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• Retail CBDCs – which are issued by the central bank to the general public; they would be the digital equivalent of today’s notes and coins. MAS sees much promise in wholesale CBDCs.They have the potential to radically transform cross-border payments. But since wholesale CBDCs by definition are not meant to be used as currency by the general public, they are not money. So let me focus on retail CBDCs for now. Retail CBDCs are essentially digital versions of cash.Interest in retail CBDCs has risen sharply in the last two years. According to a survey by the Bank for International Settlements, six out of ten central banks are experimenting with retail CBDCs. MAS has been carefully studying the economic merits and implications of a retail CBDC in the Singapore context. We have just released a detailed paper outlining our current thinking. There are three possible reasons for MAS to issue to the public a digital Singapore dollar. First, a digital Singapore dollar would make available the benefits of using central bank money in the growing world of online transactions. Like notes and coins, a digital Singapore dollar issued by MAS will be safe, widely accepted, and bear the authority of the state. Cash is the ultimate risk-free asset, and means of final settlement. The rapid displacement of cash in favour of electronic payments based on bank deposits or e-wallets is one of the chief motivations for countries like Sweden and China to consider retail CBDCs.

On the external side, even though export growth in January is especially robust at 33 per cent, the likelihood of seeing a repeat of spectacular export performance is slimmer this year, as global growth is projected to slow down considerably. In fact, export growth in February has already decelerated to 16 percent. Going forward, the risk factors that can weigh on the ability of the Thai economy to expand will likely come from the US recession and high oil and commodity prices. In an increasingly integrated world, the slowdown in US demand can impact on Thailand’s export prospects. Despite the Fed’s aggressive interest rate cuts and innovative measures to forestall the rise in mortgage interest rates, substantial downside risk remains. Most US watchers agree that the US economy may not be able to avoid a recession; indeed, employment, house price and business confidence data all point to a possibility that it is already in a recession. It’s only a matter of how deep and how long this process will last. But while the US economy weakens substantially with worsening prospects, global price pressure is not letting off. Crude oil prices continue to rise as world oil demand strengthens in the face of limited global production capacity. In this tight demand-supply situation, adverse geopolitical events, unfavorable weather condition or further dollar slide can spike up oil prices. This phenomenon is not new. In fact, continued demand pressure coupled with supply constraint and other uncertainties have led countries to find substitutes to fossil fuel.

The rationale behind this view was to free the monetary policy conduct from conflicting objectives and thus render policymakers’ mission and life easier. It was advocated that banking sector supervision should no longer be assigned to the central bank, but rather to an independent agency (which might also ensure the consolidated supervision of all financial markets). I, myself, found the idea rather interesting at the end of the 1990s, when the collapse of several Romanian banks influenced the decision-making process at the National Bank of Romania. I realised at the moment how costly it was in terms of reputation for a central bank to be in charge of supervision and prudential regulation – not to mention that the separation appeared quite fashionable after the newly-established Financial Services Authority had become operational in the United Kingdom. At the same time, I vividly remember the conflict between price stability and financial stability, when I had to mediate the divergent positions taken during Board meetings by the deputy governors coordinating the two functions, not by virtue of personal affiliations, but due to the very nature of the specific tasks they had been entrusted with. I was wondering, in light of these Board disputes, whether separating the monetary policy and the supervision functions was preferable. At hindsight, I believe that Romania has made the right choice preserving banking supervision as a prerogative of the central bank, sorting out such disputes under the same roof.

Of course, no matter how much or how responsibly the central bank would get involved in safeguarding financial stability, this public good can only be delivered through cooperation and coordination with the other institutions tasked with financial market supervision and regulation. Relevant in this respect is that in Romania a National Committee for Financial Stability was established as early as 2007. The Governor of the National Bank of Romania, the Minister of Public Finance, the President of the Financial Supervisory Authority and the Chairman of the Bank Deposit Guarantee Fund are members of this committee, whose key objective is to ensure the exchange of relevant information, as well as to prevent, appraise and manage any issues with a potentially systemic impact. Efforts are currently underway to turn this entity set up based on an agreement among member institutions into a National Committee for Macroprudential Oversight, whose composition, tasks and areas of competence shall be set forth by law. This inter-institutional structure will act as a macroprudential authority, within the meaning of ESRB Recommendation 2011/3. 4. NBR: the internal control layers I imagine we all agree that improving the governance structure is essential for a central bank and I strongly believe the sharing of views and experience made possible by reunions such as the one we are attending is extremely beneficial for the process.

One driving force is of course that the world around us is constantly changing – and often very quickly. Quite simply, there are new demands made on us from outside, which we must deal with as best we can. Developments during the financial crisis in recent months are a good example of this. There are also demands from outside regarding our interaction with the general public, with other public authorities and with you who work in the financial markets. It is important that we communicate and work together efficiently, both to ensure monetary policy functions smoothly and to safeguard financial stability. But the pressure for changes does not only come from outside. We are constantly working on developing our working methods. It may not always be apparent to those who do not work at the Riksbank, but there is a strong will among our employees to improve our ways of thinking and working. There is a positive driving force behind the changes we are implementing. I am convinced that this driving force has contributed to the fact that we now have much better working methods than before. Another positive driving force is the regular contacts we have with other central banks and with the academic world. 2 BIS Review 155/2008 The developments cover everything from new methods to our communication. Something that constitutes an example of both of these things is the forecast for the repo rate path that we now publish regularly.

Irma Rosenberg: My time at the Riksbank – some final reflections on challenges along the way Speech by Ms Irma Rosenberg, First Deputy Governor of the Sveriges Riksbank, at SEB, Stockholm, 8 December 2008. * * * On a chilly day in January 1976 I crossed the threshold of the newly-built Riksbank building for the first time. It was true that all employees were moving into the new building that day, which contributed to the more or less organised chaos of furniture gone adrift and employees trying to find their new offices. But for me it was probably an extra special day. It was my first day at work. And it was my first job outside of the university after taking my PhD. Almost 33 years have passed since that day in January. And as I leave the Riksbank at the end of the year one could say that I have come full circle. It was where I began my career. In 1986 I left the bank, but in January 2003 I once again crossed the threshold at Brunkebergstorg 11, then as one of the six members of the Executive Board. This will now be my final full-time job. The years have been eventful ones, with more than a little drama from time to time.

Based on the most recent reading in September 2022, about a quarter of respondents have deflation expectations five years in the future, nearly as large as the share expecting inflation above 4 percent at the five-year horizon. Following the onset of the pandemic, aggregate uncertainty—which combines disagreement and individual uncertainty—increased but has also become more symmetric. Figure 4 shows the aggregate distributions of inflation three years in the future based on the SCE.14 Two-thirds of the widening of distributions reflect greater dispersion across respondents, and the remainder is due to greater uncertainty reported by individuals.15 Interestingly, the distribution of aggregate uncertainty before and during the first year of the pandemic was skewed to the upside, as seen in Figure 4. Since then, the rising share of those who report deflation expectations has caused the overall distribution to become more symmetric relative to the median. In terms of the uncertainty criterion, uncertainty does not increase linearly with the forecast horizon in the SCE. Figure 5 shows the distributions of aggregate uncertainty for one-, three-, and five-year-ahead inflation forecasts from September 2022. As Figure 5 shows, the distributions are very similar for the different forecast horizons. This seems consistent with the evidence that many respondents view the inflation surge as reflecting a unique set of developments.16 An additional, albeit indirect, measure of inflation uncertainty is provided by the distribution of expectations of interest rates from options.17 Although future interest rates depend on a variety of factors, the expectations about inflation are a key determinant.

Simultaneously, we have prolonged the maturity span of injecting operations to smooth down the upward slope of interest rate curve and we have expanded the base of eligible collateral to facilitate the access of financial institution in liquid funds. These operations of the Bank of Albania have helped control on interest rate level. Bank of Albania’s intervention has been more effective in controlling the short-term interest rates. The long-term interest rates of Government securities and loans revealed rising tendencies, owing to the Government’s demand for financing and the increased sensitiveness of the banking system towards liquidity indicators. In parallel, the depreciating exchange rate trends have complemented the easier monetary conditions framework, providing advantage to exports and trade deficit improvement. However, as we have constantly underscored in our statements, the Bank of Albania has been attentive to managing the momentary stimulus, aiming above all the achievement of its target for maintaining the macroeconomic stability, by preserving internal and external balances. Annual inflation in the first semester 2009 was 2.0 percent, recording a fall compared to inflation rates of the last year, but remaining within the Bank of Albania’s targeted band. Low inflation rates over the first semester of the current year are due to the weakening of inflationary pressures on the demand and supply side, consequent to raw materials price cut in the international market and the economic activity slowdown at home.

Input prices have fallen and companies can sell their products in new markets. But there are also costs. Norwegian businesses and jobs may lose in the competition. The challenge lies in moving idle resources to new business activities. This requires adaptability and a sound cost policy. The Norwegian economy is unique in being both a fully developed economy and a major oil exporter. Norway is the world’s third largest oil exporter. In the future, we will become an increasingly important exporter of natural gas. The petroleum sector accounts for 44 per cent of exports and 17 per cent of GDP. The present value of remaining petroleum reserves has been estimated at close to NOK 2 000 billion (present rate of net cash flow). The bulk of Norway’s petroleum wealth will be extracted over a period of 40 years, from 1990 to 2030. We are now in a phase where petroleum wealth is being converted from natural resources under the seabed to financial assets abroad. The Government Petroleum Fund was established in 1990 with a view to promoting an even distribution of wealth across generations. The intention behind the Petroleum Fund is that the cash flow from petroleum production should be channeled to the Fund and invested abroad. By doing so, changes in oil prices have little effect on the mainland economy. This chart illustrates how petroleum activity is separated from the mainland economy. 2 BIS Review 16/2004 Oil companies’ revenues are in foreign currency.

Leaving aside differences across countries, a long and challenging process of economic transformation brought countries in the region significant improvements in incomes and living standards. Full membership of the EU – or the prospects of accession – provided an important stimulus for the process of transformation as well as an anchor of stability. In Western Europe, completion of the three stages of EMU led to the establishment of the European Central Bank (ECB) and the introduction of the euro in January 1999. Having started originally with 11 participating countries, the euro area has since expanded to include 17 EU Member States including some previous transition economies, namely Estonia, Slovenia and Slovakia. The changes Europe has seen over these past 20 years are enormous. Equally enormous have been the challenges along the way, not least of course due to the global financial crisis. But there have also been enormous achievements. In my remarks today, I would like to take stock of some of those achievements and focus on three main aspects of the process of economic convergence in Central and Eastern Europe. BIS central bankers’ speeches 1 Three main aspects of the process of economic convergence 1. Nominal and real convergence: what has been achieved? The first aspect of convergence relates to developments in terms of nominal and real convergence between the countries of Central and Eastern Europe and the euro area.

Pursuing monetary policy to stabilise inflation and raising the key rate to achieve this, the Bank of Russia curbs growth in long-term interest rates in the economy. This quarter experience is a good illustration of the above. Despite the increase in the key rate on three occasions since last March for a total of 125 basis points, the yields of long-term OFZs are currently on the same level as in late March. As far as the pace of lending growth is concerned, it remains high both in corporate and particularly retail segments. Thus, mortgages are rising by more than 25% year-on-year. In addition, retail loans are heating consumer demand. We are also concerned by the fact that lending is growing due to loans to borrowers with a high debt burden. Therefore, we resume prepandemic macroprudential add-ons on unsecured loans from 1 July and on mortgage loans with a low down payment and a high debt-to-income ratio of borrowers — from August. The Bank of Russia will stand ready to further increase macroprudential add-ons to prevent the accumulation of systemic risks and to ensure financial stability. Since our meeting in April, the balance of risks has tilted even more towards proinflationary risks. Elevated inflation expectations as a response to high inflation and low interest rates still pose a major risk. With fears of future price growth, people tend to spend more today and save less for tomorrow. This makes prices grow even more rapidly. Disinflationary risks look weaker.

According to our estimates, annual inflation is expected to be higher than we forecast in April but lower than its current level. Due to the high base effect in the first half of this year annual inflation will return to the target only in the second half next year. Third. Monetary conditions remain accommodative. Interest rates on loans and deposits are low as compared to current and expected inflation. Our decisions to raise the key rate in March and April have not yet been fully reflected in banks’ interest rates. Banks’ lending and deposit rates are closely connected with yields on government bonds, OFZs. OFZs are risk-free ruble assets for banks and the pricing of all other ruble products of banks is pegged to them. OFZ yields with various maturities change together with the key rate, though to a different extent. The key rate impacts to the most extent the yields on short-term OFZs, with maturities of up to two-three years. These yields have increased significantly over the past two months. They will impact the cost of short-term loans and also deposit rates, which have already started rising. Meanwhile, yields on long-term OFZs are largely determined by long-term inflation expectations, the assessment of the macroeconomic policy stability, and external environment. The cost of long-term financing of investment projects as well as mortgage loan rates depend precisely on the yields on long-term OFZs.

Domestically, the prolonged period of economic slowdown has subjected indebted households and smaller businesses to financial strains. Loan quality for weaker borrowers has deteriorated somewhat as a result. The good news is that these risks have been confined to specific sectors, and the banking system remains strong and has weathered the slowdown very well, owing to their prudent risk management policies. Externally, we also cannot rule out further episodes of volatile capital flows owing to shifts in monetary policy abroad. Our economy has proven resilient to such shocks in the recent past, thanks to strong macroeconomic fundamentals and robust policy framework. We will closely monitor the adjustment process to ensure that risks to financial stability continue to be contained. To summarize, the economy seems to be at an inflection point. The outlook for growth has improved following the political event in May. But a new set of challenges has also emerged. Now that political uncertainties have waned, what should be the priorities for public policy? What are key areas of needed “economic reform”, and what should such agenda entail? This brings me to the second topic of my talk, that of challenges to public policy management during the current period of transition. Challenges to public policy management The agenda for economic reform under discussion today is wide-ranging and may at times seem confusing to the public. To organize one’s thoughts, it might be helpful to revisit the basic role of government in a modern economy.

To build a common analysis of balance sheet positions and a shared understanding of the implications of that analysis for the world economy, a trusted, independent and expert secretariat is needed to facilitate those discussions. Only if countries are willing to share confidences with each other - discuss their "policy reaction functions" - will international meetings justify their cost. Those three tasks do not exhaust the responsibilities of an international financial institution. From time to time, there may well be financial crises when it would be appropriate for the international community to provide temporary financial assistance to mitigate the costs of sharp adjustment in trade flows and output. But such a role should not be the principal focus of international monetary co-operation, and, as I have pointed out, it has not been the role for the IMF vis-a-vis any developed economy for many years. Moreover, nor is it likely to be true of many important emerging market economies in the future. As I argued in my K.B. Lall Lecture in 2001, following the Asian crisis of the late 1990s it was likely that countries might choose to build up large foreign exchange reserves in order to be able to act as a “do it yourself” lender of last resort in US dollars. It is now clear that this is exactly what many Asian countries have done. Nevertheless, it is sensible to provide the Fund with the capability to act when necessary. How should the IMF be reformed?

However, in a context where inflation has turned out to be higher than expected; where inflationary expectations remain above target; where the peso is weaker than normal; where the global inflationary problem has become more complex and there are doubts as to how policies to address it will affect the global economy and financial markets, we must acknowledge that the risk of experiencing a more persistent inflationary phenomenon is our primary concern. Monetary policy makers will remain attentive to these developments and, as I mentioned a few moments ago, future movements of the MPR will be contingent on them. Urgently resolving the inflationary problem does not imply that we should set aside our medium-term challenges. More than two years into the pandemic and almost three since the social unrest of October 2019, our economy has suffered a string of events that have put the effectiveness of our economic policy framework and the authorities' ability to react to the test. In addition to the inflationary effects, some of the measures adopted to deal with the effects of the pandemic generated significant costs in the local financial market. Withdrawals of pension funds reduced the size of long-term savings and possibly also the economy's capacity to react to external shocks, especially under conditions of high uncertainty. Therefore, the strengthening of financial markets should be an important item on the economic agenda.

Following the decision of the September meeting, the MPR stands near the maximum level considered in the central scenario of this Report. Future movements in the policy rate will depend on the evolution of the macroeconomic scenario and its implications for the convergence of inflation to the target. The Board will be especially vigilant of the upward risks for inflation, considering both today's high level and the fact that two-year inflation expectations remain above 3%. The upper bound of the MPR corridor reflects sensitivity scenarios where the global inflationary problem calls for a more aggressive response of monetary policy around the world, particularly from the Federal Reserve. In such an event, there would be a sharp deterioration in global financial conditions and growth, with sharp declines in commodity prices and a further appreciation of the dollar. In a scenario where domestic inflation and expectations remain high, further peso depreciation would require a tighter monetary policy response than that described in the central scenario. The same would occur if, irrespective of the cost pressures in the external scenario, local inflationary dynamics proves more persistent as a result of the high medium-term inflationary expectations of households and firms. The lower part of the MPR corridor reflects scenarios where inflationary pressures subside faster. This could be the case if the contraction of activity and demand is more intense as a result of a faster adjustment of private consumption and/or weaker investment, which would also negatively affect the performance of the labor market.

CONCLUSION Norges Bank has assessed whether the equity share in the GPFG’s strategic benchmark index should be changed. The current equity share is slightly higher than 60 percent. In Norges Bank’s assessment, the equity allocation can be increased to 75 percent. The Bank’s proposal is based on a broad analysis of changes since the equity allocation was last assessed. In financial markets, bond portfolio characteristics in particular have changed over the past ten years. Expected returns on investment grade bonds have fallen sharply. At the same time, the expected excess returns on equities over bonds are now estimated to be somewhat higher than when the equity allocation was last assessed. Moreover, there is reduced covariance between bond and equity returns. In short, bonds have become a better, but also more costly, hedge against fluctuations in the fund’s value. Both of these factors suggest that some increase in the equity allocation would be appropriate. If the analysis is expanded to include the relationship between return and risk for overall 6/7 BIS central bankers' speeches petroleum wealth, we arrive at a similar conclusion. Today, the GPFG accounts for a far larger share of petroleum wealth. This means that the fund’s owner can accept a higher level of risk associated with the return on the fund while keeping the level of risk associated with petroleum wealth unchanged. A higher equity allocation means that the expected return on the fund will increase. The realised return, however, may differ considerably from expectations.

These strengths are found in the sector’s strong capital base, its limited exposure to subprime-related and other toxic assets, and its low reliance on external funding. As a result, the impact of the crisis on the Thai banking system so far has been limited. The Thai banking system is resilient with good fundamentals, and continues to function normally to support the economy. In the last two quarters, despite the consecutive negative GDP growths, the performance of the Thai banking sector remains satisfactory. The sector continues to see profits in the last two quarters, while the increase in the non-performing loans has not been large. This robust performance reflects a number of common responses that have been undertaken by the banks to manage the increase in credit and market risks. The responses include parring down of investment in foreign assets, lowering the loan growth target in line with the economy, strengthening risk management and credit standards, paying close attention to liquidity, and acting early to assist clients to adjust to the impact of the shock. These measures have helped banks to contain credit risk, and so far we have seen the gross NPL ratio rising slightly to 5.5 percent in March from 5.3 percent in December. As for the Bank of Thailand, our approach to bank supervision during this time of global stress is to ensure that the banking system is healthy, and the system continues to operate fully to support the economy with good risk management and adequate capital.

While the outlook for the global economy remains firm, the persistently higher oil prices and some softness in the recent US data have shifted the balance of risks more to the downside. The key issue at this time is thus the oil prices, and the key question is how the higher oil prices will affect the global economy going forward. Ladies and Gentlemen, This year prices of oil have gone up by more than 40 percent. The Dubai price, which is the key reference price for Thailand, went up from last year’s average of $ 27 per barrel to now about $ 39 per barrel. Domestic retail oil prices, however, have gone up by less because of the price support scheme that the Government has been running. This has helped limit the immediate effects of the high global oil prices on the economy. But notwithstanding the subsidies, domestic inflation has been rising. Headline CPI inflation, for example, rose to 3.1 percent in July. At this time, we believe there is substantial price pressure building up in the economy that could eventually translate into higher consumer prices once the proft margin is adequately squeezed. This pent - up price pressure is linked not only to the higher global oil prices that have yet to be passed through to the consumer prices, but also to the continued high level of capacity utilization and to the reported tightening in some segments of the labour market.

For those of you who have not been home for a while, cleanskin wine is quality wine that is sold more cheaply because it is unlabeled. So, you are getting something good but you don’t know why because you don’t know what it is. Half an hour ago, the Thai economy this year to many of you was like cleanskin wine. You know the economy is doing better but you don’t know why. BIS Review 50/2004 3 In this brief space of time, I hope I have given you an adequate account of how we at the Bank of Thailand see the Thai economy evolving this year, and hopefully have helped improve your understandings of the economy. As with the cleanskin wine, I will definitely go back for more. I only hope you will do the same by continuing to have confidence in the Thai economy and remain a trusted friend and a dependable partner of Thailand for many many years to come. Thank you. 4 BIS Review 50/2004

Liquidity provision is affected by changes in market structure, how trades are executed and by competition from outside of the regulatory boundaries that have been established for systemically important financial institutions. The market structure for many asset classes has evolved from a bilateral OTC structure toward a more open, centralized structure through the adoption of electronic trading platforms, post-trade infrastructures and higher degrees of transparency. For example, in the U.S. Treasury market, firms specializing in high-frequency 4 BIS central bankers’ speeches algorithmic trading have become much more important and now make up more than half the trading in the electronic, interdealer cash market. This change in market structure has reduced the cost of trading in the interdealer market, especially for small trade sizes. Electronic trading enables the use of automated trading strategies which tend to employ speed for executing small-size trades, and the liquidity on electronic trading platforms allows traders to get in and out of positions quickly. The growth in high-frequency trading likely accounts for the reduction in trade size discussed earlier rather than this reduction being indicative of less liquidity. The movement toward electronic trading has allowed a more diverse set of actors to participate in the market, thereby increasing competition and likely leading to improved market liquidity. These changes, though, may have reduced the profitability of providing liquidity for dealers engaged in trading activity in the Treasury market. 2 Liquidity risk in the Treasury market may also reflect the growth in high-frequency trading rather than the impact of regulation.

In November, the Leaders will, at their Summit in Singapore, issue a legally-binding blueprint to implement the ASEAN Economic Community. ASEAN will eventually evolve into a single market with free flow of goods, services, investment and talent. For investors, an integrated market of half a billion people will be an attractive investment proposition. For financial institutions, it will mean more projects to finance and more wealth to manage. ASEAN’s combined GDP of $ is larger than most economies. It is, in fact, bigger than India’s $ and more that a third of China’s $ In addition, the ASEAN Economic Community will boost the region’s GDP by 10%. To benefit from the growth of China and India, ASEAN is negotiating FTAs with these two giants. They are targeted for completion by 2010 and 2011 respectively. Besides China and India, ASEAN is also enhancing links with other economic centres. ASEAN signed a regional Trade and Investment Framework Arrangement (TIFA) with the US last August. It is negotiating FTAs with Japan, South Korea and Australia and New Zealand. And in May, ASEAN and the European Union decided to launch FTA talks. Political coalescence At the political level, Asia is also coalescing. However, political coalescence is progressing more slowly than economic integration. And it will be far less defined and institutionalised than what we see in the EU. Compared to Europe, Asia is more diverse politically and culturally. There are complexities and practical difficulties. However, the basic direction has been set.

You have to make do with estimates, which in the nature of things are uncertain and therefore have to be interpreted with caution. Still, the available estimates do suggest that in Sweden the equilibrium level of unemployment rose in the early 1990s and is somewhere in the interval 4.5 to 7.5%, expressed in terms of registered unemployment.1 The OECD also concludes that the level has increased markedly in the 1990s and judges that in Sweden equilibrium unemployment is around 6%.2 Not everyone agrees, however, that equilibrium unemployment is markedly higher than before.3 But even though we cannot be certain about its exact level, an increase is indicated by the fact that 1 2 3 See e.g. Calmfors, L (1995), Will high unemployment in Sweden become persistent?, Swedish Economic Policy Review 2:1. Economic Surveys – Sweden 1999, OECD, Paris. See e.g. Åberg, R (1997), Är stigande jämviktsarbetslöshet huvudproblemet på arbetsmarknaden? (Is rising equilibrium unemployment the principle labour market problem? ), Ekonomisk Debatt 25:1. BIS Review 106/1999 4 otherwise the currently high unemployment would be acting as a strong restraint in wage formation. Instead, the wage level in Sweden is still rising somewhat faster than in our main competitor countries. Considering that the rate of registered unemployment is currently around 6% and thus inside the estimated interval for structural or equilibrium unemployment, this might suggest that the Swedish economy is relatively close to full capacity utilisation.

With the budgetary measures that have been proposed, the fiscal stance will also exert an effect on demand that is more expansionary in the future. In the absence of negative shocks, such a direction of policy normally tends to generate GDP growth above the rate that the economy is capable of sustaining in the longer run. If such a situation is allowed to continue for too long, it can lead to problems with bottlenecks and inflationary tendencies. In time, expectations of inflation’s level in the longer run may be adjusted upwards and this can result in a price and wage spiral that brings inflation above the targeted rate. Such a course of events has to be prevented by the Riksbank, which the Riksdag (Sweden’s parliament) has made accountable for maintaining price stability. So sooner or later the level of the repo rate will have to be normalised in order to counter an acceleration of inflation in an upward cyclical phase. This is something that the Riksbank is discussing, as was evident from the published minute of the Executive Board meeting on 12 August. In the present circumstances what we have to do is decide when – not whether – the time has come to initiate the shift towards a less expansionary monetary stance.

Despite the rise in oil prices, the Norwegian krone has been fairly weak since 2014. A weak krone has a positive influence on exporting companies. At the same time, prices for imported goods and services increase. A weaker krone therefore leads to higher inflation. Measured by the import-weighted exchange rate index (I-44), the krone appreciated somewhat in the period to autumn 2018, but depreciated again towards year-end. The depreciation coincided with a fall in oil prices and heightened uncertainty in global financial markets. Chart: Growth mainland Norway Growth in the Norwegian economy has been solid since autumn 2016. At the same time, labour market conditions have improved considerably. The number of employed has increased by more than 100 000, and unemployment has declined. Solid global growth, higher oil prices and low interest rates have contributed to lifting growth. The enterprises in Norges Bank’s Regional Network reported rising output growth through 2018, particularly for oil service providers thanks to the rebound in petroleum investment on the Norwegian shelf following several years of decline. There was also a pick-up in exports from oil service companies. Chart: Employment as a share of the population After some years of solid growth, spare capacity has gradually diminished. At the end of 2018, capacity utilisation appeared to be close to what we regard as a normal level. Employment also appears to have returned to a more normal level.

