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Tripathy et al, “Macroprudential Policy, Mortgage Cycles and Distributional Effects: Evidence from the UK” show that constrained banks issued fewer high LTI mortgages after the FPC’s policy was introduced. They also find evidence supporting the macroprudential benefits of the policy. The local areas with greater exposure to constrained lenders experienced smaller declines in house prices in the aftermath of the EU referendum in June 2016, when house prices fell across most UK regions. 15 11 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 11 The distinction between expectations effects and credit constraints matters in another way. To the extent that demand for housing is simply subdued by dampened household expectations about the future, there is no ‘loss’ to households. If however, demand for housing is held back by credit constraints, transactions which are desired are ‘lost’. One needs to be careful however about assuming that relaxation of credit constraints will lead to all otherwise ‘lost’ transactions taking place. The thought experiment I carried out earlier suggested that almost 10 million additional transactions would have occurred from 2007 to 2020 had transactions remained at their-pre financial crisis level. But this assumed that house prices remained at the actual levels we saw over the period. In the absence of increased supply, the evidence suggests that much of the additional demand would have fed into higher prices, raising indebtedness in the short term but eventually choking off the additional demand. | In a market with a sufficiently large share of such deep-pocketed arbitrageurs, it can be argued that the development of house prices relative to incomes can be largely accounted for by the substantial decline and then flattening out of the real risk-free interest rate over this period. Miles and Monro (2019) apply such a framework to demonstrate this. However – as I will go on to describe – this relationship does not fully explain house price moves over shorter time periods, which may be affected by credit conditions. 6 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 6 decisions (as housing is also an asset). In this literature, expectations of future income, future interest rates, and future house prices and can all play a role. There is some evidence that current interest rates and current house price growth have an important influence on expectations (Charts 4 and 5). All of these factors were likely at play during the pre-Covid decade. Chart 4: Momentum in annual asset price growth 1.0 Regression coefficient on lagged asset price inflation using annual data 0.8 0.65 0.6 0.33 0.4 0.2 0.0 House prices FTSE all share Sample uses annual data from 1971-2020 for house prices, from 1977-2020 for FTSE allshare. | 1 |
Irma Rosenberg: Monetary policy and the Swedish economy Speech by Ms Irma Rosenberg, Deputy Governor of Sveriges Riksbank, to the Swedish Society of Financial Analysts, Stockholm, 5 March 2003. * * * Thank you for the invitation to come here and speak at the Swedish Society of Financial Analysts. This is my first public appearance in my new role as Deputy Governor of the Riksbank. It is stimulating to meet people and discuss economic issues. At the same time, I feel a little nervous, as I know I am facing an audience who are used to examining and interpreting statements by the Riksbank. One difference between this post and my previous work is that a member of the Executive Board must to some extent exercise caution when speaking publicly. This is to avoid creating any misunderstandings among participants in the financial market, who try to translate statements by representatives of the central bank into future interest rate policy. This means that some of you may not be acquainted with me, but my aim is to be as honest and clear as I possibly can. What I intend to start talking about today is the development of the economy in recent years and to follow this with a look ahead at the challenges facing both the Swedish and international economic climates, and finally say something about monetary policy. Those of you who are familiar with the economic assessments I have made know that I sometimes have not shared the Riksbank’s conclusions. | Our ambition will then be to make it clear that we have done so. By raising and lowering the steering interest rate - the repo rate - the Riksbank attempts to influence inflation. As it is so difficult to steer inflation in the short term, the Riksbank makes an assessment of developments for the coming 1-2 years. This is the period of time usually assumed necessary for an interest rate adjustment to work its way through the economy and have a full impact on the rate of price increase, i.e. inflation. The Riksbank uses a simple rule-of-thumb when shaping its monetary policy. If the total picture of inflation shows that it is expected to be above or below the target level, the steering interest rate is adjusted accordingly. There are four main factors in the analysis of future inflation that stand out as central to the shaping of monetary policy: the development of total resource utilisation, international price trends, the exchange rate and the general public’s inflation expectations. Inflationary pressure varies according to the demand situation and to changes in resource utilisation. The stronger the upturn in demand in relation to potential production, the greater the risk that prices and wages will rise rapidly and vice versa. This is why we who work in central banks around the world BIS Review 12/2003 1 must analyse the picture of economic activity as a whole, despite the fact that inflation is our target variable. | 1 |
We also need to ensure the harmonised application of banking regulations in all Banking Union countries, and avoid the risk of fragmentation, which would reduce the expected benefits of a union. It is also vital to strengthen the integration of European financial markets. The action plan for the Capital Markets Union, launched by the Commission in 2015, has allowed a few advances to be made, with the creation of European cross-border funds and a pan-European retirement savings product. We must go even further on this, and create a genuine Financing Union for Investment and Innovation, that would better channel Europe’s savings surplus (3% of GDP) towards productive investment, by shoring up companies’ capital and increasing their ability to develop and innovate. For this, we need to (i) facilitate cross-border investment by harmonising accounting, tax and bankruptcy rules; (ii) develop incentives for equity financing; (iii) develop European securities and savings products (venture capital funds, green bonds, securitised portfolios, etc.) aimed at providing long-term, diversified financing to Member States. Finally, with its strong international commitment on climate issues, Europe must play its full role in initiatives to tackle the risks linked to climate change. The Banque de France was one of the founders of the NGFS or Network for the Greening of the Financial System, and provides secretariat services for the platform which now has 42 members and 8 observers, representing 5 continents. | Philipp Hildebrand: Principles for sound compensation practices Summary of a speech by Mr Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, at the Economic Outlook 2009 (Unternehmer NW-Schweiz), Basel, 23 April 2009. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Most financial institutions viewed compensation systems as being largely unrelated to risk management and risk governance prior to the crisis. Short-term profits were rewarded with generous bonuses with little regard to the longer-term risks taken on behalf of the firm to generate those profits. With hindsight, it should therefore be no surprise that these bonuses fueled the excessive risk-taking that has ultimately undermined the global financial system. It is important for the future stability of our financial system that compensation systems be viewed as an integral part of the risk management system in financial firms, and designed and governed with this in mind. The Financial Stability Board (previously the Financial Stability Forum) has drafted a set of sound compensation principles for large financial institutions with exactly this goal in mind. The Principles were endorsed by the G20 leaders at the London summit earlier this month and aim to be widely implemented by the 2009 remuneration round. BIS Review 50/2009 1 | 0 |
These are summarized in the Report’s box V.1. Also, this time around, we have attached to the Report a supplement describing a body of background information on the determinants of and perspectives for Chile’s trend growth over the next 30 years. I will come back to the contents of this document in a few minutes. Our estimates suggest that Chile's trend GDP growth over the next ten years is in the range of 3% to 3.5%, quite comparable to our estimates a year ago. This range implies, among other things, that investment again grows in line with GDP; that the productivity of sectors other than natural resources grows near its average of the last 20 years; and that immigration and increasing female participation partially offset the effects of the aging population on the labor force. With regard to potential growth, at the shortest terms, investment and productivity show below-trend growth rates, so potential growth is lower than trend. Thus, potential GDP growth is now estimated to be around 2.5%, compared to the 2.5% to 3.0% we estimated in September 2016. With this, the current activity gap is somewhat narrower than previously estimated, even considering that the evolution of GDP has also been somewhat lower (figure 9). For the purposes of monetary policy, the evolution of the activity gap is still consistent with an economy needing an important monetary impulse throughout the 4 projection horizon. In addition, the Board continues to estimate the neutral interest rate to be between 1% and 1.5% in real terms. | Merchants and consumers With increased transparency in payment services brought about by the various regulatory and industry measures, merchants and consumers alike should leverage on expanded information disclosure to get the best deals that suit their requirements. A smart consumer will drive competition and reduce costs over the long run Processing payments and account reconciliation manually is a tedious affair and a source of much inefficiency. Merchants in particular should leverage on e-payments as a means to rationalize their business processes to be more efficient, so that more resources can be directed towards growing their business. Merchants should also leverage on the latest payments technology such as the mobile point-of-sale (mPOS) which allows them to leverage on smart devices to accept payment cards on-the-go. Consumers on the other hand, should also embrace e-payments to be more efficient and safe by taking advantage of the various incentives provided by the banking industry. Opportunities and key priorities for 2016 We have now reached a critical juncture in our migration to e-payments. With the enabling environment in place and the encouraging progress recorded for the past five years, emphasis should now be devoted towards implementation and facilitating behavioural change among individuals and businesses. We must use as beacon the targets set out in the Financial Sector Blueprint. The achievement of such targets would put us on par with other advanced countries and become as competitive as we transition into a high value added and high income economy. | 0 |
They may also, however, reduce market discipline and increase the overall scale of leverage assumed by those funds. We don’t have the capacity to assess with confidence the balance of these effects on the probability of crisis and the severity of market dynamics in conditions of stress. What should be the focus of supervisory efforts in this new context? Clearly, capital supervision and market discipline remain the key tools for limiting systemic risk. The emergence of new market participants such as leverage institutions does not change that. I am going focus on three broad policy priorities - risk management, capital and margining practices, and the financial infrastructure. Risk management We should focus more attention on parts of the risk-management process where uncertainty is greatest and materiality of the risks that we can’t readily quantify is highest. This means more attention on the risk factors where the measurement challenges are most complex. It means more attention on assessing potential exposure in extreme events that lie outside past experience, not just those outside of the recent past. These challenges require using a mix of different analytical tools to help illustrate the range of possible outcomes and the dimensions of uncertainty that apply to the measurement of exposure. The focus should be not on the specific estimates produced for various types of asset price movements or stress events, but the uncertainty that surrounds those estimates and the magnitude of the potential underestimation of losses. | In my view, these should remain the priorities of economic policy if we intend the incipient recovery in our economy to strengthen and be sustainable over time. Thank you. 4 BIS central bankers’ speeches | 0 |
A strong takaful market in Malaysia, supported by the experience and expertise of several niche players in retakaful operation during the last two decades, would provide a strong base for a global retakaful operation to flourish. Under this initiative, qualified local and foreign applicants will be allowed to conduct both Malaysian and international currencies retakaful business. Flexibility is accorded to the retakaful operators to conduct its retakaful business in Malaysia by way of an incorporated either entity or a branch. Foreign applicants are also welcomed to conduct retakaful business in Malaysia through a joint-venture with Malaysian companies. It is anticipated that this measure would serve as a catalyst in our efforts for Malaysia to become the centre for takaful and retakaful business through the establishment of a significant number of strong and reputable retakaful operators. For the potential investors in these ventures, I wish to highlight that Malaysia maintains a liberal foreign exchange administration regime where investors are freely able to obtain ringgit and foreign currencies to fund their investments in Malaysia. Please do forget the foreign exchange administration rules introduced during the 1997/1998 Asian financial crisis. BIS Review 129/2007 3 We have even further relaxed the foreign exchange administration rules to allow resident and foreign issuers to raise foreign currency-denominated bonds, including Islamic bonds or sukuks. | As affirmed by the Governing Council at its last monetary policy meeting on 7 September, we expect the key ECB interest rates to remain at present levels for an extended period of time, and well past the horizon of the net asset purchases. Our asset purchase programme (APP), at the current monthly pace of € billion, is intended to run until the end of December this year, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases are made alongside reinvestments of the principal payments from maturing securities purchased under the APP. Later this year we will decide on the calibration of our policy instruments beyond the end of 2017, taking into account the expected path of inflation and the financial conditions needed for a sustained return of inflation rates towards our objective. 1/3 BIS central bankers' speeches The ECB’s monetary policy measures and the favourable effects they are having on borrowing conditions for firms and households, access to financing and credit flows across the euro area are supporting domestic demand and are also facilitating the deleveraging process. In order to reap the full benefits of our monetary policy measures, actions in other economic policy areas remain necessary to strengthen long-term growth and resilience in the euro area. Meanwhile, the condition and resilience of the euro area banking sector has continued to improve. | 0 |
To this end, the SNB is investing very substantial resources to contributing actively to international regulatory reform projects, especially within the FSB and the Basel Committee. Indeed, a main raison d’être of these international bodies is to ensure a level playing field. We must accept, however, that not all countries are confronted with the same urgency for reform as we are in Switzerland. As I have already explained to you this evening, given the size and importance of our banking sector, our country is particularly vulnerable to a financial shock. Agreeing on an international common denominator of regulatory reform may turn out to be insufficient for the Swiss case. Ultimately, it will be a political decision to choose the level of risk Switzerland is willing to accept, both for the financial and for the real sector. Given the particular situation in Switzerland, higher-than-average regulatory standards are warranted. Conclusion The worst of the crisis is behind us, and intensive efforts are underway to increase the resilience of the financial system. Banks are again generating profits. In some cases, these profits are very substantial and are clearly linked to the public support measures, many of which are still in place. As the situation improves, complacency can easily become the rule of the game. We will forget the severity of the crisis and fall prey to lobbying by a powerful and recovering financial industry. Ladies and gentlemen, we must not let this happen. The stakes are simply too high. | Lord Mayor, as we prepare to toast the Bankers and Merchants of the City of London, we remember that the City is more than banking and that banking is much more than the trading of complex securities. So all of us here tonight would like to pay tribute to your work since you became Lord Mayor, to support your efforts to promote financial literacy, and to thank both the Lady Mayoress and yourself for the splendid hospitality which you have extended to us all this evening. So I invite you all to rise and join me in the traditional toast of good health and prosperity to "The Lord Mayor and the Lady Mayoress", Ian and Lin Luder. 4 BIS Review 76/2009 | 0 |
I wish you a very fruitful conference. 2 BIS central bankers’ speeches | A number of actions have already been completed to enable the targets, currently being consulted on by the FSB, to be met.11 The importance of progress in this area was highlighted in the recent G7 Communique.12 The improvements we are making to RTGS, will help us to deliver key elements of the FSB roadmap. Key elements include the implementation of APIs, the capability to extend operating hours, synchronisation and our first key milestone of the implementation of the emerging global standard for financial messaging in payments ISO 20022. Future proofing the payments infrastructure Innovation is crucial to the future payments landscape. It is not a single act: it needs to be continuous. We are building a renewed RTGS service as a modular flexible platform so we can introduce new features in an agile flexible way with less cost and less risk, to enable us to respond more quickly to market changes and continued innovation in payment technologies. We 5/6 BIS central bankers' speeches already plan further enhancements following the replacement of the new our core ledger in September 2023. This will include the ability to connect via multiple message networks, additional APIs, consideration of extended operating hours and synchronisation functionality. It will also include improved contingency functionality to enhance resilience. These ideas have been developed in conjunction with industry, and we will be consulting later this year to help to prioritise the enhancements. I encourage you to actively participate in this consultation and to help shape the next phase. | 0 |
Another reason that our new objective should not encourage risky bets on regulatory standards is that we all remember what happens when such bets backfire. Over the last thirty years we saw the spectacular unravelling of the Bank of Credit and Commerce International, a subsequent small banks crisis, the equally spectacular collapse of Barings, and problems in the insurance sector including the closure of Equitable Life. And that was before we even got to the historic crisis of Page 6 2007-08. In case anyone has forgotten, government support to the financial system peaked then at almost £ trillion. [15] The economic damage was immense and enduring. [16] Good prudential regulation – like a good immune system – remembers previous crises so that it can tackle similar ones when they come along in future. But to reiterate, strong regulation also needs to be responsive to the needs of the UK and to accommodate beneficial innovation. While I do not believe there is a fundamental tension between strong regulation and competitiveness for a global financial centre like the UK, it’s obvious that stronger and ever stronger is not the right answer. The PRA will not be turning the dial up to eleven. We will turn the dial down when we can. This is what we are doing as we go through the hard and unglamorous work of considering our detailed prudential rules to tailor them to the circumstances of the UK. | That would be an argument for keeping the programme in place while recognising that it may not be employed unless unusual circumstances appear. 2 BIS central bankers’ speeches Q. How would you evaluate the programme. Has it been a success? The programme has been a success. One has to ask what is the counterfactual for what would have happened in the euro area had the programme not been in place. In the dramatic situation that we were facing in May 2010, the damage that could have resulted from the absence of this programme could have been quite severe. Q. Is the transmission mechanism working now? Speaking for myself, I have less concern for the transmission of monetary policy today than in May 2010 when it was introduced. Q. Could Portugal government bonds be extended similar treatment as Greece and Ireland regarding collateral use in ECB operations? Regarding the eligibility of collateral, as a rule we rely on the rating agencies, but in those circumstances when we can make an independent evaluation of the country we don’t need to rely on the rating agencies. This has happened in the case of Greece, this is what has happened in the case of Ireland and I trust that if it becomes necessary to have an independent evaluation in order to assess the eligibility of collateral of any other sovereign in the euro area, then this will be done as well. Q. | 0 |
Goh Chok Tong: Opportunities in a New Asia – China, India and ASEAN in-between Speech Mr Goh Chok Tong, Senior Minister and Chairman of the Monetary Authority of Singapore, at the Institute of International Finance (IIF) Opening Dinner, Singapore, 16 September 2006. * * * Let me bid you a warm welcome to Singapore. I hope that your stay here will not only be intellectually stimulating and professionally beneficial but also enjoyable and memorable. The IMF and World Bank meetings were last held in Asia in September 1997. A few months before the meetings in Hong Kong, the Asian Financial Crisis had started to erupt. The crisis swept across the region, causing immeasurable damage. Pundits declared the end of the East Asian growth miracle. But Asia has bounced back. Looking at East Asia through post-Crisis lens, a 2001 World Bank report "Rethinking the East Asian Miracle" noted that Asia was still: "...the most exciting development experience available to us...the Crisis has tarnished that record only slightly and, if anything, together with the strong recovery in several of the countries, may have reinforced the conclusion that there is something very special about these countries." Indeed, there is something special about Asia. Asia had problems, and will face big challenges ahead. But never in human history has the world seen such large-scale reduction in poverty and the rise in living standards for billions in so short a time. I am therefore confident about Asia's prospects. | Over the next 20 years, Asia will continue to surge, led by the re-emergence of India and China, and a revitalised ASEAN. Japan, will remain an important player in Asia. However, as a mature economy, Japan is not expected to grow as fast as India and China. This evening, I will focus on India, China and ASEAN in-between. India on the march First, India. Prime Minister Manmohan Singh said on India's Independence Day this year that India is "certainly on the march". The Prime Minister is a modest man who is not given to exaggeration. Today, India is attracting attention from foreign investors and world leaders alike. Over the past 12 years, India grew by an average of 6.5% per year. Growth was even higher, at 8% per annum, over the last three years. I believe that India will continue to grow at a fast pace for two main reasons. First, in India, old mindsets are being tossed aside in favour of pragmatic policies supporting reform and liberalisation, and integration with the global economy. India's market reforms have stayed the course despite several changes of governments and Prime Ministers. Business leaders, too, are prepared to compete against foreign companies and foreign investors in India. Early this year, I met with the Chief Minister of West Bengal in Kolkata. The state has been under communist rule for 30 years. The Chief Minister, one of the politburo members of the Communist Party of India (Marxist), was keen on foreign investments. | 1 |
With more competitors around, the wider effects of the failure of an individual bank would in all likelihood be smaller. The stability authorities need to be more alert than in the past to this source of economic vulnerability. Consistent with that, as we prepare for the transfer of prudential supervision, the Bank of England wants to reduce barriers to entry somewhat, so that the banking system can, over time, become less concentrated. But for that to be sensible, we need to be confident in the authorities’ ability to resolve those banks that get into distress without dramatic spillovers – lowering barriers to entry by removing barriers to exit. For smaller banks, that should already be possible using the Special Resolution Regime introduced in 2009. Prudential supervisors will need, as a priority, to ensure that banks are set up to enable the Financial Services Compensation Scheme to pay out rapidly. To be clear, for banks funded by insured deposits, the costs of failure will fall on their peers. Over time, I suspect that that will increase pressure for a funded deposit-guarantee scheme with risk-based levies. The Bank would welcome that. Prudential regulation: higher risk-based capital requirements and a cap on leverage But the reform agenda is not just about handling failure. Banks will be better capitalised, more liquid, and less interconnected. To take just one of those changes in the global order, higher capital requirements will affect behaviour as well as resilience. | It would be too much to promise that that can never recur. Nor can we hope completely to eliminate the linkages within the system that can propagate distress. But this realism is not remotely a counsel of despair. On the contrary, I want to emphasise this morning that the emerging new regime will enable the authorities to lean against stability-threatening exuberance and will make the financial system much more resilient . The tendency to excessive risk in the system That excesses occurred in the run-up to the current crisis is not remotely in doubt. As leverage increased, asset prices rose, increasing net worth and so inducing more balance sheet expansion. The buoyancy in markets gave intermediaries the confidence to lend secured on wider classes of securities – temporarily enhancing day-to-day liquidity. Facing depressed returns from their core business of providing liquidity to customers, banks sought to sustain high headline returns by resorting to ever more leverage and maturity transformation. In other words, increasing leverage fed upon itself. This poses deep but pressing questions about the efficiency and effectiveness of capital markets in monitoring and pricing risk. Why did boards and investors in bank equity expect such high returns? Why didn’t the capital markets downgrade the value of bank equity and debt as leverage and other sources of risk increased? Why didn’t the markets distinguish more between banks? 1 These remarks draw on a chapter contributed to a book, edited by Andreas Dombret of the Bundesbank and Professor Otto Lucius, being published next year. | 1 |
Investment grew by an estimated 12.8%, somewhat less than in 2003. GDP growth in the euro area is estimated at 1.9% in 2004 and growth prospects are lean for the years to come. This shows yet again the difference in the economic challenges faced by Iceland and the rest of Europe, since policies there aim at stimulating the economy, whereas Iceland’s problem is to try to prevent overheating. The widening current account deficit is also a cause for concern. Last year it is estimated at 70 b.kr., the equivalent of 8% of GDP. Exports increased by 12% in 2004 after being virtually stagnant in 2003. The strong value of the króna, robust private consumption and stepped-up investments in BIS Review 22/2005 1 aluminium-related projects are reflected in substantial import growth during the year. Merchandise imports were up by 23% in real terms, the sharpest increase since 1998. Roughly one-third of the current account deficit may be attributed to investments in the aluminium and power sectors. The current account deficit is forecast to widen even further in 2005, but will also peak this year instead of in 2006, as had been forecast earlier. Unemployment declined slowly last year despite brisk economic activity. It was not until the closing months of the year that labour market statistics indicated mounting pressures. Seasonally adjusted unemployment measured 2.4% in February and vacancies have soared. To some extent, growing labour demand was met with imported labour; issues of new work permits almost doubled in 2004. | However, even if liquidity worked, 4 BIS Review 22/2005 their impact on interest rates and the exchange rate would be broadly the same as raising the policy rate, although the transmission mechanism might be different, and they would affect individual segments of the credit system unevenly. In addition, changing the minimum reserve requirement is not a transparent measure and its impact on expectations is unpredictable. The Central Bank firmly advocates that housing costs should remain part of the reference index for the inflation target, and believes that by and large the best available methodology is being used by Statistics Iceland to evaluate them. This is because housing costs are a major item in household consumption in Iceland, where the level of owneroccupancy is 80%. Excluding changes in housing prices would ignore a large proportion of household expenditures. Experience also shows that housing inflation has the advantage, from the perspective of central banks on an inflation target, of being a leading indicator of general inflation later on. Presumably this is because the housing market is independent from foreign markets. Increased housing demand cannot be channelled out of the economy, unlike various other goods and services, nor is foreign competition present to any significant extent. When demand surges, housing prices often rise sooner and by more than prices of goods and services in general. | 1 |
Yields of shorter-term notes and bills have declined, with two-year government bond yields of Italy, Ireland and Portugal declining by over 400 bps since 8 December 2011. Longer-term government yields have declined as well, although not to the same extent as shorter-term yields (Slide 7). The positive secondary market developments were accompanied by favourable primary market activity with sustained demand in auctions of T-bills and shorter bonds in several euro area countries. All in all, there is now strong preliminary evidence that the three-year LTROs have helped the banks to reduce liquidity risk and therefore allowed them to smooth the deleveraging process over a longer period of time and maintain exposures to SMEs – at least in some cases. Anecdotal evidence also points to the return of some institutional money market investors, with quite a number of banks reporting that funds (also unsecured) are becoming available again at somewhat longer maturities. While banks seem to have used the funds obtained from the first three-year LTRO mainly for refinancing purposes, when looking forward to the next six months, they now seem to expect a stronger use of these funds for granting loans. Whether these expectations will materialise remains an open question and the Governing Council will closely monitor these developments. Challenges ahead A side effect of the three-year LTROs is that the banking system in the euro area is now in a situation of abundant excess liquidity. | Up to a certain amount, banks’ demand for central bank reserves is completely inelastic (due to central bank reserve requirements, internal and external liquidity regulation and other factors). Beyond this amount, however, the decision to hold excess reserves responds to risk-return considerations as for any other asset: if a bank decides to hold a certain amount of excess reserves, it is because their risk-adjusted return dominates that of other assets. As I mentioned earlier, while an individual bank can decide to hold less excess reserves, in the short run the banking system as a whole cannot dispose of excess reserves. Since, in equilibrium, supply must equal demand, if interest rates on central bank deposits (the riskfree remuneration of excess reserves) are at levels such that demand for reserves exceeds supply, banks will be willing to hold on to the excess reserves present in the market. This is likely to be the case in a situation of high risk aversion, where – like today – the risk premia demanded to hold risky assets are so high that their risk-adjusted return is lower than that offered by the deposit rate. If, however, banks become more willing to accept risks, their demand for excess reserves for a given deposit rate will decrease and they will look for more attractive alternative uses for these funds: riskier assets and/or loans. | 1 |
