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The integration of e-trading with internet banking and banks’ websites is also a notable feature. These IT advancements have enabled banks to gradually replace manual work by automated procedures with on-line real time processing. BIS Review 13/2008 1 2. Adoption of IT by banks in Sri Lanka 2.1 The banking sector in Sri Lanka has undergone a rapid transformation with the adoption of IT-based banking solutions. The widespread usage of IT in Sri Lanka’s banking sector began only in the late 1980s with the introduction of the first ATM by HSBC Bank in 1986. The introduction of ATMs and automated processes has reduced the cost per transaction significantly, as staff overhead costs have decreased. 2.2 Initially, the banks adopted systems developed in-house or used vendor provided systems on a decentralized basis, thus transforming manual systems to automated processes. However, most of the core-banking systems provided by different vendors were ad hoc solutions and on piecemeal basis, i.e. separate modules and technology platforms for key operations such as deposit mobilization and lending, trade finance, treasury operations, and more recently card transactions. Those who opted to implement new core-banking systems together with other sub systems and integrations may have made relatively large investments with sustainable gains to compensate costs. The arrival of new foreign and private banks with state-of-the-art technology-based services pushed other banks in Sri Lanka to move towards the latest technologies so as to retain their customer base and meet competition.
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Today, we will also focus on what this evolution means for low- and moderate-income households. One session will explore on-the-ground community development and labor models, with a focus on the implications for low- and moderate-income earners. This will be an important discussion on how to help workers build the skills necessary to adapt to change—a conversation that should ultimately include workers, their employers, their communities and the public sector, working together. We all need to share in the responsibility of helping people increase and maintain the skills relevant to contributing valued work. Again, I wish you a fruitful dialogue, and I commend you for coming together to discuss such important issues and the trends affecting the U.S. workforce. 1 BIS central bankers' speeches
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Since 1973, international trade has been growing on average by 11% per annum (from 22% of the GDP in 1973 to over 40% of the GDP in 2002), whereas the capital flows 1 increased from 7% of the global GDP in 1973 up to over 20% of the GDP in 2002. 1 Capital flows are defined here as a total of the FDI, portfolio investments and other investments recognized in the financial account of the balance of payments statement, exclusive of changes in receivables and liabilities of monetary authorities and the central government.
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It seems that apart from the – growing for a few years now – role of the global financial markets and the liberalization of commerce, new factors have emerged, such as taking advantage of the technological progress in the ICT and joining the global economy by China and India. Thomas Friedman, author of the famous book entitled “The World Is Flat: A Brief History of the Twenty-First Century”, 24 hows how radical the changes in the organization of the manufacturing process and service performance have been over the recent years, as a result of, inter alia, the use of new communication technologies, such as the Internet, mobile phones, or the appearance of such techniques of gaining and processing information as the Google search engine. I may share my personal thought with you. I have just completed my work on the first draft of a paper discussing global imbalances. Owing to the Internet and new websites providing specialist information and knowledge in the area of economy, it took me three months to write the article. I worked on it only in my free time, of which I do not have much as the deputy president of the central bank. Ten years ago, over a three–month period, I would probably not have been able to collect even half of the literature, not to mention the ongoing monitoring of speeches delivered at all important conferences dedicated to global imbalances.
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But the effects have undoubtedly been felt most severely by manufacturing. The frustration felt by those who have built up efficient and competitive businesses, only to find their market position threatened by a rise in the exchange rate over which they have no control, is entirely understandable. In our judgments on interest rates, we consider it extremely important to take account of differences in the conditions that different sectors of the economy, and different regions of the country, may be facing. For that reason, our 12 Agents, located around the country, keep closely in touch with local business and provide us with a continuous and very up-to-date feedback on local business conditions. Visits like my own today provide valuable opportunities for MPC members to supplement at first hand the feedback we get from our Agents. The message we get - that the rise in sterling has been, and is, causing severe strains, comes through loud and clear and we give that considerable weight in our judgments about interest rates.
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When the weaknesses BIS Review 99/2006 1 were not adequately addressed, the process of reconstituting the Board and management of Bank Islam was initiated in 2003. In such an exercise, key shareholders are expected to be proactive in making prudent and responsible action to remove any member or employee that is found to be unsuitable or not having the required calibre so as to avoid a prolonged process in the reconstruction of the Board and management of the bank. It needs to be recognized that the responsibility for the safety and soundness at the institutional level rests primarily with the Board and the management of each banking institution and the key stakeholders such as the significant shareholders. Institutional investors should also have an active role and make swift and bold decisions in ensuring that only capable individuals are appointed and remain on the Board and senior management of banking institutions. Currently, virtually all the directors and key executives of Bank Islam are new, with diverse banking experience. In accelerating the provisions and in instituting the measures to address the bank's system, processes and business culture, it has now paved the way for drawing in new shareholders. It can now offer a valued proposition. And indeed, the participation of a new strategic investor will in fact further strengthen the bank. This has allowed the existing and new shareholders to focus taking the bank to the next level and to capitalize on the new opportunities the environment offers.
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The average growth rate during these years was just over 3 per cent. This was very different from the average growth we had during the previous ten years. During the transition phase between these periods a number of important changes were implemented regarding the allocation of resources in society. Here I am referring to the deregulation of the financial markets, reforms in the pension, tax and social insurance systems and a reduction in the burden of taxation. In addition, wage formation has been improved, which has probably been facilitated by monetary policy focussing on price stability. It seems to me probable that the return to macroeconomic stability and in particular the structural reforms have actively contributed to the favourable developments of the past decade. On the other hand, I do not believe that the changeover to a floating exchange rate has been crucial in itself. Over the past century Sweden has mostly had a fixed exchange rate and usually shown good growth. At the same time, the past ten-year period has been a special one in terms of the euphoric expectations of the “new economy” connected to telecommunications and IT. This contributed to soaring stock market prices, followed by a fall of historic proportions. History can demonstrate similar episodes. The railway construction in the 19th century gave rise to similar over-optimism, as did the introduction of electric and internal combustion engines at the beginning of the 20th century. Sometimes, these periods of over-optimism have put considerable strain on the financial system.
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These opposing wishes can be reconciled via banks, and also directly via the financial markets. The latter assumes that there are well-developed secondary markets with a large turnover in, for instance, equity. This enables companies to borrow long-term while savers can quickly sell their shares if they so desire. Risks are managed through the spread in borrowing, but also by transferring them, against payment, to others in the financial market. The spread and redistribution of financial risks enables investments to be made that would not otherwise have been possible. The third and final main task is the intermediation of payments, which enables payment to be smoothly made and received for goods and services sold either in the conventional manner or via, for instance, the Internet. 2 BIS Review 37/2003 In countries like Sweden we tend to take it for granted that these functions work. However, if we try to imagine that they did not exist, we will realise how extremely central they are to the functioning of the economy and to our welfare. If we imagine a country where savers and investors did not have access to functioning and reliable banks and financial markets, it is easy to see how this would hamper development. The effect would be a tendency for savings to move abroad, while profitable investment projects did not get off the ground in countries with an undeveloped financial sector. If we look back at the 1950s, we can see that the intermediation of payments functions much more smoothly today.
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Michael C Bonello: Financial crisis impact on the Maltese economy Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the annual dinner of the Malta Institute of Financial Services – Malta, Saint Julian’s, 5 December 2008. * * * I would first of all like to thank you, Mr President, and your Council for inviting me to address the members of your Institute and their guests. I would also like to commend IFS Malta’s growing contribution to the Maltese economy through its learning activities, and in particular its involvement in the Education Council. I understand that it has also been participating actively in the work of the European Banking Training Network, and that it will next year start offering the Foundation Degree Programme of the University of Kent and the IFS School of Finance. When I addressed this distinguished gathering a year ago, the world was a very different place. At the time, the ECB forecast a euro area growth rate of around 2% for 2009; now the talk is about the likely depth and duration of the incipient recession. A year ago we were concerned about the upside risks to inflation; only twelve months later the prospects are of inflation falling well below the ECB’s price stability objective. What has gone so terribly wrong, so quickly? In The Great Crash, 1929, J.K. Galbraith noted that “Far more important than rate of interest and the supply of credit is the mood”.
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On 8 October, six of the world’s major central banks, including the ECB, cut official interest rates by half a percentage point in a coordinated move. Later in the month, the Eurosystem shifted the conduct of its monetary operations toward the injection of liquidity at fixed rates, with full allotment at the minimum bid rate, to ease funding concerns and to drive money market rates closer to official ones. A further half-point interest rate cut by the ECB followed in November, and yesterday we reduced rates by a further 75 basis points amid growing evidence that inflationary pressures are diminishing further. The crisis has so far had a limited impact on the domestic financial system and on the Maltese economy. While the latest data point to continued, if slower economic expansion in the third quarter, Maltese banks continue to benefit from an approach based on traditional intermediation between retail depositors and borrowers. Their funding model, therefore, eschews reliance on wholesale markets; they have substantial liquidity, adequate capital and prudent lending policies. Exposures to asset-backed securities or failed institutions are small, while lending in foreign currency to residents is limited. It would be naïve, indeed dangerous, however, to expect that the turmoil abroad will leave the Maltese economy and its financial system unscathed. First, Malta has a small open economy, highly dependent on trade. As the recession grips our major markets, Maltese exporters will be increasingly affected.
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At today’s oil price, it seems that virtually none of the new field developments planned on the Norwegian shelf can be realised at a profit. But cost calculations may change. Oil prices are not the only prices trending downwards. The cost level on the Norwegian shelf is also drifting down. This is perhaps best illustrated by developments in rig rates. The rates followed oil prices upwards, but have fallen in recent months. At the same time, oil companies are slashing costs. The development of the Johan Sverdrup field is now profitable even at oil prices around USD 30 per barrel. For the Castberg field development in the Barents Sea, the breakeven price has been reduced from more than USD 80 to below USD 45 per barrel. 3 Norway’s oil age is not over. Proven crude oil reserves are larger today than 10 years ago despite substantial sales over the period. 4 Our gas resources are even larger. So far, only a third of the estimated exploitable Norwegian gas resources have been produced. 5 Oil and gas prices will to a large extent determine the quantity that will be extracted. That is something we can do little about. What we can do is to optimise production efficiency on the Norwegian shelf as far as possible. There is still potential in this respect. Increased productivity and lower costs in the oil industry will contribute to sustaining activity on the Norwegian shelf, which will also benefit the oil service industry.
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There have been signs of such behaviour across the housing markets in advanced economies. In anticipation of similar risks arising in the UK the Bank’s MPC and FPC have met jointly to review them. The FPC has identified a graduated range of macroprudential tools available to it for a coherent, proportionate response to these risks, and has taken initial, prudent steps. As the housing market evolves and macroprudential policy responds the FPC and MPC will continue to work together to understand the collective impact of measures on residual vulnerabilities and macroeconomic outcomes. That co-ordination, the shared monitoring of risks, and clarity over the FPC’s tools allows monetary policy to keep Bank Rate as low as necessary for as long as appropriate in order to support the recovery and maintain price stability. For example expectations of the future path of interest rates – and hence longer-term borrowing costs – have not risen as the housing market has begun to recover quickly. Macroprudential and microprudential policy There is also a natural complementarity between macro and microprudential policy because, in essence, macroprudential policy uses prudential policy tools for macroeconomic ends, specifically the mitigation of risks that could in time undermine price and financial stability. 12 So the two will often operate through the same channels – albeit towards different objectives. 11 See Adrian and Shin (2010), Jimenez et al. (forthcoming). 12 For example, the Basel III framework for capital regulation combines microprudential and macroprudential elements.
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In this regard, FAIR will review the scope of financial advisory activities currently carried out in insurance brokers. Some insurance brokers advise on group term life insurance to complement the suite of general insurance products offered to their corporate customers. However, over the years, we have noticed that for some insurance brokers, FA activities and revenue from the advisory business have eclipsed that of their core insurance broking business. MAS is concerned that insurance brokers may not have sufficient management expertise and compliance capability to oversee and manage the FA portion of their business. Lowering distribution costs Our fourth key thrust is to lower the cost of distribution, so that we can keep the overall cost of life insurance products affordable for Singaporeans. Direct sales of simple products The online channel is one of the ways in which we can lower distribution costs. We have seen the use of direct sales via the internet for the distribution of general insurance products such as travel insurance and motor insurance. Why not life insurance? The industry could explore the use of the internet as an alternative distribution channel to offer life insurance to consumers at competitive prices. Online distribution will also mean that products will have to be simplified. Simple term life insurance via the internet could be a good way to help lower cost and make affordable insurance protection more readily available to a wider population. And simple term life insurance is sometimes all that a person needs to protect against risk.
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The financial crisis that shook the industrialized world could have caused a major disaster with unimaginable consequences on developing economies, much more severe than actually occurred. Had it not been for the determination of the economic policymakers around the world to stabilize the financial systems and implement significant fiscal and monetary packages, the economic performance would have been much worse. Nevertheless, the world could not prevent the “Great Recession”, the name with which this period has been already labeled, and world output will fall for the first time in sixty years. The ability of macroeconomic policies to react promptly was particularly important for developing economies, cushioning the impact of the global crisis and making it much milder than in the past. Chile was no exception. As we said time and again from the onset of the crisis, our economy could not and would not be immune to the events occurring in the world. Nonetheless, as we have also insisted, the policy framework we have in place allowed us to mitigate the effects of the global economic scenario. Today, two weeks short of the end of the year, we know that although we were not spared the recession, its impact was much milder than we had been accustomed to. It is enough to recall just a couple of episodes. In 1982–1983, while Chile saw GDP fall dramatically, the world economy was growing. Measured in market prices, Chile’s GDP variation was around 18 percentage points below the world average.
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Supervisors should also stand ready to act if bubbles like phenomena appear in some markets. For emerging economies, measures aimed at stabilizing capital inflows may help and relieve the pressure on domestic financial conditions and prevent further asset bubbles. International financial architecture In the longer run, however, we may need to work together towards a more efficient and stable international financial architecture. Let me highlight three possible avenues for progress. First, we have to find ways of dealing with international capital flows volatility. For one given country, capital controls may temporarily reduce the pressure on its capital account or even permanently limit the volatility of its exchange rate. For the whole international system, however, they may simply displace the pressure to other countries or asset classes and exacerbate, rather than reduce, overall volatility. There might be ways to eliminate those 2 BIS Review 160/2010 negative effects by creating a predictable framework defining the circumstances, modalities and conditions through which temporary controls would be implemented. Second, there would be benefits in finding ways to disconnect reserve accumulation from exchange rate management and, more generally, from balance of payment situations and monetary policies. At present, reserve accumulation can only occur through a conjunction of balance of payment surplus and some degree of exchange rate intervention. Emerging countries have increased their foreign exchange reserves from 4 percent of GDP in 1990 to over 20 percent on average today.
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Global imbalances and financial stability There is broad agreement on the need to rebalance aggregate demand across the world. That shared objective has underpinned the cohesion exhibited by G20 countries during the acute phase of the crisis. It has played an essential role in 2008 and 2009 in restoring confidence and setting the path for the recovery. However, this concerted approach to global BIS Review 160/2010 1 imbalances may have weakened recently. There is clearly a debate going on about two major and interrelated issues: first, the appropriate pace of the rebalancing, with advanced countries feeling a greater sense of urgency; and second, on the most efficient strategies, in particular regarding exchange rates. It would a mistake to ascribe responsibility for imbalances to one specific cause. All countries have legitimate concerns. We have seen in recent weeks a tendency by countries to challenge each other monetary policy. This cannot produce a good outcome. We have to start from three basic realities. First, countries are free to conduct monetary policies they deemed appropriate. Indeed, when Central Banks are independent, they are legally obliged to do so. Monetary policies are conducted with domestic objectives in mind but, as you have noticed, all central banks have the same mandate: to maintain price stability. This is true for all countries, whether small or large. The world has enormously benefited from two decades of price stability resulting from monetary regimes based on Central bank independence and a focus on internal price stability.
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Some of the critical ones are: the security of the bank’s IT systems and protection of logins; confirmation of all transactions BIS Review 15/2008 3 with all counterparties; respect for “Chinese Walls” between front and back offices; monitoring of cancellations and changes in trades coming from a single trader; and “atypical” behaviour such as failure to take holidays by Kerviel – the rogue trader. 3. Changes to the regulatory framework in Sri Lanka 3.1 Several new regulatory measures have been introduced to strengthen the regulatory and supervisory framework in Sri Lanka. In recent times, the Central Bank has moved away from compliance-based supervision to risk-focused supervision. In 2002, the Central Bank issued a voluntary code of governance for banks and financial institutions expecting them to improve their corporate governance. However, the introduction of this code did not show significant improvement at Board level, primarily due to lack of commitment by the Boards. The Central Bank’s regulatory examinations of banks and financial institutions have raised concerns on corporate governance, inadequate systems and controls, exposure to related party transactions, under-estimation of non-performing loans and inadequate provisioning for bad and doubtful loans, weak administration of loan accounts and potential credit risk and lapses in submission of periodical returns to the regulatory authorities. Almost all of these concerns are related to non-availability of a proper GRC processes in financial institutions.
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Following a two-week dual circulation period during which payments could be made using either euro or Slovak koruna, the euro became the sole legal tender in Slovakia from 17 January 2009 and the changeover was very smooth. Today, the single currency is used in an area that stretches from Cyprus to Ireland and from Portugal to Finland. As you know, the euro cash did not enter into circulation until 1 January 2002, when it replaced the banknotes and coins of the national currencies like, in the case of Italy, the lira. To support the cash changeover, which was one of the largest logistical operations undertaken in Europe, extensive information campaigns were successfully run to acquaint citizens with the visual appearance of the euro banknotes and coins. The euro is widely recognised as a currency of major significance on the international level. Some 12 billion banknotes circulate in Europe and beyond, representing a face value of more than EUR 700 billion. The number of euro banknotes in circulation continued to grow since the initial cash changeover in 2002 and their value has almost tripled since the end of the changeover period. With this success story in mind, we are confidently looking forward to the anniversaries to come, which will be marked by the full consolidation of the euro and its further adoption by new member states. 2. The Euro Exhibition Today we inaugurate the Euro Exhibition here in Rome.
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Several of them have issued their own bills for this purpose, particularly where in the early years the finance ministry was reluctant to issue government paper. Whether the market being developed is in government, central bank or private paper, the central banks have had to strike a difficult balance in deciding how frequently to intervene in the markets. In the absence of intervention, a market can remain illiquid and unused. But if the central bank intervenes too much and holds prices too steady, then private market-makers will not develop. This dilemma is not unique to transition countries. Similar dilemmas arise elsewhere, and some western central banks still sometimes play a role, if only a marginal one, in balancing supply and demand in the domestic securities and foreign exchange markets. (iv) Payment and settlement systems One area of activity in which the new central banks do mirror the diversity of their western counterparts is in responsibility for payment and settlement systems. Of the nine central banks in central and eastern Europe, five operate the main clearing system themselves. In the other four countries the position is roughly as it is here, with the central bank participating BIS Review 33/1997 -8- in, and providing final settlement for, a privately owned clearing system. In Russia the central bank has been slow to develop its own payment system, and commercial banks have been putting parallel mechanisms in place.
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Philip R Lane: Monetary policy, low interest rates and low inflation Dinner remarks by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Centre for European Reform, London, 27 February 2020. * * * It is a pleasure to be invited to speak at the Centre for European Reform. Before turning to the longer-term issues that are the primary focus of this speech, I wish to comment on the coronavirus. As emphasised by President Lagarde earlier today, we are closely monitoring the information about the spread of the coronavirus, which is first and foremost a public health emergency, with the most severe impact on the families of those that have died from the virus. In terms of the macro-financial implications, the more quickly is the virus contained, the smaller will be the impact on the world economy and the faster will be the recovery. Conversely, more widespread contagion and a longer interruption in normal economic activity constitute additional downside risks to near-term projections. Accordingly, it is a priority for the ECB to assess on a continuous basis the implications of the evolving situation for economic and financial conditions. In my remarks this evening, I aim to outline some of the factors that are relevant in understanding the role of monetary policy in the current environment of low interest rates and low inflation.1 First, there has been a trend decline in the underlying equilibrium real interest rate since the 1980s.
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This is why we continue to invest a large amount of our time engaging with our counterparts in Europe as well as with the European Supervisory Authorities, the ESAs. We liaise closely with EIOPA, the European Insurance and Occupational Pensions Authority. Julian Adams sits on the EIOPA Board of Supervisors and Management Board and this gives us an opportunity to participate at a European level. A few weeks ago, EIOPA reported on the critical issue of the long-term guarantees assessment and closed its consultation on proposals for preparatory guidelines. We now have acceptance that the classic matching adjustment is a prudent measure, which is hugely important for the UK life insurance industry. We know that many of you still have concerns around the restrictions built into the classic matching adjustment, particularly around the assets that can be used and the effect of possible downgrades in portfolios which are held for the long-term. We will continue to push for a prudent solution that will meet the needs of UK insurers and allows for the continued provision of annuities to policyholders. In doing so, we recognise that some restrictions are needed for the classic matching adjustment to be an effective and prudent measure. The importance of the EIOPA recommendations and their acceptance by the European Commission should not be underestimated. We have come a long way from the suggestion last year that a matching adjustment would not be part of the directive at all.
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But the monetary policy of the Banque de France was backed by the people. Historically, what matters is that all future euro area countries, including France and Germany, cooperated very closely from the very outset to ensure convergence. Today, people throughout Europe are convinced of the importance of price stability. And they are also aware of the fact that being addicted to inflation is like being addicted to a drug that over time has extremely negative effects: stagnation and the destruction of jobs. FOCUS: Nevertheless, many experts are expecting prices to rise significantly again in the near future ... Trichet: We have made it very clear that we always take the decisions necessary to guarantee price stability over the medium term: an inflation rate below, but close to, 2%. Observers and market participants are fully aware of this. It is precisely because of the challenges posed by price stability that we stand ready for action at all times. I call that “credible alertness”. FOCUS: At the moment, the markets are addicted to cheap money – to low interest rates. Politicians, bankers and stock market traders have already become too used to this situation, and as a result the risk of inflation is on the rise. How do you intend to change this? Trichet: You can be sure that the European Central Bank will continue, as before, to maintain price stability. Keeping inflation expectations solidly anchored – in line with our definition of price stability – protects us against the materialisation of both inflationary and deflationary risks.
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They attempt to harmonize legislation and the regulatory tools which become imperatives, worldwide, against financial crime and terrorist financing. At the same time, let us not forget that terrorists too, learn from each other. Sometimes the learning and co-operation may be direct. At other times, it could be indirect. Perhaps they too, have workshops like what we are having today. On 31st January 1996, Tamil terrorist suicide cadres drove a 500 kg. explosive laden commercial truck into the Central Bank of Sri Lanka building. About 5 ½ years later, on 11th September 2001, Al Quaeda terrorist suicide cadres piloted 2 jet fuel laden commercial air crafts into the WTC Twin Towers in New York. The scale and the means employed may have been different, in the two instances. But the method was similar. So, let us remember that terrorists and terrorist financiers will also surely learn from each other and wreck havoc in our respective societies, and they too, must be, obviously trying their best to be ahead of us. Regulators need, therefore, to be constantly abreast of these methods, if not be ahead of them. We need to equip ourselves for this purpose by enhancing our capacity and processes to effectively meet the challenges of terrorism and terrorism financing. I am happy to say that Sri Lanka has made considerable headway in this regard.
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The analysis and projections in this Report contribute to the understanding of how the Central Bank exercises its responsibilities, as well as the opportunities and challenges that we face together. We remain at your disposal to deepen this discussion. Thank you. *** 7 Figure 1 Quarterly GDP change (1) (2) Imacec (1) (3) (contribution, percentage points) (quarterly change, percent) 2.0 2.0 2.4 1.5 1.5 1.8 2.4 Imacec Other 1.8 non-mining GDP 1.0 1.0 EGA 0.5 0.0 Fishery -0.5 2017Q1 2017Q3 1.2 1.2 No minero 0.5 0.6 0.6 0.0 0.0 0.0 -0.5 -0.6 -0.6 2018Q1 15 16 17 18 (1) Seasonally-adjusted series. (2) Other includes trade, manufacturing, financial and entreprenurial services, construction, agriculture, transport&communications, housing services, personal services, public administration, VAT and import duties. (3) Moving quarters. Source: Central Bank of Chile.
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Challenges and dilemmas for central banks and financial regulators Slide 16 ▪ FinTech is not necessarily a threat to a central bank ▪ Smets (2016) | FinTech offers good opportunities to central banks coming from the cost reduction implied by the DLT ▪ The ability to align FinTech developments with central bank objectives depends on the regulations issued by central banks and financial authorities Developments vs stability and trust o Inclusiveness vs risk of uninformed decisions o Decentralization, choice and competition vs. operational efficiency, economies of scale and client knowledge o Personal credit assessment and privacy Challenges and dilemmas for central banks and financial regulators [SLIDE 16] FinTech is not necessarily a threat to a central bank, no matter how striking the contrast between its sobriety and the exuberance of FinTech developers. The Governor of the National Bank of Belgium Jan Smets,4 has argued that FinTech offers good opportunities to central banks coming from the cost reduction implied by the “distributed ledgers” technology; in his opinion, the greatest revolution of FinTech. The ability to align FinTech developments with the objectives of inflation control and financial stability depends to a large extent on the regulations issued by central banks and financial 4 Smets, J. (2016), “FinTech and Central Banks,” speech delivered at the Conference “FinTech and the Future of Retail Banking,” Brussels, 9 December, 2016. 13 Central Bank of Chile 29 June, 2017 authorities themselves.
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Banking services coverage: international comparison 100 90 80 70 60 50 40 30 20 10 0 Adult population with debit or credit card (percent) 90 Debit Adult population with savings in financial institutions (percent) Credit 80 Saving accounts (% of pop > 15 yo) 70 Cards (% of pop > 15 yo) Accounts in financial institutions (% of pop > 15 yo) Adult population with any type of account in a financial institution (percent) 60 50 40 30 20 10 0 OECD High Middle Low LAC OECD High Low Slide 7 50 45 40 35 30 25 20 15 10 5 0 LAC OECD High Low All figures at the end of 2014. Source: SBIF (2016), “Financial Inclusion Report in Chile 2016”. [SLIDE 7] In middle and low-income countries, the proportion of population holding any type of account in a supervised financial institution under supervision amount to 37% and 20%, respectively. These figures are far below the 92% and 90% of OECD countries and high-income countries. The use of bank-intermediated debit and credit cards and savings in financial institutions follows a similar pattern. [SLIDE 8] Insurance services contribute to deepen the financial system due to their long-run investment perspective. Both life and non-life insurance is far less extended in emerging markets compared to high-income OECD countries.
