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I should first clarify that many of the aspects to which I will refer, especially those relating to the budget balance and revenue and expenditure aggregates, are based on the information provided in the Draft Budgetary Plan for 2021 which the Government published a few weeks ago. This Plan is based on the same macroeconomic forecast that underpins the Draft Budget and includes almost all the revenue and expenditure measures. There are two advantages to incorporating this information. 18 First, not only does the Draft Budgetary Plan include the budgetary outlook for the State and Social Security for 2021, but it also includes the general government outlook, and in addition, in National Accounts terms. In a country as highly decentralised as Spain, to analyse budgetary policy correctly it is essential to take account of general government. Second, the Draft Budgetary Plan does not include the increase in general government revenue in 2021 resulting from the European funds linked to the NGEU programme, nor the expenditure that these monies will fund. Accordingly, in comparison with the information contained in the Draft Budget, it provides for a more exhaustive analysis of the composition of public finances in 2021. 2.1 Main public spending measures Overall, the Draft Budget envisages a highly significant increase of 24% in total expenditure and of 26% in primary expenditure compared with the 2020 budget outturn projection.

High uncertainty persists over the intensity of the recovery in the closing months of the year, given how the pandemic has recently evolved in Europe. The across-the-board roll-out of new containment measures to counter the health crisis might lead to a significant slowdown in the rate of growth of activity, and even to a contraction, at least in some countries or sectors. For the year as a whole, the baseline scenario of the ECB’s latest forecasts points to an 8% reduction in euro area GDP in 2020, followed by a 5% increase in 2021. The estimated contraction for this year widens to 10% in the harshest scenario (based on a greater impact of the pandemic, with more severe restrictions and a delay in any possible health-related solution), which would moreover entail a very slight recovery, of 0.5%, in 2021. As to the inflation outlook for the area, the ECB augurs a very weak increase this year, of only 0.3%, rising in 2021 to 1%, a figure nevertheless some distance off the medium-term price stability objective. 2 1.2 Recent developments in the Spanish economy In Spain, the impact of the pandemic on economic activity has been particularly marked, and much more acute than in past recessions. GDP duly posted historical quarter-onquarter contractions in the first half of this year (5.2% in Q1 and 17.8% in Q2), essentially as a result of the rapid spread of the virus and of the measures of confinement and restriction of activity adopted to contain the pandemic.

Under these circumstances, major banks are becoming more active in extending loans, while carefully evaluating the credit risks involved. However, credit demand for economic activities such as business fixed investment remains weak. In addition, firms continue to reduce debts as part of their balance-sheet restructuring measures. As a result, credit demand in the private sector has continued to be basically stagnant, and thus private banks’ lending has remained sluggish. Issuance of corporate bonds and CP has been steady. The growth in money stock (M2+CDs) continues to slow reflecting the above-mentioned situation. In this financial environment, corporate financing conditions are easing, and the lending attitude of financial institutions is perceived by firms as less severe. It continues to warrant careful monitoring how these favorable developments in corporate financing environment will affect economic activities. This BIS Review is available on the BIS website at www.bis.org. BIS Review 33/20009 6

Thirdly, as concerns over the security of corporate and government bonds grew, the premia investors have had to pay against bond defaults have increased very significantly. The perceived decrease in the creditworthiness of key European companies and Western European sovereign bonds was highlighted by the very sharp rise of several benchmark credit default swap (CDS) indices for these markets.1 The foreign exchange market has been of particular concern to the SNB, as the Swiss franc’s safe haven properties and the growing dearth of alternative “safe” assets led to massive movements in our currency, which required the SNB to act. In early August, the real effective exchange rate of the Swiss franc peaked at an estimated level of almost 40% above its post-1990 long-term average.2 The extent of this deviation was very rare, in historic terms, as the previous high point, at the end of 1995, was only 12% above the same long-term average. Since the introduction of the euro in 1999, the volatility of the EUR/CHF exchange rate has averaged approximately 5%.3 In August it rose to almost 30%. As chart 1 shows, three of the largest ever daily negative movements in the EUR/CHF exchange rate also occurred in this period. Since the introduction of the minimum exchange 1 The Markit iTraxx Europe Index, for example, which is composed of 125 investment grade entities from six sectors (auto, consumer, energy, financial, industrial and TMT), more than doubled between July and September.

For financial institutions, while cyber threats may have been regarded as a cost of doing business at one point, it is not an exaggeration to say that they are now viewed as potential existential threats, not just for individual firms but also for the broader financial system and critical infrastructures that support it. As central banks with broad mandates for financial stability, this is certainly a concern for us all. We recognize the challenges and complexities in strengthening prevention, detection, and incident response regimes around fraudulent payment instructions. Users of financial messaging services such as SWIFT span the full range of IT sophistication and capacity, and remediating deficiencies in prevention and detection may require a substantial re-orientation of priorities and resources for some institutions. Overcoming these obstacles will be no easy task, but so long as there is a weak link in the cybersecurity chain criminals will seek to exploit it. As we face the common challenges of strengthening our cybersecurity defenses and payment controls, the need for cooperation is greater now than ever. The Federal Reserve stands ready to engage in further dialogue and cooperation with both its foreign official accountholders and fellow central bank service providers in addressing these challenges. 5/8 BIS central bankers' speeches Conclusion In doing so, we as a community can ensure that the provision of account services among central banks continues to bear the hallmarks of safety, confidentiality, and reliability which are essential to the execution of our public mandates.

President Wilson, having won reelection in 1916 on the claim of having kept the U.S. out of the Great War and observing strict neutrality, had directed the Federal Reserve Board in Washington to issue a clear-cut warning to U.S. banks not to invest in a pending large placement of British Treasury bills in the U.S. market. The immediate and worldwide effect of the statement was to give the impression that the U.S. had “broken with Britain,” an impression which officials were soon scrambling for ways to counteract.5 The result was the Federal Reserve Board’s decision, contrary to the terms of the account negotiations and to the consternation of the New York Fed, to unilaterally announce to the public the account agreement with the Bank of England. The whole episode spoke perhaps to the Fed’s inexperience in matters of delicate international financial diplomacy. In any event, the Bank of England magnanimously let the matter slide— noting that mistakes “may arise even in the best regulated families”—and the account agreement was executed on May 3, 1917 and operationalized on June 20, 1917.6,7 Andrew Hauser will provide more insight into this fascinating period in his remarks in a few minutes. As expedient as the accounts were for wartime needs, the historical records show they were also motivated by ambitions of the Fed’s first leaders to establish the dollar as a major international currency and, for Benjamin Strong, to establish New York as a great international financial center to rival London. They had their work cut out for them.

BIS central bankers’ speeches 11 Figure 11 Inflation expectations (*) (annual change, percent) 5 5 4 4 3 3 2 2 1 1 0 0 10 10 10 10 Jul. 10 10 11 One year ahead 11 11 11 Jul. 11 Two years ahead (*) Economic Expectations Survey. Source: Central Bank of Chile. Figure 12 Consensus Forecasts for inflation (*) (percent) 2011 5 5 5 4 4 4 4 3 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 Developed economies Emerging Asia 2012 5 Latin America Emerging Europe (*) For 2011, uses CF forecasts between September 2010 and September 2011. For 2012, as from January 2011. Geometric averages of y-o-y mean inflation forecast for the economies of each region except for Latin America, which uses December-to-December inflation forecast. Developed economies are the U.S., Japan and the Eurozone; Latin America includes Brazil, Chile, Colombia, Mexico and Peru; Emerging Asia includes China, India, Indonesia, Malaysia, Singapore, South Korea, Thailand and Taiwan. Emerging Europe includes the Czech Republic, Hungary, Poland and Russia. Devloped economies and Emerging Asia consider information through October 2011; Latin America and Emerging Europe, through September 2011. Source: Consensus Forecasts.

Finally, the price hikes began feeding back into inflation expectations. Facing the resurgence of inflation, we sped up the process of raising the monetary policy interest rate (MPR). Between June and September of 2008, we increased it 200 basis points. In September of that year, when we still thought we would continue to raise the interest rate in order to bring inflation back to the target – as we had said in Congress early that month – came the Lehman Brothers debacle, and the rest is history. Uncertainty and fear took over investors, consumers and entrepreneurs. Consumers postponed expenses; firms interrupted their projects and depleted inventories; manufacturing production collapsed; demand plummeted; commodity prices fell sharply and the global recession followed. Chile was not spared. Domestic demand also fell with unprecedented force. Sales came to a halt (figure 5). Although the inflation scenario was still complex – it peaked at 9.9% in October 2008 – , a slowdown was foreseen that suggested changing the orientation of monetary policy. Growth projections plummeted unusually fast in every region of the world, going from a moderation to a recession (figure 6). Chile was no exception. In November 2008 we modified our predictions and pointed out that the economic slowdown would entail a drop in inflation, not only because of the sharp fall in commodity prices, but mainly because of the sudden creation of output gaps. We then observed that most likely we would begin cutting down the MPR in the coming months, which set out the process of financial easing.

This present economic recovery is taking place in a sound economic environment. Inflation level remains under control even though the balance of risks to price stability has recently gone up: some pressures have resulted from recent oil price rises or may result from some capacity constraints that could be encountered in the course of next years. Needless to say that the Governing Council of the Eurosystem has been and will remain vigilant in order to secure our primary objective of price stability. Besides, the current account is slightly in surplus and fiscal deficits are, in the euro zone as a whole, on a downward trend. It is worth stressing that European economies have never been creating so many new jobs so fast. The past two years (1998 and 1999) have seen very rapid job growth (about +1.5% a year) and a very big decrease in unemployment. In France, the rise has been sharper since almost 900,000 new jobs were created by enterprises (excluding Government administration) from December 1996 to December 1999 i.e. +6.6% over three years. With the economic growth speeding up, we can expect a further drop in the unemployment rate which is presently below 10%. Due to this economic recovery, the growth differential between the US and the euro zone is progressively to disappear. This gap between the two economic zones in terms of economic growth has resulted in the past years from the lag between their economic cycles.

1.3 Transparency and enhanced surveillance The efficiency of international capital markets depends on the availability of reliable and timely information both on debtor countries and market participants. – As regards the public sector, many efforts have been achieved, such as the IMF codes of good practices on transparency in the field of fiscal policy or monetary and financial policies or the promotion by the IMF of statistical standards (the so-called SDDS). – International Financial Institutions have also continued to proceed toward greater transparency. Several initiatives have been launched, I will particularly point out the participation of 60 countries on a voluntary basis in the pilot experience for the release of IMF article IV reports. – As far as the private sector is concerned, parallel efforts need to be pursued. Progress may take the form of improved disclosure on a voluntary basis, more demanding statistical reporting and extended requirements for non-transparent segments of the financial markets. Thanks to improved transparency important progress is being made to strengthen IFI’s surveillance in key areas, including financial sector issues, external debt and capital account developments, exchange rate policies. As Prime Minister Fraser has mentioned, the definition of internationally agreed standards and codes is also strongly impacting the IMF surveillance; the implementation of these standards will reduce emerging market economies’ financial vulnerabilities and together with enhanced transparency, improve market discipline and market participants’ ability to better assess the risks of their investment decisions.

The problem is not the idea of the euro. It is much more about repeatedly reviving citizens’ awareness of the benefits of a united Europe and a single currency. And about creating a solid and sustainable economic basis. I have shared with you some proposals on how monetary union could be designed so that it responds to people’s wishes and durably fulfils its objectives. Are these proposals new? No, these and other proposals for the further development of monetary union have been around 4 4 Asdrubali, P., Sørensen, B.E. Yosha, O (1996), “Channels of Interstate Risk Sharing: US 1963–1990”, Quarterly Journal of Economics, 111(4), 1081–1110. BIS central bankers’ speeches for quite some time. This shows that we have no problem understanding, but we do have a problem implementing. It’s up to politicians to create a framework that is appropriate for the idea of a single currency – at national as well as at European level. The longer politicians stand still, the more people will lose faith in Europe. One sign of this is that political parties which want to move backwards have recently been gaining support. At the same time, the European Central Bank is being pushed into a role for which it was not created. Monetary policy can neither solve structural problems at national level nor institutional problems at European level. On the contrary, the more that is expected from monetary policy, the more likely it is to be overburdened. The ECB alone cannot create growth and prosperity for all.

Among the households of people employed in industries less affected by the pandemic, saving by that half of households with least saving is higher: up to 40% of their annual income. 3 Taking as an indicator of financial vulnerability of the firm the ratio between its debt and its assets (net of non-interestbearing debt), and for the vulnerability threshold a value for this ratio of 75%. 4 See P. Hernández de Cos (2021): "The challenges to the banking sector a year after the outbreak of the COVID-19 pandemic", Speech at the Observatorio de las Finanzas event organised by El Español/Invertia. 2 With a view to the future, the development of various vaccines and the start of their roll-out to the population has allowed us to discern a horizon in which this crisis is resolved. Yet uncertainty remains high, especially that arising from the course of the pandemic and the vaccination process, and the consequences of the crisis on the productive system and on agents’ behaviour. Against this background, the projections presented last Tuesday by the Banco de España continue to complement the baseline scenario with another two alternatives, with different assumptions about how the main areas of uncertainty will evolve.5 The first point of uncertainty evidently pertains to the epidemiological situation.

Even if the central bank could, through intervention in the foreign exchange market or actions to influence domestic interest rates, fix the nominal exchange rate at some particular level, and even if it succeeded in fixing not simply the bilateral rate but the trade-weighted rate, this would only determine the real rate for the short term. This is because any monetary policy actions, such as exchange market intervention or changes in interest rates, in due course have a feedback effect on domestic inflation. More specifically for example, depreciation tends to raise prices. In a market-based economy the central bank, if it already uses monetary policy to set the nominal exchange rate, cannot separately control inflation. Eventually any initial gain in competitiveness from depreciation is offset by the inflationary feedback, most obviously so in highly import-dependent economies such as Hong Kong. Empirical studies do not reject the hypothesis that this feedback is eventually 100%, although the full offset may occur only after a considerable lapse of time. Meanwhile the real rate is also affected by movements in price levels in other economies, which lie beyond the home central bank's influence. In sum, the central bank cannot, except perhaps for the short term, dictate the real exchange rate. Equilibrium of the real rate The second misconception about the real exchange rate is that a weak rate (if it could somehow be arranged) would necessarily be a good thing, because of the benefit which an improvement in competitiveness, thus measured, would bring to the economy.

Mugur Isărescu: Regional economic outlook - Europe Opening speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the conference "Regional Economic Outlook - Europe", Bucharest, 17 November 2017. * * * Your Excellences, Ambassadors, Members of the diplomatic corps, Ladies and gentlemen, Distinguished guests, It is my pleasure to welcome you to the National Bank of Romania. The Board and I are honored to host the presentation of an important IMF document, one of their flagship reports, namely “2017 Regional Economic Outlook Report”. It is a tradition for the National Bank of Romania to host this event and we are pleased to greet the presence of many foreign diplomats – this is a clear testimony of its importance. Allow me to extend a warm welcome to Mr. Jeffrey Franks, who has been a long-standing friend of Romania. Mr. Franks is a veteran of the Fund, who – over the last 25 years – has managed challenging assignments, including the resident offices in Ukraine and Ecuador, and has led teams in Pakistan, Romania, France, Belgium, and Paraguay. He was the IMF Mission Chief for Romania for almost 3 years, from 2009 till 2012. As many of you may remember, during his mandate as mission chief, Romania overcame a very difficult period, with the support of the IMF, WB and EC.

This policy may provide a direct support to aggregate demand, through fiscal transfers, and an immediate and targeted improvement of liquidity to enterprises, through the postponing of the payment of taxes and through the sovereign guarantees programs. The two introduced fiscal packages, so far, provide for a maximum potential stimulus at around 3% of GDP. Even without considering the negative effect on public income, this stimulus transfers to the balance sheet of public sector a considerable part of the financial costs of the crisis. On its side, the Bank of Albania has increased the dosage of the monetary stimulus. This stimulus has been taken the form of the reduction of policy rate, already in its historical minimum of 0.5%, aiming to boost lending and reduce the servicing cost of existing loans. Also, it has been in the form of removing the quantitative limits of liquidity injection into the system, aiming to a better supply of the banking market and the Albanian economy. The volume of liquidity that we inject every week in the system fluctuates around the level 2%. In addition, the Bank of Albania has undertaken operational measures for guaranteeing the supply of economy with cash, in response to its increased demands. In parallel, the Bank of Albania – in an agreement and good understanding with banking industry – has carried out regulatory amendments which ease the postponing with one quarter of the credit payment for firms and households which face temporary financial difficulties.

A broad-based analysis of the data, taking the appropriate medium-term perspective and allowing for these considerations, confirms the underlying strength of money growth. In particular, the pace, maturity and sectoral composition of borrowing from banks suggest that, at the level of the euro area as a whole, the availability of bank credit has, as yet, not been significantly affected by the ongoing financial tensions. This notwithstanding, growth in loans now shows signs of moderation, as previously anticipated, with corporate demand for credit slowing. At the same time, the growth of loans to households continues to follow the downward trend observed over the past few years, as a result of higher short-term interest rates and housing market weakness in several parts of the euro area. To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment of upside risks to price stability over the medium term. The information that has become available since the last meeting of the Governing Council has confirmed that annual inflation rates are likely to remain well above levels consistent with price stability for a protracted period of time. The growth of broad money and credit aggregates is now showing some signs of moderation, but the still strong underlying pace of monetary expansion points to continued risks to price stability over the medium term. The latest economic data also confirm the weakening of real GDP growth in mid-2008.

Second, manufacturing costs have increased sharply since 1998. Up to the summer of 2000, this cost increase was to some extent offset by a weaker krone. The appreciation of the krone has highlighted and exacerbated the deterioration in cost competitiveness. On balance, it appears that cumulative wage growth in Norway will be a good 15 per cent higher than in other countries from 1998 to 2003. The krone is now about 7 per cent stronger than the average for the 1990s. BIS Review 51/2002 3 Third, as a result of the fiscal guideline, the internationally exposed sector is subject to additional pressure. Over time, the phasing in of petroleum revenues will lead to restructuring and the transfer of resources from the exposed to the sheltered sector. Fourth, the response patterns in stabilisation policy function in a different way from previously. Under the “Solidarity Alternative”, the response pattern consisted of countering labour market pressures and strong wage growth by reducing growth in public spending (or, if appropriate, by strengthening government revenues). This had a beneficial impact on manufacturing industry. Today, monetary policy shoulders more of the burden. This may sometimes result in a strong krone exchange rate. Fifth, growth in the global economy is sluggish while, at the same time, oil prices are high. The fall in share prices curbs economic growth among our trading partners. Markets for Norway’s export industries are stagnating, but at the same time high oil prices are providing a stimulus for some sectors of the Norwegian economy.

High-level lecture – College of Europe, 31 March 2021 Europe’s growth gap: reconciling Keynes and Schumpeter Speech by François Villeroy de Galhau, Governor of the Banque de France Press contact: Mark Deen ([email protected]), Déborah Guedj ([email protected]) Page 1 sur 14 Dear students, Professors, Ladies and Gentlemen, I am delighted to be with you today, and I extend my warmest thanks to Professor Béatrice Dumont for her kind welcome speech. For obvious and unfortunate reasons, I was unable to come physically to the magnificent city of Bruges, this architectural jewel of the Middle Ages. Bruges is also a highly significant place for a central banker, as it was the birthplace of stock markets in Europe, in the 14th century. I also stand before you as a committed European, born and raised at the FrancoGerman border, present in Maastricht 30 years ago, and the College of Europe reflects this fruitful European spirit that I particularly cherish. What I want to do today is to avoid "langue de bois". In these troubled times, we need to speak “truthfully” before acting positively. In this respect, I would like to address the following issue: why is Europe lagging economically behind the United States? In order to find the right cure, we first have to elaborate on the right diagnosis. I. The diagnosis: Europe is an economic heavyweight, but lacks speed I would like to start with our undeniable successes.

SOFR is sometimes criticized for the lack of a term rate, but my message is don’t wait for a term rate to get your house in order. Don’t use that as an excuse to halt the vital work of understanding where your exposure to LIBOR lies and how to prepare your business. The OSSG has produced a document explaining how market participants can use overnight risk-free rates, as opposed to waiting for term rates.15 In addition, the New York Fed is preparing average SOFR rates and a SOFR index, with the goal of publishing them daily by the middle of next year. Contracts that reference U.S. dollar LIBOR continue to be written, which only serves to increase the level of systemic risk. In rare cases where for some reason LIBOR must be referenced, robust fallback language that accounts for a future without LIBOR needs to be included. I also strongly encourage market participants to address legacy LIBOR-linked contracts. There’s no one-size-fits-all approach for closing out or converting existing LIBOR positions so market participants need to get ahead of this issue. We know this is difficult and complex work. At the New York Fed, we’re working to identify where we have potential exposure to LIBOR and other non-IOSCO-compliant reference rates. We have teams examining monetary policy operations, foreign reserve management activities, and trading agreements with counterparties. We want to hear your voice so we can incorporate your feedback and facilitate the development of the tools you need to ensure an orderly transition.