Owing to a high employment rate, the number of employed persons as a share of the working-age population is now close to the level prevailing before the sharp fall in oil prices in 2014. In 2018, employment rose in most sectors of the Norwegian economy, including oil-related industries. More people entered the labour market, but unemployment nonetheless edged down. There are signs of growing pressures in the economy. A rising number of Regional Network contacts report little spare capacity. A number of employers report difficulties in finding skilled and experienced labour. In the wake of the oil price decline, wage growth has been moderate. The improvement in the labour market has contributed to a pick-up in wage growth in recent years. At the same time, inflation has been high. As a result, real wage growth has been low, with little improvement in household purchasing power. Chart: Consumer prices 2/3 BIS central bankers' speeches Consumer price inflation edged up through 2018, primarily reflecting a sharp increase in electricity prices. Underlying inflation also moved up, partly owing to the pick-up in wage growth and higher imported inflation. Annual consumer price inflation (CPI) was 2.7 percent in 2018. Persistently high debt growth has added to the vulnerability of the household sector. High house price inflation has fuelled debt growth. In 2018, house price inflation was low, and debt growth eased somewhat. Debt nevertheless grew faster than household disposable income.

Other costs have also continued to rise, reflecting an underlying theme of supply constraints and bottlenecks: the oil price has now reached $ per barrel, non-oil commodity prices have continued to rise, and the sustained rise in shipping costs that we have seen since 2020 has also continued. And those cost pressures appear to be passing through to manufactured goods. That said, some of the most extreme price pressures, for instance in the lumber futures market, do now appear to be easing. 7 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 7 Table 1: Estimates of Q2 economic performance Nov 2020 MPR May 2021 MPR Latest nowcast/data GDP growth (% YoY) 20¼ 21½ 22¾ CPI inflation (% YoY) 1.7 1.7 2.1 Private sector regular AWE (% YoY) 4¾ 7¼ 8 When thinking about how these latest developments might affect the economic outlook, it’s important to keep things in perspective. The projected GDP growth rates shown in Table 1 compared with a year ago show just how unusual this period is economically, with growth of 22¾% expected in 2021Q2 relative to the trough in activity a year ago . And relative to that, the forecast revisions between the November 2020 MPR and the staff’s latest ‘nowcast’ for GDP growth to 2021Q2, while noteworthy, are relatively small. Nevertheless in the near term the signal is clearly to the upside.

31.10.2022 Remarks at the Conference “Building resilience in uncertain times: safeguarding financial stability, encouraging investments” 2022 Conference of Mediterranean Central Banks/Banco de España, Central Bank of the Republic of Türkiye, OECD and European Institute of the Mediterranean Pablo Hernández de Cos Governor Good morning ladies and gentlemen. It is a great pleasure for me to welcome you all to this Conference on Building resilience in uncertain times: safeguarding financial stability, encouraging investments. We could not have asked for a more delightful setting for this Conference than this beautiful city of Istanbul. Let me start by thanking our colleagues from the Central Bank of the Republic of Türkiye, the OECD and the European Institute of the Mediterranean (IEMed) and, in particular, Governor Kavcıoğlu, Ambassador Florensa and Achraf Bouali for jointly organising this Conference. I would like to especially emphasise the decisive commitment of IEMed, thanks to which we are now opening the seventh edition of this Conference, which is becoming a reference among the fora for dialogue and cooperation in economic and financial relationships in the Euro-Mediterranean region. The last edition of this conference was held in June 2021 in a fully virtual format, as we were in the middle of the pandemic. On that occasion, an incipient recovery was taking place and there was optimism about the outlook, given the good progress made with vaccination. However, almost a year and a half later, even if we have returned to a face-to-face event, we are once again in a highly uncertain environment.

We also see limited overall risks to euro area financial stability. Without sufficient mitigating action, however, a cliff-edge Brexit could have an adverse impact in certain areas of centrally cleared derivatives markets. Sources of risk from outside the EU have grown since May. A stronger US dollar and heightened trade tensions triggered renewed stress in a number of emerging market economies. Financial integration and the deepening of EMU Thanks to our collective efforts at the European and national level, we have come a long way since the start of the financial crisis. However, to strengthen our economies and preserve financial stability, we need to go further. Let me highlight in particular some of the concrete steps in the area of financial integration that we need to take at the European level. First, we need to complete the architecture of the banking union. The benefits of having a euro area supervisor are clear when we look at banks’ strengthened balance sheets. Still, more needs to be done to reduce the risks for citizens as both taxpayers and depositors and to break the remaining link between banks and national governments. In addition to the adoption of banking package which is currently under negotiation among EU legislators, a genuine banking union needs further regulatory harmonisation, for instance through greater reliance on Regulations 2/3 BIS central bankers' speeches instead of Directives. In particular, unwarranted national options and discretions still stand in the way of a level playing field for banks.

We face important global challenges that are naturally causing concern among the people of Europe, especially those who feel left behind. Common institutions and collaboration among Member States give Europe a strong voice in the world. More importantly, they make it possible for us to find effective answers to joint problems. In other words, we are stronger together. Thank you for your attention. 3/3 BIS central bankers' speeches

Compared to the fluctuations in the first part of the period we see here, from 2002 to date, the krone exchange rate has been relatively stable in recent years, but there has been some short-term movements. An appreciation of the krone has in some periods occurred in tandem with higher oil prices and in other periods with lower oil prices. The krone appreciated when the interest rate differential against other countries was high in 2002, but as interest rates in Norway moved down to the level among trading partners, the value of the krone fell back. In recent years, the actual interest rate differential against trading partners has been close to zero. Earlier analyses conducted at Norges Bank have shown that other factors, such as expected volatility among major international currencies and developments in US equity indices, may have been factors behind developments in the krone exchange rate, but the effects vary over time. This reflects among other things shifts in exchange market themes. 1 Shifting themes in exchange markets make it difficult to predict short- and medium-term exchange rate developments. The exchange rate projections in the monetary policy reports are based on the theory of uncovered interest rate parity. According to the theory, the return on financial investments will be the same irrespective of the currency involved. If Norwegian interest rates are higher than external interest rates over a period, the krone exchange rate must depreciate during that period or NOK-denominated investments generate an excess return.

Over the past few years, the Norwegian real exchange rate, whether measured by relative labour costs or by relative consumer prices, has been stronger than the average since 1970, largely due to a stronger nominal exchange rate. The corollary to these developments is the pronounced improvement in Norway’s terms of trade. The strong rise in prices for oil and other Norwegian export products has contributed to the krone appreciation 6 BIS Review 97/2007 over the past few years. The strong real krone exchange rate is therefore a result of Norway’s position as one of the nations that has benefited most from freer global trade and increased cross-border flows of capital, technology and labour. In this respect, the strong krone is a sign that the Norwegian economy is faring well. Thank you for your attention. BIS Review 97/2007 7 8 BIS Review 97/2007 BIS Review 97/2007 9 10 BIS Review 97/2007 BIS Review 97/2007 11 12 BIS Review 97/2007 BIS Review 97/2007 13 14 BIS Review 97/2007 BIS Review 97/2007 15

Within its own remit, each NCB carries out the regular tenders orchestrated by the ECB and grants refinancing within the framework of these periodic auctions of central bank money. The NCBs manage the settlement accounts of credit institutions, hold the standing facilities for overnight credit and deposits, and also monitor minimum reserves. They are in constant contact with the ECB and supply it with all the daily data essential to the conduct of effective monetary policy. • A rapid integration of the national money markets It was crucial to enable liquidity to circulate smoothly from one financial centre to another in the euro area so that operators could conduct the necessary arbitrage between the different centres, thus ensuring a single euro interest rate for each maturity. The TARGET system is the key component of this unification. Right from the start of 1999, it enabled credit institutions to effect large-value, crossborder transactions with same-day value all day long, thus allowing the interbank market to function as a single market right away.

European firms were lagging behind US firms in terms of foreign direct investment and they are now catching up. European firms have entered a “globalisation process” whereby they aim to reach a global size through acquisitions. BIS Review 61/2000 6 Conclusion Allow me to conclude. The euro area has adopted a sound macroeconomic policy and has embarked upon a fairly comprehensive programme of structural reforms. These reforms will still take time to be fully completed. But they are well underway and have already boosted economic growth, job creation and corporate restructuring. This move has been triggered by the creation of a monetary union and a vast unified financial market. I am impressed by what has been achieved during the past years and the National Central Banks as well as the ECB are strongly encouraging governments and businesses to foster structural reforms in the future. The euro exchange rate is clearly misaligned relative to euro area fundamentals (robust domestic growth, steady implementation of the single market, abundant domestic savings, healthy external accounts). This is the reason why we consider that the euro has a strong potential for appreciation. The Eurosystem, which is the guardian of the euro on behalf of the people of Europe, knows that our fellow citizens want the single currency to be at least as solid as their previous national currencies. In France, to give but one example, 96% of the population want the euro to be at least as solid as the franc.

So far, the "middle way" seems a statement of the obvious – namely that there are limits to IMF lending and that there is merit, for debtors and creditors, in having clarity about those limits. The other side of this coin is that, on occasions, there will be countries that have run up unsustainable debt burdens, or face severe liquidity pressures, and who have little alternative but to restructure or reschedule their debt. Perhaps this is why the international community has moved significantly in the direction of giving "private sector involvement" a greater role in the resolution of financial crises than was typically the case in the late 1990s. The IMF communiqué in Prague last year, the G7 Finance Ministers statement last month, recent joint work by the Bank of England and Bank of Canada, and, significantly, speeches by the new Managing Director of the IMF, Horst Kohler, have all emphasised the need to move further in the direction of greater private sector involvement. As one example the Report of the G7 Finance Ministers to the Heads of State and Government only last month stated that, 6 BIS Review 71/2001 "While the IMF has an essential role to play, official resources are limited in relation to private financial flows.

Other countries have abandoned the attempt to maintain rigidly fixed exchange rates, and adopted a BIS Review 71/2001 1 combination of domestic monetary management based on an inflation target and a floating exchange rate. Examples include both developed economies, such as the UK and Canada, and emerging market economies, such as Brazil and South Africa. There are arguments for and against both of these approaches. But what is clear is that both in theory and practice there is now a recognition that pegged (fixed but adjustable) exchange rates do not provide a viable long-term middle course. More interesting, perhaps, is the absence of serious debate on the merits of the third position, namely the willingness to forego freedom of capital movements in order to retain domestic monetary autonomy and stable exchange rates. That is perhaps surprising in the light of the experience of the two major countries in Asia that escaped the financial crisis of 1997-98, namely India and China, which had in common the presence of capital controls. The willingness to impose controls on capital movements, at least temporarily, was certainly evident at the Bretton Woods Conference. Mindful of the weakness of Britain's national balance sheet, Lord Keynes, urged on by the Bank of England, argued that there should be no legally binding obligation to make the sterling balances convertible into dollars.

That has to be the job of the management of the institution - indeed the taking and management of financial risk is the essence of their contribution to society; it’s what they are paid for! Nor is it the job of the supervisor to prevent each and every bank failure. Indeed, if the supervisor were to attempt to do so, it would inevitably involve such rigorous prudential standards and enforcement that it would effectively stifle innovation and competition, at the cost of reducing the efficiency of the financial system in meeting the needs of the wider economy, but ultimately also of weakening its structure - reducing rather than increasing the safety of the system. So effective supervision is a vitally important part of the answer to improving the safety of the banking system but it is not a complete answer. Secondly, national authorities can introduce deposit protection arrangements which can reduce the risks of the panic withdrawal of deposits or some other forms of investments - though here too a balance needs to be struck. Overly generous deposit protection carries the danger that it will damage market discipline, by making the depositor indifferent to where he places his deposit, encouraging him simply to look for the marginally higher return. Thirdly, as I noted earlier, national authorities can do a good deal to strengthen the legal and accounting as well as the corporate governance infrastructure as it applies to the financial system.

Since imbalances persist on the Swiss mortgage and real estate markets, it is important that banks take adequate account of risks when granting mortgages. We are confident that the banks are aware of these risks. We are also confident that they will not use the latitude afforded by this access to capital to pay dividends or buy back shares, but rather to fulfil their economic function. In addition to facilitating lending, the SNB is helping to stabilise the economic situation through its expansionary monetary policy. To ensure appropriate monetary conditions, we must counteract increased upward pressure on the Swiss franc. We have therefore decided to scale up our foreign exchange market inventions – a tried-and-tested instrument – to shield the Swiss economy. Ladies and gentlemen, within the scope of its mandate, the SNB is doing everything it can, in cooperation with the Federal Council and the authorities, to mitigate the economic impact of the coronavirus crisis on the population and on companies. Page 2/2

(Chart 12: Norges Bank’s key policy rate) In order to prevent inflation from becoming too low and to dampen the impact of weaker developments abroad on the Norwegian economy, the key policy rate was reduced to 1.75 percent in December 2011. With high money market premiums and elevated credit premiums, low key rates are not passing through fully to banks’ lending rates. The difference between various lending rates is unusually wide at present. Many households pay a mortgage interest rate of around 4 percent, and rates on corporate loans are between 5 and 6 percent. Monetary policy is the first line of defence in demand management. Norges Bank still has room for manoeuvre in interest rate setting – in both directions. The question nonetheless remains of whether it is desirable to use monetary policy to accelerate the pace of inflation when the countries around us are in a recession. Even if the krone depreciates somewhat, relatively high cost growth in Norway that could quicken the pace of inflation might lead to a further deterioration in competitiveness. This cannot be the way to go. Moreover, low interest rates over a prolonged period tend to amplify an upward spiral in house prices and lending. Imbalances that build up in credit and property markets 6 BIS central bankers’ speeches can have severe ripple effects further ahead, with a substantial impact on output and employment. Many Americans and Europeans have recently experienced this, as Norwegians did 20 years ago.

We can likely achieve the same risk distribution with substantially fewer securities. This will also reduce operational risk and bring down management costs in the long run. Petroleum revenue spending In the book “Over Evne”1 [Beyond our power] about the history of the Ministry of Finance, the historians Einar Lie and Christian Venneslan describe how the discovery of oil at the end of the 1960s brought bright prospects for the future and considerable eagerness to spend the revenues. Oil would give us a “qualitatively better society”2. But the oil nation stumbled at the start. The current account surplus at the end of the 1960s had been reversed to a deficit of 12 percent of GDP by 1977. The deficit was three times as large as that recorded by Italy and Spain last year. The International Monetary Fund came knocking at Norway’s door. Fiscal policy had to be tightened and many Norwegians experienced a decline in income. Norway was hit by oil price shocks in the following years and economic reforms were implemented in several areas. After a period it became clear that the central government budget would be in surplus and that transfers would be made to the Fund. Norway’s experience from its first 30 years as an oil-producing nation led to the introduction of the fiscal rule, which has been a key element of Norwegian economic policy for the past decade. Report no.

The fact that Sweden has a surplus thus means that saving in Sweden is higher than the level needed to fund Swedish investments. An important reason why saving has been relatively high in Sweden since the mid-1990s is the relatively high level of financial saving in the public sector since the budget consolidation process carried out in connection with the crisis of the 1990s. Another reason is that the Swedish households also increased their saving in connection with this crisis. At the same time, the level of investment in Sweden has been relatively low compared to that in other countries (see Figure 5). This is largely due to relatively low investments in housing.2 2 See for example Chapter 3 in Vredin et al. (2012), Report of the Economic Policy Group 2012, “Simple rules, difficult times: does stabilisation policy need to be changed?” 4 BIS central bankers’ speeches Figure 5. Total investment as a share of GDP Per cent 30 30 2001-2007 25 2008-2011 25 20 20 15 15 10 10 5 5 0 0 Note. Average value 2001–2007 and 2008–2010. Source: IMF WEO, October 2012. The current account surplus has in fact decreased somewhat in recent years. It was approximately 9 per cent of GDP in 2008 and approximately 7 per cent of GDP in 2011. However, it is still high in historical terms and in comparison with other countries.

Global banks’ misconduct costs have now reached over $ billion – capital that could otherwise have been used to support up to $ trillion of lending to households and businesses. The FSB’s misconduct action plan addresses these issues through: (i) improvements to financial institutions’ governance and compensation structures to align better risk and reward; (ii) new global standards of conduct in fixed income, commodities and currency markets; and (iii) reforms to major financial benchmark arrangements to reduce the risks of their manipulation. Authorities cannot and should not try to legislate for every circumstance, watch every transaction, or anticipate every market innovation. So while fines and sanctions have roles in deterring misconduct, they will not, on their own, bring about the cultural change we need. In the view of UK authorities, we must move from an excessive reliance on punitive, ex post fines of firms to greater emphasis on more compelling ex ante incentives for individuals, and ultimately a more solid grounding in improved firm culture. In the UK a significant proportion of variable compensation for senior employees now must be deferred for a period of seven years. This ensures that it can be clawed back over the time scale it generally takes for conduct issues to come to light.

AIG’s failure to pay all of its contractual obligations in full would likely constitute a selective default resulting in a downgrade. That downgrade not only would have triggered potential terminations and collateral calls at AIG’s Financial Products unit (AIG FP), but also would have resulted in substantial value destruction at AIG’s insurance companies. Large annuity distributors likely would have stopped selling AIG products, replacing them with better-rated, more stable competitors. High-end life insurance sales would have decreased significantly, BIS Review 73/2010 3 and remaining sales would have been vulnerable to adverse selection. Withdrawals and surrenders among existing customers would have increased, depleting cash reserves and creating pressure for asset sales at depressed levels. As a result of a downgrade, many of AIG’s insurance companies may have been unable to write new business, and state and foreign insurance regulators may have begun seizing AIG insurance company assets in their respective jurisdictions. Conditional lending would not have allowed AIG to remain a going concern, but rather would have pushed it into bankruptcy. II. Continuing pressures on AIG By the end of September 2008, AIG had drawn $ billion from the Fed Facility. While successful in providing AIG with the liquidity it needed to avoid default and bankruptcy in the short term, over the longer term AIG’s borrowings from the Fed Facility were perceived by some to be potentially unsustainable.

Banks sharply curtailed their lending. A full fledged panic had started and was spreading rapidly; the financial system was facing the threat of collapse. In light of the circumstances at the time, a bankruptcy filing by AIG would have had disastrous consequences. Federal Reserve Chairman Bernanke has stated that it could well have “resulted in a 1930’s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs.” Because of the decisions made that morning, we can never really know. Let us be clear, though, about the risks that the policymakers did know. Policymakers knew that AIG’s largest creditors were other financial firms and that those firms clearly would have been directly impacted by an AIG bankruptcy filing. But the gravest risks were not the direct exposure of other financial firms to AIG. The gravest risks related to the indirect consequences of a bankruptcy of AIG, indirect consequences that would impact millions of Americans. AIG’s role as one of the world’s largest and storied insurance companies meant that its failure likely would have had a contagion effect, causing damage as it spread throughout the insurance industry. Policy holders would be hurt. Municipalities, who were already reeling from a lack of financing options for their building projects, would have seen their financial protection disappear. Workers whose 401(k) plans had purchased $ billion of insurance from AIG against the risk that their stable value funds would decline in value would see that insurance disappear.

Some assets will be stranded – such as those in carbon-intensive sectors – while others – such as those in the renewable energy sector – could enjoy strong tailwinds. The value of global financial assets at risk from climate change has been estimated at $ trillion by the London School of Economics1 and $ trillion by The Economist2. Investors cannot ignore these potential changes in asset values. Second, approaches to sustainable investing have developed significantly in recent years. There is growing evidence that investments incorporating strong ESG considerations can reduce exposure to systemic risks and improve resilience to market shocks. Some recent research has found a strong correlation between market performance and ESG ratings, for both equity and fixed income portfolios.3During the early weeks of the COVID-19 crisis, there was also some evidence that major ESG funds were able to outperform broad indices like the S&P 500. Sustainable investing is becoming mainstream. 1/7 BIS central bankers' speeches More than $ trillion of assets globally are being managed in ESG investments, up 34% from 2016. 4 Global funds linked to ESG principles more than doubled in 2020 compared to just a year before. 5Global investors plan to further double ESG assets over the next five years. 6 Third, investor preferences will change as wealth is handed over to the next generation. We are on the cusp of the most significant inter-generational transfer of wealth in history. $ trillion of assets is expected to change hands between generations by 2030.

Total ESG assets in the region more than doubled, from about $ billion in 2019 to about $ billion in 2020. 12 Of the record $ billion global inflows into ESG funds last year, Asia attracted about $ billion. 13 But we need to do much more to allocate the capital that is necessary to support Asia’s transition to a sustainable future. As a centre for green finance in Asia, Singapore will play a purposeful role in this effort. We will do this in two ways: as the platform for developing green financing solutions customised for Asia; and 2/7 BIS central bankers' speeches as the channel through which global capital is directed at meeting Asia’s transition needs. There are three areas where we need to intensify efforts: broaden the range of green financing solutions and markets; improve the consistency and transparency of ESG reporting and disclosure; and build knowledge and capabilities in sustainable finance. BROADEN GREEN FINANCING SOLUTIONS AND MARKETS Let me begin with broadening green financing solutions and markets. I will highlight three strategies that Singapore is focusing on. First, facilitate the issuance of more established green financing instruments, such as green bonds and green loans. Bonds and loans are a familiar and key source of financing for corporates of all sizes. Green, sustainability, and sustainability-linked bonds and loans enable corporates to raise financing as they take up green projects, invest in green assets, or move towards more sustainable business practices.

4 BIS central bankers’ speeches deploy their balance sheets for holding Treasury securities and other fixed-income assets allows them to serve as shock absorbers, particularly during times of volatility. Automated trading firms, on the other hand, typically do not end the day with significant long or short net exposure, despite the fact that they often conduct a substantial volume of gross transactions.9 As a result, automated trading firms do not face the same level of capital constraints under the traditional way of thinking about capital requirements.10 However, for the same reason, they also may not be capable of serving as shock absorbers during periods of heightened volatility, as traditional market makers are thought to do. Thus, while the market may have come to rely on automated trading firms as suppliers of very-short-term intraday liquidity, market participants still rely on traditional market makers with balance sheet capacity to supply liquidity over longer-term horizons. Electronic trading, including automated and high-frequency trading, has likely had a number of benefits. For one, technological advances have supported market efficiency by increasing the pace at which price discovery is disseminated across financial markets. It may also have reduced transaction costs, both through the economies of scale that large technology investments produce, and perhaps through the maintenance of narrow bid-offer spreads that automated market-making arguably makes more likely.

Traditional broker-dealers generally carry net long or short positions in Treasury securities from one day to another, an activity that requires capital. Dealers hold Treasuries for a variety of reasons, including to support the liquidity needs of their customers, to hedge exposure in other fixed-income products, and to meet their obligations as primary dealers to participate in U.S. Treasury auctions and the Federal Reserve’s open market operations. Many argue that the ability and willingness of dealers to 7 A CLOB protocol aggregates all executable bids and offers across participating liquidity providers in a single order book that is available to all market participants. In a liquid market, the continuous visibility of quotes and the interaction of multiple bids and offers are likely to enhance the price discovery process and market transparency. In contrast, a request-for-quote protocol, where a request for liquidity typically is submitted to only a limited set of providers, by its nature imposes a degree of market segmentation that may impede the price discovery process as compared with a CLOB protocol, but is arguably better suited to handle large block trades and illiquid securities. 8 Momentum detection is a strategy that attempts to predict short-run price changes based on patterns in realtime market data. Statistical arbitrage is a trading strategy that typically relies on identifying mean reversion from historical relative pricing relationships between correlated assets. Spread trading seeks to profit from a simultaneous purchase and sale of two closely related fixed-income assets.

The quality of the indicators and the assessment of investments will further improve as more and better data sources become available. 5 See ESMA (2023). Progress Report on Greenwashing. May. 5 Several regulatory initiatives in the European Union will make new data available as a result of new climate and sustainability reporting requirements for financial and non-financial institutions. Currently we have the Sustainable Finance Disclosure Regulation (SFDR), that sets mandatory environmental, social and governance (ESG) disclosure obligations for financial markets participants, and the Corporate Sustainability Reporting Directive (CSRD). With regard to the latter, the European Financial Reporting Advisory Group (EFRAG) is working on the details of the thematic standards for collecting information on ESG aspects, trying to reconcile CSRD with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the work of the International Sustainability Standards Board (ISSB). As you know the TCFD issued a set of recommendations to disclose climate-related risks and opportunities, grouped into four categories: i) governance, ii) strategy, iii) risk management and iv) metrics and targets, but again they are voluntary. The ISSB is working on a global framework for sustainability but it has a different approach from EFRAG. For example, the ISSB considers single materiality while EFRAG considers double materiality. As you can see we have an alphabet soup to negotiate in the drive for transparency. In reality, there is as yet no global standard for disclosure, and it will take several years to achieve a complete framework.

The main characteristics proposed by the European Commission are: - Taxonomy alignment: meaning that the funds raised by the bond should be allocated to projects that are aligned with the EU taxonomy. - Transparency as to how bond proceeds are allocated, through detailed reporting requirements. - External review: all European green bonds must be checked by an external reviewer to ensure compliance with regulations and taxonomy alignment of the funded projects, and, 2 See ECB (2023). Towards climate-related statistical indicators. Statistics Committee of the European System of Central Banks. January. 3 - Supervision by the European Securities Markets Authority (ESMA) of the reviewers. This means that external reviewers providing services to issuers of European green bonds must be registered with and supervised by ESMA. The European Council and the European Parliament have this year reached a provisional agreement on the creation of this European Green Bonds Standard. Pending the final text, a very important element of the proposal is that the standard will be voluntary. The European Central Bank issued an opinion in 2021 on the proposal for a regulation on European green bonds,3 which it welcomed. Regarding its voluntary nature, the ECB considered that, in the short term, a strictly mandatory standard might lead to divestment from non-taxonomy-aligned green bonds and a sudden drop in Union-based green bond issuance.