Risks arising in a single bank’s operations can thereby easily be spread to the other major banks. During the crisis, we also saw how uncertainty over future loan losses in individual banks spilled over to the others. In the eyes of a foreign investor, the Swedish banks were all travelling on the motorway in the same vehicle. Swedish banks are large and internationally dependent The Swedish banks are also large in relation to the Swedish economy. The assets in the total banking sector are equivalent to about 425 per cent of Sweden’s GDP. One reason for this is that they have comprehensive international operations. At the same time, there are few effective international agreements on how to manage cross-border banking groups in a crisis situation. Consequently, the failure of a major Swedish bank would risk being difficult to manage. This also means that the cost for Sweden’s taxpayers would risk being significant. The market assumes that major Swedish banks have implicit state guarantees The market also assumes that the major banks have an implicit guarantee from the state, as they are considered to be too big for the state to allow them to fail. This means that these banks can obtain cheaper funding than would otherwise have been the case. The implied state guarantees were clearly illustrated by our neighbour, Denmark, when Amagerbanken collapsed and the Danish authorities forced senior lenders to contribute. | The correlation between the two series was a remarkable 0.85 during the period 2005 to 2011. 2 / 11 BIS central bankers' speeches Admittedly, academics typically take this correlation much less seriously than practitioners. It is a good habit of academics to dismiss contemporaneous correlations between two variables as spurious. If anything, standard theory – also known as uncovered interest parity (UIP) – predicts a correlation between today’s interest rate differentials and tomorrow’s exchange rate changes, thereby discrediting any perceived contemporaneous causality. Other approaches are less dismissive, however. The “asset market approach” to exchange rates, for example – which, in essence, is an alternative representation of the UIP – posits that, as an asset price, exchange rates should fully reflect today’s expectations about the future, just as equity prices reflect the expected discounted stream of future earnings and other relevant information.5 The implication is that the current level of the exchange rate should be a function of the average of current and future expected short-term interest rates. And because monetary policy, away from the zero lower bound, predominantly sends signals about the current level of central bank interest rates, and because the term premium – the additional return that investors demand for the risks incurred by not simply rolling over a series of short-term bonds – was typically contained at shorter horizons, it is not surprising to see a strong correlation between short-term interest rates and the exchange rate. | 0 |
5 This reduces the return potential of investments and hence also the demand for capital to finance investments. The real rate of interest had to fall in order to balance supply and demand on the capital market. Negative interest – still essential from a monetary policy perspective The decline in long-term interest rates also has implications for monetary policy and thus for short-term rates. What is known as the ‘neutral rate of interest’, i.e. the rate at which monetary policy neither holds back nor stimulates the economy under conditions of price stability, is also lower than it used to be. To achieve the same degree of monetary policy expansion in these circumstances, short-term interest rates must therefore also be lower now. This is one of the reasons why many central banks lowered their policy rates to zero or even into negative territory in the financial and debt crisis. It was because of this that the SNB, too, introduced a negative rate of interest on the sight deposits that banks hold with it. We are aware that the negative interest rate is an unconventional instrument, and one that has side effects. That is why we subject the benefits of this instrument for monetary policy, as well as any resulting costs, to particular scrutiny. We will only maintain the negative interest rate for as long as the benefits outweigh the costs. We undertook the most recent evaluation during our September monetary policy assessment. | Retail activity, which was buoyant in May, fell back in June partly due to poor weather conditions. In aggregate, activity was up over the last two months. The construction and civil engineering sector1 recovered in the second quarter of 1997 primarily as a result of seasonal factors. Employment levels held steady in industry, except for the automobile sector, where there was a further contraction, and the building, retail and market services sectors. Wherever possible, companies sought to enhance workforce flexibility via temporary staff and overtime, in order to cope with fluctuating demand and organize themselves for the summer vacation period. __________________ 1 Unadjusted data. BIS Review 70/1997 | 0 |
In some respects, this may sound like old news. For example, an evaporation of liquidity, amplified by algorithmic trading, lay at the heart of the 1987 stock market crash. And it is also well-known that stock prices exhibit non-normalities, with the distribution of asset price changes fatter-tailed and more persistent than implied by the efficient markets hypothesis at frequencies of years and months, perhaps weeks and days. 14 But these abnormalities were thought to disappear at higher frequencies, such as hours and minutes. Over shorter intervals, efficient market pricing restored itself. Recent studies point, however, to a changing pattern. Non-normal patterns in prices have begun to appear at much higher frequencies. A recent study by Smith (2010) suggests that, since around 2005, stock price returns have begun to exhibit fat-tailed persistence at 15 minute intervals. Given the timing, these non-normalities are attributed to the role of HFT in financial markets. 10 Lehalle et al (2010b). 11 Lehalle et al (2010a). 12 CFTC-SEC (2010), Kirilenko, Kyle, Samadi and Tuzun (2011). 13 For example, Jarrow and Protter (2011, Cvitanic and Kirilenko (2010). 14 For example, Gopikrishnan et al (1999), Bouchaud et al (2009). 6 BIS central bankers’ speeches The measure of stock price abnormality used by Smith is the so-called “Hurst” coefficient. 15 The Hurst coefficient is named after English civil engineer H E Hurst. It was constructed by plotting data on the irregular flooding patterns of the Nile delta over the period 622–1469 AD. | An altogether bigger prize would be to put these data to work before the fact, identifying the next victim pre-autopsy. That could mean using transactions data to help detect early warnings of systemic fault-lines and stresses. This is a potentially massive analytical and technical challenge. The technical challenge is certainly surmountable. Advances in computer power over the past decade mean that storing and processing huge volumes of data poses no technological barrier. The answer lies in the clouds – conveniently enough, since they too exhibit fractal properties. If we can search and track the world wide web in close to real time, we can certainly do the same for its financial sub-component. The analytical challenge is altogether greater. In essence, it is to find summary measures of billions of transactions data which are informative about impending market stress. There is serious needle-in-haystack risk with such an endeavour. And experience in economics and finance of finding robust early warning indicators is mixed. But here again, the market microstructure literature offers some tantalising clues. For example, Easley et al (2011b) have suggested that measures of “order imbalance” may provide early warning signs of liquidity voids and price dislocations. Their measure of imbalance follows closely in Mandelbrot’s footprints. It uses a volume-based metric of the proportion or orders from informed traders. Any imbalance towards informed traders causes potential liquidity problems down the line as a result of adverse selection risk. | 1 |
The funds obtained through the issuance of supranational debt will be used to tackle the effects of the COVID-19 crisis and to prepare the European economy for future challenges. More than half the funds are expected to be used in two priority areas: digitalisation and the environmental challenge. To access these funds, countries must design recovery and resilience plans containing specific proposals for projects aligned with the particular country recommendations made in the context of the European Semester.7 To assess the impact of these funds, we must turn our attention to some of the aspects that are yet to be clearly defined. Specifically, there are four sources of uncertainty, the response to which will be crucial to determine the fund’s capacity to boost economic activity: the amount to be disbursed, the schedule for implementation of the projects, the type of projects to which the resources will be allocated and, lastly, how the loans envisaged in the agreement will be used. Regarding the amount to be disbursed, it is important to set in context the sheer scale of the resources that the NGEU programme could potentially make available to a number of European countries, including Spain. Specifically, the portion taking the form of grants would alone approximately triple the entire general government's investment expenditure in 2019. Since countries risk facing difficulties when it comes to absorbing such a huge volume of funds, it is vital that bottlenecks are reduced at all levels of government, and that effective and swift public tender processes are designed. | However, a common European response should be considered a necessary but not sufficient condition for ensuring a swifter and stronger recovery of our economy and minimising the structural damage caused by this crisis. To attain these goals, not only must fiscal policy continue to provide adequate support for households and firms in the short term, but the European funds must be allocated to high added-value investment projects, accompanied by a structural reform programme designed to strengthen the economy’s long-term growth. Indeed, the European funds should also be used to finance the structural improvements required by the Spanish economy. Thank you very much for your attention. 11 | 1 |
BIS Review 124/2008 17 | This fragmentation was affecting the whole economy of the area, and a banking union has been proposed in order to re-establish a smooth transmission of monetary policy and ensure that the credit supply meets the real economy’s needs. Some evidence on the fragmentation of the banking system First of all, let me give you some evidence on the fragmentation of the banking system. BIS central bankers’ speeches 1 The ECB has been continuously monitoring the degree of integration in the euro area financial markets. The latest Financial Integration in Europe report, published in April 2012, showed several indicators pointing to rising fragmentation in various market segments as the sovereign debt crisis has escalated. In addition to the price-based indicators highlighted in the report, quantity-based indicators also continue to point to a further and significant renationalisation of euro area banks’ funding markets. Banks located in peripheral countries continued to lose market funding, while those in some other countries retained it and managed to issue bank debt at attractive yield levels. The market for secured bank funding has also been affected by the increased tensions in some euro area government bond markets. Differences between bank lending rates offered to non-financial corporations and households in euro area countries reflect divergences in bank funding conditions that go beyond country-specific economic conditions. Let me give you a few examples. The coefficient of variation across euro area countries of the short-term cost of borrowing for non-financial corporations has been increasing towards all-time highs. | 0 |
The east European trade is particularly important to the Swedish economy, which is already one of the most open and trade-dependent economies in Europe, at the same time as we have strong historical ties to several eastern European countries, particularly the three Baltic states and Poland. Already, central and eastern Europe as a whole is a larger market for Swedish foreign trade than, for instance, Japan or East Asia. When the Riksbank makes its inflation forecasts, central and eastern Europe will move gradually from being a brief footnote to becoming an important area in the international forecasts. The importance of membership The recipe for success behind the trade integration between the EU and eastern Europe is a littleknown international trade agreement. While the WTO and NAFTA steal the headlines, few people are aware of the agreement that created the boost in east-west trade in Europe, the “Europe agreement” between the EU and the eastern European countries. There are major shortcomings in this agreement, but it includes free trade for almost all industrial goods and thereby enabled the rapid changeover to become reality. However, a decisive factor for the success of the Europe agreement is that all of those involved knew that actual membership of the EU would come in the near future. Membership is that major and important step, when the rules of the game are confirmed and investors know that the institutional conditions are stable and up to EU standards. | The benefit is not limited only to enhancing credit evaluation, but also provides the foundation for more effective portfolio analysis and management on an ongoing basis that are the hallmarks of any effective risk management system. For example, the overall quality of the SME portfolio can be monitored based on information available from the Bureau to BIS Review 67/2008 3 support analyses on the distribution of financing by rating, migration analysis and stress tests. The findings from portfolio analysis supported by the bureau information would assist SME financiers to better price their SME financing and facilitate more effective allocations of capital. Moving forward, one of the roles that the SME Credit Bureau can effectively play is to provide market research and reports on the SME industry. This will expand its user base beyond SME financiers and creditors to include policy makers, economic and investment analysts, and even academic scholars. The credit information infrastructure in Malaysia is advance, relative to other countries in a similar stage of economic development. Our main credit information database currently is the CCRIS that captures information on all credit facilities extended by licensed banking institutions in Malaysia , as well as other institutions regulated by Bank Negara. While access to CCRIS is limited for the time being mostly to regulated financial institutions, we are encouraged by the progress made by private bureaus, such as the SME Credit Bureau, in providing access to credit information to a wider user base, as well as developing new value added products and services. | 0 |
In addition, a cheque processing fee of 50 sen per cheque leaf will be imposed 11 months later on 1 April 2014. 4 Norway, Sweden, Denmark, Finland. 5 RM636 million (banks) + RM19 million (MyClear) + RM113 million (businesses). RM113 million for businesses was computed based on the ECB study that businesses incur a cost amounting to 0.012% of GDP. BIS central bankers’ speeches 3 The 11-month grace period before the implementation of the cheque processing fee is intended to afford both the public and the businesses ample time to familiarize with, adjust and migrate to using electronic payments such as the IBG for their payment transactions. Improving accessibility, security and convenience of electronic payments Based on a recent survey conducted on businesses, we have identified 4 key hindrances to the adoption of electronic payments, namely: • Concern of the security of electronic payments • Difficulty to perform payment reconciliation • Low limit of electronic payment transaction • Lack of familiarity with electronic payments In terms of security measures, banks have continued to invest significantly to ensure the safety of electronic payment transactions. Examples of security enhancements that have been undertaken include the migration to secure chip-based payment cards to address card counterfeiting fraud, the introduction of a second factor authentication to strengthen authorization of online banking transactions and the implementation of SMS alert to mitigate credit card fraud. | The return on real estate and infrastructure tends to follow a slightly different pattern than the return on equities and bonds. Investing in these asset classes is therefore expected to improve the GPFG’s risk-return trade-off. Looking ahead, the GPFG will likely reduce its allocation to bonds from today’s weight of 35 percent. For a long-term investor, this is a sensible adjustment. At the same time, it will signal that the authorities are willing to accept considerable fluctuations in the return and size of the GPFG, at least on a par with the volatility seen during the financial crisis. Even though a number of countries hold substantial foreign exchange reserves, Norway stands out. In almost no other country does the central bank manage such a large and diversified investment fund. The GPFG has delivered solid results, and its management model has been shown to be robust despite periods of rough weather. Transparency, accountability and the safety of capital invested are paramount. The organisation has been enlarged to manage a steadily growing and more diversified portfolio. Changes in the organisation of the GPFG may come. But whatever the future solution may be, the primary objective of investment management must remain firm: the highest possible return for the benefit of current and future generations. The GPFG should remain a financial investor. If the government were to use the GPFG for other purposes, it would limit the scope for achieving good returns and thereby Norway’s fiscal space. | 0 |
As in parts of Europe, the United States is experiencing a major budget deficit and a growing national debt. In May this year, the US national debt reached the so-called debt ceiling, which limits how much the United States is allowed to borrow. This meant there was a risk that government grants and everything from salaries for government employees to interest payments on the national debt could not be paid. As the United States is the largest borrower in the world this led to a lot of unease on the financial markets. Reaching agreement on how to deal with this was made more difficult due to the political divisions between the Republicans and the Democrats. An agreement to raise the debt ceiling and reduce the federal deficit was actually reached at the end of June, but the strongly politicised process prior to the agreement and the fact that it was reached so late has created doubt about the United States’ ability to handle its national debt. The increasing concern about economic problems around the world is dampening the prospects for global growth. At the same time, the pressure that that is being put on the euro countries with weak public finances means that more countries in the euro area can be expected to tighten fiscal policy even further than was previously assumed. This applies not only to relatively small economies like Greece, Portugal and Ireland but also to larger economies such as Spain and Italy, and perhaps France too. | This has risen sharply in the past couple of 5 years and to historic highs; it fell back in the most recent, 4 April, data, but remains high. Against the backdrop I 3 have been discussing of slowing global growth, trade 2 tensions and Brexit uncertainty, that is not surprising. 1 But it suggests a policy environment that could 0 potentially be challenging. -1 Many of the drivers of elevated policy uncertainty are Differences from averages since 2002 (number of standard deviations) -2 2002 2006 2010 2014 Policy uncertainty 2018 VIX fundamentally shocks to supply, which monetary policy is not able to offset, rather than demand. But they could introduce a more complicated policy trade-off for the The policy uncertainty index is available at http://www.policyuncertainty.com/. This chart shows data to end-April. MPC. And they represent risks to financial stability which the FPC needs to be mindful of and prepared to respond to. That is particularly the case given the apparent disconnect between this measure of policy uncertainty and measures of market uncertainty, for example the VIX measure of US equity market uncertainty which is also shown on the chart. The VIX has risen far less than the policy uncertainty index in recent months, suggesting market participants see relatively little risk of major disruption. | 0 |
8 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 8 We therefore face a trade-off between simplicity and calibration. A focused approach would impose the fewest requirements, but those that were applied might have to be conservatively calibrated in order to maintain resilience. A streamlined approach would lead to less conservatively calibrated, but more complex requirements, when compared to the focused approach. Figure 1 illustrates this trade-off, along with a second trade-off between simplicity and minimising barriers to growth. This second trade-off arises because a focused approach would be very different to the requirements a growing firm would face after it moved out of the simpler regime. It might therefore be more difficult for a small firm to grow out of a focused regime, as it would effectively have to gear up to meet a whole new set of requirements. Figure 1: Illustration of the characteristics of a ‘focused’ and a ‘streamlined’ approach In practice, there are a spectrum of approaches we can take between the extreme cases of a very focused approach which is like the requirements we have in place for credit unions, and a slightly streamlined approach which is almost the same as requirements for larger banks and building societies. And different approaches might work better for different sorts of requirements. For example, the right approach for capital requirements might differ from the right approach for liquidity requirements. What this way of describing different approaches provides us with is clarification of the choices and trade-offs we face. | The simpler regime will, of course, only apply to firms which are not internationally active because internationally active firms will remain subject to Basel standards. We therefore also ask for views about how we should identify which firms are not internationally active. Decisions about scope will be important because, speaking generally, the more alike the firms in scope are, the simpler the regime can be. For example, 40% of the existing rules and technical standards for credit risk relate to the internal ratings based approach.3 If just those firms which only use the standardised approach were eligible for the simpler regime, these rules could be entirely removed. But, on the other hand, too restrictive a scope will mean fewer firms are able to benefit from the simpler regime. That is why we want to receive comments about where we should draw the line for a first step which delivers meaningful simplification for a worthwhile number of firms. These choices will determine which banks are affected by the simpler regime. As I say, these are likely to be smaller non-systemic banks as we focus on taking the first step towards building a strong and simple framework. But before moving on I would like to draw your attention to two other important reviews that the Bank aims to consult on this summer. | 1 |
First is a relative shift of dependence on foreign savings, as against domestic savings, as a source of funding domestic (fixed and portfolio) investments. Second is reduced availability of such funding, as evidenced by Asia being a net exporter 2 BIS Review 66/2004 of capital. To be sure, there has correspondingly been more efficient allocation and use of scarce funding on a global basis, made possible by the freer mobility of capital and the freer convertibility of currencies. But there has also been a change in the dynamics of financial intermediation in Asia, in that there is a process of recycling of Asian funds through the developed markets back into Asia that has become quite significant. And not only is it significant, it is also quite potent and demanding. Whether we like it or not, the behaviour of foreign savings in the hands of foreign financial intermediaries is quite different from that of domestic savings. To start with, they are more volatile than domestic savings and more sensitive to shifts in market sentiment and in macro-economic policies, to a degree that has proven, in the Asian financial crisis of 1997-98, to be brutally destabilising. Given also the existence of some forbearance, in terms of, for example, the disclosure of activities and the maintenance of concentrated positions, in the interest of sustaining the presence of foreign financial intermediaries and foreign savings, there is a much greater likelihood of market overshooting. | Zeti Akhtar Aziz: Towards creating an Islamic Financial System as an integral part of the International Financial System - strategies and challenges Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Asian Islamic Banking & Finance Summit, Kuala Lumpur, 21 September 2004. * * * “The integration of Islamic finance with international financial markets and institutions has demonstrated its viability, competitiveness, resilience and sustainability as a form of financial intermediation. This trend has contributed towards facilitating greater cross border flows in terms of increased trade and investment transactions thereby strengthening the global economic and financial linkages. As this international integration process intensifies, it not only raises the prospects for more balanced global growth but also allows for greater diversification of risks thus contributing towards greater global stability. At the core of this financial globalisation process is the robustness and resilience of the domestic Islamic financial system. The development of a sustainable Islamic financial system that is able to withstand the challenges of the uncertainties and instabilities inherent in the global financial system, thus not only requires an effective global financial architecture but a system that is also supported by an appropriate, comprehensive and sound domestic financial infrastructure. These mutually reinforcing structures would not only accentuate wealth creation and foster greater potential for trade but would also promote global financial stability and breakthroughs in new business relationships”. | 0 |
In the third quarter, the U.S. exceeded market consensus expectations 2 BIS central bankers’ speeches and, although inventory accumulation played a part, the improved performance of the housing and labor markets, combined with better entrepreneurial and consumer expectations, the behavior of stock and other asset prices and, in particular, the lower intensity of the fiscal adjustment suggest that next year the country will outperform its 2013 figures. The recovery of the Japanese economy is still ongoing, but the tax increases announced for 2014 will taper economic growth. The Eurozone posted positive growth for the second consecutive quarter, although less than expected by the consensus. Worth noting were the slower growth of Germany and the contraction of the French economy and, on a positive note, that some of the peripheral economies grew again. Emerging economies have slowed down further and consensus forecasts have seen new downward revisions. In China, after a substantial correction to its growth projections in the first half of the year, recent data show growth stabilizing around 7.5 percent, quite less than in recent years, however. The baseline scenario assumes that the Chinese economy will slow further to reach 7.2 percent annually in 2015, which points to the need to continue to restructure its sources of growth and resolve some of the vulnerabilities of its financial system. In the rest of the emerging world, economic activity continues to moderate, leading some economies to lower their benchmark rates. | In this trajectory, the maturation of the mining investment cycle discussed in previous Reports has played a major role. In addition, the extraordinary imports of transport materials of the last quarter of 2012 did not continue into this year, and imports of other capital goods were weak in the past few months. Consumption has also slowed down, although its adjustment has proceeded gradually, because of still tight labor market conditions, real wages growing strongly and consumer expectations still optimistic, although less so than in the first half of the year. The deceleration of private consumption is expected to continue over the coming months coupled with a not so strong labor market, a vision that is grounded on our business perception report Informe de Percepciones de Negocios. CPI inflation has been below expectations, mainly reflecting the drop in international fuel prices, which more than offset the seasonal price increases of some perishable foods and the peso depreciation. Thus, in October the CPI rose 1.5% y-o-y, which again placed it temporarily below the tolerance range. In contrast, the core measure CPIEFE brought no major surprises and continued to increase up to 1.6% annually in the same month. Two years ahead inflation expectations remain around 3% (figure 3). In the international financial markets, movements in the last few months have been largely determined by news about the future course of monetary and fiscal policies in the United States. | 1 |
This observation shows that inflation target, to a significant extent, continue to serve as an anchor and that economic agents expect the disinflation process to continue in the medium term. Nevertheless, the fact that currently medium-term inflation expectations are significantly above our medium term target of 4 percent necessitates a cautious policy stance 1 . Figure 10: Medium-Term Inflation Expectations* 9 12-Month 24-Month 8 7 6 5 0108 1107 0907 0707 0507 0307 0107 1106 0906 0706 0506 0306 0106 1105 0905 0705 0505 0305 0105 4 Expectations regarding the period after 24 months have been published since May 2006. Source: CBRT. 1 As of January, one-year and two-year ahead inflation expectations are 6.01 percent and 5.17 percent, respectively. BIS Review 20/2008 7 3. Inflation and monetary policy outlook Distinguished Guests and Press Members, After summarizing inflation and monetary policy developments in 2007, in this part of my speech, I would like to share our evaluations on inflation and the monetary policy outlook. First of all, I would like to summarize several factors that might enable the disinflation process to continue in the upcoming period: Annual percentage change in CPI excluding food, energy and tobacco imply an inflation trend of 4.8 percent (Figure 11) 2 . In other words, underlying inflation in the past year was not far away from the medium-term targets. | It said that: “The authorities’ commitment to a rules-based and non-interventionist approach should enhance the economy’s ability to withstand the recent regional and financial market turmoil.” “As in the past, the mission strongly endorses the authorities’ continued commitment to the linked exchange rate system.” “Appropriately, the authorities have taken forceful action during the past two weeks to tighten significantly monetary conditions, and have successfully demonstrated their ability and commitment to defend the link.” “It is important to recognize that allowing interest rates to rise in response to exchange market pressures is an essential element of the currency board mechanism that lies at the heart of Hong Kong’s monetary arrangements.” BIS Review 115/1997 -4- “Recent events demonstrate that the system is working exactly as intended ...” “Our discussions with market participants have indicated a widely-held consensus that the prudential and regulatory oversight of the financial sector is strong, which has helped underpin confidence in the system.” 16. But what the internationally renowned doctor, in the form of the IMF, says may not always be universally acceptable, particularly for those who may have been innocent parties having to suffer the pain of market adjustment, inevitable as it may be. It is quite understandable therefore that there will always be grievances and consequently calls for prescriptions for pain killers and other preventive medicine. | 0 |
In fact to varying degrees, reflecting differing assessments of how far our particular currency areas are expected to be affected by the world slowdown and different starting points, relating both to our assessment of trends in domestic demand, and of how close we were initially to full capacity, both the UK and the Euro-zone, as well as the US, have acted fairly aggressively to reduce interest rates since the autumn; and Japan has moved to more active fiscal stimulus. And if the global economic prospect, and net external demand in the industrial countries, were to deteriorate further, then it would be right to contemplate further moves in the same direction – consistently with our aim of effective price stability. What we all aim to do – as I said earlier – is to keep aggregate demand in line with the supply capacity of our economies. We have no interest in the creation of unnecessary spare capacity in our economies as a whole, nor in a fall in the underlying general price level. But that will still inevitably mean a sharp deterioration in the balance of payments of the industrial countries, collectively and probably individually, reflecting the imbalance between external and domestic demand growth in the industrial economies. And that in turn is bound to mean substantial pressure on the internationally-exposed sectors of the economy, not just in this country but throughout the industrial world, and we are already seeing ample evidence of that. | The strong exchange rate gave us somewhat more time than we would otherwise have had to bring about this domestic slowdown – it meant that monetary policy did not need to be tightened as aggressively as would have been necessary otherwise. But we could not avoid tightening policy altogether, even though we realised that this would be likely to increase the pressures on the internationally-exposed sectors, because in anything other than the short term that would have put the whole economy – including the internationally-exposed sectors we were trying to shelter – at risk of accelerating inflation. I would remind you that right up until the summer of last year we were seeing signs of increasing pressures in the labour market, even in the manufacturing sector – reflected in increasing skills shortages and recruitment difficulties, in the employment/unemployment data, and in gradually increasing pay settlements. The uncomfortable reality, as I’ve said very often before, is that monetary policy can only target the economy as a whole – it can’t seek to protect individual firms, or sectors, or regions, however much we might wish it otherwise. That – as I’ve discovered – is not exactly a popular idea, but there’s no question that that is the reality of it. Over the past year the world – and I mean the world – has changed very substantially. | 1 |
