widespread collateral liquidation might further erode collateral values. If investors respond by seeking more collateral to ensure they will be secured – that is, that they will be made whole in a liquidation scenario – the firm may run out of high-quality collateral that the firm can borrow against. This is a significant risk when a financial firm is highly leveraged and equity is only a very small proportion of total assets.5 The risks of liquidity crises are also exacerbated by some structural sources of instability in the financial system. Some of these sources are endemic to the nature of the financial intermediation process and banking. Others are more specific to the idiosyncratic features of our particular system. Both types deserve attention because they tend to amplify the pressures that lead to liquidity runs. Turning first to the more inherent sources of instability, there are at least two that are worthy of mention. The first instability stems from the fact that most financial firms engage in maturity transformation – the maturity of their assets is longer than the maturity of their liabilities. | Ladies and Gentlemen, Let me take a moment to say a few words on Islamic banking. Today, Islamic banking in Malaysia has firmed its position as a viable and vibrant component of the banking system. Bank Negara Malaysia has been in the forefront in providing the necessary and required infrastructure for the sector to grow further. From a market share of virtually nil a decade ago, Islamic banking has captured more than 8% of the assets of the banking system and is poised to reach 20% by 2010. We capitalized on the dual banking system which we believed is the right approach, and we will continue to embark in this direction. There are currently two Islamic banks and 33 conventional banks with Islamic windows offering the full range of Islamic financial services, and the industry has recorded commendable growth at an annual rate of 48% in terms of assets. At the end of March 2002, the assets mobilised by the Islamic banking sector amounted to RM 59 billion. Deposits and financing mobilized during the same period amounted to RM 48 billion and RM 30.1 billion respectively. Islamic banking in Malaysia is now at the threshold of entering its next stage of development, to expand on a global basis, to gain greater acceptance as an effective and efficient means of intermediation and to contribute to the overall wealth creation. | 0 |
• Asian companies are choosing to stay private for longer and becoming more receptive to venture capital (VC) and private equity (PE) financing. • Asia is already a major destination for VC and PE investments. • Last year, VC and PE investments into Asia reached $ billion, accounting for 30% of global investments, surpassing Europe for the first time. • With close to 7,000 start-ups in Southeast Asia alone, there are opportunities abound for private investments in the region. http://www.imas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statem... 21-07-18 Connecting Global Markets Supporting Asias Growth Page 3 of 7 The demand for infrastructure financing in Asia is outpacing countries’ funding capacity. • According to the ADB, Asia will need around $ trillion annually in infrastructure financing between now and 2030 to sustain economic growth. • Currently, more than 90% of infrastructure investment is financed by governments. • This is not sustainable if the demand for infrastructure is to be met. The challenge for governments in Asia is this: to make infrastructure more attractive to private capital. • At their recent meeting in Singapore, ASEAN Finance Ministers agreed to accelerate infrastructure development through mobilising private capital. This means mainstream infrastructure financing as an asset class. • The prospects are good. There is a strong pipeline of projects in the transport and energy sectors, diversified across the ASEAN countries. • We have seen some early success. | 20, 21 But there are also areas where there has been somewhat less progress and more may be needed to mitigate corporate governance frictions. All involve acting on the structure of incentives at source, to generate higher returns for lower risk for businesses, investors and, 20 Admati and Hellwig (2014). 21 There have also been initiatives aimed at increasing levels of accountability amongst senior individuals in financial institutions. One example is the PRA and FCA’s Senior Managers Regime (SMR) which will come into force in March 2016. The SMR intends to create stronger incentives for senior individuals to run institutions prudently and to take greater responsibility for their actions. The PRA has also recently published a consultation on its expectations of the collective responsibilities shared by board members which will complement the SMR. The PRA published its consultation paper “Corporate Governance: Board Responsibilities” in May 2015, available at: http://www.bankofengland.co.uk/pra/Documents/publications/cp/2015/cp1815.pdf. 12 BIS central bankers’ speeches ultimately, wider society, helping central banks meet their objectives. Let me mention three areas in particular: executive remuneration and accountability; control rights; and company law. Executive remuneration and accountability Historically, perhaps the most commonly-pursued approach to tackling corporate finance problems has been to adjust managerial compensation practices – for example, the shift to equity-based compensation practices in the 1980s. This shift worsened incentive problems elsewhere within firms. In response, attention more recently has switched to paying executives in debt, rather than equity. | 0 |
The results from a study of the IMF (REO – Europe, November 2019) on a sample of EA 15+3 and the NMSs reveals “that all these factors suggest that it is unlikely that the recent increase in wage growth will meaningfully spur inflation in the near term”. These findings support the need for monetary policy in many European countries to remain accommodative for a longer period, but at the same time being vigilant as the “prolonged period of accommodative financial conditions may have created an environment conducive to greater risk taking”. Inflation in the region has been above the average compared with the inflation in the euro area, reflecting the convergence process, the greater exposure to shocks in primary commodities prices, and country specific factors. Yet, the overall inflation dynamics mimics the one in the euro area, given the tight trade linkages. The average headline inflation rate in the CESEE region in 2003 – 2012 period averaged around 4%, while the euro area inflation gravitated around 2%. In the last six years, a suppression of inflation rate was visible across the board, and in both regions (CESEE and euro area) it averaged around 1%. Some reversal to 2% is observed in the last two years, but it is debated how sustainable the pickup in prices is. Very similar is the pattern of the core inflation, which started decelerating in 2013, averaging around 1%, with converging dynamics in the CESEE and the euro area. | We have tried to transpose these challenges to the countries in the region, as in some of them economic boundaries for the monetary policy are lesser compared to the ECB, given positive policy rates. Our simple analysis shows that financial vulnerabilities, observed through the leverage of the public and private sector, seem to be contained, despite the loose financial conditions. Sovereign 17 debt has decreased in the last couple of years, indicating that countries use the benign financial conditions for creating more fiscal space. Private leverage is well below some of the accepted benchmarks. Yet in many of the countries, given the low interest rate environment, household credits are on a rising path, and potential risks are addressed through macro-prudential measures. Hence, some vigilance is needed, with respect to build-up of financial vulnerabilities, though they seem to be much lesser in the region compared to the more advanced economies. Inflation dynamics and its drivers seem to resemble those in the euro area, asking for more profound scrutiny of prices, before proceeding with monetary loosening. At the current juncture, it seems that despite the monetary policy space which exists in part of the region, further policy cuts should be carefully calibrated and considered in the context of country specific assessment of future financial and inflation risks. References: 1. Aleksandra Riedi “Household debt in CESEE economies: a joint look at macro- and micro-level data”, Focus on European Economic Integration, 2019, issue Q1/19. 2. Bank of Spain. 2019. | 1 |
This means that movements in the Libor that are not in line with the SNB’s monetary policy objectives have to be countered with a change in repo rates. Thus, over the course of the turbulence, we consistently offset changes in Libor risk premia with changes in the repo rate, as shown in chart 4. For this reason, the Libor remained in the middle of the target band during the whole episode. The Swiss franc Libor was much more stable during the turmoil than the Libor for other currencies. This simply means that we were able to protect the Swiss economy from part of the crisis-induced increase in risk premia. Libor criticised Recently, some market observers have questioned the information value of the Libor. The Libor for all major currencies is fixed daily in London by the British Bankers Association 2 BIS Review 80/2008 (BBA) on the basis of a survey of top-rated international banks. Critics argued that some banks would report unduly low Libor rates, in an effort to talk up their creditworthiness. Others claimed that the rates were too high because the panel of reporting banks was not sufficiently representative. These criticisms almost exclusively concerned the dollar Libor. The BBA has found no evidence of a systematic distortion of the Libor, and has announced that it is leaving the fixing method for the Libor unchanged. However, it will strengthen governance of the Libor fixing process, especially the monitoring of individual banks’ reports. | The job is to promote a financial system that can serve households and businesses not just in the good times, but also in the bad.3 The financial system of 2007 was totally unable to do that. It was too weak. Banks, in particular, had too little of their own capital on the line. As the UK and world economies turned down, major UK banks faced losses of £ But they had only £ of their own money – their shareholder capital – on the line.4 So as losses mounted, banks buckled. Credit was crunched, bringing the economy to its knees. And because there was no way to deal with failing banks without harming their depositors and the economy, the taxpayer was forced to step in with a bailout of more than £ So it’s not surprising that our efforts focussed initially on fixing these fault lines in the system. A resolution regime for dealing with failing banks is in place and banks are much stronger. They now have three times as much of their own capital on the line for the risk they take when they make a loan or a trade. 1 Based on OBR forecasts and ONS data. Financial crises often lead to a long run reduction in GDP, with a persistent decline in output relative to pre-crisis trends. | 0 |
However, price developments are uncertain even six months to a year ahead. There was thus a possibility that inflation could fall even lower than projected, and be more than one percentage point below target. As from May 2003, core inflation (measured by the CPI-ATE) has been more than one percentage point below target. Average core inflation in 2003 is now projected at 1¼ per cent. The difference between the outcome and the projection thus proved nevertheless to be unusually wide, largely reflecting the fact that the economy was exposed to sizeable, unexpected disturbances. Inflation through 2003 has been pushed down in particular by the fall in prices for imported consumer goods. The low rise in imported price inflation is a consequence of the appreciation of the krone throughout 2002 and low inflation abroad. The rise in prices for domestically produced goods and services has also slowed somewhat. This is particularly the case for prices for domestically produced goods influenced by world market prices. Weaker than expected economic developments in 2003 The krone appreciated more in autumn 2002 and at the end of the year than assumed in our projections. This was related to unexpectedly weak developments in the global economy resulting in lower interest rates abroad and a wider interest rate differential between Norway and other countries. 1 A measure of core inflation is the rise in consumer prices adjusted for tax changes and excluding energy products (CPI-ATE). | This is particularly visible in the components that are most sensitive to the cycle and to expectations, such as durable consumption, inventories, and gross fixed capital formation in machinery and equipment. The evolution of indicators of consumers and entrepreneurs’ expectations – IPEC and IMCE – despite a recent small rebound, shows levels below those seen in the few months leading to the crisis (Figure 7). The fall in domestic demand also responds, albeit to a lesser extent, to a cyclical adjustment component. Up to the third quarter of 2008, domestic demand grew at annual rates above 10 BIS Review 65/2009 3 percent during several quarters (Figure 8), driven primarily by investment and durable consumption. Output, meanwhile, was showing clearly lower growth rates, because a significant portion of the demand was deviating to imported goods. The worsening of the financial crisis in the developed markets only sped up and deepened this cyclical adjustment. The drop in domestic demand has been most visible in a fall in imports, limiting the extension of the current account deficit forecast for this year. Accordingly, the impulse of the world economy and the response of domestic demand to the worsened expectations and to the prevailing uncertainty will be negative this year, although partly offset by expansionary monetary and fiscal policies. Because of the connection between our economy’s prospects and the external environment, whatever judgment is made regarding the future pace of global recovery is crucial in the evaluation of our economy and its relevant external environment. | 0 |
Understanding pay gaps Speech given by Andrew G Haldane Chief Economist Bank of England Co-authors: Zahid Amadxarif, Marilena Angeli and Gabija Zemaityte Joint Bank of England, Federal Reserve Bank and European Central Bank conference on Gender and Career Progression Frankfurt 21 October 2019 The views expressed here are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Will Abel, Shiv Chowla, Julia Giese, Brian Hallissey, Sam Juthani, Tomas Key, Clare Macallan, Jen Nemeth, Doug Rendle and Ratidzo Starkey for their comments and contributions. This work contains statistical data from ONS which is Crown Copyright. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. 1 All speeches are available online at www.bankofengland.co.uk/speeches Section 1: Introduction “Pay gaps” measure the difference in pay between people with different demographic characteristics doing identical jobs. They are considered to be a good approximation of inequality in workplace rewards (EHRC (2018)). Under the Equality Act 2010, it is against the law to discriminate on the basis of protected personal characteristics. When it comes to pay, this means people should earn the same wage for the same work, irrespective of their gender, race, religion, disability, or other protected characteristics. In other words, no “pay gap” should exist across any of these characteristics. | The Goldin specification is: (5) ln ∝ Where ∗ ∗ = 1 0 female male We regress the natural log of average gross hourly pay on a binary female coefficient and a set of controls, wider than the ones used in Goldin (2014). The set of controls comprises both individual and job-specific characteristics. It includes: age, female-age group interactions, usual hours worked, public or private sector, full time or part time, contract type, whether born in the UK, has a child under 2, female and child under 2 26 All speeches are available online at www.bankofengland.co.uk/speeches 26 interaction, occupation, female and occupation interaction, educational qualifications, tenure, region of home and sector (Annex Table 1A).11 Once we take account of these factors, Table 2 suggests that there was, on average, a conditional gender pay gap of just under -15% between 1994 and 2019.12 This gender pay gap is highly statistically significant. To understand how it has changed over time, we split the sample into five periods (1994-1998, 1999-2003, 2004-2008, 2009-2013, 2014-2019) and re-estimate (5). As Chart 22 shows, the gender pay gap has fallen over time, though it remains around -10% and is statistically significant by the end. Table 2: Gender pay gap for specification (5) Female Observations Coefficient Pay gap, per cent Number of observations for females -0.159*** -15% 291,859 (-11.17) 537,177 Source: ONS Labour Force Survey and Bank of England calculations. | 1 |
First, it sets out a method for measuring the riskiness of assets. Second, it sets out a definition of capital. And third, it lays down a minimum ratio between capital, the numerator, and risk assets, the denominator, namely that capital should be at least 8% of risk-adjusted assets, with at least 4% of this consisting of Tier 1 capital. What changes will the new Accord make to these elements? BIS Review 70/2000 2 The work has to date been heavily focused on the first element of the framework, the method for measuring risk. There will be substantial changes here, with the aim of introducing more risk sensitivity to the existing crude measures and to widen the coverage of the measures beyond just credit risk and market risk which was addressed in the previous review of the Accord. The direction of the changes was laid out in the Committee’s consultative paper of June last year and I do not intend to go into a description here. On the second aspect, the Committee has stated that “With respect to the definition of regulatory capital, the Committee will maintain at this stage the existing rules set out in the 1988 Accord.” In other words, they will not at this stage be revising their definition of capital. Just to remind you, this definition of capital broadly divided capital into two tiers, of which Tier 1 mainly consists of shareholders equity and reserves and Tier 2 of certain subordinated debt instruments and an element of general provisions. | In order to give appropriate consideration to financial stability aspects, we feel that the SNB should be involved in regulatory procedures at an early stage. In other words, in the conceptual phase. The authorities responsible for issuing financial market regulations should, therefore, be obliged to consult with the SNB early on in the process. Thirdly, the National Bank must have clearly defined decision-making powers with regard to regulations that either bear direct relation to monetary policy or to emergency liquidity assistance. I would like to take two current regulatory proposals to explain more clearly what I mean: the countercyclical capital buffer and the implementation of the TBTF regulations. The countercyclical capital buffer represents a capital requirement that can be adjusted over time. This buffer will be introduced within the framework of Basel III and has the important tasks of protecting the banking sector from the risks posed by excessive lending and of curbing the banking sector’s procyclical behaviour. In the event of excessive growth in lending, the capital requirement can be increased; then when growth in lending is weak, it can be lowered again or even reduced to zero. The countercyclical capital buffer thus has a direct impact on banks’ lending activities and can, as a result, strengthen or weaken the effect of the SNB’s monetary policy significantly. Therefore, whoever determines the level of this buffer also influences the effect of monetary policy. | 0 |