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However, in over two decades’ time, the ratio will deteriorate significantly to 2:1, which means that there will only be 2 persons in the age group of 15–64 supporting one elderly person. The Government has already made it clear that, while we are having budget surpluses, structural budget deficits will occur within a decade mainly due to changing demographic structure. 20. Ladies and Gentlemen, I have just made a long speech and now I would like to leave you with several key takeaways. First, it is very easy for governments to fall into the trap of going down the path of fiscal unsustainability as a result of the collective irresponsibility syndrome as well as population aging. Second, it is very, very hard and immensely painful to try to get out of a government debt crisis. Third, more likely than not, it is the next generation and the next and the next that will have to shoulder the costs and to suffer the pains for excessive spending and stock piling of debts by the current generation. If we don’t want to mortgage the future of our children and grandchildren, try not to leave with them a pile of debts as in the case of many developed countries. How can we do this : we must take great care in not demanding or condoning policies that would undermine the long-established fiscal prudence and discipline of our Government.
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Structural reforms were also needed to correct earlier structural mistakes and restore our economic vitality. Whether the measures that have been taken up to the present are sufficient is a debatable issue; but the point I want to make is that a change of direction and some political action had already been initiated in the 1980s. The work has continued since then and been undertaken by governments of diverse political hues and personalities. In other words, something happened to Swedish economic policy in a wide sense in the late 1980s. When the immediate crisis had been managed in the early 1990s it was clear that the weak government finances would have to be tackled. Moreover, the independent status of our central bank has been formally confirmed, accompanied by a clear mandate. The floating exchange rate regime and the explicit target for price stability have worked well. Several segments of the Swedish economy have been deregulated, though less has been done in this way in the labour market than in markets for goods and services. But the labour market organisations have been working on their own account to improve the system for wage formation. As a result of all this, the Swedish economy is doing better than we have seen for a long time. The economic upswing has now continued for more than six years, during which annual GDP growth has averaged around 3%. And notwithstanding the strong growth of demand, inflation has been lower than one would expect from earlier relationships.
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SIMEX was the first financial futures exchange in Asia. Well before exchange linkages became the norm, SIMEX co-pioneered the world’s first mutual offset trading link with the Chicago Mercantile Exchange, facilitating round-the-clock trading. Renamed SGX-DT, the derivatives exchange today trades a broad range of interest rate, fixed income, equity and energy derivatives. A later initiative was the programme launched in 1994 to develop the fund management industry in Singapore. Our fund management industry was small compared with other financial centres. The Central Provident Fund (CPF) system was absorbing the bulk of the population’s long-term savings, and starving the private fund management industry of local funds. The Government liberalised the rules to allow CPF savings to be invested in approved unit trusts and fund management accounts. MAS and GIC went on to give modest mandates to external fund managers, although these could only be the seed money to grow the industry. At the end of 2000, the total assets managed by Singaporebased financial institutions was $ billion, four times the $ billion in 1994 when we embarked on the programme. New directions The approaches that we took in monetary policy, financial supervision and development have served Singapore well. We maintained low inflation and a macroeconomic environment favourable to growth. Our capital markets have grown rapidly over the past few years, while our forex market is one of the largest in the world. With over 200 banks and merchant banks, 150 insurance companies and 160 investment advisors in Singapore, we have become a major financial centre.
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Such a competitive and pro-enterprise environment will bring out the areas in which we have a competitive advantage. We cannot predict in advance which activities will take off. But when some activities succeed we can promote and encourage their development, always pushing in the direction of market forces, and not against them. Conclusion MAS has built a reputation for credibility, prudence and competence over the last 30 years. But major challenges lie ahead. We have to manage exchange rate policy in an increasingly volatile market, build a sound and responsive regulatory environment that allows the financial industry to thrive, and promote Singapore as a financial centre even in the midst of adverse external conditions. It is always easy to shelter from change, to reject anything new and to adopt a risk adverse approach. But if the sole objective of a captain is to protect his ship, then his vessel would never leave port. Over the last few years, we have altered our course – opening up to, rather than sheltering from, the winds of change. 6 BIS Review 67/2001 To navigate in this dynamic environment, MAS will have to continue to strengthen its own capabilities. The pace of change is intense, and the demands on MAS’ resources, expertise and judgement will only grow. We must broaden our contacts and consultation with market participants and fellow central bankers and regulators. This is the way to keep abreast of the latest developments in the financial industry, and evolving best practices in central banking and financial supervision.
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Those responsible for other policy areas are urged now even more to take the necessary steps to improve longer-term growth prospects for the euro area through strictly and decisively adhering to the aims of the Stability and Growth Pact and through convincing structural reforms in the economy. I should now like to inform you about some of the other matters considered today. The Governing Council examined the outcome of a test run of the production of euro banknotes. This so-called zero production run involved the printing works of the participating countries. The main purposes of this test were, first, to check the compliance of the test banknotes against the technical specifications and, second, to prove that all printing works are in a position to produce the euro banknotes to the same high quality standards. The result of this test was positive, as only some minor technical specifications need to be modified slightly. The printing works will now start their final preparations for the commencement of the mass production of the euro banknotes. The Governing Council also decided to establish an Analysis Centre for Counterfeit Euro Banknotes. As is already indicated by its name, the main purpose of this Analysis Centre will be to technically analyse and classify new types of printed counterfeits, and to store the related technical data in a database. The Analysis Centre will be located at the ECB in Frankfurt. We are now at your disposal should you have any questions.
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Underlying this stable rate of price increases have been offsetting developments at the level of services and goods prices. In February, services price increases moderated further slightly, mainly owing to downward adjustments in prices 1 BIS Review 39/1999 in the telecommunication area. At the same time, goods prices contributed slightly more to overall HICP increases than before, due both to price developments for unprocessed food and a deceleration in the fall in energy prices. It may be worth noting that goods prices may continue to move upwards temporarily, in particular as oil prices increased strongly from mid-February onwards. Such movements reflect the higher volatility of price changes of some categories of goods, in particular imported oil and other commodities. The interest rate decision has been taken in a forward-looking perspective, focusing on the mediumterm trends in inflation and the compatibility of these trends with the Eurosystem’s definition of price stability. In the view of the Governing Council, monetary growth is - at the current juncture - not a risk for future price stability. The decision taken today keeps monetary policy on a longer-term stability-oriented course and, by doing so, contributes to creating an economic environment in which the considerable growth potential of the euro area could be exploited.
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The Maiden Lane II and Maiden Lane III assets continue to generate substantial proceeds, which are distributed monthly to pay down the New York Fed’s Senior Loans to the respective Maiden Lane LLCs. While the New York Fed may direct its investment manager to sell Maiden Lane II and Maiden Lane III assets into the market at any time, as a practical matter, the value maximizing strategy has been largely to hold the assets to maturity while collecting interest income, and principal repayments. Currently, the hold-to-maturity expected proceeds of each LLC’s portfolio are greater than the LLC’s debt to the New York Fed. As of May 20, 2010, the balance on the New York Fed’s Senior Loan to Maiden Lane II was $ billion (inclusive of accrued interest), while the total asset value was $ billion. The balance on the New York Fed’s Senior Loan to Maiden Lane III was $ billion (inclusive of accrued interest), while the total asset value was $ billion. In sum, the LLCs have repaid approximately $ billion of the loans made to them by the Federal Reserve. Based on the current performance of both portfolios, as well as our analysis of forecasts provided by our investment advisor, it is anticipated that the proceeds from both portfolios will exceed the principal and interest due on the New York Fed’s Senior Loans to both Maiden Lane II and Maiden Lane III. We expect to recover our principal and interest on the loans to the LLCs, and on the Fed Facility.
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So far, 21 APG Typologies Workshops have been held since the APG’s formation in 1997, where the last Workshop was held in 2018, jointly with the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) in Russia. These Workshops have contributed to a better comprehension of prevalent money laundering and terrorism financing (ML/TF) threats in the region, by allowing members to understand latest trends, identify key red flags as well as sharing of information on possible counter-measures to respond to the threats. This has assisted members to take the hard decisions to prioritise, apply resources and put in place systems to effectively tackle financial crimes. With so much benefits, the APG is committed to continue holding the Annual Typologies Workshop so that members could keep abreast with the latest ML/TF trends and typologies. As you can see in the agenda, this year’s Workshop aims to discuss two key areas that were approved by the membership earlier. These two topics namely, Digital ID/e-KYC and Financing and Facilitation of Foreign Terrorist Fighters, are timely given the current development in our region. Allow me to touch briefly on these two topics. Digital ID/e-KYC The rapid technology advancement in the last decade has led to significant innovations in the financial sector. Then came the COVID-19 pandemic, which has accelerated the need for financial institutions around the world to shift their operations onto the digitalised platforms. Digital ID/e-KYC is one such innovation and the authorities have responded accordingly.
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José De Gregorio: Capital flows and the interaction between macroprudential policy and monetary policy Keynote speech by Mr José De Gregorio, Governor of the Central Bank of Chile, at the Central Bank of Chile Annual Conference on “Capital Mobility and Monetary Policy”, Santiago, 17 November 2011. * * * I am very grateful for comments and suggestions from Rodrigo Cifuentes, Kevin Cowan, Luis Oscar Herrera, Alejandro Jara, Ernesto Pastén and Claudio Raddatz. Welcome to the 15th annual Conference of the Central Bank of Chile, this time focusing on “Capital Mobility and Monetary Policy”. In this address, I will discuss the challenges of dealing with macroeconomic and financial instability in the context of inflation targeting in emerging economies and analyze the special case of capital inflows as a source of such macroeconomic and financial instability. The monetary policy framework based on inflation targeting and exchange rate flexibility has been successful in providing price stability and the conduction of countercyclical monetary policy over the last decades. Perhaps precisely because of this success, the “separability view”, that takes price stability and financial stability as independent goals, was the preferred policy framework before the global crisis in those countries that explicitly pursue financial stability as a policy goal.1 Nevertheless, the recent crisis and financial turmoil resulted in increasing awareness of the linkages (spillovers) between macro and financial stability, both at the national and the international level.
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This calls for a revision of this view.2 In my remarks today, I would like to start by discussing some general issues regarding the linkages between price and financial stability and the linkages between monetary and macroprudential policy. In the second part of this talk, I will refer to the context of international capital flows and policy responses in a small open economy with inflation targeting, and the relation that monetary policy has to have with macroprudential policies in that context. Interactions between Monetary and Financial Policies Most central banks care not only about price stability, but also about financial stability. The goal for price stability is usually the main mandate of central banks, and is widely understood as maintaining low and stable inflation, which also reduces the deviations of output from its potential. However, the central bank’s mandate for preserving financial stability is less explicitly defined; probably in part because there is less agreement on what is financial stability and what should be considered an indicator of it. Broadly understood, it encompasses a stable and fundamental-driven credit and asset price growth, as well as the absence of large mismatches in the financial sector. It is not the purpose of my talk to narrow the definition of financial stability, so I will use the term in a broad sense. There is also the key distinction between micro and macro financial stability, and in most of what follows I will be focusing on the systemic aspects of financial stability, unless noticed otherwise.
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Estimations showed that Romania’s deficit financing for 2009 could have ranged between EUR 7.5 billion and EUR 16 billion, dependent upon foreign investors’ sentiment and their willingness to roll over the credit lines extended to banks and private companies. This gloomy sentiment was reflected in the weakening of the leu during October 2008 – February 2009. In this context, the authorities have decided to implement policies aimed at ensuring minimum cuts in Romania’s foreign financing. As early as December 2008, the economic programme was envisaged to focus on narrowing the external deficit of both public and private sectors, containing the impact of recession, averting a currency crisis as well as on easing inflationary pressures. Attaining these objectives required the design of adjustment measures meant to bring the economy onto a sustainable path with minimal losses, including in terms of employment. Given the sudden stop of the massive capital inflow episode, the leu’s exchange rate developments posed serious challenges. While in the past foreign currency inflows generated the overappreciation of the leu well above the level indicated by exchange rate fundamentals, the reduction in external financing and the degree of uncertainty tended to result in the unwarranted depreciation of the leu. The challenges were all the more so great that, despite the heavy foreign currency purchases performed during 2005–2007, the NBR only managed to contain the unsustainable appreciation of the leu, instead of completely avoiding it.
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Consequently, during 2005–2008 the NBR did not refrain from making discreet forex market interventions by purchasing considerable amounts of foreign currency so as to preclude the fast overappreciation of the leu, which was likely to cause a dangerous erosion of the Romanian economy’s external competitiveness and to lead to a fall in inflation, yet in an unsustainable manner. At this juncture, I should bring to the fore other arguments in favour of a managed float policy for the Romanian currency. The major reason underlying the NBR’s purchases of foreign 10 BIS Review 5/2010 currency consisted in the fact that the leu strengthened in both nominal and real terms, concurrently with an extremely loose wage policy in 2006 and especially in 2007. During those years, pay rises overtook productivity gains, thus reducing the previously accumulated competitiveness gains and contributing definitely to the worsening of the balance of payments current account. Another argument I would like to point out is of a precautionary nature. As it has been noticed in practice, the end of cycles of synchronous large capital inflows coincide with somewhat abrupt depreciation episodes, which can be avoided provided sufficient reserves are available. The pro-cyclical conduct of fiscal policy that added to the vulnerabilities associated with the widening of the current account deficit during 2004–2008 also underpinned the NBR’s purchases of foreign currency. In principle, fiscal policy may either cushion or magnify the undesired effects of large capital inflows.
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Although growth remained high in the emerging economies and exceeded the long-term trend in Europe, economic activity in the US slowed considerably in autumn on the back of the credit crunch on the property market. The last few months of 2007 were characterised by the emergence of considerable uncertainties regarding the future path of the global economy, with the latest energy price hikes and, of course, the destabilisation of the financial markets in autumn being the main sources of concern. Switzerland has not remained unscathed amid all this turmoil. Since the summer, we have seen substantial stock market corrections and a return to lower-risk investments, particularly in Swiss francs. However, we experienced these turbulences during a very dynamic phase in our economic cycle. Despite the volatile climate of recent months, the Swiss economy has continued to enjoy sustained growth. For the fourth year in succession, real GDP growth was significantly higher than the longterm average, reaching 3.1%. We owe this gratifying result to the extremely broad-based nature of Swiss economic growth. As already in 2006, the global economy and the performance of the Swiss franc facilitated exports, accounting for a jump of some 10% in this sector. What is more, robust domestic demand also played a role this time round. Significant increases in real salaries and the continued labour market upturn had a positive impact on private consumption, while the robust financial health of the corporate sector coupled with a rosy business outlook helped to stimulate investment.
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We now have the same policy commitment to price stability as the rest of the world. That leaves around 40 per cent of the depreciation to account for. Our work at the Riksbank suggests that in the 1970s and ’80s, the major part of the real exchange rate’s weakening can be attributed to deteriorating terms of trade, low GDP and productivity growth compared with the rest of the world and growing external debt. One of the models we have used indicates that about three-quarters of the depreciation stemmed from relatively poorer growth in Sweden and about a quarter to worsening terms of trade. The picture in the 1990s looks different. As far as we can tell at present, in the past decade neither productivity nor GDP growth has been poorer than in the rest of the world (Fig. 1). So in this respect, too, there seems to have been a change for the better. It is partly against this background that the krona’s persistently weak average path in the latter part of the 1990s is surprising. BIS Review 75/2001 3 Fig 1.
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For the year 2009, a GDP loss of about 4 percent was recorded for the OECD countries. There is possibly also a permanent depressing effect on medium-term potential output.3 Governments and central banks took unprecedented action globally in response to the perils originating from the financial market turmoil. Euro area governments, for instance, increased their deficits on average by more than 5 percentage points of GDP in 2010. This was a joint consequence of rescue packages for financial institutions, cyclical stimulus packages and operations of automatic stabilizers. In 2010, Ireland recorded a deficit of over 30 percent, resulting from a one-off support for its banking sector. Debt-to-GDP ratios in advanced economies have increased on average by about 25 percentage points since 2007. Central banks around the world expanded their balance sheets, though to different extents and with different asset-liability structures. It is clear that in our democracies, such measures taken by fiscal and monetary authorities can only be an exception. They are not at all repeatable, neither in nature nor in scale. The disasters that we witnessed in the financial system must not repeat themselves. It all leads to one conclusion: Reforms are urgent! The Basel III framework means some progress on the way towards a more sound and resilient financial system and in my view it is at the core of financial regulation. Nonetheless, to complete the G20 Action Plan, further policy actions need to be taken.
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In current conditions of uncertainty, investors – reading our rate guidance – tend to anticipate a more extended period of time to the date of a rate hike. By the chained structure of our forward indications of all instruments, this automatic adjustment mechanism extends the horizons for full reinvestments too, and thus reinforces the impact of rate guidance on longer-term interest rates. Moreover, our new series of long-term refinancing operations (TLTRO-III), which started in September 2019 and will end in March 2021, help to ensure favourable bank funding conditions in support of an efficient bank-based transmission of monetary policy in the euro area. The combination of our monetary policy measures continues to prove effective in stabilising the economy and in ensuring very favourable financing conditions. This is evident in the successful pass-through of our policy measures to financing conditions that matter for the real economy. In fact, bank lending rates for both firms and households have continued to decline in the recent months and remain close to historical lows. Loan growth to non-financial corporations, while moderating in tandem with the slowdown in the economy, is still supporting capital creation and the mortgage market. Our recent Bank Lending Survey confirms that credit supply conditions are favourable. 2/3 BIS central bankers' speeches Overall, the present monetary policy stimulus lends substantial support to growth and inflation developments, buffering to a large degree the negative impulse from global factors.
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It also makes changes to the obligations of product manufacturers by imposing a product design process that takes account of the interests and characteristics of the targeted customers. Lastly, extensive work on the delicate subject of the compensation of sales staff and other employees should be completed in the coming months. As regards the latest and not least substantial European developments in the area of business practices, the aim of the drive to standardise rules in the framework of a crosssectoral approach is simplification. This drive should be extended. An obvious case is the Key Information Document of the PRIIPS Regulation. It will allow customers to easily compare two investment products, irrespective of whether they are classified as bank products, insurance products or financial instruments. But I could also cite examples of work in the area of “product governance”, conflicts of interest or compensation, which bring regulations from the three sectors closer into line. I will finish by discussing changes stemming from new technologies. We are all aware that they change business practices by affecting consumption patterns and customer relations. The contractual nature of the banking and insurance industries means that relationships are rich and often long-standing. Such relationships are based on the consent of both parties to the contract and execution on the basis of trust. Today, over and above agreement on the price and on the object, which forms the basis for a sales contract, the possible use and security of customer data is increasingly relevant.
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François Villeroy de Galhau: Supervision of business practices Opening speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the Autorité de contrôle prudentiel et de resolution (ACPR), at the ACPR conference “Supervision of business practices”, Paris, 20 November 2015. * * * Ladies and gentlemen, I am delighted to welcome you today to this new conference organised by the Autorité de contrôle prudentiel et de résolution and would like to thank you all for coming. This is an opportunity for me to tell you for the first time how important I find this type of event, where the Authority that I chair explains its actions and the principles that guide it. It is also an opportunity for us all to listen to the parties concerned, on a topic that brings us together today – that of the supervision of business practices – on which I would like to put forward three ideas: (I) First, our supervision of business practices is important for the current mobilisation of the nation. (II) Second, our supervision of business practices is important for financial stability. (III) Lastly, our supervision of business practices must increasingly take account of developments in technology and changes in Europe. Our supervision of business practices is important for the current mobilisation of the nation. Many lessons can be learned from the dramatic events of Friday 13 November in Paris and its suburbs, which requires of us a total mobilisation.
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14 We can see that they have not been entirely accurate. The forecasts we have produced for the exchange rate of the krona since the exchange rate was allowed to float have often indicated that the krona would strengthen. Typically, however, this strengthening has only materialised in periods preceded by a substantial weakening of the krona exchange rate, as in the periods 2002–2003 and 2006–2007. 12 Rose and Yellen (1989) is a classical study in this field. 13 The effects of a weaker krona on the Swedish economy were also described as an alternative scenario in MPR08:3. 14 The TCW index weighs together the krona exchange rate against other currencies according to the other countries’ share of Sweden’s foreign trade. The Riksbank’s forecasts in the Figure are from the first report (Monetary Policy Report or Inflation Report) of that year, which has usually been published in February. BIS Review 3/2010 5 Figure 2 The Riksbank’s forecasts for the krona exchange rate (TCW index) Index, 18 November 1992=100 Source: The Riksbank. Figure 3 Consensus forecasts for the krona exchange rate (approximate TCW index) Index, 18 November 1992=100 Sources: Consensus Economics and the Riksbank. 6 BIS Review 3/2010 However, the Riksbank has certainly not been alone in expecting that the krona will strengthen. Figure 3 shows the forecasts according to “Consensus forecast” for an approximate TCW index. 15 This can be said to represent the average of the other analysts’ forecasts at the same point in time.
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It is this tradeweighted krona rate that the Riksbank tries to analyse and forecast. If one looks at the period with a floating exchange rate (since November 1992), one can draw the conclusion that the nominal and real exchange rates are strongly correlated. This is because exchange rates, which translate prices into a common currency, change quickly, while price levels change slowly. Nominal exchange rates are determined at the trading counters daily, while it takes time to change prices. Figure 4 Nominal and real TCW-weighted exchange rates Index, 18 November 1992=100 Note. Broken lines represent the Riksbank’s forecasts. The real exchange rate has been calculated using Swedish and TCW-weighted CPI. Sources: Statistics Sweden and the Riksbank. How do we compare the impact from the nominal exchange rate on inflation, which I took up earlier, with Figure 4, which shows a strong correlation between the nominal and real exchange rates? According to the earlier example, only around 15 per cent of a nominal exchange rate change “spills over” into domestic inflation. This means that 85 per cent of the nominal exchange rate change does not have any effect on inflation and that the real exchange rate is thus affected by 85 per cent of the change in the nominal exchange rate. There is thus a strong, but not complete, correlation in the short term between the nominal and real exchange rates.
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The unfortunate result was that these banks were not as protected from falling housing prices as many had assumed, and this contributed to the substantial decline in stock prices and the need for government support for many of these large financial intermediaries. Myth 4 – Investment banks were not subject to runs, because their liabilities were collateralized There has long been an understanding, and indeed a regulatory presumption, that banks could be subject to “runs,” resulting in a need for both deposit insurance and a heavily regulated environment to reduce that risk. At the same time, it had largely been presumed that investment banks were better protected against such runs. While the balance sheets of investment banks had substantial short-term liabilities, many of them were collateralized. Investment banks would buy longer-term securities but finance them with short-term borrowing (using repurchase agreements). It was assumed that because there was collateral backing up the loans, borrowers were protected and would not run. Financing securities with short-term borrowing allowed investment banks to substantially expand their balance sheets, as shown in Figure 10. However, the lenders in this market 3 Collateralized debt obligations (CDOs) constructed from subprime asset-backed securities (ABS) are perhaps the most potent example of underestimation of risk. Triple-A rated CDOs did more damage to balance sheets than Triple-A rated ABS. 4 Holding to maturity may have moderated some losses, but many did not have that luxury. Investors needing to sell with the threat of downgrades suffered substantial losses, particularly in an illiquid environment.
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Luis de Guindos: Europe’s role in the global financial system Keynote speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the SUERF/Netherlands Bank Conference “Forging a new future between the UK and the EU”, Amsterdam, 8 January 2020. * * * It is my pleasure to deliver the keynote speech at this year’s SUERF/DNB conference. The title of this conference is very apt. Brexit will certainly require a new future to be forged between the United Kingdom and the EU. The United Kingdom’s departure has important implications for the EU financial system, most notably for capital markets. So we need to give serious thought to optimally shaping the future relationship between our financial sectors in the awareness that London, though likely to remain an important global financial centre, will become less integrated with EU markets and firms. We will also need to step up our efforts to further develop the EU’s domestic capacity in capital market activities, so as to avoid a Brexit-induced increase in financial fragmentation, while at the same time ensuring that the United Kingdom and EU Member States do not engage in a race to the bottom on regulation. Taking up the theme of the conference, I would first like to focus on how to forge a new future between the United Kingdom and the EU with regard to some key financial activities. I will then turn to the much-needed drive to strengthen the European financial system by completing the capital markets union and banking union.
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In a speech on economic prospects in July 1957, the former Chancellor of the Exchequer, who had recently become Prime Minister after the resignation of his predecessor following an unsuccessful military excursion in the Middle East, said: “Indeed, let us be frank about it: most of our people have never had it so good. Go around the country, go to the industrial towns, go to the farms, and you will see a state of prosperity such as we have never had in my lifetime – nor indeed ever in the history of this country. What is beginning to worry some of us is, is it too good to be true? – or perhaps I should say, is it too good to last? … Our constant concern today is, can prices be steadied while at the same time we maintain full employment in an expanding economy? Can we control inflation? This is the 3 problem of our time”. Some of you may think that it is the problem of our time too. CPI inflation has now risen above 3%, the highest rate since the MPC was set up. Although I believe we are better equipped to maintain stability now than fifty years ago, largely because we have a monetary framework based on an inflation target and clearly defined responsibilities for the Bank of England, we should perhaps look in more detail at how the MPC has worked before coming to a final judgement on the likelihood of continued success.
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The geographical proximity and cultural similarities have been reinforced by the diverse strengths that exists in the region. These factors have been important in enhancing the integration process. As this greater regional economic and financial integration is advanced, it will serve as a powerful catalyst for the future expansion of intra-regional trade and investment, creating a self-sustaining and mutually reinforcing economic growth in the New Nusantara region. Ladies and gentlemen: It is my pleasure today to speak on the potential role of an integrated economic and financial platform within the Nusantara region, a region of rapid economic growth in which almost 300 million Muslims resides. My remarks will focus on the potential generated by a collaborative platform and the significance of building linkages between the Nusantara region with other parts of the world. The region's current economic progress, prosperity and financial stability has now accorded us a new strategic window of opportunity to develop new value propositions to unleash the full potential accorded by the accelerating economic and financial integration process. There are already encouraging formal and informal inter linkages between our respective financial markets as well as a higher level of engagement between the respective corporate communities, the market participants and the authorities. A collaborative platform that is based on the diverse comparative advantages of the Nusantara economies can benefit from the complementarities between our respective economies. Essentially, these opportunities will increase the potential to expand markets, increase products lines and deepen the research and development capabilities.