Overall, I believe that our communication with the public is multifaceted and highly efficient. Efficient foreign exchange market The third condition I view as crucial for successful monetary independence is an efficient foreign exchange market, as changes in monetary policy often translate into movements in the exchange rate. The amplitude of these movements can depend critically on the depth and efficiency of the foreign exchange market. An interest rate increase generally leads to an appreciation of the domestic currency, and this appreciation can be particularly large in a narrow market, where there may be few agents willing to sell. Hence, changes in monetary policy can cause large – or even excessive – exchange rate volatility if the foreign exchange market is not well-developed. Deep markets, by contrast, allow the exchange rate to stick more closely to the fundamental factors of the economy. This in turn facilitates the conduct of monetary policy. How deep is the Swiss foreign exchange market? A survey by the Bank for International Settlements shows that, in 2004, 6% of all currency transactions worldwide involved the Swiss franc. Considering BIS Review 46/2006 5 that Switzerland contributes less than 1% to world GDP, this implies that the Swiss franc market is very deep indeed. Hence, when we change interest rates, the exchange rate does not respond in an overly volatile fashion. I would like to point here out that the SNB has not always been keen on free financial markets. | BIS central bankers’ speeches 1 The emerging global regulatory paradigm Following wide-ranging discussions and consultation, the global regulatory community has made progress to strengthen the resilience of the financial system. The Basel Committee on Banking Supervision has strengthened global minimum capital standards as part of its Basel III Framework. The Financial Stability Board (“FSB”) has released guidelines to reduce the risks posed by systemically-important financial institutions, or “SIFIs”. MAS welcomes the Basel III reforms. They will strengthen the resilience of individual banks during periods of stress, and in doing so, contribute to banking sector stability. Basel III is a major step forward in several areas: (i) First, it strengthens capital requirements for trading activities, off-balance sheet vehicles, securitisation, and counterparty credit derivatives. (ii) Second, it improves the quality of capital, with a greater focus on common equity to absorb losses. (iii) Third, it raises the level of capital that banks will have to hold to absorb losses in both going-concern and unwinding scenarios. (iv) Fourth, it introduces international liquidity standards for the first time, to make banks more resilient to short-term funding disruptions and longer-term liquidity mismatches. The FSB is finalising its recommendations for global systemically important financial institutions, or G-SIFIs. This will comprise a package of measures, the most important of which are quite clear: First, G-SIFIs will have to meet higher capital requirements, above the Basel III minimums. This is to reflect the greater risk that their failure would pose to the financial system. | 0 |
Jean-Claude Trichet: Interview in Il Sole 24 Ore Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in Il Sole 24 Ore, conducted by Mr Beda Romano and published on 9 April 2010. * * * Il Sole 24 Ore: Greece is in dire straits as it struggles with a huge public debt and a fall in competitiveness. Some market players and newspaper commentators see Italy as being the next in line to experience a financial crisis in the euro zone. Trichet: Of course, Italy is not at all in the same situation of Greece. Your country has shown resilience in this difficult period. In particular it was able to contain its yearly budget deficit and it has committed to get back to a sustainable situation according to the European rules. The ECB strongly encourages it to implement rigorously this programme. This said, the current crisis has demonstrated that all 16 countries of the euro zone must work hard, in a determined and efficient way, in order to make their economies more flexible and elevate their growth potential thanks to determined structural reforms. Improving labour productivity in particular is good for export growth and job creation. If this had been done more efficiently in the last years better results would have been attained in Italy as well as in the euro area as a whole. | Or should they stay their hand, in the expectation that what appears to be structural unemployment might actually be cyclical? This is the debate that I would like to enter into today, from the perspective of the euro area – that is, to ask whether we have indeed seen significant hysteresis effects, and whether this warrants changing how we think about our monetary policy decisions. My tentative answer today is that we have not yet seen hysteresis in its typical form – we have seen scratches, not scars. And though this more subtle type of hysteresis may warrant policy accommodation over a longer period, this is solely with the aim of achieving our price stability mandate, not preventing a rise in structural unemployment per se. Indeed, if those two aims were ever in conflict, our choice would be absolutely clear. Evidence of hysteresis in the euro area Let me start with a chart similar to the one Larry Summers showed for the US economy in his seminal 2014 speech.2 You can see that the level of potential output in the euro area today is much lower than what we had expected before the outbreak of the crisis, assuming it would have continued to grow at its 2007 growth rate. By this measure, the output gap has largely closed – not because the economy has been doing so well but because potential GDP has been revised significantly. These effects have been taken by many as evidence for hysteresis.3 But the discussion is arguably more complex than this. | 0 |
This calls for urgent adoption of the Bank Recovery and Resolution Directive that will provide a harmonised toolkit across the EU. The SRM should have control of and access to a European resolution fund for resolution financing. This fund should be funded by ex ante risk-based levies on the industry. The European resolution fund should have access to a temporary emergency facility that is fiscally neutral in the medium term, meaning that any temporary public support will be recouped by ex post levies on the industry. BIS central bankers’ speeches 5 Restoring financial integration will unburden monetary policy From a monetary policy standpoint, the banking union will alter neither our policy objective nor our policy strategy. The pursuit of price stability as our prime objective is set out in the EU Treaty. We have delivered on our mandate. However, the banking union will change the environment in which we conduct our policy for the better. A banking union has the potential to unburden monetary policy in two important dimensions. First, the banking union has important implications for the ECB as liquidity provider to the banking system. Sound supervisory assessments and access to a powerful resolution framework is paramount for ensuring liquidity provisions to sound and solvent counterparties. In its role as supervisor, the ECB will have strong incentives to make sure its supervision is rigorous in order to protect our balance sheet and to ensure tight control over the risks we assume. | This growth projection and its composition are generally consistent with the baseline scenario of macroeconomic projections for Spain published by the Banco de España in mid-December and with those of most analysts (see left-hand panel of Chart 7). However, I would like to point out the two risks which I consider most significant for the macroeconomic scenario of the Budget. BANCO DE ESPAÑA 7 TESTIMONY BY THE GOVERNOR OF THE BANCO DE ESPAÑA BEFORE PARLIAMENT IN RELATION TO THE DRAFT STATE AND SOCIAL SECURITY BUDGET FOR 2019 First, the macroeconomic projections of the Budget include an adjustment to the budget deficit clearly exceeding that expected by other analysts (see right-hand panel of Chart 7). In particular, the deficit target for general government as a whole stands at 1.3% of GDP in 2019, which is a reduction of 1.4 percentage points (pp) with respect to the envisaged final figure of 2.7% for 2018. By contrast, the projections of the Banco de España and of most analysts, as reflected by the Consensus Economics Forecasts, put the deficit for 2019 above 2%. Therefore, if the greater fiscal efforts required to meet the deficit target for general government as a whole included in the Draft Budget, amounting to 1.3% of GDP, were included in the projections of other analysts, their economic growth estimates for this year would be liable to a risk of downward revision. | 0 |
It is our objective – although it is difficult to accomplish – that the community understands our work, which is to provide the public good of stability that allows the country to progress, and is not an operation carried out by technocrats with incomprehensible criteria. There is another important reason why central banks need to be transparent: the efficacy of monetary policy. In the past few years, advances have been made towards consensus that a more predictable monetary policy is better, without itself being a source of noise and instability. To that end, it is necessary to properly communicate our vision of the way the economy works and how monetary policy decisions affect inflation. Results During the 1990s there was a substantial increase in the number of autonomous central banks; many countries enacted legal reforms favoring central bank independence (table 1). The evidence shows that the increase in central bank independence has been associated with a reduction in inflation (Figure 1). This is valid for both developing and advanced economies, and confirms the findings of a large body of research that includes more rigorous statistical analysis to verify the robustness of the partial correlations. Also, higher degrees of independence have helped to reduce inflation volatility. Therefore, autonomy is the adequate strategy to correct the inflationary bias. In summary, the evidence indicates that higher degrees of independence are associated with lower, more stable inflation and, hence, with increased growth. In Chile, over the twenty years of central bank autonomy, inflation has averaged 7.5% per year. | (2007) BIS Review 156/2009 5 Figure 2 Growth volatility in Chile, 1911-2010 (*) (Standard deviation of the growth rate) 18% 15% 12% 15.0% 11.5% 12.0% 9% 7.5% 7.3% 5.1% 6% 2.9% 3% 0% 6.9% 3.6% 2.2% 1911- 1921- 1931- 1941- 1951- 1961- 1971- 1981- 1991- 20011920 1930 1940 1950 1960 1970 1980 1990 2000 2010 (*) 2009-2010 based on the IPoM of September 2009. Source: Central Bank of Chile. Figure 3 Percentage drop in the MPR between September 2008 and September 2009 and Central Bank independence % drop in MPR (09.2008 09.2009) 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0.2 0.4 0.6 0.8 CBC independent index (Arnone et al. , 2007) 1.0 Sources: Arnone et al. (2007) and Bloomberg. 6 BIS Review 156/2009 References Arnone, M., B.J. Laurens, J.F. Segalotto, and M. Sommer (2007), “Central Bank Autonomy: Lessons from Global Trends,” Working Paper 07/88, International Monetary Fund. Barro, R. (1995), “Inflation and Economic Growth,” Bank of England Quarterly Bulletin, 35, pp. 166–176. Céspedes, L.F. and C. Soto (2007), “Credibility and Inflation Targeting in Chile,” in F. Mishkin and K. Schmidt-Hebbel, eds., Monetary Policy under Inflation Targeting, Vol. XI, Central Banking, Analysis, and Economic Policy series, Central Bank of Chile. De Gregorio, J. | 1 |
The financial supervisory authority in Sweden, Finansinspektionen, also promotes stability in the financial system, but with a greater focus on individual institutions – what we usually call microprudential supervision. As knowledge of the risks in individual financial institutions is extremely important for successful macroprudential policy, it is essential that Finansinspektionen also participates in macroprudential policy (see Figure 9). This is particularly important in a country like Sweden with four dominant major banks. Thus, the competence and experience of both the Riksbank and Finansinspektionen will need to be utilised if macroprudential policy is to be effective in Sweden. What other requirements can one reasonably make of a framework for macroprudential policy so that it will function efficiently? The framework for macroprudential policy in Sweden should entail a clear mandate and effective tools… The Riksbank has earlier highlighted a number of general criteria that should be met for macroprudential policy to function successfully, and which I certainly agree with. There are four main criteria.11 Firstly, it is necessary to have a good power for decision making, in the form of a clear mandate and well-defined tools. Secondly, a strong independence from political and sectorspecific considerations is needed, as I mentioned earlier. Independence assumes, thirdly, that there are forms for clearly holding the authorities accountable, for instance, through farreaching requirements for transparency and reporting. Fourthly, a substantial and lasting capacity for analysis is required. | A higher interest rate aimed at limiting financial imbalances therefore entails a balance, where short-term losses in the form of lower inflation and growth, must be weighed against long-term gains in the form of lower risks linked to a high level of household debt. As I am sure you are aware, I think that the recent monetary policy decisions entail a reasonable balance between these factors under the prevailing circumstances. However, this does not mean that there is no room for improvement in the future. A new policy area – macroprudential policy – could offer better honed tools than the interest rate for dealing with financial imbalances. Macroprudential policy is better suited to managing financial imbalances than monetary policy… The experiences of the global financial crisis have led to extensive international work on regulation, and to many countries now establishing new organisational structures and tools in what is known as macroprudential policy.5 Unlike the traditional financial supervision – microprudential supervision – which focuses on the risks in an individual institution, the 3 The real exchange rate is defined as the nominal exchange rate adjusted by prices in Sweden in relation to prices abroad. An alternative definition is that the real exchange rate compares prices in Sweden and abroad, measured in the same currency. 4 See, for instance, M. Apel and C.A. Claussen (2012), “Monetary policy, interest rates and risk taking”, Sveriges Riksbank Economic Review no. 2. | 1 |
This less frequent auction schedule will limit the opportunity of banks to “be liquid” based on distributing their treasury bill investment in such a way that liquidity is generated by maturing these government papers. Increasing the investment base of investors. In cooperation with the Ministry of Finance and the Financial Supervisory Authority, it is agreed upon increasing the investors’ base, eligible to directly invest in the auctions of government papers. The new agreement signed between the Bank of Albania and the Ministry of Finance provides the necessary regulative framework for giving an end to the monopoly that the banking system has had in investment in the primary market of government papers, leaving space to natural and legal persons, foreign and domestic individuals. I do not feel well to assert that this step became indispensable, under the conditions of high commissions applied by commercial banks in providing this service, making the clients reluctant to this kind of investment. Earnestly believing in the efficiency and development driven by competition, I am convinced that increasing the number of operators licensed to trade government papers has also become a necessity. Primary rate for favorable clients. Being convinced that the monetary policy efficiency is enhanced through transparency, the Bank of Albania aims at including even this rate to the entirety of orientation rates used by commercial banks. This package is designed to increase incentives for you to find new profit opportunities and secure the necessary liquidity at a fair price in the secondary security markets. | The current development of the interbank market in Albania does not fulfil these assumptions yet and therefore, it makes the work of the Bank of Albania difficult in carrying out this essential function. Year 2002 recorded the start of the interbank market, the same year when the indirect instruments were introduced by the Bank of Albania to conduct its monetary operations. The Bank of Albania has attended the developments of the interbank money market in the last five years. During this period the trading volume has been fifteen folded, climbing from a daily average of 130 million lek in 2002 to a daily average of around 2 billion lek in 2007. Also there has been an increase in the maturity of the traded funds, from only trading overnight back in 2002 to trading up to three months in 2007. Also there has been an increase in the maturity of traded funds, from only trading overnight back in 2002 to trading up to three months in 2007. From the beginning of this year, we have been able to publish the fixed interest rate indexes, TRIBOR and TRIBID, which is hoped to promote the development of the interbank money market. However, we have to admit that this development has been a very slow one. During the last five years, the lek liabilities of the banking system have increased by 135 billion lek, which makes the increase in the trading volume of interbank market by a daily average of 1.9 billion lek, only a peanut in a big cake. | 1 |
* * * I. The euro has brought us all four main benefits Maastricht and the euro are naturally part of a broader history: the history of Europe, and its singular achievement of making the transition from war to peace. This history is just as topical in the highly uncertain world of 2017. Great Italians have counted among its key players, and not least Alcide de Gasperi or Altiero Spinelli. But I would also like to cite an almost unknown German, Josef Müller, founder of the Bavarian CSU, who was deported to a concentration camp during World War II; In 1946, he was one of the first to say: “We need a European currency, because countries that share a currency will never be at war”. In 1990–1992, the time had come: because German reunification required more European Union; and because the disintegration of the Soviet bloc brought the European continent back to the global arena. And so, from Rome in 1990 where we launched the intergovernmental conference – I remember the Palazzo Madama – to Maastricht in 1992, we created the euro. And others Italians have continued to be key players, from Tommaso Padoa-Schioppa to Mario Draghi today. Our foundations are therefore partly political; but the European edifice also has sound economic foundations. And I now wish to discuss its four tangible and concrete benefits. These are the three advantages of a sound currency: price stability; financing stability; and exchange rate stability. And, this results in the euro being an internationally recognised currency. | Moreover, from 12 at the start, the number of participating countries has risen to 19 today: 7 countries decided democratically to join the euro, and none has wanted to leave it. These are the concrete economic benefits that make the 340 million citizens of the euro area attached to their currency, to our currency. This attachment, which has been measured since the outset, has remained strong throughout the crisis. 70% support the euro today, i.e. the highest level since 2008; a large majority of French citizens support the euro (68%). Support remains strong in Italy, albeit at a lower level (53%). The euro is not a technocratic utopia: it is a political and democratic decision, supported 25 years on – with hindsight – by a clear majority of citizens. II. However, there are four doubts about the euro. I will address them seriously, even though I think that these ideas are erroneous. a) The euro is enemy of growth and employment Some say that the euro acts as a brake on growth, employment, and competitiveness. However, at 1.7% in 2016, growth in the euro area was higher than US growth (1.6%) and above all there are major economic successes among euro area countries. | 1 |
As I said earlier, the rise in the oil price in the past year has, more than previously sharp oil price increases, been due to a pickup in the demand for oil owing to world economic expansion. A rise in the price of oil that is largely a result of high international growth is likely to have less negative consequences for the real economy than a more outright supply shock. In addition to this, of course, the economies in the West - and particularly the Swedish one - are far less dependent on oil than they were during the oil crises in the 1970s. This should mean that the impact of oil price rises on both the real economy and inflation would be considerably more limited than what proved to be the case at that time. The assessment of most analysts today seems also to be that the increase in the oil price in 2004 could indeed curtail somewhat the international economic upswing but that the recovery will not be derailed. The impact of the oil price on inflation, too, should be less than before. Since the oil price shocks in the 1970s there has been a shift in the economic policy regime in many countries which has meant that low, stable inflation has become one of the central targets of economic policy. | It is therefore also difficult to judge how productivity will develop in the period ahead. Our assessment has been that the robust productivity partly reflects longer-term changes but that it is also due to the economic situation, and is thereby partly of a more transitory nature. We examine this assessment regularly, of course. In order to judge how demand in the economy will affect future inflation it is important to have a good picture of resource utilisation. There is no exact measure of this, however. In the latest Inflation Report, the assessment was that total resource utilisation in the economy was still relatively low but that it would rise gradually and in 2006 reach levels at which it no longer would restrain price and wage increases. New data from the National Institute of Economic Research, for example, suggest that resource utilisation is still relatively low, even though all indicators are not completely in accord. The indicators based on labour market conditions point consistently to low resource utilisation. The somewhat stronger GDP growth that there is now reason to expect suggests, however, that the idle resources will be employed at a somewhat faster rate than forecast both in May and August. House prices and debt levels One issue that is of importance to the Riksbank for several reasons is household indebtedness and developments in residential property prices. The Riksbank is required to maintain price stability. In addition the Bank is required to promote an efficient, stable payment system. | 1 |
Davies, R, Haldane, A, Nielsen, M, and Pezzini, S (2014), “Measuring the costs of shorttermism”, Journal of Financial Stability Vol 12 Pages 16–25. DeLong, B (1998), “Estimates of World GDP, One Million BC to Present”, available at: http://delong.typepad.com/print/20061012_LRWGDP.pdf. Eichengreen, B (2014), “Secular stagnation: A review of the issues”, in VoxEU (2014). Eisner, M (2003), “Long-Term Historical Trends in Violent Crime”, Crime and Justice Vol 30 Pages 83–142. Fernald, J and Jones, C (2014), “The future of US economic growth”, Federal Reserve Bank of San Francisco Working Paper Series, available at: http://www.frbsf.org/economicresearch/files/wp2014–02.pdf. Frey, C and Osbourne, M (2013), “The future of employment: how susceptible are jobs to computerisation?”, Oxford Martin, available at: http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf. Gordon, R (2012), “Is US Economic Growth Over? Faltering innovation confronts the six headwinds”, NBER Working Paper 18315, available at: http://www.nber.org/papers/w18315.pdf. Gordon, R (2014), “The turtle’s progress: secular stagnation meets the headwinds”, in VoxEU (2014). Haldane, A (2014), “Twin Peaks”, Speech given at the Kenilworth Chamber of Trade Business Breakfast, available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech764.pdf. Hansen, A (1939), “Progress and Declining Population Growth”, The American Economic Review Vol XXIX No 1. Hansson, I and Stuart, C (1990), “Malthusian Selection of Preferences”, The American Economic Review Vol 80 No 3. Heim, C and Mirowski, P (1987), “Interest rates and crowding-out during Britain’s industrial revolution”, Journal of Economic History Vol 47 Pages 117–139. Hills, S, Thomas, R and Dimsdale, N (2010), “The UK recession in context – what do three centuries of data tell us?”, Bank of England Quarterly Bulletin 2010 Q4. | Some growth epochs have seen secular stagnation, others secular innovation. Understanding the 1 Stiglitz, Sen and Fitoussi (2009). 2 Measured at purchasing power parity exchange rates and, for the moment, not on a per capita basis. 3 Summers (2014), Vox-EU (2014). 4 Hansen (1938). 5 For example, Gordon (2012, 2014), Summers (2014), Cowan (2014). 6 For example, Brynjolfsson and McAfee (2014), Mokyr (2014), Arthur (2011). BIS central bankers’ speeches 1 determinants of these growth phases – sociological and technological – provides insight into the forces of secular stagnation and innovation operating today.7 What follows is a cocktail of economics, history, sociology and psychology. For those seeking a common denominator, it is sitting between your ears. Psychologist Daniel Kahneman says the brain has two ways of thinking (fast and slow). 8 The same may be true, and for many of the same reasons, when understanding growth (fast and slow). The short history of growth Let me start with the short history of growth. This is shown in Chart 1 which plots (log) world GDP per capita back to 1750, the dawn of the Industrial Revolution. Save for wars, it suggests a straight-line growth path over the past 250 years or so, averaging 1.5% per year. That means each generation has been around a third better off than its predecessor. Growth has driven secular rises in living standards, generation by generation. While steady, growth has not been constant. | 1 |
In the domestic context, the LOLR ensures that neither the managers nor the equity holders of the institution receiving support are allowed to benefit. Internationally, it is not easy for the IMF to penalise those responsible for management of the economy, nor to distinguish between those citizens that have been responsible for excessive risk-taking and those who will be the innocent victims of the consequences of a financial crisis. It is the ordinary taxpayers in emerging market countries who will have to bear the burden of servicing loans from the IMF.5 4 Fischer, S (1999), “On the Need for an International Lender of Last Resort”, IMF. 5 A point stressed by Calomiris (“The IMF’s Imprudent Role as Lender of Last Resort”, Cato Journal, Vol. 17 No. 3 1998) although he underestimates, in my view, the possibility of liquidity runs as seen, for example, in Korea in 1997. BIS Review 95/1999 4 Absent a world government, it is difficult to see a credible ILOLR on the horizon. The reason is the simple maxim: “it’s the politics, stupid”. The second purist solution, at the opposite end of the spectrum, is the imposition of permanent capital controls. In other words, a return to the world in which the Bretton Woods institutions were created half a century ago. The advantage of capital controls is that they prevent the liquidity runs that result from currency and maturity mismatch of the financial sector. India did not experience a financial crisis, Korea did. | If we cannot find a way to reconcile free movement of capital with prevention of financial crises, then many countries may draw the lesson that they are better off with capital controls – either explicit or implicit – than without. Over the past decade, the two-year swing in the current account among G7 countries has been of the order of 1-2% of GDP. The largest swing was less than 4% (3.7% for Italy over the period 1992-94). These are small compared with the swing of 17% for Korea, in 1996-98. 1 Stiglitz, J E, Financial Times, 25 March 1998. 2 Sakakibara, E (1999), “Reform of the International Financial System”, speech to the Manila Framework Meeting in Melbourne on 26 March 1999. BIS Review 95/1999 2 Two dimensions of the reversal of capital flows have been evident in recent experience. First, their intensity and scale. Second, the rapid contagion from one emerging market to other previously unaffected countries. Both phenomena are a product of the nature of the capital flows concerned. The problems arise from short-term flows of debt finance, not long-term equity flows or direct investment. Equity investment has a self-stabilising mechanism. When an investor wishes to withdraw from the equity market he or she has to find a buyer before they can head for the exit. The market price adjusts in order to attract a buyer to replace the seller. The physical investments financed by equity flows remain in place, even if their value on the market has fallen. | 1 |
Clearly, at the international level, this now seems to be out of reach, but one could ask whether at least in the EU such an arrangement might be feasible sometime in the future. If ever put in place, an EU-level resolution authority could act as a resolution authority responsible for all the major cross-border banks of the EU, working together with national authorities as its agents, operating on the basis of a single crisis management, resolution and insolvency framework for EU banks. In the field of prudential regulation, something similar is already happening, since the new Basel rules will partly take the form of an EU regulation, thereby eliminating the room for national differences in transposition. In the future, the Single Rulebook could ultimately be one that also covers the crisis management, resolution and insolvency of banks. If we continue to unfold this vision, there would also be a need for robust arrangements to finance the measures of such an authority. An obvious option for that purpose would be an EU-level fund of resolution funds, or a single EU resolution fund. The benefits of such an integrated regime are most easily seen if we imagine how resolution under a loose cooperation framework would work. A previous mapping exercise by the ECB identified more than 40 banking groups with significant cross-border activities which were headquartered in the EU. Notably, 17 of them had a presence in at least ten Member States. | Second, a forward-looking element of the new framework is the concept of intra-group financial support, which could reduce the current legal uncertainty that surrounds asset transferability within groups. In today’s regulatory environment, group liquidity management may in some cases be suboptimal, making the survival of a group more difficult as a result of – for instance – supervisory ring-fencing measures. At the same time, some of these restrictions are in fact justified, since they serve to protect domestic creditors and shareholders from unfavourable transfers. This implies that the conditions for intra-group loans, guarantees and transfers of assets for collateral could be set out in group financial support agreements between parent banks and bank subsidiaries. However, progress in this area is extremely challenging, since group interest is not a well-defined legal concept, while national laws focus on protecting local creditors. Here I think the critical issue is whether we manage to include adequate safeguards in the framework to ensure that the financial stability of the transferring country is not exposed to undue risk as a result of the support provided according to the agreement. This means that host countries supervisors have to be involved in any solution implementation. Third, I also consider the involvement of the European Banking Authority (EBA) as a very promising element of the EU plans. The EBA could play two equally important roles in the future regime. As a standard-setter, the EBA drafts binding technical standards and nonbinding guidelines. | 1 |
The banking system profitability, which is estimated through return on assets and return on equity, is positive but lower than a year earlier, whereas the effectiveness indicator is higher. As at end-2011, the capital adequacy ratio of the banking system was about 15.6%, being higher than in 2010 and significantly higher than the 12 % minimum regulatory requirement. Supervision During 2011, the supervision of banks and non-bank financial institutions was strengthened in accordance with international standards and dynamic requirements that the financial situation in European market has brought about. On-site examinations aimed at a complete evaluation of institutions’ risk profile, followed by examinations initiated from appearance of specific issues at licensed institutions. Overall, the system operated in accordance with the requirements of the legal and regulatory framework. Year 2011 recorded the finalisation of a number of new regulations and amendments to some other banking supervision regulations, aiming at alignment with Basel Committee standards, European Union directives and best practices on banking regulation and supervision. I would highlight here, regulations on: credit risk, liquidity and operational risk management; enhancement of financial institutions’ transparency to their clients; and, expansion, diversification and well functioning of business processes of financial institutions. In order to address the liquidity risk, at end-2011, some regulatory amendments were made, including re-definition of liquid assets, increase in the minimum regulatory threshold liquid assets to short-term liabilities ratio to 25%, and the start of implementation of two separate limits for the indicator in the national currency and in foreign currency at the minimum level of 20%. | During 2011, seminars and round-tables were organised, aiming at training and sharing scientific novelties among economists at local and international level, thus making the Bank of Albania a point of reference for researchers of economics and finance. The main focus of Bank of Albania’s research papers was on issues pertaining to: financial stability, monetary policy, fiscal policy, regional integration and trade relations, study of uncertainties arising from estimation of econometric models, etc. At the same time, with the assistance of foreign experts, we worked for constructing and improving macroeconomic and statistical models, on the basis of which the Bank of Albania builds its projections for macroeconomic and financial indicators. Improving communication with the public Establishment of transparent and productive relations with the public is an integral part of Bank of Albania’s development strategy. The conduct of activities for financial education of the public was a priority of the communication strategy in 2011. In order to achieve Bank of Albania’s objectives in this area, we carried out a number of educational activities in 2011. Among them, we would highlight the project for integrating the financial education into high-school curricula in Albania. A working group with Bank of Albania’s experts, assisted by experts of curricula from the Institute for Educational Development, worked for compiling the curricula and preparing the text in the form of a free-choice module, which was incorporated into the high-school curricula for the first time in the 2011/2012 academic year. | 1 |