This past Friday we announced a plan of continued daily overnight repo operations through October 10, accompanied by three twoweek term repo operations that span the month end.1 The goal of these actions is the same as for recent open market operations: foster conditions in money markets to keep the federal funds rate within the target range. This episode reminds us all of the importance of having well- functioning markets and the vital role that the Federal Reserve plays in supplying liquidity to the system when markets are under stress. We were prepared for such an event, acted quickly and appropriately, and our actions were successful. Friday’s announcement on open market operations to address potential quarter-end funding pressures on interest rates followed this same approach: quickly diagnose the problem, develop the right action plan, and execute that plan. At the same time, it is equally important that we examine these recent market dynamics and their implications for the liquidity needs in relation to the overall amount of reserves held at the Federal Reserve. We will continue to monitor and analyze developments closely. As Federal Reserve Chair Powell stated in his most recent press conference, the FOMC will assess the implications for the appropriate level of reserves and time to resume organic growth of the Federal Reserve’s balance sheet consistent with the successful execution of the FOMC’s ample reserves framework.2 That’s enough on recent events for now. I’ll turn to another very important issue, reference rate reform.

We can consider how the further development of market infrastructures can be an important part of this process. 2. The role of market infrastructures In the second part of my remarks today, I would like to consider the role of market infrastructures. Market infrastructures have proven very resilient to the crisis. 11 Resilient market infrastructures also play an important role in helping to address some of the issues that have been identified in the money markets. In this regard we can usefully build on the CPSS’ analysis of areas for further development and for enhancing market infrastructures in repo markets. The CPSS has identified seven issues directly or indirectly related to repo market infrastructure that may affect the resilience of repo markets. I would like to pick up on two of these seven issues now in the context of euro area money markets. The first issue concerns “effective protection against counterparty credit risk”, which I believe can be addressed to some extent by the use of CCPs, while the second issue relates to “the inefficient use of (high-quality) collateral due to constraints within repo clearing and settlement arrangements”, which is being addressed via collateral optimisation initiatives. a) Role of central counterparties (CCPs) CCPs play a major role in reducing counterparty risk, thereby mitigating the potential risks associated with the drying-up of funding sources.

The rise and fall of the EURIBOR-OIS spread, of the use of the ECB’s deposit facility and the proportion of cross-border transactions all indicate that banks are more risk-averse than they were before the financial crisis. Money markets, especially unsecured ones, suffer from counterparty risk, that is, the fear of not being repaid. Accordingly, driven by the desire to protect and ensure repayment, transactions in money markets have become both more short-term and secured. There is no official data on the overall size of the repo market in the euro area, although surveys are regularly conducted by ICMA and the ECB. According to the latest ICMA survey, the total value of repo contracts outstanding on the books of the 62 participating institutions was € trillion in June 2012, down from € trillion in December 2011. 6 The ECB’s Money Market Study of 3 See, for example, F. Heider, M. Hoerova and C. Holthausen, “Liquidity hoarding and interbank market spreads: The role of counterparty risk”, ECB Working Paper No 1126, 2009. See also B. Cœuré, “The importance of money markets”, speech delivered at the Morgan Stanley 16th Annual Global Investment seminar, Tourrettes, Provence, 16 June 2012. 4 Injecting liquidity in the financial system increases the assets of the Eurosystem, which leads to an equivalent increase in liabilities, in this case in the form of more deposits from banks. 5 A similar cessation of interbank lending after the Lehman bankruptcy has been documented in the United States.

There were signs of strain in particular segments of these markets, such as dislocations in forward exchange rates and a notable decline in the liquidity of currency swaps. However, market participants were generally able to execute trades and manage currency exposures in these markets on an uninterrupted basis. The resilience of foreign exchange markets owed in part to the availability of CLS Bank for 2 BIS Review 40/2010 eliminating time gaps in the settlement of different currencies, to the efficient collateral exchange achieved through credit support annexes and to the standardization of trade documentation. Credit intermediation and market disruption While those capital markets demonstrated meaningful resilience to financial stress, that was not the case for other parts of the financial system – namely, those involved in more complicated forms of credit intermediation. Many of the most acute problems were driven by a build-up in leverage in which large amounts of opaque, illiquid, long-term assets were financed by short-term liabilities. These activities took place both in traditional financial intermediaries and in what is often referred to as the shadow banking system. The shadow banking system performs a function similar to that carried out by banks and other financial institutions. In particular, it takes the short-term, highly liquid investments that households and other investors want to hold, and it uses them to fund the longer-term, relatively illiquid loans that businesses and households demand to finance their economic activity.

The clause in the law dealing with the transfer to the Treasury makes some for provision for whether the Bank’s capital has reached a specified minimum relative to the size of the domestic credit system. The Central Bank Act states that an amount equal to two-thirds of the Central Bank’s profit shall be paid annually to the Treasury. However, the Bank pays only one-third of its profit to the Treasury if its capital is equivalent to less than of 2.25% of the amount of lending and domestic securities in the credit system. At present the Bank’s capital is still a long way short of this legal reference level, and its annual profit will not suffice to strengthen it markedly anyway. Growth has not only soared in the Icelandic credit system, but on an increasing scale each year has also been associated with foreign markets, where credit institutions’ activities have expanded enormously. These changes also give grounds for considering other terms of reference for foreign reserves than import levels alone. As the Prime Minister stated in his speech earlier, the government responded positively to the points raised by Central Bank and authorised it to borrow abroad in the name of the Treasury in order to strengthen its foreign reserve substantially, while the government was also mandated by parliament to strengthen the Bank’s capital position. The Board of Governors would like to thank the government for such a good, firm response.

So far, the second round impact of food prices has been limited and confined to selected sub-components of the overall index such as restaurants and catering services. The potential second round impact of elevated food and energy prices, however, on overall economy should not be overlooked. Therefore, the CBRT will keep a close eye on the price setting behavior along with various core inflation measures. In the upcoming period, the Central Bank will tolerate the first-round impacts on inflation resulting from food, energy and one-off adjustments in administered prices, yet remain responsive to the second round effects such as possible deterioration in general pricing behavior. The Central Bank closely monitors the developments in global markets. The potential impact of ongoing difficulties in the US credit markets, on the financial markets and the real economy, continue to create uncertainty about the course of the global economy. Our baseline scenario assumes a soft landing in developed economies, with no major portfolio shock on the Turkish financial markets. However, the probability of a sharper than expected slowdown should not be ruled out. While the possibility of a sharper-than envisaged slowdown in global economic activity, through its potential impact on the exchange rates, may constitute an upside risk for the short term inflation outlook, it also poses downside risks for inflation in the medium term through a possible weakening in external demand and domestic credit.

Iceland’s external position has proven to be sustainable. The trade surplus has been around 8% of GDP since 2009. This is the longest continuous period with a surplus over 5 % of GDP in the history of the data, which extend back to 1875. The current account balance as a whole has averaged 5.5% of GDP per year; that is, excluding the effects of the failed banks and other factors that do not reflect Iceland’s financial burden. The current account balance has reduced Iceland’s debt, cutting underlying net external debt almost in half since year-end 2008, to about 45% of GDP by the end of 2014. But all of this does not change the fact that Iceland still faces a balance of payments problem, which is reflected in the fact that a too large share of its debt is too short-term, and a part of the debt takes the form of possibly volatile ISK assets held by non-residents. This situation could put substantial pressure on the BIS central bankers’ speeches 1 exchange rate or the Central Bank’s foreign exchange reserves if these ISK assets were free to exit the country. The three new commercial banks have also performed well in a number of areas, as can be seen in various indicators, including their capital ratios, which have risen from a 2009 average of 16% to last year’s average of nearly 29%.

Second, leverage can evolve greatly over a short period of time. Third, and perhaps most importantly, there are different forms of leverage, some of which are unlikely to be captured reliably by any aggregate industry data. The most basic form of leverage pertains to financial intermediaries such as global investment banks extending credit facilities to hedge funds to allow them to invest funds in excess of their own capital base. Such credit facilities are usually at the root of industry-wide or strategy-specific estimates of leverage in the hedge fund industry. Following the collapse of LTCM, much of the regulatory discussion focused on this type of leverage by attempting to strengthen the relationship between financial intermediaries and hedge funds to improve counterparty risk management. A second, more recent form of leverage in the hedge fund industry is related to the rapidly growing fund of funds industry. A number of fund of funds managers have begun to leverage their products by either using their own balance sheet or, alternatively, borrow credit facilities from other financial firms with large balance sheets. 2:1 leverage ratios are typical. In some cases, leverage ratios can be as BIS Review 8/2005 3 high as 4:1. This form of leverage, though probably still limited, is unlikely to be captured by any industry leverage figures. Finally, the most complex form of leverage that hedge funds employ is what I would refer to as instrument leverage. This type of leverage is embedded in the use of most kinds of derivative instruments.

Thank you Chair INTERNATIONAL MONETARY AND FINANCIAL COMMITTEE the IMFC Deputies meeting Tuesday, September 20, 2022, Statement by Mr. Mouatassem BOUDIAF Deputy Governor Bank of Algeria On behalf of Islamic Republic of Afghanistan, Algeria, Ghana, Islamic Republic of Iran, Libya, Morocco, Pakistan, and Tunisia Session 2 MD’s Global policy Agenda Thank you, Chair. I will be brief. We welcome the Managing Director’s GPA, which we believe is balanced and well focused. We particularly welcome and strongly support the GPA’s emphasis on “acting together and acting now” to alleviate the immediate hardship due to successive years of global crises, and to build resilience for addressing future shocks. Food insecurity and debt distress are two key challenges facing the developing countries where a global collaborative approach is most urgently needed. It is also important to recognize that the current geopolitical fragmentation will likely have major longer term implications for the global economy and lasting impact on global trade, including energy, and supply chains, for which we have to prepare. We welcome the Fund’s readiness to enhance and adapt its lending toolkit to address not only the immediate financing needs related to the two overlapping crises, but equally importantly, the future crises that could not be easily anticipated. In this connection, we welcome the establishment of the RST and urge members with strong external positions to meet its funding requirements, including through additional pledges to channel SDRs and bilateral contributions.

Before I start, however, there are three important points to bear in mind. The first is that credit or debt is not “bad”. It is an essential part of what makes modern economies grow. It facilitates consumption smoothing, house purchases, investment and risk management. The last eight years have demonstrated what happens to the economy when the credit mechanism is badly damaged.2 Nor does the stock of credit to GDP have to be constant; there are good reasons, as I will try to set out, why advanced economies may have been able to sustain and indeed benefit from an increase in the level of credit to GDP. Our economy and society would be very different, and I suspect much less congenial if the credit to GDP ratio were at its 1880 level of 16%. The issue rather is what are the financial stability and broader economic risks for the UK if credit consistently grows faster than GDP and as a result debt to income resumes its upward path? That cannot continue indefinitely. Trees cannot grow to the sky. The second important point to make at the outset is that the great financial crisis of 2007 was not triggered by UK households’ build up of debt. But the debt made our economy much more vulnerable when the shock hit us. And high stocks of household debt – especially when secured on housing assets – have been at the root of many other financial crises in the past. I will say more about this later on.

And indeed, recent work in the Bank of England suggests that much of that fall could well be due to persistent structural factors (Chart 5).7 These factors include a slowing in the underlying global economic growth rate, the rise in saving due to demographic forces, lower desired investment given a lower relative price of capital, changes in the income distribution, excess saving in emerging markets and declining public investment. 7 4 Rachel and Smith (2015) attempt to decompose the substantial fall in real rates over the past 30 years. Although acknowledging significant uncertainty, they account for around 400 basis points of that fall, the majority of which they attribute to structural factors. In another piece of Bank of England work, Waldron and Zampolli (2010) calibrate a model of the UK household sector to examine the behaviour of household debt between 1987 and 2006 – their model can explain most of the rise in debt and house prices if households expected lower real interest rates to persist. BIS central bankers’ speeches However, not all of these factors will support a higher level of debt. In particular a fall in the potential growth rate of the economy will lower the long-term real interest rate. But it will also lower long-term income so the overall impact on house values and debt sustainability is likely to be neutral.

With mobile payments, the cost of travel to a financial service provider is reduced to pressing a button, the risks associated with carrying cash are managed by simply securing a pin number. Since the mobile telephone industry has seen tremendous growth in its coverage, mobile payments seems to be the inevitable retail payment method that reaches out to large segments of the population a way that the conventional ones do not. Chairperson, notwithstanding these advantages, mobile payment platforms are not without challenges. At the centre of these challenges is the need to protect the consumer or user of mobile payment platforms. Undoubtedly, the number of people with access to mobile payment services in Zambia has significantly increased since the early days of Celpay. However, for us at the Bank of Zambia, as regulators we have taken note of how growth has been accompanied by a change in the character of mobile payments. The line between a mobile payment product and a conventional banking product has now become a fine line. For this reason developing appropriate regulations that protect the consumer against fraud and such risks anti-competitive practices, is a critical and necessary response to the innovations brought about by the mobile telephone technology. But it is important to understand that by its nature technological innovation can achieve an overnight quantum leap by the sheer ingenuity of one person. Where this happens, there is a danger that the development of appropriate regulation can lag behind technological advancement.

Chairman, the 2009 Finscope Survey highlighted a number of barriers to financial inclusion, which were broadly categorized into  The physical access or proximity to financial institutions  Affordability of financial products BIS central bankers’ speeches 1  Appropriateness of financial products  Regulation barriers such as know your customer requirements Chairman, we know, for instance, that the apparent high cost of providing banking services to a population that is largely subsistence and therefore financially challenged excludes many from accessing financial services. Brick and mortar establishments are expensive to set up and even when they are set up, distance to the nearest branch for many, particularly for those in the rural areas becomes a problem. The findings relating to the cost of providing financial services contained again of the Finscope™ Zambia Survey (2005) goes some way in underscoring the nature of the problem. The survey found that about 32% of the banked reported that it costs them between K5,000–K10,000 to get to their bank while about 26% spend between K11,000–K25,000. At these cost levels it is not difficult to see why certain segments of our population do not actively seek financial services. The mobile payment system does therefore address some of these challenges and consequently can be an important platform for expanding the delivery of financial services. In some respects it complements conventional financial services or products. In other respects it makes up for the weakness of the conventional financial service providers.

Of course, the Committee hopes that, over time, more and more countries will adopt the framework. We do not want them to do so before they are ready. And, when they are ready, we want them to adopt the options and approaches that are most appropriate for their circumstances. For a country that wishes to adopt Basel II but may not yet be ready, I would suggest a three-stage approach to the transition to Basel II. These stages could be categorised as (1) strengthening the supervisory infrastructure; (2) introducing or reinforcing the three pillars; and then (3) making the transition from the 1988 Accord to Basel II. This three-stage process recognises that Basel II is not intended simply to ensure compliance with a new set of capital rules. Rather, Basel II is intended to enhance the quality of risk management. To achieve this goal, Basel II must be built on the foundation of a sound supervisory system. Such a foundation includes having successfully implemented the Basel Committee’s “Core Principles for Effective Banking Supervision,” including the provisions on operational autonomy of the supervisory authority, adequate supervisory resources, regulatory and remedial powers, and a sufficient legal framework. Likewise, sound accounting and provisioning standards are critical to ensuring that the capital ratios - however calculated - reflect meaningfully the bank’s ability to absorb losses. Establishing a solid foundation of sound supervisory, legal, and accounting systems constitute the essential first stage of the process of moving to the new supervisory framework.

Likewise, banks seek to quantify in a more reliable manner 2 BIS Review 33/2004 their exposures to operational risk, or the risk of losses stemming from failures in internal processes or systems or from damage caused by an external disruption. Evolution in markets has likewise provided banks with more tools for managing and transferring credit risk, such as through securitisation transactions and credit derivatives. As risk management becomes more sophisticated, the simple and static rules of the 1988 Accord are becoming less relevant. Leading banks increasingly view the old rules as a burden, constraining their abilities to administer their businesses relative to the best information and practices available today. Supervisors, for our part, have less confidence in the 1988 Accord’s measures of risk for banks that engage in the most sophisticated forms of risk taking and risk mitigation. By the late 1990s, it became clear to banks and supervisors that we needed a new capital framework. But one person in particular knew that we should do more than merely revise the minimum requirements. Bill McDonough, the previous chairman of the Committee, and the former president of the Federal Reserve Bank of New York, convinced leaders in the industry, in central banks, and in supervisory agencies that we should provide incentives to advance the state of the art in risk management across the industry.

In the face of these developments, we welcome the recent concrete steps, as part of the medium term program in Turkey, towards reducing the dependence on energy imports by shifting to domestically produced and renewable energy sources. These measures will hopefully ease the susceptibility of the current account to commodity prices in the long run. The key question in the short-run is how to smooth out the impact of the commodity prices on the domestic economy in the short to medium term, while there is a heightened degree of uncertainty regarding financial and real factors. In Turkey, ex-refinery fuel prices, in addition to the 18 percent-Value Added Tax (VAT), are also subject to the Special Consumption Tax (SCT). Special Consumption Tax, which is not only a fixed tax but also comprises a major part of the final prices of fuel products, helps to smooth out significant fluctuations in crude oil import prices. Thus, consumers are less affected by such fluctuations. Esteemed Guests, It seems that uncertainties regarding commodity prices will continue to be an important factor to be considered carefully in policy implementations in the forthcoming period, too. I believe that the papers presented in this conference will guide us in overcoming the policy challenges we will face along the road. Thank you very much for your interest and participation. 4 BIS central bankers’ speeches

Especially important in this regard is to moderate and possibly reverse the course of public indebtedness, adopt a framework to capitalize the banking system and ensure a sustainable evolution of household borrowing. The signals of the government regarding the orientation of its fiscal policy, its backing of the new General Banking Act and the reactivation of its search for mechanisms to consolidate borrowers’ financial information are very 6 positive in this regard. Equally valuable in dealing with future turbulences seems to be to strengthen fiscal institutions by enhancing the status and autonomy of the Fiscal Advisory Council, as well as acknowledging the role of institutional investors in the Chilean economy in the face of future reforms. Dear senators, the Chilean economy is progressing in the recovery of growth and the closing of gaps. Rather than a result, this is a good start for a more favorable stage of the business cycle. Many challenges lie ahead. It is important to deepen the recovery of investment, that the labor market be strengthened and that competitive advantages be exploited to make this recovery more self-sustained and shared. Greater long-term growth calls for more structural changes that will help raise productivity. The Central Bank will be there to ensure that imbalances or vulnerabilities do not incubate in the process, which later may require more costly adjustments. Together we also have the responsibility to strengthen those factors that allow us to better withstand external shocks that will sooner or later be felt.

The task is even more daunting when the world is going through significant transformation, with unprecedented policy actions all across the globe, and with yet-to-be- known consequences of such actions and their unwinding. Faced with the uncertainty and the complexity of the environment we are operating in, we need to take a broader perspective and make sure our decisions are robust under different plausible eventualities. At the same time, the Bank of Thailand constantly strives to expand our economic surveillance capability, by collecting up-to-date intelligence on economic and financial conditions through indirect and direct contacts with the market. The insights from direct contact, coupled with the information from surveys like our Business Sentiment Survey sharpen the picture we get from the other available statistics. This is one reason why monetary policy cannot simply follow mechanistic and simplistic rules based solely on any single data. Nonetheless, uncertainties can never be off the table. In this light, a prudent approach is to move in careful and measured steps. That kind of incremental action in what we perceive to be the right direction is likely to contribute more to economic stability than aggressive attempts to fine tune the economy. BIS central bankers’ speeches 3 3. Inability to address supply-side impediments The third limitation of monetary policy I would like to emphasize today is its inability to address supply-side impediments. Through interest rate adjustment, monetary policy can influence aggregate demand in the economy.