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More than that, developments during the year have helped in several ways to strengthen the prospect of our being able to sustain this improved economic performance going forward. A year ago, output was growing at over 3%, which is arguably faster than we can hope to sustain for any length of time without running risks of generating inflationary pressures. We needed therefore to see some degree of moderation in the pace of overall demand, to ensure that the economy could continue to grow without generating strains. For preference, the moderation needed to come principally in the area of consumption spending, which had been the major factor driving growth through last year, as households enjoyed the benefits of high employment and rising incomes. Sustainable growth in household spending is, of course, highly desirable and very much the mark of a healthy and growing economy; but it needed to be balanced against the equally desirable planned increases in government spending on public services, and the higher levels planned for public investment on improved infrastructure, both made possible by the government's strong fiscal position. The need was to ensure that all these sources of demand did not over-stretch the economy's overall productive capacity. The evidence that consumption spending may indeed have moderated somewhat towards the end of the year, and in parallel that there has been a resumption of growth in business investment, represents an improvement in the balance of demand in the economy which in turn improves the prospect of our being able to sustain growth going forward.
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First, we need to recognise that we are talking of slowdown in the US from what have been extremely buoyant rates of growth, maintained for several years past, as the US economy has reaped the benefits of the application of information technology and the rise in productivity growth that had engendered - the new economy. There is plenty of evidence that growth in the US needed to slow somewhat, to alleviate imbalances in the economy. So part of what is happening should be helpful in providing a sounder base for sustainable recovery. 2 BIS Review 22/2001 Secondly, the new economy is, in the US, a reality: there plainly has been a continuing process of improvements in efficiency, achieved by harnessing the benefits of IT, which have raised the growth capacity of the economy. It seems unlikely that those gains will vanish into the night and, if they remain in place, they should provide a basis for a recovery in US growth when the present adjustment has run its course. That, of course, says nothing about how long the adjustment may take. But a third important feature is that the Federal Reserve has demonstrated a willingness to act rapidly and vigorously in easing monetary conditions in response to the downturn. Monetary policy cannot remove economic cycles. But active and intelligent management of interest rates can help substantially to alleviate the severity of the adjustment. And a fourth factor suggests that the markets share this view.
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Increases in electricity and oil prices are examples of this type of supply shock. It is therefore important to separate the effects of the energy price rises from the effects of other driving forces behind inflation. This is also completely in line with the clarification of the inflation target published by the Riksbank in 1999. The Riksbank's assessment is that energy prices one to two years ahead will fall back to roughly the same levels as forecast before the increases. However, these forecasts include a slight trend increase in electricity prices. Uncertainty in connection with the Iraq conflict Assessing more exactly how much is a temporary rise in inflation and how much depends on more lasting tendencies is a delicate task. The assessment of economic activity, both here in Sweden and abroad, plays an important role here. The uncertainty currently prevailing in the global economy makes it more difficult than usual to interpret various economic indicators and to predict future developments. When weak figures are received from various sources, it is difficult to know whether they are the result of a slowdown in the economic recovery due to fundamental reasons, such as households wanting to increase their saving to compensate for the large stock market falls, or whether they are the result of an inability to act while waiting for the solution of the Iraq crisis. The assessments of the economic situation and even more the oil prices are largely due to the assumptions made with regard to developments in the geopolitical situation.
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Let me emphasise, before I go into this, what is actually obvious; a war entails much more than just economic consequences of the type the Riksbank has reason to observe in its Inflation Report - first and foremost considerable human suffering. Let me also say that in this field - i.e. geopolitics - we are of course amateurs, although we have tried to use our international contacts when putting together our forecast. The Riksbank's main scenario assumes a solution will be reached in the Iraq conflict that does not give any reason to significantly reconsider the picture we have of a gradual recovery in economic activity. The surveys we have made indicate that the macroeconomic consequences of a brief war will not be so different from a less dramatic development. In this sense one can say that our main scenario is consistent with both a peaceful solution and a brief war. The Inflation Report describes in greater detail how we assess the effects of a worse development, which is, of course, a possibility. A weaker recovery An increasing number of indicators over the past few months have given the impression that the international economic recovery will be more protracted than anticipated. The main difference from the assessment we made in the December report, is the deterioration in prospects for the euro area. All in all, our assessment is that international growth will be slightly lower this year than we believed when making our forecasts in December.
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1.8 Conclusion At this point, no unequivocal conclusion can be drawn concerning Iceland’s optimal currency and exchange rate policy option. All of the possibilities have advantages and disadvantages. Although the assessment of these options is based on a relatively sound economic foundation, there is no simple economic formula stating how these pros and cons should be weighted together so as to yield a clear answer. In addition, it is quite uncertain how these factors will develop in the future. But it should also be noted that this report contains numerous findings indicating that the selection of a currency and exchange rate policy may be less important for economic welfare and stability than might be expected in view of the public discussion on the issue. An example of this is how different countries have fared during the financial crisis (see Chapters 16 and 17) and how likely asset price bubbles are to develop inside and outside a currency union (see Chapter 11). Based on the limited experience to date, it appears that fiscal policy, financial system structure and regulatory framework, and the incentives and opportunities of private agents to borrow are much more important. One of the reasons it is difficult at this point to draw a clear conclusion about which path Iceland should take is the uncertainty about near-term developments in the two most likely scenarios: an improved framework for the króna and removal of the capital controls, or EU membership and eventual adoption of the euro.
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In the United States the real earnings trend since 1940 has been virtually constant between 2% and 3%, while - as I just mentioned - the real return on shares shows a trend break after 1982 (Fig. 3).2 Are present share prices fundamentally justifiable? I shall now use a simple model to examine whether the present level of share prices can be justified in fundamental terms.3 Simplifying somewhat, this model equates the value of a share with the present value of the future income the share is expected to generate. A valuation in P/E terms accordingly rests on the assumptions that are made about these future incomes - the future growth of the company’s earnings - and the factor by which these incomes are discounted - the stock market’s expected return. We can insert alternative values for these assumptions to find the combinations that might justify different P/E ratios (Fig. 4). It will be seen that a P/E ratio of 14 can be warranted if the expected real return is 6% and the real growth of earnings averages 2.5%. These figures are all approximately in line with the historical trends.
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The above indicators unveil the Central Bank of Kuwait’s prudent policy and proactive approach that helped banks to weather one of the most difficult economic crises from a position of strength, and continue providing their services efficiently. Having considered the positive results and resilience of the banking sector, the Central Bank of Kuwait decided to lift restrictions and lay down a map to redirect its regulatory mitigants to prepandemic thresholds. Notwithstanding the banking sector’s sound indicators, high liquidity ratio and strong solvency, the estimated liquidity and solvency ratios above the minimum regulatory thresholds, and outlook of healthy growth, the Central Bank of Kuwait decided to gradually unwind the regulatory mitigants in line with the IMF recommendations. The first phase of our 2-phased transition began early 2022 by withdrawing 50% of the regulatory mitigants. The second phase of withdrawal process shall be completed early 2023 to return to the previous pre-crisis regulatory thresholds. Meanwhile, we shall still support small and medium enterprises by maintaining the same risk weight, and closely monitor the performance of the banking sector and conduct stress testing on its various units. Though the Central Bank of Kuwait is satisfied of the resilience of the banking and financial sector in the State of Kuwait, the developments recently seen in the world and the evolving risks surrounding the prospects of the global economy drive our efforts to protect our economy and banking and financial sectors from external shocks through proper monetary policies and supervisory measures.
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It is understood that the previous mitigants and supporting measures taken by central banks, including the Central Bank of Kuwait, are were to survive coronavirus induced health/economic crisis, and had been unwound once they were no longer needed. The challenges and risks seen today differ from those we experienced during the past two years, and require attention, monitoring of their impacts on our economy and banking and financial sectors, and applying the appropriate measures and policies to face them. Among such risks is deceleration of the global economic growth. IMF forecasts in July indicated a decline in growth to 3.2% in 2022 and 2.9% in 2023, driven by several shocks, most notably is deceleration of the American and Chinese economies, Russian-Ukrainian conflict, the geopolitical risks in Southeast Asia, the elevating tensions between China and Taiwan, continued supply and demand imbalance as a result of disruption of supply Page 3 of 4 chains of many basic commodities (mainly food and energy), risks of the continuous rise in global commodity prices and decade-old high inflation rates, especially in USA and major European economies. To contain the prolonged and far-reaching rise in inflation rates, many central banks tightened their monetary policies, by withdrawing the stimulus packages they had taken to withstand the negative impacts of the pandemic, reduced asset purchase programs, and increased interest rates. Such actions are expected to result in inevitable economic costs and we, however, hope that these would not adversely affect our economic sectors, banking and finance in particular.
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And so the foundation was laid for a modern investment policy whose aim is to optimise the risk/return relationship for assets. However, this was only possible to the extent allowed by monetary policy, which has always had priority over investment policy considerations. In addition to expanding the SNB’s freedom of action, investment and risk control processes were fundamentally adapted and adjusted to the new requirements from 1997 onwards. As a result, the SNB frequently found itself in the role of central bank pioneer, not only as regards the choice of investment instruments, but also in the area of investment processes. It is with some pride that I can report how, in recent years, we have received enquiries from other central banks about our investment processes. The SNB has also played a pioneering role with regard to transparency. The composition of our investments is, to a large extent, accessible to the public. Indeed, the SNB is one of the few central banks which publishes both its investment allocation and the net result on foreign currency positions on a quarterly basis. Investment policy committed to security, liquidity and return Nowadays, therefore, when investing our currency reserves, we base our decisions on the criteria of security, liquidity and return. The currency reserves of a country serve primarily as a means to prevent and overcome crises. In order to fulfil this function, they must, in essence, be liquid. In the past, the SNB defined liquidity by specifying the term of the bonds.
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If we look at Sweden, productivity growth in the business sector has been very weak since 2006, a year or so before the global financial crisis occurred. We have often had to revise down our productivity forecasts as a result of the surprisingly weak development. Productivity has also shown weak development in other developed countries recently, which indicates that it is the result of a joint trend. There are many possible explanations for the decline. Some economists, such as Robert Gordon, say we are in a period of very low productivity growth that will be the new normal for a rather long time. According to this point of view, a large share of the fruits of digitalisation have already been harvested. As early as 2005, for instance, several economies had adapted their business methods and models 3 Roine (2016). 2 [12] to the internet.
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In my view, there are five principles that should be followed. First, create international institutions only when there is a need to do so. International institutions should focus on those areas of global governance where we need to tackle problems collectively – whether on trade, the environment, or large spillover effects of changes in macroeconomic policy. Second, ensure that the commitments countries enter into are clear. The job of institutions is to support those commitments. In many cases, like an umpire, their job will be to uphold them. That will only be possible if the players – countries – are very clear about the agreed rules of the game. Without that, any further design is pointless. Third, provide institutions with the necessary tools to umpire the commitments of nation states. But, just as umpires are accountable for their performance to the whole community of cricket-playing nations through the International Cricket Council, the staff and management of the international institution should be accountable to the whole community of nation states for their performance in upholding the rules. Fourth, recognise that we do not start with a blank sheet of paper. We must accept the constraints of history. Existing institutions have an institutional memory, talented staff and much of the infrastructure that will be needed in the future. But that is not to say reform will be easy – there are far too many vested interests for that to be the case. Fifth, avoid unnecessary duplication.
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The test is whether member countries are ready to make genuine commitments to each other. Without that the institutions lack any real purpose. So the subject of my talk today is why we need rules of the game to govern globalisation, and the institutions that are necessary to oversee those rules. 2. Is the post-war settlement still relevant today? At the end of the Second World War, a new global order was put in place by the United States, Britain and their allies. One of those primarily responsible, US Secretary of State Dean Acheson, described his time as being “present at the creation” of a new global order. A range of new international institutions was created – the United Nations, the two Bretton Woods institutions (the IMF and World Bank), the OEEC that implemented the Marshall Plan (and later became the OECD) , NATO, and GATT (which has subsequently been succeeded by the World Trade Organisation). Those institutions are now, for the most part, past their 60th birthdays. And there has been much heartsearching over the past few years as to their role and governance. Unless the spirit of the original founders is rekindled, there is a real danger that the present institutions will wither on the vine leaving us with a more unstable and fragile international environment. As Martin Wolf pointedly wrote, “To defend a liberal world economy is not to defend the International Monetary Fund, the World Bank, the World Trade Organisation or any specific institution.
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The residual impact of the one-off factors on annual inflation is set to be entirely gone in one year’s time – in the first quarter of 2020. Now, I will say a few words about the economy and the forecast. Economic growth rates remain close to their potential levels. Unemployment is invariably low and close to its natural rate. Having said that, certain economic activity indicators continue to post a mixed performance. The forecast remains essentially unchanged. Given the state of the global energy market over recent months, we have downgraded the oil price path somewhat in the baseline scenario. The assumption has been updated to reflect faster declining oil prices in the course of 2019 – based on the calculation that the average oil price will total $ per barrel (from the previous estimate of $ a barrel). Moving forward, the average price is set to remain at this level between 2020 and 2021. As before, our approach to oil price assumptions is conservative. The oil price volatility we saw in the fourth quarter (from $ to $ a barrel) is an indication of the validity of this approach. The running fiscal rule will ensure that the impact of changing oil prices on economic growth 2/3 BIS central bankers' speeches remains limited. We therefore leave our GDP growth forecast unchanged at 1.2-1.7% for 2019, admitting it may rise to 2-3% in 2021 as the Government implements its structural reforms. Changing oil price assumptions have stronger implications for our estimated balance of payments.
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Source: QRTs, PRA analysis 10 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 10 Chart 5: The impact of MA on the base balance sheet. Source: PRA analysis, Solvency II Regulations Chart 6: Credit Spread on Investment Grade Corporate Bonds. Source: Bloomberg data, PRA analysis 11 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 11 Chart 7: Decomposition of Bond Spread. Source: PRA analysis, Solvency II Regulations Chart 8: FS Components: Non-Financial CQS 3 (BBB-rated). Source: PRA analysis, YE20 12 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 12 Chart 9: FS – Credit Quality Step 2 (A-rated). Source: PRA analysis, YE20 Chart 10: Illustrative A-rated 10 year financial bond. Source: Bloomberg data, PRA analysis 13 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 13 Chart 11: 2020YE FS as % spread - Illustrative A-rated 10 year financial bond. Source: Bloomberg data, PRA analysis using YE20 FS 14 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 14
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The illustration is from our third Monetary Policy Report in 2012. If monetary policy at that time had given weight only to the low level of inflation, the key policy rate should have been lowered sharply and kept close to zero for some time, as indicated by the red dotted line in the upper left panel. Inflation would then have been predicted to pick up relatively fast, partly owing to a weaker exchange rate. Taking into account our second criterion for an appropriate interest rate path, the key policy rate would have been somewhat higher in the short term, as indicated by the blue dotted line. Inflation would have been predicted to take somewhat longer to rise towards the target, but developments in output and employment would have been more stable. Finally, taking into account considerations of robustness (criterion 3), we reached the interest rate forecast indicated by the black dotted line. [Chart: Decomposition of change in the interest rate path] Our communication of interest rate decisions is aided by a decomposition of changes in the interest rate path. This is a model-based illustration of how the change in the interest rate forecast from one report to the next can be decomposed into contributions from exogenous disturbances. The intention is to communicate the driving forces behind any changes in the interest rate path. The chart illustrates the different forces behind the change in the interest rate path from the last report in 2012 to the last report in 2013.
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Major variation between different groups Cashflow effect on disposable household income of a rate increase of 1 percentage point 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 All borrower households (DTI ≈ 2.6) 10 per cent most highly indebted (DTI ≈ 8.7) 0 Note. Per cent. Refers to the average for each group. Within each group, the figure in paranthesis refers to the average debt-to-income (DTI) ratio. Source: The Riksbank This variation among households can also have a bearing on the total effects on consumption. If the most highly indebted households adapt their consumption mostly in the event of a given change in income, the total effect will also be greater. As the interest rate affects housing prices, it can also affect the scope of households to consume by borrowing against their home as collateral. Currently, many households not only have high debts in relation to their disposable income but also in relation to the value of their home. But in order to ascertain how differences among households can affect total consumption, we would need better data on household assets. 15 From this perspective, there is therefore reason to proceed cautiously with rate rises, in light of the uncertainty surrounding how the most highly indebted households will act.
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Jarle Bergo: The outlook for the Norwegian economy and the challenges ahead Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at Norges Bank, Bodø, 25 August 2005. Please note that the text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 11 August, Inflation Report 2/05 and on previous speeches. The references and the Charts in pdf-format can also be found on the website of the Norges Bank. * * * The economic situation The Norwegian economy is in an upturn and is now expanding at a brisk pace. Inflation remains low, but has edged up since last year. The risk of a fall in the level of prices and markedly lower inflation expectations has diminished. At the same time, there appears to be little risk that inflation will rapidly move up to a level that is too high. The reduction in the interest rate through 2003 and into 2004 has resulted in low real interest rates. For a period, the real interest rate has been considerably lower than normal. The low level of interest rates is supporting the high activity level in the Norwegian economy. The economic upturn is broad-based. At the beginning of the recovery, activity was primarily fuelled by private consumption, traditional exports and petroleum investment. In addition, growth in mainland fixed investment has gradually gained considerable momentum.
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Over time, a strong krone and weak demand among major trading partner countries will probably have a dampening impact on activity in Norway. Little excess production capacity in OPEC countries, combined with the prospect of lower production in non-OPEC countries, has probably influenced oil prices. At the same time, there are prospects of continued strong demand growth in important oil-importing countries, such as China and some other emerging economies. More on the oil market The IMF has analysed supply and demand in the oil market for the period ahead in the latest issue of “World Economic Outlook”, published in April of this year. Assuming an annual global GDP growth of approximately 3 per cent and an oil price in line with market expectations in February 2005,1 demand for oil is expected to increase by around 2 per cent per year until 2030. Price expectations are higher now, but according to IMF calculations, the demand for oil in the long-term reacts relatively little to price changes. The growth in demand primarily reflects higher demand for fuel for motor vehicles, particularly in non-OECD countries. An increase in per capita income in China will in particular lead to a sharp increase in car use. Output in non-OPEC countries will peak in the not-too-distant future – in 5 years, according to IMF estimates. Higher demand will require higher output in OPEC countries. These countries have substantial oil resources but are currently producing close to capacity. Production capacity must therefore be increased.
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Stephen Cecchetti sums it up as follows: “Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster” (cf. slide 27). 27 I myself have compared lending not with a double-edged sword, but with food. A balanced diet is essential for survival. Excessive and unhealthy eating, however, can become a problem. Judicious borrowing and lending is an essential foundation of a flourishing economy. Excesses on the credit market, by contrast, can lead to crises and, as a result, cause extensive damage to the economy as a whole. It is therefore important that banks, households and companies always exercise sufficient caution and restraint at the ‘credit buffet’. Equally, it is just as important that the SNB carefully analyses developments on the credit market and makes optimal use of the tools at its disposal in order to mitigate any risks to financial stability as far as possible. 26 The overall subdued economic growth in Switzerland over the last two years and lower net immigration are also explanations for the recent restrained momentum on the credit and real estate markets. 27 Cecchetti et al. (2011). The International Monetary Fund (IMF) came to a similar conclusion regarding household debt in its latest financial stability report: Household borrowing promotes growth in the short term. In the medium term, however, too high a level of household debt reduces economic growth (IMF, 2017).
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The aim is twofold: First, banks with more equity are better equipped to absorb losses that can arise as a result of excessive lending growth. Second, costs for mortgage lending rise, counteracting the build-up of imbalances in this segment. The buffer is called countercyclical because capital requirements increase when the mortgage market is on the rise. This dampens the upswing and strengthens the safety buffer of banks and of the financial system. The requirements are reduced in a downturn when banks have more capital available to absorb potential losses on loans. This mitigates the likelihood of systemic risk materialising and leading to a downwards spiral of emergency sales and loan defaults. Acting on proposals by the SNB, the Federal Council activated the sectoral CCyB in 2013 and, in 2014, increased it to 2% of risk-weighted mortgage loans for residential property in Switzerland. In addition to the sectoral CCyB, there are two measures in particular which the industry introduced in 2012 in the form of self-regulation. These measures address the demand for loans: First, the obligation that mortgage borrowers have to supply a minimum amount of own funds. Second, the obligation that part of the loan has to be repaid within a set period if the loaned amount constitutes more than two-thirds of the property value. 24 Cf. Smets (2014).
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This crisis experience clearly shows that a financial crisis can happen in any markets regardless of the level of market development, size, and region. To date, the economies that have been hard hit by the crisis originated in the US through financial spillover effects include the Euro zone, UK, and some economies in Eastern Europe, Asia, and Latin America. It is confirmed again that, whenever financial imbalances arise, financial BIS Review 147/2008 3 distress can easily occur and become rampant due to the increasing linkages across the globe. So I believe that the key to our endeavor is to 1) take a careful step of further integration, 2) increase economic and financial resiliency, and 3) be ready to deal with unforeseen risks ahead. We can compare this important decision of embarking on further integration to the situation where we are already in a sea expedition. If we are already in the middle of the ocean, sailing back to the origin or resisting further integration seems likely a bad idea. However, to reach the destination safely and be able to weather the likely stormy sea along the way, we need to plan ahead in navigating the boat and be ready to adjust the speed. Moreover, we need to make sure that the boat is in a good condition. We must therefore be alert and well prepared to deal with the storms and other dangers.
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to keep inflation expectations anchored in the proximity of the ECB’s objectives, has been pivotal in determining the successive steps to be taken in terms of monetary easing. In June 2014, the ECB cut its official interest rates, setting the main refinancing operations rate at 0.15%. Also, for the first time, it set the interest rate on the deposit facility in negative territory, at –0.10%. In addition, it announced new long-term refinancing operations maturing in September 2018, with the specific aim of boosting lending. It is worth noting that these operations combine credit-enhancing elements, as they link the granting of liquidity to bank lending, with quantitative easing, through the expected increase in the Eurosystem balance sheet. In September 2014, the ECB adopted new measures. First, it made a fresh cut to interest rates, whereby the MRO rate stood at 0.05%, its technical minimum, and the deposit facility rate became even more negative, reaching –0.20%. Furthermore, the ECB initiated asset purchase programmes. In the fourth quarter of 2014, the ECB launched its third covered bond purchase programme and, subsequently, its ABS purchase programme. By end-March, covered bond purchases had reached almost € billion, with slightly over € billion of these being made by the Banco de España. As to ABS purchases, these stood at € billion at end-March, indicating that this was evidently a less significant component of the programme. In January 2015, the ECB decided to add a third programme, called the “Expanded Asset Purchase Programme”.
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We are a country that is, in terms of population and employment, quite significantly dependent on agriculture, about 30 percent of our labor forces is tied to agriculture. So obviously, higher temperatures and higher risk of droughts and floods will severely hit the agricultural sector. Thailand is also highly dependent on tourism, the beach tourism, and so substantial rises in sea levels will hit our country very hard. Therefore, as a country that is very vulnerable to climate change, I think it is beholden upon us to take much stronger initiatives on the climate change and the green front. Page 6 of 9 On Thailand’s development on the green front, I welcome a lot of initiatives that happened in Thailand, especially in the capital markets. We have seen the Stock Exchange of Thailand launching the Thailand Sustainability Index, which is an index composing of green and sustainable listed firms. We have seen our colleagues at the Security Exchange Commission undertaking welcomed initiatives with the Environmental, Social and Governance (ESG) bonds, which are seeing a significant growth in Thailand. I would also like to see that progress on the banking side catching up that of the capital market as the banking side, both in Thailand and globally, still lags in terms of green and climate initiatives that have already been undertaken by capital market participants. Thus, we, at the Bank of Thailand, will do our best to make sure that the banking sector catches up and does play its role as needed.
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1 Article 3.3 of the Treaty on the European Union. 2 Article 127.5 of the Treaty on the Functioning of the European Union. 3 The monetary policy strategy review: some preliminary considerations, Speech by Christine Lagarde, President of the ECB, at the “ECB and Its Watchers XXI”conference, 30 September 2020 4 www.banque-france.fr/sites/default/files/medias/documents/2020.05.25_sep_en_cl.pdf 5 See Blanchard & Summers (2020), Automatic Stabilizers in a Low-Rate Environment, AEA Papers and Proceedings, vol 110, May. 5/5 BIS central bankers' speeches
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The growth momentum is expected to pick up further after China’ s announcement to formalise the use of RMB in foreign direct investment (FDI) in 2011. The upside is very significant as China’ s total FDI amounted to USD 116 billion in 2011, or RMB 750 billion equivalent. Besides facilitating the rapid development of the sukuk and dim sum bond markets, more importantly, the Pilot Platform will contribute significantly to financial stability in the Asian region. With the advanced economies undergoing structural adjustment and fiscal consolidation, the two-speed recovery will continue to entice portfolio flows into Asia. The key challenges for Asia are to channel such flows to productive use, reduce concentration in short-term positions of the more volatile asset classes, and to avoid such flows spiking up a BIS central bankers’ speeches 1 property price bubble. Channelling the inflows into the bond market will serve these useful purposes as the investors are typically institutional investors who take long-term positions in strategic economic sectors. The global financial crisis has reminded us of the destructive powers of a liquidity crunch and the need for quick access to local currency liquidity in times of stress. In particular, the increased risk aversion arising from the recent financial crises and heightened alertness to the counterparty exposure have raised the demand for secured lending. As an illustration, the average tripartite collateral management deals outstanding administered by Euroclear Bank increased substantially from EUR 76 billion in 2001 to EUR 325 billion in 2011.