It has come to symbolize our commitment to collaboration and consultation within the SADC Committee of Central Bank Governors (CCBG) and annually marks our contribution to the process of regional economic co-operation and integration. It is in this light that the Bank of Zambia applauds the favourable response from all central banks, individuals and other institutions represented here for allowing their members of staff to attend this event. As Bank of Zambia, we believe this event provides an excellent opportunity for exchanging views and sharing ideas in improving our national payment arrangements to foster economic growth and integration. Ladies and Gentlemen, lessons from the development of payment systems in the European Union and the United States of America provide a useful guide for emerging market economies such as ours. That be as it may, recent technological advancements and developments in China and India are also instructive as they glaringly indicate that it is possible to leap frog some of the historical development experiences of these major industrialized economies. However, it is without a doubt that this will require the concerted efforts and commitment of all those involved in the transformation of national payment systems to stay the course as challenges are abound. For instance, it is quite clear that consumer demand for payment services largely outstrip supply and more work needs to go into improving the outreach, efficiency and pricing of existing payment arrangements.

These investments were, of course, driven by a series of important changes in law and regulation, but they also reflect a rational response by the institutions themselves to the financial and reputational damage associated with some of the earlier weaknesses. The progress achieved in internal control regimes has of course come with some costs. Many of these costs can be measured in dollars, but others, such as management attention and the uncertainty induced by greater vulnerability to enforcement action and litigation, are more difficult to measure. Despite the difficulty of adding up all these costs, it is hard to challenge the widespread view that they have been quite substantial. But the relevant metric is not merely their magnitude, but how they compare to the magnitude of the resulting gains. There is no straightforward way to make this assessment, but today I want to offer some perspectives on our continued efforts to balance critical financial stability objectives with the need to foster and encourage the innovation and dynamism that is such a central part of the U.S. financial system. I’ll begin with the observation that profitability measures suggest that the business of financial intermediation is reasonably healthy, despite the costs induced by changes in the regulatory environment. Part of this reflects the reduction in credit costs and increased macroeconomic stability of the past several years. The financial performance of the well-run U.S. financial institutions seems to compare favorably to that of their peers in other markets.

Mr Latter gives an overview of the current monetary policy stance of Hong Kong Address by Mr Tony Latter, a Deputy Chief Executive of the Hong Kong Monetary Authority, at the CLSA Investors’ Forum in Hong Kong on 17 May 1999. I should like to say a few words about the present stance of monetary policy in Hong Kong and its relation to the broader state of the economy. Hong Kong has a fixed exchange rate against the US dollar. The pros and cons continue to be a focus of debate in some quarters, but I don’t intend to dig over that ground yet again today. Suffice it to say that over the past fifteen years Hong Kong has enjoyed, on balance, remarkable prosperity. I happen to think that the visible and trusted monetary discipline of the exchange rate link has been a decisive contributory factor to that prosperity. Of course, one cannot deny that there is some association between the strength of the exchange rate and the level of interest rates on the one hand, and the current recession on the other, but I would caution against adopting too short-term a horizon when drawing conclusions, and I would also suggest that some of the adjustment which we have experienced - for example in property prices - was both necessary and somewhat overdue.

However, I suspect that, while that may well have been the case a little while ago, we are now in a period where decisions are being more influenced by confidence factors relating to the broader economic situation than by interest rates per se, although interest rates do of course remain important. 3 BIS Review 54/1999 I have pointed to elements of the present economic conjuncture - namely, competitiveness and interest rates - where the position may not be so bleak as painted by some. But I do not deny that we face tough challenges and I note that the consensus for the immediate outlook is for no more than an unspectacular recovery. I have no brief today to try to talk up our economic prospects. My wish is rather to contribute analytically to the discussion of those prospects. The only certainty is that the future is always uncertain. BIS Review 54/1999 4

Uncertainty prevails over exactly when and how Brexit will take place; we can expect recurrent bouts of market volatility in the months ahead. Central banks across the world have said they will do what it takes to safeguard financial stability and maintain smooth functioning of their markets. We expect the global financial system to stay resilient, given ample liquidity and the generally stronger balance sheets of banks. But the UK economy is expected to take a hit and there will be some fallout on the EU. Uncertainty, especially over the terms of the UK’s exit from the EU and its future access to EU markets, will weigh on business confidence and investment spending. Growth in the EU will be weighed down by Brexit, on account of its significant trade and financial linkages with the UK. This in turn is likely to have a small dampening effect on global growth. The political and social implications of Brexit could have more significant economic consequences over the medium to long term. But it is too early to tell what these implications might be. There are several key elections taking place in Europe next year. They will determine the ability of governments to maintain support for structural reforms as well as for the European project. Destabilisation of politics in Europe could impact global markets and global growth. The US is expected to stay on a moderate expansion path. The consensus growth forecast for 2016 is 1.9%.

The asset management industry continued to grow well last year, with assets under management posting a 9% increase to reach $ trillion. Singapore will introduce a new corporate and regulatory framework to encourage fund domiciliation in Singapore and build up fund administration capabilities. MAS is working closely with the private equity/venture capital (PE/VC) industry to see how we can enhance financing for growth-stage companies, both local and from around the region. PE/VC financing has been increasing at a compound annual growth rate of 30% over the last 5 years. In the Renminbi (RMB) market, we are expanding two-way flows between China and Singapore. Besides Suzhou and Tianjin, Singapore has established cross-border RMB initiatives with the rapidly growing city of Chongqing. Corporates in Chongqing that issue RMB bonds in Singapore can fully repatriate the proceeds raised for infrastructure and other development projects in western China. We are witnessing a healthy volume of transactions now. In foreign exchange trading, we are working on electronification of the market. Digitisation, competition, and consolidation are rapidly transforming the global foreign BIS central bankers’ speeches 7 exchange (FX) landscape. MAS’ focus is to position Singapore as Asia’s e-trading hub to build on our FX centre, which is already the largest in Asia. We are working with FIs and FX trading platforms to build relevant infrastructure such as matching and pricing engines that will anchor liquidity in our marketplace. In infrastructure finance, the focus now is on enabling capital recycling.

We can choose to store our savings in the form of cash or in a current account. The price we pay is the return other alternatives would have provided. Bank deposits and bonds are examples of investments that provide a reliable return – interest income. If we choose to store money, we lose this income. But in contrast to bonds, money can be used directly to purchase goods and services. Interest is therefore also the price we pay in order to have liquid holdings. The interest rate is also used as an instrument in economic policy. Setting the interest rate to achieve a monetary policy objective, often price stability or low and stable inflation, is usually the responsibility of the central bank. The central bank sets a very short-term nominal interest rate. In Norway, this is the interest rate on banks’ overnight deposits in Norges Bank, the sight deposit rate. This rate determines the very short interest rates in the money market with maturities from one day upwards, normally up to Norges Bank’s next monetary policy meeting. Longer-term rates are determined by expectations concerning Norges Bank’s use of instruments in the future and by the degree of confidence in monetary policy. The real interest rate, that is the nominal interest rate minus expected inflation, is the rate that influences decisions concerning saving and investment. BIS Review 46/2003 1 The interest rate influences inflation indirectly via domestic demand for goods and services and via its effect on the exchange rate.

First, I would underscore the importance of good corporate governance, the basic elements of which include: • independent and competent outside directors; • capable and experienced management; • a coherent corporate strategy and business plan; and • clear lines of responsibility and accountability. Together, these elements contribute to an overall operating process conducive to long-term health and prosperity. A tightly run ship with a disciplined crew led by an experienced and competent cadre of officers is far better able to survive a long journey that will inevitably confront sudden storms. Closely related to good corporate governance and critical to any banking institution’s well-being is a rigorous internal control apparatus. Of course, effective internal control systems have always been centrally important to sound banking. This point becomes clear if we consider for a moment their basic purposes: • to provide reasonable assurance that the bank’s and its customers’ assets are safeguarded, that its information is timely and reliable, and that errors and irregularities are discovered and corrected promptly; • to promote the bank’s operational efficiency; and • to ensure compliance with managerial policies, laws, regulations and sound fiduciary principles. With these purposes in mind, it is clear that the success of any banking organization depends on the effectiveness of its internal control apparatus. And never has this been more true than today.

The Governing Council of the ECB has decided to support, in principle, the activities pertaining to the introduction of a STEP label, which would acknowledge adoption of the standards, for the first two years after its launch. It has also decided to produce and publish STEP yield indices as well as statistics on volumes on an ongoing basis. The ECB would like to strongly encourage similar initiatives to promote financial integration in Europe. Continuing my assessment of the wholesale markets, I will briefly discuss the equity market. Recent empirical evidence shows that the degree of integration has increased here. For example, the so-called “home bias” in the equity holdings of investment and pension funds has decreased substantially over the time. Overall, however, this market segment is still one of the least integrated. As a final comment on the wholesale markets, I would like to say a few words on the development of new credit markets. Sometimes, these markets are set up in a pan-European context right from the start – we might say they are “born integrated”. One example of this is the European market for synthetic collateralised debt obligations. This development is encouraging. However, the existence of cross-border activity, with its impact on prices and volumes, does not always signal the absence of hurdles and the achievement of full integration. Factors of segmentation may still exist, but can be overcome by innovative instruments.

The first is that, five years on, very limited progress has been made in resolving one of the fundamental problems that helped make the crisis so devastating for so many economies: a deficient global financial architecture, which has been outgrown by the markets that use it. There have indeed been some reforms both internationally and in individual economies, and there is a much greater alertness to the threats to stability posed by volatile, high-velocity international capital flows. But much still remains to be done, and as capital flows get bigger, the risk of further crisis remains. Paradoxically, the risks are increased by a false sense of security brought on by two or three years’ absence of the kind of contagion that shook so many parts of the world in the nineties. The second observation is that, in the absence of international solutions, a number of economies in the region have adopted local approaches to the problem. Some have chosen to go slow or even step back from financial liberalisation through introducing or tightening restrictions and controls. While understandable - and in some cases effective as short-term measures - such an approach is regrettable because it shuts off many of the benefits, as well as the dangers, of globalisation. In Hong Kong, where controls of this kind are not practical because of the realisation that global links supply our lifeblood, we have taken a different approach. We have chosen to enhance policy credibility through greater transparency and through strengthening and tightening up our rule-based monetary system.

These include reverse repo transactions with dealers and other counterparties, auctions of term deposits for banks, or securities sales from the Fed’s portfolio. A related concern is whether the Federal Reserve will be able to act sufficiently fast once it determines that it is time to raise the IOER. This concern reflects the view that the excess reserves sitting on banks’ balance sheets are essentially “dry tinder” that could quickly fuel excessive credit creation and put the Fed behind the curve in tightening monetary policy. In terms of imagery, this concern seems compelling – the banks sitting on piles of money that could be used to extend credit on a moment’s notice. However, this reasoning ignores a very important point. Banks have always had the ability to expand credit whenever they like. They didn’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve’s standard operating procedure for several decades has been a commitment to supply sufficient reserves to keep the fed funds rate at its target. If banks wanted to expand credit that would drive up the demand for reserves, the Fed would automatically meet that demand by supplying additional reserves as needed to maintain the fed funds rate at its target rate.

Similarly, the current unemployment rate of 9 percent is well above most estimates of the nonaccelerating inflation rate of unemployment (NAIRU) – the lowest rate of unemployment consistent with sustained price stability. In the pre-crisis period, the NAIRU was likely in the region of 4.5 percent to 5 percent. There are several reasons why the NAIRU may now be higher. First, extended unemployment compensation benefits create incentives for prospective workers to keep looking for better jobs rather than accept less attractive positions. Empirical work on this subject suggests that the NAIRU might currently be roughly 1 percentage point higher because of this factor. However, this effect will only persist for as long as the extended benefits are in place. Second, the rise in unemployment has been associated with an increase in the degree of mismatch between unemployed workers’ job skills and available job vacancies. Some cite the upward shift in the Beveridge curve, which illustrates the relationship between unemployment and job vacancies (Chart 22), as evidence of this effect. Third, the longer that people are unemployed, the more their skills tend to atrophy, which makes it harder for them to become employed in the future. For unemployed workers, the median duration of unemployment has climbed and a growing proportion of the unemployed has been jobless for long periods (Chart 23).

Andrew Bailey: The capital adequacy of banks – today’s issues and what we have learned from the past 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 Bloomberg, London, 10 July 2014. * * * I would like to thank David Curry, Hywel Dawes, Simon Dixon, Marc Farag, John Jackson, Duncan Mackinnon, Sasha Mills, Jitendra Patil, Rhys Phillips, David Rule and Vicky Saporta for their help in preparing this speech. The views expressed are my own and not necessarily those of any other members of the Bank of England. Good morning and thank you for giving me this opportunity to speak on the subject of bank capital adequacy. I am going to focus on the design of the capital adequacy regime. I am going to draw out the failings of the old regime and why those failings were so critical, comment on the major progress made over recent years, and use all of this to draw out design questions that remain to be settled. In doing so, I will examine a set of key objectives of the regime: first, that it creates good incentives for the behaviour of regulated firms; second, that it is appropriately forward-looking – at the risks in the future; and third, that it encourages and requires appropriate transparency which fosters market discipline.

In one sense, this should not matter if the regulatory capital calculation provides a robust floor below which the “economic” capital should not fall. But it was unclear how we could know this was so, and the lack of line of sight into how the firm managed risk was disturbing. The second weakness is generic to simple systems which conflate different levels of inherent risk, namely that they tend to create incentives for banks to increase the average level of riskiness of their assets. And, one thing we now know, incentives are hugely important in the capital regime. As I noted earlier, Basel II was not in place properly when the crisis broke, but the Market Risk Amendment was, and this introduced the use of banks’ own so-called “internal” models. As an aside, my experience suggests that the contribution of Basel II to the crisis was far more that it diverted the attention and effort of regulators and the industry away from broader risk management and into the implementation of a new and more detailed approach to regulation. This was especially so for large banks seeking approval to use their internal models. Moreover, this process was not well done. The Market Risk Amendment and Basel II dramatically increased the complexity of the capital framework, and whilst it intended to increase the scope of risk capture in the regulatory capital measure it ended up creating new opportunities for “optimising” regulatory capital.

BIS central bankers’ speeches

The only conclusion to be drawn is that with their operational reforms, strong communication, successful financing arrangements, building of liquidity and ongoing strong business performance, the banks have largely reclaimed their former position in the eyes of global investors. The authorities, and the Central Bank in particular, focused their efforts on communication about the character and structure of the economy, the current position and outlook, and other relevant information. The Central Bank’s regular Monetary Bulletin includes inflation and macroeconomic forecasts and a detailed analysis of economic developments. Once a year the Central Bank publishes a separate Financial Stability report and a more detailed and comprehensive edition than otherwise was produced in spring 2006 in response to prevailing conditions. It sought to address as many points as possible that had been raised by foreign analysts in the preceding months. The Bank’s financial stability analysis has been described by international reviewers as professional and transparent. It strove to fulfil such expectations a year ago in difficult circumstances. In the Bank’s view this aim was achieved and the report played an important role in explaining the position of the Icelandic financial sector at that time. Another crucial factor was that the Central Bank tightened the monetary stance sharply by raising its policy rate by 3.75 percentage points during the year and signalling clearly to the markets a firm commitment to bring inflation back to target after it had risen substantially as a result of the króna depreciation.

2 INTRODUCTION NORGES BANK From a not too distant future, let’s return to the present day. We can already see the contours of the digital tools used by Kristoffer and his digital assistant. Technology is advancing at a rapid pace. Every day we rely on new technology as we tap our payment cards on the reader. We also have to adapt to new developments on many other fronts. A shift in production methods and consumption is underway in response to global warming. The world economy is marked by densely interwoven trade flows, but also by uncertainty about the path ahead. ECONOMIC PERSPECTIVES 14 FEBRUARY 2019 INTERNATIONAL ECONOMIC COOPERATION IS CREAKING Throughout history, technological innovation and increased trade in goods and services have been important sources of growth and development. The two driving forces have functioned in tandem. Trade barriers have been reduced in recent decades. Faster transport and advanced communications systems have greatly facilitated access to ever bigger markets. Global value chains have emerged, and service providers can be located far from customers. With free-flowing capital, we can invest globally. Since the 1970s, world trade has grown rapidly (Chart 1). As a percentage of world GDP, international trade has almost doubled. Goods are still the dominant component, but trade in services has been on the rise. A host of new countries have also increased their share in world trade. Substantial technological and economic lags have been reduced. The world’s economic balance has shifted. Chart 1 World trade1) has grown markedly.

Norwegian businesses are part of global value chains. This means that protectionist measures can spill over into the Norwegian economy even if Norway is not targeted. The international framework and trade agreements we have with other countries are essential to the Norwegian economy. The EEA agreement is of particular importance. Thanks to the free flow of goods, services, labour and capital within the EEA area, Norway’s domestic market is about 100 times bigger than it would have been otherwise. A good half of our trade with other countries is with EU countries (Chart 5). Common regulations and product standardisation facilitate market access for Norwegian firms. 1 Based on GDP at market rates. 6 NORGES BANK Chart 5 We trade mostly with the EU. Goods and services. In billions of NOK. 2017 EU US China ECONOMIC PERSPECTIVES 14 FEBRUARY 2019 Other countries Exports Imports 0 200 400 600 800 1000 1200 Sources: Statistics Norway and Norges Bank Norwegian business and industry may soon feel the consequences of Brexit. The UK is an important trading partner. The UK’s exit from the EU means it will also exit the EEA agreement, creating uncertainty for many firms. At the same time, international economic cooperation is creaking. In the years ahead, the multilateral trade system is at risk of being undermined, which may leave us with a more fragmented system. This may adversely affect small countries in particular.

Many Asian central banks have brought dollars that are invested in US government bonds in order to prevent their own currencies appreciating against the dollar, which would reduce their competitiveness. China, in particular, has been strongly dependent on exports to maintain a stable increase in employment and thereby to avoid even higher unemployment. This has meant that the foreign exchange reserves in Asia have increased dramatically in recent years. The consequences of the saving have been that household consumption has been kept down and the increase in welfare has not been as large as it could otherwise have been. 10 OECD, Economic Outlook, No. 78, December 2005. BIS Review 35/2006 5 In my opinion, all of these factors depend on one another and altogether they provide an explanation of the US deficits and the global imbalances. Are the imbalances sustainable in the long term? Although opinions are divided as to the seriousness of the US current account deficit and the main explanations behind it, most analysts agree that there must be a correction sooner or later. Some claim that the sustainability of the US current account deficit is greater than many have earlier believed. They point out that there has been no correction so far, despite the fact that the deficits have remained high over a long period of time and that the dollar has even appreciated over the past year.

This means that 100 million people have moved to "stage 3”, that is, marginally above the poverty line. There have also been major geographical changes in the spread of poverty. The number of poor people has declined in Asia, but increased in other developing countries. Africa South of the Sahara has fared the worst, with the number of poor people there doubling over the past 20 years. Over the past two years, Africa has enjoyed the highest GDP growth in more than 30 years. 2 So even there, globalisation may begin to have a positive impact. China – an important force in the change process China’s entry into the global market economy has been one of the driving forces in the change process that the world economy is currently undergoing. The country’s significance in the global world economy has increased at a rate and in a scope that few people considered possible a few decades ago. Since the reform policy began at the end of the 1970s, average growth has been 9 per cent a year. China has accounted for one third of the world’s real growth in recent years. The country has rapidly transformed into the second largest economy in the world, become the third largest trading nation and one of the largest recipients of foreign direct investment. 3 The strong growth in China has been driven by investment and exports. Investment comprises just over half of GDP, which is much higher than the shares in OECD countries or in other rapidly-growing economies.

Financial development has been important not only for firms but also for the country as a whole. A deeper and far-reaching financial system contributes to building financial and economic inclusion, and financial stability against external shocks. In this respect, the Chilean financial system shows better performance than other Latin American and Emerging economies, in dimensions like market capitalization, number of branches per inhabitant, use of derivatives, and participation in domestic credit to the private sector, to name a few. Nonetheless, increased development and complexity of financial markets also means that risks may be higher, and that a stronger and more sophisticated regulatory framework is required. Page 10 of 20 Central Bank of Chile September 2019 The Chilean financial crisis of the early eighties led not only to a radical bank regulation revision, but also to learning valuable lessons for the future. A deeper and properly regulated financial system contributes to financial stability, inclusion and increased welfare. Even though significant progress has been made in this regard, there are still challenges ahead that must be faced to further strengthen our financial system. Let me now address some of these regulatory challenges the CBC has been working on. Page 11 of 20 Central Bank of Chile September 2019 In order to have a deeper FX market and enhance resilience of the financial sector a number of measures are being taken by the Central Bank of Chile (CBC).

Loans to the private sector have stabilised at growth rates somewhat above 5%, a rate of expansion which, in real terms, is broadly in line with the long-term average. Considering all the evidence relating to the first pillar, from a medium-term perspective, more liquidity is available than would be needed to finance sustainable, non-inflationary growth. However, given the current economic environment, we do not see the risk of this translating into inflationary pressure in the near future. Concerning the second pillar, recent short-term conjunctural indicators and survey data suggest that real GDP in the euro area has continued to grow only moderately in the third quarter of this year. This is in contrast to earlier expectations that a more pronounced upswing would occur in the course of this year. Obviously, the hesitant pace of economic expansion and current, lacklustre confidence reflect the significant degree of uncertainty that has been building up over recent months. This uncertainty is associated with geopolitical tensions, the evolution of oil prices and developments in stock markets. However, for the time being, the main scenario for the euro area remains that economic growth is expected to return to rates close to potential in the course of 2003. In fact, this expectation is consistent with all forecasts published by international organisations. Private forecasters, on the whole, also seem to share the same view. Moreover, financial markets have shown signs of stabilisation in recent weeks following a period of considerable turbulence.

The disadvantage of this approach at the time of its rollout was that this policy decision coincided with a drop in the price of oil, triggering a surge in inflation, which in turn necessitated a rise in the rates. But you will recall that we saw a comparable drop in the price of oil in early 2016 which had almost no impact on inflation. These are signs of an economy which is becoming accustomed to a floating rate and how it works. In my opinion this is where the floating exchange rate demonstrated its positive role as an economic adjustment enabler. We are indeed scared of floating schemes in the economy, explained by the many decades of a fixed exchange rate which changes only during a crisis, such as a devaluation crisis, and aside from which remains permanent for a period of time. Admittedly, this volatility of the exchange rate is a concern. But I will remind you that when the exchange rate was permanent, our interest rates were very volatile, as were other prerequisites to business. Therefore, it will take some time for the economy to adjust to some volatility. This is number two. 8 / 14 BIS central bankers' speeches Third. Volatility receded drastically following the introduction of the floating exchange rate. It was very high according to various measures: both realised volatility and implied volatility, monthly and three-monthly. It is now down to levels seen in other emerging markets, possibly even lower. Moreover, it is substantially lower than oil volatility.

Do you think this authority should remain independent, or should it once again be subordinated to the Ministry for Economic Development? Thank you. ELVIRA NABIULLINA: Many thanks for your questions. As for the guidance you mentioned – this is still in the works. It is not so simple, as we are all accustomed to comment on a variety of processes. This is common practice when experts, business representatives and governmental officials voice their opinions on the current economic and forex situation. In other countries these opinions are not usually referred to as verbal interventions – verbal interventions are normally understood as the statement of a central bank, and are taken as verbal interventions, as well, possibly, forward guidance, too. I think that markets will gradually adopt the right view of such communications, and become accustomed to them. At the same time, we are looking to develop some general rules in this area. The idea is to ensure a more careful approach. 5 / 14 BIS central bankers' speeches On the subject of Rosstat, there are objective complexities. These are understood to arise when Rosstat makes estimates in the context of significant external changes, which causes structural shifts to take place. These changes have to be reflected in data series as they unfold – so as a result we are not immune to recalculations. While we do use the full set of Rosstat data, we have always drawn on additional data obtained through surveys.

While the Fed raised the fed funds rate by 25 basis points in June and has signaled two more increases this year and three the next—while continuing to 4 downsize of its balance sheet—the European Central Bank extended its asset purchasing program and signaled that the benchmark rates will stay put for a while. The trade dispute between the US and China has continued to escalate. So far, the tariffs applied by the US and the reprisals have been limited, but the conflict has not subsided, and the measures adopted are already having an impact on risk perceptions, and the markets are more sensitive to them. As detailed in a Box in this Report, the effects that these measures may have on the global economy are difficult to quantify, as they depend on the number of countries that would be directly and indirectly involved, the amounts levied, the sectors affected and the time during which the higher tariffs would be applied. However, there are some qualitative dimensions and certain transmission channels common to the different possible scenarios. For the economies directly involved, there would be a negative impact due to lower external demand and greater uncertainty, which would affect local consumption and investment decisions. The size of the impact is related to the importance of trade among those directly involved and their ability to divert it to other economies.

MONETARY POLICY REPORT PRESENTATION BEFORE THE HONORABLE SENATE OF THE REPUBLIC Mario Marcel Governor Central Bank of Chile 5 September 2018  The September 2018 Monetary Policy Report can be downloaded at http://www.bcentral.cl. The Spanish original prevails. Introduction Mr. President of the Senate, senator Carlos Montes, honorable senators, ladies, gentlemen, On behalf of the Board of the Central Bank of Chile (CBC), I am grateful for your invitation to present the Monetary Policy Report (IPoM). As usually in September of each year, this coincides with the report that, according to the Organic Law of the CBC, we must submit annually to the Senate. In compliance with this obligation, the Monetary Policy Report that I will be summarizing in a moment contains our view of the recent macroeconomic and financial developments in the Chilean and international economy, as well as their prospects and implications for the conduct of monetary policy. It also includes the Bank’s financial results of the first half of 2018, the results of the management of international reserves and a summary of the main decisions adopted by the Board this year to date. The Monetary Policy Report Incoming data this year has been showing greater than expected economic growth, and inflation consolidating its prospects of convergence to the target, in a context of positive surprises in several areas, an upward revision of potential growth and a faster closing of the activity gap.