But monetary policy cannot solve deeper structural problems or lift growth potential of the economy. That needs to come from real progresses that increase productivity and relax supply-side constraints. Sure, demand stimulating can buy time by cushioning the economy from short-term economic shocks. But this may possibly delay necessary adjustments of the economy to longer-term challenges. For example, keeping interest rate too low for too long and keeping exchange rate undervalued, beside encouraging risk taking and storing up financial instability problems for the future, may also temper incentives for businesses to improve efficiencies, and may slow the reallocation of capital and labor to more productive uses. In the context of Thailand, one of the most important structural issues facing the Thai economy at the moment is that of the labor shortage. Through our business contact and recent surveys, the labor shortage has scored one of the top concerns by both domestic and foreign businesses operating in Thailand. Underlying causes of labor shortage include the demographic change and education and skill mismatch. Clearly, there is little monetary policy can do to solve this supply bottleneck. It can help foster macroeconomic stability conducive to business investment, but most of the efforts to address supply-side impediments still need to come from a broader and more balanced set of economic policies including fiscal, industrial, technology, and labor market policies.

In any event, it ought to be borne in mind that the budgetary cost of the crisis has also been very high. The government debt-to-GDP ratio stood at 118.4% at end-2021, 1.5 pp lower than in 2020, but over 20 pp higher than the pre-pandemic level. Meanwhile, the budget deficit fell from 10.3% to 6.9% of GDP in 2021, yet it remains over 3 pp of GDP above its pre-crisis level. The outlook for the Spanish economy: the impact of the war in Ukraine The outbreak of war has prompted a worsening of growth prospects in the short term and stronger inflationary pressures. There are various transmission channels for this new shock. First, Russia and, to a lesser degree, Ukraine are major producers of certain energy and non-energy commodities. The outbreak of the war has given rise to a significant increase in many of their prices. A second channel derives from the direct trade exposure to these countries, in addition to the indirect exposure via a fall in demand from other, more exposed countries. Additionally, there is the possibility of the global production chain disruptions being compounded, particularly amid the sanctions imposed on Russia. A third channel is through the negative effects on uncertainty and confidence. A fourth channel is the financial implications, insofar as escalating inflationary pressures result in a tightening of the monetary policy stance.

Removing a portion of the excess reserves from the system ahead of increasing the rate paid on reserves is a cautious approach, as it should improve the Fed’s control of short-term interest rates when it comes time to tighten monetary policy. 4 To be sure, even at today’s reserve levels, we would expect the interest rate paid on excess reserves to exert considerable pull on other short-term interest rates such as the federal funds rate or repo rates. However, we are unsure of the exact relationship between these rates and believe that it is likely to be tighter when the banking system is not as saturated with liquidity as it is today. Thus, it may be prudent to remove some portion of excess reserves before raising the interest rate on reserves. Note that the policy tightening in this scenario will still likely be taking place in an environment of large excess reserve balances, and the main workhorse of the tightening cycle will still be the interest paid on reserves. However, the draining tools can be used to best ensure the success of that framework. Market conditions: at risk on exit? Finally, let me turn to conditions in financial markets and discuss whether there may be vulnerabilities related to the Fed’s exit from the current monetary policy stance. I think there are two potential areas of concern. The first potential concern is that the exit strategy could simply cause confusion among market participants, prompting volatility in asset prices.

In an age of greater demands for performance and in an environment of increased scrutiny and transparency, the transition to such leadership positions has not been based on gender. Indeed, it is based on the capability as administrators, policy makers and thought leaders. Power sharing is therefore the shared power to contribute to the nation rather than on the power that is wielded. My presentation today will therefore start on the role of the public sector and its accountabilities before discussing women and leadership in the public sector, its challenges and some strategies for success. Accountabilities of the public sector The role and accountabilities of the public sector differs markedly from the private sector. Unlike in the private sector, financial measures are generally not the indicator of the performance of agencies in the public sector. In addition, actions taken by the public sector have far reaching implications on the economic well being of the public at large and entire spectrum of businesses. Such actions may even have implications on other countries given the greater international interdependence that prevails in the current environment. The responsibility and accountability is therefore immense. History has shown that mismanagement can greatly damage a nation resulting in high costs to the people of the country. In contrast, well managed nations have brought great prosperity to its people. Being in the public sector is all about bringing value and benefits to its citizens. Such benefits can include improved housing, education, health and transportation.

This will therefore involve balancing the trade-offs and managing the risks to the different interests of the different segments of society. Sixth, is a skill that is increasingly important in the current environment. It is the management of crisis. Unlike previously, when conditions were relatively stable, the current environment is 2 BIS central bankers’ speeches frequently plagued by crisis. During such times of distress and instability, the public sector is at the forefront in providing a response, in providing a solution to the crisis. In making decisions, during such times, any delays, inaction or wrong policies can produce widespread damage to the entire country. Seventh, is the ability to effectively manage under intense pressures. Such pressures can emanate from the high expectations of the different stakeholders, the crisis conditions or from the failure of other parts of the public sector that have implications on your performance. However, being strategically focussed and having the ability to stay on course avoids being derailed by such pressures. Eighth, is then courage and bravery to undertake the responsibilities. At the extreme it requires having nerves of steel. This is to enable sound decisions at the time of high level of distress and ensures that the organisation remains calm and cohesive during such times. Ninth, is having the drive and unwavering perseverance to pursue the vision. The agenda of public sector which is to ultimately improve the well being of its citizens is a long haul business which therefore requires perseverance.

We do not think, act or communicate in the same way today as we did when the inflation targeting regime was new. The driving force behind the changes has come partly from practical experiences, both in Sweden and other countries conducting an inflation-targeting policy. Academic research has also played an important role. Before I go into greater detail on how the Riksbank’s way of conducting monetary policy has developed, I intend to begin by describing the background to the establishment of an inflation target in Sweden. The background to Sweden introducing an explicit inflation target Today the Swedish krona has been floating for fourteen years and two months. 19 November 1992 will always have a special significance for the Riksbank. This was the day when we were forced to abandon the fixed exchange rate, under very dramatic circumstances and after a stubborn defence of the Swedish krona. At that time we were in the middle of the most serious economic crisis in Sweden since the 1930s – a tragic end to almost 20 years of stabilization policy problems. The idea behind the fixed exchange rate policy was to ensure that inflation in Sweden would be in line with that in the countries that were our most important trading partners, and that the fixed exchange rate would function as a nominal anchor. But for various reasons the economic policy conducted in the 1970s and 1980s tended to be too expansionary.

Monetary policy based on an inflation target was a relatively new phenomenon at that time. There was also great uncertainty about how this would work in Sweden. For those of us who were around during the crisis years, it is particularly pleasing to see how well the Swedish economy has developed over the past ten years, compared with the previous two decades. Naturally, one cannot ascribe all success to the changeover in stabilization policy – the general economic developments have also been favourable. However, there is no doubt that the new regime with an inflation target for monetary policy has given a steadiness and stability to economic policy that was previously lacking. A stable fiscal policy has also been very important. A lot has happened to the monetary policy framework since the inflation target was introduced. This includes much of the learning process I mentioned in my introduction. As deputy governor during the years 1994 to 1998, I was involved in setting the course, so to speak, and when the work on building up competence and analysis tools for the bank’s main tasks - monetary policy and financial stability began. Other important tasks included improving communication and increasing transparency, both internally and externally. It was necessary to win confidence in monetary policy as quickly as possible and this required openness and clarity. Since I returned to the Bank at the beginning of last year, I have been able to note that the Riksbank’s work procedures have continued to develop and modify.

Regulation implementing Basel III in Europe entered into force two months ago. Tomorrow the European Parliament will discuss the regulation establishing a Single Supervisory Mechanism, an important step towards a European banking union. Under the Single Supervisory Mechanism, one supervisor will have a complete overview of an entire large and interconnected banking group in the context of the BIS central bankers’ speeches 1 single currency. Furthermore, work is being undertaken to address cross-border regulatory inconsistencies. So where do we stand five years after Lehman Brothers and four years after Pittsburgh? Did we achieve the overall goal of improving transparency, mitigating systemic risk and protecting against market abuse in OTC derivatives markets? Are we now better placed to monitor risks building up in the financial system? I will limit myself to three of the many issues covered by this conference: lack of transparency, the challenges remaining in central clearing and inconsistencies in crossborder application. Transparency First, I would like to reflect on one of the main root causes of the financial crisis: the lack of transparency relating to OTC derivatives in general. When I say “in general”, I mean that there was not only a lack of transparency on OTC derivatives at the level of the market, but also at the level of individual institutions and counterparties. There are two dimensions to the lack of transparency: lack of information due to a lack of reporting requirements, and data fragmentation making it difficult to connect the dots and see the full picture.

It will therefore be critical to ensure, in the context of the EMIR implementation, that information-sharing within the colleges will effectively address not only the micro-prudential concerns of authorities but also the need for appropriate macroprudential analysis. Second, another important concern regarding the institutional setting is the fact that global cooperative oversight arrangements for central counterparties are still lagging significantly behind what has been agreed in the CPSS-IOSCO Principles for financial market infrastructures. Indeed, the respective gap between the EU level and the global level is striking in this regard. In the European Union, given the introduction of legally binding requirements for central counterparty supervisors to cooperate and consult with all relevant authorities – including central banks, supervisors of major clearing banks and supervisors/overseers of interoperable infrastructures – cooperative oversight arrangements for all EU central counterparties, in the form of EMIR colleges are currently being set up. At a global level, however, virtually no progress in cooperative oversight or even in terms of pure informationsharing has been achieved for several major global central counterparties outside the European Union. This is a key concern especially in the field of OTC derivatives, given the global nature and interconnectedness of these markets. Indeed, if we want to ensure that the introduction of mandatory clearing is implemented in a way that ensures that central counterparties manage systemic risk effectively, it is not enough that they are supervised and overseen in their home jurisdiction.

Monetary stimulus is more effective if, in a deflationary environment, other policies can also give households and firms the confidence that global reflation is in prospect. And structural reforms can boost long-run wealth allowing monetary policy to bring forward spending from future incomes that are real and not ephemeral. All must recognise the imperative of avoiding the global liquidity trap. Not to beggar-thyself via beggar-thy-neighbour. Not to obsess over process at the expense of productivity. But by building resilient domestic demand and sustainable cross border capital flows, we in the G20 can redeem an unforgiving world. BIS central bankers’ speeches 15 Annex Chart A1 Secular drivers of lower real rates – quantification Source: Taken from Rachel and Smith (ibid.). 16 BIS central bankers’ speeches

In principle, the three-pillar structure of the New Accord provides more precise directions to regulators to strengthen bank supervision and incentives to banks to become more sophisticated in risk management. Implementation of Basel II eliminates “one size fits all” methodology to assess risks and offers instead a wide range of methods to evaluate risks based more on failure likelihood. But the supervisory authorities in several emerging markets and many developing economies are concerned that Basel II puts a challenge they cannot meet. Probably our greatest concern relates to the need of the standardized approach to rely on external rating agencies for calculating minimum capital requirements. Currently domestic rating agencies are totally absent in Albania and not well developed as in many other non-OECD countries. On the other hand, in most of our economies many small enterprises cannot afford to be clients of international rating agencies. Since borrowers unrated from rating agencies will be assigned a 100% risk according to Basel II, initially most domestic credits may end up under this 100% category. This could reduce risk sensitivity of the new system brining it close or similar to that of Basel I. On the other hand, Albanian banks hold a significant share of government treasury bills and notes. Actually, under Basel I to this exposure of the banking system denominated in local currency is assigned 0% risk independently whether credit risk of the sovereign debt is rated or not.

This includes considering a fiscal union and even a political union, which are difficult topics and ones that I have not touched upon today. Let’s remind ourselves that Europe’s Heads of State or Government already “laid the foundation for completion of the European Union” with the Maastricht Treaty. This Treaty, BIS central bankers’ speeches 5 according to former German Chancellor Helmut Kohl, marked “a new, decisive step in the process of European integration that in a few years will lead to the creation of what the founding fathers of modern Europe dreamt of after the last war: a United States of Europe.” 7 It is time that this affirmation resulted in action. A completed Union would not mean that Member States give up their national identities. Quite the contrary: they bring their national identities with them into the euro area. That is why we speak of “unity in diversity”. The Euro Exhibition illustrates this: while one side of our coins all share the same design, each Member has its own country-specific design for the reverse side. These designs often bear symbols of national identity, such as Milda, the symbol of freedom, who features on the Latvian euro coins. But go and take a look for yourself! I hope you will enjoy the exhibition. My thanks go to the Deutsche Bundesbank and the City of Osnabrück for inviting me to today’s opening event. 7 6 Kohl, H. “Zielvorstellungen und Chancen für die Zukunft Europas”, speech given on 3 April 1992.

Our price stability mandate has not constrained us from responding forcefully and successfully to the biggest disinflationary shock experienced in generations. With inflation rates in the euro area currently projected to be slightly above 1% in the short to medium term, deflation risks continue to be absent, and price stability has been maintained. Most importantly, of course, price stability has not compromised macroeconomic stability. Thank you. 4 BIS Review 22/2010

Norges Bank has explained its interpretation of the Exchange Rate Regulation on several occasions, not least in a letter to the Ministry of Finance dated 21 October 1999, often referred to as the budget submission. When exercising discretion, Norges Bank attaches importance to fulfilling the fundamental preconditions for exchange rate stability. To ensure stability in the exchange rate against the euro, monetary policy instruments must be oriented towards reducing price and cost inflation to the level aimed at by the European Central Bank. At the same time, monetary policy must not in itself contribute to deflationary recessions, as this could undermine confidence in the krone. Hence, there is no conflict between gearing monetary policy instruments towards low and stable inflation and the objective of a stable krone exchange rate over time. In the budget submission, the Bank also provided information about key policy response patterns when price and cost developments and the basis for exchange rate stability are influenced by external factors. Price and cost inflation are influenced by monetary policy through a number of channels. When interest rates increase, it becomes more profitable to save and to postpone consumption until a later date. Interest expenses exceed interest income for households collectively, meaning that a rise in interest rates reduces real disposable income. The value of household wealth decreases, since interest rate rises normally lead to lower house prices and weaker trends in securities markets. Growth in private consumption and fixed investment slows. Lower demand for goods and services may also affect enterprises’ profit margins.

In its December 1999 Inflation Report, Norges Bank presented calculations based on our macroeconomic model which illustrated that an interest rate rise of 1 percentage point might reduce price inflation by 0.3 percentage point after two years. This reduction is largely due to the effect on the exchange rate. These calculations were based on the assumption of uncovered interest rate parity. An interest rate rise will then result in an immediate appreciation of the krone, which is sufficient for the interest rate differential between Norway and other countries to correspond to expectations of future changes in the exchange rate. After three years the effect is somewhat less strong as a result of the depreciation of the krone, but at this stage domestic factors will gain in importance. A number of comparative analyses have been published which study the effect of rises in interest rates on inflation in different industrial countries.1 There is substantial variation in the calculations across countries and between different analyses. In a report published by the Monetary Policy Committee of the Bank of England,2 the effect of an interest rate rise which is sustained for one year is illustrated using simulations in the bank’s macroeconomic model. After two years, inflation has fallen somewhere in the region of 0.2 to 0.4 percentage point, dependent on the other assumptions. The report emphasises that the effects are dependent on factors such as the general state of the economy and the credibility of the monetary policy regime.

In Europe, the reform of IAS 32 and 39 represents an attempt to improve the comprehensiveness of banks’ disclosure requirements. In recent years, banks’ risk exposure has shifted to instruments that have, up to now, not been reported as assets. What is maybe most important is the increased reliance of financial institutions on derivatives contracts, which has resulted in growing disparities between the information contained in financial statements and the true risk profiles of the reporting entities. The new accounting standards to be finalised next year will introduce a definition of financial instruments. They will also cover derivative instruments, which will have to be reported on balance sheets. As a consequence, information quality and coherence will be improved, providing a more accurate reflection of the new financial environment. However, the framework that is emerging is still far from satisfactory. The revised accounting standards will most likely include an option for banks to measure any financial asset or liability at fair value. This means that instruments for which a market price is not available could also be valued on the basis of an estimate of a fair value. Several serious concerns arise from this approach. Comparability of financial statements could be affected, as the same transaction could be carried out at different values by competing financial institutions. Moreover, if the reliability of the valuation of nontraded assets is limited, the quality of the information contained in financial statements is going to deteriorate, thus allowing imbalances to build up without the possibility of activating correcting mechanisms.

Consequently, cooperation efforts are being BIS Review 53/2003 1 made by central banks and supervisory authorities to overcome the problems caused by the fact that supervision and oversight primarily remain a national responsibility. The ECB - and the Eurosystem as a whole - is also enhancing its activities in the field of European financial stability. One part of these activities is visible through the regular articles and reports. Many other activities are less visible and take the form of discussions concerning financial stability in the ECB Governing and General Councils and ESCB Banking Supervision Committee, or our regular contribution to the strengthening of cooperation among relevant European authorities and our participation in international discussions. I would like to organise the rest of my remarks around the three themes I have identified. First, I will look at what evidence is provided by past crises about the severity of the market frictions. Second, I would like to discuss the changes in the policy framework which have been made and, third, are being made in order to preserve financial stability. B. The three themes and financial stability Past crises could give us some hints about what could also be important financial stability concerns in the future. One should not go too far back as the financial system is rapidly changing and one must always be prepared for surprises. Often the new crises come as complete surprises.

We have seen the value of this in our own region in the 1980s and early ’90s, and, when discussing the problems created by capital flows, we should never forget that they have specific and beneficial functions. 6. The second characteristic is the sheer Volume of capital movements around the world. In April 1995 the global value of foreign exchange transactions taking place on an average day was $ trillion. In April 1998 this figure increased to $ trillion, or, to put it in more meaningful terms, to around 48 times the daily value of world trade. It is also worth stressing that these are largely private capital flows. In 1997, for example, the amount of private capital flowing into developing economies was estimated by the World Bank to be five times the size of official flows. 7. Within these private flows there is considerable Variety and fluctuation in the nature and organisation of capital. With financial liberalisation and the globalisation of financial markets, portfolio capital flows are of increasing importance compared with the more traditional foreign direct investment and commercial bank lending as a source of international capital flows. An aspect of this Variety is the growing number of complex investment tools, and different orders of derivatives therefrom, involving different degrees of leverage, available for moving money around the world, or indeed enabling investments to be made in markets without having actually to move money around. 8.

And how can we ensure that institution-specific insights of the national supervisors are best maintained and incorporated? Allow me to give you a few examples to explain the conclusions we have reached. I will focus on the specific features of the SSM. So do not be surprised if I do not mention things that are self-evident, such as a preventative, forward-looking and risk-oriented supervisory approach. 18 perspectives – one best practice Let us start with 18 perspectives and what is deemed best practice. In developing the SSM’s supervisory culture, we are in a unique starting position. Following the financial market crisis, many countries adjusted their supervisory structures. The reforms generally focused on addressing country-specific experiences of the crisis and on international recommendations. We are in a similar situation in setting up the SSM – but with one major difference: we are not just looking at the experiences of one country; we are incorporating the perspectives of 18 – soon 19 – Member States into a common European supervisory culture. For me personally, this is one of the most exciting aspects of creating the supervisory mechanism. An example of this is the weekly meeting of SSM management. Every Friday, Danièle Nouy and I meet with the heads of the four SSM business areas. Around the table we therefore have representatives of the French, German, Finnish, Spanish and even US supervisory traditions. Another colleague brings to the table many years of experience at a systemically relevant bank.

So, there is a risk that central bank may cut interest rate by too much, hence, sowing the seeds for inflation and an asset price boom down the road as well. On the other hand, sterilized intervention also entails quasi-fiscal costs, as well as adding to inflation risk from the build-up of local currency debt should there be future fiscal stresses. Moreover, international reserves accumulation can also risk damaging central bank credibility as they can incur balance sheet loss when reserves are marked to market in local currency. These are all important and delicate points for policy consideration. The second challenge is the ability of emerging market central banks or financial supervision authorities to identify and quantify risks of potential financial instability in advance. On this, we find stress testing to be a powerful tool to assess financial stability ex-ante. Unfortunately, financial institutions and regulators in emerging markets have significantly lagged behind their counterparts in advanced economies, especially on credit and liquidity risk stress testing. Therefore, regulators in emerging markets should move faster to increase the use of macro stress testing. They should also push financial institutions to invest in human resource and technology to conduct macro stress testing at least on an annual basis. And regulators and monetary policymakers must increase coordination in order to arrive at more relevant and convincing macro stress testing scenarios. The third challenge is the role of prudential measures.