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I see little evidence that inflation expectations might generate the start of a wage-price spiral for example. There are, however, immediate downside risks to the growth outlook. Although my central expectation is that the recent weakness will just be a soft patch, I do worry about a more 8 BIS central bankers’ speeches prolonged weakness in demand, and in particular, consumer spending. That could knock the recovery off course for a sustained period, shifting the balance of risks around medium-term inflation to the downside. With that risk in mind, putting up Bank Rate could be exactly the wrong thing to do at this precise moment. If it further damaged consumer confidence then it could be the marginal factor that makes a soft patch turn into something worse. Of course, at some point, Bank Rate will have to rise: interest rates will need to normalise if, once the spare capacity in the economy has been eliminated, monetary policy is to be consistent with the 2% target. And because of the lengthy lags involved, Bank Rate will need to start the long journey back to more normal settings well before the degree of spare capacity is eliminated. But for now, I believe there remains time to allow the economy to recover before the eventual tightening begins. I am not trying to give any hints today as to exactly when that will be. I honestly don’t know. I can only continue to assess the data and the outlook as it changes, month by month.
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Ladies and Gentlemen, Now let me turn to the issues that directly impact the banking industry: what might be the implications for financial institutions as a result of the measures discussed earlier, and what are the challenges ahead for the banking sector? I would like to point out a few: First, in the new financial landscape following the implementation of the Master Plan, we anticipate a structural change in the banking sector with more industry consolidation and emergence of financial conglomerates, embraced by the “One Presence” principle. Such processes should lead to larger size and falling number of financial institutions. Although not a sure ticket to success, size will allow the working of economies of scale and scope - to eliminate redundancies in administrative and operational functions, reduce costs from more diversified portfolio of clients and enhance income from provision of wider range of services. For the first time ever in the Thai banking history, banks will have the opportunity to do all these and grow through consolidation and/or forming a financial group. Up until now cost cutting and income enhancement, for example, were possible only through reorganization and re-engineering within the same organization. Of course, there were cases of mergers in the history, but they were mainly out of necessity to solve the problem of some weak BIS Review 43/2004 3 banks, not as a calculated move for growth.
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The logical question to ask here is how do we ensure that these positive developments will maintain their momentum and that the banking sector will remain strong and sound amidst a more liberalized environment, fierce domestic and external competition, and the advent of more advanced technology and financial innovation? We can wait passively for external forces to inflict changes on us, or we can chart our own path of development in anticipation of any change. The Asian crisis brought it to the fore that complacency when met with abrupt and radical reforms as a result of external forces could entail enormous output loss and social cost. Thus, we must do what we can to ensure that the banking system is up to meeting any challenge. This brings us to the second point I want to make - what the authorities intend to do to enhance the financial system’s competitiveness and its capability to withstand forces of change in this age of globalization. The authorities are quick to grasp the opportunity of healthy economic and banking conditions conducive to embarking on a structural reform, with the announcement of the Financial Sector Master Plan. Thorough discussion on the Master Plan will require a separate session of its own. So, let me just pick some of its key features that will have the most significant impacts on the structure and efficiency of the banking industry.
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Jacqueline Loh: Keeping green and impact in focus Keynote speech by Ms Jacqueline Loh, Deputy Managing Director of the Monetary Authority of Singapore, at Asian Venture Philanthropy Network (AVPN) Virtual Conference 2020, 8 June 2020. * * * Ms Naina Batra, Chairperson and CEO, AVPN Distinguished guests, ladies and gentlemen 1. Good morning. Thank you for inviting me to the eighth AVPN Conference. I am very glad that AVPN has pressed on with this flagship event virtually in these unprecedented times. The COVID-19 pandemic has resulted in significant health, economic and social challenges globally. The IMF has projected that global GDP will contract by 3% this year1, 2. marking a significantly deeper downturn than the 0.1% contraction in 2009 during the Global Financial Crisis. “The Power of Networks”, which is the theme of this year’s AVPN conference, is highly apt as we strive towards the United Nations Sustainable Development Goals (UN SDGs). Addressing complex and multi-dimensional challenges like climate action, inequality, and 3. quality healthcare and education requires policymakers, financial institutions, corporates, nongovernmental organisations, and multilateral development banks (MDBs), to come together on a common global challenge. The financial sector and MDBs have stepped up and shored capital towards building capacity in healthcare and pharmaceuticals, while supporting the recovery. 4. Social and sustainability bond issuances totalled $ billion in the first quarter of this year2, nearly double that of the same period last year.
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MAS announced our green finance action plan last year, which comprises three key thrusts: firstly, building resilience to environmental risks; secondly, developing green finance solutions and markets; and thirdly, leveraging innovation and technology. 8. We have made good progress across all three thrusts. We will issue a consultation paper on MAS’ Environmental Risk Management Guidelines for the banking, insurance, and asset management sectors later this year. These guidelines will set standards on governance, risk management, and disclosure, to enhance the financial system’s resilience to environmental risk. Last year, we expanded the sustainable bond grant scheme to support not just green but also social and sustainability bonds. This year, to accelerate green and sustainability linked lending, we are developing a green and sustainability loan grant scheme, which aims to defray the costs of external review and bank frameworks for such loans. This seeks to increase the ease of loan origination and reduce expenses for small and medium sized enterprises (SMEs), and encourage SMEs, corporates, as well as banks to integrate green and sustainability issues in their financing discussions and decisions. We will also be anchoring centres of excellence in Singapore, to undertake quality green finance research and talent development, with strong customisation and applications for Asia’s transition needs. The theme for the Global FinTech Hackcelerator, in this year’s Singapore FinTech Festival, is “Building Resilience, Seizing Opportunities, Emerging Stronger”. The 9. Hackcelerator will identify solutions that enable financial institutions to respond to the pandemic and climate change.
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8 For example, the central banks in Chile, the Czech Republic, Israel and Mexico have been able to fulfil their tasks despite having worked with negative equity for long periods of time (Archer and Moser-Boehm, 2013). 4 [12] Both the Riksbank’s own interest rate forecasts and the statistical methods suggest that the term premiums are now very low, and maybe even negative. Chart 3 shows the Riksbank’s and the Swedish National Debt Office's estimations of the term premium on ten-year government bonds based on similar statistical methods. These statistical methods, as I have said, produce fairly uncertain results, but they clearly indicate that premiums have fallen sharply in the last decade. 9 Both the Debt Office's and the Riksbank’s estimates indicate that the term premium is negative. If the premium really is negative, the Riksbank is expected to lose money on purchasing bonds and funding them at the repo rate. The Riksbank’s estimate points to the term premium currently being around -0.7 per cent on bonds with long maturities. 10 This would mean that the loss is expected to be around 0.7 per cent of the purchase price for each year of maturity. Since the average maturity on the bonds is about five years, this would mean that the losses are expected to be 3.5 per cent of the purchase price. Chart 3.
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14 The Riksbank has communicated that the interval of 3.5 – 4.5 per cent is a reasonable assumption for the level of the long-term normal repo rate (Sveriges Riksbank, 2010). There is a great deal to suggest, however, that the normal level of interest rates has fallen (see, for instance, Armelius et al., 2014, and Holston, Laubach and Williams, 2016). For example, members of the US central bank’s monetary policy committee, the FOMC, have recently lowered their assessment of the level of the long-term US policy rate from just over 4 per cent to just under 3 per cent. 7 [12] Chart 5. Yield in accordance with the forward curve but funding at the repo rate Per cent 4 4 Repo rate Forward curve 3 3 2 2 1 1 0 0 -1 -1 12 14 16 18 20 22 24 26 Note. Projection of the repo rate extended from the forecast in the Monetary Policy Report in Oc tober 2016. The forward curve is estimated on 26 October 2016. Source: The Riksbank Changed interest rate environment directly impacts the Riksbank’s profit and dividend Up to now, the bond purchases have thus been profitable for the Riksbank. There are, however, good reasons to anticipate counteracting losses in the period ahead, but it is still unclear what the total effects on the Riksbank’s financial position will be.
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The Bank is also reviewing the role of signing actuaries of general insurers which may be expanded to support the more robust management of risks by insurers, particularly with respect to underwriting and solvency assessments. The regulatory framework for takaful operators will also be significantly strengthened with the issuance of the Takaful Operating Framework by the end of this year. These developments will further strengthen the preconditions for the wider adoption of more principle-based regulations in the insurance and takaful sector. This will include our plans to proceed with the liberalisation of operating cost control limits as set out under our Financial Sector Masterplan. This move will usher in a more competitive environment within a stronger framework of governance, market transparency and prudential safeguards that has already been put in place. Finally, the work on amagalmating and modernizing the existing legislation governing financial institutions and intermediaries under the purview of the Central Bank is now in its final stages. A key extension of the proposed new legislation involves putting in place a more comprehensive framework for the effective regulation and supervision of financial conglomerates. This will include proposals to cover financial holding companies under an appropriate prudential regulatory and supervisory regime to ensure that the evolution of such complex financial groups does not, over time, pose a threat to financial stability and the safety and soundness of regulated institutions. The proposed new legislation will also provide strengthened legal powers to support more effective market conduct regulation and supervision. IV.
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Page 5 of 14 1.2 The cyclical causes The primary mission of central banks, and of the European Central Bank (ECB) in particular, is to ensure price stability, notably by “smoothing” fluctuations in the economic cycle. They do this by setting the level of shortterm interest rates. In 1998, the ECB established a quantitative definition of price stability that it went on to clarify in 2003: to maintain inflation rates below, but close to, 2% over the medium term. More recently, other central banks have adopted this 2% inflation target, for example the US Fed in 2012 or the Bank of Japan in 2013. Our monetary policy has pursued this inflation target since 1999, with tangible results: inflation has remained close to target at an average of 1.7%. Page 6 of 14 Source: Eurostat In the past decade, however, euro area inflation has been too low: 1.3% on average between 2011 and 2019, and 1.3% today [Core inflationv is also at 1.3%]. This weakness in inflation, which can be observed in the majority of advanced economies, has reignited the debate over the 2% target. Some, such as one of my great predecessors, Jacques de Larosière, say we should be content with the current 1%. Others, on the contrary, such as Olivier Blanchard, former chief economist at the IMF, are arguing for a higher target of up to 4%, which would leave more room to lower interest rates at the bottom of the cycle. It is tempting simply to ignore these arguments.
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As a matter of fact, the faster-than-expected economic recovery and falling interest expenditures have helped to improve Turkey’s fiscal outlook. The increase in tax revenues amid rapid economic growth and tax adjustments were the major drivers of the improved budget balances in 2010. Moreover, the relative slowdown in the growth of non-interest expenditures as well as the significant decline in interest expenditures driven by falling domestic borrowing rates contributed to the improvement in fiscal balances. 10 BIS central bankers’ speeches 31. Fiscal indicators in the MTP suggest that the positive outlook, which was also underpinned by the stronger-than-expected recovery in 2010, would continue in the upcoming period. Indeed, the recent data imply that the favorable outlook persists in tandem with the robust economic activity. Nevertheless, I would like to remind that in order to maintain fiscal discipline and ensure that Turkey continues to have more positive readings than other emerging economies, implementation of the institutional and structural reforms set out in the MTP remains critical. Esteemed Guests, 32. In the last part of my speech, I would like to mention monetary policy decisions in 2010 and the monetary policy strategy that we currently implement. In this context, I will first summarize inflation developments, and then, I will move on to monetary policy implementations within the inflation targeting framework. Monetary policy decisions and implementations 33. Inflation was mainly determined by tax adjustments and the course of unprocessed food prices in 2010.
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Core inflation indicators remained low and stable as unemployment rates and capacity utilization rates hovered below pre-crisis levels. Thus, inflation came down to 6.4 percent by the end of 2010, almost reaching the year-end inflation target of 6.5 percent. With the downward revision in food prices, the decline in inflation continued in the first quarter of 2011, and inflation rate was down to 3.99 percent in March 2011. BIS central bankers’ speeches 11 34. Core inflation indicator SCA-H (consumer price index excluding energy, unprocessed food, alcoholic beverages, tobacco and gold) increased 3.49 percent year-onyear while SCA-I (SCA-H excluding processed food) registered an all-time year-end low of 2.99 percent. In the first quarter of 2011, despite a slight upward movement, the annual rate of increase in core inflation indicators remained relatively low. 35. Although year-end inflation expectations fluctuated due to the volatile course of food prices throughout 2010, medium-term expectations remained basically unchanged. As of the first quarter of 2011, the 24-month ahead inflation expectation stands at 6.29 percent, hovering slightly above our medium-term target of 5 percent. 12 BIS central bankers’ speeches 36. Inflation may rise in the short term due to lagged effects of oil prices and base effect. I would hereby like to remind you that we will be more extensively providing the public with updated evaluations and forecasts on the medium-term inflation outlook along with possible risks and policy measures, in the Inflation Report to be published on April 28, 2011. Distinguished Guests, 37.
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The other question mark concerns the differences between countries, with inflation of 1.7% in Germany. However, following a temporary peak in the first quarter, German inflation is expected to remain under 2% on average throughout 2017. Moreover the inflation differences between countries are consistent with their different national economic situations: growth and employment are also stronger in Germany; and these differences could even contribute, via their impact on relative wages, to correcting the imbalances, hence achieving greater convergence within the euro area. I can naturally grasp the concern of German savers in the face of low interest rates. It is not our aim to keep interest rates low for too long: low interest rates are not a goal in themselves; they are merely the necessary condition today for gradually returning towards our inflation target, and ensuring lastingly higher interest rates in the future, as Mario Draghi himself has put it. This movement has already started for long-term interest rates, with the 10-year Bund gaining nearly 60 basis points since the end of September. In December, in view of the progress achieved, we decided to reduce the volume of our monthly asset purchases from 80 to 60 billion euro. I also repeat that although I am convinced that negative interest rates have their use, they have clear limitations. But, although QE will obviously not last forever, we clearly did not discuss tapering or any exit strategy.
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The euro area as a whole must aim for stronger and more lasting growth. Monetary policy naturally plays a vital role: it ensures the price stability required for growth; this is my first point. However, on its own, it can never be enough. To accelerate growth, the other economic policy levers must be brought into play; I shall come back to this later. Lastly, I will share some thoughts on the new international environment that heightens the urgency of taking action in Europe. ** 1. Our monetary policy is an asset for the euro area. I am perfectly aware that the ECB’s monetary policy is the subject of lively debate in Germany. I would first like to explain the reasons for this policy and what the situation is today. a) Why have we been pursuing this monetary policy? Our European Central Bank, it should be remembered, was constructed on solid foundations shaped according to the model of the Bundesbank and its successes. And I sincerely believe that our present monetary policy is very much in accordance with the German values that I fully share: independence, respect of the Treaties, price stability and a long-term approach. Contrary to what some critics suggest, our monetary policy is not some sort of Latin fantasy. It is decided collectively by the Council of Governors and we take the mission entrusted to us – ensuring price stability – very seriously. This means ensuring that inflation is neither too high nor too low.
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And the City has continued to play a very active part in developing market activity in the new currency ever since. In many respects the City is already an integral part of the Eurozone. There were those who argued that the City would suffer if the UK failed to join from the outset. That clearly has not so far happened - quite the reverse. The argument now is that we will suffer if we don’t join reasonably soon. That’s not something you can actually prove either way. It’s not a general point about the City’s competitiveness. It’s euro-specific, with the implication that somehow or other obstacles will be put in our way. That possibility cannot be altogether excluded, but it would be illogical. Most of the people that I talk with recognise the positive contribution the City is making to the development of euro financial markets - it is in fact the most positive contribution that we can make from the outside. Of course it represents competition with other European financial centres, but at the macro-economic level such competition is a positive - not a zero - sum game from which borrowers and lenders and market intermediaries collectively all stand to gain. Certainly the City has benefited from the euro’s introduction, but not at the expense of other centres, rather alongside them.
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I have no doubt at all that the City has the professional and technical capacity, and the self-confidence, to make a major contribution to this process. Let me touch, finally, Chairman, on financial globalisation more generally. As we have seen, the increasingly free flow of capital internationally has the capacity to contribute massively to the expansion of the world economy; but it can become distorted, with the risk of destructive volatility, which in turn can pose a significant threat to financial stability on a world-wide basis. Since the sudden onset of the Asia crisis some three years ago with its global repercussions there has been a 3 BIS Review 49/2000 huge international effort to reduce the risk of volatility. This has involved drawing up codes of best practice - covering everything from fiscal and monetary prudence, external balance sheet and liquidity management and greater transparency, to increased financial regulation as well as higher legal, accounting and corporate governance standards - which national governments particularly in capital importing countries, are being encouraged to apply. It has involved extensive and ongoing reviews of the financial infrastructure and regulatory practice also in creditor countries. And it has involved a continuing review of the role of the international financial institutions in preventing and managing international debt crises.
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It would ensure regular supply of international liquidity, but could only provide partial protection against exchange rate volatility and valuation losses. There is an important trade off, there, which is the essence of a new “Triffin dilemma” and which cannot be avoided when looking at the public supply of international liquidity, whether by one nation or within a multilateral framework. More fundamentally, a new currency which would provide a reliable store of value would, in fact, grant its holders a collective guarantee against exchange risk. That guarantee would benefit surplus countries and would be given by deficit countries. This issue was intensely debated when the substitution account was discussed and negotiated within the IMF, more than 25 years ago. It became clear, at the time that it would not be accepted by many countries unless some explicit, binding and symmetric rules on balance of payment adjustments were agreed upon simultaneously. Most likely, those questions would be raised again today and the creation of a new reserve currency would have to be part of a broader framework. Conclusion and provisional policy lessons Looking at the next decade, one can project two alternative – and polar – scenarios for the evolution of the international financial system. First, a scenario of progressive and partial fragmentation: no significant capital account opening would occur in many parts of the world.
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A successful person is someone whose life is filled with purpose and joy, something that can be felt, shared and remembered not only by his family and loved ones but also by people around him. 9. Four decades ago, I was just like you: a young passenger, filled with hopes, curiosity and anxiety on what might lie ahead of me in this train journey. I have worked very hard in all these years. I have had a great ride and learned many things in this long and fascinating train journey, which by the way is still continuing. 2 BIS central bankers’ speeches 10. My fellow graduates, let me conclude by asking you this simple question: are you ready to embark on this fascinating train journey? If you are, hold on to your tickets and board the train, find yourself a good seat and fasten your seat belt. The train is about to depart now. Thank you very much. BIS central bankers’ speeches 3
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Every firm that signs up to the FLS will be able to borrow an amount equal to at least 5% of their initial stock of lending on a standard definition for which the Bank already collects data.4 If the firm expands its lending over the period until end-2013, they will be able to borrow an equivalent additional amount too. There are therefore strong incentives for banks to boost lending because every pound of additional lending increases the amount that a bank can borrow cheaply by a pound.5 If a firm’s lending stock contracts, however, they can only access up to that 5% allocation and the price of the scheme will also be higher – rising linearly to a maximum of 150 basis points if their lending contracts by 5% or more. You might reasonably ask some questions: • Why have we set this minimum access amount and complicated pivot in the price? • How can we be sure that any increase in credit flows to where it may be most needed? In particular to SME businesses and to first-time home buyers. • What if there just isn’t sufficient demand for credit? • Won’t the banks just pocket the benefits of the cheap funding? Indeed those are some of the questions I am most often asked and where I want to put some answers on the record today.
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I will leave this for the presentation by Kate Sweetman, the main author of this study. Broadly, the Asian Leadership Index demystifies that attributes leaders in Asia must develop if they are to engage the people they lead. The Asian Leadership Index does not propose a new leadership model. Rather, it identifies a number of areas for behavioural change that are needed based on the attributes that respondents indicated are currently missing in their leaders, reinforced with suggestions on how leaders might move forward with greater influence and impact. In conducting this research, it is hoped that it generates thinking on these leadership issues and contribute towards the development of the new generation of effective leaders in Asia. BIS central bankers’ speeches 1
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This means harnessing technology to increase efficiency, manage risks better, create new opportunities, and improve people’s lives If Singapore is to maintain its position as one of the top financial centres in the world, it must embrace FinTech – maximising its benefits, minimising its risks. STRATEGIES FOR A SMART FINANCIAL CENTRE And so, for the last two to three years, the Monetary Authority of Singapore (MAS) has been working together with the industry to foster a thriving FinTech hub. This requires getting several pieces right: an ecosystem of diverse players competing and collaborating; an open architecture economy that enables connectivity and innovation; a web of international links to promote the exchange of ideas and scale solutions; a strong talent pool and deep research capabilities; 1/9 BIS central bankers' speeches a conducive regulatory environment; and a safe and secure cyber environment. Ecosystem of Diverse Players We want to create an ecosystem for innovation, where established financial institutions and FinTech start-ups compete as well as collaborate. Financial institutions are no longer the laggards and technology dinosaurs of popular myth. I know this from my conversations with CEOs of global banks and insurance companies. Almost every major financial institution has an active innovation agenda to strengthen its business by harnessing technology. Many CEOs today can carry on an intelligent conversation about blockchains without looking at their notes – this is a big change from just two years ago. Singapore wants to be the place where these financial institutions test, develop, and apply new technology solutions.
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I suspect, increasingly, we will have to take a more risk-specific approach and an activitybased approach with respect to FinTech. This means: Setting thresholds for when regulation kicks in; calibrating regulatory requirements to specific risks; and applying these requirements to activities rather than entities. A good example of our attempt to do this is the new Payment Services Bill, which we will publish for public consultation next week. Our aim is to right-size the regulations, to fit the various new developments that are taking place in electronic payments. Licensees will be regulated according to the activities they conduct, because different activities pose different risks. Finally, there are areas – be it new technologies or new business models – where regulators will never know enough. This is where the regulatory sandbox comes in – to facilitate experimentation in a contained environment. 4/9 BIS central bankers' speeches Cyber Security Finally, cyber security. As we go more digital and online, cyber risks will mount. And if these risks are not managed well, public trust and confidence in technology will suffer. To fully harness the benefits of digital technology, we must build robust cyber defences and have effective remediation plans when things go wrong. First, cyber surveillance and information sharing. We are pleased to see the official launch in Singapore of the Asia-Pacific Regional Information & Analysis Centre by FS-ISAC. FS-ISAC, or the Financial Services Information Sharing and Analysis Centre, is a global intelligence gathering and sharing initiative for the financial sector, with over 7000 members worldwide.
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Nevertheless, the ability to meet initial margins and variation margins can pose severe liquidity constraints for market participants, especially in non-banks financial institutions, and may thus exacerbate liquidity stress in the system. The proper calibration of haircuts is therefore essential so that in times of crisis they do not behave procyclically and do not have to be increased abruptly. Several international working groups are currently exploring the issues related to margin requirements, in particular in the context of the market turmoil observed in the early stages of the Covid crisis. More recently, the default of Archegos on its margin calls, at the end of March 2021, also highlighted the significant risks to which certain banks were exposed through their services to non-bank financial entities, through their prime brokerage activity. Both adequate dimensioning of margins, and requirements of high quality collateral prove critical. At the level of the European Union, the last step of the compulsory use of the initial margins will come into force in 2022 in application of the EMIR regulation, and should help contain such developments. And the ESRB issued in June 2020 recommendations to address liquidity risks arising from margin calls. Nevertheless, we should remain alert and critical in terms of supervisory actions and regulatory requirements to ensure that best practices are enforced. b) The second issue is the sovereign-bank-corporate nexus European banks’ ownership of sovereign debt has increased in the course of the year 2020.
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A number of factors have contributed to this outcome, including flight to safety flows, the presence of the Eurosystem on the secondary market, the hunt for yield by investors, and the success of the first European common debt issues. Liquidity indicators also displayed good resilience. For instance, the depth of the secondary market for French government negotiable securities, measured by the average volume of daily transactions (excluding Eurosystem purchases), has remained at a historically high level,albeit at 1/4 BIS central bankers' speeches an increased transaction cost, more pronounced for non-core sovereign debt markets, but at levels far below those of previous crises. The ownership structure of European debt securities has also contributed to and reflects this resilience. According to data from the ECB1, non-residents of the euro area were holding a significantand stable 44% of euro area government debt at the end of 2020,willing to invest in EUR, via highly liquid securities. Among residents, long term investors are prominent investors : the central banks were accounting for 21% of total outstanding debt, for the euro area, investment funds, insurance corporations and pension funds were holding about 11%, while other monetary financial institutions or banks for 19%. b) Let me now turn to the repo market and its resiliency during the Covid crisis. Under normal market conditions, the repo market is very liquid since large banks dedicate specific balance sheet capacity for this activity.
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6 Recently, given the expected benefits of achieving greater market efficiency in a single interest rate benchmark regime, as well as the good progress in developing SORA markets, the industry jointly recommended for Singapore’s interest rate markets to adopt a SORA-centered approach.6 In short, a transition from SOR and SIBOR towards SORA. 7 What does this mean for SGD financial markets? First, this shift is an opportunity for us to enhance the overall functionality and efficiency of SGD interest rate markets. For banks, compared to managing both SIBOR and SOR exposures, this approach will reduce basis risks between assets and liabilities based on two different benchmarks, and allow for greater pricing efficiencies. For borrowers, the averaging effect from compounded SORA will provide more stable rates, compared to single-day SOR readings, which is exposed to idiosyncratic market factors, such as quarter- or year-end volatility. By concentrating activities in a single SORA-centered interest rate benchmark, market efficiency will be enhanced. Second, the adoption of a SORA-centered approach is aligned with the direction in key financial centres. This will support the continued participation of global institutions and 2/7 BIS central bankers' speeches investors in SGD markets. As our banks get ready for SORA adoption, this has synergies with their transition efforts to trade and risk-manage positions denominated in other major currencies, which are similarly shifting to risk-free interest rate benchmarks. 8 The recommendation to shift to a SORA-centred benchmark rate regime has been put out for public consultation.
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With regard to the outlook for Sweden, the Riksbank foresees an average annual growth rate of almost 3 per cent in the coming years. Looking at inflation prospects, the rate of price increases is expected to rise in the period ahead as resource utilisation increases in Sweden and abroad. However, a continuation of relatively weak labour market conditions and a favourable cost situation mean that the rise in inflation is expected to be relatively moderate in Sweden. Our forecast in the Report is for a risk-adjusted inflation rate of 1.1 per cent one year ahead and 1.8 per cent two years ahead, measured as UND1X inflation. Swedish housing finance On 1 July this year the Act on issuing secured bonds (2003:1223) will come into force. One of the main incentives behind the new Act is to offer Swedish mortgage institutions the same favourable financing opportunities that these institutions face in European countries that have already introduced similar legislation. So will this new legislation result in a new financing structure for Swedish mortgage institutions and in large issue volumes in the international markets? This remains to be seen. The Riksbank has, for reasons of principle, been hesitant towards the introduction of the legislation on secured bonds, primarily because the supervisory task charged to Finansinspektionen (the Swedish Financial Supervisory Authority) could be perceived as an implied government guarantee, but also because the legislation in this field entails a return to regulation in the credit market, which in itself can be questioned.