The root causes of job polarization appear to be technology and globalization, which have displaced many jobs, particularly those involving routine tasks. This loss of jobs has been especially pronounced for what we often think of as traditional middle-skilled workers. Its impact is perhaps most evident in the manufacturing sector, where so many jobs have been lost in recent decades. Given the strong history of manufacturing in our region, job polarization has been an important feature in our local economy. No doubt, the widening wage gap and loss of job opportunities for middle-skilled workers has contributed to a rise in economic inequality and created challenges for many workers and their families. More than ever before, jobs are requiring a greater degree of knowledge and skill. In order to adapt to these changes, it is increasingly important for workers to acquire and upgrade their skills, whether through formal education or other forms of training. In addition, it is important for employers to communicate their needs to educational institutions BIS central bankers’ speeches 3 so that they can offer the coursework and programs so that people can develop the right skills to fill the available jobs. For these reasons, we think it is particularly important to highlight these trends in today’s briefing. Conclusion In summary, recent data are consistent with the expectation of moderate growth in 2012 and stronger, but still not robust, growth in 2013. I also expect both headline and core inflation rates should moderate over the next few months. | Taking into account the current stance of monetary policy, I anticipate that inflation will decline to slightly below our 2 percent long-run objective over the next few years. So what does this all imply for monetary policy? I currently anticipate that the Federal Reserve’s federal funds rate target will remain exceptionally low – that is at the current level – at least through late 2014. Given our forecast of stable prices and a still slow path back to full employment, there is an argument for easing further. But, unfortunately, our tools have costs associated with them as well as benefits. Thus, we must weigh these costs against the benefits of further action. As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs. But if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing. Under such circumstances, further balance sheet action might be called for. We could choose between further extension of the duration of the Federal Reserve’s existing Treasury portfolio and another large-scale asset purchase program of Treasuries or agency mortgage-backed securities. | 1 |
Many of you are very knowledgeable about these topics and we hope you will take the opportunity to share your insights on these questions. The GFXC is not only seeking views at the tails, but also those more in the middle of the spectrum as well. Importantly, all perspectives are welcome. Conclusion The request for feedback is an opportunity to engage at an industry level in supporting the resilience of this critical and fundamental market—one that represents far more than the sum of its parts and players. As I said in 2015, 3 “the transactions that take place [in the FX market] are the lifeblood of a global economy that comprises many different national currencies.” At that time, I called upon the industry to take action and I am impressed by what I have seen through the work in developing the Code and in the spirit in which it has been received so far. But that work isn’t over—it never is. Best practices do not work without the ongoing commitment of those in the industry, those making the choices each day. No Code, and in fact no law or regulation, can force all 5/6 BIS central bankers' speeches participants in a market as broad and diverse as FX to maintain a marketplace that values openness, resilience, high ethical standards, and competition. But, that fact is no reason to forego striving for such a marketplace. Developing the Code has been one way of working toward that goal. | The spectrum of buy side institutions active in FX is particularly complex and varied, encompassing hedge funds, high frequency trading firms, asset managers and corporates among others. The size and complexity of their FX market activities and the nature of those activities may differ significantly. Hearing the viewpoints of many different institutions was critical to delivering a relevant Code for this diverse landscape, recognizing that while the Code applies to all, the details of precisely how it applies may differ. I found that the series of frank debates and discussions that we—market participants and central bankers alike—had over the past two years was an important process in itself, and not just a means to an end. The result was multiple drafts of the Code and, ultimately, a product that more clearly articulated principles and defined terminology. The 55 principles within the Global Code focus on promoting transparency, fairness and mitigating risk across six primary areas–Ethics, Governance, Execution, Information Sharing, Risk Management and Compliance, and Confirmation and Settlement. I would like to highlight a few of these principles to provide a sense of the Code’s content, and use these examples to illustrate some of the fundamental building blocks of a fair, transparent, and efficient market. The Code begins with principles on ethics. The very first principle states that Market Participants should strive for the highest ethical standards. While this is a basic concept, the principle is fundamental and underpins each and every principle that follows. | 1 |
This could overcome a central difficulty of “lower for longer” strategies – how to make the commitment to delay lift-off credible given its inherent time inconsistency – by “tying the hands” of the policy committee to prevent it from reneging. One option, involving only a modest change to the current framework, is a “whites of their eyes” strategy, in which policy remains on hold until there is clear evidence that inflation has returned sustainably to target. Such an approach could be accommodated within the flexibility of current inflation targeting frameworks, as it would involve trading off somewhat higher inflation in future with lessening the constraint of the ELB today. There could be benefits to changing the remit to recognise explicitly that this is an acceptable use of flexibility. In this regard, the UK’s monetary framework could be well-suited to this strategy as a temporary approach to addressing constraints at the ELB. In particular, the annual confirmation of the MPC’s remit and use of open letters could promote the accountability of the Committee in pursuing this strategy. This underscores the importance of developing measures of core domestically generated inflation to help gauge when inflation has returned sustainably to target, as headline UK inflation can be pushed far from underlying domestic inflationary pressures due to movements in the exchange rate. A stronger variant would be to change temporarily the inflation target objective to build in a bias to stimulate at the lower bound. | In summary, in my view, all these issues underscore the value of a careful deliberate review of the current monetary framework, and the value of today’s research workshop. Conclusion To conclude, the flexibility in the UK monetary policy framework means that the MPC has been able to support the UK economy through the changing of the seasons. Despite the economy being buffeted by diverse and sizable shocks since the recovery began, inflation has averaged 1.7%; GDP growth has generally been robust, averaging around 2%, and above the subdued rate of potential supply growth. The wide margin of spare capacity present after the crisis was absorbed, unemployment is at multi-decade lows and employment at an all-time high. Real wages have finally returned to relatively strong rates of growth. Inflation expectations have remained anchored to the target, even when CPI inflation has temporarily moved away from it. This performance underscores that the bar for changing the regime is high. But it is nonetheless healthy to review it periodically, and that review is supported by the Bank’s active research agenda. Today’s workshop is organised with that in mind, and we appreciate all your contributions to help focus our research efforts. There is an old saying that there is no such thing as bad weather, just inappropriate clothing. With the economic climate changing, let’s ensure that the Bank remains well suited to deliver its mission to maintain price and financial stability in support of the Good of the people of the United Kingdom. | 1 |
I will then explore some of the regulatory gaps that need to be closed with a view to both strengthening the resilience of the financial sector and mitigating the risk of financial dominance. The expansion of the non-bank sector The financial sector landscape in the euro area has changed significantly over the past decade. Today, non-bank credit accounts for around a third of firms’ total external debt financing, twice the share in 2008 (see left chart slide 2). And the share of marketable debt securities in external financing has also doubled in the euro area since the global financial crisis (see right chart slide 2). These developments are to be welcomed. There are significant advantages of having broad and diversified funding sources. If properly regulated, a diverse financial system has the capacity to distribute risk more efficiently, foster economic resilience and allocate funds more effectively towards their most productive uses. [1] This is why the ECB has repeatedly called upon legislators to accelerate progress towards a true capital markets union in Europe. [2] A more balanced funding mix is also important as a shock absorber, or as “spare tyre” as Alan Greenspan famously put it. [3] When the global financial crisis and the sovereign debt crisis hit the euro area, the disproportionate reliance on the banking sector as a source of external finance threatened to destabilise not only the economy but also cohesion in the single currency area. | [15] To meet redemptions or margin calls, funds sold large amounts of US Treasuries beyond the capacity of dealers to accommodate the demand for liquidity, contributing to the highly unusual decline in Treasury prices in this period of stress. Similar developments may have played a role in euro area sovereign bond markets. The crisis also exposed the strong interconnections between banks and non-banks through direct exposures and overlapping portfolios, and demonstrated how these can increase the risk of contagion. [16] For example, MMFs play a particularly important role in the short-term funding of banks. They hold around 10% of outstanding debt securities issued by euro area banks. During the crisis, many of these funds, in particular low-volatility net asset value (LVNAV) funds, which account for almost half of the euro area MMF sector in terms of total assets, came under severe liquidation pressure as investors redeemed large amounts of shares (see left chart slide 10). [17] Large outflows, in turn, led to a freeze in the demand for commercial paper and a measurable rise in their issuance rate for both banks and non-financial corporates, draining liquidity from the system at a time when it was most needed (see right chart slide 10). [18] While some investment funds and MMFs took exceptional measures to cope with their liquidity stress, these were not sufficient to prevent systemic stress. Some investment funds used quantity-based measures, such as the suspension of redemptions and redemption gates to address liquidity issues. | 1 |
*** Dear representatives of the banking sector, We should not limit ourselves to seeing only the consequences from a natural disaster; we should see an opportunity for recovery and development. The Government has announced the areas designated for reconstruction after the earthquake and in addition to the allocated funds for this purpose funds are expected to be collected from the Conference of Donors. Amid this situation with financing opportunities from the Government, donors, and a high interest from households to invest in re-building their properties and making them safer, banks should be active, to intensify their intermediary role and enhance their lending to another dimension. Let me now address some key issues, which should be addressed attentively to ensure sustainable pillars for banking activity to continue to build on as a whole, particularly with regard to sound and competitive lending, which ensures sustainable income. First, the reduction of the non-performing loans portfolio does not guarantee they do not arise again if we do not look behind and address the problems and errors made when they were originally provided. Addressing them starts with improving governance, building-up and strengthening audit lines, attracting and training sufficient and qualified staff, above all, establishing an effective supervision by senior management bodies to maintain the adequate balance between risk appetite and the objectives of the business. These are only a few of the steps to be implemented in this regard. | For a relatively 2/3 BIS central bankers' speeches small market, such as Albania, it is proved that the costs of non-performing clients are borne by the whole system, and individual strategies have no effective results. To provide an effective restructuring for clients in distress, it is indispensable to have an honest collaboration between banks, which ensures not only a more fair assessment of the client’s repayment capacity, but also optimises the time and cost of assessment for both the bank and the client. The Bank of Albania remains committed in supporting energetically such collaborative projects, by guaranteeing impartiality; meanwhile banks should show a good will in this regard. Last, in these days of daily technology advancement, banking business would not be able to survive without investing in technology, in the right time. All banks are fully aware of this, but the pace of development in each of them has been different. Thanks to the strong relations and exchanges with our European neighbours, and the firm aspiration to be part of the EU, a postponing of the necessary investments in this regard would be at the cost of competitiveness. But, investments in technology only, without the support of internal human resources, may expose banks to high operational risks and irreparable consequences. | 1 |
Combined with low growth abroad and increased trade with low-cost countries such as China, this has led to a fall in import prices. The relatively high price increases of Norwegian products reflect high wage growth and a tight labour market. The krone exchange rate, measured against the trade-weighted index, has appreciated around 13 per cent in the last two years. However, the krone was exceptionally weak in mid-2000. The krone is 4-5 per cent stronger today than in the early 1990s, and about as strong as the previous high in early 1997. Thus, the recent strong showing of the krone is not without precedent. Changes in the oil price have time and again been an important factor behind exchange rate movements. Empirical evidence shows that the exchange rate is affected mainly by large fluctuations in the oil price. The krone tends to depreciate if the oil price is very low, as happened during the Russian crisis in 1998. On the other hand, the krone did not appreciate accordingly when the oil price surged from 1999 onwards. Hence, the relationship between the oil price and the exchange rate has not been evident for the last two years. Since late 2001, however, our currency may have been used as a hedge against the upside risk to the oil price, and this may have contributed to its appreciation. Another factor behind the appreciation of the krone is the current low risk premium in global currency markets (measured by a global risk index, GRI). | State-of-the-art NK-DSGE approaches introduced rigour and strong microeconomic foundations into macroeconomic thinking. They became an important tool for simulating the effects of monetary policy and other macroeconomic shocks. But nothing is for free. The positive features of this framework came at the cost of what is described as a high degree of model stylisation. Put simply, these models, especially at their beginnings, were very narrow in terms of the specification of the economy and its behaviour, and omitted a number of important linkages and processes. Despite much progress in the academic literature over the last 10 years, the variants used by central banks remain suitable mainly for analysing small deviations of macroeconomic variables from their long-term trends. They represent a highly imperfect description of the economy and are not able to cope with shocks or structural changes that deflect it from these trends for lengthy periods. The macroeconomic instability we have seen over the last 20 years is essentially inconceivable in these models. Despite these limitations, NK-DSGE models have for quite some time been strongly dominant in academic macroeconomics and been the main tool used for analysis and forecasting in some central banks. In a scientific discipline in which scholars have always held different views and argued heatedly among themselves, such a situation was by definition strange. It is good that after the GFC, the fundamental debate on different approaches to macroeconomic modelling was revived and the seemingly irreconcilable camps were able to reach some common conclusions. | 0 |
We have the recent case against BNPP for its conduct in evading U.S. sanctions related to Iran, Sudan and Cuba. The case is noteworthy because the disposition involved pleas to Federal and state criminal violations, and a record fine of nearly $ billion. The BNPP case is not the only case against a financial institution for economic sanctions violations. There have been a series of others. Every one of this series of cases concerns a foreign bank. Observers ask, “why are all of these economic sanctions cases against foreign banks?” Before offering my answer, let me start with some “not’s”. In my view, it is not that U.S. financial institutions are so much more compliant than foreign institutions. I will avoid an ugly name-and-shame ritual, where I would identify the U.S. financial institutions that violated U.S. law. It is not that U.S. prosecutors are xenophobic individuals who are bound and determined to target only foreign institutions. I know from personal knowledge that prosecutors have followed the evidence and it has led them to the doors of foreign banks only. What explains this phenomenon? Some foreign institutions, unlike their American counterparts, did not see the values that motivate and support U.S. economic sanctions rules. At most U.S. financial institutions, and I may be myopic in seeing too much nobility in them, there is a widely accepted understanding that our U.S. sanctions are tailored to accomplish a laudable public purpose. The Sudanese sanctions are designed to coerce a regime to cease certain horrific practices, like genocide. | I am of the “old school” – the duties of the management and the board are owed to the company and to the shareholders. I do believe that the best among chief legal officers will see the job as more than just dispensing legal advice, and, as being the “guardian of the corporation’s integrity”. 1 But being the guardian of the corporation’s integrity cannot mean that integrity is defined by the chief legal officer’s personal value system and not the organization’s value system. We are not priests or rabbis. In a world where the consequence of rule breaking can lead to fines in the multiple of billions of dollars, lawyers and compliance officers can accurately claim that, in guarding the corporation’s integrity, they are enhancing shareholder value. When the BNPP case was announced, FBI Director James Comey said: “Until shareholders demand from their boards that those boards choose leaders who understand what it means to create a healthy culture of compliance, the money will keep walking out the door . . . .” 2 My remarks today have focused on the organizational value system as distinct from its rule set. Organizations should adopt and nurture organizational value systems because they are healthy for the company and its shareholders. The personnel in the organization will feel better about the work that they do, and they will do better work and more of it. It is good business to refuse to finance a jurisdiction that is sponsoring genocide. | 1 |