That is supplemented by three operational objectives, including “protecting and enhancing the integrity of the UK financial system” which is in turn defined in the legislation to include “its soundness, stability and resilience”. This is in line with Principle 6 of IOSCO’s objectives and principles for securities regulation: “the Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate”. 10 See Tucker (2011), “Building resilient financial systems: macroprudential regimes and securities market regulation”, International Council of Securities Associations. 11 This was highlighted by the Bank of England in 2006 Financial Stability Review p. 8: “Many may have believed that the price of certain assets had become too high and the premium for taking risk too low. But there are business risks associated with acting on that view when others are not; it may not only reduce profitability in the short run, but may also risk losing market share or failing to establish a foothold in a rapidly expanding market. These concerns often seem to have outweighed the risks to balance sheets associated with potentially overpriced assets. As a result, in the early part of this year, there appears to have been an extension of risk-taking activities by financial institutions, including some UK banks. “ BIS central bankers’ speeches 7 the system safe and sound has made real progress in recent years, but it is not complete and absolutely must continue with energy.

However, in avoiding excessive reliance on models, we must be mindful not to “throw the baby out with the bath water”. We should examine carefully the impact of these proposals on two areas, namely trade finance and SME finance. This is of particular significance for emerging economies. • Across much of emerging Asia, where capital markets are relatively undeveloped, banks are a major source of funding for trade and SMEs. • Trade and SMEs are major engines of growth in many emerging market economies. Let me start with trade financing. • Being short-term and self-liquidating in nature, trade financing is probably one of the safer forms of bank lending. • But the proposal to move bank exposures completely to the Revised Standardised Approach could result in imposing significantly higher capital requirements for trade finance, more punitive than justifiable by its historical losses. BIS central bankers’ speeches 5 • While the availability and cost of trade finance have so far held up well in the face of Basel III implementation, the latest set of proposals could have the effect of discouraging banks from trade financing. • This is not what we need at a time when trade is growing more slowly than income in many parts of the world. Second, SME financing. • I would say we are broadly on the right track.

• But banks have held up well. − In the US, nearly all the largest banks have passed the Federal Reserve’s most recent annual stress test. − In Singapore, an industry-wide stress test conducted by the MAS indicates that Singapore’s banking system will be resilient against severe economic stress scenarios in the major economies and Asian region. • And beyond the stress tests, the global banking system has remained relatively resilient through actual episodes of market stress in recent years: − the May 2013 US taper tantrum; − the Oct 2014 US Treasury “flash crash”; − the Jan 2015 Swiss franc de-pegging; − the Aug 2015 “Black Monday” selloff; and most recently − the Jun 2016 UK referendum. Third, bank lending to the real economy has been stable. • Overall provision of credit to the economy has been maintained even as banks met higher capital and liquidity requirements. − According to the FSB, by the end of 2014, bank lending growth had resumed in all regions of the world. • The cost of financing has not increased, although I suspect that this has had more to do with highly accommodative monetary policies. • There has been no material shortage in the supply of long-term investment financing in most countries surveyed.

However, as I have argued in a number of recent speeches, these business survey indicators do not support the view that firms currently have a significant margin of spare capacity – particularly in manufacturing industry.7 And there also appears to be less slack in the labour market than we saw in the aftermath of the recessions of the early 1980s and early 1990s, as I noted earlier. Changes in demand conditions clearly do affect inflationary pressures. In a climate of stronger demand, firms will expect price increases to stick more readily than in weak demand conditions when discounting will be much more prevalent. But this pressure of demand is not well captured by simple “output gap” type measures which are too crude and prone to measurement error. Indicators of the growth of demand or changes in employment may be more useful, as they remove the need to make judgements about the sustainable level of economic activity.8 But it is probably unrealistic to try and capture the pressure of demand on inflation in any one single measure, particularly in an open economy like the UK where both domestic and international factors have a bearing on the rate of increase in costs and prices.

So if services prices continue to rise at a 3–4% rate, and goods prices continue to be pushed up by external factors and the weakness of the pound, it is very difficult to see how the MPC will be able to return inflation to the 2% target, even over a number of years. BIS central bankers’ speeches 13 As a counter to these arguments, it is frequently suggested that a low rate of pay increases will help deliver low UK inflation, and pay freezes and low pay settlements negotiated during the recession may be a helpful factor in helping businesses to contain cost increases in the short-term. But I question how long we can sustain low pay settlements in the medium term when headline measures of inflation continue to run at such a high level and companies find that they can pass through cost increases to the consumer fairly readily. The most recent report from Income Data Services indicated that pay settlements had risen from 1.3% to 3% over the past year. And while pay increases are being held back in the public sector, the trend in the private sector is in an upward direction.

Accordingly, when we were at the zero lower bound, we weren’t able to rule out the possibility that initial increases in the policy target might not translate one-for-one into increases in money market rates, as reduced uplift from the zero lower bound could have offset some of the policy tightening. In addition, one might have also worried that various money markets might not move together as rates rise, meaning that, for example, a larger spread might emerge between secured and unsecured rates, or between overnight and term instruments, than had historically been the case. I will discuss some evidence on these issues later on. The second development, in October 2016, was the entry into force of new SEC rules for money market funds. These new rules require, among other things, a floating net asset value for institutional prime money market funds, provide for liquidity fees and redemption gates for prime funds, and establish more stringent rules for portfolio diversification and financial reporting for all money market funds.11 Many of these reforms are aimed at least in part at enhancing financial stability, and in particular at addressing the potential for runs on prime funds to intensify financial stress. They could also make prime funds, which can hold a broad spectrum of money market 3 / 13 BIS central bankers' speeches assets, less attractive to investors who desire an investment opportunity with a fixed net asset value or who are concerned about redemption fees or gates.

During the financial crisis, this spread rose and fell with changes in investors’ perception of bank credit risk. In contrast, its recent moves are related to money market fund reform: term rates rose considerably as prime money market funds both shrunk in size and reduced their maturities to remain highly liquid, and have recently come back a bit as the market has stabilized and markets have adapted to the new industry structure. Shown in (Figure 15) are customer-to-dealer versus dealer-to-dealer Treasury repo rates. The customer-to-dealer market consists primarily of cash investors like money market funds lending to dealers, while the dealer-to-dealer market reflects dealers lending amongst themselves.31 The 8 / 13 BIS central bankers' speeches spread between these two rates is thus a proxy for the cost dealers with ready access to cashinvestor financing charge to act as intermediaries between these two markets. Since all the lending is secured by Treasuries, this intermediation entails very modest risk. U.S. versus currency-hedged 3-month interest rates, as reflected by foreign exchange basis swaps, are shown in (Figure 16). U.S. and foreign money markets are linked together by a dealer-intermediated foreign exchange derivatives market, which allows firms to essentially convert money market loans and borrowings from one currency into another. A dealer that intermediates this spread can be thought of conceptually as making a secured loan, in which it lends out dollars and takes in foreign currency cash as collateral.

Each of us will help in coordinating regional Y2K forums or conferences and will publicly promote the goals of the Joint Year 2000 Council in speeches and on conference programs. The Joint Year 2000 Council will also maintain extensive world-wide-web pages that can be accessed freely over the Internet.3 These pages are being maintained through the support the Council has received from the Bank for International Settlements, in particular from the General Manager, Andrew Crockett. These web pages will maintain current information on the activities of the Joint Year 2000 Council. The most extensive aspect of the Council’s web site will be a series of country pages, one for each country in the world. For each country, the page will contain contact information for government entities (including national coordinators), financial industry supervisors and regulators (including central banks, banking supervisors, insurance supervisors, and securities regulators), financial industry associations, payment, settlement and trading systems, chambers of commerce, and major utility associations or supervisors. For each of these organizations, a name, address, phone number, fax number, electronic mail and web site address will be provided. Other relevant information on an organization’s Y2K preparations may also be included, for example, whether it has a dedicated Y2K contact or has taken specific action with respect to the Y2K problem. The motivation for developing these country pages is to increase awareness of the work that is being done to address the Y2K problem and to enable market participants to easily find out more information about the state of preparations worldwide.

This differs from the natural rate when macroeconomic shocks affect the rate of inflation corresponding to any degree of excess demand in the labour market. Since the NAIRU represents the current reduced-form relationship between inflation and unemployment, it is possible to calculate the prospects for inflation without any need to refer to such a variable as the NAIRU. It is a convenient shorthand concept for purposes of exposition, but not a necessary tool for operational decisions on interest rates. Second, the contribution of monetary policy to employment objectives is to promote economic stability in its broadest sense. I referred at the outset to Keynes’ view that the “triple evils” of an unequal distribution of income, instability of expectations and unemployment were all related to an unstable and unpredictable monetary standard. The solution, Keynes suggested, was to set monetary policy to hit a target for prices, or a low and stable inflation rate. He argued 75 years ago that monetary policy should be devoted to regulating the supply of money so that “the index number of prices will never move far from a fixed point”. Keynes went on to say that: “The Bank of England since the war has always done exactly the opposite of what the latest science recommends. I conclude from this that their opposition comes, not from mere obstinacy BIS Review 103/1998 – 10 – or conservatism, but from their not yet understanding the point.

The job is to promote a financial system that can serve households and businesses not just in the good times, but also in the bad.3 The financial system of 2007 was totally unable to do that. It was too weak. Banks, in particular, had too little of their own capital on the line. As the UK and world economies turned down, major UK banks faced losses of £ But they had only £ of their own money – their shareholder capital – on the line.4 So as losses mounted, banks buckled. Credit was crunched, bringing the economy to its knees. And because there was no way to deal with failing banks without harming their depositors and the economy, the taxpayer was forced to step in with a bailout of more than £ So it’s not surprising that our efforts focussed initially on fixing these fault lines in the system. A resolution regime for dealing with failing banks is in place and banks are much stronger. They now have three times as much of their own capital on the line for the risk they take when they make a loan or a trade. 1 Based on OBR forecasts and ONS data. Financial crises often lead to a long run reduction in GDP, with a persistent decline in output relative to pre-crisis trends.

Brexit Nowhere has that been more obvious than Brexit. On June 24th 2016, we started contingency planning for a ‘no-deal’ Brexit. With our focus on making sure finance can serve the wider economy, our work has had two elements. First, checking that, whatever economic disruption arises as we leave the EU, major banks have the capacity to keep lending through it. We know from our stress tests that banks can withstand an economic scenario for the UK that is worse than the financial crisis. That stress test scenario encompasses even a Brexit scenario based on the very worst case – ‘disorderly’ – assumptions, including: severe disruption at the border, acute economic uncertainty and financial market instability, and sharp increases in inflation requiring interest rates to rise. On that basis, we’ve been able to judge the core of the UK banking system to be able to continue to serve through Brexit, whatever form Brexit takes. The second element of our work has been to ensure that households and businesses using services from EU financial companies can continue to draw on those services after Brexit. 70 branches of EEA banks operate in the UK and provide services to both EU and UK end users. UK households and businesses hold 16 million insurance policies with EU insurers.8 UK investors invest in funds based in the EU. And clearing houses based in the UK sit at the centre of EU and global derivatives markets, helping the financial system to manage and distribute risks.

As we move further into a period in which the external environment, characterised by unusual monetary and financial developments in the United States and the Mainland of China, presents increasing risks to monetary and financial stability in Hong Kong, such confidence and credibility will be crucial for us to stay the course and not be derailed. 6 BIS Review 139/2007

Without further reforms, and depending on the nature of the next crisis, we may well be forced to test the limits of our mandate – a concern that has been voiced by Germany in particular. I offered three “lines of defence” that any well-functioning monetary union depends on: flexible markets, adequate national fiscal buffers and a common fiscal instrument to cope with large shocks. The logic is simple and compelling. Flexible markets for goods, services, labour and capital reduce the need for costly macroeconomic stabilisation and curb contentious debates about 1/3 BIS central bankers' speeches crisis management. They reduce both the likelihood and impact of shocks and allow economies to bounce back more quickly. And they save much of the precious political capital governments had to spend on acrimonious crisis discussions. But flexible markets come at a price. In a downturn, they often impose economic hardship on workers through job losses or wage cuts. Governments can mitigate these effects. Unlike the United States, however, the European Union is not a federation. This means that – as a rule – stabilisation needs first to take place at Member State level. Building and maintaining adequate room for action at national level is therefore essential. This is what our fiscal rules are about.

Even if residents choose to move into foreign assets, the liquidity in the domestic currency will not disappear and will ultimately be deposited with the domestic banking system. In the end, and as a whole, the banking system is trapped. The question then is how banks will react and with what consequences for the economy. They could impose negative rates on depositors, but that is not always easy, and in the case of households, it could have a negative impact on the wealth sentiment. They could increase their credit margins, with the effect of tightening credit conditions, although that may also be difficult if the demand for credit is weak. Or the banking system could simply become weaker, with the paradox that the more a bank is conservative and well-managed, extending high-quality loans and covering them by deposits with no short-term market funding, the more it will be penalized! A second, different challenge, relates to the rigidities in the economy. Price rigidity is higher in Europe than in the United States as the goods and labour markets are less “contestable” and outsiders find it harder to compete. And in the labour market, there is a strong downward rigidity on wages. Structural rigidities have complex effects on inflation and monetary dynamics. In the very short run, price rigidity may somehow protect the economy against deflationary shocks and, more generally, increase the output response to a monetary stimulus.

Futures prices have also risen markedly, indicating expectations of a sustained increase in metal prices similar to the increase in oil prices. Prices for fresh farmed salmon have also exhibited a pronounced rise. Rising commodity prices and buoyant activity in markets that are important for Norway have fuelled growth in the Norwegian economy, even though growth has been low in some of Norway’s most important export markets. Overall, prices for our imported goods are falling in relation to prices for goods we export. Norway’s terms of trade are improving. The impact of the rise in oil and gas prices is particularly strong, but the terms-of-trade gains for the mainland economy have also been high. The domestic economy is partly insulated thanks to the oil fund mechanism. The situation in Norway differs from that of its Nordic neighbour countries. Sales of Swedish and Finnish high-tech products are growing strongly in volume terms, but prices are falling. Denmark has a diversified business sector, which is overall moving on a steady path. Growth among our trading partners remains solid. High commodity prices are exerting upward pressure on consumer price inflation in a number of countries, although underlying inflation remains low. Economic growth in the US probably picked up again in the first quarter. In Japan, growth appears to be solid. In the euro area, confidence indicators point to optimism in the business sector. There is a broad-based expansion in the Swedish economy, while some indicators in the UK have shown weak developments.

In principle, a suitable central rate for the krona could be estimated by producing a forecast for the nominal krona/euro rate for the exact date on which ERM2 membership is expected to begin. However, all of this is complicated by the existence of several theories for exchangerate determination and the uncertainty of the forecasts themselves. Nor are models capable of encapsulating all the relevant aspects that could conceivably affect the development of the exchange rate, which is why it would be necessary to complement the modelbased analysis with different kinds of expert assessments. This implies that we have to confine ourselves to narrowing in on an interval of conceivable central rates. In various situations, including the December Inflation Report in 2002, the Riksbank has shown forecasts of the krona’s real exchange rate against the euro according to a number of models under the assumption of a floating nominal exchange rate in the future. Forecasts of this kind underline what I’ve just said: the forecast outcome is highly dependent on the chosen model of application. Common to all models, however, is that they predict a strengthening of the real exchange rate over the coming years. According to the models, this strengthening is due to the expected development of a number of factors including relative GDP, Sweden’s relative net assets, our terms of trade, relative demography, etc.

Thomas Jordan: Does the Swiss National Bank need equity? Summary of a speech by Mr Thomas Jordan, Vice-Chairman of the Governing Board of the Swiss National Bank, to the Statistisch-Volkswirtschaftliche Gesellschaft, Basel, 28 September 2011. * * * The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). The Swiss National Bank (SNB) had to report heavy losses for 2010 and the first half of 2011 due to the strength of the Swiss franc – or, more precisely, due to valuation changes on its foreign currency reserves. Consequently, it suffered a substantial reduction in its equity. Understandably in such a situation, concerns began to be voiced in public. Questions often posed in this context include: Might the SNB lose its capacity to act as a result of a negative equity level? And, if its equity were negative, would the SNB have to be recapitalised, or might it even have to go into administration? The short answer to these questions is “No”, because the SNB cannot be compared with commercial banks or other private enterprises. For one thing, a central bank cannot become illiquid. This means that a central bank’s capacity to act is not constrained if its equity turns negative. Moreover, unlike other enterprises, it is not forced to implement recovery measures or go into administration. For another, central banks enjoy a funding advantage over private companies, owing to their banknote-issuing privilege. Moreover, they generate surplus income over the long term.

Having become independent in the 1990s, both the Banque de France and the Bank of Japan maintained price stability in the face of adverse pressures, whether inflationary or deflationary, making use of a range of appropriate instruments. Participating in the community of central banks that has gradually been built up, the Banque de France and the Bank of Japan, in parallel, have been regional pivots of the central bank function. After the Second World War in particular, our two institutions favoured co-operation with the central banks of economic regions undergoing reconstruction and newly emerging markets. Finally, during the twentieth century, we carved out a place for ourselves in the world by adapting to the new international functions: the more dynamic the international markets were, like in the 1920s and in stages from the 1960s onwards, the more our two banks’ international functions developed. 2 BIS Review 1/2008 This morning’s session, concerning the history of our economies and institutions, will enable us to shed light on all these aspects. The afternoon’s session will focus on developments in our economies and institutions in an increasingly globalised world. Globalisation is not a new phenomenon. The past 150 years of diplomatic and economic relations between our two countries are proof of this. However, the scope and the speed of the current stage of globalisation have far outstripped anything experienced in the nineteenth and twentieth centuries.

Ladies and Gentlemen, the development of the local bond market is central to Government’s strategy for diversification of the economy for one key reason. All businesses, including state owned enterprises, require finance, covering both equity and debt, and ranging from short-term to long-term. In the absence of a properly functioning local bond market, those in need of capital and qualified enough have had to turn to international financial markets to finance their local projects with the attendant exchange rate risk. Similarly, those seeking a competitive return on their investments that also meet their maturity preferences but are unable to find these features locally, have always sought out alternative avenues offshore in foreign currency, thereby creating pressures in the foreign exchange market. Therefore, Government’s involvement in improving the local bond market has been deliberate. Ladies and Gentlemen, Government’s participation in improving the functioning of the local bond markets has seen the establishment of appropriate market infrastructure that facilitates cost-effective and secure trading, and a transparent price discovery process. Further, Government’s decision to bring to market longer term bonds in 2005 have proved to be positive and catalytic for the local bond market as this has resulted in an extended yield curve that has provided a benchmark for pricing longer dated security issues by the private sector and banking industry.

But if you are used to eating lavish lunches like this one every day, check with your doctor before you tackle the mountains in Sai Kung. And avoid Sharp Peak, the steepest, slipperiest and sharpest summit of the lot. 2. Hong Kong’s economic development bears some resemblance to its mountain ranges: indeed, the dramatic ups and downs of the past decade alone form as stark a profile as anything that can be seen on the Maclehose Trail – the most daunting and relentless of all of Hong Kong’s hiking trails. Go back further into Hong Kong’s history, and it is possible to see, decade after decade, this same jagged landscape. The remarkably rapid reconstruction of an entrepot economy after the devastation of World War II. Then the blow to Hong Kong’s entrepot position from the UN embargoes on China during the Korean War, which, far from destroying Hong Kong, helped stimulate its dramatic transformation into a major manufacturing economy. And again, in the late ’70s and early ’80s, when the Mainland began to liberalise its economy, and when manufacturing industries began to shift from Hong Kong to the Pearl River Delta and beyond, Hong Kong’s re-creation of itself as a regional entrepot and its further development beyond into an international financial and services centre. Hong Kong has been sent more than its fair share of challenges, and there have been hardships and casualties along the way, but it has scaled each of them with the skills and the stamina of the best mountaineers.

As in Puerto Rico, the fiscal woes of many of our largest cities have been closely related to long-term economic transformations—essentially, changes in the industrial specialization that occurred in those particular places. In the case of New York City, the transformation was from manufacturing to services, and it took a generation to complete. The city’s management of that transition was far from perfect, and the fiscal crisis was the major manifestation of that failure. The institutions set up to respond to the crisis were crucial to ensuring that fiscal policy didn’t continue to amplify the problems associated with the economic transition. For a city to turn its circumstances around, it must navigate this economic transformation, identify what will define its comparative advantages going forward, and then build 2/4 BIS central bankers' speeches anew around those sources of strength. The road to recovery A successful fiscal reform first requires a regime in which local officials recognize and accept the reality of the changing economic situation, and set spending budgets accordingly. This part is fairly straightforward, because it produces the simple policy dictum that borrowing—in all its forms—must be strictly limited. Of course, knowing what to do and actually getting it done are different things, especially when politics are involved. As a result, the record suggests that it can be extremely helpful to have some kind of independent fiscal monitor in place on an ongoing basis.