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BIS Review 69/2004 5 Figure 2 Oil price average level and volatility 40 35 30 25 2 8 U SD +/- 4 .5 20 15 18 U SD +/- 3 .5 10 5 86 88 90 92 94 96 98 00 02 Mean [Median] S.D.
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Management of the Petroleum Fund The Petroleum Fund is currently one of the world’s largest institutional investors, on a par with the largest pension fund in the US and the largest European fund. With the rate of growth that can be expected, the Petroleum Fund will be larger than these two funds in the next year or two. Norges Bank manages the Petroleum Fund on behalf of the Ministry of Finance. This is a challenging task that has been given high priority within the Bank. We have established what we believe is a professional management organisation. Performance is measured against the benchmark portfolio defined by the Ministry of Finance and the results are published in a quarterly report. So far, Norges Bank has achieved an excess return every year. Management costs have been low. In terms of net earnings, Norges Bank has added close to NOK 15bn to the Fund. The total return for the Fund is largely determined by the benchmark portfolio. Since 1997, the real return has averaged 4.2 per cent. Of this, 0.4 percentage point can be attributed to active management, for which Norges Bank is responsible. The Fund has become a large investor in international equity markets. Norges Bank recently established a group dedicated to actively supporting best practice corporate governance in companies where the Fund has ownership interests. Norges Bank already makes extensive use of its voting rights and has voted in about 17 000 cases this year.
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And within the banking system, to strengthen even further the core – the globally and domestically systemic banks which provide the key connections in the financial system and with financial markets. We have, as I have noted, further to travel through the economic stresses of the COVID crisis. The extent of the economic damage remains very uncertain. But as far as the initial phase is concerned, the banking system has by and large been able to absorb a very sharp financial market shock and the large prospective losses. In the UK, the desktop stress test carried out by the Financial Policy Committee on the basis of the scenario for the economy in the MPC’s May Monetary policy Report3, indicates the banks could face up to £ of credit losses over the next two years. There is of course great uncertainty about the future evolution of the pandemic, of the health policy measures necessary to contain it and of the consequent economic impact. The stress test scenario is only one possible economic path through the crisis; more adverse paths are possible. But even after the very significant losses indicated by the stress test, considerable resilience remains in the core banking system to deal with more adverse outcomes: the impact of the stress test would exhaust a little less than half of the loss absorbing capital buffers in the system. Liquidity failure, as we learned 10 years ago, can damage the banking system faster than credit impairments.
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Over the years, the DFIs in Malaysia have evolved in tandem with the country's economic transformation, especially to support developments in the strategic and new growth areas such as high technology, infrastructure, SME development and micro finance. Bank Pembangunan was entrusted by the Government to support infrastructure development in expediting economic recovery following the financial crisis in 1997. Likewise, in line with the strategy to promote capital-intensive and high technology industries, Bank Industri was entrusted with the task of supporting advanced industrial development, such as engineering activities and computer software development. In the Malaysian financial system, the banking institutions form the largest component of the financial system, constituting about 51% and 78%, respectively, of the total assets and loans of the financial system. In contrast , the total assets and loans of DFIs as a group, respectively accounts for about 5% of the financial system. Nevertheless, these DFIs have been instrumental in providing the complementary financial services needed to support development of the targeted sectors and activities. One particular notable development is the support provided by the DFIs for SMEs. Like many other economies, in Malaysia, the SMEs form the backbone of the economy with high potential in fostering the forward and backward linkages of activities along the value chain. While SMEs constitute about 90% of total establishments in the manufacturing sector, at the 3/5 moment they only provide about 30% of employment in the sector and contribute about 6% to Malaysia's GDP.
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Accordingly, we will continue to monitor very closely all developments over the period ahead. As regards fiscal policies, many euro area governments are faced with high and sharply rising fiscal imbalances. If not addressed by a clear and credible exit strategy, this could seriously risk undermining public confidence in the sustainability of public finances and the economic recovery. The very large government borrowing requirements carry the risk of triggering rapid changes in market sentiment, leading to less favourable medium and longterm interest rates. This in turn would dampen private investment and thereby weaken the foundations for a return to sustained growth. Moreover, high public deficits and debts may complicate the task of the single monetary policy to maintain price stability. The Governing Council therefore calls upon governments to communicate and implement in a timely fashion ambitious fiscal exit and consolidation strategies based on realistic growth assumptions, with a strong focus on expenditure reforms. Tax cuts should only be considered over the medium term, when countries have regained sufficient room for budgetary manoeuvre. In this regard, the recent ECOFIN Council conclusions, which call for consolidation to start in 2011 at the latest and to go well beyond the structural benchmark of 0.5% of GDP per annum, represent the minimum requirement for all euro area countries. The success of fiscal adjustment strategies will also depend crucially on the transparency of the budgetary procedures and the reliability and completeness of government finance statistics.
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But the latter would surely have made it even worse had it be in place for longer. Looking forwards, we do need strong judgemental supervision, and we do need the powers to separate trading activities into separate legal entities as the ICB has proposed. As Paul Volcker recently pointed out, customer banking involves a fiduciary duty, whereas trading with counterparties does not. My only caveat here, and it is a very important one, is that the fiduciary duty of customer banking was sadly lost in the wave of mis-selling. Judgemental supervision has already been applied to correct the excesses of pre-crisis activities. Investment banks have been forced to lower leverage and raise capital, and we are seeing the consequences. The monoline mortgage bank model – in the commercial not mutual-sector has been restructured heavily already. No demutualised building society survives as an independent entity today. The high return on equity with low cost of equity business model is dead. Of course, there is more to be done, and I have set out the framework within which I think about the capital needs of the banking system. Above all, simplicity is about clear focus and a firm resolve. Thank you 4 BIS central bankers’ speeches
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BIS Review 21/2009 9 Some argue that the framework imposed a straightjacket on central banks including ours by setting too narrow a remit. Interest rates could only be changed when there was a clear and present danger to the near-term outlook for consumer inflation. So they could not be used to prevent imbalances building up. Action was almost bound to be too late. This critique takes an unduly narrow interpretation of the framework. There is nothing in the MPC’s remit which would prevent us from consciously allowing inflation to undershoot the target for some time, in order to avoid a significant overshoot at some point in the future. Or as my fellow Deputy Governor Charlie Bean put it: “a central bank seeking to stabilize inflation and output over a sufficiently long time horizon, should necessarily aim to incorporate the possible adverse long-term consequences of an asset price bubble in its deliberations” Intelligent inflation targeting on these lines run by independent central banks still seems to me the best foundation for macroeconomic policy. But that does not mean the current framework or the way we explain it is perfect. First a point on communication. Inflation targeting was designed not just to control inflation but as the best policy framework for promoting wider economic prosperity and stability.
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The question is why we didn’t see the problems in the Stability and Growth Pact from the beginning? Perhaps because we were fortunate to have something that could work as a temporary replacement for rules: clear objectives, strong leadership and the market as a quickly reacting judge. Most countries wanted to meet the convergence criteria and thereby join the euro area. Germany led the way, both in terms of its economic size and its example of fiscal discipline. Now the objective of joining the euro has been achieved for many countries, and, in addition, Germany has lost its leading role and the markets react less to fiscal laxity. Instead of national leadership towards clear objectives we have seen the opposite – the political exploitation of the gap between the national and European level. The requirements of the Pact are blamed on heartless “accountants in Brussels”, and when a majority within the countries puts narrow national political interests first the agreed rules become moot – “peer pressure” becomes ”peer protection”. Incorrect facts have been more or less deliberately sent to the Commission ahead of sensitive elections. A study by Barclays Capital shows that during the years 2000-2003 growth projections were overestimated by 1.5 percentage points on average each year by the euro area countries, leading to fiscal balances turning out worse than expected on average by about 1% of GDP per year.
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This includes how we should conduct supervision, how we formulate regulations and how we organise ourselves to be able to manage financial crises, if these should arise. In Europe, the EU cooperation gives us a joint forum for tackling this challenge. The EU’s Financial Services Action Plan was launched in 1999. It has been a driving force behind the development I described earlier. The measures proposed in the action plan have now largely been implemented. However, much remains to be done. This is evident when one looks more closely at the EC regulations that form the basis for the national frameworks for supervision and crisis management. The regulations we have in the EU at present and the way we organise ourselves is not adapted to the new conditions prevailing due to the increased integration. One problem is that the responsibility for supervision is not adapted to banks with cross-border operations. Within the EU the supervisory responsibility for banks is governed by the principle which in practice imbues all EC regulations in the financial field, namely the home country principle. This means, in brief, that the responsibility for supervision lies with the country where the bank is legally domiciled. To illustrate how this works, we can imagine a bank with branch offices abroad. The bank and its branch offices are regarded as one single legal entity. They are therefore governed by the regulation and supervision that apply in their home country. How the operations are actually divided up between the different countries in principle has no relevance.
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Above all, it would mean that individual countries were not forced to pay large compensation amounts to depositors in other countries. I am aware that this type of suggestion is far-reaching and controversial. It would mean a transfer of power from the member states to the EU. But the suggested arrangements would only apply to the banks conducting cross-border operations of sufficiently large scope to warrant EU-wide measures. The main advantage of such a “supranational” arrangement is that the public frameworks for regulation, supervision and crisis management can correspond to the actual structure of the financial market. When supervision and crisis management are centralised, this also creates the conditions for reducing the administrative burdens on the banks and at the same time managing the risks where they actually arise. Both the banks and the individual countries would be the winners in such a system. Conclusion My main message today has been that financial integration is increasing rapidly in Europe, and that this leads to better conditions for economic growth, but that it also means that regulations, supervision and arrangements for crisis management must become more international. Financial integration provides us with a number of new challenges and we must work together to find solutions to the problems that arise. Thank you! 4 BIS Review 38/2007
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The three transformations are: first, the rapid advances in financial technology, or ‘fintech’; secondly, the deepening of cross-border banking, particularly in relation to the Greater Bay Area1; and thirdly, the trends in green finance. Fintech 7. First, fintech and its fast adoption by banks and their customers. Hong Kong is among the fintech leaders in Asia. The COVID-19 pandemic has given new impetus to the use of mobile banking and electronic payment services, the most important technology in times of social distancing. 8. Customers who once relied on face-to-face teller services are now paying their bills and transferring money to family and friends through electronic services. Older generations – 1/5 BIS central bankers' speeches who are especially vulnerable to COVID – have proven that they can be tech-savvy. Some 80% of payments under this year’s Cash Payout Scheme were made through electronic registration, easily beating our expectations. The Faster Payment System, introduced just over two years ago, now has nearly six million registrations and handles about 400,000 transactions a day – over twice the amount compared with last year. 9. Other initiatives transforming the way banks serve their customers include the recent launch of Hong Kong’s virtual banks and the growing adoption of open API2 technology. Retail banks are increasingly adopting artificial intelligence (AI) and big data analytics to provide tailored products and services to customers. These fintech initiatives help promote innovation and competition among banks, while increasing convenience for customers and improving the transparency of choices available to them. 10.
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One of the first tasks of the Steering Group is to develop a local green taxonomy that would incorporate the harmonisation work currently being done by the Mainland and EU authorities and take into account local circumstances. The aim is simple: there should only be one local taxonomy for use by all financial regulators in Hong Kong. 26. At the global level, the HKMA is an active member of international and regional networks devoted to addressing climate risk. Through our participation in these networks we are able to contribute to international efforts and to draw on some of the best expertise in these fields. We will do our best to align practices in Hong Kong with international developments. 27. When considering international experience, we have to accept that there is no one-size-fitsall solution. This is something we are keenly aware of as we develop our regulatory approach on green and sustainable banking. While we base this approach on international best practices, we also take into account local conditions, recognising that banks in Hong Kong come in many shapes and sizes, and that their progress in green and sustainable banking varies considerably. We will be flexible, proportionate and inclusive in developing and applying regulatory requirements. It will take time for the less prepared banks to build capacity to address climate-related issues; we are ready to work with them to help them catch up. At the same time, the fast-movers or market leaders are encouraged to make the most of the work they have already done.
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* 1998 prices BIS central bankers’ speeches Chart 9 – Wealth by type Chart 10 – Mean versus median wealth* £ bn Wealth, £ 120 500,000 100 400,000 800 300,000 600 400 2008 2010 2012 2014 200,000 200 Median net wealth inc. pensions 0 Mean net wealth inc. pensions 100,000 0 Private Pension Wealth 2012 2014 2008 2010 Physical Wealth* Sources: Wealth and Asset Survey, ONS, Bank calculations. Financial Wealth (net) * Property, physical and financial wealth excluding private pensions. Property Wealth (net) Total Wealth (including Private Pension Wealth Sources: Wealth and Asset Survey, ONS, Bank calculations. *July 2006 to June 2008 estimates for physical wealth are based on half sample. Chart 11 – Regional GDP per head* North East Yorkshire and The Humber West Midlands London South West Scotland North West East Midlands East of England South East Wales Northern Ireland 2007 = 100 110 105 100 95 90 2007 2008 2009 2010 2011 2012 2013 2014* 85 2015** Sources: ONS, Bank calculations. * Regional GVA (income approach) deflated using the GDP deflator. 2014 is provisional ONS estimate. 2015 figure is indicative, estimated using the average annual growth rate from the preceding two years.
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They may also be linked to the stagnation, or in some cases falls, in disposable incomes in some regions, age groups and income cohorts. A third area of perceived deterioration concerns income. With a sizable fraction of households having seen their disposable incomes stall, especially once account is taken of housing costs, that should perhaps come as no surprise. One metric often looked at here is poverty. For example, Charts 30 and 31 look at the fraction of households whose incomes are below a fixed threshold (“absolute poverty”) and below 60% of median incomes in the UK (“relative poverty”), in both cases after housing costs. 13 It does so for three cohorts: under-16s, those aged 16–65 and the over-65s. Whether in absolute or relative terms, the story is roughly the same. Among those over-65, levels of poverty have declined steadily both prior to and following the crisis, if at a less rapid rate over the past few years. That is not true, however, of the 16–65 cohort. Their levels of poverty have tended if anything to drift upwards slightly over the past few years. In other words, poverty levels among those of working age have increased at the same time as the economy as a whole has recovered fairly robustly. This, too, puts a somewhat different gloss on whose recovery this has been. Monetary policy implications What, then, does this mean for monetary policy? Around a year ago, my assessment of the UK economy was a cautious one.
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This coincided with monetary policy being increasingly aimed at holding inflation in check. A growing number of countries had introduced explicit or implicit inflation targets and monetary policy had increasingly been delegated to independent central banks. Once inflation expectations had been anchored, it became easier to stabilise the real economy as well. Many felt that an important reason for the favourable developments in the world economy was that these changed enabled monetary policy to be conducted in a better manner than before. 1 Moreover, during the period prior to the crisis financial stability was increasingly being taken for granted. It was assumed that the financial markets were on the whole efficient and functioning smoothly. Financial crises did occur, but most of the countries affected were able to get back on their feet relatively quickly. The successful management of the IT bubble at the turn of the millennium supported the impression that if crises occurred, they could be dealt with relatively simply and efficiently. Japan, where the problems following the crisis at the beginning of the 1990s nevertheless had been long-lasting, was regarded as a special case. Although developments in Japan were regarded as interesting, the lessons perceived were not thought to indicate that anything similar could happen in, for instance, the United States or Europe. In this apparently stable macroeconomic environment, interest in research into the interaction between the financial sector and the real economy gradually declined.
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During the recovery phase after the crisis, the Riksbank has also tried to reduce the risk of exaggerated indebtedness and overly-inflated housing prices by conducting slightly less expansionary monetary policy than would otherwise have been the case. 6 See, for example, Mishkin (2007) and Cagliarini, Kent and Stevens (2010). Heikensten (2008), writes: “With house prices increasing drastically, risks for the real economy have been perceived to be bigger. On a few occasions in 2004–05 the Riksbank did for that reason not follow a strict inflation-targeting rule. We “leaned against the wind”, in the sense that we did not take rates down as quickly as we could have done considering the outlook for inflation alone.” The development of house prices and household debt have long been on the agenda of the Riksbank’s Executive Board, see for example Srejber (2002). 7 Ingves (2007). I said, for instance: “[W]hen we observe long periods of high growth rates in asset prices and debt, growth rates that appear to be unsustainable in the long run, our view is that it is not reasonable to completely ignore that there may be risks associated with this[. ]…What this view has meant in practice is fairly marginal changes in the timing of our interest rate changes, and substantial oral and written focus on the issue.” This problem is also taken up in Ingves (2010).
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This substantial, but not insuperable, reservation aside, I am confident that, in terms of producing business for Hong Kong’s banks, the creation effect of WTO entry will outweigh any diversion that will arise from the preference of some foreign banks and enterprises for dealing directly with the Mainland. There will still be factors that will encourage international businesses to use Hong Kong as a financial centre. These include the efficiency and sophistication of Hong Kong’s financial markets and the financial infrastructure, the critical mass that goes with being the world’s fourth largest banking centre, and all the qualities that single out Hong Kong, of which an audience such as this needs little reminder: the rule of law, the free movement of goods, capital and information, light government, and a trained and energetic workforce. Globalisation 10. WTO is about globalisation. So let me turn to that subject now. Hong Kong’s openness, and our connectedness to the larger world, place us in an excellent position to take advantage of the acceleration of globalisation that trade and financial liberalisation, and other forces are bringing about. Globalisation is not a new phenomenon. Our ancestors embraced the idea with the opening of trading routes, the building of canals and steamships, and the laying of railway lines and telegraph cables. And for a hundred and fifty years or more, Hong Kong has been a classic example of a global hub – a city at the crossroads of a number of regional and transcontinental trading routes.
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7. How do banking and finance fit into all of this? We expect to see two main developments over the next few years. The first is the greater demand for banking services resulting from the growing volume of business that will follow WTO accession. The second is the financial deepening, stimulated by more rapid financial liberalisation, greater banking competition, and product innovation induced by the terms of WTO accession. These developments will accelerate the reforms already in train within China’s domestic banking sector – reforms that cover the whole spectrum of banking management and services from corporate governance to the professional training of staff. The developments will also progressively open China’s business environment to competition from banks from outside the Mainland. In two years’ time, foreign banks will be able to conduct RMB business with Chinese enterprises in Shanghai, Shenzhen, Tianjin and Dalian. Within five years, they will be able to deal with all Chinese enterprises without any geographical restriction. The advantages for banks with a base in Hong Kong are obvious. Many of them have a head start on the Mainland, with networks of branches and more than a generation of practical experience. They also have all the advantages of geographical proximity, a common language and culture, yet separate financial and legal jurisdictions that Hong Kong’s unique position in China brings. Forty per cent of the Mainland’s trade is routed through Hong Kong. Hong Kong is the Mainland’s largest source of foreign direct investment and China’s main financial conduit and funding centre.
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This includes expansion of gig workers, increased remote or flexible working arrangements, and a dynamic workforce with more frequent career switches. We have already witnessed, for example, a rise in digital nomads who travel freely and work remotely. Third, an ageing population and the need for diverse participation. Malaysia is swiftly ageing, requiring changes in the labour market policies to cater to an older working segment as well as encouraging higher workforce participation among women and other minority groups. At the same time, we need to resolve the issue of relatively higher unemployment rates among youths. And fourth, the growing generational gap in the workforce. Up to four different generations now coexist in many workplaces. Each have varying perspectives on leadership, learning and workplace culture. We can thus expect a host of opportunities, but also the need the navigate deep-seated differences. 1/4 BIS - Central bankers' speeches The digital revolution is expected to increase our labour productivity by 30% and create up to 500,000 jobs by 2025. However, the reconfiguration also poses challenges. The need for specialised skills can lead to a widening talent gap, if left unaddressed. Already, 51% of firms surveyed by BNM faced difficulty in hiring workers, largely due to mismatches of skills for the mid and high-skilled segments1. What does this mean for us? Looking ahead, the local and global outlook means organisations need to embrace the 'new normal' by adopting new business models to address overall productivity and challenges at work.
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Suhaimi Ali: Future-proofing talent for a dynamic and resilient workforce Opening remarks by Mr Suhaimi Ali, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the MyDigital and Tech Roundtable Kuala Lumpur, 17 January 2023. *** Introduction Distinguished guests, ladies and gentlemen. A very good morning and thank you to the organisers of this MyDigital and Tech Roundtable for inviting me to deliver the opening remarks We are here today to discuss issues and ideas to spur digital-ready talent and futureproof the workforce for Malaysia. I believe this conversation is timely. As leaders in our fields, I'm sure all of us agree that staying relevant amid a shifting and competitive landscape is a top challenge for today's employees and employers. The pandemic exposed deep-rooted labour market fragilities and structural inequalities. In Malaysia, as in other countries, vulnerable segments such as low-income workers, the youth, women, ethnic minorities, informal and fixed-term workers were among the hardest hit by the crisis. Some are still finding their footing. More importantly, we are facing several structural shifts that continue to reconfigure our economy, with resulting implications on the future of work. Among the key ones that may resonate with us here today are: First, the digital and sustainability revolution. Increased adoption of technologies such as AI and IoT, coupled with rising urgency on the sustainability agenda will reshape industries. This will demand new skillsets and unlock opportunities, but also create challenges for businesses and employees. Second, shifting work preferences.
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These include the two episodes of bird flu that have affected production and exports of poultry, and the uncertainty linked to the situations in the south which has importantly affected consumer confidence and business sentiment. So, for the most part, the performance of the Thai economy this year is essentially a story of how the domestic economy has been adjusting to the risks that emerged. This includes adjustments in the domestic financial markets and the real economy, as well as the implications for economic and financial stability. Let me go through each of these points in turn. As for the domestic financial markets, the adjustment has been led by the repricing of financial assets that has been underway since the second quarter. Yields on long bonds have been rising. Equity prices have declined. There have been some outflows of short - term capital, and the Baht has weakened from last year. In all, the adjustment has been smooth and orderly, and has benefited from the flexible market mechanism that underpins the movements of the economy’s key prices. And for the real economy, the adjustment has been accompanied by a moderation in growth in the first quarter to 6.5 percent, led by the slowdown in agriculture because of drought and the bird flu. Output of manufacturing and services, however, has continued to expand robustly.
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Bandid Nijathaworn: Thailand’s economic conditions and prospects - a mid-year update Speech by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at a luncheon organised by the Australian-Thai Chamber of Commerce, Bangkok, 27 August 2004. * * * Let me begin first by thanking the Australian-Thai Chamber of Commerce for the invitation to speak to you today. For the Australian-Thai Chamber, this is the first for me and I am very pleased to be here. Today, I plan to cover the evolving economic pictures both at home and abroad. For the global economy, a number of interesting new themes are now emerging and I will try to put these developments into the perspective as we understand it at the Bank of Thailand. As for the domestic economy, despite a number of risks and challenges, this year the economy has managed well under the circumstances. Growth momentum remains firm and economic stability remains intact. Today, I will not open up any new kind of inquiry on the Thai economy, but will simply update you on the recent economic outturn and explain the rationale behind this week's decision by the Monetary Policy Committee to increase the policy interest rate. This decision, which is the first increase in three years, has been expected by the market following signs of increased pressure on domestic prices and following our own assessment and communication to the market that low interest rates have become less necessary given the changed outlook on inflation.
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Kevin Stiroh: The impact of the pandemic on cultural capital in the finance industry Remarks by Mr Kevin Stiroh, Executive Vice President of the Financial Institution Supervision Group of the Federal Reserve Bank of New York, at the Risk USA Conference (delivered via videoconference), 16 November 2020. * * * Good morning and thank you for the opportunity to participate today, the first day of what looks to be a very interesting four days featuring a range of important and timely discussion items for the financial sector. As I looked through the agenda, I was impressed with the diversity of topics the panels will be covering, including traditional banking risks, emerging risks like climate change, and the industry’s response to the pandemic. Today, I want to focus my time on the importance of a firm’s culture in determining business outcomes and how that culture may be impacted by the Covid-19 pandemic. Through my remarks today, I will address two core sets of questions. One, what is cultural capital, why does it matter, and how does it evolve? Two, how is cultural capital impacted by the pandemic? I think we’ll hear more about how the pandemic is impacting financial firms in a wide variety of ways throughout the conference. Before proceeding, I will emphasize that I am speaking for myself and my views do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System. What Is Cultural Capital? First, what is cultural capital?
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Since March, our world and the financial industry have changed before our eyes. Our workplaces were transformed overnight from offices to our homes. Our office mates now include our spouses, kids, and roommates. And, our colleagues became voices on the other ends of our phones or faces on our screens. What does all of this externally-driven change do to a firm’s culture? In the early days of the pandemic, the financial industry and the official sector responded quickly and forcefully to ensure that the provision of critical financial services continued despite the tragic health crisis, significant economic and financial uncertainty, and substantial operational challenges. Many were focused on solving the immediate problems and figuring out how to work remotely. This proved surprisingly effective, at least in the short run. From the perspective of cultural capital, this sudden and dramatic shift in how we work raises multiple questions. First, how does cultural capital influence outcomes in this new environment? How are we drawing on, or depleting, the cultural capital that already existed? Does this environment pose new challenges regarding behavioral risk? And finally, is it possible to identify new opportunities to build cultural capital in a predominately remote environment?
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The success of the principle-based approach to regulation will depend on the ability of banking institutions, individually and collectively as an industry, to make use of the flexibilities given without giving rise to excessive risk taking, overpricing, credit rationing and other actions that could threaten stability in the financial system and overall economic well-being of the nation. The key is for banking institutions to act responsibly, as the actions of banking institutions would have implications on all segments of the economy. Due attention must be given to ensure that all segments of the society have access to banking services at reasonable cost and no groups should be marginalised in this process. In this respect, while we advocate a principle-based regulatory framework, Bank Negara Malaysia will closely monitor the performance and actions of banking institutions, and would intervene and prescribe specific regulations in the event that actions by banking institutions could jeopardise financial stability and public confidence in the financial system. As a custodian of public funds, and as a service-oriented industry, the banking sector must continuously strive to maintain public confidence in the system and deliver high standards of services. Maintaining public confidence entails efforts beyond maintaining strong financial results and having a wide range of products and services for customers. As customers become more financially savvy and better informed of their rights, the conduct and practices of banking institutions will increasingly be scrutinised by the public.