As some banks may be too big to fail, as regulators we should also discuss the possibilities of creating debt instruments which automatically convert to equity when losses mount above certain trigger points. Building trust to enhance cross-border crisis management A financial crisis is costly to resolve. The potential costs are so large that only the nation state, through its power to tax, can shoulder the costs. This makes the state the only ultimate and credible guarantor of financial stability. Today, we have a mismatch between the geographical reach of the only party that can guarantee financial stability – the state – and the international financial system. The logical solutions to this geographical mismatch are either to shrink the financial system back to within national borders or to create an international institution with a right to tax or a system of burden-sharing, so that confidence in an ultimate guarantor can be established on an international level. The first solution would be too costly. Basically, it would imply rolling back decades of globalisation and financial integration. Consider, for example, the costs of dismantling a large cross-border bank. It would also mean a serious blow to the European single market. In a way, I find it puzzling that we are discussing the possibility of a single market for all kinds of goods and services except for the commodity most suited for free trade: money. | A concrete example of the merits of financial integration is how the arrival of foreign banks resulted in a rapid development of the banking systems in the Eastern and Central European countries. The citizens and corporations of these countries benefitted substantially from early access to advanced financial services. The second solution – to create an international institution with taxation rights or a system of ex ante burden sharing – is simply not realistic for the foreseeable future. 4 BIS Review 118/2009 Consequently, we are stuck with the geographical mismatch and, as a consequence, crossborder banks pose a real challenge to crisis management. To accommodate this mismatch, national authorities must cooperate more effectively. This is the only feasible option. In order to achieve efficient cooperation, it is vital to build trust between authorities, which explains my third ingredient. In the EU, we have the home country principle as a fix for the geographical mismatch. We have also signed a European Memorandum of Understanding (MoU) aimed at improving cross-border cooperation. However, the home country principle does not solve the dilemma of international banks and national authorities. Tension arises because the home country is responsible for the supervision of branches but the host country is responsible for the financial stability of the country. This tension also persists if the foreign bank operates through subsidiaries. Many cross-border banks centralise different parts of management. There are good economic reasons for such centralisation. | 1 |
Zeti Akhtar Aziz: The transformation of Labuan as an International Business and Financial Centre Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the launch of Labuan International Business and Financial Centre, Kuala Lumpur, 28 January 2008. * * * Distinguished Guests, Ladies and Gentlemen, It is with great pleasure that I welcome you to the launch of Labuan International Business and Financial Centre. This decade has seen the Labuan Offshore Financial Centre demonstrate its ability to adjust and reinvent itself in a rapidly changing international and regional environment. This decade has also witnessed the robustness and resilience of the Labuan Offshore Financial Centre as evidenced by its ability to continue to expand and mature even during the most challenging of periods. The global and regional market place however, continues to transform, bringing with it new opportunities and challenges. To have the flexibility to benefit from the new opportunities and to have the capacity to rise to the new emerging demands and challenges, continued reassessments need to take place to rediscover new directions, build new strengths, new comparative advantages and to define our new role in this ever changing and more competitive market place. Today we are defining a new beginning for the Labuan Offshore Financial Centre as it positions itself for a much larger role. Your presence here today to share in this auspicious occasion is indeed appreciated. | In this context, the CBRT will continue to monitor global economic developments closely and will take the required measures promptly to maintain stability in domestic financial markets. While formulating the monetary policy, we will continue to monitor fiscal policy developments closely as well. In this respect, our forecasts presented in the baseline scenario take the Medium Term Program as given and thus assume that fiscal discipline will be maintained. A revision in the monetary policy stance may be considered, should the fiscal stance deviate significantly from this framework and consequently have an adverse effect on the mediumterm inflation outlook. In the period ahead, monetary policy will continue to focus on price stability while preserving financial stability as a supporting objective. To this end, the impact of the macroprudential measures taken by the CBRT and other institutions on the inflation outlook will be carefully assessed. Strengthening the commitment to fiscal discipline and the structural reform agenda in the medium term would support the relative improvement of Turkey’s sovereign risk and thus, facilitate macroeconomic and price stability. Sustaining the fiscal discipline will 10 BIS central bankers’ speeches also provide more flexibility for monetary policy and support social prosperity by keeping long-term interest rates permanently at low levels. In this respect, I would like to conclude my remarks by underlining that timely implementation of the structural reforms envisaged by the new Medium Term Program remains to be of the utmost importance. Thank you for your participation. BIS central bankers’ speeches 11 | 0 |
Ong Chong Tee: Life insurance industry - riding the technology wave Address by Mr Ong Chong Tee, Deputy Managing Director (Financial Supervision) of the Monetary Authority of Singapore, at the LIA Annual Luncheon, Singapore, 7 March 2018. * * * Mr Patrick Teow, President of LIA Singapore Distinguished Guests Ladies and gentlemen Thank you for inviting me to join the 2018 LIA Annual Luncheon. Allow me to first congratulate the new LIA Management Committee. I last spoke at this event in 2015 on a theme of confidence and resilience of the industry. Last year, my Assistant Managing Director Lee Boon Ngiap spoke on the importance of strong culture and ethics as key drivers of good conduct. Today, I like to build on these themes with the backdrop of the technological wave sweeping our shores. For those of you who have visited London and taken its underground trains, you will be familiar with the rather famous broadcast in the Tube stations repeatedly telling commuters to “mind the gap”. In an analogous way, as technology innovation and business model disruptions impact various economic areas including the insurance sector, it is worthwhile to remind ourselves to “mind the gap” as we ride the technology wave. Let me elaborate. My remarks will cover three aspects: (a) Bridging the protection gap; (b) Leveraging FinTech (or more specifically, InsurTech); and (c) Doing more to eliminate ‘conduct gaps’. Protection gap Many studies have found sizeable insurance protection gaps across countries. | After client on-boarding, the ongoing contact between the insurer and the insured is limited to premium payment and processing of claims. Many people do not see a need to meet their insurance agents regularly to review their coverage. Some, I am told, even shun calls from their agents. New insurance apps can transform the insurer-policyholder relationship into a broader partnership. The insured person can benefit from various lifestyle information, healthy living tips and other information, emerging trends, advisories on new products and various service options. These can include transactional services such as the option to buy additional insurance based on new needs – all done digitally. Claims can also be an automated self-service process, with expedited settlement based on digital submissions of proofs. The use of Chatbots can also support a customer by providing on-demand standard reports or for other procedural or contract information. I read that in some countries, new InsurTech players now offer universal all-in-one “plug and use” insurance cover. They use AI-enabled insurance platforms that allow a person to key in his details – like his health statistics, occupation, business and personal travels, his car, family, home and home possessions, pets and so on – and get all the insurance that he needs under one policy that can be flexibly adjusted across the difference risk coverage over his life cycle. What this does is to make the customer experience more pleasant and fuss-free. | 1 |
For example, most of the measures taken by the Federal Reserve have aimed to make it easier for households and companies to get access to credit and to reduce risk spreads. The strategy has therefore been called credit easing. The Federal Reserve has thus focused on the asset side and has, for instance, bought different types of domestic, private financial assets. In this context, what happens to the monetary base on the liability side of the balance sheet has not been the central issue, although of course everything that happens on the asset side of a balance sheet is directly reflected on the liability side and vice versa. Technically speaking, the monetary base has increased in Sweden too because the Riksbank has increased its lending to the banks. This has not, however, been the main aim BIS Review 41/2009 11 of the lending and is not something that, in the present circumstances, can be expected to automatically lead to an increase in lending to borrowers outside the banking system. The Riksbank's lending has, on the other hand, eased trading on the interbank market. However, increasing the monetary base may sometimes be a deliberate strategy. In such a case we usually talk about quantitative easing. | 5 See also Siven, C-H. (1998) "Penningteori utan pengar – hundra år med Knut Wicksell", Ekonomisk Debatt 1998, year 26, no. 6. 6 Wicksell, 1898 [1936], p. 189. 7 See also Orphanides, A. (2207), "Taylor Rules", Board of Governors of the Federal Reserve System, January 2007. 16 BIS Review 41/2009 lending. In the same way as the policy rate can be expressed as a Taylor rule, it should be possible to express the banks’ capital adequacy requirement as a function of, for instance, the lending gap, or growth in lending in the economy and the output gap. Image 10: A ”Taylor rule” for capital adequacy ( ) ( c t = c + α L Lt − L* + α Y Yt − Y ) Here the capital adequacy requirement the banks are subject to depends on the development of total lending in relation to a long-term trend and economic activity. The idea is that the capital adequacy requirement will increase when lending increases too substantially, and will decrease when lending declines. In this way the banking system will be forced to build up capital reserves in good time, which can in turn be used to cover losses when times are hard. One creates a model that evens out cycles rather than reinforcing them. The current capital adequacy rules are sometimes accused of being procyclical. | 1 |
Miguel Fernández Ordóñez: The state of Spain’s economy Testimony by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, before the Parliamentary Budget Committee in relation to the draft State Budget for 2011, Madrid, 5 October 2010. * * * Ladies and gentlemen, I appear before this Committee in connection with Parliament’s discussion of the State Budget for 2011. In my view, this Budget will be crucial for Spain’s economic future and it will be subject, more than on any other occasion, to in-depth analysis and close scrutiny not only by Spanish society as a whole but also by the main supranational agencies, by our European partners and by the international financial markets on which Spanish households, firms and governments obtain the funds they need to finance much of their activity. As is known, Spanish budgetary policy responded most forcefully to the global economic and financial crisis, in step with the support programmes for the financial sector, coordinated at European level, and with the firm, resolute action by the European Central Bank, which drastically cut its interest rates and implemented a wide range of conventional and non-conventional measures to prevent liquidity tensions from ultimately shutting down the European financial system. The fiscal policy response undoubtedly contributed to softening the adverse effects of the crisis on the Spanish economy. | Looking beyond short‐term volatility, the real question is whether this architecture will be conducive to the efficient and stable allocation of capital over the long run; or whether, on the contrary, it will lead to an accumulation of imbalances and recurrent bouts of instability. An optimistic view can be found in the “Bretton Woods II” theory, which posits that the pattern of international capital flows results from a mutually beneficial equilibrium between two groups of countries. On the one hand, emerging economies follow an export‐led BIS Review 127/2010 1 development strategy and seek to prevent appreciation of their real exchange rates by constant foreign exchange intervention (together with capital controls). As a consequence, they accept to accumulate increasing stocks of liquid assets denominated in dollars. On the other hand, the United States is happy to receive both reserve inflows to finance its deficits and cheap imports to fuel their demand for consumption goods. Such equilibrium is stable by virtue of the mutual benefits it brings to both groups. Moreover, the longer it lasts, the more impossible it is to change since both groups become mutually dependant through the stock of claims and debts they have reciprocally accumulated. This “financial balance of terror” is supposed to keep the system in place for a long period of time. A more recent, and pessimistic, explanation is provided by the “asset shortage” theory according to which the world has a shortage of liquid and riskless assets. | 0 |
During decades of spectacular growth, total factor productivity or TFP rose only modestly. Overtime, Thailand’s inability to further move up the quality ladder, after it graduated from a low-labor-cost production- base status, gradually led to the erosion of our export competitiveness. In relation to the attitude towards risk, Thailand’s use of leverage, being among the highest in Asia, put the country in a vulnerable position to potential adverse shocks. When the crisis hit in 1997, many companies thus found themselves in desperate straits to service their debt, eventually leading up to a major collapse of the real economy. While these weaknesses have been and are being addressed since the crisis, these measures take time to become fully effective. In the meantime, these shortcomings have been accentuated by the recent change in global competitive landscape brought about by China’s WTO accession. Thailand, like many other countries, will need to reposition itself quickly to meet this new global challenge. Stepping beyond the realm of the real sector, another expensive lesson learnt during the crisis is that the world financial markets have become extremely slippery. As today’s financial world becomes increasingly interconnected, disturbances in one market can quickly spread to others with devastating results. These merciless and indiscriminating financial storms therefore need to be guarded against around the clock, with an early warning system developed to help protect all those involved. Looking back over the past ten years, the Thai financial sector has changed considerably. | Thailand’s better performance this year, notwithstanding a lackluster global economy, has been supported by the strong momentum in both domestic demand and exports. Front-loaded fiscal measure sparked up the initial momentum in domestic demand, while private consumption and investment are now adding firmly to the growth process. As the regional economies began to recover in the last five months, export growth has also provided an additional impetus to the recovery. Along with this recovery, inflation remains subdued, credit growth has turned positive, and business profits are improving, encouraging firms to expand their capacities through new investment. These broad movements are indicative of a positive dynamic linked to the current recovery. The most significant improvement since the crisis, however, has been the strengthening of external stability. Continued current account surpluses have allowed external debt to run down in concomitant with a build-up of international reserves. The coverage ratio of reserve to short-term debt has risen to 290% in July 2002, four times the ratio at the end of 1997. Ladies and Gentlemen, Although I share the view that the worst may now be behind us, I believe Thailand still has some way to go. The key question is how can we make it last, especially now that the global economic recovery BIS Review 62/2002 1 may be somewhat slower than earlier anticipated? The answer to this question probably lies in the answers to yet another important question: what have we learnt from the recent crisis? | 1 |
This would be above the range which the SNB equates with price stability. The forecast shows that the current level of interest rates cannot be maintained once the economic situation normalises. Since monetary policy has been expansionary for a long time now, there is a greater threat of inflation in the future. If the economic outlook continues to improve, it will be necessary to make adjustments to monetary policy. With our decision to leave the three-month Libor unchanged, we are adhering to our previous monetary policy course for the time being. We continue to support the economy, using the leeway available to us. This policy should guarantee longer-term price stability. As mentioned before, the SNB will respond appropriately if the Swiss franc appreciates rapidly, and is keeping all its options open for this eventuality, as it has done in the past. Observed inflation June 2005 Inflation forecast on March 2005 with Libor at 0.75% and of June 2005 with Libor at 0.75% Inflation forecast of June 2005 (53 kb) | 6 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 6 Chart 2: ECB forward guidance has helped to anchor forward interest rates through the euro area recovery Introduced rates guidance Linked forward guidance to APP Euro Fwd 1y rate Euro Deposit Facility Rate Per cent Extended by 6 months to end 2019 Date based guidance to summer 2019 0.6 Extended by 6 months to first half of 2020 0.4 0.2 0.0 -0.2 -0.4 -0.6 2013 2014 2015 2016 2017 2018 2019 2020 The ECB has also innovated with guidance on its asset purchase programme. In the September 2014 press conference the President said that the aim of policy was to steer the balance sheet towards its size at the beginning of 2012. This guidance was important to dispel any doubts about the ECB’s ability to deliver. The Bank of England introduced guidance in 2013 in order to secure the nascent recovery while granting the MPC the flexibility to learn more about the rapidly changing supply capacity of the economy. When the longawaited UK recovery began to take hold, even though inflation had been persistently above target, there remained a significant but highly uncertain margin of spare capacity in the economy and it was unclear whether productivity growth would pick up. We felt that guidance was essential to help clarify our reaction function so that stakeholders could learn alongside the MPC. | 0 |