In addition, some member jurisdictions will continue to receive responses through their national rule-making processes up until late autumn of this year, during which time we anticipate hearing additional thoughts. What are some of the themes emerging from the public’s reactions? Certainly the complexity of the proposals continues to draw your attention. This is a matter we have discussed in the past and is a valid concern. It is important to remember that much of the complexity in the proposals stems from the concerns raised by banks earlier in the process. Throughout the process, various banks have requested that the Committee offer flexibility and a range of approaches to evaluate the particular risks and profiles of various businesses and specialisations. Indeed, one needs only to read a handful of the letters on our website to discover that some recommendations from the industry would tend to increase further the degree of complexity of the Accord. Nonetheless, the Committee is aware that it is easier to enforce a simpler rule than a complicated one. We have long sought ways to simplify those rules thought most complicated. Those efforts will continue. Another theme noted in the comments concerns the need to maintain a level playing field – or, at least, to avoid “unleveling” the playing field further. The Committee is very conscious of this matter, and I will say something about our efforts in this respect a little later. | By promoting a more consistent approach to supervisory review, we intend to strengthen the quality of supervision across countries. We recognise as well the special function the Committee can offer in strengthening the ability of host supervisors – particularly those in emerging market economies – to regulate the local operations of foreign banks. Harmonisation of accounting standards and the New Basel Accord Supervisory review helps to create very direct incentives for banks to evaluate and manage their risks carefully. Transparency can supplement that incentive by leveraging the power of financial markets to encourage prudent risk-taking, and I would like now to address the third pillar of the New Accord, namely market discipline. Even just over the past few months, the popular press has reported on several examples of corporations that failed to disclose adequately the kinds of activities in which they were involved and the degree to which they bore risk. Both inside and outside the banking industry, the renewed focus on sound corporate governance practices has highlighted the importance of appropriate disclosure to the market – and the dangers that ensue when companies fail to disclose their risks adequately. These failures in disclosure have added fuel to the drive to harmonise accounting and disclosure practices worldwide. With reference to the New Accord, many respondents quite correctly noted the need to align the supervisory framework more closely with the converging accounting practices worldwide. | 1 |
Second, the speed and intensity of normalisation has been a prudential process, guided by the new information and harmonised with the fiscal policy direction, as well as with developments in the financial market. In this view, I would like to highlight that the reaction of our monetary policy has been - on one hand sufficiently strong to guarantee the return of inflation to the target, within a reasonable time horizon, and - on the other hand – sufficiently gradual, in order to have the least possible impact on both economic activity and financial stability. In addition, I would also like to emphasise, that the normalisation speed in Albania has been lower than that implemented by our trading partners, due to the fact that fiscal policy has followed a consolidating trend throughout 2022, while the strengthening of the exchange rate has restrained the imported inflationary pressures pass-through to the domestic market. In absence of these factors, the increase in interest rate would have been faster and more aggressive, with negative consequences on both consumption and investments of private sector. Third, the monetary policy, even in presence of normalisation, continues to retain the overall accommodative stance for the growth of consumption and investments. Nevertheless, it provides better financial conditions for a more balanced performance of demand and aggregate supply in economy in the future. The monetary policy has been transmitted smoothly across financial markets. | The aim of the CBRT’s road map is to improve the resiliency of the economy to external shocks through (i) maturity lengthening – encouraging banks to shift their non-core liabilities from short-term to long-term (Figure 17); (ii) providing incentives to banks for borrowing and lending BIS central bankers’ speeches 7 directly from and to the Central Bank in times when foreign players are reluctant to engage with banks in Turkey due to heightened volatility in global markets; (iii) bolstering safety-nets – making sure that the banking sector has access to adequate foreign exchange liquidity in times of market stress; (iv) supporting financial stability – providing incentives to banks to improve loan to deposit ratios; and (v) simplifying the monetary policy framework to improve the communication of the monetary policy stance. All but the interest rate corridor simplification step on the roadmap have already been taken and the focus is now firmly on fine-tuning their parameters. Overall, these measures ease the policy tradeoffs posed by the excessive volatility in cross border flows, enabling the interest rate policy to concentrate on the primary objective of price stability. So far the financial market performance of Turkey suggests that the measures undertaken since August 2015 have helped Turkey outperform many peer EMEs. Of course, on the way, Turkey also enjoyed the benefits of lower oil prices relatively more than many EMEs and reduced political uncertainty after the general election result in November 2015. | 0 |
As banks develop new methods of evaluating capital adequacy, we can consider whether these approaches provide new tools for assessing capital adequacy from a supervisory perspective. The second area is transparency. The challenge of understanding the impact of changes in the financial system on banks and financial markets should add impetus to our efforts to increase transparency in the financial markets. As understanding the nature of the borrower and its risks becomes more complex, the demand for better and more timely information is increasing. Moreover, we supervisors have a special interest in putting good information in the hands of investors, lenders and counterparties, and that is the powerful assistance that market discipline can provide supervisors. We have seen how a bank’s equity price, its funding spreads and its access to markets can provide feedback on the bank’s prospects, and how these market signals can be a decisive factor in motivating management to address problems. We also have seen through current events how the absence of sufficient information can mask critical weakness in the corporate and banking sectors, leading initially to an over-optimism that is followed by excessive risk aversion. The Basle Committee has created two working groups, the Transparency Subgroup, led by Susan Krause of the Office of the Comptroller of the Currency, and the Accounting Task Force, led by Nick LePan, of the Office of Supervision of Financial Institutions in Canada, to suggest ways in which banks, bank supervisors, the accounting community and others can further transparency. | Preventing Financial Problems The market disturbances of the past 18 months have focused a great deal of attention on the need for greater transparency and for increased attention to corporate governance, legal and accounting matters, without diminishing the traditional supervisory focus on credit, liquidity and capital. Recent events suggest that we are seeing new ways in which the links between credit and liquidity are increased in the financial system. Wider credit spreads in virtually all actively traded financial markets, accompanied by declines in liquidity in many markets, signal us that credit concerns are rising in the financial system. We, as supervisors, must interpret and respond to those signals, often in shorter time frames than we are comfortable with, and often in concert with a high level of market volatility. One anomaly is that these issues arise in the face of apparently genuine improvements in liquidity in the high-yield bond, syndicated loan, and emerging markets that we have seen at various times since the early 1990s. Four questions about the current developments appear to offer well-defined avenues which supervisors can pursue. First, are current market conditions signaling a loss of confidence in prior credit judgments, perhaps in response to the growing awareness of how capital markets instruments, especially derivatives, can transform the risk profile of customers and counterparties? | 1 |
He urged writers to “throw away anything that is false, no matter how much he might love that page or paragraph”. In a similar vein, Malaysia’s microfinance journey has been one of trial and error, as we continuously strived to increase the social and economic impact of microfinance, sometimes working against the tide of popular thinking. This has led to a more nuanced approach to the development of microfinance over time, and an ongoing process of rethinking norms which we may take for granted today. Today, I would like to talk about three perspectives that have shaped the way we approach and implement microfinance in Malaysia. First, technology when used in a clever way, can be of great use. While technological advancements hold great promise for expanding access to financial services for the poor, we need to invest time and resources to understand the factors that affect the poor, and the suitable approach to generate income and create wealth. These insights are what will determine whether technology is central or peripheral to the inclusion agenda. Second, the tradeoffs between financial stability and inclusion requires smart management. A microfinance strategy that focuses largely or wholly on providing credit to the unserved is almost destined to fail, potentially leaving communities worse off from excessive debt burdens. Instead, implementation strategies should ensure that the provision of credit are complemented by the necessary safeguards and financial education. | Third, successful microfinance programs are fundamentally compatible with sound commercial and management principles and practice, and normally have two things in common; an obsessive focus on operational innovations and the ability to create powerful synergies. We have built on these premises to continuously adapt, amplify and align our approach. This year, we have embarked on an initiative, working with the Credit Guarantee Corporation in Malaysia, to develop behavioral insights that will enable microfinance providers to integrate business and technological strategies that best serve the poor. The initiative will leverage on analytics to identify drivers of borrower behavior, and expand the use of psychometric tools by financial providers to develop financial solutions that are more responsive to the needs and circumstances of micro borrowers. A deeper understanding of borrower behaviors also provides a solid foundation for executing successful operational strategies. In fact, operational innovations – even those that represent small adjustments to existing processes – can have a far more important impact on smart design than a costly, hi-tech re-tooling of financial services. Our experience in Malaysia suggests that simple changes in application procedures and faster processing times have encouraged a higher take-up of microfinance. Flexible repayment schedules have also enabled borrowers to better manage irregular cashflows while continuing to meet their repayment commitments. Repayment reminders, delivered in ways that are relatable 2/4 BIS central bankers' speeches to the poor (for example, “your repayment can help your friend in need”), can help keep repayments current. | 1 |
This can have implications for the macroeconomy and for financial markets. As a central bank, we must adapt to the economic effects of climate change. In Norges Bank, climate risk has long been on the agenda in the management of the GPFG. For the rest of the Bank, this field of work is a more recent addition. There is still a great deal we do not know about the economic and financial consequences of climate change. That is why we are working with other central banks to build up expertise in this field. Our aim is to play a role in strengthening the resilience of the Norwegian economy to the challenges posed by climate change and climate risk. Thank you for your attention. 1 Parker, M. (2018): “The Impact of Disasters on Inflation”. Economics of Disasters and Climate Change, Volume 2, Issue 1, April, pp. 21–48. 2 Regional Network 3/2019. Norges Bank. 3 Skånland, H. (1989): “Refleksjoner ved utgangen av 1980-årene” [Reflections at the end of the 1980s]. Speech on 23 August 1989. Norges Bank. 4 Carney, M. (2019): “Remarks given during the UN Secretary General’s Climate Action Summit 2019”. Speech on 23 September 2019. Bank of England. 5 United Nations Office for Disaster Risk Reduction and Centre for Research on the Epidemiology of Disasters (CRED) (2019): “2018: Extreme weather events affected 60 million people”. Press release, 24 January 2019. 7/7 BIS central bankers' speeches | Yves Mersch: Translating a shared vision into a winning story Closing remarks by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at the T2S Launch Celebration, Milan, 2 July 2015. * * * We chose to call this T2S launch celebration “Translating a shared vision into a winning story”. Listening to the speakers for the past two hours I believe the name was just right. We have heard how the T2S Community transformed the shared vision of an integrated securities settlement landscape into a winning story, culminating in the launch of T2S on 22 June. Stimulating views have been shared tonight and I would like to thank the speakers for presenting their perspectives on the capital markets union. It is evident that T2S, post-trade harmonisation and the CSD Regulation are among the elements that will be pushing this agenda forward. Looking around the room I am happy to see so many familiar faces. Faces of people who have been part of the project since the idea of T2S was born in 2006. The journey over the past nine years has been an inspiring one. There have been some bumps in the road, some twists and turns, but with the launch of T2S we have achieved a monumental milestone. We made the vision of a single securities settlement platform for Europe a reality. | 0 |
a) Credit Risk Financial crises have traditionally arisen where the solvency of one or more institutions either crumbles, or is perceived to be in danger of doing so, in a way that threatens the financial system. So we need to focus on credit concentrations, credit aspects of prudential standards, credit pricing and terms etc. We need data and intelligence to do that. Understanding credit conditions and vulnerabilities is quite well developed territory. But new threats have arisen, particularly from sophisticated credit transfer instruments. This is a tricky and opaque arena. It is hard to know where concentrations of credit risk actually reside and even where credit risk ends and market risk begins. In addition there is the increasing range of participants who are also taking on credit risk. Of course in addition to this we can – and do – think about credit risk standards like Basel II. We focus on the systemic aspects of prudential design since in the UK FSA focuses on supervisory issues. b) Market and Liquidity Risk As the global capital market has expanded on the back of securitisation and derivatives increasing vulnerabilities arise. Change has been so rapid and development so fast that it has been hard for any of us to keep up. Given the multitude of new instruments and new markets that have appeared and the resulting increase in risk, this is a significant area of work for us. | And it means we have to understand the dynamics and interrelationships of markets; how new products work; and the possible behaviour patterns of intermediaries, investors, and borrowers. Above all we need to be focused on where major risks are most likely to emerge and the market dynamics if those risks start to crystallise. And we need to distinguish those which are systemic from a myriad of fascinating developments, many of which are just “noise” but which could otherwise distract us. b) Risk Reduction: Oversight of Payment Systems The second area where we, and typically other central banks, are required to perform is oversight of payment systems. Payment systems facilitate economic transactions of goods, services and financial assets and are an essential component of a well functioning financial system. So reduction of risks in these systems, for example through the introduction of our Real Time Gross Settlement system, is clearly a priority from a systemic perspective. c) Provision of Liquidity and Preparation for a Financial Crisis And thirdly the MoU stipulates that we need to be in a position to inject liquidity at all times. This means that we must be able to provide liquidity in normal times, as well as in times of stress or crisis. This puts an increased onus on well developed and tested crisis management plans, and a particular focus on ensuring that we are able to undertake a range of official financial operations in exceptional circumstances. 4. | 1 |
14 BIS Review 130/2009 For example, in the latest World Bank's Doing Business in 2010, Malaysia ranks first in the category of ease of getting credit. Baele, L, A Ferrando, P Hordahl, E Krylova and C Monnet, 2004, "Measuring Financial Integration in the Euro Area", ECB Occasional Papers, No. 14, April. Centre for Economic Policy Research (CEPR), 1999, "Financial Integration and Asset Returns", Discussion Paper No. 2282, November. International Monetary Fund (IMF), 2002, "Chapter 3: Trade and Financial Integration", World Economic Outlook: Trade and Finance, September. EMEAP Task Force Report on Regional Financial Cooperation in Asia (2006). BIS Review 130/2009 15 | The result is that scarce resources are stolen in these schemes and the general population pays the price. Sadly, we have seen too many examples of this type of behavior. But banks in the United States are on notice. They are aware of their obligation to look for transactions that support corruption schemes, often involving agents and consultants receiving payments on large infrastructure projects. All too often these intermediaries are the conduit for kickbacks. 1/3 BIS central bankers' speeches The schemes to provide the bribes can be simple or complicated: cash payments; free family vacations; payments for personal credit card bills; payments to friends, spouses or significant others for non-existent services; payments to shell companies controlled by the government official; free cars or housing, or the rental or sales of these assets at below market values. The list goes on. Some clear examples of this type of egregious behavior include: 1MDB in which billions in debt guaranteed by the government of Malaysia was illegally siphoned off by criminal actors and corrupt government officials so that the country was left without the promised infrastructure. This was a brazen scheme carried out by corrupt government officials in multiple countries and was supported by corrupt bankers. In response, the U.S. and governments across the globe took strong action against the individuals and financial institutions involved and helped recover billions of dollars to offset losses from the scheme. | 0 |
Concluding remarks Let me conclude with a few reflections on the general issue of this talk, namely monetary policy and Basel II. I have tried to highlight those distinctive features of the revised capital framework which, in my opinion, are more likely to exert some influence on the terrain in which central bankers design and implement their monetary policies. Only the passage of time will reveal the consequences of the most ambitious bank-capital regulatory framework ever envisaged at a multinational level for the conduct of monetary policy. Still, I feel we can lay hands on some basic, but valuable, equipment for performing this jump into the future by looking at the past. So far, I have drawn on some important lessons imparted by past monetary and financial episodes and experiences. Let me now draw on one further lesson. The enormous success of monetary policy in bringing us the benefits of low and stable inflation could have hardly been possible without a preliminary diagnosis of the causes of high inflation and its effects on welfare, including an assessment of what the objectives of monetary policy should be, their relative importance over different horizons, and a comprehensive analysis of the best institutional framework and the instruments required. | Financial market participants pay considerable attention to the monetary policy decisions made by central banks, for these are, in a broad sense, the “guardians” of liquidity. Excessively expensive liquidity is likely to result in a suboptimal volume of investment and, in turn, in an inefficient under-use of society’s productive resources. Likewise, when monetary conditions are excessively lax, some liquidity may be directed to financing projects with poor returns. If this situation prevails for some time, inflation arises, the average productivity of investment declines, asset prices deviate from their normal or fundamental values and the economy as a whole loses its ability to maintain a sustained growth path. When deciding on monetary conditions, central banks must understand the mechanisms underlying the workings of the economy in order to react to potential dangers and opportunities in due manner and course. No diagnosis could ever be complete without a careful analysis of how the entire circulatory system is behaving. From that standpoint, central banks can then be thought as of being the heart, initially controlling the price of the transactions conducted in the money market. Commercial banks would naturally fit into this analogy as the veins and arteries, for they have the last word on the destination of the funds they are being endowed with, a decision that pertains greatly to the sphere of banks’ credit management. | 1 |
This momentum has an important meaning: supervisors and central bankers have collectively acknowledged that climate change-related risks are a source of long-term financial risk. In April 2019, the NGFS published its first comprehensive report issuing four recommendations for central banks and supervisors, and two additional recommendations for policy makers. Looking down the road, I see three priorities for the near future. First, we will require enhanced disclosures that need to be built on sound taxonomies. The taxonomy framework published by the Technical Expert Group (TEG) on Sustainable Finance of the European Commission on 18 June is a welcome step. Second, we have to better anticipate long-term climate-related risks, through what I call “the video of the risks”. We must push for the development of comprehensive climate stress tests in order to build a forward-looking approach of the impacts of climate risks. Third, green finance needs to mature and upgrade its professional standards. The financing needs for the energy transition are huge; in Europe alone, it is estimated that an additional EUR 177 billion per year will be necessary over the period 2021-2030 to reach the EU’s energy and climate objectives for 2030.3 The European Green Bond Standard proposed by the TEG should ultimately help to further develop the green bond market and channel more investments towards green projects. Furthermore, many proposals have been made to allow monetary policy to play a direct and sector-focused role in financing the transition to a low-carbon economy. | On our side of the Channel, our collective response to Brexit may possibly be a further integration of Europe, with the new and promising Commission led by Ursula von der Leyen, rather than isolationism or paralysis. Europe should build on its most valuable assets: the euro, which is celebrating its 20th anniversary this year, the single market and its shared social and environmental model. II. Making the digital leap with lucidity Let me now turn to our shared common challenges. Digitalisation is shaking up the way we live and consume, opening up a world of possibilities for corporates and customers alike. Worldwide, it clearly represents both an opportunity and a challenge for banks, as well as for supervisors. New players are becoming increasingly important. Fintechs do not have the capital resources to disrupt incumbent banks and can even be acquired by them. By contrast, Bigtechs do have the potential to fundamentally redefine financial intermediation: they have strong brand recognition, a 1/4 BIS central bankers' speeches worldwide customer base and privileged access to cutting-edge technologies. This new situation is a major challenge for regulators and supervisors. Of course, financial regulation should remain technologically neutral: the basic principle “same activity, same rules” must apply. This is a good thing for the level playing field. However, beyond traditional financial regulation, international cooperation should be developed in four areas, four cornerstones of the regulation of digital finance. First, cybersecurity is a sine qua non for a reliable and sustainable digital future. | 1 |
Given this scenario, the enhancement of the income from services by promoting the services sector would definitely help the country to have a stable balance of payments position. What should the country do to attain the goal of having a vibrant and efficient services sector? First of all, it should invest heavily in infrastructure so as to facilitate the production of services. In this connection, the proposed international airport and the port in Hambantota and the attendant roadnetwork would make a significant contribution to facilitate the promotion of global services. But the country should not stop there. As a top-most priority, the road network should be improved to be on par with global standards. Roads would create access to markets and reduce transaction costs. Since the services, like the visibles, should be produced at the cheapest costs to attract global customers, the maintenance of efficiency at all levels of the economy is a must. For this purpose, the country need be wired electronically covered by a reliable road network. The most important requirement for a sustainable services sector is the continuation of the development and supply of the needed human resources. The plan made by Singapore at the turn of the new millennium in this regard is a guidance for other countries. The Singaporean Ministry of Education is reported to have instructed, in 1999, all the tertiary educational institutions and universities to concentrate on courses on genetic engineering, ICT, nano-technology and entertainment so as to provide the skilled human resources needed for the future. | The first day of our seminar is dedicated to this topic. The second day of the seminar targets mainly the corporate sector. The Small and Medium Enterprises’ access to finance is also important for financial stability. Small and Medium Enterprises constitute the overwhelming majority (99 percent) of businesses at European level, with important contributions both in terms of value added generated by non-financial corporations (57 percent) and employment (67 percent). Increasing access to finance in this sector is among the EU priorities. It is also 3 true that this portfolio accounted for the highest post-crisis NPL ratio in the European Union. At its peak, the average NPL ratio for Small and Medium Enterprises reached around 20 percent at European Union level. In Romania, the ratio was 35 percent, while the NPL ratio for microenterprises accounted for 53 percent. Therefore, the same lesson learnt from the household sector also applies here: the Small and Medium Enterpises’ financial inclusion should unfold in a sustainable way. On the other hand, the experience with macroprudential instruments for companies is extremely limited at the European level. For example, France has recently implemented a measure focusing on highly indebted firms, but it applies only to large companies. Therefore, I think that deepening this area of research is very useful for macroprudential policymakers. In Romania we have also tried to come up with solutions that might improve Small and Medium Enterprises’ financial inclusion. | 0 |
For recent programs, this maturity distribution has been announced at the outset, and a schedule of upcoming operations is released at the end of each month.17 Such transparency is possible because, unlike the agency MBS market, the composition of Treasury coupon securities available for purchase is reasonably predictable. The current monthly pace of Treasury purchases is within the range seen during the Federal Reserve’s previous asset purchase programs, whether measured in par terms or when adjusted for duration risk. Current SOMA holdings are less than 20 percent of coupon Treasuries outstanding, and our purchases make up only about 25 percent of monthly gross 14 For example, in January, the Desk decreased its purchases of 30-year fixed-rate 3.5 percent coupon agency MBS relative to projected gross issuance as a result of concerns about the near-term availability of this coupon for settlement and increased its purchases of 3 percent coupon agency MBS. 15 The Desk could also purchase from the stock of securities that trade as specialized pools, although such purchases may involve different efficacy and cost considerations. 16 For example, the percentage of securities issued outside of the TBA market has recently been higher due to programs like the Home Affordable Refinance Program (HARP). MBS backed by loans refinanced through HARP have lower prepayment risk than other MBS, because borrowers can only use the program once, and consequently are not typically issued in the TBA market. | 22 See TMPG Best Practices for Treasury, Agency Debt, and Agency Mortgage-Backed Securities Markets. 23 Selling dollar rolls when concerns arise about the availability of certain TBA contracts is conceptually similar to making SOMA Treasury holdings available to the market through our securities lending program. One key difference is that the Desk offers settled Treasury holdings to the market through its securities lending program, whereas the Desk only rolls unsettled MBS holdings. 8 BIS central bankers’ speeches Fuster, Andreas, Laurie Goodman, David Lucca, Laurel Madar, Linsey Molloy, and Paul Willen. 2012. “The Rising Gap Between Primary and Secondary Mortgage Rates.” Paper presented at the The Spread between Primary and Secondary Mortgage Rates: Recent Trends and Prospects conference, held at the Federal Reserve Bank of New York, December 3. Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack. 2010. “Large-Scale Asset Purchases by the Federal Reserve: Did They Work?“ Federal Reserve Bank of New York Staff Reports, no. 441, March. Hancock, Diana, and Wayne Passmore. 2011. “Did the Federal Reserve’s MBS Purchase Program Lower Mortgage Rates?“ Journal of Monetary Economics, Vol. 58 (July): 498–514. Krishnamurthy, Arvind, and Annette Vissing-Jorgensen. 2011. “The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy.“ Brookings Papers on Economic Activity, no. 2: 215–65. Li, Canlin, and Min Wei. 2012. “Term Structure Modelling with Supply Factors and the Federal Reserve’s Large Scale Asset Purchase Programs.“ Finance and Economics Discussion Series 2012–37. Washington: Board of Governors of the Federal Reserve System, May. Rich, Robert and Joseph Tracy. | 1 |
Given the fact that the policy rate is an inadequate tool to deal with overleverage, excessive risk taking, or apparent deviations of asset prices from fundamentals, there are other instruments at the policymaker’s disposal: countercyclical regulatory tools. Thus, if leverage appears excessive, regulatory capital ratios can be increased; if liquidity appears too low, regulatory liquidity ratios can be introduced and, if needed, increased; to dampen housing prices, loan-to-value ratios can be decreased; to limit stock price increases, margin requirements can be increased. As I said earlier, the NBR has always had to juggle the “three aspects of stability” and that called for the deployment of alternative instruments, such as the full use of the reserve requirement ratios and recourse to administrative measures. Reserve requirement ratios were increased up to 20 and 40 percent for lei- and forex-denominated liabilities respectively, and the list of administrative measures included: enforcing a maximum loan-to-value ratio, introducing debt service ceilings relative to households’ monthly disposable income, setting limits on banks’ forex exposure vis-à-vis unhedged borrowers, using differentiated coefficients in stress tests (higher for exposures to EUR than lei, with even stricter coefficients for CHF- and USD-denominated credit). Even though at the time our modus operandi was seen as deviating from the orthodoxy of central banking, during the global crisis or in its aftermath, macroprudential instruments are now part of the mainstream and forex interventions re-entered the arsenal of many central banks, including some of those using a free floating regime before the crisis. | It is expected, however, that central banks will make more explicit their concern for all the “three aspects of stability” in their policy decisions, realising that price stability and financial stability are much more intertwined than we used to think. I believe this development has farther-reaching consequences when it comes to the future of central banking. I can easily imagine, some years down the road, a more “normal” world in which unconventional monetary policy tools are a thing of the past, since their relevance is ultimately circumstantial, but I cannot imagine a future where the explicit concern for financial stability and the macroprudential policy are not central banking fixtures. To be frank, the NBR has never had the luxury of being concerned exclusively with price stability and interest rate setting in the belief that financial stability and exchange rate stability will follow. In a world with freely moving capital, the idea of being able to manage aggregate demand exclusively via interest rates would have been an illusion: the interest rate hikes required to manage aggregate demand and anchor expectations would have entailed further capital inflows and an unsustainable nominal appreciation, thus boosting foreign currency lending and creating vulnerabilities on the financial stability front. That is why, when introducing inflation targeting in 2005, the NBR opted for the “light” version of the strategy, which meant retaining the managed float feature of the exchange rate regime. | 1 |