First, private partnerships such as that between Clearstream and SGX, allow customers to better BIS central bankers’ speeches 3 allocate and optimise collateral resources in Asia by enabling collateral to be managed on a fully automated and real-time basis. Second, central banks have also stepped in with cross-border collateral arrangements to permit the deployment of head-office cash and government securities to support local currency liquidity requirements of their branches and subsidiaries overseas. b. Futurisation. Even before most jurisdictions introduce trading mandates, some segments of the OTC derivatives markets are already coming together to create exchange traded products. One example lies in Asian currency futures contracts traded on exchanges like SGX. With the introduction of new listed contracts, market participants have chosen to futurise some of their rolling forward contracts. Compared with OTC markets, exchange-traded futures have more transparent pricing, and are faster to execute and more cost effective. 14. These developments demonstrate that commercial incentives can be brought into alignment with regulatory priorities, which aim to reduce aggregate risk in financial markets and promote greater financial soundness and stability. 15. We also see promise for integration in infrastructure finance and insurance to produce exciting outcomes. 16.

Jacqueline Loh: Integrating Asia’s capital markets Keynote address by Ms Jacqueline Loh, Deputy Managing Director of the Monetary Authority of Singapore, at the ASIFMA (Asia Securities Industry and Financial Markets) Annual Conference 2014 “Developing Asia’s Capital Market”, Singapore, 5 November 2014. * * * Mark Austen – CEO, ASIFMA Ashley Alder – CEO, Hong Kong Securities and Futures Commission and my fellow keynote speaker Fellow regulators and central bankers Distinguished guests Ladies and gentlemen 1. It is my pleasure to join you this afternoon at the ASIFMA annual conference held in Singapore. 2. We have a very ambitious agenda ahead of us. The title of the conference, “Developing Asia’s Capital Markets”, certainly does not do full justice to the breadth of topics covered in the breakout sessions and roundtable discussions over these two days. These topics are very wide ranging indeed, from traditional equity and debt markets, to foreign exchange, investment banking, fund management, financing of Asia’s infrastructure needs, market infrastructures; as well as specific geographic markets China and India. Each segment not only aims to address opportunities and challenges in each market or asset class, but also opportunities and challenges across markets and asset classes. 3. Accordingly, I will focus my remarks on integrating Asia’s capital markets as a natural pairing to the conference theme on developing Asia’s capital markets. I. Economic dynamism and wealth creation in Asia 4.

One-fifth of world population is still living in poverty, with the majority of them in Asia. How to address the poverty issue and the uneven distribution of income amid globalisation has become your biggest challenge. Mr. President, I believe more wealth could be generated if savings in BIS Review 32/2005 1 the region could be recycled to finance investments in the region, if intra-regional trade could grow faster, and if investors could move funds easily from one economy to another in the region. Mr. President, I am confident that under your leadership, the Bank will play an even greater role in the integration of trade, finance and investment in the region. You have our unremitting cooperation and support. Thank you. 2 BIS Review 32/2005

But there’s something wrong. Interest rates are on the wrong side of the argument! They are too low, not too high, even if we assume that the equilibrium real interest rate is zero. Chart 5 Chart 6 Neither does international comparison suggest that Iceland is off the charts. Chart 5 shows a comparison of the real policy rates in a number of countries, based on the most recent interest rate decisions and the most recent twelve-month inflation figures. Iceland is 4 BIS central bankers’ speeches somewhere in the middle. In Chart 6 we see several industrialised countries. Iceland is at about the same level as Sweden. Interest rates are higher in countries that are further along in the business cycle and have less slack, and they are lower in countries where the slack is greater, monetary policy is more credible, and long-term inflation expectations are near target in spite of higher current inflation. Chart 7 Chart 8 Finally, I show charts that illustrate, on the one hand, nominal GDP growth as forecasted for 2011 and, on the other, the current nominal policy rate. Some have posited that monetary policy should aim at keeping nominal GDP growth as stable as possible at a level that, in equilibrium, would deliver a desirable inflation target. I have certain doubts about how this would work in practice, but that is beyond the scope of my speech today.

In addition, the distribution of net saving flows across the globe, with large excess saving (relative to domestic investment opportunities) in some emerging market economies searching for higher global investment returns also contributed to the fast pace of financial globalisation and development in recent years. When examining and assessing the effects of BIS Review 9/2008 5 globalisation on the financial system – its efficiency and stability – it is important to keep in mind the role of the other factors, e.g. financial innovation, new business models, risk management practices, which have simultaneously exerted a significant impact on the functioning of financial markets and institutions. The securitisation of bank loans and the development of credit risk transfer (CRT) instruments and complex structured finance products have fundamentally changed the functioning of the financial system and the distribution of risk across sectors and borders. Since the mid-1980s, an unprecedented growth in the development and issuance of new financial market instruments has allowed the transfer of risks across market participants also in connection with previously relatively illiquid assets like bank loans and mortgages. While initially the focus was on transferring market risk, credit risk transfer instruments have increasingly gained in importance since the 1990s. 13 With respect to securitisation, this development can best be described by pointing out that the outstanding value of US agency mortgage-backed securities grew from about 100 billion US dollars in 1980 to about 4 trillion dollars in 2006 [Chart 9].

You have probably seen pictures of bank runs – when queues form outside banks in crisis as people want to withdraw their money in the form of (safe) cash. This is why central bank money is still the linchpin of the system, even if it is rarely used in normal circumstances. The fact that it is available as an alternative acts as a kind of guarantee for the private bank money. 4 It is also the case that some key systems for payments are increasingly concentrated to a few agents. See, for instance, the card payment market where two American companies are entirely dominant in Sweden. Unlike our neighbouring countries, we do not have any domestic card payment network. This means that we are dependent on foreign infrastructures to make the majority of households’ payments. Without cash, therefore, an important part of the Swedish infrastructure would be completely in private ownership and dependent on foreign infrastructures and foreign companies. So if the use of cash continues to decline, it is not enough to say that this works fine at present, because the future will look rather different, regardless of whether we produce an e-krona. Other functions that cash has performed include functioning as a back-up when there have been disruptions to other forms of payment. It has also helped ensure 3 See, for instance, Fung et.al. (2018) and Söderberg (2018). 4 See, for instance, Tobin (1985).

The assumption underlying both reports was that the Central Bank’s key objective would continue to be price stability, as is mandated by law, and that the exchange rate of the króna would remain flexible, although it would not need to be entirely free-floating. I will not explain the grounds for these assumptions here, as they have been discussed widely, except to point out that it is unrealistic to entrust monetary policy with objectives other than those it has the chance to fulfil using the available instruments, and that adopting a fixed exchange rate would eliminate the advantages of an independent currency and independent monetary policy without eliminating the disadvantages. Therefore, policy formation lies in finding a framework that can work under the above-described conditions. There were a number of drawbacks to Iceland’s pre-crisis monetary policy framework. A major flaw was the lack of an adequate response to the excessive capital inflows that contributed to credit and asset price bubbles and domestic residents’ significant foreign exchange risk, which was to a large extent unhedged. Furthermore, monetary and fiscal policy were not well enough aligned, and the same can be said of other Government decisions that affected demand. The burden on monetary policy was therefore greater than it would have been otherwise, which further stimulated capital inflows. This, together with strong demand, pushed the real exchange rate higher than it would have been otherwise and exacerbated macroeconomic imbalances, as could be seen most clearly in a sizeable current account deficit.

The new global landscape of growing cross-border financial flows between regions that have national and cultural differences also underscores the need for enhanced recognition and understanding of practices in the different jurisdictions. This imperative translates into high demands on the use of standardised documents and agreements among Shariah compliant financial market players. Standardised documents and agreements increase market efficiency, transparency and uniformity, as well as reduce the cost of transactions as we strive towards seamless global interlinkages. The fourth prerequisite is the catalytic role of Shariah scholars in expanding cross-border Islamic financial transactions. Given the prominence of Shariah in the industry’s advancement, greater internationalisation will require the capacity and capability of Shariah scholars in offering practical solutions to Shariah issues faced by various global participants. Equally important is the efficiency and agility of Shariah scholars in responding to these matters. This calls for continuous discussions and active dialogues involving scholars across the globe. Of importance is also the need for mutual respect and common understanding within the international Shariah fraternity to enable productive and effective deliberations that will facilitate cross-border businesses. Many can indeed benefit from learning and leveraging on these country reports. To better disseminate the information, an idea is for the IDB Regional Office here in Kuala Lumpur to act as a focal point for member countries seeking further information or clarification on the reports. As a measure to further develop Islamic finance, the Regional Office can also expand its scope to include capacity building programmes for member countries.

BIS Review 41/2009 to be drawn into an overoptimistic frenzy and to underestimate the risks as long as things are still on the way up. What distinguishes this crisis from earlier ones is of course its global range and extreme complexity. This means that we can put a further couple of layers onto the foundation of Turner’s canvas. The globalisation and development of the art of financial engineering in recent decades can be said to be part of the first coat of paint on the canvas. The scope and complexity mean that the situation is in many ways much more serious than before. The course of events has also made us more confused than we have been in previous crises. At the same time, we can now see an increase in deglobalisation in the wake of the crisis. The cross-border integration of the financial sector has come to an abrupt standstill. And in the global economic downturn many countries are tempted to resort to protectionist measures. This is a worrying development. Both globalisation and the development of the financial services sector entail large potential welfare gains. In recent decades, an increasingly large share of the world population has obtained a reasonable standard of living, and a smaller share is living in poverty. Financial integration and new services lead to efficiency gains that in the long term benefit households and companies in all countries. It is important that we do not throw these welfare gains out of the window.

This is a difficult question that requires more detailed analysis, but it is unlikely that it will be easy to reach a general policy conclusion. I am convinced, on the other hand, that many central banks will review their macroeconomic models and more precisely define the role of asset prices in the transmission mechanism. I do not believe, however, that we should exaggerate the ability of monetary policy to prevent crises from arising. Even if excessively expansionary monetary policy can contribute to the build-up of a bubble, it is less clear to what extent monetary policy can entirely prevent this from happening. It is probable that it would require fairly substantial interest rate increases, something that may not be received sympathetically when the reasons for the increases are not crystal clear. But more moderate interest rate increases could, of course, contribute somewhat. If nothing else, it 14 BIS Review 41/2009 would provide a signal from the central bank that it envisages certain development problems. I also believe that risk scenarios with a longer forecast horizon may be an option for clarifying what the risks may be in the longer term. It is conceivable that the price of housing or some other asset may be driven by factors that are difficult to explain or which may be assumed to give rise to inefficient risk allocation and large fluctuations in economic activity and inflation.

[3]John Locke, An Essay concerning the true original, extent and end of civil Government, 1690. [4]UNCTAD (2018), World Investment Report 2018: Investment and New Industrial Policies. [5]There is some debate as to whether technology will evolve in the future in ways that make global value chains less important. Technologies such as 3D printing or robotics could allow the local production of many more goods. Some scholars find that technological change has so far only mildly slowed offshoring, while others see a more significant reversal ahead. See Koen De Backer, K., Menon, C. Desnoyers-James, I. and Moussiegt, L. (2016), “Reshoring: Myth or Reality?”, OECD Science, Technology and Industry Policy Papers, No 27, OECD Publishing; and Baldwin, R. (2016), The Great Convergence: Information Technology and the New Globalization, Harvard University Press. [6] 8 / 10 BIS central bankers' speeches [6]OECD (2018), OECD Economic Outlook, Volume 2018, Issue 1, Chapter 2. [7]in ‘t Veld, J. (2019), “Quantifying the Economic Effects of the Single Market in a Structural Macromodel”, European Economy Discussion Paper, No 094, European Commission, February. [8]This scenario assumes a counterfactual in which trade reverts to WTO-rules, and applies Most Favoured Nation (MFN) rates as tariffs on goods. For non-tariff barriers, it relies on estimates calculated for trade between the EU and the US. See in ‘t Veld, J. (2019), op. cit. [9]As measured by PPP-adjusted GDP. [10]Excluding intra-EU trade. [11]For further details, see ECB (2015), The international role of the euro, Frankfurt am Main, July.

There is only one answer: recovering the unity of vision and action that alone can hold together such different countries. This is not only a hope, but an aspiration based on political and economic advantage. But there are also internal challenges that have to be faced, which are no less important for the future of the European Union. We need to respond to the perception that it lacks equity, between countries and social classes. We need first to listen, and then to act and explain. So, unity and equity are needed, above all, as a guide for policymaking in Europe. I would like to recall in closing the words of Pope Emeritus Benedict XVI in a famous speech held 38 years ago: “To be sober and to do what is possible, and not to claim with a burning heart the impossible has always been difficult; the voice of reason is never as loud as an irrational cry… But the truth is that political morals consist precisely in resisting the seductions of magniloquent words… It is not moral the moralism of adventure… It is not the absence of all compromise, but the compromise itself that is the true moral of political activity”. [38] Footnotes [1]Reflection paper by Monnet, J. (1965), Les Portes, Archives de la Fondation Jean Monnet pour l’Europe, August. [2]European Commission (2018), “Public opinion in the European Union”, Standard Eurobarometer 90 – Autumn 2018, Directorate-General for Communication, European Commission, Brussels.

The risk profile’s covariation with the return on human capital has to be considered, too; perhaps a 16 8 Merton, R.C. (2000), Finance and the role of financial engineering in the 21st century, unpublished, Harvard University. BIS Review 5/2001 stockbroker, for example, should be wary of exposing even her/his personal financial savings to the stock market. Other risks lie in fluctuations in the price of a home that one either owns or is saving up for, as well as in the financing costs and, not least, the cost of refinancing; even if the mortgage rate is fixed, when the time comes to renew the loan it may be too high. The risks inherent in price fluctuations apply to other capital goods, too. It is also necessary to consider the risks in any saving plan for children’s education or for personal supplementary health insurance and life assurance. Perhaps it would even be advisable to allow for the risks that are covered today by insurance against fire, theft and accidents. Merton’s point is that there is a composite package of risks that is specific to each person and needs to be identified and covered. The management of all these risks calls not only for professional advice in the construction of such a plan but also for tailor-made financial products. The plan can include a variety of financial instruments but these must be easy for the individual household to understand in order to form a picture of and decide about the potential risks.

A relatively weak stock-market trend in the 1960s and ’70s no doubt fed expectations of a favourable return in the future. Another factor was certainly that the real return on bank deposits had been negative at times in the 1970s. Moreover, the introduction of mutual funds with tax incentives in the late 1970s and their subsequent replacement by a national savings system presumably drew many people’s attention to the stock market. It is also conceivable that the rise of economic journalism in the 1970s and ’80s contributed to a greater interest in the stock market. Neither should the formation of the Shareholders Association and the Share Promotion Association in the 1960s and 1970s, respectively, be overlooked. More knowledge and information certainly contributed. However, the increased saving in shares is one item in a larger context, in Sweden as well as other western industrialised countries. I mentioned earlier that Swedish households have transferred much of their traditional saving from banks to other instruments. Thirty years ago, bank deposits and other very liquid assets with little risk made up almost 60 per cent of households’ financial wealth, as against less than 20 per cent today. The major part of this adjustment in financial portfolios has gone to shares but a good deal now takes the form of insurance saving. The trend towards forms of saving with a higher risk has been accentuated by new rules for insurance companies, permitting a high proportion of shares, although this is arranged more indirectly.

Before you ask, we are of course trying to rectify this, trying to get banking down to 55% of total credit by the year 2010, and in the last three years, somehow we have got the debt market which was before then nonexistent to be double the size of the stock market. But it takes life times and generations to change people’s habits and the nature of the country. The world monetary system could in fact be monitored quite easily if the superpowers of the world would only wish it to be done. It sends forces to keep peace in other countries, so it could quite just as well impose a system , a world monetary system that would significantly reduce this kind of crisis. But the only crisis which might have affected the superpowers were the LTCM crisis of the 1998 and the Asian crisis of 1997 and it soon became apparent that the suffering could mainly be kept to the poor nationsand so it looks as though nothing good is going to happen in the international arena. Let me end my statement therefore by saying that before coming here I looked at the list of speakers and participants and was truly impressed by the diversity and excellence. I have therefore tried to put some interesting thoughts in the area of national central banking for your perusal. All of us here wish for peace and prosperity in the world.

M R Chatu Mongol Sonakul: National Central Bank and building world peace Speech by Mr M R Chatu Mongol Sonakul, Governor of the Bank of Thailand, at the 27th International Conference on World Peace “Building a Culture of Peace in the New Millennium”, held in Bangkok on 1 December 2000. * * * Members of the Professors World Peace Academy, Participants of the 27th International Conference on World Peace, Ladies and gentlemen. The history of central banking is normally agreed to have begun around four thousand years ago in the Greece, Roman and other empires up to the middle ages when banks were put up primarily for the purpose of getting finance for governments to wage war. So the first period of central banking cannot very well be said to have been in conformity with the topic I’ve been asked to talk about here today, which is entitled “National Central Bank and Building World Peace”. But in the sixteenth and seventeenth centuries and especially later on when industrialisation began in earnest, there were great needs for finance for the many various industries that sprang up around that time. Commercial banks and great finance houses became common but the limitations of the technology of that period of using precious metals as currency became quickly apparent. Commercial banks began issuing their own paper notes, for the amount of the valuable metals that they had in stock being much more transportable.

The Bank and Benchmark Reform Speech given by Chris Salmon, Executive Director, Markets, Bank of England Roundtable on Sterling Risk-Free Reference Rates, London 6 July 2017 I would like to thank Tim Taylor and Rob Harris for their help in preparing these remarks. 1 All speeches are available online at www.bankofengland.co.uk/speeches Introduction Thank you to NatWest Markets for hosting this event, and let me add my own welcome and thanks to you all for coming. The Governor has set out the need for a substantial transition from Libor to near-risk free alternatives. I want to expand on his remarks by explaining what the Bank has been doing to advance this objective, and why. And, importantly, looking ahead, I want to highlight the need for action from many of you. The financial system has a Libor dependency But let me first paint a picture of where we are starting from. The financial system has a Libor dependency. I’m sure this won’t be news to you, but it bears some examination. Usage of term Libor – that is the 3-month and 6-month tenors – is widespread, especially in Sterling and US Dollar markets, but also in Japanese Yen and Swiss Franc. The greatest concentration of financial contracts referencing Libor is in derivatives markets. For example, in sterling, more than £ trillion of ‘over-the-counter’ derivatives and £ trillion of exchange traded derivatives (on a gross notional basis) reference Libor. USD Libor derivatives probably run to the hundreds of trillions.

These reforms, including to the timing of SONIA publication, will take effect from March/April next year. Working Group on Sterling Risk-Free Reference Rates Let me now turn to the issue of forging a market consensus on the appropriate risk free rate. 4 All speeches are available online at www.bankofengland.co.uk/speeches 4 Here the Bank set up the Risk Free Rate Working Group with the objectives of identifying an RFR and promoting its use as an alternative to sterling Libor. We used our convening power to do this because we recognised that individual market participants, acting alone, cannot overcome network effects. Only coordination and cooperation across a broad spectrum of market participants can create the conditions for change. We also believe that the solution must come from the market – that is why the Group is market-led. As you know, and having considered the merits of two secured benchmarks alongside SONIA, the Group has now reached a decision to recommend SONIA as the RFR. This is welcome progress: the main priority from the Bank’s perspective was for the market to coalesce. We were committed to supporting whatever decision the Group made. That is what having a market-led process means. As it happens we were not surprised by the outcome because the transition path to a secured rate would clearly be much more difficult than it will be for SONIA. A consequence of the Group’s decision is that SONIA will grow in importance.

Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk. That is what economists mean by “moral hazard”. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The “too important to fail” problem is too important to ignore. There are only two ways in which the problem can – in logic – be solved. One is to accept that some institutions are “too important to fail” and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low. The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society. Any solution must fall into one of those two categories. What does this mean in practice? Consider the first approach. To reduce the likelihood of failure, regulators can impose capital requirements on a wide range of financial institutions related to the risks they are taking. This is the current approach underpinned by the Basel regime. In essence, it makes banks build a buffer against adverse events. It has attractions but also problems. First, capital requirements reduce, but not eliminate, the need for taxpayers to provide catastrophe insurance.

That is already pulling down on inflation and will continue to do so until spending recovers. To put money spending back on a desirable trajectory is likely to require a pick up in the growth rate 4 BIS Review 129/2009 of broad money in the economy. That is precisely what our asset purchase programme, by injecting more money directly into the economy, aims to achieve. In deciding when and by how much our present programme of asset purchases should be either expanded or reduced, the Monetary Policy Committee will continue to base its decision each month on a judgement of the action required to meet the 2% target for inflation. Before the financial crisis, a generation of households and businesses had accepted that the discipline of a market economy was the most promising route to prosperity. Uncomfortable though it seemed, the importance of more flexible labour markets, greater competition in product markets, regulation of privatised utilities and allowing unsuccessful businesses to fail, came to be widely understood. Then, out of what must have appeared to many of you to be a clear blue sky of economic stability, arose a financial firestorm that wreaked substantial damage to the real economy, and we have not yet seen its full consequences. The case for market discipline is no less compelling for banking than for other industries. So I am sure that we can turn this crisis to our long-run advantage by reviewing and reforming the structure and regulation of banking.

(cnBlog – official blog of the Czech National Bank). Adam, T. and Michl, A. (2023). Inflace klesá – prbžné vyhodnocení dezinflaního procesu v esku [Inflation is falling – an interim assessment of the disinflation process in the Czech Republic] (cnBlog – official blog of the Czech National Bank). Bianchi, F. and Melosi, L. (2022). Inflation as a Fiscal Limit. (FRB of Chicago Working Paper No. 2022-37). DOI: http://dx.doi.org/10.2139/ssrn.4205158 Blinder, A. (2022). A Monetary and Fiscal History of the United States, 1961–2021. Princeton University Press. IBSN: 0691238383. Bullard, J. (2023, 12 May). The Monetary-Fiscal Policy Mix and Central Bank Strategy [conference presentation]. Hoover Institution at Stanford University. 5/7 BIS - Central bankers' speeches Cochrane, J. H. (2023). The Fiscal Theory of the Price Level. Princeton University Press. IBSN: 9780691242248. Czech National Bank [CNB]. (2022). Inflation through the lens of demand factors. (CNB Monetary Policy Report – Autumn 2022), 30. Ddek, O. and Michl, A. (2021, 13 October). Krotitelé nákladové inflace [Tamers of costpush inflation]. Mladá fronta DNES. Frait, J. (2023, 17 March). Monetary Macroeconomics and Central Banks in Turbulent Times [lecture transcript]. Czech National Bank. Frait, J. and Matj, M. (2023a). The current monetary conditions in the Czech Republic: tight or easy? (cnBlog – official blog of the Czech National Bank). Frait, J. and Matj, M. (2023b). Are interest rates really unusually low by comparison to inflation? (cnBlog – official blog of the Czech National Bank). Kubíek, J. and Morda, P. (2023).

In effect, the single currency has removed the exchange risk between the countries of the euro area and is facilitating the standardisation of debt instruments and their management on a much larger scale. This integrating effect of the euro has been most evident in the money market, by virtue of, in particular, the establishment of the large-value payment system TARGET, made available to the banks by the European System of Central Banks. This integration has shown itself in, for example, the rapid adoption by the market of reference rates for the euro area, such as the EONIA overnight rate or the EURIBOR rate for maturities of less than one year. Above all, we have seen a total convergence in short-term interest rates within the euro area. In the bond markets, the integration of the markets remains incomplete, owing to: national differences relating to property rights over securities; taxation, accounting and supervisory regulations; and payment systems (which are also hindering the integration of the short-term securities markets and repo markets). The integration of the bond markets is nonetheless progressing. First, we have seen European bond indexes become standardised. Second, the differences in rates between sovereign issues within the euro area fell substantially in 1998. Furthermore, 1999 was characterised by a spectacular growth in euro bonds issued by private non-financial firms (a threefold increase, over the first ten months, compared with the same period in 1998), and an increasing share of bonds being issued by small and low-rated companies.

To many, financial planning can be a fairly complicated task. Identifying personal financial needs requires consideration of an impossibly wide array of factors, finding the right solutions for them even more so. For years, financial advisers have played the crucial role of condensing the vast technical complexities of finance into practical, reliable advice on a personal level. It is a role whose prominence I am certain can only grow with time, but only if it successfully adapts to a rapidly transforming financial and social landscape. In this connection and before elaborating further on the concept of a trust, I would like to draw your attention to three major trends that are shaping the industry as we speak. 1/5 BIS central bankers' speeches First, demographic shifts. Malaysia is a relatively young nation. 40–50% of our workforce are aged between 21 to 35, also known as Gen Y. This remains a largely untapped market for financial advisory services, and for a reason – many individuals within this age group are skeptical of, or distrust financial advisers. According to a survey by the Asian Institute of Finance in 2015, only 37% of these individuals had sought advice from a financial adviser. Of this, only 26% trusted the advice they received. This is complicated by the fact that these are highly connected, tech-savvy individuals with broad access to online platforms that act as a primary source of information and advice.

With the scorecard, remuneration of intermediaries will be more closely aligned to the suitability of products for prospective customers and the overall quality of service. I believe that such a shift in incentive structures will encourage advisers to build more enduring relationships with customers. More can be done beyond the realm of regulation. In other countries – such as Australia, United Kingdom and India – financial advisers are voluntarily adopting a fee-based model. The combined effect of increased customer awareness and bargaining power are also pushing financial advisers to reduce their commission-based income. In India for example, several firms have successfully shifted to largely fee-based models. This is, however, not a painless transition. In doing so, some have parted ways with customers who were unwilling to pay these fees. I believe that the move towards a fee-based model is an important signal that the advisers’ incentives are aligned with those of their customers. To ensure a successful transition to a feebased model, financial advisers will need to enhance their value proposition to ensure that customers receive the standard and breadth of advisory services that would be worth paying for. 3/5 BIS central bankers' speeches This is no easy undertaking, but I am confident that it is one that our financial advisory firms will be able to achieve. Adaptability to change At the beginning of my remarks, I had highlighted three key trends affecting the industry. How well financial advisers respond to these developments will determine the industry’s relevance in the years to come.