The system switches to a low-liquidity equilibrium. These liquidity droughts were perhaps the defining feature of the financial crisis during 2007 and 2008. In the model, the likelihood of such systemic liquidity crises depends critically on two key structural characteristics of the financial system – the two c’s: concentration and complexity. The greater the concentration within the financial system, the greater the potential for systemic collapse as larger banks spread a disproportionate amount of financial pain around a densely networked financial system. A greater degree of system complexity has a similar effect, creating more channels for contagion and heightening banks’ incentives to hoard liquidity when the weather worsens. The two c’s are very much features of today’s financial system. On the face of it, that bodes ill for future systemic crises. So what role might policy play in avoiding those crises? The model provides a test-bed to consider a range of policy options, including for haircuts policy. An illustrative policy experiment, based on a simulation of the model in which haircuts spike sharply, is shown in Chart 1. Up the vertical axis is a measure of the probability of a systemic liquidity crisis. Along the horizontal axis is the initial size of the haircut on secured financing transactions. The three lines trace three policy options. Consider first the “baseline” path without policy intervention. Provided haircuts remain high come rain or shine – in the example, above around 20% – the probability of a liquidity crisis remains very low. | A recent paper, co-authored with Prasanna Gai and Sujit Kapadia, attempts to fill that gap.4 We 1 For example, Committee on the Global Financial System (2010), “The role of margin requirements and haircuts in procyclicality”, CGFS Publications No. 36, Geanakoplos, J (2010), “Solving the present crisis and managing the leverage cycle”, Federal Reserve Bank of New York Economic Policy Review, August, 16 (1) and Kashyap, A K, Berner, R and Goodhart, C, “The Macroprudential Toolkit”, forthcoming in the IMF Economic Review. 2 http://www.hm-treasury.gov.uk/d/consult_newfinancial_regulation170211.pdf. 3 http://www.treasury.gov/press-center/press-releases/Pages/tg1202.aspx. 4 “Complexity, Concentration and Contagion”, which is forthcoming in the Journal of Monetary Economics, Vol 58 (5). 2 BIS central bankers’ speeches develop a model of a banking network, inter-connected through unsecured interbank lending and secured funding markets. This financial web exhibits classical tipping point properties. It is even-tempered most of the time. Indeed, having a tight-knit circle of financial friends helps keep the financial system strong and stable. Risks are diffused across the system. A problem shared is a problem halved. The system is in a high-liquidity equilibrium. But, on occasion, the system can be pushed beyond its tipping point. Connectivity then generates contagion. A problem shared is a problem multiplied. The best of financial friends become the worst of enemies. In the model, one of the key channels for contagion is the secured financing market as banks hoard rather than lend liquidity when haircuts rise. The liquidity feast then turns to famine as secured and unsecured financing markets dry up. | 1 |
Collateral should be required, but good collateral can never outweigh a borrower with a poor credit rating or an uncertain project. The bank must also make a realistic assessment of the value of collateral. For example, it is common to provide the borrower’s own premises as collateral. However, when a borrower goes bankrupt the value of the premises often declines substantially, as it is difficult and costly to adapt them to another user. The banks accepted high concentrations, not merely in lending to individual borrowers, but also credit granting to individual sectors and geographical areas. For example, the banks’ loans to the property sector, or with property as collateral, accounted for more than 60 per cent of all loan losses. This is a concentration risk that contravenes all sound risk management and is currently prohibited. However, it is easy to say all this with the benefit of hindsight. At the end of the 1980s, the banks had substantial profitability and low loan losses. Economic activity was strong. I believe that all of us active in the financial system then would have found it hard to believe that a crisis was impending. Nevertheless, the Swedish banks had one important piece of the puzzle already in place prior to the crisis. They were well capitalised and had built up capital reserves that corresponded to, or exceeded, the statutory level of 8 per cent. This created some resilience and to a great extent reduced society’s direct costs when the crisis occurred, as the bank owners’ money was lost first. | I intend today to describe in broad terms the design of, the background to and the effects of the Swedish regulations and then go on to discuss the deregulation process. After this I shall point out which factors led to the crisis and what it entailed for Sweden. This is because I believe that our experiences in Sweden are in many respects relevant to other countries. Although conditions tend to differ somewhat between countries, financial crises usually have similar causes and similar results. For example, comparisons have been made between the crises in South East Asia at the end of the 1990s and the crisis in Sweden. It appears that at least three quarters of the crisis causes were the same, including the excessively rapid credit boom, insufficient credit assessment and overheating in the economy. The sequence of events for the actual crisis was also similar; with large currency outflows, rapidly increasing loan losses and insolvent banks. I therefore hope you will have the patience to listen to my account of the Swedish experiences. I believe you will be surprised at how many similarities there are! The Swedish regulations During the period between the Second World War and up to the 1980s, the Swedish financial system was subject to a number of regulations. I shall mention some of the most important ones. Credit regulation was one of these. Around half of the Swedish banks' lending must be directed to the Government and provided at a low interest rate and with a long duration. | 1 |
As a result, very few prices are denominated in cryptoassets and not many large brick-and-mortar or online retailers accept bitcoin for example, although there are some exceptions [i.e. showroomprivé.com, France’s second largest flash sale web retailer, which has accepted bitcoins since 2014]. Second, as intermediaries in exchanges, crypto-assets are far less effective than a settlement asset with legal tender status, insofar as (i) their price volatility makes it hard to use them as a means of payment, (ii) they generate transaction fees that are far too high for simple retail transactions (for instance, the redemption fee on Tether is 3%), and (iii) they offer no guarantee of a refund in the event of fraud. 3/6 BIS central bankers' speeches Third, the fact that they have no intrinsic value and that they offer no guarantee that they can be converted at par upon demand with commercial bank money or central bank money means that they cannot be used to create trustworthy stores of value. In addition, crypto-assets « front end » and « back-end » payment arrangements are significantly exposed to risks of various nature, including legal, financial, operational and compliance risk with money laundering and terrorist financing, consumer and investor protection, which need to be seriously addressed if they are not to become the « weak links » in our payment systems, with the risk that they undermine the safety of the whole payment chain. | 3- Indeed, it is quite clear that crypto-assets undergoing technical and economic trials bring about not only opportunities to improve our payment systems but also material risks which on the contrary might weaken them if unaddressed, both from an efficiency perspective and a safety perspective through the introduction of new sources of fragmentation, instability and fraud. As many central bankers have pointed out, today’s crypto-assets do not satisfactorily offer the qualities expected from a settlement asset to be used interchangeably with commercial bank money and central bank money, let alone to displace central bank money as the central reference of value, as the privileged settlement asset for wholesale transactions and as the last recourse settlement asset given its legal tender status. The reasons for this assessment are well known and documented and boil down to stressing that there are misnamed as « currencies » for three reasons: First, their value fluctuates enormously, preventing them from being used as units of account. For instance, the value of Bitcoin (not however representative of all crypto-assets) went up to more than 19 300 euros in December 2017 and has since fallen down to 7400 euros in September this year. And stablecoins represent an imperfect improvement in this field: their value aims to be relatively stable based on backed assets, but in fact fluctuates, in particular if they are not backed on safe assets. | 1 |
What impacts of cyber-criminality on financial stability? There is one question we must pay particular attention to: the virtual currencies. Recent operations against financial criminality have evidenced that new payment methods using the internet, and linking the virtual sphere with the real sphere, are a privileged way for cyber criminals to launder money. Virtual currencies have indeed recently drawn attention from authorities and from central banks in particular. Designed as alternatives to official currencies but with no guarantee of reimbursement, they cannot be classified as currencies because they lack legal tender and therefore do not infringe the central banks’ monopoly in the issuance of money. However, although they currently do not pose a significant threat to financial stability, they do pose serious questions in terms of money laundering and can be perceived as vehicles for speculative investments. Virtual currencies therefore bring challenges to authorities when it comes to regulating them. Our speakers on the virtual currencies topic could address such questions as: should the use of virtual currencies be prohibited to protect us from cybercrime and the expansion of money laundering or 2 BIS central bankers’ speeches terrorism? Or is it better to set out the legal, regulatory and ethical issues of the virtual currencies? A round table dealing with financial sector solutions to curb new cybercriminals’ strategies will follow. To what extent do current guidance and principles deal with the threat of cybercrime? Can cybercrime be effectively deterred or only defended against? | This has unified the basis on which supervision is carried out. The largest and most significant banks are now supervised directly from Frankfurt, in close partnership with the national authorities. The euro area has also set up the Single Resolution Mechanism to ensure the orderly resolution of failing banks, while at the same time reducing the impact on the taxpayer. Conclusion This account of how policymakers and researchers have interacted in the past ten years shows 5/7 BIS central bankers' speeches how indebted the former are to the latter. From my point of view, one can draw five lessons for policymakers. First, sudden shocks often make visible the flaws in our policy frameworks and challenge the explanatory power of existing theories in ways that have been previously overlooked. But analysis conducted by researchers and embraced by policymakers remains essential in designing the policy response. Second, a policy response that has its foundation in rigorous research is less prone to being impaired by political compromise and easier to explain to the general public. Third, Keynes is often quoted as saying, “When the facts change, I change my mind. What do you do, sir?” Well, for policymakers, it is not that simple, and research helps us to decide whether a change in the facts deserves a policy response or, as we say, we should look through it. Fourth, when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. | 0 |
For example, the $ proceeds must be swapped into foreign currency if they are to be used outside Singapore. Our approach was a cautious one, for although we wanted to promote the bond market, we maintained our basic stance of discouraging the internationalisation of $ But we stated that so long as the stability of the exchange rate was not compromised, the actual implementation of the non-internationalisation policy would continue to evolve as we gained experience with the new rules, and as our financial sector and capital markets grew and developed. We also committed to review the restrictions after a year. We have now completed the review. The response to our new policy has been encouraging. Since the new Notice was introduced, there have been 19 $ bond issues by 16 foreign entities, raising a total of almost $ billion. The issuers were a good mix of supranationals, financial institutions and corporates of good credit standing from around the world. The financial institutions have given MAS feedback, proposing changes to the Notice to give the players more flexibility and generate more liquidity and depth in the market. We have adopted many, but not all, of their suggestions. We will liberalise guidelines in four key areas. Repo consultation limit The development of a liquid repo market is critical to the Singapore government securities (SGS) and $ debt market. An active repo market enables investors and primary dealers to finance their bond inventories and hedge their $ debt positions. | Over this period, Malta’s performance has been quite distinct, outperforming the non-stressed countries, while having a declining trend since 2013. This year, at 5.4%, it is the second lowest in the euro area, after Germany. Chart 2: Unemployment rates by groups of countries Chart 3 shows the employment performance. Since 2008 employment in Malta increased by around 18%, compared with a rise of just under 3% in the non-stressed economies and a contraction in employment in the stressed ones. In particular, the private sector employment growth rate averaged above 3% per year over the past three years. 2 BIS central bankers’ speeches Chart 3: Employment growth by groups of countries Of significant importance is the strong potential output growth, which has been supported by the robust dynamics in the Maltese labour market. In its projections, the European Commission had foreseen potential output growth in 2015 in excess of 3.5%, compared with around 1% in the euro area as a whole, as shown in Chart 4. In fact, according to the European Commission, Malta and Germany were the only two Member States in which potential GDP in 2014 had already exceeded its pre-crisis growth rate. Chart 4 – Potential GDP Labour market participation is a critical factor supporting potential output, particularly the steady increase in female participation. This is further reinforced by inward migration, mostly from the European Union. In fact, we estimate that in the period 2010 to 2014, migrant workers contributed to 0.6 percentage point of potential output growth. | 0 |
The interest rate only has a predictable effect on the krone exchange rate when it influences price inflation in the right direction.2 Historically, it has often been the case that the central bank has raised its key rate when confidence in monetary policy has declined, and the currency has been exposed to depreciation pressure. This is probably one of the reasons why it has proved difficult to find empirical support for a direct relationship between the interest rate and the exchange rate. The impact of the interest rate on the krone exchange rate will depend on how uncertain krone positions are perceived to be and the size of the risk premium required for these positions. The Bank’s analyses3 indicate that the krone exchange rate is also affected in the short term by uncertainty in the global economy and international financial unrest. Volatility in international foreign exchange markets may explain short-term fluctuations in the krone exchange rate, particularly since 1997. This may be because international operators are more aware of the Norwegian krone as a speculative object. The direct relationship between the interest rate and the exchange rate is therefore not stable, and the exchange rate level in itself provides limited information for the setting of interest rates. It is essential to take into account that the Norwegian economy is small and very open. Norway’s foreign trade is substantial. All capital controls have been removed. Our financial market is becoming increasingly integrated into the international economy. Significant structural changes took place during the 1990s. | Inflation has fallen to single digit, while the exchange rate has remained relatively stable. In 2011 inflation closed at 7.2% from 7.9% in 2010. In February 2012, inflation was recorded at 6.0%; iii. The financial sector has also recorded tremendous growth since the commencement of liberal economic and financial policies in the early 1990s; and iv. Equally, positive developments have been registered in the payment systems. I must caution though that sustaining macroeconomic stability remains a key challenge in the face of a weak global economic outlook and limited domestic resources. It is important that we all keep an eye on economic developments with a view to striking a balance between wealth redistribution on one hand and sustaining the required investment and economic growth on the other. Ladies and gentlemen, in the recent past, we have witnessed a number of work stoppages as workers press for increased remuneration. In this regard, I wish to urge the Union leadership to be wary of sparking a wage price spiral because this may cause a rise in inflation. As you may be aware, high inflation is detrimental to our economy because of the following reasons: i. Makes Planning difficult for economic agents; BIS central bankers’ speeches 1 ii. Companies and consumers are unable to draw up effective investment and expenditure plans; iii. Government is also unable to make good projections of revenue collections and thus unable to effectively plan its current and capital expenditures; iv. | 0 |
It should be specified in Inflation Reports and in connection with monetary policy decisions that we expect inflation to deviate from target for a longer period than two years, why this is the case and when we expect the target to be attained. Increased clarity on the principles guiding monetary policy These principles as to how monetary policy is formulated are in many ways an accepted reasoning for those who have followed the monetary policy discussion in Sweden and in other countries that apply inflation targeting. However, there have also, as I mentioned earlier, been some changes in recent years that are worth highlighting. As it is a question of a gradual development of our work, the extent of what can be regarded as new elements depends on how far back one looks. A point of comparison that feels natural is the clarification of the Riksbank’s monetary policy strategy published in 1999 2 . The difference between then and now is that the Riksbank can now go a little further with regard to how we communicate the consideration that monetary policy gives to the real economy. I do not consider it particularly strange that there have been changes on this point. The possibility to formulate monetary policy based not only on inflation prospects but also on how production and employment will develop has come about because the inflation target is today firmly anchored in the economy. | The assumption that the repo rate will develop in line with expectations in the financial markets should not be interpreted as a stance with regard to which interest rate path the Riksbank considers to be most desirable, just as the assumption of a constant repo rate was no reflection of this. If the forecasts of inflation two years ahead are on target, it means that the interest rate path expected by the market could be a desirable path for the repo rate. However, we must also evaluate the course for inflation and the real economy that the interest rate path is expected to entail. The monetary policy decisions and how we regard market expectations are based on a total assessment of these courses of events. Personally, I think the time is right to go one step further and publish our own interest rate path. My experiences of increased transparency have been only positive. As we have gone over to the new interest rate assumption, it has been a natural progression to abandon the simple policy rule that was previously used to explain monetary policy and relied on forecasts based on a constant repo rate. One purpose of the rule was that it would be simple to understand. However, it often did not provide a sufficiently good description of the monetary policy considerations. For instance, the policy rule did not give any guidance as to how the Riksbank views future interest rate developments. | 1 |