Is it worth accepting slightly weaker demand and thereby inflation over the coming years if the economy develops as we have assumed in our forecasts in order to perhaps reduce the effects of possible corrections following inflated asset prices and loan stocks? Before I get into a discussion of this dilemma, I would like to give a brief reminder of how central banks with price stability as their objective take into account developments in the real economy. Flexible inflation-targeting policy requires openness and clarity In the short term, monetary policy can affect demand in the economy. Most countries with an inflationtargeting policy use this possibility and conduct what is known as flexible inflation-targeting policy, which means that some consideration is given to short-term fluctuations in the real economy. However, in the long term growth is essentially determined by factors outside of the control of monetary policy, such as technology and population growth. As I mentioned earlier, monetary policy’s best contribution is to ensure that inflation is low and stable, which requires confidence in the target. This sets limits as to how much consideration can be given to short-term fluctuations in the real economy, but also limits the uncertain negative effects on inflation and the real economy that in some cases risk arising from a strong growth in asset prices and loans. To be able to maintain confidence, it is necessary that the inflation target has strong support from the general public, the politicians and the financial markets.

However, at the same time, transition countries and previously strictly-regulated countries inspired by planned economies such as China and India are playing an increasingly important role in the world economy. While the adjustment towards market conforming economies is moving at a rapid pace, there is still a long way to go until conditions in the domestic markets are the same as those in the old industrial nations. Fixed exchange rates, undeveloped credit markets and a high level of domestic saving in emerging economies can, for instance, delay price adjustments and thereby push down both short-term and long-term interest rates in the international capital markets. Increased competition from low-price imports coupled with low import prices for clothes, for instance, have already kept inflation down for several years in many parts of the world and contributed to the interest rates determined by monetary policy being very low. There is thus some risk that demand for credit and asset prices in many countries have been pushed up by expectations of lower interest rates in the future than is sustainable in the long term. We thus find ourselves in a situation where the inflation rate has been pushed down by increased competition from low-inflation economies at the same time as asset prices and indebtedness have increased rapidly. A dilemma ensues here.

Against the background of weak credit growth, the ECB is now close to finalising the comprehensive assessment of banks’ balance sheets, which is of key importance to overcome credit supply constraints. To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirms the recent decisions taken by the Governing Council to provide further monetary policy accommodation and to support lending to the real economy. Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to strengthen investment activity, job creation and potential growth, other policy areas need to contribute decisively. In particular, the legislation and implementation of structural reforms clearly need to gain momentum in several countries. This applies to product and labour markets as well as to actions to improve the business environment for firms. As regards fiscal policies, euro area countries should not unravel the progress already made and should proceed in line with the rules of the Stability and Growth Pact. This should be reflected in the draft budgetary plans for 2015 that governments will now deliver, in which they will address the relevant country-specific recommendations. The Pact should remain the anchor for confidence in sustainable public finances, and the existing flexibility within the rules should allow governments to address the budgetary costs of major structural reforms, to support demand and to achieve a more growth-friendly composition of fiscal policies.

On the basis of current information, annual HICP inflation is expected to remain at low levels over the coming months, before increasing gradually during 2015 and 2016. The Governing Council will continue to closely monitor the risks to the outlook for price developments over the medium term. In this context, we will focus in particular on the possible repercussions of dampened growth dynamics, geopolitical developments, exchange rate developments and the pass-through of our monetary policy measures. Turning to the monetary analysis, data for August 2014 continue to point to subdued underlying growth in broad money (M3), with the annual growth rate increasing moderately to 2.0% in August, after 1.8% in July. Annual growth in M3 continues to be supported by its most liquid components, with the narrow monetary aggregate M1 growing at an annual rate of 5.8% in August. The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) remained negative at –2.0% in August, after –2.2% in the previous month. On average over recent months, net redemptions have moderated from the historically high levels recorded a year ago. Lending to non-financial corporations continues to reflect the lagged relationship with the business cycle, credit risk, credit supply factors and the ongoing adjustment of financial and non-financial sector balance sheets. The annual growth rate of loans to households (adjusted for loan sales and securitisation) was 0.5% in August, broadly unchanged since the beginning of 2013.

Svein Gjedrem: Economic policy challenges Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), to the Executive Board of the Confederation of Norwegian Business and Industry, 19 September 2002. Charts for the speech can be found on the Norges Bank’s website. * * * A year and a half ago, the Government and the Storting adopted new guidelines for economic policy, which call for an annual use of petroleum revenues equivalent to the expected real return on the Government Petroleum Fund. At the same time, the Government issued a new operational mandate for monetary policy. Norges Bank shall set the key rate with a view to maintaining low and stable inflation. The first sentence in the monetary policy mandate refers to the value of the krone. Stability in the national value of the krone implies that inflation must be low and stable. This is the best contribution monetary policy can make to economic growth and prosperity and is a necessary precondition for stability in the financial and property markets. The regulation also states that monetary policy shall be aimed at stability in the international value of the krone. The krone exchange rate fluctuates from day to day, from week to week, and from month to month. We do not have the instruments for fine-tuning the exchange rate. The first paragraph of the mandate sets forth an objective. The last paragraph specifies what Norges Bank shall do. The inflation target is set at 2½ per cent.

Several reasons may lead to the interplay between monetary and fiscal policy failing to function. Interplay functions well when the decision-making bodies are conscious of how one body’s decisions influence the decisions of the others. Unless this fact is recognised, a decision will not produce the result that was planned. The economy may move in a very undesirable direction, with high interest rates, sluggish economic growth and a deterioration in the state’s financial position. Without coordination, a good result may still be achieved if fiscal policy acts as “leader” and monetary policy as “follower”, to use expressions taken from game theory. The fiscal policy authorities can internalise the monetary policy response pattern. The central bank’s response pattern must of course be known so that the fiscal authorities can take this into account. The social partners can similarly take any monetary policy response into account when wages are being determined. The “leader” in this interplay - the social partners - can take the “follower’s” - Norges Bank’s - response into account. This view is most relevant in centralised wage formation. In decentralised wage formation, monetary policy will instead affect wage growth via market mechanisms by stabilising aggregate demand. A precondition for interplay that functions well is that monetary policy is known and remains firm. The outcome of this year’s wage settlement indicates that the social partners have not internalised the monetary policy response pattern.

It is not MAS’ role to front all investor education – this is where industry bodies and consumer groups come in. However, MAS will need to act as a catalyst to increase the focus on investor education in the financial sector. MAS can set out clear directions for industry, do more to explain its own market conduct regulation to investors and consumers, work with industry and other partners to co-ordinate current education efforts and, where relevant, co-fund with industry new investor education initiatives. Focusing and targeting our development efforts Fifth, we need to focus and target our development efforts. Despite the adverse environment, there are still opportunities for Singapore. The Financial Services Working Group (FSWG) set up at the beginning of the year has identified three promising areas: wealth management, universal processing centres and an Asia Risk Exchange. In identifying wealth management, the Working Group has reaffirmed a key thrust of our developmental efforts. It has gone on to single out alternative assets, such as private equity and hedge funds, as areas for development. Universal processing centres and the Asia Risk Exchange will be two new fields for Singapore, where Singapore’s efficiency, technology and infrastructure will be important strengths. For universal processing centres we need to consolidate global transactional flows into Singapore. The Asia Risk Exchange will combine Singapore’s existing insurance and capital market expertise into a new physical vehicle for the transfer of large and sophisticated risks.

This is a valuable approach which should be extended to all facets of MAS’ dealings with industry. Industry feedback will help us refine our policy and avoid mistakes and unintended consequences. Our contacts with industry need not be confined to Singapore. More often than not, business decisions that affect Singapore are made in the head offices. Where possible, we should extend our presence and reach by linking up with institutions and organisations worldwide. Deepen talent pool Third, we need to deepen the talent pool in the financial sector. The vibrancy of Singapore’s financial centre is dependent on this. Without the trained talent, it will be very hard to persuade financial institutions to site new activities in Singapore. MAS must continue its efforts to build up and upgrade this talent pool. While MAS is already co-funding financial skills training, we also need to extend our efforts into improving the quality and quantity of financial training and research conducted in Singapore. One possibility is to set up specialised financial service institutes in Singapore to teach both the art and science of finance, for example in wealth management. At the same time, the local talent pool must also be supplemented by infusions of fresh blood from abroad. Singapore must continue with its open door policy to attract talented professionals to work here. Another means of deepening the overall talent pool is through greater circulation of talent between the public and private sectors. MAS has actively hired from industry in order to build up its expertise.

However, although loans for housing seldom constitute major problems for the banks, they may mean disaster for individual households that suddenly find it difficult to make the payments. At 9 In the economic literature this ratio is called Tobin's q after the Nobel Prize winner James Tobin who, among much else, has studied property prices. If Tobin's q is equal to 1, then the cost of buying an existing house is equal to the cost of building a new one. This means that if house prices increase so that the market value is higher than the replacement value, then it pays to build a new house as each invested krona is valued at more then one krona by the market. In several of our large cities, Tobin's q is between 1 and 2, or even higher. In many parts of Sweden, however, the value is well below 1, which means that it does not pay to build new housing there. 6 BIS Review 105/2009 present the interest rate is very low. However, our forecast indicates that the Riksbank, following a period with a low interest rate, will need to raise the interest rate quite quickly in the period ahead. It is therefore particularly important that the banks check that every household that borrows money can cope with the expected interest rate increases and potential losses of income. The major Swedish banks have strengthened their capital bases and in international terms appear to be well capitalised.

The Black Swan: The Impact of the Highly Improbable. Random House. 1 As the recent IEA report3 stresses “the global pathway to net‐zero emissions (…) requires all governments to significantly strengthen and then successfully implement their energy and climate policies. Commitment made to date fall short of what is required”. Meanwhile, the world has been hit by the Covid 19 health crisis. This is a crisis that is due to lack of prevention, unpreparedness at national levels and flaws in international cooperation. This is a crisis that has forced governments to lock down hundreds of millions of people and has stopped or reduced economic activity. This is a crisis with huge macroeconomic costs and which has forced governments to provide substantial fiscal support and central banks to intervene with bold monetary policies, in order to preserve favorable financing conditions. As regards climate change and the environment, scientists as well as the authors of the Green Swan try to explain to us what could happen if we don’t act. On the health front, we experienced “skin in the game” what an unexpected, severe, global crisis can be, because we did not collectively act on time. In advanced economies, thanks to vaccinations, we are seeing some light at the end of the tunnel. This is a relief. However, other crises could occur; there is no vaccine against climate change and environmental risks. This tangible experience makes the Green Swan even more interesting to read and to meditate upon now, than when it was published.

Let me be crystal-clear: any hypothesis of a reduction of purchases partly for Q3 or the following quarters is purely speculative. As Christine Lagarde has said, we did not even discuss phasing out at our April Governing Council meeting. Our net purchase volumes will be freely determined until at least March 2022 by our commitment to preserve favorable financing conditions for all economic agents. Our monetary policy can be patient, as the euro area inflation is well below other jurisdictions. Page 5 sur 9 III. Is the ECB efficient in its results? Over the period 1999-2007, inflation averaged 2.1%. But the inflation rate has dropped to only 1.0 % between 2013 and 2019. This is a substantial shortfall. Headline inflation in the US (CPI) experienced a similar decline of 1.1%, having dropped from 2.7% to 1.6% between the two periods, although the gap to the target is smaller. In the euro area, according to Banque de France’s analysis, two factors explain most of the gap between the observed level of inflation and our targetiii. The first one is caused by the Great Recession and the sovereign debt crisis.This set of crises has durably depressed demand and therefore prices, through the Phillips curve; while the slope of the Phillips curve seems to have decreased in recent decades, it is still positive. The Phillips curve remains well alive: in the bad news of “missing inflation”, this is the good news for monetary policy.

Faced with such swings in sentiment, I want even more to stress today two ideas that are constant and consistent: (A) the ECB has been an innovative and efficient inflation-targeter, including in the Covid-crisis; (B) beyond Covid, the ECB has a powerful “quartet of tools” to keep its monetary policy as accommodative, and for as long as necessary. A. The ECB as an innovative and efficient inflation targeter In the first part of my remarks, let me try to answer three questions: is the ECB clear in its objective? is it consistent in its instruments? and is it efficient in its results? Page 2 sur 9 I. Is the ECB clear in its objective? For the ECB, like all other major central banks, our inflation objective is our lodestar. That means our definition of price stability should be simple, symmetric, and medium-term oriented. However, not everyone may perceive it this way. Hence, in the context of the Strategy Review launched by Christine Lagarde, we are currently reflecting on whether it can be communicated more clearly. To make it even simpler, we should reexamine the overly sophisticated qualifiers attached to the 2 % figure (“close to but below”). There is no benefit in appearing ambiguous about what we are aiming at. “Symmetric” refers to the fact that our objective is a target and cannot be a ceiling. Looking backwards, a central bank that has been successful in achieving its target on average will have had roughly as many episodes of inflation above its target as below.

TRICHET: The quantum leap we are asking for in surveillance of fiscal policy has to be the equivalent, in our own institutional framework, of what a federation could do. And we should not overestimate labor mobility in the U.S. and underestimate it in Europe. If I take the U.S. state with the highest unemployment and the state with the lowest, I am not that far from what we observe in the euro area, for instance in 2009 between 18% and Spain, 3,7 % in Netherlands, and between 13,6 % in Michigan, and 4,3 % in North Dakota, 4.3%. WSJ: Should senior bondholders of bank debt be forced to accept haircuts in the event of a bailout, as proposed by the European Commission? TRICHET: This is not a European concept. This is a global concept, which is discussed in particular at the level of the Financial Stability Board and of the Basel Committee It is particularly important for so-called systemic financial institutions. Very careful analysis is BIS central bankers’ speeches 3 required on the various possible options – additional capital buffers, contingent capital, bailing in financial instruments, etc. I would say for us it is still a work in progress. In any case I don’t imagine we could have a different solution in Europe than in other advanced economies. WSJ: What can be done to improve the euro zone’s growth potential?

I maintain that. WSJ: What do you think the risk is that this wrenching process will cause the breakup of the euro or its membership? TRICHET: Of course the euro is there and will be there in the future. I do not comment on what I consider absurd hypotheses. I am used to such questions from the very beginning of the euro. The paradox is that, years ago, the question was about Germany supposed to be at that time the “sick man of Europe”. I was responding that Germany was doing hard work that its economy was catching up on competitiveness. Now the same hard work has to be done by those that were growing rapidly over the past years but at the same time had lost their competitiveness. One has to accept that within a vast economy that has the size of the euro area, with 331 million people, there are economic differences. For instance when I look on both sides of the Atlantic I see that the differences between the fastest and slowest-growing U.S. states, it is more or less of the same order of magnitude as between countries in the euro area, for instance between Oklahoma and Nevada, 13 % differences in growth in 2009; between Slovakia and Ireland more than 9 % in growth in 2008. WSJ: The U.S. copes with these differences through labor mobility and a federal budget. Does the euro zone ultimately need a big federal budget?

At the same time, the pressures on the productive system appeared to be particularly strong in France. The Banque de France’s surveys indicate that the production capacity utilisation rate of over 87% is almost three points higher than its long-run average. Recruitment has become increasingly difficult: according to the INSEE surveys, 53% of industrial companies reported difficulty in hiring new staff in October 2000, against 39% in January 2000 and 32% in October 1999. This was the information available to me on 20 December 1999 when I commented on monetary policy developments in 1999. It is the highest level ever recorded in these statistics. These pressures on the productive system have been corroborated by the sharp increase in imported capital goods and manufactured products. Price stability: the monetary policy decisions of the Eurosystem The recent decisions should be assessed against the price stability objective assigned to the Eurosystem by the Treaty on European Union. In its pursuit of transparency and accountability, the Governing Council of the European Central Bank decided in October 1998 to give a precise definition of price stability as being a year-on-year increase in the euro-area HICP of below 2%. Its success in meeting this objective, which is the same as that adopted by the Monetary Policy Council for French monetary policy when the Banque de France became independent, should be assessed in the medium term.

This type of forward looking planning by country’s educational institutions is also needed for the development of a vibrant services sector in Sri Lanka. The conclusion to be drawn from the discussion so far is that Sri Lanka has missed opportunities in the past, but it need not continue to suffer in the future. It is still not too late to re-orient the economy towards the establishment of a vibrant services sector catering to the needs of the globalised industry, trade and commerce. The country’s highly literate and easily trainable work-force, investments in ICT infrastructure and conducive economic reforms will pave the way for its entry to the newly emerging globalised services industry. If Sri Lanka does not acquire its position in this newly emerging global trend, as it did during the Anuradhapura and Polonnaruwa periods, it cannot be avoided to be relegated to yet another episode of missed opportunities. 8 BIS Review 4/2007

Covered bonds have mortgages as collateral for their funding and according to the regulations governing the handling of these bonds, mortgages with an excessively high loan-to-value ratio may not be used as collateral. As the covered bonds are regarded as more secure by the market, the banks had the incentive to change over to this form of funding. Moreover, 3 See, for instance, Chistelis, Georgarakos and Haliassos (2013), Differences in portfolios across countries: economic environment versus households characteristics. The Review of Economics and Statistics, March 2013, 95 (1), pp. 220–236. 4 Another explanation for the banks’ extensive market funding is that the Swedish occupational pension system means that Swedish households themselves do not save with the banks, which means that the banks must find funding in the markets. The pension funds in their turn invest substantially abroad, which means that the banks must partly fund themselves abroad. BIS central bankers’ speeches 3 many banks in Europe had already introduced similar covered bonds. However, mortgage institutions were not allowed to fund the entire stock of mortgages with these bonds. To cover the remaining amount, the mortgage institutions instead began to borrow from their parent banks, which in turn to a great extent obtained funding on the financial markets. This meant that the link between the mortgage institutions, the banks and the financial markets were further reinforced, and this also increased the complexity of the funding of housing. During the 2000s, the banks’ market funding in foreign currencies also increased.

Philipp Hildebrand: The Swiss National Bank’s monetary policy strategy in the financial crisis Summary of a speech by Mr Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, at the University of St. Gallen, St. Gallen, 23 March 2010. The complete text in German can be found on the Swiss National Bank’s website (www.snb.ch). * * * To contain the financial crisis, central banks all over the world have chosen to take advantage of the room for manoeuvre afforded by their monetary policy strategy. The major central banks were only able to act in a flexible way – at least in part – due to their high degree of credibility with regard to their goal of pursuing price stability. The monetary policy strategy of the Swiss National Bank (SNB), too, has made it possible for the Governing Board to take conventional and unconventional measures to counter the crisis. The SNB’s approach has proven viable in the crisis. But this does not mean that we can sit back now. We must first find ways to withdraw smoothly from the measures taken to contain the crisis. In addition, we need to be sure that the Swiss economy is back on a sustainable growth path. After all, the crisis has shown that imbalances in the global financial system can occur even in an environment of price stability and macroeconomic stability. The main way to counter imbalances in the financial system is through better regulation.

Annual overall inflation is projected to remain above 8.0% during the first quarter of 2011, mainly due to the following factors:  Seasonal increase in some food prices: During the first quarter of the year, there is seasonal low supply of selected food items including fish, fresh vegetables and BIS central bankers’ speeches 7  Lagged effects of money supply growth in 2010: During the second half of 2010 there was a rapid increase in broad money by over 15.0%, largely due to lending to government for the purpose of purchasing maize following the bumper harvest. 57. However, the Bank of Zambia will continue to monitor developments and undertake appropriate monetary policy actions to ensure that monetary targets are achieved. To contain growth of money supply within the programmed path, Bank of Zambia will continue to employ open market operations and auctioning of Government securities. This is expected to be complemented by prudent fiscal operations. 8 BIS central bankers’ speeches

Norges Bank has adopted a set of recognised international standards for corporate governance and the exercise of ownership rights and takes an active part in their further development. The GPFG’s expectation documents and voting guidelines clearly express the bank’s priorities as a long-term owner. We exercise our ownership rights by voting at shareholder meetings and engaging in dialogue with companies. On 7 April, we announced the GPFG’s first investment in unlisted renewable energy infrastructure, ie a 50 percent stake in the world’s next largest offshore wind farm off the Dutch coast. Unlisted renewable energy infrastructure is still a relatively new area for Norges Bank. We intend to build up the portfolio gradually, primarily through investments in wind and solar power. We will prioritise investments that contribute to improving the overall risk-return tradeoff in the GPFG. Management of the GPFG is to be cost-efficient, and the Executive Board monitors cost developments closely. Earlier this month, Norges Bank announced a revised strategy describing how we will fulfil the investment mandate ahead. The strategy plan expresses our ambitions and our overall aim of achieving the highest possible return after costs. Our ambitions are high. As they should be. Nonetheless, we still aim to be a small, flexible and cost-efficient organisation. 2/2 BIS central bankers' speeches

We have policy space today due to our preventive, cautious and prudent policies that preserved macro-financial stability through the adoption of a pragmatic approach towards capital inflows over the last few years. It is now a well-understood and documented story: ample global liquidity due to easy monetary policies in advanced economies resulted in exceptionally intense capital flows to emerging market economies. And we know that large and volatile capital inflows can potentially lead to economic and financial instability. They are associated with excessive credit expansion, lower quality of loan origination, increased financial system exposure to exchange rate risk, asset price distortions, including excessive exchange rate appreciation, BIS central bankers’ speeches 1 and inflationary pressure, as excessively easy global monetary conditions can boost domestic demand independently from the desired domestic policy stance. In a nutshell, excessive flows are a fertile terrain to grow excessive financial exuberance. The textbook policy response for my country and other EMEs was to use its floating exchange rate regime, which helps to smooth economic and financial adjustments, while conducting sterilized interventions and international reserves accumulation, which reduces exchange rate volatility and builds a foreign currency liquidity buffer to prepare for reversals. But the intensity of this inflow episode was special as were the circumstances and policy responses in advanced economies1. Therefore, Brazil and other emerging markets pragmatically complemented their response and other textbook (aggregate demand) policies with the implementation of specific macroprudential policy measures to prevent the exuberance deriving from these large inflows to threaten financial stability.