The composition of financial institutions will also show much greater diversity: with banks, insurers and takaful operators offering higher value-added services to serve the more sophisticated customers, with more developed venture capital industry and angel funds providing risk capital for innovative firms, and with development financial institutions stepping up to widen the base of financial services to all Malaysians. In addition, new and existing forms of financing that have thus far remained at the fringes of the financial system such as factoring, leasing and credit companies are expected to become more significant. Spurred by new technologies, such as greater adoption of electronic invoicing and receivables 6 BIS Review 146/2010 exchanges, it will generate more competition to the traditional players while enriching the product offering, particularly to the SME segment. The evolution of the financial sector will also focus on the new growth areas that will catalyse Malaysia’s transition to a higher value added economy. These include areas of financing such as for green technology, infrastructure development, education, and entrepreneurship and innovation. These are key focal points that will yield increased national productivity, drive innovation and stimulate the formation of businesses. It is anticipated that a significant portion of new frontier industries will be spearheaded by young, innovative SMEs that would require substantial investments in research and development, and for the commercialisation of the research and development. To support these endeavours, a more diversified financial structure, involving new financing modalities will be essential.

V. Conclusion Let me conclude: Considerable uncertainty remains in the outlook for the global economy and we must thus remain vigilant to emerging risks. Second, in a more complex and interconnected environment, broader prudential and economic considerations must factor more prominently in financial institutions’ management of risks. Third, while we believe our regulatory and supervisory system has served us well, we are not complacent and will continue to work hard to place the financial sector on firmer ground so that our ability to manage future shocks will be further improved. And finally, we are confident that with a clear vision, focus and effective implementation, our strategies to bring the financial sector to a new level in this next decade will deliver better outcomes for our financial system and our overall economy. Thank you. 8 BIS Review 146/2010

The ECB is taking measures to ensure the proper transmission of its monetary policy and maintain price stability, which buys time for this adjustment to continue. Completing the euro area’s institutional architecture To stabilise EMU over the long-term, however, requires a more fundamental reform of the institutional architecture. The minimalist approach pursued at Maastricht was found to be inadequate in the context of highly integrated financial markets. In recognition of this, the Presidents of the European Council, Commission, Eurogroup and ECB have been asked to lay out a roadmap to complete EMU over the next decade. They presented their interim report to the European Council in July and will present a final version in December This Report does not aim to identify what features we would ideally like for the euro area, but rather what features it cannot do without. Having been thoroughly stress-tested over the last three years, we now have a much clearer idea of what rules and institutions are essential for monetary union to function effectively. In the view of the Four Presidents, a stable EMU needs to be built on four pillars: financial union, fiscal union, economic union and political union. Let me explain each in turn. Financial union The first and most urgent pillar is financial union or, as it is more commonly known, banking union.

Aside from a single currency and a fiscal brake, EMU’s institutional architecture was minimalist: governance of economic and financial policies remained firmly a national competence. What lay behind these expectations? Of course, political considerations were a dominant factor, insofar as governments had incentives to limit the centralisation of fiscal, economic BIS central bankers’ speeches 1 and financial policies. But to an extent, it also reflected the economic thinking that prevailed at that time. The rational expectations, perfect foresight paradigm was – and to a large extent still is – dominant. Many of its followers are, of course, aware of its limitations but hope to successfully expand the theory to encompass new aspects of reality. Standard models feature unboundedly rational agents and complete knowledge of all variables’ probability distributions in all possible future states of the world. They do not foresee significant credit cycles or irrational asset price bubbles. Moreover, information is fully symmetric and complete state-contingent contracts can be written and enforced. Default – a situation in which debtors cannot repay due debt in some states of the world – was also ruled out. The optimal lending contracts in such an environment do not even resemble a debt contract. Agents use so-called “Arrow-Debreu” securities. The set-up allows a different payback for every future eventuality so that borrowers are always able to meet due repayments.

Our Remit builds in important accountability and transparency mechanisms. One of which is the requirement for the Governor to write an open letter to the Chancellor if inflation moves away from its 2 per cent target by more than one percentage point. Inflation developments I am in the middle of a likely sequence of such open letters – I have another one due next month – on account of the record low inflation the UK is experiencing this year, currently at zero per cent. Such letters must explain, among other things, why inflation has deviated from target and what policy actions the Monetary Policy Committee (MPC) is taking in response. The “why” is straightforward. The bulk of the shortfall of inflation below target can be explained by the sharp fall in the prices of commodities and other imported goods since last year. Of these, the single most important factor has been the steep drop in energy prices globally. The rise in the value of sterling has also played an important role in lowering non-energy import prices, which have fallen over the past twelve months. The sum total of these effects has been to drag inflation below target by around 1½ percentage points. This temporary period of below-target inflation has provided a welcome boost to real household income. Inflation looking ahead The MPC’s intention is to return inflation to target in a sustainable manner within two years.

Bank of France reports industrial output generally stabilized in May 1997 BANK OF FRANCE, MONTHLY BUSINESS SURVEY, 17/06/97. According to business leaders surveyed by the Banque de France, industrial output generally stabilized in May, following a sharp upturn in April. The automobile sector was the only one to register a decline, which was accentuated by calendar effects. The capacity utilization rate fell back slightly from one month to the next. Overall demand changed little. On the domestic market, inter-industry demand was less buoyant than in April, whereas foreign demand, boosted by the strength of the dollar and the pound sterling, remained firm. Orders continued to stream in from English-speaking, Asian and East European markets. Order books were considered to be at normal levels across the different sectors, and they appeared on the full side in the business equipment sector. Inventories, which fell back, now seem to be at the desired level. Over the coming months, industrial output is likely to advance appreciably in all sectors. The best performances are expected from the food-processing industry and the capital and intermediate goods sectors. Commodity prices edged up, notably in the food-processing and capital goods sectors. These increases were only partially passed on to finished product prices, which rose only in the food processing industry, while remaining unchanged for consumer and intermediate goods and dipping in the capital goods and automobile sectors.

And an essentially sectoral solution, where payment system overseers and securities regulators do not co-operate in an integrated way, is inappropriate. Therefore I welcome the second Giovannini Report which provides an excellent view on how efficiency gains and further risk reduction in the field of securities clearing and settlement systems should be achieved. In Switzerland as in several other countries oversight of clearing, payment and settlement systems is still work in progress. A draft of the revised National Bank Law has been submitted and is being discussed in Parliament. The revised law will presumably enter into force in May 2004. It is intended to explicitly vest the responsibility of overseeing payment systems as well as securities clearing and settlement systems with the Swiss National Bank (SNB). The revised law will thus formally express that an efficient and secure financial market infrastructure is imperative for the implementation of monetary policy and for the stability of the financial system. The inclusion of clearing and settlement systems follows from the obvious fact that, given their linkages, these market utilities are of considerable systemic importance. The SNB, however, can only fulfil this expanded mandate by closely co-operating with other authorities. Domestically the SNB will work hand-in-hand with the Swiss Federal Banking Commission (SFBC), our banking supervisor. The SNB will focus on systemic issues while the SFBC will deal with institutional aspects. This job-sharing is based on the premise that each authority will be able to make use of its comparative advantage.

However, since the price of the high quality good or services lies above that average price the seller who has high quality items will withdraw from the market. Therefore only a market for medium and low quality goods will emerge. Consequently most buyers will be disappointed and the high quality suppliers will be frustrated. Ultimately this might even lead to an extinction of the market for those goods and services the quality of which cannot be correctly assessed by buyers. To eliminate this breakdown of market exchange due to adverse selection quality screening is required. Market utilities such as CSDs, ICSDs or CCPs contribute to soften the problem of adverse selection. Indeed, these utilities may monitor their participants by defining financial and technical criteria to be met permanently. This ensures a certain quality of the participants. For example I may refer to Central Counterparties who have long recognised the value-added of such a monitoring function. As you know, CCPs replace numerous bilateral counterparty risks that market participants face through a single counterparty risk towards itself. This transfer of risk tends to be efficient since the CCP is best positioned to monitor the risks of all the participants of the system. Another means to soften the problem of adverse selection is the provision of delivery-versus-payment mechanisms since they eliminate principal risk in securities settlement. All in all, market utilities that ensure a certain minimum quality of the participants and reduce principal risk contribute to limiting the damage of adverse selection.

Consequently, this policy can only be effective if the authority responsible for defining and implementing is credible. The conjunction of a clear, overriding objective of price stability (which has been explicitly laid down in the statute of the ECB), with well-established institutional independence ensures the continuity of the monetary policy decisions made by the authorities. • Secondly, the emergence of a globalised market has quite naturally led to new developments in monetary policy instruments. Interest-rate instruments have gained in importance to the detriment of quantitative and regulatory instruments. Third consequence: renewed set of risks to the stability of financial systems First of all, it is worth noting that financial liberalisation did not eliminate the occurrence of financial crisis. The development of new financial instruments, increasingly mobile and rapid capital flows, and faster reactions on the part of the players have rendered markets more volatile. Moreover, stock market prices and interest rates in the various financial centres have become closely correlated due to increased arbitraging between currencies and financial products and the spread of disintermediated financing.

Zeti Akhtar Aziz: Developing effective leaders in Asia Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Iclif’s Asian Leadership Index, Kuala Lumpur, 1 April 2014. * * * It is my pleasure to welcome you here this morning for the launch of Iclif’s Asian Leadership Index. The Asian Leadership Index, is part of an important stream of global research on the expectations on leaders in today’s world. The world is rapidly changing, and is becoming more challenging. Effective leaders must act in full recognition of the fact that their best followers will demand more of them. This is because in many cases their expectations of leaders have shifted in an age where information flows have intensified and where travel has removed all our known boundaries. The Asian Leadership Index is a substantive, broad-based research on Asia. The focus on Asia is because the region is becoming increasingly more significant in the global landscape. And yet, there exists little, if any, systematic study of leaders doing business in Asia.

Demand-side factor are especially important for companies, which attribute their low demand for credit to the shortage of investment projects (figure 8). Considering the usual revision to the growth projection range for the current year that we must do in this MP Report, the Board estimates that GDP will expand between 1% and 1.75% in 2017, while for 2018 it foresees a range between 2.5% and 3.5%. The changes owe mainly to the fact that mining activity fell more than expected in the first months of this year and that its subsequent recovery has been slower, as the growth prospects for the rest of the sectors have not changed much. Thus, it is still believed that the return to growth rates in line with potential growth and closing gaps, is consistent with an economy that shows no major imbalances, a gradual dissipation of some of the factors that have hindered a better performance in the past few years— such as the sharp drop in mining investment in the last three years—and the recovery of confidence indicators. Plus a more expansionary monetary policy and a greater external impulse than in recent years. As for fiscal policy, it is assumed that the consolidation announced by the Government will continue (table 1). On the external front, the data of recent months do not show great divergences with respect to forecasts. Developed economies continue to show signs of recovery in a context in which their inflation indicators have stabilized and their monetary policies remain highly expansionary.

The Treasury Markets Forum, as a broad-based and authoritative group, can help explore opportunities for closer co-operation with the Mainland on market development issues. Since the establishment of the Treasury Markets Forum, we have made visits to the Mainland financial regulatory bodies and the China Association of Banks to deepen our mutual understanding of the markets in two places. They were interested to learn about the work of the Forum, including those in raising the professionalism of our practitioners. The Forum also participated in the Hong Kong Financial Services Expo held in Shanghai in September to promote our treasury markets services to Mainland financial institutions and enterprises. We will also organise a seminar for the Mainland to promote their understanding in our financial markets, and responses from the Mainland have been very favourable. In addition, we will maintain close contacts with major overseas financial centres. In particular, we intend to invite major members from New York and London foreign exchange committees to meet with the Forum to facilitate the exchange of views on issues of mutual interest. In the past half year since its establishment, the Treasury Markets Forum has made good progress in its work. We will continue to work closely with industry associations with a view to enhancing the competitiveness of Hong Kong’s treasury markets and promoting Hong Kong’s status as the preferred hub for treasury markets services.

Participants are the commercial banks, savings banks and Central Bank. The Icelandic Banks’ Data Centre provides software services for both systems and the Central Bank acts as a settlement provider. These systems are described in detail in the Central Bank’s annual report. Since 2001, the Central Bank has been working in close collaboration with Fjölgreiðslumiðlun, the Icelandic Banks’ Data Centre and credit institutions on development of payment systems with the aim of bringing them into compliance with the BIS Ten Core Principles for Systemically Important Payment Systems. This work has focused on clarifying the qualifications and responsibility of management and netting system participants. Settlement processes have been reviewed with respect to finality of payments and timing of settlements. Risk management has been strengthened by defining and monitoring risks, making debt positions visible, restricting debt positions and requiring collateral for settlements. Arrangements for oversight, communication of information and contingency plans have also been reviewed. An important landmark in the development of these systems was reached last year when two sets of rules were adopted, on the Central Bank of Iceland’s real-time gross settlement system and on activities of netting systems. At the end of the year the systems were designated and notified to the EFTA Surveillance Authority. The real-time gross settlement system and netting system have thereby been recognised as legitimate payment systems in Iceland and across the European Economic Area. Also in 2003, the Central Bank and FME [Financial Supervisory Authority] signed a cooperation agreement on oversight and prudential supervision of payment and settlement systems.

The main shock to financial stability and monetary policy would be if asset prices were to drop sharply at the same time as the growth of real disposable income slows down at the end of the aluminium-related investment boom. Lending developments As I mentioned before, lending growth is a cause for concern, both for financial stability and the Central Bank’s inflation target. Domestic lending grew at a brisk pace in 2003 and this development appears to be heading in the same direction this year. Total domestic lending by deposit money banks over the twelve months to the end of January increased by about 23%, which is above a rate consistent with longterm price stability and economic stability. The period 1998 to 2001 provides a recent example of the consequences of heavy credit growth. Both arrears and loan losses rose in the wake of the credit boom, leading to a temporary tightening of the commercial banks’ and savings banks’ foreign funding. While the recession and the ensuing strain on the financial system are now over, it can be partly ascribed to relatively favourable economic conditions and the consequently sharp turnaround in the exchange rate of the króna that financial companies only sustained minor setbacks. Proportionally, the highest growth in deposit money banks’ lending has been to foreign borrowers, but foreign currency-denominated lending to domestic entities has also surged, by more than 45% over the past 12 months.

The central bank sets the interest rate, and in all of these countries monetary policy is currently based on the understanding that in the long-term there is no trade-off between inflation and employment. This applies regardless of whether they have introduced inflation targeting or not. Among the countries with positive economic developments in the last ten to fifteen years, different degrees of confidence in the nominal anchor early in the 1990s have probably been decisive for the choice of inflation targeting as a monetary policy regime. When confidence was lacking, it was costly to reduce inflation. For many countries it was important to establish a system that could build confidence. Inflation targeting is tailor-made for this purpose. It is possible that the disturbances in the world economy were particularly large in the 1970s and 1980s, and that later it has been easier to stabilise inflation and output.8 In the 1970s and early 1980s, oil prices rose sharply. We have not had similar disturbances in the last fifteen years. On the other hand, monetary policy is probably more robust now. Disturbances are not allowed to spread in the same way as earlier. Many countries have been exposed to major disturbances in the last fifteen years as well. 7 Consensus Forecasts Inc. provides an overview of different institutions’ inflation forecasts for different countries. This may be a measure of inflation expectations.

But experience showed that this was not an available option. An attempt to increase output beyond the level that is consistent with stable inflation will over time lead to steadily rising inflation. Economic agents will eventually incorporate higher inflation into their inflation expectations. In the long run, the result will only be higher inflation, not higher employment. Output and employment will return to their potential level. Another important lesson from the 1970s and 1980s was that economic agents look to the future when they make decisions about consumption and investments, wages and prices. They will take into account not only current economy policy, but their expectations of future economic policy. If economic agents expect that tomorrow’s policy will result in high inflation, the cost of reducing inflation may be high in terms of increased unemployment. Therefore, it is important to establish confidence in monetary policy and the objective of price stability. There must be consistency between the stated objectives of economic policy and what is actually done to achieve these objectives. This is the most important reason why the implementation of monetary policy has been delegated to the central bank in Norway, as has been the case in other comparable countries. In Norway, responsibility for interest rate decisions was delegated to Norges Bank through the 1985 Norges Bank Act and through adaptations in practice in 1986. However, confidence in the inflation target also requires that government finances are in order.

Likewise, the Employment Law and the changes in unemployment benefits seek to ensure compatibility between protecting the most vulnerable and providing appropriate incentives for job seekers. Looking ahead, public employment services need to play a more prominent role in job mediation (currently very minor) and their training and vocational integration activities need to be more effective. This requires appropriate professional profiling of the unemployed, rigorous assessment of training and vocational integration programmes and, on the basis of this assessment, sufficient funding for these programmes. Squaring protection for the more vulnerable groups with appropriate incentives on the labour supply-side calls for greater coordination between active and passive policies. The capacity of migration policies to effectively smooth any mismatches arising in the Spanish labour market also needs to be continuously monitored. The fifth factor I wish to refer to is confidence in institutions and their management capacity. Both these types of confidence are currently low in comparison with other European countries.24 The efficiency of public administration may have a key role to play in overturning this perception. For example, efficiency indices for the Spanish judicial system stand below those in comparable countries. In this respect, one of the priorities of the Spanish Recovery, Transformation and Resilience Plan (RTRP) is public administration modernisation. Specifically, the aim is to improve the efficiency of public administration through, among other measures, a digitalisation drive, strengthening the public policy assessment framework and reducing the proportion of public employment that is temporary.

Zeti Akhtar Aziz: The development of Islamic finance Welcoming address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Global Islamic Finance Forum 2010, Kuala Lumpur, 25 October 2010. * * * These are defining moments in the development of Islamic finance. In this current global economic environment of extraordinary challenges and uncertainties, Islamic finance is becoming very much a part of the journey to bring the world towards a new level of stability, prosperity and international integration that is inclusive. Whilst Islamic finance has come a long way and is set to continue its growth trajectory, new capabilities and strategies are needed to tap the immense opportunities from the growing internationalization of Islamic finance. It is my great pleasure and honour to welcome you this morning to this Global Islamic Finance Forum (GIFF) 2010. Allow me to express our gratitude to Duli Yang Teramat Mulia Raja Dr. Nazrin ibni Sultan Azlan Shah for gracing and addressing our gathering today, and to the Honourable Prime Minister of Malaysia, Yang Amat Berhormat Dato’ Sri Mohd Najib bin Tun Haji Abdul Razak for officiating this important forum. Since the dawn of this 21st century, Islamic finance has undergone the most dramatic transformation to its landscape. This period in the history of Islamic finance is remarkable for its many significant milestones and for the rapid growth that has been sustained.

When a faulty motorcycle is brought to a mechanic, he may simply jump to conclusions based on his 2 BIS Review 161/2008 previous knowledge. Instead of subjecting the motorcycle to a thorough scientific inquiry, he may conclude that the fault lies in a certain part or a certain mechanism. To reach this conclusion, he has not gathered the relevant information. The chances are that he may be correct or may not be correct. If he is correct, the repair performed on the basis of the diagnosis made with imperfect information will prove to be a success. But the mechanic in that case has behaved like a speculator and the outcome of speculation may have the chance of being a success or a failure. If it turns out to be a failure, the cost to the owner of the motorcycle would be enormous. In that case, since the correct repair has not been performed, the motorcycle will continue to remain faulty. Hence, a true scientist engaging himself in scientific inquiry should not be a speculator. Instead, he should be a person willing to follow the scientific method to arrive at conclusions. Decisions could be made by a mechanic attending to a faulty motorcycle by resorting to either inductivism or deductivism. The inductive approach requires the mechanic to look for evidence in the real world and come to conclusions. For instance, if we see crows that are black and if we continue to see black crows, we may conclude that all crows are black.

In this fast-changing environment, public policies should be agile and should help build innovation and growth • The success of the payment services directives (PSD1&2) has illustrated that the European legislation can accompany new trends and trigger innovation. With new settlement assets such as Global Stablecoins, the adaptation of existing regimes will have to fit into a larger regulatory framework, to be adopted at a global level. • Central banks need to have an in-depth understanding of innovation and souldn’t be afraid to “learn by doing”. The Banque de France is now engaging with the innovators from the private sector to conduct a program of 8 experiments, with a view to integrating a wholesale CBDC into innovative procedures for exchanging and settling tokenized financial assets. The expansion of the BIS Innovation Hub with the establishment, in Paris and Frankfurt, of the Eurosystem Centre will definitely accelerate the collaboration among central banks in innovative financial technologies. • We, the ECB and the Eurosysteme, may decide to issue a money in digital form. Let me be clear: we cannot allow ourselves to lag behind on CBDC. That may mean that we create if necessary a retail CBDC, in order to ensure the accessibility of central bank money for the general public, in particular in countries where the use of cash in payments is declining. And/or it may mean that we Europeans may decide to issue a wholesale CBDC, with the aim of improving the functioning of financial markets and institutions.

Let me limit my observations to the value of fiscal prudence and sustainability. Arguably, the most important lesson of Gallatin’s achievements is that public debt reduction requires unwavering political commitment to fiscal discipline. This lesson is certainly relevant in the context of today’s fiscal challenges. Gallatin faced an unexpected fiscal time bomb in the form of a war with Great Britain. The developed world now faces a predictable and rapidly ticking fiscal time bomb in the form of aging populations. The demographic strains on government budgets in the developed world are already visible. Pressures will almost certainly intensify in coming years. The implication is that in the not-too-distant future, spending on public goods and services will have to contract. Alternatively, taxes could be raised in an attempt to maintain the level of public 27 Wright and Cowen, op.cit. 28 For all these references, see Chernov, op.cit., p. 647. 6 BIS Review 106/2008 goods and services we currently enjoy. Given these longer-term fiscal strains, we should be building up a fiscal cushion rather than becoming more indebted. Allow me to review very briefly some trends in budget deficits and debt levels in the developed world. Historically, government budget deficits have been typically used to finance wars. War time deficits have then been compensated by surpluses in times of peace. This cycle of deficit finance and subsequent debt reduction is illustrated in fig 1. It shows historical deficits for G7 countries excluding Germany.

The principle of so-called “insignificant host”, as viewed from home supervisor’s perspective, may contradict with the agreed principle of the need for the host to oversee systemically important institutions. Thus, a host supervisor should receive better information and even be included in supervisory colleges by home supervisor, if the global bank branch operations are systemically important to the host economy. Colleagues, ladies and gentlemen, This is a challenging time, with new paradigm, and therefore leadership by all of us is required to ensure that we set a balanced agenda in our reforms going forward. I believe SEANZA forum would become all the more valuable in the future in cementing our network and friendship. Thank you for your attention. 6 BIS Review 146/2009

This came against the background of quite volatile movements in the global currency markets, which included, most notably, a sustained weakening of the US dollar against other currencies. At the risk of stating the obvious, an orderly depreciation of the US against other currencies is in Hong Kong's interests because it means that, because Hong Kong's currency is linked to the US dollar, Hong Kong also becomes more competitive. This larger point may have been overlooked in all of the fuss about the somewhat less significant strengthening of the Hong Kong dollar against the US dollar. With regard to the Mainland's currency, the political pressures from outside for an appreciation of the renminbi exchange rate have been prompted by the considerable attention that is being given in the US to the bilateral trade imbalance between the Mainland and the United States. The arguments for appreciation are that, from the US perspective, Chinese exports are undervalued and therefore unfairly competitive, and, from the Chinese perspective, the substantial capital inflow into the Mainland might carry long-term risks. Leaving aside the arguments about trade, let us look a little more closely at the question of capital inflow and how to manage it. First, to put things in perspective, it should be noted that the Mainland's current account surplus is really very small by international standards perhaps something around one per cent of GDP in the first half of 2003. This is much lower than the corresponding figures for many other economies.

Exports continue to grow, deflation has moderated, and unemployment appears to have peaked. Less easy to quantify is the change in mood, although it is, as I have said, shown to some extent in the activities in the markets, as well as in consumer spending. What is, I think, clear to every observer, however cynical, is that there has been, among all sectors of the community, a marked and quite sudden turnaround, from pessimism bordering on despair to a cheerful if cautious optimism. This comes as a huge relief after the gloom and despondency of the second quarter. Important initiatives, such as CEPA and the relaxation of restrictions on individual travellers from the Mainland, have undoubtedly helped to stimulate confidence. So too have the general - though by no means conclusive - signals that the world economy is also in better shape. It is also very likely that the recent surge in markets and the gradual growth in economic activity are part of a longer-term trend, going on for at least a year now, in which there have been underlying improvements in the Hong Kong economy. Deflation, under the discipline of the Link, has made Hong Kong more competitive: it is now a less expensive city in which to do business or take a holiday. The real effective exchange rate for the Hong Kong dollar - which is a true measure of the competitiveness of an economy - has declined by 24% over the past five years.

8 I remember this period very vividly, because I was fortunate to have the opportunity to discuss and debate the problems of current monetary policy, deflation and liquidity traps in a group of great economists at Princeton University that included Ben Bernanke (before he left to be a Governor at the Federal Reserve Board), Alan Blinder, Paul Krugman, Chris Sims and Michael Woodford. 9 See Svensson (2003a) for a discussion of policy options before and in a liquidity trap. 10 Kohn (2008), after extensive discussion, concludes that there is insufficient evidence that low interest rates would have contributed much to the house-price boom and that higher interest rates would have had much dampening effect on it. Del Negro, Marco, and Christopher Otrok (2007) find small effects of Fed monetary policy on house prices during 2001-2005, whereas Iacoviello, Matteo, and Stefano Neri (2008) find larger effects, although their including the Regulation-Q period in their sample may increase the apparent monetary policy effect on housing. BIS Review 112/2009 5 One obvious conclusion is that price stability is not enough to achieve financial stability (Carney 2009, White 2006). Good flexible inflation targeting by itself does not achieve financial stability, if anyone ever believed that. Specific policies and instruments are needed to ensure financial stability. Another conclusion is that interest-rate policy is not enough to achieve financial stability.