Thus, if it were to leave its decision until the uncertainty is resolved, and it discovers the outcome of the event, the firm would go ahead with the project only if the news was good. The probabilities of these outcomes, conditional on the event occurring, are 1-λ and λ respectively. As for the event itself, this has a per-period chance q of being realised. This means the expected duration of the uncertainty E[T] is equal to 1/q. If the firm expects to have to wait a long time for things to become clear this equates to a low value of q – there isn’t much of a chance, in any given period, of the uncertainty being resolved. A high value of q corresponds to an expectation that the resolution is imminent. 4 There is a direct parallel between the nature of this extra margin required for real investment decisions and the value of an option in financial markets. A financial “call” option gives its owner the right to buy an underlying security for a pre-set price, known as the “strike”. If the price of the security in the spot market rises above that level the owner can “exercise” the option and buy it for less than it’s now worth. In that sense he or she enjoys the same exposure to good news – to upside moves in the spot price – as the owner of the underlying security itself. The big difference is what happens when there’s bad news (i.e. | Inflation rates have been falling in most countries and they have registered appreciable expansion in economic activities with GDP growth rates averaging at about 5% in 2007. In addition, most countries have become more democratic in political circles, giving more say to the public on the running of governments and their institutions. Distinguished Participants, allow me now to turn to the subject we are gathered here for, that is, “Central Bank Governance”. Good corporate governance is generally acknowledged as BIS Review 26/2008 1 important in economic management. In this regard, Central bank governance is arguably defined by a number of key-concepts or pillars, which together should form the basis of an effective legal framework governing a central bank and on which central bank governance should rest, that is, operational independence, democratic accountability and transparency. Despite its common usage, it is not always very clear what central bank transparency amounts to. Generally, two definitions of transparency can be distinguished in the policyoriented literature. Firstly, central bank transparency is referred to as the activities of the central bank in providing information. Thus, in this case, transparency has been defined as the degree to which information on policy actions is available. However, a somewhat broader approach to transparency includes the public’s understanding of the decisions taken by the monetary authorities and the reasoning behind it. | 0 |
Such instruments might have proven very helpful had they been in place before and during this crisis. Investors would have anticipated that common equity would be replenished automatically if a firm came under stress, and this knowledge might in turn have tempered anxieties about counterparty risk. At a minimum, contingent capital instruments might have enabled common equity buffers at the weaker firms to be replenished earlier and automatically, thereby reducing uncertainty and the risk of failure. There are many details that still need to be worked out to determine the potential for contingent capital instruments to enhance financial stability. For example, what are the circumstances under which conversion is triggered? How much common equity do debt holders receive upon conversion? However, our early work on this issue suggests that contingent capital may be a promising mechanism for injecting common equity into the banking system in times of stress without unduly raising intermediation costs or pushing financial activity out of the banking sector into the unregulated sector. On the liquidity front, there are a host of initiatives underway. For starters, the Federal Reserve is now supervising most of the holding companies of the systemically important financial institutions. That was not true at the start of the crisis. | In the context of actions taken to support the financial system, the Federal Reserve and other government agencies have provided considerable support to banking organizations and other large systemically important financial institutions. The employees and executives of those institutions have benefitted from our intervention. In a perfect world we would be able to prevent those individuals and institutions from benefitting; we would have a better way to penalize those who acted recklessly. But once the crisis was underway, one goal took precedence: keeping the financial system from collapsing in order to protect the nation from an even deeper and more protracted downturn that would have been more damaging to everyone. The Great Depression represents an important example of the consequences of inaction. Recall that during the Great Depression the unemployment rate rose to 24 percent. It is generally accepted that the authorities at that time, by not responding sooner and more forcefully, contributed greatly to the severity and duration of the Great Depression. In contrast, during this crisis, the Fed and other agencies acted much more aggressively to ward off a total collapse of our financial system – liquidity was restored to markets and the banking system was recapitalized much more quickly. These aggressive actions helped to prevent the type of deep and protracted crisis that occurred during the 1930s. Going forward, the Federal Reserve and other regulators need to move aggressively to change the system so we don’t ever find ourselves in this position again. | 1 |
There are many sides to this. One has to do with whether monetary policy ought to allow for other matters besides inflation, for instance the real economic situation or the risk of problems that might threaten financial stability. I shall be returning to that shortly. Another is the timing of an interest rate adjustment. It is, of course, primarily the inflation forecast that guides monetary policy. But there may be room at the margin for other aspects. Normally it is a matter of whether a measure can be taken a little sooner or later than otherwise. This may be desirable to ensure that the measure is well received in the financial markets, for example. On other occasions we have prepared the general public for future decisions in order to avoid unnecessary conflicts and discussions in society. When we raised the interest rate in 1997, for instance, the decision was timed with a view to sending a clear message in advance of the wage negotiations at that time. 4. Should we take output and employment into account? Price stability is the Riksbank’s policy objective. The antecedents to the Riksbank Act state that, without prejudicing this objective, the Riksbank should also endeavour to promote other economic policy goals that the Riksdag has established, for example a favourable development of growth and employment. One reason for focussing on low inflation is that most things suggest this is a prerequisite for a favourable long-term development of growth and employment. | This institution could consist of a democratically legitimate euro area “Finance Minister”. It could also – subject to certain conditions – have a European stabilisation budget to enable it to cushion any economic shocks in Member States; one possible solution, which remains to be discussed, could be a shared unemployment insurance scheme, as suggested by Finance Minister Pier Carlo Padoan. * * * Allow me to conclude with the words of Carlo Azeglio Ciampi, that great Tuscan and President of 5/6 BIS central bankers' speeches the Italian Republic, who unfortunately passed away just recently. “What has been achieved [in Europe], in both the economic and political spheres, seems too important each time to be put at risk: it is so important to give governments and citizens the courage to make further steps forwards […]. In this sense, the creation of the euro is not only an end point but also a starting point.” The euro has never been easy but it is not a self-imposed straitjacket – rather it is a political and historical ambition. In these troubled times for Europe, we need both to buttress this vital asset and to build on it for the future. We have to do it for your generation, because you are the hope for Italy and for Europe. But more than that, we need to do it with your generation. Thank you for your attention. 6/6 BIS central bankers' speeches | 0 |
As regards expenditure, 28% of interviewees live in households whose spending has outpaced income over the past 12 months, a percentage that is in line with the average observed in OECD and EU countries. 51% financed this shortfall resorting to savings, and 35% through informal credit (friends, employer, etc.). As in the foregoing cases, differences were observed in terms of educational level and level of income. As both levels increase, the percentage of instances in which spending has exceeded income diminishes and the percentage of cases where greater spending is financed with savings increases. Undoubtedly, financial behaviour does not depend solely on financial literacy, but is also influenced by other circumstances; but, in light of some of the above-mentioned results, I do believe there is clearly room for improvement in the field of financial education in Spain, and that we should continue to strive in this direction. Financial education in a context of technological innovation and developments Giving priority attention to financial education is, moreover, particularly significant in the current context of financial innovation. Technological developments are changing the way in which customers relate to financial institutions and how they take up financial products. And this, though it has attendant advantages, also entails risks. Greater financial culture, greater awareness of the new reality and a greater development of the general public’s digital competences can help mitigate these risks. 5/7 I would like to refer, in particular, to three examples of these risks. | Without losing sight of the interest this seminar has in the challenge the new technologies pose, I would like to focus today on another major challenge that is not exclusive to the banking industry but applicable to everybody: financial education. Allow me first to set out, non-exhaustively, some of the results drawn from the Survey of Financial Competences presented by the Banco de España and the CNMV last month. I shall then refer to how important it is to continue dedicating efforts to financial education, especially in the current context of financial innovation. The Survey of Financial Competences The Survey of Financial Competences, which is included in the National Statistics Plan, adapts for Spain a questionnaire devised by the International Network for Financial Education, coordinated by the OECD. The aim is to measure, in an internationally comparable way, the financial competences of the population aged 18 to 79. The Survey measures these competences from different perspectives, and obtains information on: (i) financial literacy; and (ii) knowledge, holding, acquisition and use of financial products. To measure financial literacy, the Survey poses questions on three basic financial concepts: i) inflation; ii) compound interest rates; and iii) risk diversification. | 1 |
Still, we must be aware that accumulated trust does not suffice; in our present world such trust must be renewed every day, on the basis of the ability to respond to new demands and challenges. I will comment on some of these challenges towards the end of my presentation. On the recent evolution of the economy, the most noticeable event has been the drop in inflation. After several quarters in which the annual CPI variation was above 4%, in recent months it fell sharply to 3%, placing y-o-y CPI inflation at 2.9% in November. We had foreseen inflation declining at a slower pace. In the Monetary Policy Report we presented to the Senate last September, we projected that annual headline inflation would close this year at 3.5%. Today, private expectations—as well as our own—put it a little under 3%. In addition, in the baseline scenario I will be describing in a moment, we assume that this decline will continue, such that during most of 2017 annual CPI inflation will stand in the lower part of the tolerance range, to start converging back to the target by year’s end. Domestic activity has also shown some surprises. It grew in line with forecasts in the third quarter and even somewhat better in sectors not related with natural resources—what we call Other GDP. However, it began the fourth quarter quite poorly. The decline in mining activity weighed significantly, as has been the trend throughout the year, and so did some specific industry lines. | Most recently, after OPEC agreements and announcements by other producers that they would limit production, it is trading around 55 3 / 19 BIS central bankers' speeches dollars per barrel. I now turn to our projections and associated risks. In the baseline scenario of the MP Report I present today, this year’s growth is estimated at 1.5%. As I said, this is the lower bound of the range we estimated in September, considering the slower growth foreseen for the fourth quarter. About 2017, the slower initial pace, in a context of higher risks and still very pessimistic confidence levels, we foresee that activity will take longer to resume near-potential growth. Accordingly, our growth estimate for 2017 has been adjusted to a range between 1.5% and 2.5% (1.75% to 2.75% in September). This higher growth in 2017 compared with 2016 is based on the fact that the economy does not present any imbalances, the mining sector will not to repeat the sharp drops of previous years, and investment will post some increase after three years in a row falling in annual terms. The effects of these changes will be seen more clearly in the second half of the year. All this, in a context where the fiscal consolidation announced by the government continues and monetary conditions remain expansionary. Excluding inventories, domestic demand will grow 2% in 2017. Just as in 2016, we expect private consumption to boost expenditure, considering a further gradual adjustment of the labor market and lower inflation driving real wages. | 1 |
14 But in day-to-day monetary policy communication, these relatively abstract arguments about the benefits of a credible and sufficiently high inflation target have to compete with observations that are significantly more concrete for economic agents: that the policy rate has been negative for rather a long time – in itself an exceptional circumstance historically – in a situation where output and employment have generally developed well, and the expansionary policy has helped lending continue to rise and led to a depreciation of the exchange rate. Regular overviews of the remit important for understanding and legitimacy What lessons can be learnt from this? To begin with, I think that it is quite a useful observation that a central bank with an inflation target may sometimes have to conduct a policy that is so exceptional as to bring the policy’s legitimacy into question, despite the aim of it being to fulfil the remit that the central bank has been instructed to pursue. Bearing in mind the current international economic environment with low real interest rates and powers that are having a restraining effect on inflation, this is something that an increasing number of countries may experience in the period ahead. A lesson to be learnt from this is, in my view, that regular public reviews of the monetary policy remit as such are a good thing, so that it becomes clear what the central bank’s task actually is and that it only does what it is intended to do. | Re-establishing it may require a prolonged and costly process, which should also be taken into account. It is such fears that largely explain the policy conducted by the Riksbank in recent years. Does a policy that “leans against the wind” require there to be confidence in the inflation target? It is probably possible to construct theoretical and quantified examples in which the recession that is prevented or mitigated by “leaning against the wind” is sufficiently long and deep for it to be worth taking the cost of losing, and having to re-establish, confidence in the inflation target. But in practice, it is very difficult to imagine how a central bank, seeing that confidence in the inflation target is being eroded, could stick to a tighter policy and risk inflation expectations staying permanently low in order to perhaps prevent a financial crisis sometime in the future. I am not saying that this is a reason to never conduct a policy that “leans against the wind”. On the contrary, I am personally in favour of the idea as such, and can well imagine formally integrating such a policy into the monetary policy set-up, in the way it has been done in Norway. But one can argue a policy that “leans against the wind” is in practice a “fair-weather” policy – windy but sunny, in other words. Only as long as confidence in the inflation target is intact, there is scope to use monetary policy to counteract financial imbalances. | 1 |
The fifteen central banks furthermore agreed not to expand their gold lending and gold forward transactions during this period. While the U.S. and Japan were not part of the joint statement, they declared that they had no intention of changing their “passive” gold policy. Furthermore, the IMF announced that it would abandon its plan to sell some of its gold reserves in the market. These declarations had a big impact on the market for two reasons: First, they removed the uncertainty about the behaviour of the holders of 85% of the world’s official gold reserves. Second, the planned annual total sales (400 tonnes) compared favourably with the sales and increases of gold lending activity of the previous years (700 tonnes). 1 The idea of a Swiss Foundation of Solidarity was suggested to the President of the Swiss Confederation by the then President of the Governing Board of the SNB. 2 BIS Review 31/2005 The Washington joint statement on gold was a coordinated effort aiming at clarifying the intentions of the participants in a market prone to rumours and secrecy. Of the 1,300 tonnes of gold which the Swiss National Bank intended to sell, 1170 tonnes were included in the 2000-tonne total sales quota of the Washington Agreement. In other words, the SNB ended up being the main beneficiary of the agreement. Formally, the initiative for the Washington Agreement did not come from the SNB. | The first gold sales by the SNB were promptly executed the day after the new law came into force. Meanwhile, the market environment was far from optimal for the SNB’s gold sales. While the SNB had merely announced its intention to sell gold, the central banks of Argentina, Austria, Australia, Belgium, Canada, Luxembourg, the Czech Republic and India had all initiated actual sales. Against this backdrop, the gold market had been under pressure since 1996. Here in Washington, intense discussion revolved around the question of whether the IMF should sell gold. Moreover, the gold policy of the future European monetary area had been subject to intense speculations. The market feared that once the European Monetary Union came into force, the participating central banks or governments would lose their inhibition about selling off parts of their 12’000 tonnes of total reserves. In May 1999, the announcement by the UK Treasury that it planned to sell 415 tonnes set a new wave of producers hedging activity and front running speculation. The gold price dropped by 10% to 252 USD/oz, a 20 year record low (see Figure 3). It is against this background of heightened speculation about wide-ranging central bank gold sales and corresponding market anxiety that the joint statement on gold was signed at the IMF meeting in Washington on September 26, 1999. The participating central banks undertook to sell a total amount of no more than 2,000 tonnes of gold in the next five years, with annual sales limited to approximately 400 tonnes. | 1 |