For example, the industry had previously criticised the differences in the treatment of banks that originate and hold rated securitisation tranches versus banks that invest in the same exposures. The Committee will eliminate this difference. Instead, it will treat all rated exposures to securitisation structures in the same manner, regardless of whether they are held by an investing or an originating bank. This will furthermore streamline the proposals. Likewise, the Committee is introducing an internal-assessment approach for determining capital charges against exposures to certain low-risk unrated securitisation positions. Under the new treatment, banks will be allowed to derive the risk weights for unrated exposures to asset-backed commercial paper conduits (mainly liquidity facilities) by mapping their internal risk assessments to external credit ratings. This simplifies the rules by allowing qualifying banks to rely on existing processes and, at the same time, incorporates best practices into the securitisation framework. Other simplifications and improvements include the introduction of greater flexibility in calculating the capital charges on certain pools of assets that may underlie a securitisation transaction and the review of the calibration of the securitisation RBA risk weights to ensure a closer alignment with the level of risk inherent in the positions. Based on the positive initial reactions that we and our member agencies have received from the industry to date, the Committee is confident that the revisions will help to clarify and simplify the treatment of securitisation exposures. | The essence of Basel II is not just the set of rules and formulas to calculate regulatory capital, these are necessary and very important but, in my view, the heart of 6 BIS Review 12/2004 Basel II is the incentives for banks and risk management professionals to advance risk management and the recognition of this progress. Studying and understanding the drivers of credit, market, and operational risk, and probing the relationships between them, will help all of us to get a better sense of the risks and rewards we face today, and how well we are prepared to navigate changes in the landscape of opportunity and challenge tomorrow. Improving our understanding of risk, and strengthening our ability to manage it, offers the promise not just of better administered banks, but more importantly the promise of a more stable financial system one that is better able to serve as a source of credit and sustainable growth for businesses and consumers alike. Thank you again for welcoming me to this conference, and I offer my best wishes for an enjoyable and educational event. BIS Review 12/2004 7 | 1 |
Earlier this month we published a Supervisory Statement and Policy Statement3 that together set out our expectations for banks and insurers regarding their governance, risk management, strategic resilience and disclosure of climate-related financial risks. To support the capacity building and the development of best practice, the PRA has just established the Climate Financial Risk Forum to work with firms from across the financial system. The Bank of England is also working with central bank and supervisory colleagues from around the world in the Network for Greening the Financial System (NGFS) to improve climate risk management in the core of the global financial system. Our priorities include the development of a small number of high-level climate scenarios that can be used in future system-wide stress tests.4 Next month, the PRA will require insurers, as part of market-wide stress tests, to consider how their businesses would be affected in different climate risk scenarios. By adapting our soft infrastructure in these ways, the Bank will help ensure that the financial system is not only resilient to climate-related risks but also can take full advantage of the enormous opportunities in a new low carbon economy. Applying New Technologies to Increase Resilience My final example of how the Bank is building a platform for FinTech innovation, considers how general purpose technologies, including advanced analytics such as AI, can increase the resilience of the financial system. As much of life moves online, a trail of data is created. | Overall, in the years following the COVID-19 crisis, the average CET1 ratio has been slightly more than 1 pp above the average ratio of the period between the end of the global financial crisis and the start of the pandemic. In any event, Spanish banks’ CET1 ratio is at the lower end of the distribution for European banks of different sizes and business models. But it is well ahead of the average requirements and offers good aggregate loss-absorbing capacity. Final assessment Over a broader timescale, it is clear that the solvency and liquidity of both the Spanish and the European banking sector have improved substantially over the last decade. This has been driven, in part, by the internationally agreed regulatory reform, which in the European Union applies to all banks, irrespective of size. Indeed, the strengthening of the banking sector and the regulatory reform have proved vital to enable the sector to successfully overcome the extraordinary stress episodes of recent years. In Spain, the fact that business models are strongly oriented towards the retail segment bolsters their capacity to absorb adverse shocks to wholesale market financing conditions and has enabled them to record a favourable financial performance of late, both in terms of higher profitability and improved balance sheet quality. However, confidence in our banking system must not allow us to overlook the existing risks, which remain significant in both the short and the long run. | 0 |
Unfortunately, access to financing for SMEs, especially those in new growth areas, remains severely constrained in many emerging markets. SMEs form the backbone of the Malaysian economy – being more than 95% of business establishments in Malaysia4; and being an important driver of employment and growth – 1/4 BIS central bankers' speeches responsible for an estimated 36% of the country’s GDP; 65% of the country’s employment; and nearly 18% of Malaysia’s exports5. If we were to look at the financing side, in Malaysia, about 60% of total financing disbursed by Islamic banks in 2016 is channelled to household. Only about 14% are to SMEs6. Meanwhile, for conventional banks, SME financing forms a larger portion of their business, accounting for 21% of total loans. Clearly – this represents an untapped market segment for Islamic banks to capitalise. I see value-based intermediation or (VBI) as one of the drivers for Islamic banks to assist SMEs and those seeking to start and grow business. VBI promotes greater involvement by Islamic banks in facilitating entrepreneurial activities through holistic offerings which include financing and proactive support. This forms part of VBI’s objectives – that is for Islamic financial institutions to conduct a more responsible way of doing business – where growth is to be driven by clear sense of purpose to create positive impact to society; environment; and the broader economy. Under VBI – business models of Islamic banks are expected to become more customer-driven, with greater understanding on customer’s specific needs and circumstances. | From the start of 1999, lending to the private sector grew at an annual trend rate of about 10% in connection with the pick-up in activity, but probably also the significant rise in the prices of property and financial assets, which were very responsive in certain sectors and economies of the area, as well as the rising number of mergers and acquisitions, many of which reflected direct investment outside the euro area. In France, twelve-month growth in total domestic debt stood at 8.1% in December 1999, compared with 4.5% in 1998. Among the elements forming the second pillar, the exchange rate of the euro is an important monetary policy indicator. The depreciation of the euro seen in 1999 is a matter of concern because it causes production costs and the general price level to rise. In addition, this depreciation of the European currency simultaneously reflected and boosted the negative financial flows, in the form of both direct and portfolio investment, that affected the entire euro area in 1999. The French economy, like the euro area’s, is enjoying favourable monetary and financial conditions and high competitiveness. These factors are facilitating a durable, non-inflationary upturn in activity. However, while a sound monetary policy is a necessary condition for economic success, it is not sufficient in itself to guarantee growth and job creation. | 0 |
This scheme comes in two parts; the first relates to concessional financing support while the second concerns the State’s guarantee of the financing. Central Bank of Kuwait - Public عام- بنك الكويت المركزي -7- Part One: support to cost of financing This program was designed to support cost of financing (return/interest) granted to SMEs and cost of financing given to companies. In line with the nature of SMEs and their unique needs, the scheme subsidizes cost of financing at a maximum of KD 250,000 per customer. This support covers part of the financing where the State shoulders the full cost of the financing for the first two years, 90% of the cost for the third year, and 80% for the fourth. The scheme specifies the purpose of the financing as meeting periodic contractual dues and expenditures, such as payroll and lease payments, with a term of up to four years. It meanwhile keeps cost of financing at a low level (discount rate as specified by the CBK + 1%), which currently comes to 2.5%. As for eligibility for financing, the program covers SMEs affected by the COVID19 pandemic that had been performing well and enjoyed a good position prior and excludes entities whose parent companies have alternative sources of financing. The scheme also requires the entity to retain current national staff and meet the Kuwaitis employment quotas to be met by end of 2021 for the relevant sector in which it operates. | During the following week, the focus of the Workshop will be exactly on the operational, back office activities, in the process of reserve management. No transaction can take place without the back office. It provides a vital service to the front office by ensuring that all funds flow in a timely and correct manner and all the necessary documentation is completed. Inaccurate or untimely trade capture can have implications for the P&L and risk management process. If the central bank does not capture the correct transaction, then position and reported credit exposure might be incorrect. Having in mind the importance of the back office service to the reserve management process, one of the goals of the workshop will be to provide best practices in the area of settlements, then different services provided by the 2 BIS central bankers’ speeches custodians, and the importance of appropriate IT tools to perform secured and efficient settlements. All the aspects cover over this week will enable to improve and make more efficient and controlled environment for the conduct of the reserve management transactions. In this regard, although back office activities should be separated from front and middle office activities, it does not mean that operations should be considered as separate from the business. On the contrary, the closer operations management is the pulse of the business, and the better communication channels between all the areas in reserve management function, the more responsive operations to changes in the business. | 0 |
Any other policy is anti-social, destructive of confidence and incompatible with the working of the economic system”. 8 In the US, these sentiments were echoed in the immediate post-war era by Benjamin Graham, the original “value investor” and yesteryear investment guru to today’s investment guru, Warren Buffett: “A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer”.9 And, famously, “in the short run, the market is a voting machine but in the long run, it is a weighing machine”. Whether an untutored savage, defective telescope or anti-social voting machine, something sounded amiss. Thus far, however, this evidence was largely anecdotal. It was not until the 1960s that the short-termism hypothesis was first tested empirically. This drew on survey evidence from investing firms. It found that investors typically expected full pay-back on an investment within 3 to 5 years. At the time, the average life of plant and equipment was often 10 times that.10 Firms played short even when they desired long. The first quantitative evidence that discount rates might be high began to appear in the early 1970s. For example, King (1972) examined investment in plant and machinery in the UK. Empirical estimates suggested the internal discount rate implied by firms’ corporate investment decisions may be up to 25%.11 This literature failed to catch fire. Starting in the 5 Jevons (1871). 6 Marshall (1890). 7 Pigou (1920). 8 Keynes (1938). 9 Graham (1949). | These projects would fail to receive financing. Investment and, ultimately, growth would be lower 4 BIS central bankers’ speeches than optimal. In fact, the potential capital misallocation problem is greater still. To see that, consider the three projects summarised in Table 1. Table 1 Short-termism and capital planning Project A B C Cash-flows (CF) $ pa in years 6–10 $ pa every year $ pa in years 1–5 Cumulative CF $ $ $ NPV (rational) $ $ $ 1 2 3 $ $ $ 3 2 1 Ranking (rational) NPV (myopia) Ranking (myopia) In the absence of short-termism, project A is selected. Its payouts are back-loaded but significant; it generates a net excess return of 22%.17 Short-termism hits such long duration projects hardest. The impatient investor chooses project C. This project delivers lower cashflows but these are front-loaded. In NPV terms, the project selected is the worst on offer, whereas the rationally optimal project ranks last. Capital allocation is not just sub-optimally low; it is also skewed towards sub-optimally short-duration projects. (b) Asset pricing Consider now a formal model of multi-period equity price determination. Finance theory typically assumes that investors care about both the level and uncertainty of their wealth and are risk averse. In this world, agents require a premium to invest in a company. | 1 |
It’s an argument which seems to say, we can’t value the firm, we can’t supervise it, and we can’t resolve it, so therefore let’s ensure it has a very large amount of equity financing, what I call the “Big Equity” argument. Honestly, it’s a nonsense. Large amounts of equity financing will not be available for such firms, so the best we can say is that this is a route to a radically different financial system, but in that world the risk goes somewhere else, and we shall still be worried. But this is not an argument against having non-risk based tools like the leverage ratio in the supervisors’ toolbox. They are very important, because to understand risks well, we need more than one view of the firm. And the leverage ratio is an important other view. But I want to emphasise that understanding risk is at the heart of supervision. BIS central bankers’ speeches 1 But this, of course, begs a very important question. Why did supervision go wrong in the period before the financial crisis, and what do we learn from that bad experience? Let me offer a number of thoughts on that. First, supervision was never given sufficient prominence and attention. It’s a very real skill. In my experience it demands not just high levels of technical skill but also interpersonal skills – to get very strong egos to change their thinking and actions – do things that they had not intended – to recognise the public interest. | Andrew Bailey: Defining the objectives and goals of supervision Speech by Mr Andrew Bailey, Deputy Governor of Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority at the Bank of England, at the New York Fed conference “Defining the objectives and goals of supervision”, Federal Reserve Bank of New York, New York City, 18 March 2016. * * * First of all, many thanks to the New York Fed for organising a conference on supervision of banks. This sounds a strange thing to say in one sense – not in another because the gratitude is genuine – but strange in the sense that surely supervision is such an important part of what we do that we shouldn’t be particularly surprised at the idea of having a conference on it. But in my experience, it is surprising how little time we spend being more reflective about supervision. I want to start with some important definitions. Frequently, and mistakenly, “supervision” and “regulation” as terms are used interchangeably. That’s wrong. Regulation is to do with the framework of rules and guidance that put the structure around the objectives that as authorities we are usually given in statute. In the UK, the PRA has a primary objective in terms of the safety and soundness of firms we authorise to do business, and safety and soundness are expressed in terms of the stability of the financial system. There is then a rulebook that tells us what safety and soundness means. That’s the framework of regulations. | 1 |
Domestic banks report the activity of all offshore branches with more than $ billion in assets, while FBOs report activity of offshore branches that are managed and controlled by offices based in the United States. Additionally, both domestic banks and FBOs report the activity of their IBFs. Prior to the revisions, only domestic banks reported Eurodollar transactions, and there was no reporting by IBFs. 33 In addition to enhancing the Eurodollar collection, the revised reporting instructions, effective October 20, 2015, modified and clarified the definition of federal funds transactions and expanded the number of reporting entities. The effect of these changes was an increase in the amount of reported federal funds activity. 34 The data file for this speech, available on the New York Fed’s website, includes a historical calculation of the OBFR based on data provided by federal funds and Eurodollar brokers until October 19, 2015 and based on FR 2420 data, from October 20th, 2015 until February 17th, 2016. 35 See “Responses to Survey of Primary Dealers,” December 2015, and “Responses to Survey of Market Participants,” December 2015. 36 One such exceptional period was in mid-October 2015, amid some market concern about the debt ceiling that eventually abated. 37 The Treasury has recently begun to ramp up its issuance of Treasury bills in part to support the maintenance of a larger cash balance, which it keeps in its “checking account” at the Federal Reserve. | Treasury bill yields rose a bit less than other rates on instruments of comparable term and now trade at yields somewhat below the ON RRP rate. Treasury bills have some attractive qualities in comparison to ON RRP, such as round-the-clock liquidity. In addition, there seems to be strong demand for bills from investors who don’t have direct access to the ON RRP or IOR, and it appears that most Treasury bills are owned by such investors. Also, bills have typically traded below other money market rates during tightening cycles, as they do now; periods where bills trade at or above other rates have been the exception and not the rule.36 Thus, the smaller increase in bill yields than in rates on other term instruments is not surprising, and I do not read it as undermining the general conclusion that the policy rate increase was effective in firming money market conditions.37 December 31 Now, I mentioned earlier that fed funds traded within the target range on all but one day. Let’s talk about that day, which was December 31. 6 BIS central bankers’ speeches On that day, the effective federal funds rate, calculated as a mean from the FR 2420 data, printed at 20 basis points, 15 basis points below its prior-day value and 5 basis points below the FOMC’s target range. The median dropped a bit more, by 20 basis points to a level of 15 basis points. | 1 |
What is not acceptable is to fall between regimes – for instance to argue that by holding backing assets such as sovereign bonds that are in general much safer than those on a bank’s balance sheet, this is good enough to ensure convertibility into fiat money at par. Low risk is not the same as no risk. This is why the FPC set out in its Financial Stability Report that stablecoins used in systemic payment chains should meet the standards equivalent to those expected of commercial bank money in relation to stability of value, robustness of legal claim and the ability to redeem at par in fiat. 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 Some major stablecoin proposals do not appear at present to meet this expectation Some stablecoin proposals do not include a legal claim for coin-holders. And some stablecoins propose backing in instruments that may have material market, credit and liquidity risk, but do not have the money protections I have outlined. While this might be acceptable for speculative investment purposes, it would not be for payments widely relied upon by households and businesses. Stablecoins need to offer coin-holders a robust claim, with supporting mechanisms and protections to ensure they can be redeemed at any time 1-to-1 into fiat currency. Some may ask if this would rule out a multi-currency stablecoin? Such a proposition is the wrong place to start – it raises questions around the value of the coin, and the underlying money it represents. | 2 See Draghi (2015), “Monetary Policy: Past, Present and Future”, speech at the Frankfurt European Banking Congress, 20 November 2015. 3 Using the Phillips curve approach presented in Box 2 of the ECB Economic Bulletin, Issue 3 / 2016. 6/6 BIS central bankers' speeches | 0 |
• Thirdly, a fund owned by the government must be highly transparent, not only to the Norwegian public but also in an international context. Let me elaborate on these aspects. In the early summer of 2007, the fund’s strategic equity share was raised from 40 to 60 percent. From summer 2007 to 2009, the fund bought equities worth USD 180 billion in international markets, equivalent to 0.5 percent of all globally listed equities. The largest volume of transactions was carried out in the midst of the financial crisis of 2008 and 2009. The long-term horizon also enables us to invest countercyclically, by rebalancing asset classes: If the equity share increases by more than 4 percentage points from the target weight of 60 percent, we will sell equities and buy bonds. Conversely, if the equity share drops below 56 percent, we will sell bonds and buy equities. The capacity to withstand market turmoil was demonstrated during the financial crisis in 2008 and 2009. For a period of 18 months, the fund’s losses totalled roughly USD 120 billion – more than 25 percent of Norway’s GDP. The losses did not go unnoticed. They led to lively public debate on the fund’s investment strategy. However, the conclusion drawn was that the strategy was robust, and the government remained committed to it.10 Norway would have to accept that the fund’s capital would fluctuate, sometimes dramatically, given the high equity share. Indeed, through 2009 and 2010, not only were those losses reversed, but additional gains were also made. | Chart: Key policy rate in the baseline scenario The degree of transparency regarding Norges Bank’s interest rate decisions has increased gradually since inflation targeting was introduced. We provide clear guidance about the future path of the key policy rate. Explicit interest rate forecasts were introduced in 2005. A key objective is to convey the contingency and the uncertainty in the forecast. To that end, we seek to be transparent about the considerations underlying each interest rate forecast and what the objectives and trade-offs are. We consider it important to explain why our forecast has changed. In our Monetary Policy Report, the interest rate forecast is accompanied by a separate chart showing the revision since the previous report due to changes in news and new assessments. Monetary policy also seeks to mitigate the risk of a build-up of financial imbalances. Operationally, and as a support to monetary policy decisions, our objectives and trade-offs are described by a monetary policy loss function7 The loss function is minimised subject to our model of the Norwegian economy, and the implied interest rate path is an important aid to the policy decision process8 Since models are simplifications, our projections are based on a combination of model analyses and professional judgement. Transparency allows financial market participants and other interested parties to make their own judgments on the revisions to our interest rate forecast – and the revisions will often be anticipated. | 1 |
Like the MPC, it has external members, drawn from outside the Bank’s executive team, a published record of its meetings and a regular Financial Stability Report to explain how it is using its powers to achieve its statutory objectives. There is substantial cross-membership between these two Committees to ensure effective policy co-ordination. But though the institutional set up for the Financial Policy Committee mirrors that of the Monetary Policy Committee, the nature of its task is different. The Monetary Policy Committee is, in the main, engaged with guiding the economy towards the best achievable path for output consistent with keeping inflation at target – or with bringing it back to target. In the jargon – which some of you in the logistics field, for example, may be familiar with – the problem is one of “optimal control” or “dynamic programming”. What setting for interest rates is consistent, looking forward, with the best central outlook for the economy? The Financial Policy Committee’s job is really about identifying risks and preventing them from crystallising. This is not just about the most likely and visible risks. What we learned in the financial crisis was that the financial system, has a myriad of connections and actors and a phenomenal ability to change and adapt. It needs to be thought of as a complex “ecosystem”. At times of stress, it can behave in very extreme ways – or break down altogether. In such a world, it is not enough to know that every individual part is managing its own risk. | • Indeed, these investigations must be undertaken hand in hand with private intermediaries. The tokenisation of finance creates a new ecosystem which is also a challenge for them, especially as their role could be transformed by decentralised technologies. • And we need to ensure that this ecosystem is fully interoperable with legacy securities and payment systems, which are likely to remain an important element of the landscape. • In that context, our goal at the Banque de France is to facilitate responsible innovation from the market, while safeguarding the use of central bank money and thus financial stability. • My final point is to say that today’s discussion showed that central banks need to further their exploration of new technologies to prepare for the future of finance. This is the goal that Banque de France has been pursuing since the launch of its first experiments on wholesale CBDC in 2020. We are now taking this endeavour a step further with a second round of experiments. Let me stress that it is a collective work, whose conclusions will feed the Eurosystem’s reflection on CBDC. • The entry into force of the European "pilot regime" next year offers an invaluable opportunity for private players but also for public players. In this sense, offering settlement solutions in central bank money - for the cash leg of transactions involving tokenised securities - could allow tokenised finance to benefit from the most secure and liquid asset. • Thank you again for your participation. Page 3/3 | 0 |
17 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Price stability vs. financial stability Current situation in Switzerland 18 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Price stability vs. financial stability Current situation in Switzerland Low reference rate remains necessary 19 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Price stability vs. financial stability Current situation in Switzerland Low reference rate remains necessary 20 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Price stability vs. financial stability Current situation in Switzerland Low interest rate environment promotes ... Low reference rate remains necessary • ... a build-up of imbalances: 2000: Mortgage loan volume * 100 = 110% 2017: Mortgage loan volume * 100 = 145% GDP GDP • ... risk appetite among banks 21 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Should the interest rate tool be used to curb excesses on the credit market? NATIONAL BANK ACT Article 5: Tasks 1 The National Bank shall pursue a monetary policy serving the interests of the country as a whole. It shall ensure price stability. In so doing, it shall take due account of economic developments. | Credit risk 8 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Credit as a burden for an entire economy Excesses on the credit market Debt crisis c Loss of income and financial assets Greater uncertainty Restricted credit supply Less consumer spending Less investment Less innovation Long and deep recession 9 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Weak recovery Credit as a burden for an entire economy – excessive risk-taking Macroeconomic environment Upturn Low interest rates Asset prices Systemic risks Distorted expectations 10 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Credit as a burden for an entire economy – excessive risk-taking Macroeconomic environment Upturn Low interest rates Asset prices Systemic risks Distorted expectations 11 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Credit as a burden for an entire economy – excessive risk-taking Macroeconomic environment Upturn Low interest rates Asset prices Systemic risks Distorted expectations 12 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Credit as a burden for an entire economy – excessive risk-taking Macroeconomic environment Upturn Low interest rates Asset prices Systemic risks Distorted expectations 13 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Credit as a burden for an entire economy Macroeconomic environment Upturn Low interest rates Asset prices Systemic risks Distorted expectations 14 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Credit as a burden for an entire economy Macroeconomic environment Upturn Low interest rates Asset prices Systemic risks Distorted expectations 15 1 November 2017 Collegium generale | Fritz Zurbrügg | © Swiss National Bank Part 3: What role do central banks play in the credit cycle? | 1 |
Several years ago, Rich Lyons, Dean at Berkeley’s Haas School of Business, spoke at the San Francisco Fed and talked about culture in a way that has stuck with me ever since. Transforming a culture is a five- to ten-year project; keeping it that way is an ongoing mission that requires strong leadership and consistent action. As a leader of a large organization, I’ve taken that message to heart. I’ve found that a culture based on the principle of open and authentic dialogue, that embraces our diverse backgrounds and perspectives delivers better results. I’ve found that well-defined collective values and direction lead to greater collaboration and innovation. Finally, I’ve found that this work is never a finished project, but an ongoing one that constantly evolves. I started by saying that I feel a sense of urgency in addressing banking culture. So where do I see the priorities for supervision? As supervisors, we need to ensure that bank management and boards are exerting strong and effective leadership with robust governance. That means holding management and boards of directors to high standards in terms of culture and conduct, even when the numbers look rosy. It means ensuring corporate values are clearly articulated and incentives are squarely align with a bank’s strategic goals. It means identifying, communicating, and mitigating risks in a timely and 2/3 BIS central bankers' speeches effective manner. It means that employees feel empowered to raise their hands if they see wrongdoing, and that comprehensive fixes are implemented when something goes wrong. | Rosthom Fadli: IMFC Statement Statement by Mr Rosthom Fadli, Governor of the Bank of Algeria, on behalf of the Islamic Republic of Afghanistan, Algeria, Ghana, Islamic Republic of Iran, Libya, Morocco, Pakistan and Tunisia, at the forty-third meeting of the International Monetary and Financial Committee, Virtual IMF Spring Meetings, Washington DC, 8 April 2021. * * * The COVID-19 crisis has taken a heavy economic toll and caused tragic loss of lives and immense human suffering. No country has been spared. The synchronized, forceful, and timely global policy response prevented a worse outcome, but the damage has been still very significant and widespread. The recovery is gaining momentum, though its course and pace are highly dependent on the dynamics of the pandemic. The pandemic’s long term scarring effects are also still uncertain. The crisis has exacted a heavy toll on the low-income countries (LICs), in many cases reversing, in a matter of few short months, their hard-earned gains achieved over decades in alleviating poverty and improving social conditions. The vulnerable groups—youth, women, low skill labor and workers in the informal sector—have been hardest hit. The crisis has pushed millions of people into extreme poverty and severe food insecurity in addition to millions already suffering. Saving lives is still the highest priority. Multiple waves of the virus and its still uncontrolled spread in some regions pose serious threats to the global fight against the pandemic and further loss of lives. | 0 |