Through the CBC's 3/4 BIS - Central bankers' speeches actions over the past years and its coordinating role in the Committee, we have shown that we consider the issue of utmost importance. Moreover, in line with recommendations by international bodies such as the World Bank, I would also like to express the willingness of the CBC to have a leading role in the implementation stage of the National Strategy. I am positive that both the State and the private stakeholders share my belief that investing in financial literacy undoubtedly means investing in a sound financial future for our country and its people. It is now time for Cyprus to take the bold step in this direction. I would like to wish you all a fruitful seminar and discussion. 1 Panayiotis C. Andreou & Dennis Philip, 2018. "Financial knowledge among university students and implications for personal debt and fraudulent investments," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 12(2), pages 3-23, December. 2 Financial Education Programs and Strategies Approaches and Available Resources, January 2014, https://www.worldbank.org 4/4 BIS - Central bankers' speeches

As for cooperation among authorities, the new resolution regime will take the form of a coordination framework. Accordingly, national authorities will ultimately maintain their discretion in the most important decisions, although they will be strongly encouraged to try to reach joint decisions on the ways to handle bank crises in resolution colleges. This is a realistic approach, already representing a major step forward. However, I think there may be a need for even more integration in the longer term. As an example, insolvency laws are addressed by neither the FSB standard nor the EU proposal – at least not its first phase of implementation – although they may well be important in practice. One also wonders whether there are other areas in which we could make progress. There were, and in fact continue to be, numerous proposals for the optimal European arrangement in the academic and policy sphere. Let me just mention three of them, which I find particularly inspiring. Most of you will be familiar with the influential arguments of Charles Goodhart and Dirk Schoenmaker, who have said that, as a form of coordination among national governments to handle cross-border bank crises, legally binding burden-sharing rules should be drawn up ex ante. Others, including David G. Mayes, have recommended adopting the prompt corrective action approach of the United States by designing a framework that would be based on stringent rules.

I think that monetary policy can best be understood in terms of the yield curve. The Riksbank implements its monetary policy by determining the repo rate, the interest rate the banks face when depositing money in accounts with the Riksbank overnight, or when borrowing money overnight. Thus, the Riksbank determines the short end of the yield curve. But the market determines the long end. Everything in between is a combination of the Riksbank’s influence and market forces. The long end is affected by many factors, not merely expectations of the repo rate. It may, as recently, be a question of a flight to safety, which has pushed up, for instance, Greek interest rates and pushed down American, German and Swedish interest rates. The Swedish yield curve is currently much lower than is consistent with the Riksbank’s repo-rate path (see Figure 14). Moreover, the banks’ lending rates are affected by other factors than the repo rate, which has led to increased spreads between the repo rate and the banks’ lending rates. This means that what is known as the transmission mechanism – how the Riksbank’s repo rate affects economic developments – has probably changed. But it is difficult to say how it has changed. On the whole, we should develop the financial part of our macroeconomic models to give greater consideration to the financial markets.

It is not surprising that these questions arise. But if they are to be discussed, it is important to separate the two tasks the Riksdag (the Swedish parliament) has given us – monetary policy and financial stability. This may not be so easy, as the areas in many ways affect one another. However, I shall try to make things a little clearer. Two different tasks… What is happening right now is important, both with regard to financial stability and monetary policy. The financial turbulence has also been included in our analyses of both areas, ever since the problems connected to the mortgage market in the United States became apparent last summer. However the perspectives are different. The stability perspective concerns how the banks, the payment system and the financial system in general are affected by the financial crisis. The monetary policy perspective concerns how inflation and developments in production and employment may be affected. … which are in many ways linked As I recently mentioned, our two fields of activity are closely linked. The financial turbulence that has spread around the world to a large extent has its roots in the problems in the United States, linked to financial stability. This has led to extensive losses in the bank system in the rest of the world, to considerable uncertainty and poorer functioning in the financial markets. This is of course important to economic activity. However, economic activity in its turn affects factors that are important to financial stability.

How activist central banks can be is an issue where there seems to be quite a bit of disagreement so let me be more explicit by using the euro area as an example. Let us take the first ten years of the euro area and look at real-time estimates of the output gap as published by the IMF and by the European Commission (EC). (The information can conveniently be found on their websites.) Both organisations have suggested, virtually every spring since 1999, that the output gap for the year reported would be negative. If we compare these to recent retrospective estimates we observe a significant bias. The bias is mainly due to the fact that the experts are now more pessimistic about what potential output was in the euro area than they were in the past. This is not the experts’ fault. We simply cannot know in real time. And this applies not only to the size of the output gap, but even to its sign. In comparing what the experts tell us now and what they were telling us then, in real time, the sign of the output gap is revealed to be incorrect in more than half of the years in the first decade of the euro area. Consider the year 2006, the year before the financial turmoil began. According to the IMF and the EC, the euro area operated below its potential that year with the gap being around minus 1 percent (see Figure 1).

For example, the MPC’s monetary loosening added around £ per year to the average household’s net interest income, £ to their labour income and £ to their net wealth. The lower part of Figure 1 looks at the effects of non-financial channels on well-being, namely the reduction in the probability of unemployment, translated into income-equivalent units. 44 The increased probability of being in a job adds in excess of £ each year for the average household. All in, this gives a boost to welfare for the average UK household of close to £ This is large relative to annual household income of £ As a memo item, and point of comparison, Figure 1 also shows an estimate of the annual cost of undertaking monetary policy, using data from the Bank of England’s accounts. 45 On a broad estimate, this annual cost amounts to around £ per household per year. This “servicing charge” for monetary policy is clearly a very small fraction of the annual benefit to households from looser monetary policy over the period. The disaggregated analysis set out means that, in principle, a monetary policy scorecard like this could be fitted to any individual’s circumstances. As an illustration, Figures 2-4 show scorecards for three different hypothetical households: a renter under the age of 30; a 30-50 year old mortgagor; and a 50-plus home-owning household.

Altmann, R (2009), ‘Why quantitative easing is a disaster for pensions’, article in The Telegraph. Atkinson, A (2015), Inequality, Harvard University Press. Ball, L, Furceri, D, Leigh, D and Loungani, P (2013), ‘The Distributional Effects of Fiscal Consolidation’, IMF Working Paper, No. 13/151. Ball, R and Chernova, K (2008), ‘Absolute Income, Relative Income, and Happiness’, Social Indicators Research, Vol. 88, No. 3, pp. 497-529. Barnes, L, Feller, A, Haselswerdt, J and Porter, E (forthcoming), ‘Information, Knowledge and Attitudes: An Evaluation of the Taxpayer Receipt’, Journal of Politics. Brynjolfsson, E and McAfee, A (2016), The Second Machine Age – Work, Progress, and Prosperity in a Time of Brilliant Technologies, W. W. Norton & Company. Büchs, M, Bardsley, N and Duwe, S (2011), ‘Who bears the brunt? Distributional effects of climate change mitigation’, Critical Social Policy, Vol. 31, No. 2, pp. 285-307. Buiter, W (2014), ‘Central banks: Powerful, political and unaccountable?’, Journal of the British Academy, Vol. 2, pp. 269-303. Bunn, P, Drapper, L, Rowe, J and Shah, S (2015), ‘The potential impact of higher interest rates and further fiscal consolidation on households: evidence from the 2015 NMG Consulting survey’, Bank of England Quarterly Bulletin, 2015 Q4, pp. 357-368. Bunn, P, Pugh, A and Yeates, C (2018), ‘The distributional impact of monetary policy easing in the UK between 2008 and 2014’, Bank of England Staff Working Paper, No. 720.

Layard, R, Nickell, S and Mayraz, G (2008), ‘The marginal utility of income’, Journal of Public Economics, Vol. 92, pp. 1846-1857. Lipton, D (2014), ‘Fiscal Policy and Income Inequality’, speech at the Peterson Institute for International Economics. Lysenko, T, Glass, B and Six, J-M (2016), ‘QE And Economic Inequality: The U.K. Experience’, Standard & Poors Economic Research. Milanovic, B (2016), Global Inequality: A New Approach for the Age of Globalisation, Harvard University Press. Monnin, P (2017), ‘Monetary Policy, Macroprudential Regulation and Inequality’, Council on Economic Policies Discussion Note. Patinkin, D (1987), ‘Neutrality of Money’, in Eatwell, J, Milgate, M and Newman, P (eds), The New Palgrave Dictionary of Economics, Macmillan Press Ltd. Piketty, T (2014), Capital in the Twenty-First Century, Harvard University Press. Service, O et al (2014), ‘EAST – Four simple ways to apply behavioural insights’, Behavioural Insights Team. Sheffield Political Economy Research Institute (2015), ‘The UK’s ‘annual tax summaries’’, SPERI British Political Economy Brief, No. 16. Stiglitz, J (2013), The Price of Inequality, Penguin. Vermeulen, P (2016), ‘Estimating the top tail of the wealth distribution’, ECB Working Paper, No. 1907. 20 All speeches are available online at www.bankofengland.co.uk/speeches 20 Winkelmann, L and Winkelmann, R (1998), ‘Why Are the Unemployed So Unhappy? Evidence from Panel Data’, Economica, Vol. 65, No. 257, pp. 1-15. World Bank Group (2016), ‘Development Goals in an Era of Demographic Change’, Global Monitoring Report, 2015/2016.

Sources: ONS and Bank calculations Chart 23: Impact of monetary policy on welfare, across the age distribution Chart 24: Perceived impact of monetary policy on welfare, across the age distribution Total income Total wealth Unemployment effect Total 0.05 Net percentage balance of household who think lower interest rates have made them better off 10 0.04 0 Utility -10 0.03 -20 -30 0.02 -40 0.01 -50 0 -0.01 25 30 35 40 45 50 55 60 65 70 75 80 All 2012-14 age group Sources: ONS and Bank calculations -60 -70 25-29 35-39 45-49 55-59 65-69 75-79 Age group All Sources: NMG Consulting and Bank calculations 27 All speeches are available online at www.bankofengland.co.uk/speeches 27 Table 1 – Regression results [1] Dependant variable Income £ Net wealth (000) ihs(income) 0.0015*** (0.0003) 0.0002*** (0.0000) 0.200*** (0.021) ihs(net wealth) [2] [3] [4] Average of happiness and life satisfaction 0.284*** (0.012) 0.094*** (0.003) 0.130*** (0.014) 0.054*** (0.003) ihs(net financial wealth) 0.081*** (0.015) 0.024*** (0.001) 0.008*** (0.002) 0.009*** (0.002) 0.124*** (0.010) ihs(pension wealth) ihs(net housing wealth) ihs(physical wealth) N N 0.008*** (0.002) 0.121*** (0.010) 0.005** (0.002) 0.003* (0.002) 0.045*** (0.003) -0.002 (0.002) -0.019*** (0.002) -0.435*** (0.051) -0.300*** (0.041) -0.582*** (0.208) -1.048*** (0.135) Y Y Y ihs(unsecured debt) Additional controls 0.007*** (0.002) Y ihs(mortgage debt) Arrears of 2 months plus 0.047*** (0.015) -0.473*** (0.055) -0.294*** (0.045) -0.517** (0.226) -1.255*** (0.146) ihs(deposits) Arrears of less than 2 months 0.059*** (0.016) -0.505*** (0.051) -0.345*** (0.041) -0.646*** (0.209) -1.126*** (0.135) ihs(other gross financial wealth) Other unemployed person in household [6] Average of all 4 0.115*** (0.010) 0.005*** (0.002) 0.006*** (0.002) 0.056*** (0.004) -0.001 (0.002) -0.016*** (0.002) -0.466*** (0.056) -0.298*** (0.045) -0.498** (0.226) -1.282*** (0.147) ihs(gross housing wealth) Household head unemployed [5] Observations 48,545 48,545 48,094 48,200 48,200 R-squared 0.018 0.048 0.112 0.128 0.127 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 All equations include additional controls for wave, age, education, gender, marital status and economic activity of head of household Effect of being unemployed is relative to being in employment 48,094 0.123 “ihs" refers to inverse hyperbolic sine – this is a similar to a log transformation but can be applied to numbers which are zero or negative.

and other international financial creditors. This explains, in part, the huge external debt the country is overburdened with today. (ii) By 1964, most of Zambia’s neighbours, such as Mozambique, Zimbabwe, Namibia, and Angola, were at the height of their liberation struggles and Zambia had no option but to offer refuge and logistical support to the liberation movements like, FRELIMO, ZANU, ZAPU, SWAPO, UNITA, and MPLA. This meant that Zambia had to sacrifice some of its scarce developmental resources for the sake of assisting these liberation movements to gain their independence, and in some instances, Zambia had to borrow to finance this expenditure. (iii) As a result of the liberation wars in the neighbouring countries, Zambia had to arm herself, militarily, against possible foreign aggression by procuring weapons and other military hardware from friendly countries such as Russia, China, etc. This again explains why Zambia today has a huge debt with Russia. Military expenditure was unavoidable as the colonial regimes used to attack Zambia directly. In this regard, one can mention the bombing of Lusaka as well as the destruction of Luangwa bridge. Ladies and Gentlemen I have endeavoured to include these seemingly simple but critical factors so that we understand the historical context of some of the policies implemented during the last 40 years and their impact on national development. Therefore, to contain the deteriorating macroeconomic situation, the Government introduced a myriad of economic policies including price controls because the economic shocks were considered transitory and, thus, the Government would easily balance its budget.

The commercial banks should also respond to changing macroeconomic indicators consistent with low interest rates, while borrowers need to improve their credit culture. As for the Bank of Zambia, we continue monitoring financial conditions and take appropriate actions to contribute to lowering of interest rates. (iii) A relatively stable and competitive exchange rate has a positive impact not only on inflation, but also on the performance of the external sector. In this regard, policies for stabilising the exchange rate must aim at increasing the export earning capacity of the country through stimulation and maintenance of strong export sector by, among other things: • Developing a diversified and competitive export base; and • Ensuring food self-sufficiency to reduce food imports. In addition, continued implementation of appropriate monetary and fiscal policies, particularly the reduction in the fiscal deficits, is critical to maintaining stability in the exchange rate. BIS Review 5/2005 3 (iv) External debt should be contracted to finance the productive sector so as to lessen the burden of debt service. Otherwise, it will result, as we have seen in the last 40 years, in huge outflows at the expense of expenditures on social and economic infrastructure development, which are pre-requisites to sustainable poverty reduction efforts. (v) The need to diversify the economy, including the external sector, cannot be overemphasised. Diversification is a sure way of preventing external shocks to the economy and will contribute to maintenance of macroeconomic stability.

Similar to many economies in the region, commercial banks in Thailand will start maintaining capital according to Basel II by the end of next year, and by the end of 2009 for banks with the advanced approach. IAS 39, on the other hand, will be fully enforced by the Federation of Accounting Professions in the beginning of 2010. However, the Bank of Thailand has already adopted some parts of IAS 39, namely the impairment of assets since December last year, and we are now considering adjusting the related regulations to be in line with the concept of IAS 39. For Basel II, preparations on the supervision side started a number of years ago. The Bank has set up several internal working groups to study the guidelines and its suitability to the Thai market. Staff were sent abroad for training on Basel II implementation. Experts from other supervisory authorities and consultants were invited to hold seminar and training on the underlying concepts, applications, and supervision issues. The drafting of the Thai version of Basel II has been quite involving. During the drafting, the Bank of Thailand carefully studied other countries guidelines and consulted with other supervisors to gain insights on the suitability of Basel II to the Thai financial system. As a result, we have made some necessary adjustments to the guideline taking into consideration its practicality. Banks in Thailand have been consulted in the process so that the guideline does not impose extra unnecessary burden.

Recent crisis indicated that we all sail in the same waters and we may resist the waves, only if we confront these 2 BIS Review 30/2009 challenges together. Export is a generator of foreign currency flows needed so much for the currency stability, which is related to all other balances, financial system’s stability also included. Under these conditions, we should be aware that a joint action, of national importance, deeply patriotic for the values and future of the country is needed. Make the market more lively, more competitive and more innovative. Now the financial infrastructure is complete and it is up to you to use it more efficiently. It is the time to try to seek other balances in terms of foreign currency flows into the economy. Remittances have been important for a long time. They were the largest foreign currency serum in the economy. However, we should be aware that other indicators, such as exports and foreign direct investments will be prior items in the total foreign currency flows in the future. This should be realised by everyone and based on this ground, let us work together for the future. Dear participants, International initiatives are in the process. The Berlin meeting was extremely important in this regard. There was broadly discussed and converged into the idea that there is room for more coordinated actions, and protectionism is not the answer to the crisis. The London meeting will make new steps in this regard.

I do think that there is too great a tendency to rely unthinkingly on the rating agencies in this area. 2 BIS Review 15/2001 Regulators have signalled their intent in this area in the new Basel Consultative package. Not only will banks need to demonstrate a clean break to earn a reduction in their capital requirements, but they will also need to consider the operational and reputational risks involved in securitisations and derivative deals. My third question is whether we collectively yet have a proper understanding of the way the credit transfer business is bridging the lending, securities and insurance markets. Contracts in banking, on the one hand, and insurance markets, on the other, are in some respects different animals. In securities markets, timing of payments is of the essence. An insurance contract, by contrast, is not typically a commitment to timely payment. If insurance companies are participating in this market, in part using reinsurance-type agreements and in part using derivative agreements, there may be imperfect hedges or liquidity risks. The relationship a borrower has with its lending banks has also traditionally been different to that with its bondholders. Any problems the borrower may have in servicing the debt are typically addressed in different ways by lenders and bondholders. This problem has surfaced recently with the debate about whether restructuring should be included within the definition of a credit event. ISDA is addressing the question and it is clearly desirable that a market standard agreement and set of defnitions should exist.

William C Dudley: The importance of financial conditions in the conduct of monetary policy Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the University of South Florida Sarasota-Manatee, Sarasota, Florida, 30 March 2017. * * * It is a pleasure to be here today. I would like to thank the University of South Florida for sponsoring this conference. As always, what I have to say today reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.1 One aspect of today’s event is the dedication of a financial laboratory to help students learn about financial markets, which I think has great value. Knowledge of how financial markets operate is an important aspect of financial and economic literacy, and it leads to greater financial security over time. For example, one important lesson is that when the promised returns on an investment offering are extraordinarily high, it is because the investment is either very risky or fraudulent. When investing, it is important to remember that if it seems to be too good to be true, it likely is! Today, I want to take the opportunity to talk about the importance of financial markets in influencing the economic outlook and, in turn, U.S. monetary policy. This is a subject near and dear to my heart.

As generally expected, consumer price increases, as measured by the Harmonised Index of Consumer Prices (HICP), picked up in July, with the annual rate of change rising from 0.9% in June to 1.1% in July. This effectively reversed the downward movement in the overall HICP rate which had been evident since April 1999. While prices for unprocessed food declined further in July, this downward effect on the overall HICP rate was more than offset by a stronger increase in energy prices, resulting from a continued rise in oil prices. We expect consumer price increases to rise somewhat further from their July levels, mainly as a consequence of higher oil prices. However, at this stage we also expect this further increase to level out below the ceiling we have defined as being compatible with price stability over the medium term. In conclusion, the prospects for a sustained economic upturn in the euro area are good, as are the chances of continued price stability. However, we remain vigilant taking into account the upward risks to price stability. In particular, with a view to conducting a thorough assessment of the risks to price stability in the medium term, the increase in monetary growth over recent months and the high growth rate of credit to the private sector need to be monitored very carefully. In addition, the short-term upward pressure on consumer prices, which stems from the increase in oil prices over recent months and the lagged pass-through of developments in the exchange rate, have to be taken into account.

If accompanied by continued wage moderation, these factors alone should not be expected to threaten the current outlook for price stability. Accordingly, the results of the wage bargaining round for the year 2000 will play a particularly important role for the further assessment of price developments in the euro area. The only way to prolong a non-inflationary recovery, and hence to substantially re-absorb the still very high unemployment, is for all responsible parties to act decisively, in the near term, to increase flexibility in the labour, product and service markets. This would also be the best way to allow the economy to take full advantage from the present stance of monetary policy. Taking all this information into account, the Governing Council decided to maintain the prevailing ECB interest rates. In addition, it stressed that low inflation and therefore low interest rates should encourage higher investment, helping to prevent the emergence of capacity constraints during economic expansion. At the same time, the expected improvement in economic activity offers greater opportunities to cut fiscal deficits further and to enhance structural reforms. Indeed, the creation of this virtuous circle depends on all policymakers playing their part. Let me now give the floor to the Vice-President to introduce three additional topics which we discussed during our meetings. In addition to reviewing the main monetary, financial and other economic indicators, we discussed issues relating to the transition to the Year 2000. We are now approaching the final phase of testing activities in connection with preparatory work for the Century Date Change.

This workshop also demonstrates the stakeholders’ commitment to support the market development efforts as outlined in the Financial Sector Development Plan. Chairperson, over the recent past, the Zambian economy has performed well. This is reflected in a number of the key macroeconomic indicators. To mention but a few; the growth rate in real Gross Domestic Product (GDP) has remained positive and above 5%, we attained single-digit inflation, relative stability in the exchange rate of the Kwacha against major currencies, stable financial sector and improved banking services. These impressive economic trends suggest that the reform programmes that have been implemented are now bearing fruit. The reforms have focused on the restructuring of the economy, to let markets determine key decisions so as to allow the private sector lead, which has provided for increased investment in the economy. It is the contention of many financial analysts that there is no better market to determine prices than the secondary market. In that regard, this workshop is vital. Ladies and gentlemen, the importance of a secondary market cannot be overemphasized. By facilitating a ready mechanism through which financial claims can be transferred from one holder to another, a secondary market provides wide possibilities for issuers of long term securities to match their cash flows in a stable and cost effective manner. Investors with their diverse liquidity needs are assured that they can convert their investments into cash at any time and at a fair market price.

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So, five or so years on from the Washington summit, with the advanced economies just beginning to show signs of healing from the crisis, how well have we done? Have we created a safer international financial system? Were we able to sustain that commitment to act together? Or have we lost sight of Benjamin Franklin’s warning? BIS central bankers’ speeches 1 II. The reform programme The G20 launched perhaps the most ambitious international regulatory reform programme in modern times. It also established a new body – the Financial Stability Board – to bring together the G20 members and the cats’ cradle of international standard setting bodies and to mobilise them behind the common reform programme endorsed by the G20 leaders. That programme was grouped around four main themes: First, prudential standards. Ensuring the system has the right reserves of capital and liquidity for the risks being carried. And to ensure that the leverage in the system does not run out of control. History teaches us that banking crises are in the end always crises of liquidity and of leverage. Second, addressing the risks that lie in the interconnections in the system. Most important here is perhaps the role in the crisis played by derivative instruments like credit default swaps traded “over the counter” between institutions. These were intended to protect against risk but when asset values dropped they transmitted the shock from the weakest institutions to the system as a whole.

BIS central bankers’ speeches 3 • At the same time, the global search for yield in a zero interest rate environment led to strong capital flows into the region, inducing increases in credit and asset prices. • The business cycle and financial cycle began to diverge: raising interest rates to quell financial imbalances could potentially put the real economy at risk. Getting in all the cracks but not filling them A second reason why monetary policy may be ill-suited to address financial stability risks is that it is a blunt instrument. It may get into all of the cracks but some cracks may be just too big to fill. Financial vulnerabilities are often not evenly spread across the economy. They tend to be concentrated in specific sectors, such as in real estate. Monetary policy may be too blunt to address such specific risks and can cause significant collateral damage on the rest of the economy if it is calibrated to mitigate sector-specific risks. There is some empirical evidence that the cost-benefit trade-off in using monetary policy to lean against financial stability risks does not look promising. • Kenneth Kuttner and Illhyock Shim estimate that a 100 basis point increase in the short-term interest rate would reduce real housing price growth by only 1 percentage point in the following quarter. • Lars Svensson, drawing from the Swedish experience, finds that the cost of leaning against financial stability risks is high – with inflation too low and unemployment too high.

In the US in 1919, a case against Henry Ford was brought before the Michigan Supreme Court by the Dodge brothers, a minority shareholder. They challenged Ford’s decision to reinvest the firm’s profits to expand the business and pay better wages, which they felt contradicted the purposes of the corporation – maximising shareholder return. The Court ruled that Ford owed a duty to his shareholders and ordered him to pay a special dividend (Fisch (2006)). In the light of these cases, lawyers began to debate shareholder primacy as a company objective. In a series of law review articles in the 1920s and 1930s, Adolf Berle proposed treating corporate managers as trustees with fiduciary obligations to act for the benefit of shareholders. Berle’s motivation, interestingly, was in having a corporate governance model that redistributed power away from managers and towards “the people”. BIS central bankers’ speeches 5 Together with economist Gardiner Means, Berle published in 1932 The Modern Corporation and Private Property (Berle and Means (1932)). It argued that the ever-wider dispersion of shareholders risked entrenching the power of management, creating “ownerless corporations”. Around the same time, Joseph Schumpeter warned that corporations could become increasingly bureaucratic and run for their own ends, hampering the dynamism of capitalism (Schumpeter (1942)). The solution proposed by Berle and Means was to give shareholders primacy in a company’s objectives, together with the control rights necessary to meet this objective. In the 1960s, Henry Manne started to weave Berle’s legal perspective into economics (Manne (1965)).

Additionally, where suitable, vetiver grass is utilised to reinforce road slopes and prevent erosion. The term "climate-resilient" is used to describe these roads, emphasising their ability to withstand environmental challenges without employing other technical jargon. 3 Water Revolving Fund in the Philippines. [Source] 4 Melaka State Climate Action Plan 2020-2030. [Source] 5 ADB Technical Assistance Report. [Source] 3/3 BIS - Central bankers' speeches

Such surveillance efforts could also lead to discovery of parties trading on privileged insider information. SGX has the power to suspend or de-list a counter if conditions for orderly trading are found to be absent. • MAS will carry out independent surveillance on a selective basis, to ensure that SGX is performing its responsibilities effectively. • The MAS will have the power under the proposed SFA to pursue civil prosecution of listed companies which fail to make timely disclosure of material information, and of any participants suspected of market misconduct. The recently introduced civil remedy regime for insider trading will be extended to cover other forms of market misconduct such as market manipulation, or the employment of fraud and deceit in dealing. Civil remedy, which lowers the burden of proof against offenders, will complement the present framework of criminal remedy for offences under securities law. d. Supervision of brokers • SGX supervises and inspects brokers to ensure that they comply with SGX's rules, are prudentially sound, and uphold high standards of market integrity. SGX has to act swiftly and firmly to deal with any unprofessional conduct by brokers and their representatives. • MAS conducts continuous off-site review of brokers' operations to check if they comply with statutory licensing requirements. Such off-site reviews will be complemented by MAS' selective, on-site inspection of brokers to assure itself of the competence and effectiveness of SGX's supervision.