To minimise uncertainty, some degree of coordination to remove these guarantee would be necessary. As governments in the developed economies inject huge sums of public funds to shore up banks, the instinct is to place demands on these banks to lend domestically. This may seem sensible individually. But collectively, this 'abandon-thy-neighbour' policy can trigger a big reduction of credit, and undermine economic recovery that eventually hurts the developed economies. Protectionist measures hurt emerging economies most, and they can trigger a backlash that sets the world back. We must resist such regression. Asia’s responses Let me now turn to the impact of the crisis on Asia, and responses to that. Asian economies will slow considerably. Those that are more highly dependent on external demand will contract more sharply than the rest. But unlike during the Asian Financial Crisis, the fundamentals in Asian financial systems and economies are generally sound. Banks are well-capitalised and have limited direct exposures to toxic assets. Corporate and household balance sheets are stronger. Current account positions are healthier and external liabilities manageable. The policy responses in several countries have been decisive and robust. Central banks in the region have appropriately eased monetary policy, and governments have put in place a range of fiscal and other measures to support lending and to cushion the impact of the global crisis. Nevertheless, considerable risks remain for Asian economies. The extent of demand contraction for Asia depends on how long and deep the recession is in the US and Europe. That remains an unknown. | Three points are worth mentioning on compliance: First, it is not the end, it is a means to an end; Second, it should be viewed within a broader context of a financial institution’s responsibilities to society; and Third, it should be approached in partnership with other key participants in the financial system. Compliance as a means to an end The past decade has been a turning point for compliance. Arising from major systemic failures of governance, regulators have since elevated the importance of compliance. For good reason, this has led to tighter regulations, greater scrutiny and stronger enforcement. The industry has in turn, invested heavily in their compliance function. It is estimated that some firms could spend up to 10% of their revenues on compliance within the next few years. This is by no means an insignificant amount. Yet, as we have seen over the recent years, this has not put a stop to money laundering and terrorism financing. A case in point is a major bank in the Asia Pacific region which is being investigated for more than 50,000 violations of money laundering and terrorism financing. Perhaps we need to take a step back and question if the industry has the right understanding of compliance. If the motivation for the increased compliance is merely to abide strictly by the rules and follow the book, thus avoiding scrutiny from regulators, this is misplaced. | 0 |
Jon Nicolaisen: What should the future form of our money be? Speech by Mr Jon Nicolaisen, Deputy Governor of Norges Bank (Central Bank of Norway), at the Norwegian Academy of Science and Letters, Oslo, 25 April 2017. * * * Origins of the central bank The Dutch financier Johan Palmstruch arrived in Stockholm in 1647. Some ten years later, he was granted permission to open a private bank, Stockholms Banco, where he combined two important innovations. The first of these, pioneered by Palmstruch, was to use customer deposits to fund lending. The second utilised Johannes Gutenberg’s invention, the printing press, to print the first European banknotes. Stockholms Banco was authorised to issue banknotes backed by the copper and silver coins in use at the time. Coins could be deposited at the bank in return for banknotes, and banknotes could be exchanged for copper and silver at the bank. The banknotes proved to be popular and were soon in circulation. Stockholm Banco also offered loans in the form of banknotes. For the Swedish king, Karl Gustav, this occurred at a convenient time. Wars were in progress that had to be financed, and a bank that would offer loans was like manna from heaven. King Karl Gustav made good use of the money. Sweden’s victory over Denmark-Norway in the 1658 Dano-Swedish War, leading to the permanent cession to Sweden of the strategically and historically important territory of Båhuslen in southeastern Norway, was thus at least partly the result of a financial innovation. | The digital revolution creates many opportunities for financial players, as for consumers: an increasing number of more accessible financial services, more complete customer satisfaction. But it also requires examining ways of adapting business models: diversifying services and adjusting their pricing, on the income side; anticipating changes in employment and skills, in the social dialogue. The Banque de France and the ACPR are mobilised to support innovation: creation of the “FinTech Forum” and a dedicated FinTech unit with the AMF; appointment of a “Chief Digital Officer". The Banque de France is also changing. Pursue efforts to combat money laundering and the financing of terrorism. Further progress will be made in 2017 with the full implementation of the Urvoas Act of June 2016 (including its anti-money laundering and financing of terrorism component) and the transposition of the 4th European Directive. I urge you to pay close attention to their effective implementation. With all these prospects, challenges and promises in mind, I renew to each and every one of you my best wishes for 2017. Thank you for your attention. 3/3 BIS central bankers' speeches | 0 |
Historical experience has also rejected the Panglossian view that there exists such a thing as an orderly debt restructuring. While some restructurings have indeed been successful and can arguably be said to have occurred in an orderly fashion, they were often on a small scale and executed under specific circumstances. The most striking and oft-quoted case is Uruguay. However, more often than not, restructurings have been disorderly, harmful and fraught with difficulties. The average length of the negotiations is 2½ years6 and it can vary greatly. In some cases, negotiations have taken just a few months (for instance, Uruguay in 2003, Pakistan in 1999, Chile in 1990 and Romania in 1983); in other cases they have taken many years (for instance, Vietnam from 1982 until 1998, Jordan from 1989 to 1993, Peru from 1983 to 1997 and Argentina more recently). Empirical evidence also shows that private investors are likely to penalise a country which has a history of restructuring and to demand higher risk premia.7 When considering a euro area economy, the following points should be kept in mind. First, the domestic financial market would be severely affected by a default/restructuring of the public debt. Large losses would have to be accounted for, as no forbearance would be possible, and recapitalisation of the domestic banking system would require additional public money. Second, given the role of the state as implicit guarantor of many financial and economic transactions, the impact on the real wealth of the domestic population and on the economy would be substantial. | Renewed public comments about a possible “soft restructuring” or “reprofiling” of the Greek debt in April this year produced an immediate spike of the spreads on Greek bonds, with strong contagion effects to other euro area countries (see Chart 1). To sum up, private sector involvement, if pursued imprudently, i.e. automatically rather than as the last resort: does not help save taxpayers’ money; indeed, it may cost them more money; favours short-term speculation over long-term investment, which is certainly undesirable; discourages and even delays any new investments in a country implementing an adjustment programme. 8 4 See FT, 24 April 2011. BIS central bankers’ speeches Given that such a system – of preventive PSI – does not exist elsewhere in any other parts of the world, the euro area would be seen by investors as handicapping itself and it would feel the effects of discrimination. The euro area, in terms of both sovereign and private investments, would become less attractive. The financial system in particular would be highly exposed to sovereign restructuring. It would also put the euro area at odds with the rest of the international community. Given the damage that such a system would inflict on other investors and countries, the other shareholders may be discouraged from supporting IMF programmes in the euro area. This is how a good idea can turn into bad practice. Continuing to pursue it suggests strong masochistic tendencies. How should the problem be solved? | 1 |
Over the coming year, the Global FX Committee and the broader international community will be working towards bringing the level of signup to the Code on the buy-side up towards that seen on the sell-side. Please join us in that campaign. 9 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 9 | While this will open up new opportunities for enhanced efficiency and productivity gains in Asia, a better understanding of the risks inherent in networks will better prepare the regional economies to address these risks. This will be a shared responsibility within and among the regional economies. Closer regional cooperation, strategic alliances and smart partnerships will be important key responses for enhancing the prospects for higher growth and development in Asia. Thank you. 2 BIS Review 32/2006 | 0 |
The reason that the HKMC can offer rather high annuity rates is because it will place the entire annuity premium received from policyholders with the HKMA. The HKMA will then invest the money alongside with the Exchange Fund portfolios, half in the public markets (bonds and listed equities) and half in private markets (private equity and real estate). As the HKMA already has the investment capability and infrastructure for managing a portfolio as large as around $ trillion, it would be easy to take on the additional investment generated by the HKMC’s annuity premium. The HKMC has now received around 10,000 applications amounting to $ billion in subscription. We are processing the applications and the exercise is expected to be completed soon. By end-October or early November this year, the first annuitants will be receiving their first monthly annuity payments. 8. Let me do some quick maths here by using a married couple at the age of 65 who has joined both the Reverse Mortgage Programme and the Life Annuity Scheme. If the property they own is worth $ million, (which is the average value of the properties under the Programme), then they would get a monthly payment of $ plus the right of lifelong occupancy under the Reverse Mortgage Programme. If they each subscribe for $ million Life Annuity, then they will get another $ $ + $ per month. So they will receive $ per month. | Loans expanded for several successive years at annual growth rates ranging from 60 percent to 80 percent in real terms. The share of foreign currency-denominated loans to households grew more than five times, from 2.2 percent of GDP in December 2004 to 11.6 percent of GDP in 2008. Moreover, the share of foreign currency-denominated loans to the corporate sector picked up substantially (Chart 3). Overall, financial intermediation (loans to the private sector/GDP) increased from 16.6 percent in 2004 to 39.3 percent in 2008 (Chart 4). BIS Review 5/2010 7 Chart 3 Breakdown of foreign currency-denominated loans granted by financial institutions percent of GDP 14 loans to households 11.6 12 10.6 loans to non-financial corporations 9.2 10 8 7.1 7.5 7.1 6 9.8 4.7 3.3 4 2.2 2 0 2004 2005 2006 2007 2008 Source: National Bank of Romania Chart 4 Breakdown of loans to the private sector 45 percent of GDP loans to non-financial corporations a.o. | 0 |
Or is there “fiscal dominance” over the central bank, which is then forced to subordinate its own objectives to those of the fiscal authority? Because they naturally respond to the economic cycle, looking at the instruments of policy on their own (fiscal and monetary measures) doesn’t really help you that much in distinguishing one situation from the other. A better method might simply be to look directly at the institutional arrangements themselves (are monetary and fiscal policies determined by independent agencies? how is that independence safeguarded?). As this is ultimately a question of ends rather than means, a better measure still is the behaviour of objectives of policy. If inflation rises materially above its target, and if it tends to do so in particular when the public finances are under strain, that may be evidence of “fiscal dominance”. If, on the 1 See https://www.bankofengland.co.uk/research/bank-of-england-agenda-for-research. 2 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 2 other hand, easier monetary policy is necessary simply to stabilise inflation, and succeeds in doing so, it’s hard to see how it can qualify as “monetary finance”, no matter how the fiscal balance is behaving2. That’s not to say the fiscal position is wholly irrelevant because higher inflation may help – if only to a degree, and at a wider economic cost – in easing fiscal constraints. Very high levels of debt could therefore test those institutional arrangements. | 3 Interested readers are referred to Moe, Solheim and Vale (2004), Norwegian Official Reports (1992), Wilse (1995), and Stortinget (1998). Steigum (2004) sets out the macroeconomic background and implications of the banking crisis. BIS Review 58/2003 1 During 1984 and 1985, the Norwegian banking system was deregulated. In this new environment, banks started to compete for market shares. We saw a huge increase in bank lending which, coupled with general optimism (oil!) and interest rates that were kept artificially low, created an economic boom. However, neither bank managers nor supervisors had much experience of banks operating in a competitive credit market, and did not pay sufficient attention to banks’ risk exposure. A sharp fall in prices for our main export commodities, oil and gas, and the need to consolidate the economy after the boom and bring down rampant inflation, led to a recession in the late 1980s. In short, deregulation, a lending boom, and an ensuing recession set the stage for increasing bank losses. The Norwegian banking crisis evolved in two stages: In the first stage from 1988 till 1990, several small and some medium banks failed. From 1990 - 1991, the crisis became systemic. The three largest commercial banks, accounting for half of the market for credit to the domestic non-financial sector, were in deep trouble. During the first stage of the crisis, the problems were mostly handled by the banks’ own guarantee funds. | 0 |
Neither can we rule out an intensification of the recent global trends and a stronger than expected impulse from abroad, by either a steeper recovery of world activity and/or better commodity prices. Some of this seems to have permeated financial markets, where the prices of riskier assets have risen. Although it is still premature to validate such optimism, it is clear that the markets are in a better mood than last year, including local markets, which have even been outperforming many of their peers. On the domestic front, after several years of subdued growth, we cannot rule out that a more persistent phenomenon may be affecting the economy’s ability to grow, in which case spending plans of both public and private agents would need some revision. One area calling for special attention is the labor market. While acknowledging that it has gradually adjusted without significantly increasing unemployment in the past several years, it is possible that, after years of low growth companies wish to make more drastic changes in their payrolls, particularly if the expected growth recovery towards the end of the year stalls. In contrast, in a context where no macroeconomic imbalances are hindering growth, a scenario where an improved external outlook consolidates, plus the end of a cycle of mining investment adjustments and a rebound in sentiment, could lead to a more dynamic recovery than expected. All considered, the Board believes that the risk balance for both inflation and activity is unbiased. Summing up, inflation has evolved in line with December forecasts. | 19 Figure 13 MPR and expectations (percent) 5 5 MPR 4 Financial asset prices in December Report (*) 3 4 EEE EOF Financial asset prices in March Report (*) 2 14 15 16 17 18 3 2 19 (*) Built using interest rates in swap contracts up to 10 years. Source: Central Bank of Chile. 20 | 1 |
These range from uncertainty about litigation and restructuring costs in a number of banks to working through a stock of legacy assets, particularly in the countries most affected by the financial crisis. There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a good position to bring down NPLs in an orderly manner over the next few years. For this purpose, the ECB’s supervisory arm is working closely with the relevant national authorities to ensure that our NPL policies are complemented by the necessary national measures. The state of the euro area recovery and the role of economic policies Against the background of downward risks emanating from global economic and financial developments, let me now turn to the economic situation in the euro area. The recovery is progressing at a moderate pace, supported mainly by our monetary policy measures and their favourable impact on financial conditions as well as the low price of energy. Investment remains weak, as heightened uncertainties regarding the global economy and broader geopolitical risks are weighing on investor sentiment. Moreover, the construction sector has so far not recovered. In order to make the euro area more resilient, contributions from all policy areas are needed. The ECB is ready to do its part. | The Great Financial Crisis is a good example: at that time, solid and well-anchored inflation expectations in the euro area contributed to counteract the strong deflationary forces affecting our economies. However, since then, market-based measures of inflation expectations in the euro area have been decreasing and this decline has been even more pronounced since the beginning of 2019. This fall in market expectations has raised some questions among central bank watchers on potential risks of deanchoring of inflation expectations and more generally on our ability to deliver our mandate of price stability. I.2. The need for better information on households expectations Let me stress that market-based inflation expectations are not the only available measures to assess future risks of inflation. Professional forecasters or consensus forecast provide a significantly higher figure than the 5Y/5Y ILS, at around 1,7% rather than 1,2% to 1,3%, although all of them point out to a decrease of inflation expectations over time (Figure 1). Market-based measures have also some technical limitations: first, related to the liquidity of 2 financial markets, and second because they are affected by the evolution of the risk premium over time. Moreover, while financial market expectations provide information on future financing conditions, the evolution of prices and wages depends more deeply and directly on what household and firms expect regarding future growth and inflation. Consequently, existing surveys among firms and households can provide very useful and valuable information on expectations. | 0 |
This meant that, for example, the differences in the risk premia applied to the various issuers of government debt disappeared. It was thought – and this was a widely held viewpoint – that membership of the Monetary Union would reduce the risk linked to current account deficits, because they could be financed within the Union in light of the free movement of capital. This approach, which would be proven to be mistaken with the crisis, led, among other things, to the risk associated with our economy’s growing external debt not being properly estimated. As regards demographic growth, the population rose by around 5,000,000 between 2000 and 2007, an unprecedented increase in such a short period since population series have existed in Spain, i.e. since the mid-18th century. Almost 90% of this population increase was attributable to net immigrant inflows, most of whom adults, which fuelled the growth of the real estate sector by means of both a permanent increase in the demand for housing and, on the supply side, by providing the labour that helped the construction sector expand. | The first half of 2012 saw a stepping up of so-called “redenomination” risk, which was a euphemism for the doubts over certain countries, Spain among them, remaining in the euro area and, indeed, over the survival of the single currency. In March, a second bail-out was approved for Greece and, in May, with the inconclusive Greek elections, rumours were again unleashed about the country exiting the Monetary Union. In parallel, there was a fresh bout of tension centred on Spain and on Italy, where two-year risk premia relative to the German Bund climbed to over 700 and 500 basis points, respectively. Fears intensified in Spain over the impact of the double-dip recession on the position of credit institutions and on the feedback loop between sovereign and banking risk. Funding conditions on the wholesale markets once again tightened and net fund outflows to the external sector stepped up, totalling € billion in cumulative 12-month terms, 29% of GDP. In mid-2012, Spain was facing what was practically a collapse in external funding, which it was able to offset with a substantial increase in Eurosystem funding, which came to account for € billion in August 2012, 34% of the liquidity injected by the Eurosystem into banks across the whole euro area. | 1 |