But it is not inconceivable that we might break that record, as the Bank’s forecast, published yesterday, entails that inflation will remain below target through the early months of 2015. Inflation below target is not more desirable than inflation above target, though. In this context, we mustn’t fall into the trap of expecting monetary policy instruments to be so strong and quick-acting that inflation will always measure 2.5%, no matter what shocks hit the economy. The main objective is to keep average inflation close enough to the target over a long period of time that the target itself provides an anchor for inflation expectations and the many decisions that require an estimate of future inflation. But how close is close enough? In this context, our so-called tolerance limits for the inflation target – namely, 1% and 4% – are too wide, and it is worth noting that those limits are merely the trigger for the submittal of a report to the Government explaining how inflation will be BIS central bankers’ speeches 1 brought back to target. In short, then, the inflation target is not 1–4%. In order to underline the control problem, I sometimes say that the inflation target is not 2.5% but 2½%. What this means is that, if we think in whole and half percentage points, a deviation of half a percentage point or less from target would be considered within the boundaries of targetlevel inflation.

That is something that we may review next year in line with the process of deregulation already referred to. In the meantime, this need not be a barrier to setting up virtual banks, either by converting existing local franchises or, in the case of an overseas bank, by setting up a branch in Hong Kong. As proof of this, we are currently considering two applications to set up virtual banks, and assuming that they can meet our authorisation requirements, I hope that these can be in operation quite soon. One of the main tests that these applicants will have to satisfy is that they have adequate security to prevent unauthorised access to their systems and to protect customer information. Weak internet security puts the financial position and the reputation of the bank at risk, and concerns about security are the major barrier to more widespread customer acceptance of e-banking. It is essential therefore that the banks get this right. We have tried to help by issuing guidelines to the banks on various aspects of security, including the need for senior management to commission periodic independent assessments of the security aspects of their e-banking services. We have recently provided further guidance on how such assessments should be conducted and the areas they should cover. However, we also need to be in a position to conduct meaningful on-site examinations of our own.

Jaime Caruana: Perspective on issues relevant to the new international capital framework After-dinner remarks by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the “Accounting, Transparency and Bank Stability Workshop”, Basel, 17 May 2004. * I. * * Introduction Good evening. I hope that you are enjoying this opportunity to dine and unwind after your deliberations on emerging issues in accounting, transparency, and financial stability. You represent a wide range of views and institutions and, based on the animated conversations taking place during dinner, it seems that you bring great enthusiasm and interest to this workshop. In my view, that mixture enlivens the exchange of ideas and helps us to sharpen our understanding of the questions we face and the options we have to address them. It has been said that “learning is achieved only in company.” In this connection, we are all indebted to the workshop’s coordinators and sponsoring organisations for bringing together such select and highly qualified company in which to learn. Here I’d like to thank in particular Urs Birchler from the Swiss National Bank, along with Reint Gropp from the European Central Bank. On the academic side, I’d like to thank Mark Flannery (University of Florida), Rafael Repullo (CEMFI and CEPR), Ernst-Ludwig von Thadden (Université de Lausanne, CEPR and JFI), and Anjan Thakor (Washington University).

Those risks have the potential to affect the Bank’s core responsibilities both for the safety and soundness of the firms we regulate and for the stability of the financial system if there is a late, abrupt and disorderly transition. In particular, risks to financial stability will be minimised if the transition begins early and follows a predictable path. Once climate change becomes a clear and present danger, it may already be too late. As outlined in the PRA’s 2015 insurance report, and in our 2017 Quarterly Bulletin article on the Bank’s 1 response to climate change , there is evidence to suggest climate change is already having an impact. In looking at physical risks for example, on a global basis, weather related insured losses have increased from an average of around $ billion per annum in the 1980s to an average of around $ billion per annum so far this decade. And for specific weather events, there are indications that climate change is becoming a significant contributing factor. For example, Lloyd’s of London has estimated that the 20cm of sea-level rise that has been seen since the 1950s at the Battery in New York increased Superstorm Sandy’s (2012) losses by 30%. In terms of transition risk, there are already examples of how disruptive changes, linked to policy, technology and other economic factors, cause sharp changes in valuations.

6 Climate Bonds Initiative and UNEP Inquiry into the Design of a Sustainable Financial System (2015) “Scaling up green bond markets for sustainable development”. 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 such a shift is in its infancy and is an area where further research and collaboration is needed to support progress. Experts and financiers in the City and China have a role to play here. The work being done by the Taskforce in its pilot is to be commended. Mobilising private capital today is essential. Almost two thirds of required financing will need to be directed at sustainable projects in developing countries. Governments alone will not be able to meet this challenge. Yet it is not obvious that private investors will naturally fill that gap. For instance, debt instruments issued by emerging market firms often do not fall within the mandate of advanced market investors due to a missing, or too low, credit rating. It is in this context that bilateral partnerships such as the UK-China Taskforce are so important in accelerating progress.

Is there a risk to budgetary independence that might emerge if the Federal Reserve did not remit any income to the Treasury for a considerable period of time? My response here is that we should take a long-term perspective when we assess the potential fiscal costs associated with the Federal Reserve’s enlarged balance sheet. The fact is that the Fed’s reimbursements to the U.S. Treasury have been around $ billion per year in recent years, far higher than the $ to 30 billion range that applied before the financial crisis. Under most scenarios, the Federal Reserve’s total remittances to the Treasury will be larger than they would have otherwise been in the absence of the asset purchase and maturity extension programs. More importantly, the Fed’s cumulative earnings understate the fiscal implications of the Federal Reserve’s actions. To the extent that the asset purchases have resulted in easier financial conditions that have promoted stronger economic activity, this in turn has had a positive fiscal consequence for the U.S. government. In addition, the Fed’s asset purchase programs have pushed longer-term interest rates below what they would otherwise have been, reducing the overall funding expenses of the U.S. Treasury. Once we take into account the broader fiscal consequences of the unconventional monetary policies put in place by the Fed, they are quite likely to cumulatively have an overall positive impact on the government budget. As a result, the use of unconventional monetary policy tools should pose no significant threat to the Fed’s independence.

Such collaboration can also be extended to facilitate retail payment card transactions via the domestic debit card schemes of both countries. Eventually, I envision ATMs in Malaysia and Indonesia will be linked seamlessly. This will reduce cost, enhance safety and expand outreach. Conclusion Let me conclude with a quote by Malaysia’s second Prime Minister, Tun Abdul Razak Hussein, who said in 1967 that, “We cannot survive for long as independent but isolated peoples unless we also think and act together and unless we prove by deeds that we belong to a family of SouthEast Asian nations bound together by ties of friendship and goodwill” We have indeed come a long way in our cooperation and journey between Indonesia and Malaysia. The potential of Bank Mandiri as a Qualified ASEAN Bank in Malaysia will be a significant milestone for both our countries and the ASEAN region. It represents the realisation of a vision that was formed more than six years ago with the ASEAN Banking Integration Framework, with roots that go even further back. We should expect greater achievements by both our countries. 2/3 BIS central bankers' speeches Thank you. 3/3 BIS central bankers' speeches

According to estimates by the Institute of International Finance, net private capital flows into emerging markets in Asia increased nearly six times from 1998 to $ bn in 1999, and are forecast to increase again by 50% to $ bn in 2000. There is therefore a real danger that we might forget the severe pains inflicted by the Asian financial crisis over the past two years. It is also easy to forget the lessons learnt and to become complacent. However, if the recovery in the region is to be sustainable, we should remain vigilant and beware of the risks lurking under these bubbling activities. Risks and challenges in coping with international capital flows Challenges of domestic structural reforms In order to address such risks, we would need to tackle three challenges faced by Asia. The first challenge is that the globalisation and liberalisation of markets require structurally sound and resilient domestic systems. Prior to the crisis, the banking systems were often inadequately supervised and were prone to incurring excessive maturity mismatch risks by borrowing short-term funds to finance long-term investments. Moreover, the corporate sectors of many Asian economies were over-stretching themselves by engaging in risky or unproductive investments. To make things worse, both the banks and the corporates were taking excessive currency risks by borrowing in foreign currencies to fund projects that could only generate income in domestic currencies. Poor risk management on the part of banks, ineffective banking supervision, political interference, and a critical lack of transparency prevented disciplinary mechanisms from functioning properly.

The euro area has to act together, exerting some pressure on the IMF, which last year adopted a resolution to effectively strengthen its surveillance of currency markets. Lastly, regarding energy issues, it is necessary that developed countries, including Europe, put a stronger emphasis on energy savings and climate change. The experience accumulated in recent years has confirmed that although energy saving measures can slow down growth in the short term, costs connected to energy waste can be much greater in the long run. I will now close with the fourth line of action, which is linked to the previous one, though being on a more national scale. The ability of a European country to become part of the globalisation process depends not only on EU-wide initiatives but also on internal measures aimed at supporting economic growth. In essence, there are only two ways of absorbing the shock deriving from price increases in raw materials and to prevent it from becoming a reduction in purchasing power. The first way is to increase productivity in order to allow wages to grow in a non-inflationary manner. The second is the reduction in the price of items other than energy and food. Of course, these are not easy ways, but they are the only ones which can allow European economies to grow while preserving the purchasing power of its citizens, even in the presence of a worsening in the terms of trade.

The general impression among financial agents seems to be that a repo rate increase is probable some time in the coming winter. The timing of a change in the monetary stance is determined by the Riksbank’s assessment of inflation. The simple rule of thumb for the Riksbank can be formulated as follows: if the assessment of inflation, given an unchanged instrumental rate, points to a rate of inflation one to two years ahead that is in line with the target, then the monetary stance is well balanced. If the assessment indicates a risk of inflation rising above (falling below) the target, then the monetary stance is too expansive (contractive) and the repo rate should therefore be raised (lowered). The time has not yet come for an increase in the repo rate, but when it does, our action will hopefully be seen as a natural ingredient of a monetary policy for price stability. Our ambition is to take predictable and timely measures so that sizeable interest rate movements can be avoided. Still, it is hardly surprising that the direction of monetary policy is being discussed. At present Swedish monetary policy’s overall impact can be described as expansionary at a time when activity is becoming stronger. The short-term real interest rate is between 2 and 2.5 per cent, depending on the exact maturity and how inflation expectations are measured.

This successive increase in resource utilisation is already evident in some indicators. A growing proportion of firms are reporting, for example, that output is being restricted by productive factors rather than by demand. The gap between total demand and total resources for production is an important but elusive indicator of inflationary pressure. The Riksbank considers that the output gap, which is an attempt to measure the degree of unutilised resources in the total economy, is 2 per cent of GDP. With the GDP forecast from the inflation report, this means that the gap will narrow by degrees and close some time during 1999, in any event towards the end of that year. In the light of the assessments of resource utilisation and other factors, in the inflation report the Riksbank forecast that the annual increase in the CPI will be around 1 per cent in 1997 and around 2 per cent in both 1998 and 1999, with some upward tendency in the latter two years. This is our main scenario. BIS Review 101/1997 -4- Like most other forecasts, however, inflation assessments are subject to uncertainty. Our forecasts as a foundation for monetary policy therefore do not consist of single point estimates of future inflation. In practice we construct a number of alternative outcomes and assess their probabilities. Normally there is one main scenario and two alternatives. Economic activity could be stronger than we have envisaged, so that inflation is somewhat higher; but it could also be weaker, giving lower inflation.

As you may have guessed though, the main reason for central bank transparency is not to make your weekends more relaxing. Central bankers today pursue a policy of broad information because we believe that transparency helps us fulfil our mandate. We are convinced that monetary policy is most effective and least disruptive if it is predictable: no news on monetary policy is good news. In the following, I would like to discuss why, today, central bankers think transparency is crucial for a successful monetary policy and how the Swiss National Bank attempts to achieve transparency in practice. I shall then debate the limitations of what transparency Finally, I would like to reflect upon how transparency in monetary policy may affect the relationship between you, the journalists, and us, the central bankers. 1. The case for transparency At the Swiss National Bank we see three main reasons to be transparent about our monetary policy. The first reason is that we count on transparency to enhance the effectiveness of our monetary policy. In the public eye, central banks may be viewed as almighty. The plain reality is, however, that our open market operations only have a direct influence on current short-term interest rates. Economic activity and thus future price developments are, however, determined primarily by the shape of the yield curve, i.e. by the expectation of future monetary actions. Transparency about how we judge future inflationary pressures enables us to guide expectations about future short-term interest rates and thus also long-term interest rates.

Interest rates moved upwards before the Swiss National Bank adapted its operational target or its repo rate because financial markets trusted that we would increase interest rates. Given our objectives and our previous track record, it was credible that we would hike interest rates in the given economic environment. Central bank transparency can only improve monetary policy effectiveness if it increases the predictability of future monetary measures. I would like to emphasise that predictability relies not just on information and the communication of intentions, but also on whether the public trusts a central bank to realise these intentions. Central bankers can thus only benefit from transparency if their statements about future monetary policy are credible. Ultimately, we know that our words must be matched by our actions. 2 BIS Review 55/2006 4. Transparency and press coverage of monetary policy Ladies and gentlemen, central bank transparency yields economic benefits because it enhances monetary policy effectiveness and reduces uncertainties. Moreover, in a de-mocratic state, transparency is essential if independent central banks are to be held accountable by the public. I am therefore convinced that central banks around the world will continue to pursue a policy of openness for a long time to come. This leads me to an important question for all of us here: how will transparency about monetary policy affect future relations between the press and central banks. Does central bank transparency mean that future monetary policy will be boring, and that press coverage of central bank interventions will become obsolete?

One must go as far back as the herring boom of the 1960s to find a comparable debt position. The end-2015 external debt ratio was probably more noteworthy than it might otherwise have been because the net debt position as measured according to international standards was nearly three-anda-half times GDP only a quarter earlier. That figure was highly misleading, however, because it included, at full price, all of the debt of the failed banks’ estates, even though it had long since become clear that those debts would not be repaid except in part. For this reason, the Central Bank had adopted the practice of publishing what it called the underlying external position, BIS central bankers’ speeches 1 which looked through the expected settlement of the estates. By this measure, Iceland’s net debt totalled just over one-third of GDP at the end of Q3/2015, down from nearly one GDP at the end of 2008. Nearly 40% of the reduction is due to the current account surplus and GDP growth during the period, and the rest is due to default, debt restructuring, and other factors. The reduction in the debt position in Q4/2015, from 35% of GDP to 14½%, is due for the most part to the settlement of the failed banks’ estates on the basis of stability conditions. As can be discerned from what I have just said, the state of the Icelandic economy is quite good. According to current forecasts, the outlook is relatively good as well.

How can the persistent current account surplus, textbook economic theory and the SNB’s own assessment be reconciled? Is the surplus in Switzerland perhaps even the result of a monetary policy designed to deliberately push down the exchange rate in order to boost exports? 1 International debate about certain countries’ current account surpluses and unfair exchange rate policy has intensified in recent years. In this context, Switzerland has been on the US Treasury’s ‘monitoring list’ since 2016, although it is not designated a ‘currency manipulator’ in the associated report as it does not meet all the relevant criteria. However, Switzerland is being specially monitored. We are maintaining a constructive dialogue on this matter with the responsible government agencies in the US. Foreign authorities and international organisations recognise Switzerland’s special position, and appreciate the rationale for the SNB’s monetary policy measures. According to the latest External Sector Report of the International Monetary Fund (IMF) of July 2017, Switzerland’s current account is in line with macroeconomic conditions, and its monetary and fiscal policy is considered appropriate. Yet, international debate about current account surpluses and deficits has at times been heated and not always objective. Some observers have repeatedly denounced Switzerland for its persistent surplus. As criticism has focused on the SNB’s monetary policy, I am naturally keen to give you my analysis of the situation. Before we get into the details, let me outline the crux of my argument.

22.02.2019 Banking Union: the challenge of going digital and being regulated Presentation of the PwC report Pablo Hernandez de Cos Governor Let me begin by thanking PwC for their kind invitation to participate in this presentation of the Sixth Report on Banking Union. In recent years these reports have provided us with a detailed analysis of the challenges facing the Spanish financial sector as a result of having to adapt to regulatory changes and to the new institutional arrangements of Banking Union. And this against a background of far-reaching technological change, which has seen the emergence of new players (such as the fintech and the technological giants, the so-called bigtech). These agents are altering the competitive framework in some of the traditional business segments of banks. As on previous occasions, this year’s report is very complete and analyses key questions on new issues relating to regulation, to banking activity and to the environment banks face. Allow me to focus on two specific issues: the tasks outstanding regarding Banking Union and the technological challenge from a regulatory standpoint. These two issues are, moreover, interrelated. To successfully address the transformation imposed by the new competitive environment resulting from technological changes will probably require harnessing the opportunities of scale and specialisation that the integration of European financial markets offers. But to enable this process of integration it will be necessary first to remove the obstacles that continue today to block the way to the creation of Banking Union and the full Capital Markets Union.

This means that aspects such as the privacy or protection of information, transparency towards consumers (so they may take informed decisions) and the effective level of competition between providers of specific technological services (take, for example, the use of the cloud) all gain in importance. However, these matters lie outside the typical remit of financial supervisors and thus make it necessary to promote a collaborative climate and more intense cross-disciplinary dialogue. Conclusions By way of conclusion, I would assert that twenty years after the creation of the euro, major headway has been made in equipping EMU with greater stability. However, the architecture of EMU remains incomplete: there is a pressing need to complete Banking Union and make headway on the Capital Markets Union. To do this, we must push through key aspects such as the common European deposit insurance scheme, and deepen financial integration. The internationalisation of the banking business would help bring about greater diversification, weakening thereby the link between sovereign and banking risk. Further, harnessing synergies and economies of scale may contribute to improving profitability. That would provide for the investment needed to enable the ongoing adaptation to the change wrought by the digitalisation of the banking business. Digitalisation promises major benefits, both for consumers (in the form of better and tailored services) and for those financial institutions able to seize this opportunity. Our role as supervisors lies in ensuring a safe and stable transition for the good of all citizens. Thank you. 8/9 9/9

Michael Held: SOFR and the transition from LIBOR Remarks by Mr Michael Held, Executive Vice President of the Legal Group of the Federal Reserve Bank of New York, at the SIFMA C&L Society February Luncheon, New York City, 26 February 2019. * * * As prepared for delivery Thank you for that kind introduction, and for the opportunity to speak to you all today. As always, my remarks reflect my own views and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.1 When I was thinking about what to talk about today, I recalled how everybody’s favorite question at these kinds of events is, “What keeps you up at night?” Of course, at the top of my own list is whether my daughter is going to get into a good kindergarten in Brooklyn. But not far below that is reference rate reform. Today I’ll keep the former to myself, and speak instead about reference rates. It’s not just me who’s concerned. The Securities Industry and Financial Markets Association (SIFMA) named reference rate transition from the London Interbank Offered Rate (LIBOR) to its alternatives as one of two leading fixed-income market developments for 2019.2 And the Financial Stability Oversight Council (FSOC) has repeatedly identified reference rate transition as a financial stability risk.3 Today I’d like to give you an update on the state of that transition. Here’s the preview: The task is immense. But it is not insurmountable. Much work has been accomplished, and much work remains.