 Banks become dependent on optimal market functioning at all times and on the confidence of market participants. BIS central bankers’ speeches 1 If this process goes too far, an external shock could turn a situation of vulnerability into a crisis. This is what is referred to as systemic risk – the risk that shocks will weaken the functioning of the financial system, rendering it unable to provide funding, execute payments or redistribute risk effectively. Systemic risk can build up over time through a rapid rise in asset prices and debt and in the form of increasing interdependence among institutions. Or systemic risk can build up when many institutions are exposed to the same risk factor, for example on the funding side. Vulnerability also in Norway A financial crisis can be triggered by domestic conditions or it can be triggered by external factors. This time, the crisis came to Norway through external channels. International funding channels dried up, creating a liquidity crisis in the Norwegian banking sector. We can never fully insulate the financial system from shocks. But we can increase our resilience. One of the ways we can do this is by keeping our own house in order – by preventing major imbalances from building up in the economy or in the financial system, and by ensuring that the financial system in general is robust. We will then also be capable of withstanding disturbances generated by external conditions.

Regarding the monetary policy implementation, the main pillars of the Central Bank’s approach are its transparency, its accountability and its predictability. We, as a Central Bank, always favor a forward-looking approach. Given the increasing importance of its economic presence and close relations with the countries worldwide, it is crucial that Turkey improve its domestic markets to contribute to the efficient allocation of world resources. With this in mind, we will continue to implement structural reforms and our disinflation program to realize robust economic fundamentals. Final thoughts In closing, I would like to comment on what seems to be important in building a more robust and healthy global financial system and the world economy. The ongoing process of globalization, along with the revolution in information technology, is likely to continue in the future. One consequence of this trend is the intensifying competition at the global level. In this context, to benefit from this trend countries all over the world should react positively. The soundness of individual financial systems clearly affects the resilience of the international financial system as a whole. We should devote our efforts towards creating a healthier global environment by minimizing the volatility of international capital flows and the risk of contagion. More effective supervision and surveillance of banking systems is of the greatest importance in today’s international banking environment and the emphasis of the recent supervisory changes has been moving from the “rules-based” method of supervision towards a “risk-focused” supervision.

During the last two decades, the banking sector, which plays a prominent role in the Turkish financial system, has made significant progress in implementing structural changes towards a more financially liberalized Turkish economy. Combined with the effects of restructuring Turkish economy and the efforts for the integration to the modern world of finance, the Turkish banks achieved important changes in their institutional structures on the one hand, and in the quality of services and products on the other. In this very outward-oriented and closely supervised banking environment, the need for highly qualified managers and specialized personnel is obvious. With this in mind, Turkish Banks became more effective in their utilization of human resources. The number of university graduates and postgraduates in the banking sector has steadily increased over the last two decades, as has the level of professional training. The increase in the number of banks and qualified personnel, in turn, enhanced competition and contributed to broad utilization of new financial instruments and techniques. Furthermore, the banks were motivated to attain a dynamic structure through automation. During the last decade, Turkish 3 BIS Review 79/2000 banks became more automated and efficient, along with their foreign counterparts. For example, the number of ATMs in Turkey has increased from zero to over 8,000 in the last decade. Intense competition and a desire to integrate with global financial markets has driven banks to improve the quality and the variety of services through information technology and international payment systems.

It involves all prices being expressed in the same unit, usually called a unit of value, in exactly the same way as we need a standardised way of measuring distance. Money also has to have a stable value (money must be a “store of value”), as this makes it possible to postpone consumption. It also needs to be accepted by everybody. It must be easily accessible and easy to use (it must act as a general means of payment). For a long time, the most common form of money was coinage issued on royal authority, with its value being determined by its metal content. In Sweden, the copper standard was introduced at the start of the 17th century, in addition to the silver and gold standards that already existed. 5 But handling the copper coins proved to be clumsy, which contributed towards King Charles X Gustav granting permission, in 1656, for the formation of Sweden’s first bank, Stockholms Banco, which was allowed to accept coins in exchange for promissory notes. These promissory notes soon started to be used as money, as they were much easier to carry It is unclear how common barter was in early, primitive economies but we know that money appeared several thousand years ago. See, for example, Humphrey (1985) “Barter and Economic Disintegration”. Man, New Series, Vol. 20, No. 1. 3 See Camera, G. (2017). “A perspective on electronic alternatives to traditional currencies”. Sveriges Riksbank Economic Review 2017:1.

If the Swedish payment system were to become dominated by private crypto-currencies or by something other than Swedish kronor, domestic monetary policy would be marginalised. The ongoing Riksbank Inquiry has examined the matter of cash in a so-called fast track and a few proposals on access to cash services have been produced. This could contribute to slowing down the trend of decreasing cash usage. However, there are indications that that the latter is mainly a consequence of reduced demand for cash. 30 I hope that the Riksbank Inquiry, in its final report, will put forward further proposals for the long term protection of Swedish kronor issued by the Riksbank, whichever form these may take, physical or digital. New legislation, 30 For an analysis of this development, see “Times are changing and so are payment patterns”. Guibourg, G. and Erlandsson, F. Economic Commentary No. 6 2018. Sveriges Riksbank. 12 [15] strengthening the protection for Swedish kronor, should be technologically neutral to allow for a future totally dominated by electronic money. I would like to be clear that, as yet, we are only at the start of the analysis of the e-krona. Last autumn, we presented a few preliminary conclusions and, at the end of this year, we will decide whether and, if so, how we will proceed with the next stage of the project. Neither are we alone in the central banking world in considering this.

That said, irrespective of the instruments that may soon be adopted, both the objective and the main criteria that have been followed in recent years should, in my opinion, be maintained. The objective is clear and leaves little room for discussion: to have solid institutions that are able to contribute effectively to the financing of households and businesses. And it would also be useful to preserve the main criteria used hitherto in the financial restructuring. Specifically, I am referring to the anticipation of problems, minimisation of the use of public funds, reducing capacity, the conditionality of assistance, the emphasis on downsizing balance sheets and the promotion of transparency. First it is very important to anticipate problems. The primary obligation of a banking supervisor is to ensure at all times that the credit institutions operating are solvent and viable. However, good supervisors should not limit themselves to analysing the present, but should also anticipate possible scenarios of non-viability that might arise in the future and attempt to reduce problems to a minimum before they emerge. When the crisis broke, the 45 Spanish savings banks then existing were all solvent and viable. However, taking into account the new economic and financial environment stemming from the crisis, it was possible to foresee that while some of them were very well-managed and unquestionably sound, many others, within a matter of years or months, might eventually be non-viable.

However, some countries have gone the opposite way by moving securities and insurance supervision under the umbrella of the NCB. They have benefited from the independence and resources of the NCB. On the other hand, these sectors require partly different staff skills and methods and they include issues which are normally outside the mandate of a central bank such as investigations of market conduct and law enforcement actions against individual firms or persons. Failures in securities and insurance companies may affect overall confidence in the NCB, although these institutions are in most cases of limited interest to the NCB from the point of view of financial system stability. Such failures might even lead to what Professor Goodhart calls “a creep of the Central Bank safety net” 4 implying that exceptional liquidity assistance might be used for non-systematically important institutions. My conclusion is therefore that you should only bring securities and insurance supervision into the NCB if this is needed because they can not fulfil their tasks outside the NCB for some reason such as lack of independence or human resources. After having discussed whether supervision should be inside or outside the Ministries and the NCB, I now turn to the issue of unified supervision. These are some often-heard arguments for the consolidation of supervisory authorities: Consolidating supervision in one authority Information sharing and coordination will be facilitated if the different sector supervisors are located in the same authority. In my experience this is mostly true, both for practical and legal reasons.

I envisage the FMC and the industry to further collaborate and come up with the new strategies and ideas to deepen and support the development of our onshore market. Beyond trade or real sector activities, we should look at financial investments, in particular the non-resident investors in our bond market. We have 33.7% of our Government bond market held by such investors. There are opportunities in this domain. 4/5 BIS central bankers' speeches Where are they hedging their foreign exchange exposures? What product can the industry offer for them to hedge onshore? Given these obvious opportunities, we need to develop solutions that will benefit the industry as a whole. The significant overseas investments by residents and foreign currency exposures arising from trade activities create a need for the domestic hedging market to be further deepened. In 2015, FX market transactions volume reached a staggering USD2.52 trillion, yet currency derivatives such as FX forwards and options only made up 5 and 1 percent of the total volume, respectively. Similar concerns also exist for the bond market. Both government and corporate bonds are still primarily held by residents, and we have one of the largest corporate bond markets in the region. Yet, this does not translate into the development of active hedging market activities. Credit derivatives made up less than 1 percent of ringgit derivatives volume in 2015. This prompts several questions. Are our investors able to hedge effectively or efficiently manage the exposures of their portfolios?

We can look at these churn rates on a more disaggregated basis by linking data on worker movements and 40 company performance. Chart 21 plots the evolution of churn rates for firms above and below the productivity median. Pre-crisis churn rates were systematically (around 20%) higher in high-productivity firms than in low-productivity ones. Ideas and skills recycled more quickly in the upper than in the lower tiers of the productivity distribution. This may have contributed to the long tail problem. Other things equal, one might wish to see higher rates of labour market churn among poor-performing companies as a means of injecting new ideas, experience and skills, speeding-up the process of technological diffusion to them. In practice, the opposite appears to have been the case. The lower tail of UK companies, pre-crisis, had a stickier workforce. Post-crisis, things have changed. Churn rates among high and low productivity firms have converged, with churn rates among higher productivity companies falling sharply. This matches the productivity patterns seen post-crisis, with the slowdown focussed on previously high-performing companies. Slower churn among these companies, and the accompanying slower diffusion, may have contributed to their slowing productivity and them becoming part of that lower tail. A different way of slicing these granular data is to look at where workers are moving to. Again in an ideal world, we might wish to see high rates of worker transition to different points in the productivity distribution, to different sectors and different regions.

I believe this has broadened my own horizons and enabled me to interact with many different people from different cultures all over the world – creating and cementing many valuable friendships. The second reason is that the theme of this year’s book fair – READING TOWARDS A SUSTAINABLE ECONOMIC FUTURE – touches squarely on my own professional responsibilities as Governor of the Bank of Zambia. Our main pre-occupation at the Bank of Zambia is to help Government attain a sustainable economic future by working to keep increases in the average prices of goods and services low, the price of money (i.e. interest rates) low, and maintaining a stable exchange rate and financial system. This is the best way in which we can assist the Government as it works to advance the welfare of the Zambian people. Needless to say, one of the key pre-requisites for the Government in achieving this goal is the need to develop an educated and enlightened citizenry, which can effectively contribute to the development process. From the Bank of Zambia’s own perspective, the experience of central banks around the world is that effective communication with the public is a very important part of the success of central banks in achieving their objectives of price and financial system stability. The written word, although not the oldest form of communication, is perhaps the most powerful and enduring form for communicating and exchanging ideas. It is therefore indispensable in the work that we do.

The culture of reading does not exist. In the past, a bookshelf was one of the most cherished assets in a typical Zambian home. Today, the picture is very different. Either books are not readily available or they are too expensive to buy relative to people’s incomes; or they have lost their place of pride in the home – to home entertainment units packed with latest movies, music and Play Stations, to mention but a few. This situation has been compounded by the non-availability of sustainable library services in our schools, colleges, universities and public libraries. At the moment the better library services are being provided mainly in the urban areas, for instance, by development partners such as the British Council in Lusaka. This clearly needs augmentation by all interested stakeholders to set up libraries both in the urban and rural areas. The other aspect that, therefore, needs to be addressed, in relation to the theme of the Book Fair, is the availability of appropriate reading materials. Achieving a sustainable economic future requires the active participation of a dynamic private sector. Such dynamism requires the availability of relevant and specialised reading materials. The agricultural sector, for example, is an important part of the Zambian economy whose success holds the key to the rapid reduction in poverty that must be achieved if Zambia is to take its place amongst the community of progressive nations. Higher literacy levels in the rural areas will help to propagate better farming methods and conservation techniques.

Central responsibility for this lies with lenders communicating effectively with their clients. But to support that the Working Group recently issued a fact sheet with the Association of Corporate Treasurers, the CBI and the authorities. 12 And a number of other collective initiatives are planned in 2020, including events with a wide range of trade associations, and further materials to help support borrowers to transition. If those are the challenges facing the private sector, what more can we in the public sector do to assist? Let me talk about the two further steps we are announcing today. A new compounded SONIA index Before borrowing firms can transition away from LIBOR-linked loans and bonds, they need to know what rate they will be transitioning to. That rate needs to be fair, verifiable and cost efficient to use. An early desire to minimise change from the status quo led some initially to look for a forward looking SONIA-based term rate to replace LIBOR. As I have mentioned, UK financial markets are deep enough to allow such a rate to be offered in due course.

Edwin Schooling Latter will talk more to these issues this afternoon. Having put in place the foundations for a decisive switch in swaps liquidity to SONIA, the next challenge for derivatives markets is to accelerate transition in futures and non-linear products. In preparation for the provision of a robust forward-looking sterling term rate, many banks are now streaming executable SONIA swap prices to regulated trading venues. Having the inter-dealer market able to trade SONIA in a single click is a key building block to helping firms hedge with the smallest friction possible. The Working Group will be considering what more needs to be done to drive transition in these markets over the coming months. 11 www.bankofengland.co.uk/-/media/boe/files/speech/2019/join-the-revolution-why-it-makes-business-sense-to-move-on-from-liborspeech-by-andrew-hauser.pdf 5 All speeches are available online at www.bankofengland.co.uk/news/speeches 5 Progress in sterling markets: cash instruments and lending If derivatives are well on their way, the big challenge for 2020 is to drive transition in the sterling cash markets – and in particular to hit the market’s target of no new issuance of term LIBOR-linked cash instruments after Q3. We know it can be done. SONIA has quickly become the default reference rate for floating-rate notes and securitisations – accounting for around 85% of new issuance across the two markets in the second half of 2019. But these are predominantly wholesale transactions, involving a relatively small number of experienced counterparties.

Although there is a considerable stock of equity in owner-occupied housing, with banks tightening the supply of both secured and unsecured credit, consumers will find it more difficult to borrow to finance spending. So in 2008 it is likely that a less buoyant housing market will go hand in hand with slower growth of consumer spending. Tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past. In the short run, that will slow economic activity, possibly quite sharply. And there is a risk that weaker activity and lower asset prices could result in another round of losses for banks and a further tightening of credit conditions. The adjustment which not only the British but the world economy is experiencing is necessary as the imbalances, between spending and saving and between domestic demand and trade, unwind. As part of a longer-run rebalancing of the UK economy, an increase in our national saving rate, both private and public, is necessary. The low level of national saving is apparent from the current account deficit – our new net borrowing from overseas – which in 2 BIS Review 8/2008 the third quarter of last year was, relative to GDP, the biggest in the past fifty years and the largest in the G7. It is possible to run a current account deficit for a considerable period. Australia, for example, has done so in every year since 1974.

The scenario I described above was that encountered by the Governing Council of the ECB at its meeting in the first week of June and required resolute and more expansionary monetary policy action. Such action was required because, although available indicators still pointed to medium-term inflation expectations remaining anchored at levels compatible with the definition of price stability, if inflation becomes entrenched at excessively low levels for an extended period, there is a significant risk that these expectations will ultimately be for deflation and a long period of low growth. And we know from Japan’s experience that once this disanchoring has taken place, it is very difficult to return to normal. Before June, the ECB had already reduced its policy interest rates to very low levels on several occasions. The rate on the main refinancing operations stood at 0.25% and that on the deposit facility at zero. The ECB had also embraced the policy of forward guidance, both in the area of liquidity, by announcing in advance that it would extend the fixed-rate tender procedures with full allotment, and in the area of interest rates. Here, forward guidance was introduced in July last year when the uncertainty surrounding the Federal Reserve’s intentions led many investors and analysts to anticipate a change in monetary policy stance not only in the United States but also in the euro area – a change evidently not on the ECB’s agenda. The ECB had also resorted to assets purchases before June.

Inflation has risen more slowly following the recent pay hikes than perhaps could have been expected in view of historical experience, and it is still well below target. This could be due in part to the additional scope provided by the favourable initial position of many firms and by the improvement in terms of trade. But the most obvious explanation is that lower prices in international trade and low or zero inflation in trading partner countries offsets domestic inflationary pressures, as can be seen in Chart 3. The downward price pressures from abroad have been stronger in recent months than was projected last spring, partly because of economic developments in China. But it is unlikely that the price of oil and other commodities will continue falling for a long time to come. The question, then, is what happens when prices stop falling – not to mention if they begin to rise again, as is forecast. Other things being equal, measured inflation would rise in Iceland. The Central Bank’s new forecast assumes, in fact, that oil prices will begin to rise again towards the end of this year. In addition, a portion of the wage increases will finally pass through to prices. According to the forecast, inflation will therefore rise in coming months, overtaking the target next year and peaking at just over 4% in the first half of 2017. It will not return to target until 2018.

Terms of trade are projected to improve significantly this year, contributing to a larger current account surplus than would otherwise occur, but the improvement will reverse to an extent in 2017 and 2018. The sizeable current account surplus of the past few years will therefore shrink significantly during the forecast horizon and will have nearly disappeared by 2018. Rapid growth in domestic demand under conditions of full utilisation of resources has often proven dangerous to Icelanders. Other things being equal, such a situation calls for monetary and fiscal tightening. Our initial position is unusually good this time, as can be seen in a strong current account surplus, a central government surplus and declining government debt, and inflation that is still below the target. But the tug-of-war between large pay increases and the BIS central bankers’ speeches 1 global tendency towards deflation will determine how much and how rapidly this situation deteriorates in the coming term. In my speech at the Central Bank’s Annual General Meeting, I expressed considerable concern about the unrest in the labour market and the consequences that it could have for economic stability. In the speech, I noted that wage pressures that jeopardise the inflation target are generally considered a sign of both demand pressures in the economy and excess demand in the labour market, which must be met with tighter monetary policy. However, this was not consistent with a slack that was just about to disappear and a sizeable current account surplus.

Malta also compares favourably on social cohesion, with income dispersions being comparable to those in other acceding countries and with the long-term unemployment rate being significantly lower. In summary, it appears that Malta has costs which do not reflect productivity levels and a highly expansionary fiscal stance. There is also a need for more spending on innovation activities and business investment. For while our economic system is successful in delivering social cohesion and stability, these factors cannot alone sustain the economy’s growth rate at sufficiently high levels. This suggests a need to question existing priorities and to re-direct policies to activities which can support higher income levels in future. Malta and EMU Malta’s participation in EMU will eventually lead to the adoption of the euro, a step which holds out the prospect of significant benefits. Perhaps the foremost of these is that Malta would share in the strength and credibility of a single, Europe-wide monetary policy. This would not only mean reduced exchange rate risks and less uncertainty for economic agents in Malta and for their foreign business partners, but also the elimination of the risk premium on the Maltese lira. The reduction in interest rates consequent upon the introduction of the euro would be of direct benefit in terms of price competitiveness, as would also be the reduction in currency conversion costs and the increased price transparency.

The country would then probably also face difficulties in meeting the other Maastricht convergence criteria, further complicating the task of economic management. If the risk of this happening is considered unacceptably large, a slower pace of fiscal consolidation, entailing a smaller risk of slippage, could be chosen. The late adoption of the euro would, however, imply that the enjoyment of the relative benefits would be postponed, and that the country could lose competitiveness if other new member States successfully adopt the euro at an earlier date. In summary, the best case scenario is the one where a relatively fast pace of fiscal consolidation is both planned and achieved. The worst case scenario is the one where fiscal policy fails to deliver on a planned fast process of consolidation. The scenario featuring a slower pace of consolidation can be described as intermediate in terms of its degree of preference. However, this could turn into a worst case scenario if fiscal policy fails to deliver even on a planned slower consolidation process. It is for these reasons that medium-term fiscal planning should be adopted, detailing concrete objectives and measures to be implemented over a number of years. It is equally important that such a programme enjoy the support of the social partners. The consensus-building approach being followed in the MCESD is a welcome, positive development in this regard, one that could facilitate an early adoption of the euro.

This therefore, not only includes providing greater access to financing but the complete financial services solution to the small- and medium-sized enterprises. In addition, monitoring loan performance during the lifetime of the loan rather than only during the approval process will allow for early remedial action to be taken well before difficulties emerge. 4 BIS Review 43/2003 A further important contribution in emerging market economies is to enhance consumer literacy through consumer and investor education to increase the potential for well-informed financial decisions. Another area that is important is the investment in human capital to create a workforce that is skilled and competent, as this will bring substantial long-term benefits. Finally, foreign institutions that have a presence in the region need to recognise the meaningful role that can be realised in the region not only in meeting the requirements of the domestic environment but also to promote investment and business opportunities from their established networks in other parts of the world. The Asian Financial Crisis not only presented the opportunity to improve the region’s resilience to external shocks, but also underscored the importance of breadth in the financial sector, in particular, the development of alternative avenues of financing. Historically, bank loans, as well as funds raised through equity markets have assumed significant roles in Asia as the main sources of financing.

Of importance, is the need to recognise the on-going economic transformation that is taking place in the region and to facilitate a more balanced growth between domestic and external sources of growth, between public and private sector-led growth, between the balance of consumption and investment, and between the different sectors of the economy, regions and communities within the country. Facilitating a more balanced growth will contribute toward sustainability of the growth process. With new areas of growth emerging, and new business models being adopted, new and more differentiated customer requirements need to be met. The level of innovation will need to be accorded increasingly important attention. While for the most part, pricing for products and services need to reflect the costs and risks, the industry needs to recognise that in emerging market economies, the basis to do so should take into account the social agenda that is an integral part of the sustainable performance of the country. The ability to achieve socio-economic stability will produce a more balanced growth. Ultimately, the objective of increasing competition and therefore enhancing efficiency in pricing needs to be balanced against providing basic financial services to the less advantaged retail customers at very minimal costs. Such trade-offs need to be made and managed. This also includes enhancing access to financing to the various sectors in the economy, to both the large and small borrowers. In emerging market economies, providing other ancilliary financial services especially to small businesses will enhance the potential quality of such assets.

By winning the battles for customer loyalty, value, efficiency, resilience and talent, banks can remain the dominant players in this space. The bank of the future will be completely unrecognizable from that of today. It will be closer to its customers, digitally enabled, and ahead of the curve when it comes to anticipating customer needs. It will be more efficient, more resilient and better able to address the economic and social challenges of the future. In the end, only collectively, we as the key stakeholders in this industry can take the difficult yet necessary steps required to shape the future of the banking industry. As Einstein said: “A new type of thinking is essential if mankind is to survive and move toward greater levels.” Thank you.

In short, banks will need to either go digital or risk being sidelined. Failure to meet changing consumer expectations can have serious implications for banks. The recent history of the mobile phone industry is a case in point. In 1997, 60% of the mobile phone market belonged to the specialist mobile phone producers like Nokia, Motorola and Sony Ericsson. Today, that same market share has been captured by Samsung, Apple and Huawei. Not only are the current market leaders three entirely different firms but they are essentially electronics and computer companies, unlike the past firms that specialized in manufacturing mobile phones.12 The incumbent mobile phone companies of the 90s failed to recognize the evolving needs of their customers. Ultimately, their complacency saw them being pushed to the fringes of a market they once dominated. Something similar could happen to the banking industry. Unless it pays attention to and serves the changing needs of its customers, it might be sidelined by telecom companies or technology firms as primary providers of financial services. Take the example of Ant Financial, WeChat Pay and M-pesa, which are firms that were launched by technology and telecom companies. All three have enjoyed tremendous growth to become the largest providers of financial services in their respective markets. By leveraging technology and adopting a customer-centric approach, they have surpassed the largest banks in their markets.

The high cost level in the Norwegian business sector is adapted to a situation where we are developing the petroleum sector and phasing in the use of petroleum revenues into the mainland economy. After a period, we will be able to cover a smaller share of our imports using current petroleum revenues and by drawing on capital in the Petroleum Fund. The Norwegian cost level will then have to be dampened, also compared with that of Sweden. Competitiveness may in the longer run be brought back to the level prevailing at the end of the 1960s before Norway became an oil nation. During such a period of adaptation, which may start in 5 or 10 or 15 years, a flexible exchange rate, with a fall in the Norwegian krone against the Swedish krona, will have to play an important role. Where do we stand today? Tariff barriers for trade in goods are low. The EU/EEA agreement also provides for increased trade in services. During the 1990s, capital mobility has increased to a level that is higher than 100 year ago. Free capital flows and free trade pave the way for high economic growth and prosperity, but also entail challenges. Competition has increased in many industries. Labour-intensive processes are being transferred to new EU member states such as the Baltic countries. Some multinational companies have streamlined various production processes and distribution and centralised them in the same location. Saab has been acquired by General Motors and Volvo by Ford.

Instead, it is important to analyze the loan growth in broader economic policy context where due consideration should be paid to the credibility of macroeconomic policies and the impact other policies may have on the incentive structure in the financial markets. As I stated earlier, the presence of Nordic banks in the Baltic market is, of course, a hugely important positive factor. Parent banks are sometimes considered to have an implicit responsibility for the stability of the banking systems in the Baltic countries. It is said that the Baltic banks are too small to fail. International experience lends support to this view, although the evidence is not always in one way. Hence, there are also potential risks. If parent banks are active in many countries of the region, a shock affecting exposure in one country may lead to a reduction in their exposure across the region. Build-up of exposures to common risk factors in a region may also increase the potential for contagion - a reduction in lending to countries not affected by a crisis. The potential for contagion is naturally higher in highly integrated economies. Another potential risk factor is the smallness of the banks in the Baltics combined with their high profitability. While the Nordic banks have high profitability in all of their markets, profitability in the Baltic market is especially high. As a result, the share of banking groups' assets in the Baltics is significantly lower than the share of profits banks make in this region.