Finally, if economic shocks extend only to the home country and joint monetary policy is insufficient to absorb the shock, labour market flexibility could take the place of nominal exchange rate adjustment once the domestic currency has been abandoned. Consideration of these criteria based on historical data does not produce an unequivocal answer about Iceland’s suitability as a member of the eurozone. The Icelandic business cycle has been rather weakly linked to that of the euro area – and actually, to most other regions and countries as well (see Chapter 10). Iceland’s export sector differs in structure from that in most other industrialised countries (see Chapter 4). On the other hand, the economy is quite open to trade and the euro area is by far Iceland’s largest trading partner (see Chapters 4, 8, and 20). In addition, the domestic labour market is quite flexible, although downward flexibility of nominal wages has not been tested much and available data suggest that it has been relatively limited to date (see Chapter 14). The OCA theory has many shortcomings and does not take account of a number of potential benefits of participation in a large currency area such as the eurozone. Historical experience also suggests that currency unions can be successful even if the participating countries do not fulfil the OCA criteria at the outset (see Chapter 5). In this context, the following points are worth noting: • Research indicates that currency union membership will stimulate trade with the currency union without reducing trade with other countries. | There’s always room for improvement and, at the ECB, we have called on Heads of State to strengthen governance procedures further, for instance by making sanctions more automatic in cases of non-compliance so as to prevent governments succumbing to the temptation of being excessively lax. This was seen in 2005 when the core countries failed to meet their deficit commitments and the Commission and the European Council agreed to change the rules so as not to sanction these countries. But the lesson whereby maintaining a monetary union is only possible if divergences remain within a moderate range must also be taken into 2 BIS central bankers’ speeches account by the national governments of each of the euro Member States, because the policies that may prevent the emergence of these imbalances or help to correct them are, for the most part, the responsibility of national governments. Many tasks lie ahead for all the euro area countries in contributing to reducing divergences. But it is our duty to pay more attention to what Spain should do. Our country reacted a year back when the sovereign debt crisis broke, and it showed resolve in adopting far-reaching measures to correct our economy’s imbalances without resorting to aid from its fellow members. It was able to do so, firstly, because its divergences were not overall as great as those of the countries that have had to apply for external financial assistance. | 0 |
As an example, an increasing number of trade repositories are collecting valuable transaction data. However, the full benefit of these data can only be realized if we can aggregate this information across the trade repositories, and if regulators have access to the data needed to support their respective mandates.7 The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have produced an analysis of some of the foundational steps that need to be taken.8 Again, implementing these steps will take time and will need our continued attention. 5 See FSB and IMF (2009) The Financial Crisis and Information Gaps. Report to the G-20 Finance Ministers and Central Bank Governors. 6 FSB and IMF (2009), recommendation no. 9: “The FSB, in close consultation with the IMF, to convene relevant central banks, national supervisors, and other international financial institutions, to develop by end 2010 a common draft template for systemically important global financial institutions for the purpose of better understanding the exposures of these institutions to different financial sectors and national markets. This work should be undertaken in concert with related work on the systemic importance of financial institutions. | Recognizing this vulnerability, the Group of Twenty (G20) in its 2009 Pittsburgh Summit statement stipulated that all standardized derivative contracts would be moved to central clearing, and that the remaining non-standard derivatives would be subject to higher capital requirements.2 While there will inevitably be a residual share of derivatives that do not lend themselves to standardization, authorities need to continue to work collaboratively to keep this residual share to a minimum. Why is standardization so important? Standardization has advantages in terms of increasing transparency, price discovery and liquidity. Standardization is also important because it allows the derivatives to be centrally cleared in a CCP. Without central clearing, participants have bilateral credit exposures to each of their counterparties. Moreover, they cannot fully assess their credit risk exposures in this framework since there is no information on the other derivative contracts that their counterparties have with other market participants. Central clearing replaces this complex web with a single set of relationships between the firm and the CCP as its counterparty. This allows for netting, so that a firm’s risk is limited to its net exposure to the central counterparty. This both reduces risk and increases transparency. 2 See Group of Twenty (2009) The G20 Pittsburgh Summit Leaders’ Statement. BIS central bankers’ speeches 5 Consequently, members of the CCP have less of an incentive to pull back in periods of stress and this makes the market more resilient. | 1 |
(c) Committee-based decision-making: Decisions on monetary, macro-prudential and microprudential policy rest with three Committees, rather than any one individual. 43 The Committees themselves vary in size from 9 to 11 people. They comprise a mix of Bank of England “internals” and “external” experts. Decisions are made either by majority voting (MPC), consensus (PRA) or by consensus with a provision for majority voting (FPC). (d) Transparency and accountability: The deliberations and decisions of each Committee are subject to public scrutiny. The minutes of MPC and FPC policy meetings are published. All three Committees produce periodic reports, tabled in Parliament, on their actions and analysis. 44 And members of each Committee appear regularly before Parliamentary Committees. There is individual accountability, as well as collective responsibility, for policy. These institutional features are no historical accident. Each serves as a constraint on the policy discretion exercised either by the Bank as agent or by its principal Parliament. The 3M 39 For more on the FPC, see Tucker, Hall and Pattani (2013) and Murphy and Senior (2013). 40 Bailey, Breeden and Stevens (2012). 41 Debelle and Fischer (1994). 42 For example, for the MPC the remit specifies that the primary objective is to maintain price stability and, subject to that, the secondary objective is to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment. 43 Although a single individual – the Governor - chairs all three committees. | Indeed, we are now in a world that is fundamentally different, a world that calls for a greater appreciation of the changes that need to be made to the systems and structures, to the institutional arrangements and mechanisms, and to the manner in which we operate in this new environment. The international dimension of these changes calls for an outcome in which the international financial system is less prone to disruptions and failures and in which economic progress is a shared prosperity among nations. Globalisation has had a deep impact on the way modern economies function. The benefits of globalisation have accrued to diverse communities and regions but it has also brought with it significant risks. While the Asian Crisis showed the effects of globalisation, it also showed that Asia was able to rapidly rebound and continue to benefit from increased international trade and financial flows. The rapid restoration of stability and resumption of growth had confined the crisis to Asia. As the current financial crisis is translated into an economic crisis, its repercussions are now being felt on a global scale. While the turmoil had its origins in the developed economies, its continued escalation has extended the effects of the crisis to the rest of the world. Economic and financial globalisation thus not only calls for policy responses at the national level but also at the international level. | 0 |
The Committee has a distinctly individualistic bias, in contrast to the consensus seeking traditions of many other central banks. It includes four external members who are appointed for their expertise, not as representatives of interest groups; and all members are individually accountable for their votes, which are made public with the minutes. Both the markets and the press take a keen interest in the pattern of voting, and members will often find a way to explain their thinking in more detail. All this adds up to a powerful set of incentives for members of the MPC to focus on maintaining price stability; to pay attention to all relevant information; to weigh up the risks; to take timely decisions; and to explain them clearly. Moreover, clarity about the aims of policy and the transparency of the decision taking process give the MPC significant scope to influence the longer term interest rates set by the market. It’s a far cry from previous policy regimes, when the main players faced very different incentives. Prior to 1997 the key decision makers were politicians, who both set objectives for monetary policy and took responsibility for the technical judgements needed to meet them. Politicians can rarely afford the luxury of focussing on one objective to the exclusion of all others. Attempts to win credibility by constraining their discretion, notably through setting monetary targets, were a fairly comprehensive failure. Interest rate decisions have been the subject of some famous tussles between Number 10 and Number 11 Downing Street under successive Governments. | Allow me to take this opportunity to invite you to join this exchange of experiences in one of the aspects that is increasingly relevant to our institutions. The theme of this Conference, Economic Policies, Trade Integration and Sustainable Job Creation, is particularly timely at this current juncture of the world economy. The world remains in an expansionary phase although there are some signs pointing to a gradual change in the global economic landscape. Some of the risks that had been the focus of our attention are beginning to materialise. In particular, we are witnessing a re-emergence of protectionist measures with pernicious effects on international trade. Beyond the impact that this can have on growth in the short term, its potential impact on the diffusion of technological advances and on improving the welfare of individuals is more worrisome. In 3/4 order to preserve the benefits derived from globalisation and technological innovation, it is now more important than ever to work towards a fairer and stronger global trade system. To this end, it is necessary to work on the reform of the rules governing international trade to ensure that all countries compete on a level playing field. But also, and not least, domestic policy-makers have a responsibility to design the right policies for stimulating innovation and job creation, and creating opportunities for all. | 0 |
On a more practical level, there is no lack of evidence that things can and do go wrong. We have recently seen lack of operational discipline in some financial markets leading to documentation backlogs and to uncertainty over the enforceability of transfer of risks. We see more relaxed lending criteria in the LBO market, increased reliance on potentially illiquid instruments in trading strategies, and questionable quality of some IPO’s. We have seen specific examples of significant downgrades or outright failures such as GM/Ford, AHBR and, more recently, Refco and Delphi. One reaction to these episodes is that they show the market doing its work and are testimony to the effectiveness of market discipline. The fact that the financial system has coped with these problems may well also be testimony to the strengths of that system. On the other hand, might not these episodes be a potential sign that all is not well? The question is: are vulnerabilities mounting, and will they one day crystallise when a bigger shock arrives that the market simply cannot absorb? The fact is, we just don’t know. And that is why we need to be particularly vigilant. Such questions lead me to think about issues relating to liquidity. If a period of market stress materialises, triggered by a sharp snap back in prices, it is critical that the financial system should be able to meet a temporary increase in the demand for cash without precipitating, in the vernacular, a ‘market meltdown’. Liquidity is therefore the focus of my remarks today. | In addition, financial stability, unlike price stability, is not easily summarised by one statistic (inflation in the case of price stability), so we therefore need in any case to look at a range of indicators. What I suggest instead is a slight evolution of the ECB strategy, to achieve a more “integrated” framework. To formalise this approach, one option worth considering could be to renovate and extend the present second pillar into a “financial and monetary” pillar, alongside the economic one. More specifically, let me mention a few examples of variables that could be monitored under this new pillar: Indebtedness of firms and households; Bank balance sheet information, which is useful for assessing the functioning of the bank lending channel (including in a forward-looking way); Indicators of excess risk tolerance and excess credit, which provide information on the risktaking channel; Stock and house prices, which provide information on the asset price channel. This list could be of course modified and completed. In fact, we already monitor many of these variables. The point of having a structured pillar is to formalise this analysis – including on proportionality of our measures – and ensure we have no blind spots. Such considerations would help us optimise the monetary policy toolkit and fine tune it with the numerous tools that central banks have now at their disposal. To some extent, we have already crossed that bridge in adapting existing instruments in order to take financial stability considerations into account. | 0 |
Specifically, the ECB expects dividends and share buy-backs to remain below 15% of cumulative 2019-20 profit and to be no higher than 20 basis points of the CET1 ratio, if this is lower. These measures provide more flexibility than the earlier recommendation. This is warranted by a slight decline in the macroeconomic uncertainty compared with the spring and by the fact that the core projection scenarios are close to those used in the vulnerability analysis carried out by the ECB in the first half of 2020 which, as I indicated above, confirmed the resilience of the European banking sector. In any event, a prudent approach is still required, considering that the impact of the pandemic has not yet been fully reflected in banks’ balance sheets, that banks continue to benefit from various public support measures and that credit impairment arises with a time lag. The revised recommendation aims to safeguard banks’ loss-absorbing capacity and to provide support to the economy. The recommendation will remain valid until the end of September 2021 when, provided there are no materially adverse developments, the ECB intends to lift the recommendation and return to assessing banks’ capital and dividend distribution plans based on the outcome of the normal supervisory cycle. Post-crisis, banking sector resilience is key Once the crisis comes to an end and its effects have receded, we will also need to ensure that the banking sector remains resilient, especially to any new risks that may emerge. In this regard, I wish to make a reflection on global banking regulation. | It means being able to integrate and think critically when there are only pieces of information. It means being able to provide breadth of perspective anchored by depth. For us in Bank Negara Malaysia, mastery of economics and finance is what helps us differentiate the ‘signal’ and the ‘noise’ in economic policymaking and financial regulation. It also helps us to differentiate the symptom and the root cause in the supervision of financial institutions. It also means learning the lessons from history and avoiding the same mistakes within the context of our operating environment. Thus, I encourage you to focus and follow your curiosity in exploring the depths of your field of study. There is no end to learning, and may your thirst for knowledge drive you on. Have the humility to recognise that we never stop learning. As a Chinese proverb goes, “Learning is a treasure that will follow its owner everywhere.” Second, on adaptability. Charles Darwin famously reminded us that, “It is not the strongest of the species that survives, nor the most intelligent, it is the one that is most adaptable to change.” This means one must be able to constantly learn new things. One must also unlearn things that have become outdated. No one can really be certain on the precise impact of automation, artificial intelligence and the new industrial revolution 4.0 on future jobs and the complexion of society. | 0 |
In a more subtle way, there have also been changes in the culture of these institutions, with greater emphasis now being placed on good governance and on the “purpose” of certain activities or the “service” provided to clients. This strengthening of the financial system’s resilience is a major source of confidence at the start of 2019, in an environment marked by mounting geopolitical uncertainties and slowing economic growth. But it is not time for complacency. One of the core challenges we face, particularly in the euro area, is preventing and limiting the impact of new potential shocks. “Madame la Vice-Présidente”, you have invited me here today to share a central banker and supervisor’s perspective on the different options open to private and public agents for meeting these challenges. Rather than talking about options, I would like to emphasise two “burning obligations” that fall on all of us, namely: for financial intermediaries, micro and macroprudential supervisors, maintaining a strong vigilance (I. ); and for regulators and the private (financial) sector promoting a deeper financial integration of the euro area (II.). I. Continued strong vigilance is needed to navigate through an increasingly uncertain world a. Persistent threats Against a backdrop of intense geopolitical uncertainty and a less favourable macroeconomic environment than expected, the financial industry faces a combination of very “traditional” risks and some relatively new ones. | If not all regulations are aligned, some private actors could (re)locate their IT systems in less-demanding jurisdictions. This is the reason why we need homogeneity among international regulatory texts with the largest outreach. Who could lead this coordination role on cybersecurity regulation? The G7 expert group has been extremely successful in producing “Fundamental elements”, but this group has no standard-setting role and its texts can only guide regulators in their work. I believe the FSB is best placed to engage the dialogue with the various standard-setters to foster the alignment of their texts, as well as to conduct global outreach, and limit the proliferation of working groups. II. Information Cyber threats are increasing, but adequate and consistent measurement is challenging. I would like therefore to make two proposals: About incident reporting. Many reporting obligations on cyber incidents have emerged, requested by various authorities. But these incident reports give little Page 4 sur 6 information to measure the intensity and sophistication of threats and their evolution. The indicators requested vary from one report to another and this limits the scope of diagnosis and comparisons. The institutions themselves can struggle to transmit information about their incidents in different formats and with different details to the various authorities in charge. FSB agreed on a “cyber lexicon”. 1 As we have done in the past for operational risk, I recommend that we work on a common categorization of cyber incidents to better measure the impacts of attacks, and better understand their evolution. About information sharing and threat intelligence. | 0 |