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Zeti Akhtar Aziz: Strengthening the banking sector for further competition Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the dialogue session with banking institutions, Kuala Lumpur, 17 February 2005. * * * Bismillahirrahmanirahim Distinguished Guests, Ladies and Gentlemen, Economic transformation, a more competitive environment, advances in technology, strengthening international linkages, and more discerning customers will be the important forces that will drive changes in the domestic financial landscape in the years ahead. Economic transformation can be expected to be more pronounced as efforts intensify to shift resources to new areas of growth. A more competitive environment will emerge from increased deregulation and further liberalisation. Advances in technology will continue to increase the potential for creating new instruments, new business processes and enhance the ability to measure and manage risks. Strengthening international linkages will come as foreign presence and participation in the domestic financial system increases and as initiatives are taken by domestic groups to operate beyond domestic borders. Against this background, more demanding customers with higher expectations will see greater consumer activism exerting their influence on the financial landscape. These developments will indeed present a dynamic environment with new challenges for the banking industry. Ladies and Gentlemen, It is my pleasure to welcome you to the dialogue session between Bank Negara Malaysia and banking industry.
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However, the difficulties in pricing the structured products linked to sub-prime mortgages and, above all, the patent lack of transparency in the process of pooling, segmentation and redistribution of credit risk carried out through these products are causing problems of confidence between institutions. All these problems have practically paralysed the interbank markets for term loans, in which transaction volumes are very low, and led to interest rates above those expected under 2 BIS Review 134/2007 normal circumstances. European stock market prices, particularly for financial and construction firms, have also been adversely affected, while some investors have shifted to lower-risk assets such as government debt, resulting in declines in yields on these securities. The uncertainties deriving from all these movements pose evident added complexity in monetary policy decision-making. Fortunately, the financial turbulence described reaches Europe at a time of high economic buoyancy and, therefore, notable resilience in the euro area. The GDP of the euro area grew somewhat less than expected in the second quarter of the year, but 2007 to date represents, overall, a continuation of the economic boom initiated in the area in mid-2005. The sound financial position of firms, the expected profit rates and the favourable response of employment to the step-up in activity suggest that this stage of output expansion will persist over the coming quarters at a rate that, although it may well be slightly lower than anticipated some months ago, continues to be around potential growth.
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The pace of recovery however varies across regions. Though global conditions have improved, recent developments in Europe have once again unsettled financial markets as doubts have arisen over the fiscal sustainability of several countries in the Euro zone. These episodic concerns serve as broad reminders that the world economy still faces serious challenges as governments, financial institutions and corporations adjust to the new realities of greater prudence, tighter market conditions and lower tolerance for weak governance and excessive leverage. 4. In Asia, economic growth has rebounded strongly above pre-crisis levels and become more broad-based. Fundamentals in Asia continue to be strong, boosted by robust domestic demand, healthy balance sheets and strong resurgence in intra-regional trade. According to the International Monetary Fund (IMF), Asia is expected to grow by an average of 7.1% in 2010 and 2011, up from 3.4% in 2009. Having reformed and restructured their economies following the Asian Crisis a decade ago, Asia was better positioned with less fiscal imbalances or corporate excesses to emerge faster from the downturn. Prospects for sustained growth in ASEAN are also good. Its outlook is enhanced by continuing efforts to create an integrated single market by 2015. With improved trade links with the two Asian giants – China and India, ASEAN will become an even more dynamic and vibrant region within Asia. 5. The GCC countries too enjoy solid growth prospects, and look set to achieve around 5% GDP growth in 2010 and 2011, according to the IMF.
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One is a decision to “not do” and the other is decision to “do”. The first is the “not do”. We decided in the early 1990s not to implicitly subsidize cash anymore by storing it all over the country and allowing for overnight deposits. It took some time to implement this strategy. But as of a few years back, the Riksbank only has one cash depot in the entire country. It is the market’s responsibility to store and transport cash, hence those costs are now borne by the market. The second is a “do”. A few years back, we engaged in a dialogue with a consortium of banks and the Swedish clearing house on how a fast payment system available 24/7 could be created. For a payment system to be safe, you want to assure an eventual settlement over the central bank’s 2 [4] books that is in central bank money. This can normally only be done when the central bank’s payment system is open. After some thinking, we found a way to connect the instant payment system with the Riksbank’s system and by allowing ring-fenced overnight balances for this purpose - or to put it differently by extending a secured credit overnight - we managed to construct a scheme where the fast payments are backed by central bank money even when our system is closed. The result?
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Today over half of the Swedish population have downloaded the fast payments app (Swish) on their smart phone and it has become a prominent feature in the retail payment landscape, providing a substitute for cash in person to person (P2P) payments. Cards and cash are the most common payment methods among consumers Source: Sveriges riksbank. These two examples shows that a central bank may need to be both “hands off” and “hands on” depending on the situation to foster innovation. The trick is to find the right degree of intervention at the right time. And to perform that trick there are no short cuts. A thorough analysis of costs and benefits is needed. 3 [4] Another lesson is that in the wake of such fundamental changes, like the one currently transforming the Swedish retail payments market, new questions keep arising. With change, there will be winners and losers. In this case the winners are the Swedes who have adapted to electronic payment means. Losers are the ones who want, or for some reason need, to keep on using cash and who increasingly find themselves in a world where access to cash, and acceptance of cash, are on the decline. This creates a new challenge for society. This change needs to be managed. For a central banker, the transformation of the retail payments market also implies a more fundamental question. If cash basically disappears, then the general public will lose access to central bank money – they will only have access to commercial bank money.
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The exchange rate remained stable up to autumn 1996, partly because wage growth was low and overall demand did not generate pressures in the economy. Gradually, the krone began to show wider fluctuations. The experience of the latter half of the 1990s demonstrated that monetary policy cannot fine-tune the exchange rate. Developments in international financial markets led to more pronounced fluctuations. And more fundamentally, when labour market pressures rose and incomes policy failed, exchange rate developments no longer provided signals to wage formation and fiscal policy. High petroleum revenues, fiscal slippage and expectations of increased government petroleum revenue spending contributed to this. The exchange rate was therefore no longer suitable as a nominal anchor. Towards the end of the 1990s, monetary policy placed emphasis on the fundamental preconditions for exchange rate stability. Monetary policy instruments were oriented in such a way that price and cost inflation was brought down to the price stability objective of the European Central Bank (ECB). Pursuant to the Regulation of March 2001, the mandate for monetary policy stipulates that monetary policy shall be aimed at stability in the Norwegian krone’s internal and external value, thereby contributing to stable exchange rate expectations. At the same time, monetary policy shall underpin 2 BIS Review 90/2006 fiscal policy by contributing to stable developments in output and employment. The operational objective of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5 per cent over time.
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Some said that the development in the last three decades was a miracle and was almost incredible. Instead, I would describe it as a “world-shaking” development. Having encountered enormous difficulties and challenges at every single stage of reform and opening up, China, as the country with largest population in the world, managed to carry out an unprecedented transformation from a planned economy to a market economy. As there was no precedent to learn from, China could only rely on its own efforts and took one step at a time. Hong Kong has played an extremely important and irreplaceable role during the process of China’s reform and opening up. At the initial stage of opening up, China focused on attracting foreign investors to set up manufacturing factories. Hong Kong manufacturers were the first to move their operations to Mainland China. In the past 30 years, Hong Kong has always been the largest source of direct investment in the Mainland. In 2009, Hong Kong invested $ billion in China, accounting for one half of the total foreign investment in the country. In the course of investing in China, not only has Hong Kong injected capital but, more importantly, it has introduced skills in production and management. In the past decade, the Mainland projects in which Hong Kong invested have gone through some significant changes. The focus has been shifted from investment in the manufacturing industry to a range of diversified and multi-dimensional investments that include investment in all kinds of service industries.
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That is to say, they sold foreign currencies on the foreign exchange market and paid the proceeds into sight deposit accounts at their banks. 7 In other words, the liquidity expansion created in the Swiss banking system by the SNB was largely reflected in customer deposits. However, for some time, statistics have been suggesting a change in this behaviour. In contrast to the first phase, no additional customer deposits have been forming following the sale of foreign currency. One possible explanation for this development is that, instead of holding francs on their accounts, domestic investors have been keeping their assets in the relevant foreign currency, but have been hedging them using derivatives (forward foreign exchange transactions and foreign exchange swaps); 8 investors may, via their banks, have been purchasing francs using forward contracts, for instance. The banks, in turn, may have hedged the resulting foreign currency risk by demanding Swiss francs on the spot market. This demand then ultimately resulted in upward pressure on the Swiss franc, which the SNB countered by means of appropriate foreign currency purchases. The rise in hedging transactions using derivatives is notable at Swiss pension funds. For a long time, diversification and return considerations have prompted institutional investors to hold a significant portion of their assets in foreign currency investments. However, the associated currency risk is increasingly being hedged using forward foreign exchange 6 7 8 As far as equity prices are concerned, the development of the Swiss market has been similar to that of the rest of Europe.
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Despite very high demand for Swiss francs, the percentage fell from 21% to 15% between 2008 and 2014; since negative interest was introduced, it has fallen further and now stands at only about 11% (cf. chart 7). Conversely, the share of domestic investors has risen. This group often favours domestic bonds for their long-term investments, or is obliged to hold a given percentage of such bonds for regulatory reasons. Nonetheless, demand from foreign investors remains strong in some segments of the Swiss franc bond market, notably that for money market debt register claims. How do we explain this apparent paradox? One contributory factor is the distortions on the FX swap market mentioned before. While they make borrowing more expensive for foreign issuers, they have the opposite effect for foreign investors and offer special arbitrage opportunities. This allows investors from the US dollar or euro areas to achieve higher returns on a hedged basis. 5 The weekly auctions have been clearly oversubscribed, as can be seen from chart 8. Although the average yield to maturity is very low, bids have been significantly higher than actual allocation (blue), with some 60% of outstanding money market debt register claims currently in the hands of foreign investors. All in all, we can say that, despite strong demand for Swiss francs and low interest rates in Switzerland, the outstanding volume of the Swiss franc bond market has barely changed.
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Such gambles for resurrection can explain the ruin of bankers as well as gamblers, including most recently Lehman Brothers and Bear Stearns. These shifts in risk preferences are not peculiar to humans. They are also observed in birds, insects and mammals when faced with a losing streak. 14 Birds foraging in mid-winter have been found to take a calculated gamble by pursuing high-risk, high-return strategies, much like the down-at-heel gambler or world-weary CEO. Although Lehman CEO Dick Fuld was 11 For example, Ainslie and Haslam (1992), Ainslie (1974). 12 For example, Madden et al (1997), Bickel et al (1999), Petry (2001), Vuchinich and Simpson (1998). 13 For example Kahneman and Tversky (1979). 14 For example, Watson and Platt (2010), Schultz et al (2010). 4 BIS Review 114/2010 nick-named the gorilla, his behaviour during a losing streak was closer to that of a ravenous robin. Self-improving cycles If preferences evolve over time, this gives rise to the possibility of self-reinforcing patterns of behaviour. Such evolutionary trends have been extensively studied by sociologists, psychologists and even some economists. These studies confirm the old aphorism: virtue is its own reward. Specifically, patience is capable of setting in train a cycle of self-improving behaviour in individuals, economic and social systems. Take happiness. Studies have shown that happy people save more and spend less. 15 Happy people also take longer to make decisions and expect a longer life. In short, they are patient. These patterns of behaviour are connected and reinforcing.
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Stefan Ingves: The relationship between the Swedish Riksbank and the Riksdag Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Sveriges Riksdag (Swedish parliament), Stockholm, 8 June 2007. * * * Independence and opportunities for evaluation and accountability Let me begin by thanking you for the invitation to today’s conference. Of course it is both an honour and an inspiration to have the opportunity to discuss in such knowledgeable company the Riksbank’s relationship to the Riksdag (the Swedish parliament) and what this means for monetary policy. In recent decades many central banks have become increasingly independent in relation to the political system. This also applies to the Riksbank. At the same time, these institutions, which have often been fairly closed and secretive, have become more open and clear with regard to their objectives, motives and means. Many central banks now conduct monetary policy with more or less explicit price stability targets and the Riksbank was one of the first to introduce this type of quantified target for inflation at the beginning of the 1990s. Both our price stability objective and our independence have been written in the law since 1999. This contributes to strengthening the credibility of monetary policy. The fact that increased independence has gone hand in hand with greater openness and clarity – what is usually called transparency in central bank language – is not particularly strange. For an independent authority to gain general acceptance and legitimacy, there must be good opportunities for evaluation and accountability.
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Index above 50 indicates growth, below 50 a decline. 06 07 08 09 Sources: National Institute of Economic Research and Swedbank 14 BIS Review 138/2008 Poorer prospects for world economic activity 8 8 USA 7 7 Euro area 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 00 01 02 03 04 05 06 07 08 09 10 11 Sources: Bureau of Economic Analysis, Eurostat and the Riksbank Lower oil price Brent crude, USD per barrel 140 140 Oil price, outcome Futures, MPU September 2008 Futures, 2008-10-16 Spot price, 2008-11-06 120 120 100 100 80 80 60 60 40 40 20 20 0 0 00 01 02 03 04 Note. Futures are calculated as a 15-day average.
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We tackled many difficult problems, although it was unpleasant, and resolved their underlying causes. This has definitely given us better resilience to what is happening now. At what stage is the global financial system now? The global financial system is currently in the middle of such a process. Deficiencies in the system that have lain in wait in many parts of the world have now come into focus in an BIS Review 138/2008 7 acute situation. This includes supervision, regulatory frameworks and the possibility for insight with regard to somewhat fanciful constructions of financial instruments. And it is not only the regulations and supervision that need to be reviewed and harmonised between countries – the same applies to the frameworks for crisis management and financial stability. Otherwise one country’s crisis management can easily become another country’s problem. We can now see examples of initiatives taken towards better and more coordinated crisis management in the EU, for instance. Now we are facing the task of fixing what is broken so that it will stay fixed and function better in the future. This applies both to resolving the deadlock on certain markets and the distrust that has been created within the financial system, as well as putting the problems to rights in the long term. Some measures have already been taken and more are on the way. It is not a simple process and it will probably take some time before the measures take full effect.
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Capital markets could go through a process of progressive and partial fragmentation: no significant capital account opening would occur in many parts of the world. Conversely, new barriers could be erected either in the form of “soft” capital controls or through national regulations forcing financial institutions to ring‐fence local pools of capital and liquidity. There would be little convergence in domestic financial systems and regulations. Foreign exchange reserves would keep growing, both in absolute terms and as a percentage of world GDP. This scenario may be seen as the only realistic response to increased diversity in a multipolar world. The systemic consequences, however, are not clear. In such a world, BIS Review 127/2010 3 current account imbalances would be heavily influenced by public actions and policies. Regulatory competition would determine the location of financial activities and the allocation of savings. In the absence of some “rules of the game”, tensions would naturally arise between countries regarding many aspects of their domestic and international macroeconomic policies. The opposite scenario would involve the progressive opening of all capital accounts, together with some (more or less intensive) convergence in financial systems and regulations. This would allow for the emergence of a unified world capital market, an efficient allocation of savings across countries and a smooth financing of current account imbalances. Experience shows, however, that an open international financial system is not inherently stable and, therefore, very dependent on strong infrastructure. Two elements of such an infrastructure seem especially important.
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Christian Noyer: International financial stability Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Lloyd’s City Dinner, London, 29 September 2010. * * * Although the financial crisis originated in one country, it quickly became apparent that it was truly global in nature, both in terms of its mechanisms and its consequences. It brought home a simple message: capital markets are closely interlinked around the world and, thus, domestic and international financial stability cannot be dissociated. Today, I would like to reflect upon international financial stability: what it means, whether or not it should be pursued as a major policy objective; and finally, what actions should be taken and which instruments should be employed. The views expressed are my own and do not represent an official position. However, as you know, next year France will hold the Presidency of the G20 and, bearing this in mind, I will try and offer my own thoughts. International financial stability: what does it mean? Over the last decades increased financial integration has led to greater reallocation of savings across countries. The expansion of gross and net capital flows has been spectacular. As a result current account imbalances have increased both in amplitude and durability. In fact, they have become a permanent feature of our economic environment. Many analysts would argue that these imbalances are the ultimate cause of the crisis. I would not go that far.
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The last turmoil in the global and domestic financial markets has been a concrete proof of this fact. Thus, the dedollarization is not a straightforward process. As a clear evidence of this, the findings of Reinhart and her friends 13 show that only two countries, Israel and Poland, out of a total of 85 countries managed to achieve large and lasting declines in domestic dollarization. Accordingly, we can say that dedollarization is a difficult and long lasting process that is very much related with the macroeconomic stability and proper incentives. Hence, what we should do first is to continue with the current sound macroeconomic policies and structural reforms in a decisive way. Second, in order to start dedollarization, an active dedollarization strategy such as the so-called “carrot and stick approach” in the literature, which consists of regulations that will encourage the use of the Turkish currency, should be planned. However, as Ize and Levy-Yeyati 14 suggest, before launching an overly ambitious policy agenda, we should make all the necessary researches to understand the roots, risks and costs of dollarization and the implications of policy reforms made against it. I think, this conference provides a big opportunity for all of us to share our opinions and experiences and to enlighten our way of dedollarization. Distinguished Participants, I would like to conclude my words by repeating that I am very glad to welcome such distinguished economists from all over the world. I am sure that we have a lot to draw on the experiences of each other.
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Secondly, Turkey had lived through the first stage of dollarization in which the foreign currency is used mainly as a store of value and partly as a unit of account, but not as a medium of exchange. In this context, the dollarization in Turkey can be called as financial dollarization. Distinguished Participants, After the 2001 crisis, the implementation of tight monetary and fiscal policies together with the structural reforms has enabled the country to bring the inflation down to single digit numbers and to reduce the ratio of public debt to GNP significantly. Also, financial markets have become deeper and less fragile. In this context, the banking sector reform that aimed to strengthen the regulation and supervision of the banking sector, restructure the public banks, improve the asset and loan quality and the capital adequacy ratio of the system has been of great importance. Additionally, the progress made towards economic stability, particularly the significant decrease in inflation, enabled us to drop six zeros from the Turkish currency. This currency reform has increased the credibility of the Turkish currency both in internal and external markets. The issuance of the New Turkish Lira debt instruments by foreign banks in the international markets is an important indicator of this increasing credibility. Consequently, the desire and the need to invest in foreign currency in order to hedge the value of wealth decreased significantly and investors have started to increase the share of Turkish currency assets in their portfolios.
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The ECB’s experience shows that a specific strategy to foster diversity can generate tangible benefits in the form of a better gender balance. In 2010, the ECB’s Executive Board implemented a marked shift in policy towards diversity by issuing a public statement and launching a diversity action plan. The action plan was supplemented in 2013 with explicit gender targets for the entire ECB hierarchy. The gender gap in the probability of promotion declined notably after the strategy was launched. Entry-level economists typically join the ECB at the age of 30, many of them with a PhD. They usually enter the ECB at the expert level (salary band F/G) and subsequently progress to the principal economist level (salary band H) and adviser level (salary band I). The salary bands above adviser level are for heads of division and senior management. To move to a higher salary band, economists must submit an application and be selected in a promotion campaign. 4 The study shows that the average difference between economist-level starting salaries for men and women in the period 2003-2017 was small: just over 1%.2 However, the gender wage gap widens notably over time, reaching more than 7% after ten years.3 For moves within the same salary band, however, the differences are minimal (see righthand panel). This indicates that the divergence between men's and women's salaries is primarily related to the probability of promotion over time.
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Instead of one tool, the policy rate, central banks now use several different tools. Previously, the focus lay on influencing the financial conditions via a short-term, risk-free interest rate that primarily affects the banks’ funding. Now, central banks also introduce measures that directly affect more long-term and even non risk-free interest rates. These too can lead to the intended effects on the interest rates and other credit conditions that households and companies face, and thereby to the desired effects on capacity utilisation and the rate of inflation. Another way of describing the menu of monetary policy measures that are now being used is that they concern both sides of the Riksbank’s balance sheet. When the policy rate is adjusted, this entails changes for a part of the Riksbank’s liabilities. 8 And when the Riksbank purchases different types of assets, this means that the asset side changes. In other words, today’s monetary policy works with the entire balance sheet. 7 Rajan (2005) is a very well-known reference. 8 In 2020, the Riksbank has also changed the conditions for other kinds of liabilities. 6 [13] Crisis preparedness – part of monetary policy Another change is that the central banks have been reminded of the importance of not just being able to stabilise normal economic cycles but also being prepared to act rapidly and broadly to restrain the effects of crises affecting both the development of the real economy and the financial system.
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Interest rates were cut faster and more than would have been justified on the basis of historical behaviour. Between the third quarter of 2008 and the third quarter of 2009, the Riksbank cut its policy rate from 4.5 per cent to 0.3 per cent, a cut of 4.2 percentage points in the space of one year. We did not hit the lower bound. GDP growth and inflation did fall, but the falls were less severe and not as prolonged as would have been the case if we had not acted so forcefully. The falling trend in the long-term real interest rate has increased the risk that we may hit the lower bound more often in the future, even if we are not sure where 22 See Brainard (1967). 23 See Apel et al. (1999). 24 See, for instance, Söderström (2002). 21 [24] it lies. In such a situation monetary policy should act more aggressively on negative impulses. Unconventional measures, such as extensive government bond purchases, may be an important measure. 25 Economists are alternatively criticised for being one-handed or two-handed – either we are too one-sided in our considerations and recommendations, or else there is too much of on the one hand and on the other hand. I mentioned earlier that “it depends” how monetary policy should react to uncertainty. When the uncertainty concerns long-term trends, monetary policy should act more cautiously. But this is not a general principle.
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It will then become easier and cheaper for companies to find new staff and the vacancies will be filled faster. But for those people entering the labour force, it will nevertheless take some time to seek and find a new job. Unemployment will therefore increase, at least initially. An increase in labour force participation will also increase competition for jobs. Employees’ wage demands will therefore be more subdued. When labour force participation increases, the covariation between unemployment and wages will become negative. But it is important to understand here that the negative covariation is due to the increase in labour force participation, that is, the causality goes from labour force participation to unemployment and wages. It is thus not rising unemployment in itself that causes lower wages. The covariation between unemployment and wages that is observed in the data is only a correlation, which does not say anything about which affects what. Figure 6a illustrates how exogenous changes in labour force participation affect wages and unemployment. The covariation is negative, as expected. Figure 6.
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Mugur Isărescu: Issue of CHF-denominated loans Presentation by Mr Mugur Isărescu, Governor of the National Bank of Romania, in front of the Budget and Finance Parliamentary Commission, Bucharest, 10 February 2015. * * * Ladies and gentlemen, Members of Parliament, First of all, I would like to thank you for the invitation to present, together with my central bank colleagues, the stance and action steps adopted by the National Bank of Romania in relation to the issue of CHF-denominated loans in Romania. I assure you that we deem this debate to be very useful at the current juncture. The members of the central bank’s top management have come before you in line with the legal obligation stipulated in the NBR Statute (Law 312/2004) of providing the Parliament and the general public with quality information for a clear image of the policies and the measures adopted by the National Bank of Romania in fulfilling its tasks. I. The Swiss National Bank’s decision The public debate on CHF-denominated loans started on 15 January 2015, when the Swiss National Bank removed the 1.2 EUR/CHF floor, which led to the immediate and significant appreciation of the Swiss franc against the euro, the US dollar and other currencies.
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Moreover, credit growth to the private sector remains subdued, and the necessary adjustment of balance sheets in the public and private sectors will probably continue to dampen the pace of recovery. The risks surrounding the economic outlook remain on the downside. Geopolitical risks, as well as developments in both emerging market economies and global financial markets, may have a negative effect on economic conditions in the euro area, through their impact on energy prices and global demand for euro area products. Further downside risks include an BIS central bankers’ speeches 1 inadequate implementation of structural reforms in the Member States and weaker than expected domestic demand. Looking at price developments, we see that euro area HICP inflation declined sharply from late 2011 to October last year, and has since been fluctuating around very low levels below 1%. According to the latest data (Eurostat’s flash estimate), euro area annual HICP inflation stood at 0.5% in June 2014, unchanged from May. Annual HICP inflation is expected to remain at low levels over coming months, before increasing gradually in 2015 and 2016. At the same time, medium to long-term inflation expectations remain firmly anchored in line with price stability. Upside and downside risks to the outlook for price developments are both seen as limited and broadly balanced over the medium term. We will monitor the possible repercussions of geopolitical risks and exchange rate developments closely in this context. The exchange rate is not a policy target for the ECB.
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If collapse occurred, the vast array of complex contracts within LTCM might not close out. The dimensions of the exposures were considerable, and a disorderly run on LTCM, triggered in part by a lack of legal certainty, could well have provoked a serious liquidity situation. No surprise that there was a co-ordinated purchase by the main creditors to enforce an orderly wind down. A key lesson for financial stability oversight is the need to encourage ways of improving legal certainty. 7. Implications of the new environment: risk and culture So much for the drivers of change - liberalisation; technological advance and new products. But what about the implications for the financial markets and their oversight? The first implication is to highlight the need for examination and possible change in supervisory and regulatory frameworks. What made sense before, in terms of separate regulation for each silo of banking, insurance and securities might look different today. We have also certainly seen a move towards consolidated supervision. I will return to this area later. But second, oversight needs an understanding of a number of different soft issues: of culture and attitudes to risk which can affect behaviour. These can and do vary across the different areas of activity. The existence of new concentrations of risk might not matter if their new holders are fully aware of the risk implications, or if their likely behaviour could be anticipated by other financial participants or the public authorities.
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Real effort is needed to try to understand the dynamics of collective, and sometimes irrational behaviour of firms, their clients and counterparties - particularly behaviour that could lead to one-way markets. In a downward market they can be the scourge of stability and destroyer of liquidity. 3. Financial stability and public policy The business of oversight of, and possible intervention in, the financial system falls to public authorities. The justification for this involvement is accepted by all but the freest of free marketers. 1 Raymond Goldsmith, Comment on Hyman Minsky’s “The Financial Instability Hypothesis: Capital Processes and the Behaviour of the Economy” in C P Kindleberger and J-P Laffargue Eds, Financial Crises: Theory, History and Politics. Cambridge University Press (1982). BIS Review 5/2004 1 Financial stability can be looked on as a public good. And the costs to society of crises and instability can go well beyond the cost borne by players within the financial services arena itself. Not only is it important in providing an effective monetary transmission mechanism, but collapse and instability can lead to decline in aggregate demand and a rise in unemployment. Research suggests that the average cumulative output loss of a banking crisis in an emerging market economy is nearly 14% of GDP, and up to 25% in developed countries.2 The roles and aims of the public authorities - a combination of supervisors, central banks and government - embrace two interdependent fields.