The lessons learned from the Great Depression and the commitment on the part of policymakers around the world to ensure that the misery that it caused will not replicate itself this time have prevented the current situation from causing even more severe disruptions. One particular aspect of the current crisis has been the synchrony among different countries. The financial earthquake that devastated developed markets last September and October and its aftershocks that swept over the financial systems of every economy, over output prospects in the world, over income and wealth, just to name a few, propagated to expectations which deteriorated across the entire world. The Chilean economy has not been absent to this phenomenon. As we said in the very beginning, our economy is not and cannot be immune. You can see it in the latest figures and projections contained in this Monetary Policy Report. The channels and mechanisms through which the crisis is transmitted to our economy are varied, and the severe international shock that hit us during the fourth quarter of last year has had damaging repercussions locally, even more so than we foresaw in January. A question that arises naturally is, why the big impact on our economy? Unfortunately, no single answer exists and only time and the gathering of information will allow us more certainty. | Growth in compensation per employee fell slightly in the last quarter of 2018 from 2.5% to 2.2%, but remains just above its long-term average. Unit labour cost growth rose to 2.4% in the same period, partly driven by a fall in productivity growth reflecting the resilience of employment growth to the economic slowdown. The key question – and one currently being asked in many advanced economies – is why these labour cost pressures are not already being reflected in rising prices. Underlying inflation has moved broadly sideways over the last year, repeatedly falling short of expectations and staying below the levels recorded before 2008. Academic literature based on US data has responded by casting doubt on the link between labour costs and inflation, in particular at shorter horizons. Studies find no conclusive results on whether, empirically, labour costs tend to precede or follow prices. 10 This has led to a debate as to whether “cost-push” models from wages to prices can still accurately describe the inflation process. There are certainly a number of forces at work today that make forecasting inflation more complex, not least the effects of globalisation and digitalisation. Yet research by ECB staff finds that, unlike in the United States, the structural conditions for pass-through from wages to prices remain in place in the euro area. | 0 |
These balance sheet linkages have altered the risks we face but they are an inevitable consequence of the free movement of capital, which has brought with it new opportunities for us all. Any answer to the question of what role the IMF should nowplay must recognise these balance sheet linkages. The size and composition of balance sheets is crucial for determining how shocks are transmitted across national borders. And surprises about economic policy and news about economic fundamentals can, by generating changes in desired balance sheet positions, have large impacts on capital and expenditure flows. 3 This principle is also illustrated by the United Kingdom. Between 1946 and 1971, the UK had four IMF programmes. The maximum current account deficit at the start of those programs was 1% of GDP. Since 1998, the UK current account deficit has not been less than 1.5% of GDP but has been financed fully through private markets. 4 Greenspan, A (2005), “International Imbalances”, Remarks before the Advancing Enterprise Conference, London. 5 Lane, P. and G. Milesi-Ferretti (2005), “Financial Globalisation and Exchange Rates”, IMF Working paper 05/3. BIS Review 11/2006 3 Is there a need for an international monetary institution? In the post-Bretton Woods world, do we need an international financial institution, and what would be its role? Or has the international capital market replaced the need for such a public institution by providing both finance to, and discipline on, countries? | He hoped that the Bretton Woods twins, Master Fund and Miss Bank, would receive three gifts from their fairy-godmothers: first, a many-coloured coat “as a perpetual reminder that they belong to the whole world”; second, a box of vitamins to encourage “energy and a fearless spirit, which does not shelve and avoid difficult issues, but welcomes them and is determined to solve them”; third, “a spirit of wisdom … so that their approach to every problem is absolutely objective”. Keynes warned the delegates that this was asking a great deal: “there is scarcely any enduringly successful experience yet of an international body which has fulfilled the hopes of its progenitors”. So he hoped that the malicious fairy would not bring its curse upon the twins: “you two brats shall grow up politicians; your every thought and act shall have an arrière-pensée; everything you determine shall not be for its own sake or on its own merits but because of something else". And if the IMF were to become politicised then, Keynes said, it would be best for the twins "to fall into an 2 eternal slumber, never to waken or be heard of again in the courts and markets of Mankind". Sixty years on, the wisdom of Keynes's position at Savannah is clear. In recent years, the critics have charged that all three of the virtues of universalism, energy and wisdom have been lacking in the IMF. And if not in a deep slumber, then the Fund has appeared drowsy. | 1 |
As part of ongoing measures to further strengthen the resilience of Islamic finance, the Islamic Development Bank (IDB) in collaboration with the Islamic Financial Services Board (IFSB) has formed a Task Force on Islamic Finance and Global Financial Stability in 2008 to analyse and propose specific recommendations on the role and contribution of Islamic finance in promoting global financial stability and to outline the areas for strengthening the Islamic financial infrastructure including for putting in place the building blocks for liquidity and crisis management in the Islamic financial system. In this recent decade, the increasing internationalisation of Islamic finance is being accompanied by new emerging global patterns of financial and economic interlinkages. This can be observed in the strengthening of ties in recent years between Asia and the Middle East in trade and investments in a wide range areas. Both Asia and the Middle East are increasingly recognised as dynamic growth regions in the global economy. The two regions have a history of strong trade ties that flourished on the old Silk Road, which served as a major global conduit between the ancient civilisations in the East and West until about the 14th century. Islamic finance today has revitalised these economic ties with the strengthening of the financial linkages between Asia and the Middle East, a trend that will generate mutually reinforcing growth prospects. The emergence of these new financial centres in Asia and the Middle East and their increased integration has paved the foundations for a New Silk Road. | Among Iceland’s major trading partners, weighted output growth measured 0.8% in 2012, as opposed to 1.7% in 2011. To a degree, the capital controls have shielded the Icelandic financial system from the euro area crisis. The effects felt through external trade were unavoidable, however, and Iceland’s terms of trade deteriorated over the course of the year, while the import purchasing power of export revenues stagnated. This played a part in slowing down output growth, even though Iceland’s growth rate was much faster than in trading partner countries. According to preliminary figures from Statistics Iceland for 2012 as a whole, output growth measured 1.6% during the year, which is somewhat below the Central Bank’s February forecast of 2.2%. On the other hand, year-2011 growth figures have been revised upwards, from 2.6% to 2.9%. This is well in line with the Central Bank’s first forecast of GDP growth in 2011. It is not uncommon that output growth figures are revised upwards during upward cycles, when more detailed investment figures become available. It will be interesting to see how estimates of 2012 develop. Output growth in 2012 was driven by growth in private consumption and business investment, while other items, such as net trade and public consumption, made a slightly negative contribution. This is similar to the whole recovery phase in 2010–2012, where business investment and private consumption contributed to output growth more or less equally, with business investment holding a slight advantage. | 0 |
First, incumbent banks have had their possible strategic responses to greater competition reviewed in our first exploratory stress exercise. 11 Second, existing bank liquidity regulation may need to adjust. Regulations currently treat customer deposits as ‘stable funding’, requiring banks to hold few liquid assets against them. As Open Banking develops, the stability of deposits connected via a central service provider will need to be monitored carefully. And third, frameworks for operational resilience, particularly cyber risk, will need to evolve too. 10 The combination of the revised European Payment Services Directive (PSD2) and the Competition and Markets Authority’s Open Banking reforms will require banks which provide online payment services to allow – at a customer’s request – third parties to access account information and/or to initiate payments via a single common Application Programming Interface (API). This was covered in a recent speech by Karina McTeague, Director of Retail Banking Supervision at the FCA. See https://www.fca.org.uk/news/speeches/payments-after-psd2-evolution-or-revolution 11 See ‘Stress testing the UK banking system: 2017 results’, section 2 ‘The 2017 biennial exploratory scenario’, pp 12-22. 9 All speeches are available online at www.bankofengland.co.uk/speeches 9 Such resilience is vital. That’s why we’re establishing clear expectations for the system’s ability to recover critical services after an attack. As customers access services increasingly through third party aggregators or payment service providers, that should not compromise the degree of resilience they can expect. The FCA has set out its initial expectations for these new entities. | It also has the ability to make Recommendations within the Bank, to HMT and to any other person, with a view to achieving its statutory objectives. 2 All speeches are available online at www.bankofengland.co.uk/speeches 2 The post-crisis reforms embody the lesson of that: keep up… …with the risks the system faces. And with the shape of the system as it shifts. To keep the system capable of serving in the bad times as well as the good. Today – declaring my obvious conflict of interest – I want to look back to consider how, over five years, we’ve got the system to a place where it can serve the economy in bad times as well as good. And then I want to look ahead, to the macro trends of Brexit, borrowing and the unbundling of banking and the challenges they present to keeping up. Looking back, we have largely corrected the fault lines that underlay the crisis. In particular, the banking system has been strengthened. Not everyone agreed it should be strengthened so much. But it was obvious that it needed to happen. The economic costs of major banks getting into distress are vast. So they must be able to withstand – and keep lending through – even very severe and rare economic events. That’s why we stress test them to economic scenarios more severe than the financial crisis. It’s why the largest banks must fund themselves with 10 times more capital than they did before the crisis. | 1 |
We are doing so with the firm conviction that this will be the new statutes of the BNB in the following, at least, 20 years. We have been actively working on other euro area-related legislative amendments as well. For example, yesterday the Governing Council adopted the required amendments to the Law on the payment systems concerning the euro area. This draft will be submitted to the Ministry of Finance today or on Monday at the latest because the BNB is not entitled to direct legislative initiative. 3/4 BIS - Central bankers' speeches I do not have to dwell on this any further. What I would like to say is that on the part of the BNB, there is not a single day of delay with regard to the euro area-related legislative programme, nor is there any unsettled issue in this regard, with the ECB or with the European Commission. And yesterday, during our debates with Mr. Dombrovskis, we cleared up this topic. The same is true for the technical preparations. The BNB and commercial banks provided in their 2023 budgets the funds required for these preparations which are well underway. For example, yesterday we discussed with Mr. Dombrovskis and his team as to how we can move forward with the implementation of the memorandum on the minting of test Bulgarian euro coins, signed in December. A few words about the date. We do understand the considerations of the European Commission and the Government about changing the date. | In this context, there has been an increase in the willingness to take on risk in financial markets, increasing stock market indices, reducing sovereign risk premiums and increasing capital flows to emerging markets. Commodity prices have also benefitted. Copper, our main export product, has been trading at prices near two year highs and prospects for the next few years have improved, which has had a material impact on the Chilean terms of trade. Thus, based on better growth prospects for our trading partners, favorable external financial conditions and increased terms of trade, the baseline scenario included in the Monetary Policy Report published at the beginning of April, considered that, for the next two years, the Chilean economy will receive an external impulse higher than considered at the end of 2016 (Figure 1). 1/ Keynote speech at the VI JP Morgan Southern Cone and Andean Opportunities Conference, April 25th, 2017. This speech is based upon that delivered at The Council of the Americas, April 20th, 2017. Figure 1 Trading partners GDP Terms of trade (*) (annual change, percent) (index; 2013=100) 4.5 4.5 4.0 4.0 105 105 Mar.17 100 Mar.17 3.5 100 3.5 Dec.16 Dec.16 3.0 3.0 95 95 Sep.16 Sep.16 2.5 2.5 Avg. 00-07 Avg. | 0 |
The cantons – our majority shareholders – are well represented in our supervisory body for operating matters, the Bank Council. As you see, the special characteristics of the Swiss system are taken into account. Federalism is mirrored in the composition of the Bank Council and in the distribution of our shareholdings and – not least – in the distribution of profit. The Swiss constitution and the National Bank Act provide for the SNB’s profit to be paid to the Confederation and the cantons. Two-thirds accrue to the cantons and one-third to the Confederation. However, a distribution can only be carried out if the balance sheet and the SNB’s result allow for this to be done. The robustness of our balance sheet, in other words, setting aside provisions for currency reserves, takes first priority over a distribution. This can be derived directly from the legislation. The appreciation of the Swiss franc against most other currencies weakened our balance sheet last year. In addition, very volatile results may be expected in the next few years because of the current size of the balance sheet and the uncertain situation in the capital markets. Consequently, the possibility that distributions to the Confederation and the cantons will have to be suspended in certain years cannot be excluded. Fiscal interests must take a back seat when it comes to ensuring our long-term monetary policy freedom of action and independence. The Governing Board is also genuinely Swiss. | The European System of Financial Supervisors, which also includes the European Systemic Risk Board (the ESRB), is a new supervisory architecture requiring the National Supervisory Authorities to cooperate with the European Supervisory Authorities in the identification and analysis of systemic risks. The objective of the ESRB is to address one of the most important weaknesses identified during the financial crisis, as highlighted by the de Larosière Report – the lack of an adequate pan-European monitoring, assessment and mitigation of systemic risk. In line with the ESRB recommendation to enhance macro-prudential governance in each Member State, in the case of Malta, it is the intention to replace the current Standing Committee by a joint committee on financial stability. This committee, which will include representatives from the Central Bank of Malta and the Malta Financial Services Authority, would be mandated to monitor and assess risks to financial stability. Its objective is to formulate policy recommendations to the Boards of the two institutions, designed to safeguard financial stability, strengthen resilience of the financial system and minimise systemic risk. The recently announced changes to the Depositor Compensation scheme are a welcome change and help increase the resilience of the domestic banking sector. They are also in line with the recommendations of the latest IMF report. | 0 |
But if those rates of expansion continued, the share of employees on zero-hours contracts would reach around 7% within a decade. Trends in temporary and part-time work have been less striking, but have gone in the same direction. Between 1997 and 2008, temporary work declined as a share of employment. But since 2008 it has increased. There are currently around 200,000 more temporary workers than before the financial crisis. Prior to the crisis, around 25% of those in employment worked part-time. Since the crisis, that share has increased to around 26%, or around 8 ½ million workers. If we took together self-employment, part-time and temporary working and zero-hours contracts, their share 9 of the workforce has probably risen to around 43%, or around 13 ½ million workers. The corresponding figures back in 2000 would have been around 39% of the workforce, or around 10 ½ million workers. This is not a majority, but it is a significant and rising minority of workers. 8 9 For example, Blanchflower and Machin (2017). There needs to be caution when simply summing these categories as some of them probably overlap, generating double-counting. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 These trends in self-employment, temporary and part-time employment are based on survey data. Those broad trends are corroborated if we look at data on job vacancies rather than employment. | The fiscal rule is a binding commitment policymakers have imposed on themselves and is intended to foster long-termism and predictability in fiscal policy. Norway’s floating currency, which normally appreciates in good times and depreciates in bad times, also has a stabilising effect. The advantage of this effect is most evident when economic developments are weak. For example, many southern European countries that have adopted the euro are currently facing considerable challenges. To improve competitiveness, wages in these countries must fall or at least rise much more slowly than in other European countries. This only occurs when unemployment is high. With a flexible exchange rate, competitiveness can also improve when the domestic currency falls in value. A flexible exchange rate can thereby reduce fluctuations in employment and output. On the other hand, the foreign exchange market can be mistaken, driving the exchange rate away from the path indicated by fundamental conditions. Herd behaviour and market psychology can contribute to fluctuations and instability. In spring 2001, the Norwegian government and parliament defined a formal inflation target for monetary policy. The task of achieving the target was delegated to Norges Bank. Norges Bank sets the interest rate on banks’ deposits and loans from the central bank. This interest rate determines banks’ lending and deposit rates and the level of interest rates in general, as well as the price of the loans you take out as students. The interest rate is set with the objective of ensuring low and stable inflation. | 0 |
I’ll begin with a few words on the conclusion of the third consultation period and a short summary of the major themes we gleaned from the comments we received. Since we have discussed the new capital requirements themselves extensively over the past several months, I would next like to address some of the other equally important issues that the BBA and others raised in their comment letters. BIS Review 42/2003 1 The conclusion of the third consultation period Allow me to begin with a report on the very busy summer we had in Basel. It’s fair to say that we received more responses on the third consultative paper than we expected. Over 200 comments were submitted by the conclusion of the comment period in July though that was less than the 250 comments we received on the second consultative document two years ago. What was not surprising was the depth of interest in the proposals and the considerable degree of thought and care that respondents demonstrated in their letters. In this regard, the Committee owes a debt of gratitude to the many members of the industry and the public who have supported our work over the past several years. The considerable time and attention that especially the BBA and its members have devoted to the development of the New Accord are evident in the high quality of your comments and suggestions. You have offered constructive thoughts and creative solutions. | This has sometimes resulted in an inconsistent application of the minimum requirements and the adoption of different expectations across countries and an increase in regulatory burden on banks. Incorporating supervisory review into the international guidelines represents a genuine breakthrough for all of us. By developing guidelines for the supervisor’s evaluation of a bank’s internal capital allocation process, the Committee believes that supervisors and banks will engage in more focused, more consistent, and less burdensome discussions of the risks that banks face and the responses they adopt. The Committee recognises that national laws and regulations provide different avenues through which supervisors may conduct such reviews, and consequently Pillar 2 affords each jurisdiction the flexibility to accommodate those differences. The topic of supervisory review must also be considered in the context of the level playing field, one of the themes I mentioned earlier that came out clearly in the comment letters. As the members of the BBA and the London Investment Banking Association expressed in their joint comment letter, for example, the way in which the New Accord is applied and supervisory review is conducted across countries matters critically to the daily operations of internationally active banking organisations. Your letter noted the importance of consistency in standards and consistency in the interpretation of the new framework, as well as the challenges that even limited areas of national discretion can create. BIS Review 42/2003 3 These concerns go the very heart of the Committee’s mission. | 1 |
Like they say, what goes around, comes around – it is now our turn to share our experience. I am glad to say that the NBR – in a consortium with De Nederlandsche Bank – has been involved since June 2015 in a Twinning project dedicated to the National Bank of Moldova, the NBR providing expertise in the areas of regulation and authorisation, supervision, financial stability and human resources. While speaking about my own experience in reforming the NBR in the early 1990s, after the fall of communism, the words of Walter Bagehot have come to my mind. Referring to the needed changes in the governance framework of the Bank of England, he wrote in his book “Lombard Street: A Description of the Money Market”, published as early as 1873, that “putting new wine into old bottles is safe only when you watch the condition of the bottle, and adapt its structure most carefully”. I find this metaphor particularly adequate for guiding us in the demanding task of tailoring the structure of central banks to the challenges of today and tomorrow. Let me add only that – as I once put it – good wine is as difficult to make as good monetary policy. And proper dosage is of the essence in both cases. 6 BIS central bankers’ speeches | Table 2: Labour mobility estimates, 2010 Regions Annual gross migration flows/population, % US: between 50 states 2.4 Australia: between 8 states/territories 1.5 Canada: between 10 provinces/territories 1.0 Scotland/rUK 0.6 EU27: between 27 countries 0.3 Sources: OECD; Bank calculations using General Register Office Scotland Migration Statistics and ONS mid-year population estimates. All data are for 2010. Notes: Population mobility estimates are shown for the UK, Australia, Canada and the Unites States and labour force mobility for the EU. BIS central bankers’ speeches 13 Table 3: Nominal export and import shares in 2013 Export Shares rUK (to Scotland) Scotland (to rUK) 2013 Q1 & Q2 14% 70% Import Shares rUK (from Scotland) Scotland (from rUK) 8% 74% Sources: Bank calculations; ONS Quarterly National Accounts (2013Q3); Quarterly National Accounts Scotland (2013Q2) Chart 4: Cumulative change in MFI deposits from other euro-area countries (all sectors) Italy Portugal Spain Ireland Greece Cyprus Cumulative change since January 2010 60 40 20 0 -20 -40 -60 -80 2010 2011 2012 2013 -100 Sources: ECB and Bank calculations. | 0 |
Sources: The Riksbank, Ministry of Finance, National Institute for Economic Research and Statistics Sweden As the figure shows, assessments of the level of equilibrium unemployment for the last four years (2008–2011) are relatively similar. The Ministry of Finance assumes that equilibrium unemployment will decrease strongly in the years ahead. The difference in the assessments is primarily because the National Institute of Economic Research and the Riksbank do not expect the economic policy to have such large effects on equilibrium unemployment. Good guidance for monetary policy? So serious attempts at calculating equilibrium unemployment have been made, but these have concluded in different assessments. Nevertheless, it is important that we try to gain an idea of equilibrium unemployment. Not least is this important in a time when reforms have been adopted that should (as most analysts agree) lead equilibrium unemployment to decrease. But I am extremely doubtful as to whether measures of equilibrium unemployment should be given too prominent a role in practical monetary policy. It seems simple in theory; but, in practice, it is not. Even if we could be more certain of the level of equilibrium unemployment further ahead, this would not give us such strong guidance for monetary policy decisions in the here and now. This can be illustrated by the following diagram. | Global integration is not the solution to all our problems, but acting to restrict it or to insulate us from its consequences would damage our capacity to grow and to adapt to change, and these costs would make it harder, not easier, to deal with our longer-term challenges. To the extent we are reluctant to remove restrictions or subsidies in the United States, we make it easier for the forces in other countries to block reforms from which we would benefit. The world has a lot of experience with the costs and benefits of protection, and the balance of judgment on those questions has not significantly changed even with all the changes that technology and policy have brought to global trade. Economies that are more open have generally seen more rapid growth, both in incomes and in employment. Economies that are less open have generally grown less rapidly. Openness itself, of course, is not enough. Our capacity to adapt to change depends in part on the effectiveness of government policy in a range of important areas. Education seems the most obvious of these, but policy in health care, in public infrastructure, and many other areas will also play an increasingly important role in determining the relative strength of the U.S. economy in this more integrated world. | 0 |
It reminds us, if need be, that crisis management is always a difficult and potentially long lasting task. Time is a key dimension for fixing the economic and financial systems, which in turn creates the conditions for self sustained recoveries. In a couple of weeks, Greece has been at the epicenter of the phenomenon when doubts about the ability of its government to honor billions of debts maturing in 2010 became widespread. The lack of market confidence translated into spectacular increases in government bond yields. While this extreme situation was largely limited to one Member State, the magnitude of these price movements and signs of contagion to other sovereigns led market participants to fully reassess global sovereign risks. In this global reassessment process even less vulnerable countries were broadly and suddenly impacted with spreads widening very rapidly and reaching sometimes unprecedented levels. The issue at stake is certainly not to refute weaknesses of certain fiscal positions. In fact I, and many ECB Governing Council members alike have regularly called on policy makers to pay due attention to debt dynamics. What was very peculiar was the intensity of contagion between member states and between segments of the financial markets. Some observers have voiced concerns that specific mechanisms were at play, highlighting the potential destabilizing role of speculation and called for decisive policy actions to curb its consequences. I will come back to this issue later on. Looking at the roots of these countries weaknesses, the financial crisis has played a pivotal role. | This decision proved once again the flexibility of our operational framework and contributed to maintain a normal functioning of the monetary policy transmission mechanisms and to mitigate strains on interbank markets. It allowed avoiding strong and potentially pro-cyclical threshold effects of credit rating agency unilateral decisions. 2) Then, the launch of the Securities Markets Programme (SMP) on the 10th of May marked a new step of the Eurosystem’s response to the financial crisis. This measure consists in intervening in the euro area’s public and private securities secondary markets to ensure depth and liquidity in markets that have been affected by severe disruptions. The objective of this program is to address the malfunctioning BIS Review 84/2010 3 of securities markets and to restore an appropriate monetary policy transmission mechanism. These interventions were sterilized as liquidity injected was exactly drained, thus fully neutralizing the effects in the banking system. This historical and exceptional type of intervention has stemmed from the spillover of increased financial market volatility, liquidity risks and market dislocations. 3) Additionally, the ECB reactivated, in coordination with other central banks, the temporary liquidity swap lines with the Fed and resumed US dollar liquidity providing operations in order to alleviate pressures on funding in dollar. The reactivation of this measure followed the revival of strains on foreign exchange markets and highlights the central role that cooperation between central banks has taken in recent years in order to preserve cross-border operations and financial stability at the global level. | 1 |
It accounted for one third of international issuance of green and sustainable bonds in Asia. In 2022, we continued to see strong momentum, in particular in the area of green and sustainable loans. The vibrant green bond market is in part a result of the many breakthroughs made by the Government Green Bond programme. Since 2019, the HKMA has assisted the Government in issuing nearly $ billion worth of green bonds targeting both institutional and retail investors. We made use of each issuance to innovate and expand the suite of green bond products in terms of currencies, tenors and distribution channels, thus laying the foundation for other public and private sector issuers in the region. These issuances kept pushing the boundaries. Just over the last few years, we made the world's largest retail green bond issuance, Asia's largest ESG bond issuance, and issued the world's first tokenised government green bond. We will continue to seek new breakthroughs. In the coming five years, planned annual issuance of Government Green Bonds will increase from $ billion to $ billion. The mandate of this programme will be expanded to cover sustainable bonds as well. We will also consider how best to incorporate green and sustainability elements into a new infrastructure bond programme we are developing for the Government. | We will continue to press ahead with the experimentation in tokenised green bonds, leveraging blockchain technology to enhance the efficiency of bond issuance and transaction, and to explore real-time tracking and reporting of the environmental impact of projects funded by bond proceeds. And to promote financial inclusion, we are now looking into an arrangement to earmark a certain proportion of future green and infrastructure bond issuances for priority investment by MPF funds. This will provide a meaningful investment option for MPF scheme members to receive reasonable returns while investing in a better future for our city. Climate finance is a subject that is very dear to the hearts of many of us here. It's also an exciting subject that I could keep talking about. But I am aware that I have taken more than a fair share of your time. So what remains for me is to wish the ASIFMA event every success, and double down on the HKMA's commitment to working with 3/4 BIS - Central bankers' speeches ASIFMA towards our common purpose of scaling up Hong Kong's green and sustainable finance. Thank you. 4/4 BIS - Central bankers' speeches | 1 |
Easley et al show that their imbalance measure rose sharply ahead of the Flash Crash, contributing to an eventual evaporation of liquidity. A more ambitious approach still would be to develop a system-wide model of financial market interaction. Cliff (2010) describes the trading infrastructure as an example of a “sociotechnical system of systems”. These involve a complex fusion between technology and human behaviour. This interaction increases the system’s vulnerability to catastrophic failure. He proposes a “test rig” for such systems, using simulation techniques to unearth potential systemic fault-lines. These techniques have already been applied to other large socio-technical systems, such as defence, space and weather systems. In each case, there have been some successes. The lessons from these exercises seem to be twofold. First, that although technology may pose a problem, it may also provide the solution. Second, that even if it ain’t broke, there is a compelling strong case for fixing it. Not to do so today runs too great a risk of catastrophic failure tomorrow. We do not need to await a second Flash Crash to establish it was no fluke. To wait is to normalise deviance. (b) Modifying market macrostructure Regulators in the US and Europe are in the process of reviewing regulatory rules for trading. In the US, some changes to market rules have already been implemented, while others are the subject of ongoing research. 29 In Europe, a review is underway of MiFID with an early set of proposals tabled. | One variant of these arbitrage strategies exploits pricing differences between common securities quoted on competing trading platforms. For that reason, HFT firms tend to have their tentacles spread across multiple trading venues, arbitraging tiny differences in price (Chart 7). These strategies have grown up as a direct response to the fragmentation of trading infrastructures. In other words, HFT is at least in part the (possibly unplanned) progeny of regulators pursuing competitive ends. The ascent of HFT goes a long way towards explaining the rise in equity market turnover in the major equity markets and in particular the rise in number, and fall in the average size, of trades executed. Put differently, the trading behaviour of HFT has contributed to the downward fall in the average duration of stock holdings. HFT holding periods lie in a narrow time range. The upper bound is perhaps around one day. The lower bound is a perpetual downward motion machine, as computing capacity compresses the timeline for trading. A decade ago, execution times on some electronic trading platforms dipped decisively below the one second barrier. As recently as a few years ago, trade execution times reached “blink speed” – as fast as the blink of an eye. At the time that seemed eye-watering, at around 300–400 milli-seconds or less than a third of a second. But more recently the speed limit has shifted from milli-seconds to micro-seconds – millionths of a second. Several trading platforms now offer trade execution measured in micro-seconds (Table 1). | 1 |