At least in hindsight there are usually fairly clear tell-tale signs of expanding fiscal deficits and/or lax monetary policies, classically accompanied by evidence of imbalance in the form of accelerating inflation or a rapidly deteriorating balance of payments. There were such signs, perhaps most notably in Thailand; but they were not for the most part particularly pronounced in Asia. In fact through the first half of the 1990s, and in some cases for much longer, the countries in question were remarkably successful. They attracted, by their very success, huge inflows of capital from the rest of the world in search of higher returns. The capital inflow made a major contribution to sustaining the economic expansion in Asia, but, with the benefit of hindsight, the increasing scale of the inflow, and particularly the form that it took, became an important part of the problem. It was not all effectively employed. There was overinvestment in some production sectors; much went into ambitious property development; and much went into financial rather than real assets. The hoped-for higher returns could not be maintained. Again with the benefit of hindsight, it is possible to identify a number of structural weaknesses in the mechanisms for financial resource allocation in the recipient countries. There was, for example, a general lack of reliable financial information, and a lack of transparency in relation to the financial position, of both public and private sectors.

CCP recovery and resolution therefore poses some specific issues, some of which I will touch on today. However, at base there are principles that are common to the resolution of any systemically important institution. Perhaps the most obvious similarity between the resolution of banks and CCPs is in the common objective: resolution should deliver continuity of critical economic functions without reliance on solvency support from taxpayers to achieve it. For that continuity to be achieved it is not enough that the financial losses of the institution are fully absorbed; the going-concern resources of the institution, or of any successor institution, must be restored to a sufficient level to command market confidence prior to any post-resolution restructuring or wind-down. In the case of banks, this means that when a bank suffers losses eroding its going concern capital to the point where triggers for resolution are met, (i) it enters into resolution; (ii) its creditors are bailed in to recapitalise the firm; and (iii) this bail-in replicates what would have happened in a court-based commercial restructuring or insolvency. In other words, losses are allocated according to the creditor hierarchy but without the value destruction created by the hard stop of insolvency. This ensures that the resolution provides continuity and meets the safeguard that creditors are not worse off than in insolvency. While these are the essential elements of a resolution, they are likely to play out differently in the context of a CCP.

Central Bank of Chile September 2019 Organisation for Economic Co-operation and Development OECD Forum on Blockchain, September 2019 High-level Policy Panel Discussion on Central Bank Digital Currencies Remarks by Mario Marcel, Governor of the Central Bank of Chile Disruptive technologies in Finance or “FinTech” are transforming the financial industry landscape, challenging traditional business models. These technologies have been able to address some gaps in the traditional financial industry that can be grouped into five categories: Access, Speed, Cost, Transparency, and Security. Leveraging on open-source technologies and Smartphone penetration, FinTech has seen fast adoption, disrupting all areas of the financial services such as payments, investments, savings & lending, insurance and risk management. One example of the innovation across different financial services is this research framework from the World Economic Forum. Fintech innovations are identified and grouped into clusters, which in turn are a result of innovation triggered by common themes that cut across financial services. These themes are enabled by different technologies. The main takeaway here is to understand the potential of these technologies to innovate across all financial services and have a visual image of how this is reshaping the financial services. As this reshaping is taking place, the policy makers, regulators, and supervisors need to understand the forces driving this innovation wave, in order to assess the risks and opportunities of these new business models.

10 Moreover, the fact that European countries have tended in the past to merge failing banks, rather than resolve them, probably reduced space for new entrants: only a handful of new banks enter national markets each year. Against that background, the establishment of Banking Union will be catalytic in triggering a change in the banking landscape. The balance sheets of cross-border banking groups will become progressively more fungible, allowing liquidity and capital to be more efficiently managed at the group level. And with the Single Supervisory Mechanism (SSM) and the new resolution framework barriers to entry and exit into national markets are expected to fall. All this should meaningfully lower the cost of doing business for cross-border banks and increase efficiency in the sector. At the same time, a more integrated banking landscape implies greater risk-sharing within the sector, which should in turn support the stability of credit provision. Cross-border integration entails greater geographical diversification. 11 And the local affiliates of crossborder banks are also less likely to be exposed to the kind of market funding dry-ups we saw during the crisis, as intragroup funding acts as a shock-absorber. 12 That said, we of course do not want to move from a situation of too low concentration towards a banking landscape dominated by large banks with excessive market power. Recent research looking at the pre-crisis period suggests that where banks face limited competition in their domestic markets, financing constraints for SMEs are higher.

13 Ryan, R., O’Toole, C. and McCann, F. (2014), “Does bank market power affect SME financing constraints?”, Journal of Banking and Finance. 6 BIS central bankers’ speeches other words, it creates the conditions for diversity and competition within the sector so that an optimal market structure can evolve. Conclusion Let me conclude. Repairing bank lending channel after a major financial crisis is inevitably a long and difficult process. Monetary policy has an important role to play, but the agenda is also broader: it involves supply and demand factors, and multiple aspects of national and European policy. The steps we have taken so far to strengthen the banking sector are necessary conditions for a stronger recovery in credit, and I am confident that we will see increasingly positive effects. But as banks transition to a new business environment, ensuring that they continue to have microeconomic incentives that coincide with our desired macroeconomic objectives is essential, as is developing a banking landscape that is sufficiently efficient and diversified to sustain credit supply. BIS central bankers’ speeches 7

First, research undertaken in universities very frequently serves as a starting point for work undertaken in central banks. One of you may just have written a very good paper on the sensitivity of the New Zealand economy to international business cycles or the determination of capital flows between Thailand and the rest of the world. It may well be that this paper, unknown to the author, triggers research at the Hong Kong Monetary Authority on how sensitive our economy is to external factors or on the determination of capital flows in and out of Hong Kong. Secondly, academic research undertaken in a free and open manner, and presented at conferences such as this, serves to improve the quality of research in central banks. There is a strong presumption in my mind that competition, no matter whether it be in the market for airline tickets or in econometric models of exchange rates, are beneficial to consumers - and central banks are large consumers of economic research. More directly, I know that some of the HKMA’s research staff will present papers here, and I am sure that your comments on the papers will trigger ideas for how they could be improved. Next time, they will be better. Thirdly, universities are the source of staff for central banks. We do hire your students and sometimes we are even able to hire academic researchers.

Non-Muslims have benefited from waqf as proceeds have been used to purchase medicine for needy Singaporeans, regardless of race and religion. The Malay/Muslim community in Singapore, while holding fast to the values of Islam also maintains an open and progressive attitude in the practice of its faith in our multi-racial and multi-religious society. The Singaporean Muslim's identity stresses the importance of contextualising one's beliefs to the environment, but without compromising the tenets of faith. The environment required to ensure the growth of waqf is similar to conventional charitable trusts. Singapore has established itself as a strong centre for the administration of charities and trusts. We have introduced several initiatives to make Singapore a more conducive jurisdiction for trusts, a vehicle commonly used for philanthropic purposes. This includes measures to modernise our trust laws, update our regulatory framework and make our tax regime more conducive for the establishment of trusts. This will help Singapore to become a centre for the development of waqf. Conclusion Let me conclude. Asia and the Middle East are becoming more interdependent. With our destinies intertwined, it is critical for Asia and the Middle East to continue our efforts at engaging each other, strengthening our bonds and enhancing mutual understanding. To overcome the common challenges we face, we should continue sharing our experiences. I hope that this conference is the first of many in bringing together interested parties from all over the world to explore new and innovative ideas, and to learn from each other.

Figure 12 The effect of an amortisation requirement on household indebtedness according to current proposals Per cent 220 220 Scenario without measures Amortisation requirements 210 210 200 200 190 190 180 180 170 170 160 160 150 150 140 140 130 130 05 10 15 20 25 Note. Broken red line shows an estimate of developments over the next 10 years without further measures. Shaded area indicates a feasible lower limit for when the risks are elevated in the economy. Broken yellow line shows an estimate of the effect of an amortisation requirement according to current proposals. Sources: Statistics Sweden and the Riksbank. A change to tax relief on mortgage interest could lead to a faster and more direct effect on household indebtedness, as it affects all borrowers. However, as a reduction in tax relief initially raises mortgage costs, it is likely that existing mortgage borrowers do not pay down their loans immediately. The effect on the total debt-to-income ratio therefore occurs gradually, even in the case of changes to tax relief. According to these calculations, it is only 19 A borrower with medium indebtedness in Sweden taking out a new mortgage, or increasing existing loans, only amortises at a rate which leads to the new loan being repaid in 56 years.

Our monetary policy strategy is based on using a highly expansionary monetary policy to safeguard confidence in the inflation target, which has provided a nominal anchor for the Swedish economy for over 20 years. However, we are well aware that the low interest rate level increases the risk of problems arising on the housing market later on and that measures need to be taken elsewhere to make our strategy successful in the longer term. Consequently, when we discuss possible measures for the housing market and household indebtedness, this is a matter of risk management: of adopting measures today to prevent the risk of unfavourable events later on. When it comes to the exact design of measures, to some extent it is, therefore, a matter of subjective opinions and not an exact science. The mandate for macroprudential policy in Sweden must be clarified Macroprudential policy is the policy area which has come to dominate the international discussion about reducing risks linked to household indebtedness. 12 Several targeted tools are offered within macroprudential policy which could be used for this purpose. For example, requirements could be placed on banks’ equity by introducing countercyclical capital buffers and risk-weight floors on mortgages, and limits could be placed on how much households can borrow by way of loan-to-value limits and an amortisation requirement. It is therefore obviously very concerning that the previously adopted macroprudential policy framework in Sweden has encountered legal problems.

Separately, one of the two largest trade unions in Malta has been running an independent price monitoring exercise, to be followed soon by a name and shame campaign. This exercise involves the participation of mystery shoppers who monitor an extensive list of products and services. More recently, a special deposit scheme was launched to provide residents with a one-time opportunity to regularise their position in respect of cash and deposits not previously declared for income tax purposes. The objective is to mitigate the risk of inflationary pressures arising from the sudden conversion of these financial assets into real assets, which would reinforce the view that the euro creates inflation. If I had to draw any conclusions from Malta’s experience, I would first say that the prospect of euro adoption has served as an additional, and welcome, impetus to fiscal consolidation and to structural reform. As a result, the economy should not only be more prepared for take on the policy disciplines of EMU, but also be better equipped to deal with an increasingly challenging global economic environment. Second, while a successful integration in the euro area demands, apart from solid economic foundations, public acceptability of the single currency, opinion surveys in Malta seem to confirm that public perceptions do respond to a targeted information campaign. Such a campaign is in hand, but the adjustment process is slow and is occasionally fraught with perceptions that are seemingly in conflict with each other. Myths are not easily dispelled!

The Central Bank of Malta’s preparatory process for integration in the Eurosystem has undoubtedly benefited from its participation in ESCB committees and from the bilateral contacts established with many Eurosystem central banks, including the Oesterreichische Nationalbank and the Central Bank and Financial Services Authority of Ireland, our partner in the Twinning Arrangement on communication strategy in which we participated with Cyprus. Some Eurosystem central banks, moreover, have responded favourably to requests for entering into cooperative arrangements with the Bank for the implementation of specific operations, such as in the field of reserve management. As for the public mood, price perceptions will probably remain a source of apprehension, at least in the immediate period ahead. Although 68% of Maltese respondents who participated in the latest Eurobarometer survey said that they are in favour of a relatively early euro adoption, some responses to the other questions suggest that the Maltese are not indifferent to what they hear about the possible negative effects of the single currency. The percentage of respondents who consider that the euro will be of personal or national benefit, 2 for example, is smaller than that of those who favour early adoption. And the main concern is not unlike that in the current euro area Member States. It is not about the ability of the ECB to deliver price stability over the medium-term. It is primarily about a temporary increase in price levels after the changeover, a fear which has been reinforced by what is reported in the Italian media.

8 However, much of the research indicates that globalisation has had relatively little significance for the reduction in inflation in advanced economies. What has been more important are changes in monetary policy strategies, changes in wage formation systems (with, for example, a reduced degree of indexation) and, as a result, stabilisation of inflation expectations; see, for example, Attinasi and Balatti (2021). However, some studies suggest greater effects; see, for example, Auer and Fischer (2010). 9 [16] Diagram 6. Global real interest rates have fallen Per cent Note. Real interest rates refer to 10-year zero coupon rates for real (index-linked) bonds for Sweden and the United States and 10-year benchmark rates for real (index-linked) bonds for Germany and the United Kingdom. Sources: Bank of England, Bloomberg, Federal Reserve and the Riksbank. Driving forces behind this development that are often highlighted include demographic factors. A large global population of working age and increased prosperity have contributed to high global savings.9 These are conditions that monetary policy cannot influence, but must adapt to. As the real interest rate situation has fallen, central banks’ policy rates have subsequently had to be cut to increasingly lower levels for each economic cycle in order to have sufficient effect, especially when fiscal policy has at the same time been restrictive and sometimes tight.

Recently, a number of global shocks − the coronavirus pandemic, Russia's invasion of Ukraine1 and lock-downs in China − have contributed to pushing up inflation in Sweden and around the world, to levels we have not seen since the early 1990s. I think it is of the utmost importance that we defend the inflation target as anchor for price setting and wage formation in Sweden. Inflation is too high. It is painfully high for both households and companies.2 In addition to worrying about rising prices, households and companies are worried about higher interest rates. Will we go from 500 per cent to −0.5 per cent to – *I would like to thank Mikael Apel for his work on this speech, Johan Almenberg, Emma Bylund, Charlotta Edler, Petra Frid, Stefan Ingves, Jens Iversen, Ann-Leena Mikiver, Emelie Nilsson and Marianne Sterner for their valuable comments, Elizabeth Nilsson for translation into English and Daniel Höffker and Josefin Poellinger Östberg for data from the Riksbank's archives. I would also like to thank my upper-secondary school teachers at Platenskolan in Motala for their solid education and for always showing their pupils respect and trust. 1 See, for example, Ohlsson (2022) for a review of how war has affected inflation in the 20th century. 2 Inflation also has a varying impact on different types of households and companies; see Breman (2022) for a more detailed discussion. 1 [16] well, what comes next?

Smart Banking is a platform that offers full interconnectivity amongst retail and corporate customers and allows more personalised financial services and transactions to be undertaken with great mobility, speed, ease and safety! At the same time, under our risk-based supervisory regime, the right balance will need to be struck between promoting financial innovations on the one hand and 5/6 BIS central bankers' speeches according appropriate customer and investor protection on the other. In conclusion, it is not a question of whether the tech firms will disrupt the banks or the banks can resist the intrusion of tech firms. It is a question of whether we make the best out of banking and technology by marrying the two. The answer to this question is crystal clear to me. We must move into the new era of Smart Banking by embracing technology and safe banking. Indeed it is most encouraging to see many banks in Hong Kong are already taking the initiative to ride on the wave and making impressive progress in this direction. Ladies and gentlemen, I feel very excited by the prospects that lie ahead because Hong Kong, by virtue of its status as an IFC and technology hub in Asia, is uniquely well positioned to advance and excel. Thank you very much. 6/6 BIS central bankers' speeches

The Governing Council fully supports all steps to avoid the occurrence of excessive deficits and all efforts to reduce the public debt and bring the fiscal stance into line with the stability programmes in individual member countries in order to ensure the credibility of the commitments made under the Stability and Growth Pact. In the same vein, we very much support the continued initiatives to foster structural reform. We welcome the focus placed on these issues in the context of the forthcoming Barcelona summit and we are looking forward to swift and determined delivery of essential structural reforms in the goods, services and labour markets to promote the euro area's growth potential. 2 BIS Review 9/2002

This could be part of a European Monetary Fund, provided that its scope of action is extended beyond the current European Stability Mechanism. - A micro accelerator: i.e. a Financing Union for Investment and Innovation. The aim is to mobilise the EUR 350 billion savings surplus of the euro area, notably to shore up equity which is the key to an innovation economy, and also to foster synergies, thanks to an integrated steering mechanism, between the Juncker investment Plan, the Capital Markets Union and Banking Union. - A fiscal accelerator, once we have increased trust between Member States and made headway towards greater economic convergence: the euro area budget could be used to Page 6 sur 6 finance, for the benefit of all countries, certain “European common goods” such as digital technology, energy transition, security, and migration controls. - An institutional accelerator: The fourth is not an accelerator in substance, but rather a “facilitator” for the first three. In terms of institutions, we would need first and foremost a euro area Finance Minister, President of the Eurogroup and member of the Commission, backed by a European Treasury; but also a euro area Parliament group, in order to ensure the democratic legitimacy of the institutions and decisions. But it only makes sense if we make progress on the substance: if not, it would be little more than mere window dressing. The latter two accelerators, fiscal and institutional, would require Treaty changes, unless they were to be very limited.

The Fund needs to make more of its presence at inter-governmental groups such as the G7 and the G20. And it needs to experiment with more flexible ways of exploring key policy issues with relevant groups of members, to add depth to the formal exchanges typical of large set-piece international gatherings. After a couple of years debate, the prospects for achieving meaningful reform now look promising, following the Fund’s Annual meetings in Singapore. The agenda for reforming surveillance includes a new focus on multilateral issues, including global financial issues and a new procedure for multilateral surveillance. The Managing Director has launched a first round of multilateral consultations on global imbalances. These are a potentially important innovation in the way the Fund interacts with key policymakers, but as they are still under way, I shall not comment further. Instead I want to focus on the other key area for reform, where there are some important outstanding issues. This is the work now in hand to clarify and update the operational guidance on surveillance, through a thorough review of the 1977 Decision and by designing a new annual remit for surveillance. This is aiming to provide a clear, up-to-date set of guiding principles, and a firmer operational foundation for surveillance. This matters because the Fund can only be effective in encouraging countries to fulfil their obligations if there is a clear and shared view of what those commitments are, and a coherent and transparent operational framework for assessing compliance.

First, by boosting incomes in retirement it will help support a large share of the population as it ages, reducing the burden that currently falls on the unfunded pay-as you-go system. Second, if individual contributions are linked more closely to individual payouts, this will encourage private saving, which, as we have seen, is necessary to close the saving/investment gap. Finally, if individuals perceive a closer link between their contributions and their retirement income, this should help curb the evasion of social security payments. There is little room for tax increases Fiscal consolidation, therefore, is desirable to help correct the economy’s external imbalance; to put public finances on a sound footing while coping with the costs of population ageing; and, above all, to maintain credibility and investor confidence, which are prerequisites for growing the economy. Now deficit reduction is typically achieved through a combination of increased revenue and expenditure cuts. As for the former, relying mainly on higher taxation cannot be an option at this juncture; besides, it generally distorts the efficient allocation of resources. Higher indirect taxation tends to push up the price level and, hence, harms competitiveness, while higher taxes on income depress economic growth. Neither, of course, is this a time for cutting taxes. An option which is at once fiscally beneficial and socially desirable is to close remaining tax loopholes and to engage in a more aggressive pursuit of tax evasion and benefit fraud. We need to cut spending, while rebalancing it The only real alternative, however, is to cut public spending.

Conclusion Mr. President, this evening I have argued that while the Maltese economy is headed in the right direction – a fact that has been recently confirmed by its 33rd place in the Human Development Index –, we must look beyond the current upturn to examine structural weaknesses that are preventing the economy from exploiting its full potential, and thus from closing the income gap with our European peers. I have therefore suggested that we need to raise labour force participation, improve the quality of the work force and increase the efficiency of public spending, particularly in education. We also need to invest more, to upgrade the capital stock. Here, monetary policy is playing an important role: interest rates are at historic lows and bank credit continues to flow. The Eurosystem’s commitment to deliver price stability in the medium term is also a key factor in sustaining investor confidence and supporting economic expansion. Market mechanisms, underpinned by appropriate legal frameworks, must be allowed to work better. In general, we need to open up domestic markets to an even greater degree of competition. In addition, fiscal tightening is necessary to correct current imbalances and begin to reverse the trend increase in public debt. This objective acquires added importance in the context of population ageing. Above all, durable consolidation requires a reappraisal of the role of the state and the tightening of fiscal rules. Finally, we need to further improve the economy’s resilience to external shocks.