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First, Spain faces the challenge of reducing the unemployment rate and the temporary employment ratio, which have been persistently high in recent decades. In particular, the unemployment rate of the Spanish economy was, on average, 15.9% over the 2000-2019 period, as against 9.3% in the euro area. Also the share of temporary employment was 28.3% over the same period in Spain, but only 15.4% in the euro area. Young people (those under the age of 24) have been particularly affected by this instability, with their rate of unemployment (32.5%) and their share of temporary employment (69.5%) standing well above the euro area average in 2019 (15.6% and 52.4%, respectively). Reducing this high employment instability is key, especially for young workers, given its adverse economic effects in many spheres. For example, employment instability affects the 3 accumulation of workers’ human capital and can thus have very persistent effects on their working lives. Furthermore, it also increases uncertainty over the future income path of the affected workers. This not only has consequences for spending decisions, but also for emotional well-being, the formation of new households and the birth rate. In this context, one of the main objectives of the labour market reform enacted in 2022 in Spain is precisely to combat the high proportion of temporary employment. And indeed, since the approval of this legislation, permanent hiring has quickened significantly and temporary hires have slowed, with permanent contracts increased most among permanent seasonal workers and permanent part-time workers.
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In this regard, it should be emphasized that our projections on inflation, which currently anticipate that it will remain high in the coming months, but will moderate gradually thereafter to levels compatible with the ECB’s mediumterm inflation target of 2% is based on the assumption that there will be a slowdown in the growth of energy prices, in line with those on the futures markets, and that a moderate wage growth response and a squeezing of trade margins will prevent the emergence of the pricewage feedback loop. Avoiding this feedback loop from wages, mark ups and prices is precisely the main priority objective of the incomes agreement that we have been advocating in recent months at the Banco de España. It would consist of an agreement between firms and workers, under the framework of social dialogue, to share the inevitable loss of national income that higher commodity import prices entail. And agreement that should also, in our view, include the public sector, by avoiding both an across-the-board fiscal impulse in this context and a widespread use of automatic indexation clauses in expenditure items. The third session of this conference addresses this question. Over a longer horizon, the Spanish economy faces a series of structural challenges, some of them going back several years or even decades. In our conference we will be focusing on four of these challenges, namely the need to correct dysfunctions in the labour market, to boost productivity growth, to make public finances more sustainable and to address the challenges posed by climate change.
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By slowing the rate tightening cycle somewhat so that labour demand increases, the central bank can contribute to promoting employment. But when employment rises sharply and rapidly, wage growth has a tendency to accelerate. Inflation usually follows suit. As shown in the Chart 5, we have previously experienced that the rise in prices for domestically produced goods and services accelerates in the wake of a sharp rise in employment. Chart 5 When employment rises rapidly, inflation tends to follow suit Four-quarter change. Percent 5 5 4 4 3 3 2 2 1 1 0 0 –1 –1 –2 1993 1996 1999 2002 2005 2008 2011 2014 2017 Employment growth, moving average Domestic goods and services inflation six quarters later –2 Sources: Statistics Norway and Norges Bank 6 The role of monetary policy is to promote maximum employment without causing inflation to accelerate. Monetary policy cannot take primary responsibility for employment. Entry into the labour market is determined by the education system, the social benefit system and labour market policy. An increase in labour supply will create more room in the next round for an increase in employment without causing inflation to accelerate. NORGES BANK ECONOMIC PERSPECTIVES 17 FEBRUARY 2022 THE LABOUR MARKET IMPROVED RAPIDLY Monetary policy is a first line of defence in stabilisation policy. Economic downturns are countered by rate cuts (Chart 6).
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Frozen capital markets threatened even solvent banks. At an early stage, there were fears that the pandemic that hit us in 2020 might also trigger a financial crisis. Three different situations, but one common endeavour for central banks: The financial system had to be protected. At the start of the pandemic, access to market liquidity was narrow, and the price of available capital was disproportionately high. Norges Bank stepped in and provided additional liquidity support to the banks (Chart 2). The purpose was to contribute to smooth market functioning and ensure that the policy rate cuts passed through to the interest rates faced by households and businesses. 3 NORGES BANK Chart 2 Additional liquidity support during the pandemic ECONOMIC PERSPECTIVES 17 FEBRUARY 2022 F-loans. In billions of NOK 200 200 150 150 100 100 50 50 0 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Ordinary F-loans Extraordinary F-loans 0 Source: Norges Bank The actions taken build on several important principles:3 First, the risk transferred to the central bank should be as low as possible. If the support schemes are too favourable, we risk undermining the banks’ own motivation to maintain sound credit and liquidity policies. Those who take risks must also be prepared to bear the losses. Second, loans should only be given to banks that are solvent. The central bank’s role is not to help recapitalise banks.
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And they include importantly, too, an adaptive regulatory framework which has in fact been remarkably successful in maintaining confidence in financial institutions and markets without stifling innovation and risk-taking. All of these factors -- and no doubt others -- help to explain why some 600,000 people are estimated to be employed in finance and other business services in Greater London -- a number which I believe is roughly equal to the total population of Frankfurt. Now you will have noticed that none of these factors has anything to do with the question of the national currency used either here in the UK or in Continental Europe. The main impact of the advent of the euro on financial activity, as I see it, is that it will encourage the development of broader and deeper and more liquid markets, in financial instruments of all kinds, where they are currently fragmented because they are denominated in the various individual national European currencies. The City of London thrives on liquid markets regardless of the currency -- and it will thrive on the euro, whether the UK is “in” or “out”. Measured in these terms the introduction of the euro represents an opportunity for London rather than a threat. I have no doubt whatever that there will be a vigorous euro-euro market in London, come what may, just as there is a vigorous market in euro-DM or euro-francs as well as $ and euro-yen at present.
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Frankly it is not clear to me that this is a risk which it would be in the interests of either the UK or the Eurozone to take in today’s conditions. For the time being our best bet, it seems to me, is for both the Eurozone and the UK to continue to pursue macro-economic - both fiscal and monetary - stability in parallel, and to hope that the euro recovers, as I continue to expect that it will. That strikes me as a more reliable path to the sustainable convergence which the British Government has set as the essential economic criterion on which its decision to move ahead to a referendum on UK entry to the euro will be based. 3 BIS Review 92/2000
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Let us take as our starting point the following scenario, which has similarities to the economic situation over the past few years. Interest rates abroad have fallen and there are prospects that they will remain low for an extended period. At the same time, higher capital requirements for banks have seemed likely for some time and, in response, banks have increased their lending margins. In this chart, we have used the NEMO model to analyse how these factors affect the economy, including the interest rate. Low interest rates abroad widen the interest rate differential against other countries. This points towards a stronger exchange rate, which will result in lower inflation and output further ahead. At the same time, banks keep lending margins higher than normal for a period in order to build up capital. Higher bank lending margins and lending rates dampen growth and inflation. Both higher lending margins and lower interest rates abroad imply a lower key policy rate in Norway. In this scenario, the central bank reduces the key policy rate, but by less than the decrease in interest rates abroad. As a result, the krone appreciates. This leads in the short term to lower activity and inflation, but a lower key policy rate and slightly lower bank lending rates will gradually result in higher capacity utilisation and higher inflation. Borrowers, however, only experience a limited reduction in bank lending rates because of the assumed rise in bank lending margins. Somewhat lower interest rates and higher output nonetheless result in increased credit growth.
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The duty of the central bank in such a situation has been to keep the lid of the jar tightly so that the child is unable to take out cookies at its own pleasure. This is not a popular measure, but central banks throughout the world have been found to keep the cookie jar in tight control for the benefit of the society. Given the above economic costs, inflation is undoubtedly the public enemy number one. 4 BIS Review 55/2007
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However, I believe that it will be important to monitor developments in the period ahead to check that new risks do not arise. Figure 11. Decline in lending to households Credit growth, annual percentage change 20 20 Companies Households 15 15 10 10 5 5 0 0 -5 -5 -10 -10 99 01 03 05 07 09 11 Source: Statistics Sweden Conclusions Today, I have discussed three aspects that were particularly important to my assessments and my stance when the repo-rate decision was made in February. Two of these relate to the debt crisis in the euro area. My view is that it is taking too long to improve public finances and that the risks associated with a high level of indebtedness mean that the debt-ridden countries themselves must assume a greater responsibility for resolving their problems. The third aspect relates to the risks that can arise when the real interest rate is low for an extended period of time. This can, for example, lead to overheating tendencies or a too rapid increase in indebtedness. My conclusion is that, in the current situation at least, these risks are limited. This was one of the important reasons why I was able to vote for a repo-rate cut at the latest monetary policy meeting. A lively public debate is currently underway on a couple of the issues I have addressed here.
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We will receive further clues as to the current state of the economy before the next monetary policy meeting in April and will then review how this new information affects monetary policy. As I said earlier, in the slightly longer term the Riksbank’s latest forecast is that there will be a gradual recovery in the euro area and the global economy following a weaker 2012. This will of course affect Sweden too. It is expected that resource utilisation will increase, the rate of wage increases will accelerate and underlying inflation will gradually rise as growth improves. The latter is illustrated in Figure 6. BIS central bankers’ speeches 7 Figure 6. Gradually rising inflationary pressures The CPI, CPIF and CPIF excluding energy, annual percentage change 5 5 CPIF excluding energy CPIF 4 4 CPI 3 3 2 2 1 1 0 0 -1 -1 -2 -2 06 08 10 12 14 Note. The CPIF is the CPI with a fixed mortgage rate. Sources: Statistics Sweden and the Riksbank Low real repo rate for some time to come We will need to gradually tighten monetary policy when inflationary pressures and resource utilisation increase. The Riksbank’s repo-rate path from February therefore indicates repo-rate increases during the course of 2013 and 2014. Nevertheless, this forecast still means that monetary policy will remain highly expansionary in the years ahead.
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The upshot was an unprecedented reduction in investment, with significant effects on the economy’s level of capitalisation. Nonetheless, in late 2009 and early 2010 there was some improvement, especially in household consumption, which began to respond to the major stimulus packages adopted. The slight rise in consumption combined with the positive contribution of the external sector enabled Spain to join in the recovery already under way in other developed countries. The signs of recovery are still very muted and are largely sustained by temporary factors that will tend to peter out in the coming months. The recovery will foreseeably be gradual and take some time to gather the momentum sufficient to generate employment. Accompanying the incipient stabilisation of the economy are certain developments which, while they may be interpreted as the counterpoint of the contraction in domestic demand, contribute to creating conditions conducive to a return to growth. The sharp fall in domestic spending has contributed significantly to altering the dynamics of inflation, the pace of which has clearly slowed to the extent of posting negative differentials with the euro area for most of last year, something unprecedented since the start of EMU. The disinflationary process has continued in 2010 to date, and there have even been falls in core inflation in a setting in which the slowdown in services prices has continued to intensify. It is too early yet to know to what extent this development is in response to a greater sensitivity of cost and price-setting to cyclical conditions.
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The non-oil sector exports were valued at about $ billion in 2006 and constituted almost 6.0 percent of total GDP and 13.2 percent of non-oil GDP. During 2006, the national economy continued its remarkable growth for the fourth consecutive year, especially in the non-oil sector which grew by 6.2 percent following its growth rate of 5.2 percent in 2005. The non-oil industrial sector was the fastest growing sector of the economy recording a robust growth of 10.1 percent during the preceding year. The sector has continued its robust growth during the current year. Due to higher economic growth and receipt of higher than anticipated revenues, the fiscal position of the government has improved substantially in recent years. The budget surpluses since 2003 have enabled the government to reduce its domestic debt sharply and increase its expenditure on infrastructure and social sectors. The ratio of domestic debt to GDP has declined from 82 percent in 2003 to 27.9 percent in 2006 which was reflected positively on our public finance and macroeconomic stability. These trends are likely to continue against the oil revenue cushion and fiscal discipline along with continuous expansion of the economy. The foregoing policy initiatives, combined with the recent budgetary surpluses have enabled us to launch a number of key development projects that are designed to develop the county's physical and social infrastructure, especially spending on education and training, diversifying the economy, creating jobs and enhancing growth prospects.
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There are always risks to the outlook – on both sides – and to ignore them in either direction would be foolish. What the MPC must do is continually update its assessment of those risks, and set policy in order that, on balance, inflation remains on track to meet the target in the medium term. No one should doubt our determination to meet the target. The inflation target introduced in 1992, and the new regime for monetary policy decision-making introduced in 1997, have shown beyond doubt that monetary policy in the United Kingdom is dedicated to maintaining low and stable inflation. Indeed, for ten years, I was, to my frustration, regularly described as a hawk. But I am neither hawk nor dove. Everyone on the Committee votes according to his or her judgement of the outlook for the economy. I have not changed. The Committee has not changed. Circumstances have changed. When confidence, output and trade around the world collapsed in the autumn of 2008, the balance of threats to the inflation outlook shifted rapidly to the downside. So the Bank of England and central banks in other industrialised countries responded by reducing official interest rates nearly to zero and injecting money directly into the economy. There will come a time when our task will be to manage the exit from such an abnormal degree of monetary stimulus. The MPC will not hesitate to begin to withdraw the current degree of stimulus when we judge that is necessary.
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This is all the more important in the context of the “originate and distribute” model given that the effectiveness of the risk transfer instruments on the basis of which the latter has developed requires sufficient liquidity both on the part of agents and markets. It is, incidentally, worth noting that the Committee of European Banking Supervisors (CEBS) and the Basel Committee are working on a revision of the current regulations regarding liquidity. Moreover, concerning risks incurred by some activities such as asset management, it appears necessary to gain a better insight into the transmission channels of these risks between activities carried out for banks’ own account and for third parties as well as the liquidity requirements generated by the latter. More generally, the methods used to assess and capture some risks such as reputational risk and strategic risk, notably in the context of Pillar 2, need to be developed. I would like to stress the very important role that Pillar 2 must play in improving banks’ management practices i) regarding new risks not covered by Pillar 1 and ii) in areas that supervisors deem, specifically, liable to become new sources of vulnerability. In practice, for some activities, there are still no universally accepted standards for risk management. This does not mean, however, that banks’ risk management BIS Review 11/2008 5 processes in these activities are always sufficiently stringent, but rather that there is a wide range of instruments available for this purpose, each with its advantages and disadvantages.
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Svein Gjedrem: Monetary policy from a historical perspective Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the conference to mark the 100th anniversary of the Association of Norwegian Economists, Oslo, 16 September 2008. The text may differ slightly from the actual presentation. * * * Introduction Let me begin by offering my congratulations to the Association of Norwegian Economists on its 100th anniversary. One hundred is a respectable age. In Norway, the introduction of a university degree in economics was certainly an important stimulus in the first part of the last century. In the period since the Second World War, major changes in society have increased the demand for expertise in the field of economics. And economists are constantly gaining new insights. This also applies to the field of central banking, even though one of the fundamental central bank responsibilities – to safeguard the value of money – was as important 100 years ago as it is today. Monetary policy in Norway has changed considerably over the past 100 years. The government, with the support of the Storting, has now defined an objective for monetary policy of low and stable inflation. Norges Bank sets its interest rate with a view to achieving price stability. This has not always been the case. Monetary policy in Norway Norges Bank was established in 1816 and was placed directly under the Storting (Norwegian parliament). The government had no control or influence.
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• Figueiredo, Ivo (2007) “Henrik Ibsen: Masken (Henrik Ibsen: the Mask)”, Aschehoug. • Jonung, L. (2005) “Den skandinaviske myntunionen 1873-1924 – en översikt (The Scandinavian Currency Union 1873-1924 – an overview)”, in Eitrheim, Ø. and J. F. Qvigstad (ed.) “Tilbakeblikk på norsk pengehistorie. Konferanse 7. juni 2005 på Bogstad gård (Norwegian monetary history in retrospect. Conference, 7 June 2005, Oslo)”, Norges Bank’s Occasional Papers No. 37, Norges Bank. • Kydland, F. E. and E. C. Prescott (1977) “Rules rather than discretion: The inconsistency of optimal plans”, Journal of Political Economy, June 1977. • Minsky, H.P. (1978) "The Financial Instability Hypothesis: A restatement”, Thames Papers on Political Economy 78. • Qvigstad, J.F. and A. Skjæveland (1994) “Valutakursregimer – historiske erfaringer og fremtidige utfordringer (Exchange rate regimes – historical experience and future challenges)”, in Berg, S. A., J. F. Qvigstad and K. Storvik (ed.) “Stabilitet og langsiktighet: Festskrift til Hermod Skånland (Stability and a long-term perspective: Festschrift for Hermod Skånland)”, Aschehoug. • Schreiner, P. (1982) "Er Ola Nordmann smart nok? Den fulle sysselsetningen i fare! (Is the average Norwegian smart enough? Full employment in jeopardy! )", Universitetsforlaget. • Snowdon, B. and H. R. Vane (2005) “Modern macroeconomics: Its origins, development and current stage”, Edward Elgar. BIS Review 111/2008 9 • Steigum, E. (2000) “Samspillet mellom pengepolitikken og finanspolitikken ved et inflasjonsmål (The interplay between monetary policy and fiscal policy under an inflation targeting regime)", in Røisland, Ø. and J. F. Qvigstad (ed.)
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Philipp Hildebrand: Developments in the current financial crisis Summary of a speech by Mr Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, at the Swiss Funds and Asset Management Forum, Berne, 2 April 2009. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * The financial market turbulence, which began some 20 months ago, has grown into the largest and most complex crisis since the 1930s. The real world economy is now feeling the full force of this financial crisis. We are currently experiencing a very difficult period, although there are a few signs that the global economy could possibly be close to the cyclical trough. However, the route to recovery is unlikely to be straightforward, and the downside risks to growth remain considerable. Throughout the world, governments and central banks have taken steps to stabilise the financial system. In addition, a large number of countries are pursuing fiscal policies aimed at stimulating demand. Central banks have lowered interest rates rapidly and sharply, and, in some cases, taken exceptionally far-reaching measures to alleviate the economic downturn. Cumulatively, these measures will ultimately help to ensure that the global economy returns to a growth path. The Swiss National Bank (SNB), too, has made decisive use of conventional monetary policy tools and innovative, far-reaching monetary policy measures.
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Gent Sejko: Global Money Week 2021 in Albania Address by Mr Gent Sejko, Governor of the Bank of Albania, at the opening ceremony of the Global Money Week 2021 in Albania, Tirana, 23 March 2021. * * * Honourable Minister of Education, Youth and Sports, Honourable Chairman of the Albanian Association of Banks, Dear students, teachers, friends and colleagues, I am pleased to welcome you in the opening ceremony of Global Money Week 2021. For more than one decade, the Bank of Albania has been engaged in this world-wide movement, in organising during the last week of March, educational and awareness activities dedicated to children, young people and students. Global Money Week, already turned into a tradition, is organized in collaboration with the Albanian Association of Banks, and with the valuable support of the Ministry of Education, Youth and Sports. Due to difficulties arisen by Covid-19 pandemic, the Global Money Week, this year won’t be launched at the premises of the Museum of the Bank of Albania, but virtually, in compliance with the health safety and social distancing measures and regulations. I have already emphasised in my previous comments to this event, that GMW is an world-wide initiative organised by the OECD International Network on Financial Education (OECD/INFE), aimed at raising awareness of the younger generation to become in turn financially responsible citizens in the future. Every year, in March, central banks, public agencies and financial institutions and civil society organisations from around the world organise GMW activities.
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The number of people in employment is the highest on record. And unemployment has fallen from its most recent peak of 10½% on a claimant count basis at the turn of 1992/93 to the present rate of 3.7%. That is the lowest for 25 years in the UK as a whole, and just about the lowest in nearly every region. 3 BIS Review 71/2000 This is not just past history. Having come through the global economic slowdown a year or two ago, the economy as a whole is now again growing at well above trend, with inflation a bit below target; and the broad prospect for the next couple of years - on most forecasts, is for continuing relatively strong growth with relatively high employment and relatively low inflation. Our economic progress - and the common approach to economic management that underlies it and which we share with our European partners - provides, in my view, a firm foundation for a continuing positive and constructive relationship between the UK and other members of the European Union, whether or not they are members of the Eurozone. That of course is in the economic interest of all sides. Just as we benefit from a stable and prosperous Europe, so too the Continental European interest lies in a stable and prosperous UK. And that mutual self-interest above all is the thing we all need to hold on to. BIS Review 71/2000 4
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The main risk is that inflation expectations stay elevated for a long time. The longer the price growth rate remains high, even if fuelled by temporary factors, the more considerable this risk is. We could already observe this over the recent three months. As regards external conditions, proinflationary risks persist as well. In the first place, they are associated with prices for energy commodities and other commodities. The damper mechanisms protect the domestic market against fluctuations of global prices for commodities. However, an increase in foreign producers’ costs might also affect inflation in Russia. For instance, this happens when we import foreign equipment and vehicles made of more expensive metals. Disinflationary risks are mostly associated with the fact that producer costs might decrease as fast as they have risen. We have recently observed a multifold increase in prices for container shipments. This has pushed up cargo delivery costs worldwide. However, this growth has stopped by the moment. Possibly, even if prices do not decline to pre-pandemic levels, they might adjust downwards considerably closer to their initial level of this year, and later on this will translate into product prices. Another important disinflationary factor is still recovery prospects in outbound tourism. I should focus on the anti-pandemic restrictions that are currently introduced. Last spring, we believed that restrictions would cause a slump in demand, that is, provoke disinflationary risks. This is exactly what happened in the second quarter of 2020.
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When the Tenth Annual International Banking Conference took place in September of last year, the market turmoil had already broken out and central banks were already engaged in interventions aiming to minimise the disruptions to money markets and to preserve the implementation of their desired monetary policy stance. While market data on future interest rates suggested that we were in for a rather protracted period of tensions in money and credit markets, it was not obvious at the time that the financial turmoil would turn out to be one of the most challenging events of the last century for our financial systems. Indeed, the international financial landscape looks today very different compared to one year ago and almost every day new events contribute to re-shape it further. In particular, over the past two weeks adverse events occurred almost on a daily basis and led to increased uncertainty and significant financial market volatility. A large bank failed, while several financial institutions had to be partly or entirely taken over by others. In response to the renewed tensions, public authorities announced a number of measures and initiatives to address problems at both stressed markets and troubled individual institutions. In particular, central banks stepped up their efforts to inject liquidity in global money markets in order to guarantee their smooth functioning. As I mentioned earlier, one of the main objectives of this series of conferences is to discuss the main lessons for public policies arising from developments in the international banking and financial sector.
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José Manuel González-Páramo: Central banks and the financial turmoil Speech by Mr José Manuel González-Páramo, Member of the Executive Board of the European Central Bank, at the Eleventh Annual International Banking Conference “Credit Market Turmoil in 2007-08: Implications for Public Policy”, Federal Reserve Bank of Chicago, Chicago, 25 September 2008. * 1. * * Introduction 1 Ladies and gentlemen, It is a great pleasure to be here in Chicago on the occasion of the Federal Reserve Bank of Chicago’s Eleventh Annual International Banking Conference. Since its inception, this conference series has aimed to gather prominent academics, policy-makers and market participants to discuss issues of major importance for our banking industries, financial systems and economies at large, such as asset price bubbles, systemic financial instability, cross-border banking, or financial globalisation. Over time, a permanent concern of the organisers has been to focus on the implications for monetary and regulatory policies and, more generally, for public policies of such phenomena. It is fair to say that a great deal of knowledge has accumulated over time thanks to this series of conferences. It is also reasonable to reckon that the foundations of this body of knowledge have been put to the test by the financial market turmoil over the past year.
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Islamic finance has now become the fastest growing segment in the global financial industry, as the $ trillion industry has shown phenomenal growth which averaged at 20 percent yearly. The Islamic financial system is no more peripheral to the conventional banking system as it has advanced from being a novelty, to become a viable and attractive alternative to the conventional banking system. Major banking and insurance groups have also shown great interest in embracing Islamic finance as part of their growth and business expansion plans in the recent years. In Malaysia, a comprehensive Islamic financial system has been established since 1983 which operates in parallel with the conventional financial system. This dual banking model has been enshrined in the Central Banking Act 2009 following recent enhancements, thereby giving significance and due prominence to Islamic finance. A strong institutional infrastructure and effective legal, regulatory and Shariah framework form the underpinnings of our Islamic BIS central bankers’ speeches 1 financial industry. In terms of market share, the Islamic banking system in Malaysia currently accounts for 20 percent of our banking system while the sukuk market accounts for more than 50 percent of the bond market. The sukuk market in Malaysia is vibrant with various innovations taking place. As witnessed in the year 2010, Malaysia has evolved its sukuk market to become a multi-currency sukuk origination platform with the issuance of four foreign currency sukuk that amounted to about $ trillion.
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Philipp Hildebrand: Swiss monetary policy Summary of a speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the Annual Meeting of the IFZ (Institute for Financial Services Zug), Zug, 1 June 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Having successfully pursued a strategy of money supply targets for around 25 years, the Swiss National Bank (SNB) decided to adopt a fundamentally new monetary policy approach in 1999. Although it integrated some of the important elements of inflation targeting, it did so less strictly, thus allowing greater flexibility. Money stocks and credits continued to play a vital role in the new concept. Unlike the European Central Bank, the SNB chose not to make the monetary analysis a separate pillar in its concept. An important distinction to inflation targeting is that monetary policy focuses on maintaining price stability in the medium to long term, while inflation targeting is generally oriented towards short-term and, in some cases, variable inflation targets. The SNB's monetary policy uses an inflation forecast as a central indicator and sets its operational goal in the form of a target range for the three-month Libor. A monetary policy that is geared to the medium and long term affords leeway for a certain degree of stabilisation of the real economy.