We do not think, act or communicate in the same way today as we did when the inflation targeting regime was new. The driving force behind the changes has come partly from practical experiences, both in Sweden and other countries conducting inflation targeting. Academic research has also played an important role. Before I go into greater detail on how the Riksbank’s strategy has developed and how it looks today, let me begin by describing the background to the establishment of an inflation target in Sweden. Background to the introduction of an inflation target in Sweden On Sunday, 19 November, the Swedish krona will have been floating for exactly fourteen years. The date 19 November 1992 will always have a special significance for the Riksbank, as it was the day that we were forced to abandon the fixed exchange rate, under dramatic circumstances and following a dogged defence of the krona against speculation. This happened in the midst of the most serious economic crisis in Sweden since the 1930s – a crisis that can generally be described as a tragic climax to almost twenty years of stabilisation policy problems. The economic policy conducted during the 1970s and 1980s tended for various reasons to be overly expansionary and it proved difficult to maintain price rises and wage increases at a reasonable level. | Irma Rosenberg: Monetary policy and the Riksbank’s communication Speech by Ms Irma Rosenberg, First Deputy Governor of the Sveriges Riksbank, at Swedbank, Stockholm, 8 October 2007. * * * Introduction In recent decades there has been a clear trend for central banks to strive for greater openness in their monetary policy. Central banks are now publishing an increasing amount of background material in the form of analyses and forecasts for inflation and other economic developments. The number of countries introducing explicit inflation targets is also growing. Something that is being discussed to an increasing extent, but which not so many central banks have dared to carry out yet, is the publication of the central bank’s own forecast for its policy rate 1 . At the beginning of this year the Riksbank decided to take this step. The purpose was to become even more open and clear regarding the way we conduct our monetary policy. I will begin today by discussing this new system and how it affects our communication. I will also give some reflections on the experiences of the two occasions on which we have published our own interest rate path in connection with the Monetary Policy Reports published in February and June this year. I will then conclude with a few words on the most recent monetary policy meeting in September. The Riksbank’s communication with an own interest rate path Advantages of an own interest rate path What are the advantages of publishing our own forecast for the repo rate? | 0 |
And banks would have to meet a minimum requirement for both measures. To some extent, such a capital regulatory framework is old news. Historically, capital requirements in most countries took the form of simple leverage ratios. Risk-weighted requirements were only introduced following the first Basel Accord of 1988. The “oldfashioned” leverage ratios were replaced by “modern” risk-sensitive requirements. Some 15 For a discussion of potential short-comings of Basel II, see Robert Bichsel and Jürg Blum (2005): “Capital Regulation of Banks: Where Do We Stand and Where Are We Going?”, Swiss National Bank Quarterly Bulletin. 16 “Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience”, Financial Stability Forum, 7 April 2008. 4 BIS Review 158/2008 countries, however, have maintained leverage ratios as essential elements of banking regulation. Notable examples are the US and Canada. Despite being somewhat old news, I am convinced that the introduction of a leverage ratio is fully compatible with the ongoing efforts to strengthen banks’ capital. We must not forget that Basel II aims to secure a minimum level of capital. It’s up to every bank and every national supervisor to exceed this minimum. As the G20 has put it, “regulation is first and foremost the responsibility of national regulators”. 17 6. The pros and cons of a leverage ratio Let me now highlight the most important benefits of a leverage ratio. Equally, I would like to address the most commonly expressed concerns about a leverage ratio. | I find this neither upsetting nor surprising. If regulation is to be effective, we must expect it to impact on behaviour and restrict action. This will solicit complaints. If it doesn’t, regulation would, by definition, be superfluous. 4. From Basel I to Basel II For all these reasons, I strongly support bank capital regulation that puts a meaningful limit on banks’ leverage. But what is the best way to restrict leverage? In an ideal world, we would, of course, also want to take into account the riskiness of banks’ assets. 12 As you know, banks can increase their risk not only by increasing their leverage but also by increasing the riskiness of their assets. To compensate for differences in banks’ assets, we would ideally require banks with riskier assets to hold more capital. The Basel Committee on Banking Supervision has embraced precisely such a risk-weighted approach. More risk, more capital. If we lived in an ideal world, this simple principle would work well. By “ideal”, I mean a world in which risks can be observed by everybody and assessed precisely. What has become abundantly clear in recent months is that we do not live in an ideal world. Banks and the risks they incur are far from transparent. In fact, banks exist because of asymmetries of information. 13 A core function of banks is to “produce information”. For instance, banks screen potential borrowers. Furthermore, banks monitor ongoing lending relationships. | 1 |
Miguel Fernández Ordóñez: The Spanish economy after the crisis Opening address by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at the “IV Conference on the unique features of Spanish savings banks”/Federación de Usuarios de las Cajas de Ahorros (Federation of Savings Banks Customers), Zaragoza, 11 February 2009. * * * Thank you Mr Chairman, The profound worldwide economic slowdown, which in the industrialised countries has already turned into a rapid and sharp recession, is undoubtedly the most serious since the 1929 Great Depression. In recent months, the collapse of international financial markets has been averted only with great difficulty and we don’t yet know what the final consequences of the events unfolding will be for the real economy. Faced with this situation, all efforts will inevitably focus on attempting to exit the crisis. Internationally, and within Spain, hitherto inconceivable measures have been adopted, such as unlimited liquidity injections by central banks, extensive fiscal stimuli and exceptional support to the financial system. Naturally enough, governments, politicians, central bankers, supervisors and academics are all contributing to these tasks. And it is not surprising, therefore, that all my speeches in recent months have been to analyse the causes of the global crisis and to review the various measures to tackle it. | Along with the effect of the positive factors I mentioned earlier, we should also highlight euro area membership for what it has meant in terms of stability and reducing uncertainty, and the contribution of immigration, which has added notable flexibility to the Spanish economy. Unquestionably, though, a decisive factor in growth from 1999 to 2008 was the extraordinary increase in household and corporate debt. In that decade, Spanish domestic demand growth was double that of the European Union because private agents' debt rose twofold in the 1999-2007 period. As a proportion of gross disposable income, household debt climbed from little more than 60% to 130%, and corporate debt from 270% to almost 600% of the gross operating surplus. 2 BIS Review 18/2009 The problem facing us on emerging from the crisis is that although this swift indebtedness drove the increase in domestic demand and, therefore, in economic growth in recent years, the high level attained will prevent debt from growing in the future at a similar rate to what it did in the past. Moreover, for several years we may well witness a debt reduction or deleveraging process, meaning its effect on domestic demand will be the opposite of what it was in the past, reducing our growth rate. The Spanish economy's main problem, then, is that its future looks very different from its past since the two possibilities I mentioned – devaluation and increased debt – have disappeared. | 1 |
We are closely monitoring the impact of the recent interest rate reductions in the euro area on Switzerland. Should there be a need for action, the SNB will take the necessary measures. The export-weighted real external value of the Swiss franc remains well above its long-term average. Since the introduction of the minimum exchange rate, it has changed only slightly. Thus, the Swiss franc is still high. The slight inflation differential during the past quarters meant that the real adjustment of the Swiss franc against the euro has come to a virtual standstill. In this environment, the minimum exchange rate remains essential for guaranteeing appropriate monetary conditions. SNB monetary policy To conclude, I would like to mention a number of challenges which the SNB will be facing in the near future. Overall, the environment remains extremely challenging for both the Swiss economy and our monetary policy. With its high level of international integration, Switzerland is strongly affected by global developments, especially those in neighbouring countries. The ECB’s measures to support economic development in the euro area are also likely to have a favourable impact on the Swiss economy in the medium term. Nevertheless, given the low interest rates in Europe and the rest of the world as well as the strong Swiss franc, the SNB’s monetary policy environment will remain highly complex. We will continue to take all action necessary to fulfil our mandate of ensuring price stability, while taking due account of economic developments. | World trade also declined, after having exhibited strong growth in the last few months of 2013, which had raised hopes of a sustained economic recovery. BIS central bankers’ speeches 1 In the US, GDP declined in the first quarter. However, we consider this to be a transitory phenomenon which can be largely put down to an exceptional cold snap experienced this winter. Growth in the euro area was weak and varied greatly from one country to another. While economic activity continued to pick up in Germany, renewed stagnation in France and Italy gave rise to disappointment. We continue to expect the global economy to firm in the coming quarters. However, the global economic recovery will remain very subdued by historical standards. Compared to the last monetary policy assessment, we now anticipate somewhat slower growth, in both advanced and emerging economies. It is entirely possible, however, that global economic growth will be weaker than we have assumed. The euro area continues to face significant challenges. These include the consolidation of public sector finances as well as the implementation of institutional reforms and reforms to promote growth. In addition, various emerging economies are suffering from structural problems. Should the current geopolitical conflicts worsen, this would also hold back activity in the international economy. Since the major currency areas are in different phases of the monetary policy cycle, there is also a danger of greater volatility in the financial and foreign exchange markets. | 1 |
As one example, we are paying attention to the possibility that a decline in the size of the balance sheet puts downward pressure on bank deposits. As discussed earlier, in general, balance sheet normalization removes an asset from the private sector that can be held only by banks (reserves) and replaces it with an asset that can be held by anyone (securities). It is possible that, on net in equilibrium relative to a counterfactual in which the balance sheet does not decline, (a) banks will hold fewer reserves; (b) banks will offset some of this decline by holding securities instead, and some by taking in fewer deposits; and (c) non-banks will replace those deposits with securities. The extent (if any) of any such decline in deposit activity on deposit and loan pricing will likely depend on a variety of factors, including the extent to which the decline comes from wholesale institutional deposit activity motivated by interest rate arbitrage. See Ihrig, Mize, and Weinbach, How does the Fed adjust its Securities Holdings and Who is Affected?, September 22, 2017. 20 In fact, following the June 2013 FOMC meeting, the dealer survey revealed a shift in expectations toward a more accommodative balance sheet stance over time. Prior to that meeting, most survey respondents had seen significant odds that the FOMC would eventually use sales of agency MBS as part of its normalization strategy. | The FOMC also indicated that it anticipates that these caps will remain in place once they reach their respective maximums. Let me spend a few minutes discussing the importance of gradualism and predictability, and how the FOMC’s plan achieves these things. Gradualism To examine the importance of gradualism, we will need to open, once again, the theoretical debate about “stock” and “flow” effects of central bank asset purchases and sales.15 Under the “stock view,” transitions in the pace of central banks’ asset flows should have little direct effect on asset prices. Instead, what matters to asset prices is the present and expected future stock of assets the central bank holds, or is anticipated to hold. The “flow view” suggests instead that the effect on asset prices relates to the pace at which assets are being added or removed from the balance sheet at that time. Many speeches have been given, and journal articles published, about the relative importance of these effects with respect to their impact on financial conditions and the broader economy, a topic that I do not intend to wade into today. 16 Instead, I think it’s important to make a few points on “flow effects” relevant to policy implementation, and in particular related to possible “flow effects” associated with an overly rapid pace. Overly fast flows of securities into private hands can be disruptive to market functioning. | 1 |
Instead, we focus on two other dimensions of the system of financial regulation: (i) the number of regulatory constraints; and (ii) the extent of discretion around each individual regulatory rule. (i) The Number of Regulatory Constraints Although the post-crisis architecture places many regulatory constraints on banks, the key going-concern constraints are risk-weighted capital requirements (RWCR), the leverage ratio (LR), the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). We assess these four constraints, recognising that other aspects of the regulatory system might also impose binding constraints on banks. For example, stress testing can be interpreted as holding banks to a different RWCR standard and a potentially different overall capital calibration (Greenwood et al (2017)). Some have recently contended that this multi-constraint system of financial regulation might be over-identified, with potentially distortionary implications for banks’ business models and behaviour. For example, Greenwood et al (2017) argue that it may be distortionary and unnecessary to have multiple, independent constraints on banks’ behaviour. And Cecchetti and Kashyap (2016) suggest that the LCR and NSFR are strongly overlapping in their impact, so that both may not be needed. These are well-reasoned critiques of the new regulatory framework whose messages should be analysed carefully when evaluating the new framework. They are just the sort of academic challenge to regulatory orthodoxy which was so missing in the pre-crisis period. Nonetheless, it is also worth reminding ourselves why and how such a multiple-constraint framework was arrived at in the first place. | Moreover, as many of you here are accounting, financial and business leaders of Hong Kong, I am sure you will also share my view that enhancing the financial literacy of our citizens is a difficult but worthy task, requiring the collaborations of all sectors of the community to work closely together. You are well positioned to help our public education programme, and we in the HKMA look forward to your continued support and advice. Thank you. BIS central bankers’ speeches 5 | 0 |
It is a great strength of the MPC that regional visits are a key part of the activities of all members of the Committee. And in the four and a half years I have spent as a member of the Committee, I estimate that I have visited around 140 individual businesses and talked to around 100 business groups – across England, Scotland, Wales and Northern Ireland.1 There are two reasons why I am particularly pleased to speak at today’s lunch. First of all, the East of England is my home region as I live in Essex and have done so for over a quarter of a century now. Second, I am always delighted to speak on a CBI platform as the seven and a half years that I spent as a CBI economist in the late 1980s and the early 1990s was a very important and formative period in my career. I have a great respect for the work of the CBI which remains the pre-eminent business organisation in the UK. That period I spent working in the CBI’s Economics Department about twenty years ago was also a period of major economic turbulence in the UK. I joined the CBI in September 1986, just as the “Lawson Boom” was getting underway. And I was the CBI’s Director of Economic Affairs from 1989 until the end of 1993 as boom turned to bust and the UK economy went through the last major recession before the global financial crisis of 2008/9. | A range of measures will be introduced to accelerate the pace of migration towards e-payments, including driving the adoption of the mobile phone banking and payment transactions, increasing the number of point-of-sale terminals, and introducing a pricing structure that incentivises the use of e-payments. Conclusion Let me conclude by expressing the Bank’s appreciation for all the valuable contributions received from the industry, Government agencies and other stakeholder groups with whom the Bank engaged over the course of this year to develop the recommendations in the Blueprint. In total, the Blueprint sets out 69 recommendations to achieve the vision for the financial sector in 2020. The Blueprint provides the vision and direction to secure a financial system that will firmly support and drive Malaysia’s long-term growth potential and aspirations. It will be our shared commitment that will result in its success. 4 BIS central bankers’ speeches | 0 |
Thus, one cannot say that privatisation has been as yet accomplished fully. What remains, however, is a more standard situation, posing similar problems as privatisation of state-owned companies in the advanced market economies. As to the future prevailing model of corporate governance, the Czech Republic can be expected to converge toward the practice which will be most widely observed within the European Union countries. Macroeconomic stabilisation The transformation strategy required a constant effort to achieve macroeconomic stabilisation. Tight fiscal policy, based on a balanced or surplus state budget, and prudent monetary policy, were mutually supporting each other. These were supplemented by wage controls and overall income policy within the so-called heterodox concept of macroeconomic stabilisation. During transformation, Czech monetary policy used two basic tools to fight inflation: targeting monetary aggregates, and the nominal anchor of a fixed exchange rate. The Czech experience with curbing inflation during a transformation period is successful, compared to other transforming economies of Central Europe. When, in January 1991, the bulk of prices in the Czech economy were freed after 40 years of central price fixing, the result was a yearly increase of the price level by almost 58%. However, no inflationary spiral evolved, and, since 1992, inflation showed a falling long-term trend towards a single digit rate in 1995-1996. BIS Review 25/1997 -5- The initial jump of prices in 1991 was not accompanied by a similarly steep increase of nominal wages. Instead, real wages fell. That created some room for subsequent increases in real wages without serious inflationary consequences. | A more detailed answer to the causes of changes in the degree of impact of individual factors on money supply growth can be found when studying their development in different periods of the transformation. In Czechoslovakia, during the first transformation years (1990-1992) money supply growth was based primarily on the relatively quickly increasing volume of credits granted to enterprises due to growing credit demand, which was very closely connected with the BIS Review 25/1997 -9- liberalisation of entrepreneurial activities in a newly created market environment (an increasing number of businesses in need of initial capital). Gradually, foreign money creation also expanded, affected by the development of an improving balance of payments, particularly the current account. The gradual stabilisation of the macroeconomic and political environment (apparent mainly after the dissolution of the Czechoslovak Federation in January, 1993, and the relatively rapid calming of price developments following the introduction of a new tax system based on value added tax), the commencement of the activities of capital market institutions and the stability of the exchange rate which significantly decreased the risks for foreign investors, led in the second half of 1993 to a significant strengthening of the influence of the inflow of foreign funds into the Czech Republic on money supply growth. The strong foreign capital inflows continued to influence money supply growth in 1994 and 1995 when capital inflows reached 18 per cent of GDP. This growth was particularly generated by increasing foreign direct investments, portfolio investments and relatively cheaper foreign credits drawn by domestic enterprises. | 1 |
40 On the second occasion, at the beginning of 2015, inflation had been below the target of 2 per cent for several years, and the policy rate had been cut to zero, that is, close to the lower bound. In this situation, the Riksbank began extensive purchases of government bonds, which were moreover extended on several occasions over the coming years. This is a measure that reduces maturity premiums, but it can also lead to lower rates on other assets, through the so-called portfolio balance channel. 41 It also has a signalling effect. If the Riksbank counts on the policy rate being low going forward, it may contribute to market expectations of future short-term rates falling. With hindsight, we can see that the government bond purchases actually contributed to a more expansionary monetary policy with lower interest rates and a weaker exchange rate and that inflation therefore returned to the target after a while. 42 The third occasion was in connection with the outbreak of the pandemic last year. On this occasion, we made large bond purchases to retain the low interest rates and we provided various types of liquidity support, including offering the banks loans against collateral at three-month and six-month maturities at the policy rate, we eased the collateral requirements and provided loans to the banks for lending to companies (funding for lending). 43 These measures were important for the functioning of credit granting in the economy, and for the impact of the policy rate on other interest rates remaining normal. | I know that the subject is a sensitive one in Italy... but I would like to say this as a friend: you should agree to examine and discuss the substance of these proposals, before worrying about the very principle of Franco-German discussions, which are often necessary but never sufficient. Rest assured, we very much want Italy to join us at the negotiating table, and you will, I think, find it in your interest to increase public and private solidarity. 1/ The first priority is to increase private risk-sharing. Our starting point here should be the real needs of the economy, and especially those of firms and entrepreneurs. In order to invest and innovate, for example in the digital economy or the energy transition, firms must to be able to take greater risks. This means more equity financing, which has a longer-term horizon, as opposed to debt financing. The euro area is already lagging far behind in this respect: equity financing was equivalent to just 77% of GDP in France in mid-2018, compared with 124% in the United States. And yet we have abundant resources: a savings surplus of around EUR 350 billion in the euro area. [slide] We therefore need to build a “Financing Union for Investment and Innovation” in order to channel these resources to where they are needed. This Union would be a combination of two existing initiatives, first of all the Banking Union, which must at last be finalised. | 0 |
If that’s been true at all over the past couple of decades, however, it’s a much more accurate description of the pre-crisis economy, when interest rates were significantly higher, than of the years since. Currently, house prices, equity prices and mortgage lending are all still materially lower, when measured in real terms, than they were a decade ago (in fact, this has been the first ten-year period since the second world war in which the real stock of mortgage lending has declined in the UK.) So if there had been a macroprudential authority throughout the past twenty years its policies would presumably have been a lot tighter in economy with low inflation and rapid credit growth, a single policymaker might well choose such a policy setting. It’s generally the case that, as long as there are at least as many objectives as policy instruments, and when there can be independent shocks to those objectives, the policy instruments will occasionally move contrariwise, whatever the arrangements for setting them. For example, the same would be true in an economy with a weak economy but an undesirably high public-sector deficit – the right reaction, even for a single decision maker, could well be to set tight fiscal policy but loose monetary policy (see Kohn (2017) on this point). 7 Differences in objectives also drive many results concerning fiscal and monetary policy coordination. The literature is significant and diverse. But one strand (e.g. | My purpose today is to put the case for continued separation, albeit within the single Bank of England. I think the interactions between the two policies are often overstated, particularly in small open economies like the UK. Domestic interest rates have a smaller effect on financial stability, and financial policy a less significant impact on demand and inflation, than sometimes suggested. And whatever the benefits of formal co-ordination, a full merger could compromise accountability. The risk is that a single committee would pay too much attention to its more verifiable objectives – the cyclical stabilisation of inflation and growth, currently allocated in the main to the monetary policymaker – and too little to financial stability. 1 2 Fernie and Metcalf (1999), Groves et al (1994). The key reference in the economics literature is Holmstrom and Milgrom (1991). 2 All speeches are available online at www.bankofengland.co.uk/speeches 2 I should say before I start that nothing I say here is very novel. Others, including my predecessor Charlie Bean and the economist Lars Svensson, have made similar points about the interaction of monetary and macro-prudential policy3. I discovered when writing the talk that my former colleague Paul Tucker made very similar arguments regarding accountability back in 20114. FPC external member Donald Kohn gave a talk on this topic only a few months ago. There is, more generally, a substantial and growing literature on the governance of macro-prudential policy and its interaction with monetary policy. | 1 |
But is that really true? I don’t think so. If we work together, we are still in control and we can still do things well. The history of the EU is a case in point. When European countries signed the Treaty of Rome 61 years ago, they chose to work together instead of working alone. Today more than ever, this choice is also a reaction to a changing world. Some of the current changes are beyond any single government’s control, and are better managed with the help of strong allies and good friends. The world of banking is no exception. Our financial systems have grown closer together and have become much more complex than they used to be. Large banking groups now cover many Member States. We have all benefited from this. But if we want this trend towards integration to continue, we must make sure it does not come at the cost of greater instability and more crises. We need rules that apply across borders just as banks operate across borders. And we need supervisors who have the power to see and act across borders. In short: we need to cooperate. And when I say cooperate, that’s what I mean. I know that some may think we have created a system in which the ECB and the Single Resolution Board hold all the power. I think otherwise. The banking union is very much a joint project. Just look at banking supervision. We at the ECB cannot act alone. | And we also benefit from our broader view when we analyse horizontal issues. A lack of profitability is one of these issues. Here, we can pool insights from a large sample of banks, and this improves our analysis. And it’s the same with other issues, such as governance, cyber risks and the use of internal models. These models in particular are notoriously difficult to supervise, so a broad yet in-depth knowledge of industry standards and practices comes in handy. But it’s not just that we benefit from a broader view. We also benefit from a broader set of views. Supervisors from across Europe work together day in day out, pooling their knowledge and their different experiences. And at the end of the day, it is the ECB’s Supervisory Board and its Governing Council that take decisions. In other words, each decision reflects the views and opinions of 26 national supervisors from 19 countries. There is less room for national bias and less room for supervisory capture. Finally, we benefit from economies of scale when it comes to employing specialists for certain topics. If you supervise just a handful of banks, it might not be efficient to have specialists for each and every topic. But if you supervise the 118 largest banks in the euro area, it does become efficient. This is another huge advantage of European banking supervision. In short, supervising banks at the European level takes us a long way towards making banks safer and sounder. | 1 |
One possible way forward to ensure something happens and to increase our knowledge in this field would therefore be a strategy that combines different possible measures on a smaller scale. 3 Even a journey of a thousand miles begins with just one step, and it is important to take this step. With regard to the statistics received over the summer, both in Sweden and abroad, they agree fairly well with the assessments we made in July. Economic developments in Sweden still look good and the expansionary monetary policy is supporting the upward trend in inflation. And if it were necessary, there is a high level of preparedness to make monetary policy even more expansionary. We are now working on producing an overall assessment of the situation in the Swedish economy, and in connection with the publication of the monetary policy decision on 3 September, we will present new forecasts. 3 8 See Per-Anders Bergendahl, Monika Hjeds Löfmark and Hans Lind (2015), “Bostadsmarknaden och den ekonomiska utvecklingen” (The housing market and economic development), SOU 2015:48, Appendix 3 to Långtidsutredningen (Long-Term Survey of the Swedish Economy), which proposes this strategy with regard to reforming the housing market. | A data-dependent normalization means policymakers need to see tangible evidence of a solid recovery, prior to any policy tightening. 2/4 BIS central bankers' speeches Given the fragile recovery policymakers would be best advised to lean on the side of caution. Faced with additional shocks, we believe our priority should be to offer additional accommodation to the economy. However, policy makers should be careful in getting the policy mix right so that potential long-term costs do not outweigh short term benefits. To that extent, we believe: Fiscal policy should provide additional support, subject to existing fiscal space. So far, public sector sin the developed economies have little financing constraints, partly on account of massive injections of liquidity from central banks. The same appears to be true also for the emerging market economies, such as Albania, which continue to enjoy both market access and relatively low financing costs. However, the fiscal authorities of emerging market economies should be mindful on the need to preserve market credibility on the sustainability of their finances. Financial intermediaries – such as banks – have also shared their fair share of the burden. They would naturally absorb a large part of the additional financial costs incurred in case of further shocks. However, financial and macroprudential policies should avoid the temptation of shifting an ever increasing part of the cost on the banks’ balance sheets. Financial stability and a robust banking sector remain paramount for the long-term growth. Finally, monetary policy should offer additional stimulus. | 0 |