The Fund serves as a buffer between current petroleum revenues and the use of these revenues in the Norwegian economy. According to the fiscal rule, future petroleum revenue will be added to the Fund while spending shall be limited to the expected real annual return on the Fund, estimated at four per cent. When all the petroleum revenues have been extracted, the Fund would grow no further, but its value in real terms would be maintained – in principle for eternity. This ensures an equitable distribution of the petroleum wealth across generations. The fiscal spending rule partly insulates the economy from fluctuations in the petroleum sector – and when followed it ensures that revenue spending is at a level that can be sustained over time. The difference between the net cash flow and spending is reinvested in foreign financial markets. Norges Bank manages the Fund, and our London office plays a pivotal role in the investment activities. The Pension Fund also functions as a buffer and dampens the wide fluctuations in the krone exchange rate that petroleum revenue inflows might otherwise have generated. The Fund is invested solely abroad, thus acting as a kind of “revolving door” for currency inflows from petroleum activities. With the fiscal rule, it was recognised that the most important contribution fiscal policy can make to stabilising the Norwegian economy is to provide a sound, long-term strategy for petroleum revenue spending. As a consequence, monetary policy had to take responsibility for smoothing the business cycle to a greater extent than earlier.

Gent Sejko: Statement - press conference with IMF Mission Chief Statement by Mr Gent Sejko, Governor of the Bank of Albania, at the joint press conference with the International Monetary Fund (IMF) Mission Chief for Albania Minister of Finance and Economy, Tirana, 10 October 2022. *** Dear media representatives, In the last two weeks, the Bank of Albania and the Albanian government have been engaged in intensive discussions with the IMF Mission, which visited Albania in the framework of the regular Article IV consultations. Discussion focused on current challenges for the Albanian economy, as well as structural reforms that would enable a faster and more sustainable development of the country in the long term. Allow me - first and foremost - to extend my thanks to the IMF Mission for the open share of views in addition to the fruitful and transparent discussions. Overall, the Bank of Albania and the IMF share similar opinions on the developmental challenges that lie ahead. The swift upsurge of prices in the global markets following the unprovoked military aggression of Russia over Ukraine, have triggered serious economic and social challenges for the economies and citizens of all countries around the world, including Albania. Inflation hit 8% in August, increasing at a rapid pace and having a broad base. Based on our judgement, we have previously stressed out that the high inflation is the main threat on the macroeconomic stability and both the stable and long-term growth of Albania.

Consequently, part of the debate about direct European recapitalisation and about the role of the SRM in delinking banks and sovereigns, was post-factum somewhat misplaced. The implications of this Directive are therefore far-reaching. Participant countries in the Banking Union are shedding considerable sovereign power. In fact, large countries with strong public finances are effectively renouncing their ability to provide domestic banks with the implicit subsidy of public support that would reinforce their advantages in increasing their market share. The strength of these banks when competing in the European market will be reduced as the new situation will be progressively reflected in their ratings and funding costs. Similarly, countries with vulnerable public finances and smaller banks will no longer be able to support and possibly not be able to keep their national champions. In accepting the transfer of supervision and resolution of banks to the European level, euro area countries are committing to a remarkable sharing of sovereignty which could be a positive sign of their willingness to deepen European integration in general. It is worth mentioning that the BRRD rules about bail-in enter into force only in January 2016. They will therefore not apply to the recapitalisations in the context of the Comprehensive Assessment that the ECB is conducting and to be implemented this year and the next.

Compare the worldwide costs for taxpayers stemming from the absence of public intervention to rescue Lehman Brothers, with the zero cost for taxpayers following the US TARP 700 billion dollars injection into US banks in 2008 which have by now been totally repaid by the banks. In other words, financial instability can have a meaningful cost to taxpayers even if it is not visible in the very short term – a notion that all policy makers should keep in mind. The new European legislation does allow, as a last resort, for interventions that can safeguard financial stability in a Member State or in the area as a whole. I trust that this legislation will be applied by the competent authorities with rigour, wisdom and a sense of proportion in the aftermath of our Comprehensive Assessment. BIS central bankers’ speeches 5 SRM as a necessary complement to the SSM My remarks about the SRM – as a mechanism less relevant than the BRRD rules for the severing of the bank-sovereign nexus – do not aim to belittle the crucial importance of the SRM for Banking Union. To begin with, the implementation of the BRRD bail-in rules will be done by the SRM at the European level. The credibility of the SSM as supervisor is also dependent on the existence of a credible mechanism to proceed swiftly, orderly and efficiently in the resolution of banks that have attained the point of non-viability.

Tharman Shanmugaratnam: Opportunities facing Islamic finance and challenges in managing capital flows in Asia Outline of special address by Mr Tharman Shanmugaratnam, Chairman of the Monetary Authority of Singapore, at the 8th World Islamic Economic Forum, Johor Bahru, Malaysia, 4 December 2012. * * * The Prime Minister of Malaysia, His Excellency Dato’ Sri Najib Tun Razak The President of Comoros, His Excellency Ikililou Dhoinine The President of the Islamic Development Bank, His Excellency Ahmad Mohamed Ali Chairman of the World Islamic Economic Forum Foundation Tun Musa Hitam Ministers and distinguished guests Ladies and gentlemen Introduction It is my pleasure to be here today and have the opportunity to share some thoughts. Let me first congratulate the WIEF on the progress it has made in establishing itself as a leading international forum for economic leaders and opinion shapers from a broad range of countries to discuss issues of interest in Islamic Finance and related themes in global finance. The theme of the Forum, “Changing Trends, New Opportunities” is particularly relevant. Allow me to first offer a brief perspective on opportunities facing Islamic finance. I will then go on to talk about the challenges we face in Asia in managing capital flows in the aftermath of the Global Financial Crisis. Islamic finance: opportunities for growth The Islamic finance industry is estimated to have grown by some 19% per year since 2006 – to record nearly $ trillion of total shariah compliant assets in 2012.

This is in addition to our other Government support schemes that FinTech players can benefit from: i) SPRING Singapore will provide Singaporean start-ups grants matching $ for every $ raised, up to a cap of $ ii) The National Research Foundation will co-invest, together with a technology incubator, up to 85% of an investment into a Singapore-based start-up. Deep skills and continuous learning 9 Not all of us can be entrepreneurs. But we all have to build the skills and expertise necessary to power the digital economy. The financial sector in particular has to build new capabilities. 10 We are often caught up in speculation as to which jobs technology will destroy and what kinds of new jobs it will create. The likelihood is that many jobs will remain but most jobs will be transformed, requiring new skills and capabilities to make the most of new technologies. 11 In the financial sector, there is already growing need for skills in data analytics, in digital and mobile user interfaces, and in application development, in addition to core finance skills. Take for example bank relationship managers who provide wealth management advisory services. They are unlikely to be completely replaced by robo-advisers. But relationship managers will increasingly use data analytics tools to analyse client profiles and offer better, customised financial solutions.

The achievement of the overriding policy objective: price stability Confronted with a series of adverse exogenous supply shocks (affecting in particular oil prices, food products and services prices), the Eurosystem has been able to contain inflationary pressures despite considerable volatility: since the Eurosystem became responsible for monetary policy in the euro area, HICP inflation has averaged 2.0 % (1.7% excluding unprocessed food and energy), which is near our definition of price stability at which we aim over the medium term. This figure mainly reflects the sharp increase in oil prices over the last two years. However, HICP inflation has remained below 2% since September 2006. In addition, let me remind you that HICP inflation was around 4% in the 1980s and about 9% in the 1970s [see Figure Annex p3]. Until recently, the single monetary policy also succeeded in stabilising and anchoring medium to long-term inflation expectations at around 1.8% to 1.9%, despite all the above mentioned shocks. That is to say, once again, at a level close to, but below, 2% in accordance with our definition of price stability – whether one takes the inflation expectations derived from surveys (for example, Consensus Forecast, or the ECB survey of professional forecasters – [see Figure Annex p4] ) or those drawn from market data, notably index-linked government bonds. Recently, the awareness of a higher cost of oil has pushed expectations slightly above 2%.

I think there is a broad agreement on the fact that interest rate decisions are state-dependent rather than time-dependent and as a consequence, both the frequency and the amplitude of the policy changes are mainly driven by the underlying state of the economy. As far as the Eurosystem is concerned, the more gradualist approach is nothing but the reflection that the economy of the euro area has been less affected by cyclical fluctuations than the US economy. Moreover, recent research carried out by the Eurosystem on inflation persistence tends to show that the degree of inflation persistence in the euro area is quite moderate while the degree of price stickiness is considerable and higher than in the United States. This finding may provide another justification for a gradualist monetary response to cost-push shocks as: first, the impact of an inflation shock will be small as agents anticipate a low persistence of this shock and therefore will maintain their expectations of future inflation at low levels; in turn, the negative response of the output gap will be limited implying a less persistent response of the real rate. 5. As a result, the Eurosystem monetary policy has won European citizens’ confidence in and acceptance of the new currency Finally, the euro has been readily accepted by economic agents and is now part of European consumers’ daily lives. Surveys confirm that the general public has confidence in the euro, as a solid currency, and in the Eurosystem as their Central Bank.

And all the time, we need to stand ready to develop new tools and make new kinds of analysis – so that we can reach our inflation target. If the world changes, we need to change with it. The ideas in this speech have developed through the course of many conversations over the years. The opinions expressed are my own. I would like to thank Marianne Nessén for her help in writing this speech, and Magnus Andersson, Emma Bylund, Charlotta Edler, Dag Edvardsson, Heidi Elmér, Frida Fallan, Martin Flodén, Jesper Hansson, Per Jansson, Cecilia Kahn, Björn Lagerwall, Stefan Laséen, Cecilia Roos-Isaksson, Marianne Sterner, David Vestin and Anders Vredin for their help and valuable viewpoints, as well as Elizabeth Nilsson, Calum McDonald and Gary Watson for help with translating it into English. ∗ 1 [13] International changes affect monetary policy There is good reason to look back and see what lies behind this development. This has certainly been done before. Both the Riksbank and other central banks have published and discussed a great deal about various international changes that have led to changes in monetary policy. But I believe we need to continue the discussion, partly because this makes it easier to understand current monetary policy, and partly because it forms a necessary basis for a conversation on what the monetary policy of the future might look like. Today, I would like to address some of the most important international changes that have a bearing on monetary policy.

Ladies and gentlemen, in today’s forum, we have arranged two panels, chaired by Eddie Yue and Arthur Yuen respectively, to elaborate on and discuss the initiatives and measures I have just mentioned. It would be useful for us to receive your comments and feedback. These initiatives and measures require persistence, dedication, and collaborative efforts of all the stakeholders: regulators, industry practitioners, international bodies, environmental groups. We must all work together. Thank you very much. 3/3 BIS central bankers' speeches

Both figures are well below those of our regional peers, suggesting that we are relatively more immune to abrupt capital flights. On the external stability front, Thailand continues to perform well across most indicators. Last year, our current account recorded a large surplus of over 8% of GDP, and it is expected to grow further this year. Moreover, we continue to have more than enough international reserves to cover our foreign debt obligations. Our banking system continues to be strong, with ample capital buffer and cushion against bad loans. Their capital adequacy ratio continues to be well above the required level of 8.5%, and has increased slightly since my last address. Moreover, amid the gradual economic recovery, banks continue to accumulate high level of loan loss provision to cushion for deteriorating loan quality. The aggregate NPL figure remains manageable at around 2.7% and the combined profits of the banking sector remain sizeable despite being slightly trimmed by the additional loan-loss provisioning. Ladies and Gentlemen, Maintaining sufficient buffers have proved essential in coping with the financial turbulence of the past year, as they helped to shield the economy from facing the full impacts of external shocks. Besides the financial system, the real economy has also been a beneficiary of stable financial environment. In the first half of this year, the Thai economy expanded by 3.4%.

In the 2/5 BIS Central Banker's Speeches former, we aim to provide an accommodative and stable macroeconomic and financial environment, so that the ongoing recovery is supported by ample liquidity and not interrupted by excessive volatility. In the latter role of development, we aim to put in place more efficient financial infrastructure in order to facilitate business activities and thereby enhancing their competitiveness. Let me elaborate on each role one by one. Recent experiences have demonstrated to us just how volatile the financial environment could be – both in terms of risks to economic growth and the policy responses that follow. Unfortunately, the journey ahead is paved with similar challenges, if not greater – financial stability risks and economic rebalance in China, the growing monetary policy divergence, the lower-for-longer interest rate policy and perhaps a more widespread use of unconventional measures by central banks of Advanced Economies. As a small open economy, we must therefore ensure that there is sufficient policy room to mitigate the potential adverse impacts or events that could unfold in the future. In this context, the Monetary Policy Committee’s decision to maintain the policy interest rate should be viewed as a preference to preserve the limited policy space for rainy days ahead. The Monetary Policy Committee expected headline inflation to return to the target band later this year, while core inflation has stayed positive at around 0.8% since the beginning of this year.

There is no option for financial institutions but to be able to deliver and ensure the integrity of their services – banking, payments, insurance or takaful, in dealing with customers – digitally or online during these times. The road is thus wide open for fintech. In a not so distant future, we can expect that fintech will be part of the mainstream, perhaps even becoming the primary mode of delivery for financial services, no longer requiring strategising and planning on how we could fully embrace it in conferences and dialogues like we will be doing today. Before I conclude I would like to congratulate ISRA for their development of the I-FIKR App, which 2/3 BIS central bankers' speeches will be launched during the event. The App certainly fits well with the digitalisation of the Islamic finance knowledge of the Islamic finance industry. We hope to see it as another home-grown product that will contribute further toward the advancement of the Islamic finance Industry. Finally, once again I would like to thank and commend ISRA for organising the Islamic Fintech Dialogue 2020. Events such as this provide us an opportunity to take a step away, allowing us the space to focus on key issues and challenges which I hope will inspire us to improve on our vision and strategies for innovative transformation in Islamic finance. Over the course of this 2day event, with the array of speakers and moderators, I am confident this will be achieved.

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.

Firms whose credit conditions have tightened face a profits squeeze and cut their production of (red and blue) cars. Households facing the same tightening in credit conditions face an income squeeze and cut their consumption of (red and blue) cars. As a result, aggregate activity or GDP in the economy – the sum of red and blue car production – falls in this hypothetical economy. There is a recession. While both regions are affected, the impact of this recession is not felt equally. Red firms might borrow more than Blue ones and Red consumers more than Blue ones. This means the tightening of credit conditions 2 In practice borrowing behaviour is likely to be driven by several other factors, such as expectations of future earnings, access to finance and the amount of collateral with which to borrow against. 3 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 3 has a larger impact on Red Car than Blue Car region - its recession deeper, the impact on unemployment greater. This further widens the income gap between Red Car and Blue Car regions. What can be done? Enter a central bank with a mandate to support the whole economy. They can do so in two ways. First, they can cut the interest rate at which they lend to banks which, in turn, is reflected in banks’ lower cost of lending to companies and households.

This will result in an extra 0.1% of GDP in infrastructure spending in 2017/18, rising to 0.3% of GDP by 2021-22. Over five years, the incremental spending amounts to an extra £ billion. This fund will be focussed on transport, housing, telecoms and research and development. 22 Just yesterday, the CBI published a report on differences in regional productivity performance and outlined a sequence of measures to help boost productivity and narrow regional differences. These measures included developing regional scorecards to enable productivity hotspots (and coldspots) to be identified; increased investment in skill-building through improved school and vocational education; increased infrastructure, in particular transport, spending; and improvements in managerial practices. The work of the “Productivity Commission”, chaired by Sir Charlie Mayfield, has identified a long tail of companies across all sectors in the UK whose productivity performance is falling short. 23 The Commission are developing, among other things, a tool which would enable firms to benchmark themselves relative to others in their sector along several key business dimensions. This could then serve as a prompt for action, enabling firms to boost their productivity performance through targeted action. I think this micro-level assessment of productivity is a useful way to formulate plans which support productivity, and narrow productivity differences, regionally and sectorally. For example, recent work by the OECD has looked at the changing distribution of productivity across firms over time.

Andrew Bailey: The future of banking regulation in the UK Speech by Mr Andrew Bailey, Executive Director of the Bank of England, at the British Bankers’ Association Annual Banking Conference, London, 17 October 2012. * * * It is a great pleasure to be here this morning. I am going to talk about what has become the hot topic of the time, namely the role of bank regulation in macroeconomic policy. But before I do so, just a few words on progress towards creating the new system of regulation in the UK. The Treasury announced on Monday that they expect that the new regime will formally come into existence at the start of April next year. I expect that the PRA’s new home, near to the Bank of England in Moorgate, will be occupied by our supervisors shortly before then. On Monday, we published two important documents on the PRA’s approach to supervision, covering banks and insurers respectively. Next Monday, we are holding conferences at the QE2 Centre, covering banks in the morning and insurers in the afternoon. Please do come along. You can access the documents now on the Bank of England and FSA websites. I should add that Martin Wheatley and his colleagues in the FCA-to-be have also issued an approach document this week and are holding a number of events too. We are doing our best to keep you entertained! Let me turn now to the issues around bank regulation and macroeconomic policy.

Let me say something unusual now: I think that the banks deserve a thank you for the way in which they have sought to use forbearance. When I was Chief Cashier of the Bank of England, I was responsible for our work on the so-called London Approach whereby we seek to use our powers of persuasion to facilitate company re-financings which are in difficulty. That brought me into regular contact with the corporate loan restructuring bankers and I was always impressed by their commitment to helping companies in trouble. Sometimes the medicine could be hard, but there are many companies around today that would otherwise not be employing people. Now, I said earlier that we need to understand more not only about the size and cause of the capital gap but also how best to fill it. The choice of solutions matters because it can influence subsequent lending behaviour. It is often said that raising new capital dilutes existing shareholders. That is not really true in a literal sense if existing shareholders have written down the market value of the capital they own. But is true in the sense that it dilutes their claim on any future upside to the current market value reflecting the inevitable uncertainty about the future. This would be the effect of raising new equity. An alternative could be to raise the capital in the form of contingent equity, or “Co-Cos” for short.

The wood and wood products industry accounts for about a fourth of manufacturing employment. As in the rest of the country, the public sector and parts of the private service sector are important for employment in Hedmark. Business and financial services account for a smaller share than the national average. In spite of interest rate cuts and a stimulatory government budget, overall economic policy has been tight as a result of the strong krone. The depreciation of the krone exchange rate since January and the reduction in the interest rate have, however, contributed to an easing of monetary policy. In the Inflation Report, we presented two alternative scenarios for the Norwegian economy. In the baseline scenario, where the interest rate is held constant at 5½ per cent and the krone exchange rate at the average for the past month, mainland GDP is projected to increase by 1¼ per cent this year and 2 per cent next year. This is lower than what is considered the long-term growth potential in the economy. In 2005, growth is projected at 2¼ per cent. An alternative scenario, which incorporates monetary policy easing in line with market expectations - as they were then, points to higher growth over time. The rise in prices for goods and services produced in Norway is being influenced by markedly higher wage growth in Norway relative to trading partners. Wage growth moved up further last year, even in industries where profitability had weakened considerably.

A more moderate rise since last summer is related in part to lower air transport prices (increased competition between airlines) and a slower rise in house rents. The rise in prices for imported consumer goods has been pushed down by the strong krone exchange rate. The shift in clothing imports from high-cost countries to Asia and Eastern Europe has also contributed. In the near term, the appreciation of the krone over the past two years will be reflected in the underlying rise in prices. Subsequent developments will partly depend on developments in the global economy, the effects on the business sector of the high cost level, the krone exchange rate and how changes in the exchange rate feed through to consumer prices in Norway. In the baseline scenario presented in the Inflation Report, where the interest rate is held constant at 5½ per cent and the krone exchange rate at the average for the past month, inflation is projected to remain below 2½ per cent over the forecast horizon. The alternative scenario, incorporating monetary policy easing in line with market expectations, points to inflation above the target at the two-year horizon. Norges Bank has reduced the sight deposit rate from 7 to 5 per cent since 11 December last year. A lower interest rate differential has been followed by a weaker krone exchange rate. The lower interest rate and weaker krone have both contributed to a more expansionary monetary policy.

In exceptional circumstances, like Brexit, when the economy is facing profound structural change, the MPC can extend the horizon over which it returns inflation to target from above in order to balance the effects on jobs and activity. After all, even though monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, it can influence how this hit to incomes is distributed between job losses and price rises. This flexibility cannot be used without limit of course, and the MPC has set out its framework for managing the trade-off including guidance for its tolerance of the overshoot of inflation.3 Developments in monetary policy In response to the challenging post-crisis environment, the conduct of monetary policy has made important advances that have helped to shape the expectations of both market participants and the public we serve. 2 The ECB also has flexibility to pursue its inflation target, but given the absence of trade-off inducing shocks has not yet had cause to use it. The ECB General Council adopted a quantitative definition of price stability in 1998 as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%; and from 2003, they clarified that this objective was to maintain inflation rates below, but close to, 2% over the medium term. 3 See Carney M (2017), Lambda, speech given at the London School of Economics, 16 January 2017.

The macroprudential buffers that are currently implemented in the SSM banking system are of a predominantly structural nature and are thus expected to be maintained over the cycle. [9] The countercyclical capital buffer (CCyB) is the only buffer that is intended to be released in case of a downturn. However, the CCyB has only been activated by seven of the 19 euro area countries and currently represents, in the aggregate, only 0.1% of risk-weighted assets [10] A lack of releasable buffers curbs the countercyclical role of macroprudential authorities. When breaching their combined buffer requirements, banks may uphold capital ratios by disposing assets to avoid the automatic restrictions on dividend distributions. If such behaviour becomes widespread in the event of systemic stress, it can result in a credit crunch, which would aggravate the downturn. This is exactly what we observed in previous crisis episodes, and what we should avoid in the future. Macroprudential space in the form of releasable buffers could serve as a potential macro-financial stabilisation in euro area countries. The release of the buffers in a downturn should help banks to sustain the flow of credit. To this end, releasable buffers would first need to be available. In sum, we are in a situation where the overall level of capital requirements is broadly adequate, but the composition may not be optimal. It is therefore important to have a discussion on the need to reallocate capital requirements towards releasable buffers in a capital-neutral manner.

Since the beginning of the 1990s, Norway, like Sweden and Finland, has become more closely integrated into Europe. The EEA Agreement, which provides for the free movement of labour, capital, goods and services, has enhanced efficiency in many industries. The recent WTO rounds have covered a broader range of goods and services and the number of member countries has increased. Almost all countries are now members or observers, and the issues are broad-ranging. Trade policy has paved the way for the change in the international division of labour which has brought benefits to Norway and the other Nordic countries. Third, the tax reform in 1992 was a crossroads. It made it possible to finance the welfare state with a substantially lower loss of efficiency and wealth creation than previously. The key was to reform the deduction schemes for personal and company taxation and to introduce more equal tax treatment of companies across industries and aim at neutral taxation of capital income and interest. Marginal taxes could be lowered. The tax deductibility rate for interest was considerably reduced for households. It became more advantageous to save and less advantageous to borrow. The pressure on our tax system has also been reduced because public spending control has improved over the past 10-15 years. BIS Review 15/2007 15 Fourth, Norwegian credit markets have undergone structural changes.

News conference 15 December 2022, 10.00 am Introductory remarks by Andréa M. Maechler In my remarks, I will talk in more detail about the implementation of today’s monetary policy decision, which Thomas Jordan has already touched on. I will start, however, by giving you an overview of how we have steered interest rates since the switch to a positive SNB policy rate in September. The switch from a negative to a positive SNB policy rate required us to make an adjustment to the implementation of our monetary policy in the money market. The new approach comprises two elements: reserve tiering – that is, tiered remuneration of the sight deposits that banks and other financial market participants hold at the SNB – and reserve absorption. This approach has proved successful. Following our monetary policy decision on 22 September, secured short-term Swiss franc money market rates moved quickly towards the new SNB policy rate (cf. chart 1). We are also continuing to see solid activity among participants in the money market, which ensures a robust basis for the calculation of SARON. From the outset, the market responded favourably to the deployment of our monetary policy instruments to absorb liquidity. On the very day of the monetary policy assessment in September, we started conducting repo transactions on a daily basis and issuing SNB bills on a weekly basis (cf. chart 2). In this way, we were able to reduce the liquidity supply in the money market sufficiently to allow us to steer interest rates effectively.

The question should thus be rephrased as “How can we identify that the build-up of risk is approaching a critical stage?” International evidence suggests a palette of quantitative early warning indicators that are reliable with respect to predicting banking crises and financial instability. For instance, real estate boom-bust cycles are particularly damaging when associated with increased leverage in both the real and financial sectors. To obtain a more accurate picture of the intensity of systemic risk, a combination of indicators should be monitored simultaneously.13 In this spirit, the Swiss approach relies on a combination of indicators to assess whether, and to what extent, the activation, adjustment or deactivation of the CCB is warranted.14 These indicators have been chosen based on their past performance as early warning indicators both for Switzerland and internationally (slide 6). Still, a purely mechanical response to financial stability risk depicted by a set of indicators, while providing a certain degree of transparency, is risky. For instance, it would leave no room for considering the influence of developments not captured by these indicators. As a consequence, an element of discretion should be embedded in the decision to activate the CCB, or not, at a given point in time.15 The current situation provides a good example: The medium-term risks to financial stability remain high, with imbalances in certain segments persisting. Some recent data releases, however, indicate a possible slowdown in momentum in Swiss mortgage and real estate markets during the second quarter of 2012.

The most important concern in this regard is that, if the CCB generates capital constraints at some banks, these banks will need to decide which sector to keep lending to. It may seem reasonable that institutions will prefer to keep lending to the booming sector, while cutting back on lending to other sectors. The design of the CCB takes such undesired side-effects into account. In particular, the sectoral approach alleviates this problem to some extent. By increasing the cost of granting credit to a given sector (real estate lending) relative to others, it should discourage lending to the former as it is “penalised” in terms of higher capital requirements. And, thanks to its dynamic nature, the CCB can be flexibly adjusted, should it still have undesired consequences in other segments of the credit market. Conclusion To sum up, the global crisis has clearly stressed the need for a more comprehensive approach to financial stability. The potential cost of a systemic crisis is significant. Remaining idle is no alternative. We must insist on addressing systemic risk issues head-on. This is the intent of macroprudential instruments. In Switzerland, financial stability risk is currently building up, driven by persistently strong momentum in the mortgage and real estate markets. Against this background, the availability of a tool such as the CCB is a significant step forward. The CCB is a “soft”, incentive-oriented instrument based on the principle of prudence. It can and will be used in a balanced and flexible way to deal with specific cyclical risks to financial stability.