The ECB will not be forced to step in for a lack of policy implementation. Third, OMTs will not create excessive risks for euro area taxpayers. Such risks would only materialise if a country were to run unsound policies. This is explicitly prevented by the ESM programme. And we have been very clear that each time a programme starts being reviewed, we will routinely suspend operations and resume them only if the review has been concluded positively. This will ensure that the ECB intervenes only in countries where the economy and public finances are on a sustainable path. Fourth, OMTs will not lead to inflation. We have designed our operations so that their effect on monetary conditions will be neutral. For every euro we inject, we will withdraw a euro. In our assessment, the greater risk to price stability is currently falling prices in some euro area countries. In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it. Moreover, we see no signs that our announcement has affected inflation expectations. They continue to be firmly anchored. This is testament to our track record on price stability over the last decade and our credible commitment to maintaining price stability. The citizens of the euro area can be confident that we will remain permanently alert to risks to price stability. | Public finances were deteriorating. Banks and governments were being forced to pay even higher interest rates. And credit and economic growth were falling further, leading to rising unemployment and reduced consumption and investment. A number of economies could have seen risks of deflation. All of this meant that the outlook for the euro area economy as a whole was increasingly fragile. There were potentially negative consequences for Europe’s single market, as access to finance was increasingly influenced by location rather than creditworthiness and the quality of the project. The disruption of the monetary policy transmission is something deeply profound. It threatens the single monetary policy and the ECB’s ability to ensure price stability. This was why the ECB decided that action was essential. Restoring the proper transmission of monetary policy So let me now turn directly to our recent policy announcements. To decide what type of action was appropriate, we had to make two key assessments. First, we had to diagnose precisely why the transmission was disrupted. And second, we had to identify the most effective policy tool to repair those disruptions, while remaining within our mandate to preserve price stability. In our analysis, a main cause of disruptions in the transmission was unfounded fears about the future of the euro area. Some investors had become excessively influenced by imagined scenarios of disaster. They were therefore charging interest rates to countries they perceived to be most vulnerable that went beyond levels warranted by economic fundamentals and justifiable risk premia. | 1 |
It will in general not be possible to specify a written contract which can cover all possible contingencies and which could be verified unambiguously ex post. Moreover, there are limits to the extent to which the behaviour of individuals inside an institution can be monitored and verified precisely from the outside. Ultimately, the assessment of performance can only be based on observable and verifiable outcomes of decisions, which - however - will also be affected by many other exogenous influences. Especially in cases where decision-making is done by committee - as is the case for the majority of independent central banks - it is rather difficult to disentangle individual contributions and responsibilities with respect to the common decisions taken. Delegating authority and placing trust in institutions which are assigned a clear objective seems preferable to relying on the discretion and good faith of individuals, on the one hand, and imposing strict mechanical rules, on the other hand. Any institution is more than the mere sum of individuals. This is the very reason for the existence of institutions - otherwise there would be no need for them. Institutions instil and reflect a sense of common purpose and responsibility. They provide a discipline on individual behaviour within such an institution. At the same time they provide support and strength to the individuals making up the institution. The strength of an institutional approach is particularly evident in the case of independent central banks. In this context, I believe, there are great merits in decision-making by committee. | The Treaty was ratified by the parliaments and governments of all Member States of the European Union and in some cases endorsed by referendum. Thus the delegation of European monetary policy to the ECB is endowed with full democratic legitimacy. This bond of legitimacy is a crucial aspect of sound institutional foundations for monetary policy. There is no doubt that in order to be successful over the longer term, the ECB as the guardian of price stability - like any institution in a democracy will have to win and maintain the trust and support of the European public. It can and should be held accountable for fulfilling its mandate. This mandate is clear, but it is also limited. It needs to be understood what monetary policy can be expected to deliver, but also what it cannot be expected to achieve. This is particular important in the case of the European Monetary Union, which not only delegates the authority for monetary policy to an independent central bank but which also severs the traditionally close link between the currency and the nation state. Historically, currency jurisdictions and national borders have tended to coincide, at least in more recent times. This reflects the fact that the right to issue money has been seen as a key attribute of national sovereignty. Thus monetary union cannot be regarded as just a small and innocuous step of a primarily technical nature. | 1 |
It is likely that continued strong growth in output and employment will result in a higher rise in prices and costs, but it may take time. According to Statistics Norway’s Labour Force Survey (LFS), employment growth picked up markedly towards the end of 2005 and into 2006. LFS unemployment fell further in January, while the number of registered unemployed was approximately unchanged in March. Measured in per cent of the labour force, seasonally adjusted LFS unemployment was 3.9 per cent. The labour supply is also being influenced by an increase in inward labour migration from the new EU accession countries. These changes are difficult to measure in official labour market statistics. The Central Office – Foreign Tax Affairs recorded an increase of about 7400 employees from the new EU accession countries from 2004 to 2005. This figure covers employees in both Norwegian and foreign enterprises. The size of the actual supply of labour behind these figures is uncertain, because there is BIS Review 35/2006 1 no information about the duration of such employment relationships. On balance, however, there are signs that the use of foreign labour has contributed to dampening pressures on real economic resources through the upturn. The effect has probably been largest in the construction industry, as evidenced in particular by continued moderate wage growth last year, despite very high activity. The figures for the first quarter of this year indicate that inward labour migration is still rising. There is competition for the best labour in the EU countries. | Futures prices have also risen markedly, indicating expectations of a sustained increase in metal prices similar to the increase in oil prices. Prices for fresh farmed salmon have also exhibited a pronounced rise. Rising commodity prices and buoyant activity in markets that are important for Norway have fuelled growth in the Norwegian economy, even though growth has been low in some of Norway’s most important export markets. Overall, prices for our imported goods are falling in relation to prices for goods we export. Norway’s terms of trade are improving. The impact of the rise in oil and gas prices is particularly strong, but the terms-of-trade gains for the mainland economy have also been high. The domestic economy is partly insulated thanks to the oil fund mechanism. The situation in Norway differs from that of its Nordic neighbour countries. Sales of Swedish and Finnish high-tech products are growing strongly in volume terms, but prices are falling. Denmark has a diversified business sector, which is overall moving on a steady path. Growth among our trading partners remains solid. High commodity prices are exerting upward pressure on consumer price inflation in a number of countries, although underlying inflation remains low. Economic growth in the US probably picked up again in the first quarter. In Japan, growth appears to be solid. In the euro area, confidence indicators point to optimism in the business sector. There is a broad-based expansion in the Swedish economy, while some indicators in the UK have shown weak developments. | 1 |
The IMF worked out a proposal for debt consolidation a few years ago, entitled Sovereign Debt Restructuring Mechanism (SDRM), but the proposal has not won general approval in this form and the problem of managing sovereign states’ payment problems remains. The example of Argentina showed clearly the need for a framework that could, for instance, solve the current problem of a risk of different borrower groups receiving different treatment, with various “clubs” for different types of loan. It is possible that we can get the ball rolling with a lucky name change to Framework for Orderly Restructuring of Debt (FORD). Ford owns Volvo and Volvo means “I roll”. 2 This example is taken from a lecture given by the World Bank’s chief economist Nicholas Stern (now at HM Treasury in the UK) at Munich University in November 2002. 3 Collective action clauses are a means of clarifying at the time the loan agreement is signed how the contract will be renegotiated if the borrower cannot pay according to the agreed amortisation and interest rate plan. 6 BIS Review 60/2004 Conclusion There is still a lot we do not know about the growth process, but fortunately the knowledge gaps appear to be dwindling as time goes by. | Mark Twain is supposed to have once said: “I’m all for progress; it’s change I don’t like.” However, change lies in the nature of market liberalism, which neither can nor should be stationary. The structural changes that come in the wake of globalisation mean that less efficient production is replaced by more efficient production, and that sectors that do not hold up in competition are replaced by sectors where the country has comparative advantages, that is to say, is relatively better than its competitors. Structural changes thus consist of two parts: closing down (or moving out) and new establishment of businesses. The Austrian economist Joseph Schumpeter called this creative destruction; old jobs and technologies disappear and new, more productive jobs arise as technology develops and production becomes more specialised. The major challenge in future, in both Sweden and other industrialised nations, will therefore be to create dynamic conditions in which new jobs can arise as the old ones disappear due to rationalisation or are moved abroad. Studies regarding some industrial nations indicate that many jobs lost during the most recent economic slowdown have not yet been replaced by new jobs in the same branch when economic activity picked up again; instead productivity has been higher. However, employment has continued to increase in other sectors, which appears to increase the number of jobs regardless of economic activity. The fact that employees have to change sector leads to greater friction unemployment arising. | 1 |
Third, despite record low mortgage interest rates, the depressed housing market remains a significant impediment.1 While house prices are no longer overvalued by historical standards, restrictions on access to credit and the large number of homes in the foreclosure pipeline means that home prices remain under downward pressure. The ongoing weakness in housing makes achieving a vigorous economic recovery more difficult for several reasons: The strong rebound in housing construction and related activities, such as furniture sales, that typically power economic recoveries following deep recessions is absent. The decline in home prices has eroded household wealth, which then inhibits consumer spending. Since home values peaked in 2006, homeowners have lost more than half their home equity and many expect further declines. The weakness in home prices has reduced credit availability because many households and small businesses use their homes as their primary source of collateral for loans. 1 See Board of Governors of the Federal Reserve System, 2012 White Paper, “The U.S. Housing Market: Current Conditions and Policy Considerations” and “Housing and the Economic Recovery” by William Dudley. 2 BIS central bankers’ speeches The big drop in house prices has made it more difficult for borrowers to refinance, undercutting some of monetary policy’s ability to support demand. In a recent speech I discussed some policy interventions that could help to stabilize the housing market. I will not discuss this further as our focus today is on education. | These three sources of risk call for different policy actions. The first approach for dealing with asset price misalignments is for authorities to communicate their views on the extent of potential asset price distortions and their consequences for financial stability. These “verbal interventions” are relatively common regarding the exchange rate. I see no reason why we should not use them also for other assets such as bonds and equity, since they are relevant variables from the point of view of macroeconomic and financial stability. Indeed, recent experience has shown that central banks need to be more assertive and communicative about the conduct of financial systems. In our last Financial Stability Report we indicated that evidence pointed to some overvaluation of stock prices in Chile, but we also indicated that financial stability was not threatened by potential corrections, even sharp corrections, in these prices. Of course, making this assessment is not a trivial task – as modeling asset prices is complex – and it is not the role of central banks to communicate continuous assessments of asset prices. For this reason, this kind of communication must be done exceptionally, and in the context of discussing the potential implications of these price developments on current and future BIS central bankers’ speeches 3 financial stability. In addition, communication must be done in a timely manner, before vulnerabilities build up. | 0 |
What we learned as a result of this experience was, among other things, that years of historic data on fixed-income market yields and spreads could not have anticipated the size of the movements in credit spreads that in fact occurred in August and September. We also learned that markets that did not previously move together can suddenly do so, that trends that were under way for several years can abruptly come to an end, and that spreads that have been consistently narrow for years can suddenly widen. In the wake of these events, we have become all too aware that liquidity can be illusory – that individual traders may be able to exit a position when they wish but that not all traders can exit their positions at the same time. For many, these lessons have been humbling. Going forward, it is important to bear in mind that there most certainly will be further instances when the credit intermediation process is disrupted, when we will face other threats to the wellbeing of our market positions, our institutions and the global economy. These risks are in the nature of the intermediation process itself. As the global capital markets continue to grow and become ever more sophisticated – as I believe they will – what is most important for us as central bankers is to operate with a disciplined sense of priorities. It is clear that we as central banks cannot be responsible for any single bond holder, any single bank or any single financial institution. | At the end of the day, the flow of credit from securities markets has the same impact on our respective societies as that from banks. Therefore, central bankers have an obligation to understand the nature of these flows and the risks that they raise. Crucial to our obligations to our citizens is the need to be certain that these credit markets work smoothly and that credit flows efficiently from those most willing and able to bear the risks to those most able to put the funds to good use. This is as true for the United States as it is for any other country, developed or developing. Does this mean that central banks believe that capital markets should be supervised in the same ways banks are overseen? Clearly the answer to this question is no. This is not our role. In my view, central banks broadly have two main responsibilities with respect to the global debt markets. The first is to enhance the price discovery process by promoting transparency in their own actions. The second is to ensure that the banks, as providers of liquidity, perform their proper role in supporting the trading process by making sound credit decisions. In the United States, the Federal Open Market Committee or FOMC has a pronounced effect on the fixed-income market, both through its policy decisions and in the way the Federal Reserve conducts monetary policy. Indeed, an important part of the price discovery process is the anticipation of the Federal Reserve’s future actions. | 1 |
However, I am less sanguine when it comes to the credibility component, which boils down to trust. Trust has to be earned over a long period of time, and can be lost overnight. 2/4 BIS central bankers' speeches For Hong Kong to excel, it is not enough for our financial institutions and practitioners to be technically competent only. They must also uphold high ethical standards in order to gain the trust and respect of customers. 10. In the past few years, a number of misdeeds by some financial institutions and practitioners have come to light. For example, the rigging of LIBOR had led to international reform of interest rate benchmarks, a process which is still ongoing. There were also cases of front running and other irregularities in FX and gold trading that had led to investigation into some banks and senior bankers. All these point to the weakness of the tradition of “self-discipline” amongst financial practitioners. It is now considered that more comprehensive and possibly more prescriptive guidelines on ethical standards and conduct are needed to strengthen the system. The latest FX Global Code is the outcome of one of such reforms. The Code was developed over the past two years by 16 central banks, including the HKMA, together with private-sector institutions from both the buy and sell sides. It is a comprehensive set of global principles on good practice in the FX market, and it is intended to promote a robust, fair, liquid, open, and transparent market. | 2 BIS Review 115/2009 The financial crisis and the global economic recession have had a substantial impact on the Norwegian economy, and a range of measures have been implemented to mitigate the effects of the crisis. These measures prevented the liquidity crisis from developing into a solvency crisis in the banking sector and a crisis in the real economy in Norway. Norges Bank has supplied additional liquidity to banks and eased collateral requirements. The Bank has provided loans with longer maturities, used foreign exchange swaps for both USD and EUR to supply krone liquidity and provided loans to Norwegian banks in USD, which Norges Bank can now procure from the Federal Reserve. The key policy rate has been reduced by 4.50 percentage points since 15 October last year to 1.25 per cent. To facilitate banks’ funding, the government has given banks access to liquid government paper in exchange for mortgage-backed securities issued by the banks’ mortgage companies. The Government has also provided increased loans and guarantees to Norwegian export industries, and has raised lending limits for state banks. Folketrygdfondet (the Government Pension Fund – Norway) has also been permitted to increase its purchases of bonds. The authorities have arranged to supply risk capital to Norwegian banks through the Norwegian State Finance Fund to strengthen banks’ solidity. In order to curb the fall in activity in the Norwegian economy, government expenditure will increase by more than 10 per cent in 2009. | 0 |
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