These two regulations must naturally be enhanced by proposals on the deposit guarantee fund and the crisis resolution mechanism, which are the two other essential pillars of the banking union. The ECB, and all the other national authorities concerned, must now continue the preparatory work so that the Single Supervisory Mechanism can become operational as soon as possible. The Banque de France and the ACP provide an important contribution and intend to play an active role in the new mechanism. This is particularly the case given that around a dozen major French banking groups will be subject, according to the criteria set out in the regulation, to direct supervision by the ECB, even though the ACP will remain responsible for day-to-day supervision. 2. Resolutely pursuing efforts to strengthen the resilience of the financial system by preparing for and implementing new regulations The international financial regulatory framework evolved substantially in 2012, and will continue to do so in 2013. It is therefore particularly important to adapt to these changes. 2.1 The insurance sector must continue, in France and Europe, to prepare itself for the application of the new prudential regime, Solvency II Admittedly, 2012 was marked by tough discussions about the Omnibus II Directive and in particular the question of the treatment of insurance products with long-term guarantees. These discussions were unfruitful and will delay the entry into force of Solvency II. | The same is also true for market making activities that play a vital role in ensuring financial market liquidity and thus in convincing investors to finance the real economy. BIS central bankers’ speeches 1 This will therefore mean a new organisation for banks and greater powers for the ACP, including notably banking crisis resolution powers. The ACP will then become the ACPR. In exceptional circumstances, the ACP could call on support from the failing entity’s shareholders and subordinated bondholders. It could then, if necessary, request intervention by the Deposit Insurance and Resolution Fund, which is currently only required to intervene in the framework of its depositor compensation arrangements, even though it has already voluntarily participated in restructuring operations. In this respect, in line with the Paris financial centre’s wishes, the draft law provides that the possibility of calling on support from the Fund will be capped at a ceiling set by decree in order to ensure that the Fund’s intervention does not result in contagion. 1.2 A few words on the banking union Distinct progress was made in 2012 in the area of European banking supervision. The euro area crisis required particularly ambitious measures to be adopted and these steps have now been taken. Thanks to the determination of European leaders, at the end of 2012, an agreement was reached on two draft regulations establishing the Single Supervisory Mechanism under the auspices of the ECB. | 1 |
Apart from the cost in net worth, intervention requires withdrawing money used to purchase foreign exchange by placing debt. This debt has an impact on market interest rates, affecting firms’ financial costs and arbitrage conditions, which could end up undoing the direct effects. At the same time, repeated or frequent interventions lose effectiveness: it is essential for intervention to be an exceptional occurrence in order to transmit the relevant information to financial markets. Nevertheless, it is a valid tool, effective in changing the exchange rate and strengthening the international liquidity position. The board of the Central Bank of Chile constantly evaluates the timing and the size of any intervention and in the past few weeks it has certainly been present in our discussions, based on weighing the benefits, costs and the present context. In the Central Bank of Chile we use a variety of methods for assessing the real exchange rate level with regard to its long-term fundamentals and thus we have an ample range of estimates. Our aim is not to determine which is the equilibrium – that is the task of the market –, but rather to detect any anomalous deviation. These discussions led us to the conclusion in our latest Monetary Policy Report that the real exchange rate is within the adequate range of levels, albeit in the lower part of it, and this is confirmed by the most recent appreciation. | When it comes to undertaking reform in the areas of financial system development, the exchange rate and monetary policy regime, and liberalization of the capital account, there is more consensus on the importance of the efforts than there is on the appropriate pace and sequencing of policy changes. These initiatives are all closely related, and designing sensible reforms in one of these areas requires careful consideration of how to proceed with the others. Progress in one requires progress in the others. And market participants and policymakers need to have the chance to adapt to change and learn as reforms are implemented. This is the classic and persuasive argument for care and for gradualism. But it is possible to move too gradually. There is risk in inertia as well as in change. The policy challenges in occupying the middle ground - the middle ground of trying to allow some but not too much variability in the exchange rate, some but not too much freedom for capital movements with the inevitable increase in leakages around the remaining controls, and some but not too much competition in a still fragile domestic financial system - may be harder during a protracted transition. The more protracted the process of agreeing on and initiating change, the greater the costs for the economy as a whole of the distortions left in place. By outlining a path for reform, governments can dispel uncertainty about the overall strategy and enable market participants to begin to adjust, mitigating some of the concern about moving too quickly. | 0 |
I understand that among other things, it intends to designate Singapore as its Southeast-Asian hub for RMB business and will make Singapore its wealth management hub covering Southeast Asia and South Asia. BIS central bankers’ speeches 1 7. ICBC and Singapore can together play a big role in promoting the greater use of the RMB for trade settlements and other economic activities within Asia, and particularly in Southeast Asia. 8. I congratulate ICBC for its commencement as Singapore’s RMB clearing bank. Thank you. 2 BIS central bankers’ speeches | WC-PSS created cross-border payment innovations: international stock markets network, electronic payment message standard, and ASEAN retail payment system network. In addition, BOT in association with Hong Kong Monetary Authority (HKMA) launched a new cross-border payment-versus-payment (PvP) link between Hong Kong’s USD CHATS, Hong Kong dollar Clearing House Automated Transfer System (CHATS) and Thai BAHTNET to ensure the simultaneous delivery of US Dollars in Hong Kong and Thai Baht in Thailand in order to eliminate or mitigate settlement and counterparty risks. The link operationally started since 28 July this year. Aligning with cross-border payment innovations, growth of IT investment is another matter that the Bank of Thailand has promoted and monitored. The widespread adoption of advanced technology in banks’ key systems is to advance efficient internal operations – Big Data Analytics for processing customers’ information to analyze customers’ behavior and Cloud Computing for allocating IT resources, and to provide products and services through online platform such as Mobile Electronic Data Capture, Net Bank, Virtual Card, Near Field Communication Contactless, and etc. However, many people, especially in the baby boom ages, have not experienced the online banking services yet, partly because they have concerns about security. So it is our job to secure them. BOT has continuously promoted online banking systems and are aware of their risks and impacts at the same time since we believe that no matter what we have in online mode, they are all connected. As digital banking products thrive, so do the competency of cyber threats. | 0 |
Eddie charged me with the task of preparing ideas on how the new committee – the Monetary Policy Committee – would decide and set the level of interest rates, and to draft the speaking note for the very last Chancellor-Governor meeting which was brought forward from Wednesday to 8am on the Tuesday. By the next morning when the public announcement was made, a paper was ready setting out the questions that the Bank would have to answer on how the new Committee would operate. We had a script but, at this stage, the cast was incomplete. Only four of the five internal and none of the external BIS Review 43/2007 1 members were in place. With the support and hard work of some extraordinarily talented young Bank economists, the new arrangements were designed and put in place in not much more than three weeks. They included the arrangements for briefing the Committee, the pre-MPC meetings, the format of the decision-making meetings of the MPC, practical matters such as the ordering of a sound system so that, in a break with tradition, it was actually possible to hear what was said in the Bank’s older meeting rooms, and rehearsals of the meetings and voting procedures with staff members playing the roles of the MPC members. So short was the time available that some of the dress rehearsals came after the first night of other parts of the policy process. | Gent Sejko: Future Balkans - towards a global inclusion Speech by Mr Gent Sejko, Governor of the Bank of Albania, at the Tirana Economic Forum "Future Balkans: Towards a global inclusion" Leadership, Institutions and Policies Convergence 2017-2020, Tirana, 24 January 2018. * * * Your Excellency Mr President, Your Excellency Deputy Prime Minister of Albania, Your Excellency Deputy Prime Minister of Kosovo, Honourable Minister of Finance and Economy, My fellow Colleagues and Honourable Participants, It is a pleasure for me to participate at this Conference, convened to discuss on the importance of regional integration, which should be promoted by a forward-looking leadership and supported by the policies convergence. I believe that the dialogue that focuses on sharing our vision for the future, the convergence of perspectives about the challenges ahead of us, and identifying the objectives and drafting agendas for joint action, will be a fruitful dialogue to all of us. Policy convergence, both within and between countries, promotes efficiency and minimizes negative spill-overs. The role of institutions in the growth and development Institutions are the backbone of any modern society, in as much as they generate and implement laws, regulations and policies of development, thus laying out the rules of the game in a market economy. From a broader perspective, these rules should provide for a stable and transparent environment, thus enabling a predictable and long-term decision-making process. They should promote fair competition and equality of opportunities, and they should engender fairness and social cohesion. | 0 |
Labour productivity in entire economy Annual percentage change, seasonally-adjusted data 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Note: Squares are the Riksbank’s forecasts. Outcomes are quarterly data and the forecasts are annual averages. BIS Review 154/2008 Sources: Statistics Sweden and the Riksbank 11 Figure 7. Cyclical variation in GDP and number of employed Percentage deviation from trend 6 6 GDP 4 4 Employment 2 2 0 0 -2 -2 -4 -4 -6 -6 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Note: Trend calculated using Hodrick-Prescott filter. Broken lines are the Riksbank’s forecasts. Sources: Statistics Sweden and the Riksbank Figure 8. | This is a substantial cut and it has been made on the grounds that since the previous Monetary Policy Report was published in October there has been an unexpectedly rapid and tangible downturn in economic activity in Sweden and abroad. So, in order to prevent development being far too weak and inflation too low, a significant reduction in the repo rate was required. The fact that the interest rate needed to be cut substantially is also due to monetary policy not having such a large impact recently as it normally does. With lower policy rates and a more expansionary fiscal policy in Sweden and abroad, we expect to see an easing-off in the slowdown of the economy and a recovery at the end of 2009. In this acute situation, one may wonder whether wage formation is something that we need to discuss just now. Obviously, wage formation is not the most central issue for monetary policy at the moment. At the same time, it is important to be able to stand firm when a storm is brewing. Today, the Swedish economy stands on much firmer foundations than it did in the early 1990s – largely thanks to the lessons that we learned from the crisis at that time and the improvements that have been made in the functioning of the economy since then. I would claim that wage formation has been an important element of this and I intend to explain this in more detail in my speech today. | 1 |
Perhaps, even more important, one of the key benefits of ensuring that certain creditors know they can be bailed in is that those creditors have a much stronger incentive to monitor and, if necessary, constrain the risks banks are taking.13 Transition to new resolution regime Moving to an effective resolution regime, including for the largest cross-border banks, will require a major transition. Many larger banks will need to make changes to their structure and financing. There will inevitably be higher costs as the implicit public subsidy is removed. There is no free lunch. This transition needs to be carefully managed. So in conclusion, I want to set out the principles that the Bank of England is following to guide the implementation of the new regime. Proportionality First and perhaps most important is proportionality. The resolution requirements for a bank should be what is necessary to deliver the resolution strategy for that bank – no more and no less. 12 See Bank of England (2015). 13 The Financial Stability Board has calculated that a withdrawal of government guarantees could reduce banks’ probability of failure by a third. This draws on evidence in IMF and Fed NY working papers that evaluate the relationship between the ‘government support assumptions’ that rating agencies express and measures of bank risk-taking. BIS central bankers’ speeches 7 Large banks cannot be allowed abruptly to cease operating. They have to be stabilised and resolved. Resolution is not resurrection. It takes time. | The public authorities of 14th century Barcelona hit upon a novel policy approach to the liability of bank owners – not only would bankers who failed be publicly vilified by the town crier, they would be forced to live on bread and water until they repaid their creditors.3 How to deal with failed banks is of course only part of a much larger public policy issue – how to deal with the failure of commercial enterprises generally. Arguably, the development of the limited liability corporate body – in which the owners’ liability is limited to their 1 See Button et al (2015). There was a reluctance from banks and from depositors to limit shareholder liability. Unlimited liability, it was thought, reassured depositors and noteholders that their claims were safe. So hybrid solutions were established in which shareholders’ liability was capped at some multiple of the capital they had invested, or in which they were subject to a call for extra capital if the bank got into trouble. 2 3 See Usher (1943). BIS central bankers’ speeches 1 investment – and corporate insolvency, is one of the most important foundations of modern capitalism. But banks are different for two reasons. First, their underlying business of maturity transformation means they depend on confidence. Loss of confidence in one bank can quickly become a run on all banks. And given their leverage and interconnectedness, failure of one bank can lead to failures of others. | 1 |
At that point, their balance sheet was almost 11 times GDP, with the foreign currency part constituting ⅔, or almost 7½ times GDP. And as is always the case in banking, there was a significant maturity mismatch between the asset and liability sides. Compare these numbers to the reserves of the Central Bank of Iceland, which were 21% of GDP at the time; a swap agreement with the Nordic countries amounting to € bn, or around 12% of GDP; and committed credit lines of around 2% of GDP, or a total of around 35%. This is dwarfed by the foreign currency liabilities of the banks, even if some of them were, of course, longer-term. These defences could only buy limited breathing space in the face of a full-scale run on cross-border operations of banks this size. Further research is needed before we can assess to what degree such breathing space would have facilitated a more orderly and less costly episode than the complete collapse that took place. At any rate, it is clear that this limited ability was one of the factors behind the decision not to grant Glitnir a loan of last resort amounting to € m, which it requested on 25 September in order to cover a loan repayment in mid-October. | International financial market liquidity and the króna exchange rate Liquidity index The króna exchange rate and bank stock prices Index, January 2005 = 100 Index, January 2005 = 100 2 120 1 110 Index, January 2005 = 100 250 120 110 200 100 0 90 ‐1 100 90 150 80 ‐2 70 ‐3 80 100 70 60 60 50 ‐4 50 40 ‐5 2004 2005 2006 2007 2008 50 40 0 2004 2005 2006 2007 2008 Financial market liquidity (left axis) Real stock prices for financial institutes (left axis) Effective exchange rate (right axis) Effective exchange rate (right axis) The liquidity index shows the number of standard deviations from the mean (exponential moving average) from a simple average of nine liquidity measures, Source: Bank of England, Central Bank of Iceland. Source: EcoWin Reuters, Central Bank of Iceland. As so often occurs in great tragedies, the two stories converged in a grand finale in early October 2008, when nearly nine-tenths of Iceland’s banking system collapsed when its three large cross-border banks – Glitnir, Landsbanki, and Kaupthing – were taken into special resolution regimes on the basis of the emergency legislation that had just been passed by Parliament. | 1 |
By contrast, a policy change designed to increase efficiency might not come with those undesirable outcomes. In practice, however, it can be difficult to differentiate among drivers of policy change due to measurement and assessment challenges, the potentially long impact horizon, and different views from a social and private perspective. I’ll turn now to describe this efficiency framework and then discuss some of the practical issues. Policy Efficiency As a point of departure, I’ll begin with an idea that I expect is familiar to most of you. Standard finance theory suggests that investors face a trade-off between risk and return that outlines the set of feasible options across portfolios. An investor can choose a portfolio with higher expected returns and higher risk, or a portfolio with lower expected returns and lower risk. I think there is a useful analogy for supervisory and regulatory policy. On one hand, the official sector cares about the provision of financial services such as credit, deposit-taking, payments, and risk transfer, where effective intermediation supports economic growth and consumer wellbeing. This is the basic function of the financial sector and can be thought of as the return on banking. On the other hand, the official sector also cares about reducing disruption in the provision of those services and broader financial stability risks. It is only a decade since the financial crisis in 2008–2009 that imposed such an enormous social cost on the U.S. economy, so those risks remain salient for many of us. | On the other hand, policies are possibly more short-term oriented and large policy errors more likely. Investors may therefore demand a higher risk premium. In direct democracies, the speed of reform is typically slower. Grid-locks are possible through referenda and therefore more common. On the other hand, political stability in direct democracies tends to be higher and economic policies typically have a more long-term orientation. As policy changes take more time to be introduced, the risk of large policy errors tends to be smaller. Over the long-term, investors appear to be willing to pay a premium for higher stability. Beyond differing parliamentary systems, our two countries’ political structures are organized along different principles. Whereas the political process in the United Kingdom can be broadly characterized as top down, Switzerland’s federalist structure implies a bottom-up political process with a great deal of political autonomy for our nearly 3000 communes and 26 cantons. It is interesting to note that there are at least some tentative signs of converging trends: In the United Kingdom, Tony Blair’s government has initiated constitutional reforms by establishing the Scottish Parliament and the Welsh Assembly in 1998 and by advancing the Regional Assemblies in England. In Switzerland, a number of centralization proposals are debated such as directly enhancing the power of the federal government or alternatively, merging a number of cantons with the aim of ending up with larger and fewer regional authorities. | 0 |
For example, one would expect that different inflation rates across countries would lead to exchange rate fluctuations, so as to equalise the cost of internationally traded goods and services. If there had been a shock to inflation overseas there may be no additional inflationary consequence for the UK of our exchange rate changing to reflect that shock. But the 25% depreciation of sterling since August 2007 in my view more likely reflects a re-appraisal of the UK economy given the financial crisis and the significance of the financial sector to the UK (in the context of what was a very large and growing current account deficit). In such a case, we would expect to see a large part of the exchange rate depreciation reflected in higher prices for goods and services imported into the UK and hence higher CPI inflation. The size and timing of such an effect, however, would be very uncertain, and would partly reflect whether firms think the lower exchange rate would be sustained and what they believe the monetary policy reaction might be. I think that the depreciation of sterling since August 2007 has had a substantial – but likely temporary – impact on inflation. Estimates are uncertain but my best guess is that it is probably adding between 1 and 2 ½ percentage points to the current inflation rate. | But I also believe that, if the exchange rate is reacting to a re-evaluation of real economic prospects – and not to some other inflationary shock – the effect should be a one-off change in relative prices, albeit spread out over time. It is important to stress that the MPC could try to offset all the price level effects of such shocks in order to leave the inflation rate unchanged. The problem with that idea in practice is the time it takes for Bank Rate to affect inflation. To counter short-term movements induced by relative price shocks would need very large and frequent changes in Bank Rate – including to offset the lagged responses of earlier changes. That sort of policy response would be very de-stabilising, likely to cause undesirable volatility in output, and be damaging to the economy as a whole. This is where the full remit of the MPC becomes effective – requiring us to support the Government’s objectives for growth and employment. Once there has been a shock to inflation, the Committee have to decide how quickly it should bring inflation back to target. To do that we have to judge the underlying state of inflationary pressure. And we have to monitor inflation expectations to check that they are not adversely affected by a succession of temporary shocks to the price level. | 1 |
They should provide three kinds of stability in a delicate combination of “synchronisation without domination”. To overhaul the changing balance between an ex ante written music score and a real-time human interpretation, let us aim at least for “mutual predictability”… And this is what today’s conference is about, for the macroprudential part of the piece. Thank you for your attention. 1 Interview of Philip R.Lane with Expansión, 26 february 2021. 2 See for instance Colletaz, Levieuge & Popescu (2018): “Monetary policy and long-run systemic risk- taking," Journal of Economic Dynamics and Control, 86(C), pp 165–184, and Dell’Ariccia, Laeven & Suarez (2017): “Bank Leverage and Monetary Policy’s Risk Taking Channel: Evidence from the United States”. The Journal of Finance, 72: 613–654. 3 This issue of the Financial Stability Review contains several excellent articles on related subjects, see for example Gabriel Makhlouf, “Lessons from Covid: a Macroprudential Framework for the Market Based Finance Sector”. 4 Istrefi, Odendahl and Sestieri (2020) provide evidence on this direction for the case of the Federal Reserve before the global financial crisis. See, “Fed Communication on Financial Stability Concerns and Monetary Policy Decisions: Revelations from Speeches“, Banque de France Working Paper Series No. 779. 4/4 BIS central bankers' speeches | These developments 7 4 Not only is liquidity both challenging to define and measure, but the impact of technological change on liquidity is difficult to isolate. On a number of dimensions, technological change appears to have improved both the efficiency of price formation and the ability to transact in size without significantly affecting market prices. But recent “flash” events in various markets – including rapid round-trips in prices on March 18, 2015, in the eurodollar currency pair and on October 15, 2014, in the U.S. Treasury cash and futures markets – have suggested the possibility that advancements in automated trading and changes in market structure may have improved liquidity in normal times but left markets prone to more frequent bouts of illiquidity during which price formation appears disconnected from fundamental information. Structural developments and the connection to liquidity and price discovery across markets warrant further study. See also recent comments by Lael Brainard, member of the Federal Reserve Board of Governors. Recent Changes in the Resilience of Market Liquidity. http://www.federalreserve.gov/newsevents/speech/brainard20150701a.htm. BIS central bankers’ speeches have resulted in damage to the integrity of the global FX market – damage that will not easily be undone. The behaviors that triggered these criminal and regulatory actions illustrate that, for many, self-interest and the lure of near-term gains were put above the preservation of the market’s integrity and long-term sustainability. | 0 |
We have made very significant progress on a resolution regime for the 21st century. The powers, international standards and institutions are all in place. The authorities and the banking system have strong and common incentives to complete the implementation. It is in all our interests that we do so. 14 8 See Carney (2014). BIS central bankers’ speeches References Afonso, G, Santos, J A, and Traina, J (2014) ‘Do 'Too-Big-To-Fail' Banks Take on More Risk?’, Federal Reserve Bank of New York Economic Policy Review 20(2). Bank of England (2015) ‘The Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL)’, Consultation on a proposed Statement of Policy, available at http://www.bankofengland.co.uk/financialstability/Documents/resolution/mrelconsultation2015 .pdf. Brooke M, Bush O, Edwards R, Ellis J, Francis B, Harimohan, R, Neiss, K and Siegert, C (2015) ‘Measuring the Macroeconomic Costs and Benefits of Higher UK Bank Capital Requirements’, Financial Stability Paper 35. Button, R, Knott, S, Macmanus, C and Willison, M (2015) ‘Desperate adventurers and men of straw: the failure of City of Glasgow Bank and its enduring impact on the UK banking system’, Bank of England Quarterly Bulletin Q1. Carney, M (2014) ‘The future of financial reform’, Monetary Authority of Singapore Lecture. Financial Stability Board (2015) ‘FSB issues final Total Loss-Absorbing Capacity standard for global systemically important banks’, Press release, available at http://www.fsb.org/2015/11/tlac-press-release/. Financial Stability Board (2015) ‘Assessing the economic costs and benefits of TLAC implementation’. Herring, R J and Carmassi, J (2014) ‘Complexity and systemic risk’, The Oxford Handbook of Banking, 77. | Miguel Fernández Ordóñez: The biggest risk - complacency Address by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, delivered to the Círculo de Economía, Barcelona, 31 January 2007. * * * I very much appreciate the opportunity provided to me by the Círculo de Economía to deliver this address at this time, just as the figures for last year have been released. In terms of the Spanish economy's performance, the figures speak for themselves and confirm a favourable short-term outlook. Against this background, I think it is very important to reflect on the underpinnings of the economy’s trajectory, in order to identify those factors that are genuinely relevant for projecting ahead the progress that has been achieved in recent decades. I have therefore thought it best to adopt a long-term approach for this speech, going beyond conjunctural analysis. And with the title I have chosen, I have sought precisely to stress that when things are going well and the outlook is favourable, the biggest risk is complacency. The year 2006 ended in Spain with growth at around 3.8%, outperforming the seven biggest industrialised countries. This is the first time in many years that this has happened. Not only has growth in Spain been higher than in the euro area countries, but it has also been higher than in the United Kingdom, Japan and the United States, which in recent years had been growing at a rate above Spain. | 0 |
It is this underlying inflation that monetary policy can best treat, and which provides the best indication of the medium-term trajectory of headline inflation. Will this turnaround require actual and duly observed falls in underlying inflation, or a sufficiently solid forecast of an expected fall in the very near term? Prudence demands the first response, while the time taken for monetary policy transmission justifies the latter, so the Governing Council will have 11 Speech by François Villeroy de Galhau at Columbia University, New York, 11 October 2022, “What monetary policy narrative after forward guidance?”. 13 Page 14 of 19 to use its judgement. The other bigger question on an economic level is how best to define underlying inflation: I shall come back to this at the end. The duration of the stabilisation phase The other key variable is the duration the interest rate is kept at its so-called terminal level. It is our duty to repeat that the fight against inflation cannot be won without perseverance, and without keeping interest rates high for as long as necessary. We need to be wary of declaring victory too soon: the final kilometres of a long distance race are often the most decisive. Here again I think we can give some pointers on this other essential “lock”: what economic data could guide us as to the length of this phase and lead us to one day envisage a lowering of the level of rates? | Similarly, it reached a turning point in mid-2022, when the other indicators were still rising. That said, the PCCI is based on a complex statistical methodology and the signal provided by its recent changes remains to be confirmed. Along the same lines, indicators that focus on “momentum” and on quarterly rather than annual changes can provide useful additional information in the current phase. At this stage, there are no clear and convergent signs in all of these indicators that would allow us to assert that underlying inflation has indeed reached a turning point. Lastly, we are closely monitoring the changes in wages, which are notably crucial for services inflation. Nominal wage growth is still accelerating across the euro area, although has so far remained below price growth; however, this is not leading to a wage-price spiral beyond what is included in our projections. The inflation expectations of households and businesses As I mentioned in the first part of my speech, market expectations have clearly improved, admittedly against a backdrop of falling energy prices. However, the inflation expectations of economic agents (households and businesses), particularly over the medium term, are also essential as they are the ones that determine the path of prices and wages. These expectations, which traditionally change more slowly than those of the markets, are giving more mixed signals. | 1 |
Most importantly, we introduced the Single Note Inspection (SNI) system to improve the quality of the newly printed currency notes with a view to ensuring zero defects in currency notes. Several other internal processes were also improved and upgraded to facilitate a more secure and uninterrupted flow of currency to the market. Going forward, maintaining the quality standards of the currency will continue to be the key focus in the Central Bank’s currency management policy. In this context, with a view to further strengthening the implementation of the Clean Note Policy and enhancing Sri Lanka’s image among non-nationals through the circulation of clean notes, licensed commercial banks (LCBs) have been instructed to refrain from accepting willfully mutilated, altered or defaced currency notes from 1 April 2018. We are also planning to issue a new coin series in 2018 by changing the metal of the coin, which would reduce the cost of minting, while also increasing durability. In the medium-term, we intend to establish a state-of-the-art cash center to improve currency operations. Also, plans have been made to set up coin dispensing/ recycling machines island-wide to smoothen the distribution and recirculation of coins in the country to meet the demand. 26 Public Debt Management We consider prudent debt management as one of the highest priorities given the challenge of managing a very large debt stock, while maintaining a proper mix between domestic and foreign financing. | Further, the reinstatement of the EU GSP+ facility, the expected conclusion of the free trade agreements with Singapore, China and India and strong institutional and policy support are also expected to drive the momentum in exports. We have seen an increased inflow of Foreign Direct Investment (FDI) in 2017 and we expect FDI to gain momentum through the commencement of the Hambantota industrial zone and the continuation of the Colombo Port City project. Higher inflows to the government securities market and the Colombo Stock Exchange (CSE) as well as long term financial flows to the government were also witnessed during the year. With these developments on the external front, the Central Bank was able to build official reserves of over US dollars 7.9 billion at the end of 2017. 4 On the fiscal front, the government has embarked on a revenue based fiscal consolidation path to strengthen the country’s public finances. The government expects to reduce the budget deficit to 3.5 per cent of GDP by 2020 and thereby reduce government debt to a sustainable level in the medium-term. It is in the process of implementing several reforms aimed at improving government revenue collection while rationalising government expenditures to adhere to the envisaged fiscal consolidation path over the medium-term. A positive primary balance is expected in 2017 for the first time since the early 1950s and a surplus in the current account is also expected in 2018 for the first time since 1987. | 1 |
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