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15 Moving depictions of financial crises and their effect on people can also be found in imaginative literature. The Norwegian author Alexander Kielland depicts the local financial bubble in Stavanger in the 1880s in his book Fortuna. There was a surge in credit growth and speculation in commercial bills that did not represent actual values. Speculation formed the basis for quick gains and it all ended in bankruptcies and banks that failed. One of the 13 See Borlaug (1999), pp 34-35 14 For more details on the Minsky moment, see www.newyorker.com/talk/comment/2008/02/04/080204taco_talk_cassidy. 15 For a further account of the tulip bubble in Holland, see NOU 1999:29 ”Commodity derivatives”, p 53. BIS Review 111/2008 7 climaxes in the book is a scene where Taraldsen – the old messenger from Norges Bank – realises that the financial bubble is about to burst: … in breathless surprise Taraldsen asked again: "Aren't your bills of exchange to be redeemed today?" "No." "Mr. Marcussen! People say that you are a jocular man; but this –" "I'm not joking – damn it!" Old Taraldsen straightened up; everyone was hunched over their work; only young Rasmus' eyes met his. The boy was white as a sheet; he began to understand.
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The Council has taken a broad range of decisions and measures aimed at restructuring and regulating the economy and streamlining regulations and legislation which would help to upgrade the level of efficiency and competitiveness of the economy and support optimum operation of production factors. The objective has been to provide an advanced regulatory and administrative framework and an environment attractive to domestic and foreign investments. Since the establishment of the Council, more than 60 major restructuring reform decisions have been taken in addition to more than 130 decisions for regulatory, procedural and administrative development. Fortunately, these developments have been accompanied by remarkable improvement in the State budget and in the world oil markets. Consequently, economic performance has obviously improved in recent years. An indicator of this improvement is the private sector’s average annual real growth rate of 5.0 percent and the rise in other non-oil exports by an average annual rate of 23.1 percent to 7.3 percent of GDP at the end of 2007. As a result of these reforms, the Kingdom has gained a high sovereign rating for its financial solvency and also won the United Nations Public Service Award for the year 2008 for developing SADAD (Bill Presentment and Payment System). Moreover, the Kingdom ranked sixteenth among 181 countries worldwide in terms of competition in business and investment performance environment according to Doing Business 2009 Report published recently by IFC and the World Bank.
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If, without 3 Detken C and F Smets: Asset price booms and monetary policy. Paper presented on 11 December 2003 at the Workshop on “Asset prices and monetary policy”, European Central Bank. BIS Review 40/2004 5 being certain, we judge that developments might lead to substantial disturbances, the choice lies between attempting in time to avoid the accumulation of large imbalances and waiting until the situation turns. Many within the central bank world believe that interest rate policy should not react to asset prices and credit expansion over and above their estimated implications for inflation and real and financial stability.4 The reasons are that it is difficult to evaluate correctly the price of an asset and that it is uncertain what level of interest rates would be necessary in a given situation to correct asset prices. Those that advocate a more preventive strategy meet this criticism by arguing that, firstly, models for asset prices exist and that it should not be more difficult to use these than to estimate the output gap, for example, which the majority of central banks make use of today. Secondly, by raising interest rates at an early stage when asset prices are starting to accelerate and before the expansion in credit has become too sharp, the central bank can indeed achieve somewhat lower inflation than is desirable in the short term. But one avoids a subsequent collapse in asset prices that could lead to considerably lower output and inflation in the longer term.
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Only in America could two sons of a once-homeless beggar and the daughter of a boardinghouse cook become what you see here on this stage today: One the distinguished chairman of the board of trustees of Bryant University, and the other a policymaker for the most important central bank in the world who is somehow deemed worthy of receiving an honorary doctorate and being chosen as speaker for the 151st commencement of this fine university. We are blessed to be Americans. 1 Westbrook: Surviving Australia’s Most Sadistic Reformatory, by William Stokes, Sydney, Australia: Macmillan by Pan Macmillan Australia, 2010. BIS central bankers’ speeches 1 The Sages of the Ages Now, the only thing that stands between you and receiving your Bryant degree is … me. I will speak quickly and take up just a few moments of your time before you celebrate your accomplishments. By now, you have taken enough writing courses to know the tongue-in-cheek definition of a good essay: It is a collection of other people’s thoughts disguised as your own!2 Most graduation speeches are no different. The standard routine for a commencement speaker is to dig through Bartlett’s or the Oxford Dictionary of Quotations or resort to Google and Wikiquote to find something said by some sage that will grace a graduation ceremony with a lesson students can take with them as they go off into this mysterious and challenging world.
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At the same time, the exchange rate target took the form of a target zone, which was then widened over the course of the decade, in part because capital movements increased exchange rate volatility and it was considered risky to eliminate investors’ exchange rate risk entirely. When growing economic imbalances were added to increased movement of capital, exchange rate targeting became even more difficult, until the dam was about to burst right before the inflation target was adopted and the króna floated in March 2001. The monetary policy framework adopted in 2001 was based on foreign models that were in the ascendant at the time. But it also reflected the broader ideas about economic policy, prudential regulation, and supervision that had gained currency but have proven in retrospect to be flawed. To simplify, it can be said that these ideas were based on separation and independence of individual aspects of economic and prudential policies, but without sufficient attention to their interactions. Monetary policy was to focus primarily on the inflation outlook, and it was largely to be implemented through a single tool: interest rates. Intervention in the foreign exchange market was to be avoided. Supervision was supposed to ensure that individual financial institutions were sound. Fiscal policy was supposed to be neutral over the business cycle. And the markets would take care of the rest. This did not turn out to be the case. Apart from the question of interactions, insufficient attention was paid to risks in the financial system as a whole.
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The first is the international level. The Asian names have been issuing bonds in the international market for quite some time, in major currencies – mostly US dollar. This market is already well developed. Some people may say that nothing needs be done further by Asian governments at this level. The market will do it. However, efforts are being made by Ministry of Finance officials to introduce new products – perhaps by securitization, by combining Asian names or a few Asian currencies, hoping to come up with an attractive product. They hope to bring new benefits to bond investors, but it will be up to the market to determine whether the ideas bear fruit. The second level is, however, more important. This is the local level – the local bond markets in each Asian country – in their local currencies. The importance of these markets can only be seen clearly in the events of the 1997 Asian Crisis. The first problem was that of capital outflow. Even though foreign borrowings of many industrial companies in Thailand were long term. But a lot of the loan contracts had default clauses imbedded within. This allows the foreign creditors to recall the loans early when certain events occur. One example is the clause requiring borrowers to maintain debt to equity ratios above certain thresholds. If the borrower makes a loss, it will eat into the debt to equity ratio. When that happens, the borrower has to increase capital, or face a default.
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This means: sustained momentum relative to trend; domestic cost growth resuming a path consistent with headline inflation at 2%; and core inflation measures moving notably towards the target. It is clear to me that, since last summer, progress has been insufficient along these dimensions to warrant a tightening of monetary policy. The world is weaker and UK growth has slowed. Due to the oil price collapse, inflation has fallen further and will likely remain very low for longer. This may mean modestly weaker cost growth through this year, with the likely path for inflation, both headline and core, softer as a result. In short, recent developments suggest that the firming in inflationary pressure we had expected will take longer to materialise. 23 In economic parlance, they are elements of a reaction function. One can think of a reaction function as akin to guide or policy rule relating the policy instrument to a set of macroeconomic variables. These are usually evaluated with respect to an “objective function” containing the policymaker’s target variables. For example, a flexible inflation targeting regime would be consistent with an objective function containing the deviation of inflation from its target and the deviation of a measure or measures of real activity from their equilibrium levels, weighted according to the policymaker’s preferences for stabilising one at the cost of another.
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Milesi-Ferretti (2010), “The cross-country incidence of the global crisis”, CEPR Discussion Paper, No. 7954. 2 See H. S. Shin (2012), “Global banking glut and loan risk premium”, mimeo, Princeton. 3 See V. Acharya and P. Schnabl (2012), “Do global banks spread global imbalances? The case of assetbacked commercial paper during the financial Crisis of 2007-09“, NBER Working Paper, No. 16079. 4 See V. Acharya, P. Schnabl and I. Drechsler, “A tale of two overhangs: The nexus of financial sector and sovereign credit risks”, 15 April 2012. 2 BIS central bankers’ speeches financing in foreign currency of long-term investments (maturity mismatch) and insufficient prudential standards leading to excessive risk taking and rent seeking behaviour. Unfortunately the warnings were not taken seriously until the issues and risks materialised first with the depreciation of the Thai baht in July 1997. Perhaps we have not learnt enough from the past! As growing financial market tensions made the financing of these deficits ever more difficult, the last and most unexpected layer of the iceberg – namely the so-called “redenomination risk”, the possibility of a break-up of the euro area – came to the surface in the middle of last year. By that time, the sovereign spread of high-yield euro area countries relative to other euro area countries had widened to an exceptional extent, hardly justified by fundamentals and fundamentally incompatible with a well-functioning monetary union.
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This would effectively tighten financial conditions not only by changing the expected path of short-term interest rates, but also by bringing forward the expected start of balance sheet normalization. To sum up, I see substantial advantages in behaving in as systematic fashion as possible in setting monetary policy. But that should be done in a way that fully accounts for any constraints on policy imposed by the economic environment, the presence of asymmetric risks, and allows us to learn as we go. The fact is that the economy is recovering after an unusually deep recession and a severe financial crisis. We don’t have much experience with this type of episode and how the economy is likely to perform. What we need to focus on is not what interest rate a given rule generates, but what policy setting can be expected to deliver the appropriate return path to the dual mandate objectives – the type of return path that standard Taylor Rule formulations achieved in different economic circumstances in the past. Thank you very much for your kind attention. I would be happy to take a few questions.
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This suggests that policymakers, faced with the economic conditions of that period, weighted deviations from their goals in a manner similar to the weights used in these versions of the Taylor Rule. Despite these attractive features, I do not believe that simple policy rules can take the place of in-depth analysis of economic conditions, evaluation of alternative policy plans, and ultimately policy judgment. While simple policy rules provide useful information to policymakers, their very virtue – simplicity – means they cannot capture all information that is relevant for policymaking. For example, such rules cannot easily incorporate asymmetric risks or financial stability issues. Moreover, the usefulness of simple policy rules depends critically on the stability of the relationship between monetary policy and economic outcomes.
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The Rt Hon Sir Edward George: Changes in the financial services industry Speech by The Rt Hon Sir Edward George, Governor of the Bank of England, at the 16th European Finance Convention, London, 6 December 2002. * * * Mr Chairman, Ladies and Gentlemen. May I begin by congratulating you, Claudio - and your colleagues - on organising such a remarkable 16th European Finance Convention here in London, spread over the past five days. I don't think I've ever seen such a distinguished and comprehensive list of speakers - ranging from politicians, central bankers and financial regulators and representatives of the international financial institutions, as well as representatives of private sectoral and specialist financial services trade associations and experts from commercial companies - all assembled on one program. I gather that the attendance has not been all that it might have been during the week. But perhaps that's not surprising: anyone with the stamina to attend even half of your proceedings is certainly a chronic insomniac. But those who have been here will have been rewarded by knowing everything there is to know about the recent development and current state of the financial services industry and how it might evolve. And they still have to listen to me! But don't despair - it's the last lap - and I'll try to keep it short! You have certainly had a great deal to discuss.
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I think of the Takeover Panel, for example, or the work of people like Adrian Cadbury - under the auspices of the Stock Exchange - in developing corporate governance standards, or of the professional organisations which set and police accountancy rules. A similar approach was followed in relation to many commercial banking issues - through approved codes of conduct in relation to their dealings with customers accompanied by an ombudsman scheme. We were in this country sensitive to the need to distinguish between different aspects of financial market activity - very obviously in the case of the distinction between wholesale and retail activity - in trying to find the most appropriate ways of reflecting legitimate public concerns. Where there has been official intervention, it has, again by now well-established tradition, sought to avoid discrimination - whether between different types of financial institution or in the form of protective nationalism in favour of British-owned businesses, provided everyone undertaking a particular activity played by the same rules. That approach has not necessarily always been popular, I have to say, with some of those who might have benefited from such discrimination! But it is certainly one of the reasons for London's attraction as an international financial centre including its attraction to so many financial companies from elsewhere in Europe. And that international presence in turn contributes enormously to the efficiency of the London market - and indeed the European market of which we are very much a part.
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But we assessed that maintaining capital buffers to cushion against potential losses was relevant to insurance companies as it was to banks. So, we proceeded to put in place capital requirements for insurers operating in Singapore, even when most other jurisdictions did not. At the same time, we were conscious of the need to apply the capital framework in a manner commensurate with the risks posed by different types of insurance activities. • For example, Lloyd’s Asia syndicates are not subject to the RBC framework. This is because the Lloyd’s market is approved and regulated by the UK regulator, and premiums are booked in the UK and protected by Lloyd’s central fund. • Likewise, captives and marine mutuals are not subject to RBC. They are restricted to writing business principally for their parent and related corporations, and of their own members respectively. The risk they pose to the broader financial system is low. Complementing regulation with supervision Close, and if necessary intrusive, supervision of financial institutions is an important complement to industry-wide regulation. Frequent and in-depth monitoring of the institutions we supervise helps us calibrate our supervisory approach to the particular circumstances of each institution. An important aspect of supervision is surveillance, which seeks to identify and assess risks and vulnerabilities that may affect the financial system, including insurance companies. A critical component of surveillance is stress testing. • Since 2005, MAS has been conducting annual stress tests to assess the insurance industry’s preparedness against both macroeconomic stress scenarios and more insurance-specific scenarios.
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• Five of the top 10 primary growth markets will be in the Asia-Pacific; this includes China, India, and Indonesia. There are three structural factors driving demand for insurance in Emerging Asia. First, Asia is getting richer. Projections by the IMF show that Emerging Asia will remain the fastest growing region in the world over the next decade. As incomes rise in Asia, governments, corporates, and individuals will increasingly seek insurance to protect their growing economic assets. • Burgeoning urbanisation, infrastructure development, and cross-border trade will drive demand for commercial and specialty insurance. • A growing middle class and rising affluence will underpin a steady increase in life and health insurance penetration rates. Second, Asia is getting older. Asia is facing declining fertility rates, increasing life expectancy, and a rapidly ageing population. • The United Nations projects that, by 2030, Asia’s old age dependency ratio will be 16%, up from today’s 11%. • Against this demographic backdrop, public retirement and pension systems in Asia remain inadequate. The retirement gap between savings and retirement needs can be as high as 13 years. • This will spur greater demand for private health insurance, annuity and other retirement security products. Third, Asia is becoming more aware of catastrophic risk. • Over the last 30 years, Asia has borne the brunt of natural catastrophe losses, accounting for almost half of the world’s estimated economic losses from natural disasters. Yet less than 5% of the losses were insured, compared to 40% in advanced economies.
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There are a number of reasons that a financial conditions framework is likely to be useful when evaluating the economic outlook and the conduct of monetary policy. Most important, monetary policy works its magic through its effect on financial conditions; it does not operate directly on real economic variables. That is because the level of the federal funds rate influences other financial market variables such as money market rates, long-term interest rates, credit spreads, stock prices and the value of the dollar, and it is these variables that influence real economic activity. 1 This means that if the linkage between the fed funds rate and this broader constellation of financial indicators is not stable or completely predictable, then knowing what is happening to the fed funds rate is not sufficient to predict economic activity. The instability of the linkage between the fed funds rate and financial conditions indicators means that these indicators provide additional information about real activity and also are relevant in deciding the appropriate fed funds rate target. In contrast, if the transmission mechanism from the fed funds rate to financial conditions and onward to real economic activity were completely predictable, then there would be no need to focus on financial conditions as an intermediate target variable. The level and path of the fed funds rate matters, but it also matters how this gets transmitted to the real economy through the financial sector.
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5 Also including jobs related to exports from the oil-service industry, see Nordbø and Stensland (2015): “The petroleum sector and the Norwegian economy”, Norges Bank Economic Commentaries 4/15. 6/6 BIS central bankers' speeches
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In particular, Financial implications are often not yet disclosed Disclosures are often in multiple reports making comparisons harder Disclosure varies by industry and region, with higher percentages of European firms, as well as higher shares of those on the climate frontline – such as the energy sector – disclosing information aligned with the recommendations; and Disclosure is weakest with respect to strategic resilience which is the topic of greatest interest to most capital providers. As they look to enhance their disclosures, TCFD members are supported by various TCFD Preparers’ Forums, which have been established to help firms prepare disclosures, for example the Oil and Gas industry group convened by the World Business Council on Sustainable Development and the Institute of International Finance for banks. A4S’ implementation workshops are exactly the sort of collaborative processes which will help ensure that the TCFD recommendations are implemented in a consistent manner. This is particularly important for more complex parts of the TCFD framework like scenario analysis and its interpretation. As A4S has identified, managing climate-related risks will require firms to assess the resilience of their business strategies: where they are now, where they are going and how they will get there. 10 See TCFD (2018), ‘2018 Status Report’, September 2018.
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The TCFD delivered – to the Hamburg G20 Leaders’ Summit last year – final recommendations for voluntary disclosures of material, decision-useful climate-related financial risks.9 Suitable for use by all companies that raise capital, the recommendations: Include disclosure of governance, strategy and risk management; Establish consistent and comparable metrics and targets applicable across all sectors, as well as specific metrics for the most carbon-intense industries; Encourage use of scenario analysis in order to assess the potential impact of the risks and opportunities of the transition to a low carbon economy on strategy and financial planning. The combination of the Paris Accord and the TCFD has led a clear transition in thinking and action about climate-related financial risks. Consider the changes in demand, supply and impact of climate disclosure. The demand for climate-related financial disclosure from the providers of capital has increased significantly. Current supporters of the TCFD include three-quarters of the world’s globally systemic banks, 8 of the top 10 global asset managers, the world’s leading pension funds and insurers, major credit rating agencies, the Big Four accounting firms, and the two dominant shareholder advisory service companies. These financial firms are responsible for managing nearly $ trillion in assets (or 20% more than global GDP). With climate-related shareholder resolutions tripling last year and litigation risks rising, the incentives for companies to disclose and manage climate-related risks have increased dramatically. Not surprisingly, the supply of climate disclosure is responding.
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Does that imply that the current stance is appropriate, if your staff forecasts are confirmed? Yes. And if there is a further deterioration, then we will react. But for now, our monetary policy stance is fully compatible with both inflation and real activity. The important element is that we are totally ready to react. And I would add another element, if I may: risks are tilted to the downside. Do you mean, in terms of real activity? Both in terms of real activity and in terms of inflation. So if those risks materialise, then we will react. Can you think about different monetary policy tools to address different problems? If the issue is with the exchange rate, official rates are probably the answer; if it’s real activity, then QE; if it’s monetary transmission, then it’s targeted longer-term refinancing operations (TLTRO)… We do not allocate our instruments to different objectives. Something that I think is relevant, but is sometimes a bit overlooked, is that monetary policy is not almighty. If there is a problem with price stability, that’s within our mandate. But this is something everyone has to keep in mind to avoid creating expectations that will not be met: we do not have the philosopher’s stone. Are you implying that having something of a policy mix would be good, in total respect of the ECB’s independence? Sure.
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But my point is that wherever there is a problem, for instance a problem with trade disputes, that is a real economic problem that is going to have real consequences. You can certainly smooth the impact with monetary policy, but you will not be able to address and fix this kind of problems with monetary policy. The real role of monetary policy is price stability. And in order to guarantee price stability, we have to monitor the evolution of the real economy – domestic demand, external demand, the exchange rate, and the rest. But you cannot fix all the 1/4 BIS central bankers' speeches economic problems of the world with monetary policy. President Draghi hinted recently that if there is a slowdown and those downside risks materialise, fiscal policy might also play a role. Yes, sure. It’s the policy mix. Of course there is monetary policy, and we have been the main game in town since 2012. Monetary policy has been key to understanding the recovery of activity and employment creation, among other things. But it’s not the only policy in place. Fiscal policy has to play a role, as do structural reforms. And in the case of fiscal policy, it’s not only the nominal deficit level, it’s the composition as well: the quality of public finances. Are you saying that the public investment-to-GDP share, which has remained flat, at 2.6%, during the QE years, could now increase? It’s not even only public investment.
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Encik Abu Hassan Alshari Yahaya: The benefits of online banking services and Inter-Bank GIRO (IBG) in Malaysia Welcoming remarks by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia, at the “Experience IBG” Roadshow, Kuantan, 2 December 2013. * * * It is my great pleasure, ladies and gentlemen to meet and welcome all of you to the “Experience IBG” roadshow in Kuantan this morning This roadshow is jointly organised by Bank Negara Malaysia, the Association of Banks in Malaysia (ABM), the Association of Islamic Banking Institutions Malaysia (AIBIM) and the banking institutions to create awareness amongst the small businesses on online banking services, focusing specifically on Interbank GIRO or IBG, which is a payment system that allows a person to conduct transfer of funds between banks. The first roadshow began in Seberang Prai on 22 October 2013, and it will end in Kuching on 5 March 2014, after covering 12 major towns in the country. The first four roadshows have attracted more than 1,500 (1,590) participants, who are mainly the SMEs and micro enterprises and more than 1,000 (1,056) or 66% of the participants have signed-up for the online banking services such as Internet banking and mobile banking. This demonstrated that the explanation and promotional efforts undertaken by the banks during the roadshow’s exhibition has helped participants to understand more about the benefits of using online banking in comparison to cheques.
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Christian Noyer: Monetary and financial research – its impact on policies and society Opening and closing speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Conference for the 20th anniversary of the Bank of France Foundation, Paris, 14 September 2015. * * * Opening speech Ladies and Gentlemen, I will now switch to English, given the international audience and speakers that we are quite lucky to have today. I would first of all like to express the great pleasure I have to open this conference for the twentieth anniversary of the Banque de France Foundation for Monetary, banking and financial economic research. I welcome the prominent speakers who made us the honor of joining us today – Yann Algan from Sciences Po in Paris and Luigi Zingales from the University of Chicago Booth School of Business – and all our chairs and discussants who also are renowned economists in their respective fields. A few words about the topic of this conference now. The idea of this conference is to take a step back and some time to reflect on monetary and financial research in general, and its impact on policies and society. We will thus evoke the role of economics and economists within our society. The two provocative papers discussed today provide a very nice opportunity for such a discussion. They both point out several concerns about economic research and finance.
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For the emerging economies in Asia, the banking system remains the largest component of the financial system. Regulatory, supervisory and legal reforms have generally focussed on effective governance and commensurate risk management capabilities. In Malaysia, the banking system leverage ratio is less than 11 times while the banking system risk-weighted capital ratio is 14.1% with Tier-1 capital at 13.6%. Equally important is the incentive structure in place for such financial institutions, the level of transparency and disclosure, effective surveillance and forward looking oversight by the authorities and the institutional arrangement for effective resolution of problem institutions that will facilitate the orderly exit of such institutions. Ultimately, the consideration of appropriate reforms should not overlook the main goal of regulation. It needs to be recognised that achieving financial stability is a means to an end. The ultimate objective is sustainable growth and a shared prosperity. High regulatory costs and the increased burden on the intermediation process would materially affect economic activity while doing little to alter the risk taking behaviors which was a major factor causing the crisis. There needs to be an understanding of the impact of the proposed measures from the many dimensions including how they ultimately influence institutional behaviours. The challenges of carrying out such an assessment on a global scale is daunting, but the policy response must rise to the challenge in order to avoid unintended consequences that will be difficult to roll back without adding further burdens on the financial system.
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With this now more developed Islamic financial services industry in Malaysia that includes the advanced development of Islamic financial institutions and markets, more aggressive liberalisation initiatives have been made in this sector to strengthen our interlinkages with financial markets in other parts of the world. This has also been reinforced by the further liberalisation of the capital account of the balance of payments and the implementation of tax neutrality measures. These initiatives are aimed at supporting the strengthening of trade and cross border investment activities through Islamic finance. Concluding remarks Let me conclude my remarks on these three major trends occurring in the world economy and the international financial system. Asia’s role in the global economy, the international BIS Review 24/2010 5 regulatory reform agenda and the development and expansion of Islamic finance is likely to have a growing influence on the global economy and financial system going forward. As we participate in this rapidly evolving environment, these new trends need to be taken into account in creating a global economic and financial order that is profoundly better than the one we have today. Thank you.
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Money market rates, which were higher than 8 per cent for a period, are now around 2½ per cent. Bank lending rates have also been reduced markedly. Monetary policy has influenced the level of economic activity through the real interest rate. The real interest rate is equal to the key interest rate plus a risk premium less expected inflation. The anchoring of inflation expectations enables changes in the key rate to have an impact. In some countries, there are prospects that inflation will approach zero. This causes the real interest rate to remain high even though the key rate is reduced. In small countries where confidence in stable inflation is lacking, the authorities have had to increase the key interest rate substantially to prevent an uncontrolled currency depreciation. This amplifies the effects on production. Lower inflation abroad and lower capacity utilisation in the Norwegian economy will have a dampening impact on inflation ahead. There are prospects that inflation will remain below 2.5 per cent for a period. It is therefore appropriate to set the interest rate at a low level so that inflation does not fall too far below the target, and to prevent inflation expectations from losing their anchor. It is also appropriate to set the interest rate at a low level to curb the decline in activity. We have already lowered the interest rate substantially. In the time ahead, we will take a more gradual approach in order to assess the impact of the measures that have already been introduced.
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Up to autumn 2008, it appeared that capacity utilisation in the Norwegian economy would most likely decline to a normal level, inflation would stabilise around 2½ per cent and the key rate ahead could be held at what we consider to be a normal level – between 5 and 6 per cent. But the outlook was regarded as uncertain. Commodity prices rose and pushed up inflation in many countries. At the same time, wage growth in Norway had become high and productivity growth was slowing. On the other hand, the financial turbulence, if it gained momentum, could have a severe impact on the global economy and our exports. In September 2008, the turbulence in financial markets erupted into a full-blown global crisis. The failure of Lehman Brothers on 15 September last year triggered a confidence crisis in financial markets. The turnaround hit hard, with synchronised effects on virtually all financial and goods and services markets, not only in the US but also in Europe, Asia, Latin America and Oceania. The crisis abroad rapidly fed through to the Norwegian economy. Our banks and the flow of credit and funds are tightly interwoven with foreign markets. Banks’ foreign funding became expensive and almost dried up. In response, banks increased interest rates on loans to businesses and households, and they tightened the lending tap. As autumn progressed, an increasing number of business sector segments were feeling the impact of contraction. In August 2008, manufacturing enterprises in our regional network reported that they expected growth to remain high.
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