In the moving year ending in the second quarter of 2022, the current account accumulated a deficit of 8.5% of GDP, a figure in which the savings-spending imbalance of the government played a preponderant role, due to the income-support measures adopted in 2021. Households also showed a significant imbalance, given the liquidation of savings involved in the withdrawal of pension funds to finance higher levels of private consumption (figure 7). Although the impact of these phenomena has been receding, this will only begin to show up in the current account in the second half of this year. On the external front, the sharp rise in inflation and the response of central banks has led to tighter financial conditions, which has reduced global growth prospects and increased the risk of a global recession happening in 2023. Inflation numbers not seen in several decades 3 have been reached in several economies. Given inflation’s higher persistence and expectations, most central banks have maintained and/or accelerated their interest rate hikes, where worth singling out are the unexpected magnitude of the hikes and the more restrictive message from the Fed. The worsening of financial conditions has begun to impact on the activity and expectations of different agents, in addition to the uncertainty surrounding the unfolding of the Russia-Ukraine war, Europe's gas supply disruptions, and the weakness of the Chinese real-estate sector and overall economy (figure 8). Commodity prices have fallen across the board, driven mainly by lower expected demand and an appreciated dollar.

15 Table 1 Domestic scenario 2021 GDP Domestic demand Domestic demand (w/o inventory change) Gross fixed capital formation Total consumption Private consumption Goods and services exports Goods and services imports Current account (% of GDP) Gross national savings (% of GDP) Nominal gross fixed capital formation (% of GDP) 11.7 21.6 18.0 17.6 18.2 20.3 -1.5 31.3 -6.6 18.8 24.0 2022 (f) 2023 (f) Jun.22 MP Sep.22 MP Jun.22 MP Sep.22 MP Report Report Report Report 2024 (f) Jun.22 MP Sep.22 MP Report Report (annual change, percent) 1.5-2.25 1.75-2.25 -1.0/0.0 -1.5 / -0.5 2.25-3.25 2.25-3.25 1.4 1.2 -3.4 -4.7 2.5 2.2 1.0 0.9 -3.4 -4.6 2.5 2.6 -4.8 -3.3 -2.2 -4.7 3.0 2.9 2.8 2.2 -3.7 -4.6 2.4 2.4 2.1 1.4 -4.1 -5.7 2.5 2.5 1.3 1.3 5.7 5.5 3.0 3.0 0.0 -1.4 -3.0 -5.5 2.3 1.2 -6.6 -6.3 -4.5 -3.6 -4.0 -3.3 18.4 18.9 20.0 20.0 20.1 19.9 23.3 23.5 22.8 22.2 22.4 22.2 (f) Forecast. Source: Central Bank of Chile.

Sound economic fundamentals continue to provide support for favourable growth and collective efforts should be focused on raising the economy’s potential output in order to achieve price stability and sustainable growth in the long run. 2 BIS Review 119/2008 By old book, growth comes from utilization of the country’s resource endowment with available technology. However, with the advent of global economic and financial integration, growth is no longer constrained by endowment. In today’s world economy, outsourcing for inputs abundant in other countries and exchange of technology and skills allow for lower production costs and greater potential to grow. Potential output in this era is thus free from conventional hindrance. From the Bank of Thailand’s latest research, the Thai economy has a potential output growth rate of around 5.5 to 6.0 percent per year from 2008 to 2015. This is based on an assumption that investment can grow at the same rate as the economy, and therefore, the ratio of real gross investment to real GDP needs to increase from 22 percent today to 28 percent within the next 8 years. Prior to 1997, Thai economy grew satisfactorily on the back of high level of investment as well as increasing utilization of labor. During this period, sufficient capital formation allowed for an increase in labor productivity. However, in the post crisis era, potential output gradually declined as real investment did not fully resume its pre-crisis level, which was 31 percent of real GDP.

I believe that all of us at this gathering are not dissimilar in trying to do the right things today for a better tomorrow. Indeed, the pursuit to become a higher income economy is not a lone man or lone organization journey. This ambitious goal calls for coordination and synergy of all participants in the economy. And, with everyone’s support, including all of us here in this room, Thailand’s fortune should be as bright and promising as ever. Thank you very much for your attention. BIS Review 119/2008 5

Second, the entire path will be considered when assessing whether there are grounds for changing the horizon. We have also begun providing projections for a three-year period in the Inflation Report. If extraordinary conditions prompt Norges Bank to apply a different time horizon than two years, the Bank will provide a clarification of this. However, confidence and credibility in the conduct of monetary policy are necessary before taking such additional considerations into account. The greater the confidence in the inflation target, the larger the scope for stabilising the real economy. A rapid and pronounced change in the interest rate may be appropriate in cases where there is a risk that inflation might deviate considerably from the target over a longer period, so that inflation expectations might be affected or where heightened turbulence in financial markets or a cost-push shock resulting from wage negotiations indicates that confidence in monetary policy is in jeopardy. In Norges Bank’s Inflation Report, we present our forecasts for both inflation and the output gap in the same chart. The reason for this is that we want to be as transparent as possible concerning the tradeoffs made in our conduct of monetary policy. Transparency enhances confidence in and the understanding of monetary policy. This has been well received internationally, cf. the following quote 8 See for example Smets, F. (2000): “What horizon for price stability”, ECB Working Paper nr. 24, July 2000 and Svensson, L. (1997), “Inflation forecast targeting: implementing and monitoring inflation targets”, European Economic Review, 41, 6, side 1111-1146.

Growth in mainland GDP was revised upwards by an average of 1 percentage point per year for the period 1995-1999. The largest revision was for 1999. As late as in May 2002, we believed that growth in 1999 had been 1.1 per cent. The revised figures now show that growth was in fact 2.7 per cent. It is obvious that such revisions can have a considerable impact on the actual output gap. Norges Bank is currently systematising different vintages of national accounts figures. We can then go back and evaluate monetary policy in “real time” to learn how we should respond to uncertain data. Frank Knight (1921) differentiates between “risk” and “uncertainty”.12 With risk, we know the probability distribution for the potential outcomes, but with pure uncertainty we do not. Thus, there is risk, but not 10 In the opening address at last year’s Jackson Hole conference, Alan Greenspan expressed the following: “Uncertainty is not just an important feature of monetary policy landscape; it is the defining characteristic of that landscape. As a consequence, the conduct of monetary policy in the US at its core involves crucial elements of risk management.” 11 Orphanides, A. “The Quest for Prosperity without Inflation”, Journal of Monetary Economics, 50(3), April 2003, 633-663. 12 Knight, Frank H. (1921) “Risk, Uncertainty and Profit”. 6 BIS Review 6/2004 uncertainty, associated with the fall of a die, according to Knight. Thus, for a decision-maker, risk is far more manageable than pure uncertainty.

The situation in the United States, where the economy is in a cyclically more advanced position and employment levels are close to their structural low, is conducive to the Federal Reserve normalising monetary policy. However, the absence of inflationary pressure, the downturn in and uncertainty over the global economy, and doubts about when interest rates will begin to rise all cast a shadow which has prompted very mixed expectations. As for developments in emerging economies, the slowdown in China, sharp adjustments to its share prices and the depreciation of its currency during the summer have heightened the risks of a steeper-than-expected fall in activity, with effects on the global economy through trade and commodity prices and via indirect contagion effects owing to higher risk aversion in international financial markets. The main issue regarding the Chinese economy is not whether it slows by a fraction of a percentage point more than projected, but rather the external consequences of such a development. For example, a slowdown in growth to around 6% of GDP, compared with 7.3% in 2014, is no grave cause for concern. In principle, these figures, which largely reflect the change in China’s production model to an economy more geared towards consumption, can be managed by the authorities. The uncertainty lies in the difficulty of evaluating the external effects of such changes, and the fact that the differing forecasts of private and public agents are reflected in greater volatility in financial markets.

At present the US still earns positive net income from abroad despite a steady deterioration in the current account since 1991, and a slower rise in its net external indebtedness. This is not to imply that the US is immune to the basic arithmetic of debt sustainability – sooner or later persistent deficits will lead to levels of external indebtedness that represent a significant economic burden even on the US; but it is more than usually hard to predict how long this might take. The dollar’s central role in the foreign exchange policies of Asian emerging markets adds to the uncertainty about the deficit levels at which the US will face tighter credit constraints. Since the foreign official sector – mostly Asian central banks – have been financing a substantial part of the US current account deficit (in net terms) and now hold a substantial amount of the outstanding stock of US Treasuries, private investors’ willingness to hold dollar assets depends to some extent on their expectations of what these Asian central banks will be doing. Since many Asian EMEs already have far more reserves than they need for self-insurance against financial crisis, their appetite for continued accumulation of US dollar assets will at some stage abate: indeed there has been some anecdotal evidence of this over the past year. They can already choose to diversify their reserve holdings, and the options available may become more attractive to them with the development of Asian bond markets. Their development strategies will also evolve.

What has been generated in recent years is a flourishing market for “green bonds”, with a primary market exceeding € billion,11 made up largely of private issuers. Although these developments are promising they are not without problems. First, there is no common denominator to determine which assets are entitled to the green label and which are not. Private initiative provides a response in the form of market standards12 and certifying companies, but due to their relative novelty, they still lack a sufficiently established record and reputation. Also, given the rapid growth of this market, there is some concern among issuers and investors about the possibility of greenwashing. Certain issuers may be attempting to appear more conscientious in relation to climate change, for reasons of corporate image and social responsibility, than their actions really imply, and this may generate future reputational problems. Especially useful for harmonising this market and avoiding these risks are the work performed in the European Union on the adoption of a taxonomy for sustainable activities, and the recognition of the importance of mitigation actions (investment to reduce the emissions of the most polluting activities). 8 Alan Blinder (2018), Advice and Dissent: Why America Suffers When Economics and Politics Collide. The Paris Agreement, ratified by 187 countries, including Spain, highlights the need for “making finance flows consistent with the pathway towards low greenhouse gas emissions and climate-resilient development”; Article 2(1)(c) of the Paris Agreement. https://unfccc.int/files/meetings/paris_nov_2015/application/pdf/paris_agreement_spanish_.pdf. 10 https://ec.europa.eu/commission/presscorner/detail/es/ip_20_17. 11 https://www.climatebonds.net/ 12 The Green Bond Principles of the International Capital Markets Association (ICMA).

Mr Yam discusses the sustainability of monetary and exchange rate policies Speech by the Chief Executive of the Hong Kong Monetary Authority, Mr Joseph Yam, JP, at the International Conference on Central Banking Policies: Leading the Way Towards Sustainable Growth presented by the Monetary and Foreign Exchange Authority of Macau on 14 May 1999. Dr. Pessoa, Distinguished Guests, Ladies and Gentlemen, It is a pleasure to be back in this beautiful city, and an honour to be invited to take part in such an important and timely conference. I warmly congratulate the Monetary and Foreign Exchange Authority of Macau on having put together a stimulating programme, and on having chosen this splendid new cultural centre for the venue. Apart from the inherent interest of the topics under discussion, the conference is significant in at least two respects. It takes place at a time when we are beginning to emerge from what has been, for much of this region, a period of sharp economic crisis, so that the questions we are addressing today perhaps have more relevance than ever. The conference is also taking place seven months before Macau becomes a Special Administrative region of the People’s Republic of China, on 20 December 1999. Hong Kong, Macau’s neighbour across the Pearl River Estuary, has a much shorter history as a city, but it does have a slightly longer experience as a Special Administrative region under the ‘one country, two systems’ formula.

Towards midyear it was even possible to raise the interest rate substantially to tackle a surprise rise in inflation that was much deviated from the target. This was so thanks to the fact that the purchase of dollars was being carried out mechanically, despite a significantly depreciated exchange rate after the intervention. The purchase of foreign currency was concluded prematurely due to global tensions in global liquidity in dollars in September of last year. The capacity of the Chilean economy to subsequently deal with a significant exchange rate depreciation, with monetary easing prospects and reduced inflationary pressures, is proof that there was no inconsistency between the decision to intervene and the conduct of monetary policy (Figure 2). It also shows that the flexible exchange rate regime adopted early this decade has the economy well prepared to absorb exchange rate fluctuations without the turmoil that used to come with them in the past. 4. Bubbles, exchange rates and capital inflows in emerging economies Latin America went through a period of large capital inflows in the first part of the 1990s (Calvo et al., 1996). We cannot disregard the possibility that after the current crisis is over, there will be a reemergence of inflows to emerging economies. Therefore, there could be strong pressures for a sharp increase in the valuation of domestic assets, with a potential bubble in their prices, and this bubble could take the form of an exchange rate appreciation.

This I find entirely natural in that the exchange rate is an important factor in our assessment of future inflation. The overall picture To sum up, the new statistics since June largely support the opinion about inflation prospects that we presented in the latest report. The figures for real economic activity and inflation suggest, if anything, that the path of inflation will be lower than in our main scenario in the June report. If so, however, it is presumably a question of marginal revisions. The exchange rate, however, instead of moving as we predicted, has weakened. The assessment of this tendency and how it should be weighed up with other factors in an overall assessment of inflation prospects is a matter to which the Riksbank will be returning in the next inflation report on September 28th. Concluding remarks Having presented the Riksbank’s picture of current economic developments, I should like to return to the somewhat longer time perspective from the beginning of this talk and take up the issue that is the theme for today’s speakers. Is there room for expansion in the Swedish economy? In doing so I shall concentrate on two fields that are closely connected with monetary policy: the functioning of the labour market and fiscal policy. The economic policy that has been implemented in recent years, with its emphasis on price stability and sound government finances, has had favourable results in a number of respects. High growth has been combined with persistently low inflation.

As regards producer prices of imported goods, these have dropped since the end of 2002. This partly reflects the more or less continuous strengthening of the krona between 2001 and 2004, which has had an impact on the prices with a slight lag. Moreover, consumer price inflation in the international market was muted during the last economic slowdown. We have also seen a rise in the share of imports from low-cost countries, which has also contributed to the low rate of price increases for consumer goods. The effect of this shift towards cheaper import countries is not fully captured, however, by the method that we so far have used to forecast import prices. This could be one reason why our forecasts have not completely managed to predict the fall in import prices. This is a problem that we are working on at the moment. The distribution sector also important for inflation The prices of consumer goods have fallen more than the aggregate producer prices of imported and domestic goods. That is because consumer goods prices, in a second step, are also affected by what happens in the distribution sector, i.e. the part of the business sector that distributes goods from producers to consumers. It is difficult to find comprehensive data for the distribution sector, but we have seen that unit labour costs in the sector that includes transportation fell in 2004.

In our monetary policy assignment of maintaining price stability in Swedish kronor, specified as inflation of around 2 per cent, we need to understand not only cyclical developments but also structural transformations in the economy. This knowledge forms a precondition if we are to be able to make good forecasts and calibrate a well-balanced monetary policy, thereby fulfilling our mandatory task. To make good forecasts, we need models, and models assume that economic relationships are stable. It therefore becomes complicated when structural changes delay or even transform old relationships. If important structural changes have occurred, they turn up as so-called shocks in the models. For example, new and better working methods should entail a positive shock in productivity. Another structural change, for example increased e-commerce, means that competition increases, putting pressure on companies’ profit margins. However, when data on productivity and companies’ profit margins is studied, it is difficult to observe larger changes. Productivity growth in recent years cannot be described as remarkably high. 1 In turn, this has an effect on wage development, which I shall return to. My point, however, is that technological shifts do not necessarily change the way the economy works. But it is nevertheless clear that technological breakthroughs can push forward changes in what have historically been fairly stable operations and open them up for new participants. For example, technological developments in society have contributed to the use of cash, the money the Riksbank offers society, going into decline.

Inflation and monetary policy Instead of using money supply target as an intermediary target, some countries (New Zealand, the United Kingdom and others) aim directly at inflation goals because no sufficiently reliable relation exists between any conceivable intermediate target and inflation. BIS Review 25/1997 - 11 - This practice has not been adopted in the Czech Republic because in transforming economies the link between the money supply and the price level has some specific features. Everybody agrees with Friedman that inflation is always and everywhere a monetary phenomenon. It means that over the longer term, a general rise in prices is not possible without an undue expansion of the money stock. One of my predecessors in this series of lectures, the former President of the Swiss National Bank, Dr. Markus Lusser, declared in his memorial lecture in 1994 that in Switzerland the time lapse between the introduction of monetary policy measures and their impact on prices is two to three years. BIS Review 25/1997

In this respect, the BWI can play a key role by focusing on their core competencies, – namely surveillance, technical assistance and lending –, and by developing new tools for the analysis of macro-critical issues such as climate change, digitalisation, and inequalities. We should aim at a better coordination between the BWI and other international organisations including UN bodies (UN Development Programme, UN Climate Change Conference, UN Conference on Trade and Development…). Given the insufficient achievement of economic development in Africa and part of South Asia, there is a need to review the functioning of development aid. We could say the same concerning climate change, stronger coordination between UN bodies and the BWI could be achieved, with the latter providing the macro-financial framework needed to assess risks and policies, following the example of the NGFS. ** Let me conclude with the prophetic words of President Roosevelt, during his inaugural address of the Bretton Woods Conference back in 1944: “Economic diseases are highly communicable [and] the economic health of every country is a proper matter of concern to all its neighbors, near and distant; [for that reason] the things that we need to do, must be done – can only be done – in concert”. Most of us could not agree more: the world today needs a new harmony instead of the dissonance of this unruly cacophony. This should be a guiding principle for the next 75 years. With that in mind, I very much look forward to the outcome of your discussions today.

While the merit of what has been achieved should be accorded to many, allow me briefly to acknowledge the work of the staff of the Banco de España, and most specifically the body of bank examiners, economists, lawyers and the senior managers of the supervisory, regulatory and legal arms of the Bank, on whom the greatest burden has fallen in terms of implementing the strategy approved in legislation. The fact is, the task discharged by them has perforce been complex and time-consuming. The decision by the authorities – previous and present alike – to use limited public funds in the reconstruction of the banking system was warranted because the big Spanish banks did not and do not need help and because, given the delicate situation of our country’s public finances then and now, the impact on the markets of a sharp and sudden increase in the budget deficit might have led to the collapse or intervention of the entire Spanish economy, as indeed occurred in some other countries. But with this strategy of minimising the use of public resources, the restructuring work increases exponentially and extends over time. The Spanish supervisor has had no “bad bank” with which to restructure the sector. Here we have not seen a State which, armed with taxpayers’ money, has bought bad assets from banks, thereby resolving all supervised banks’ problems at a stroke. Our Bank’s supervisory team has had to apply a strategy which has obliged it to seek predominantly private solutions.

While we should be proud of our many achievements these years past, we must also be ready to listen to others, particularly and attentively so to the European institutions which, lest we forget, have been buying us time so that we can see through our adjustments. It is not the time for pessimism, but nor is it for complacency. What we must do is fruitfully use the time we have. Thank you. BIS central bankers’ speeches 7

In both the SPD and the SMP, many of the questions are tailored toward matters that are of policy relevance at the time of the survey. Further, we use the fact that the respondents are market professionals with a good understanding of finance and economics to ask direct and at times technically complex questions. In this regard, the surveys contrast with the SCE, which uses language that is accessible to respondents with no economic or financial training.41 37 See Armantier et al. (2016). 38 Using a standard test of the difference between two distributions, the change from September to January is significant at the 1 percent level. The change from April to May has a “p-value” of 16 percent. 39 This dispersion implies that random samples of small size (less than one thousand) will exhibit variability even if the underlying population distribution of inflation expectations remains constant. 40 Correia-Golay, Friedman, and McMorrow (2013) provide an introduction to the SPD. 41 Many surveys of market participants do not use their technical sophistication to the extent necessary to produce robust measurement of expectations. For example, currently many surveys ask market participants to identify the FOMC meeting at which the next increase in the fed funds target range will most likely occur. This question implicitly assumes that the next rate change will be an increase; moreover, eliciting expectations about the most likely meeting when the number of future meetings is large is particularly uninformative.

Marzunisham Omar: Capital flows management for monetary and financial stability Remarks by Mr Marzunisham Omar, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Seminar and Meeting of the SEACEN Expert Group on Capital Flows, Kuala Lumpur, 11 June 2019. * * * I am delighted to be here today. Let me take this opportunity to express Bank Negara Malaysia’s appreciation for the collaborative efforts of the SEACEN Centre and the Bank of Japan that have gathered us here for this biennial SEG event. It has been six years since I last attended the SEG Seminar in Manila, back in 2013 as the newly appointed co-chair. I am truly honoured to have had the opportunity to work alongside Deputy Governor Diwa. Under his capable stewardship and intellectual guidance, the SEG has developed into a beneficial platform for its members since it was established 19 years ago.

Also, if the current expectations for rising interest rates are incorporated, the public debt burden will increase from 2.2% of GDP at end-2021 to 2.7% in 2024. Against this backdrop, allow me to repeat the recommendation I have made on numerous occasions to adopt a medium-term fiscal strategy. This should include immediately setting out a multi-year fiscal consolidation plan for implementation once the economic impact of the pandemic and of the war in Ukraine has been overcome. The plan should have broad 3 A household is deemed to have a high financial burden when its financial expenditure minus financial revenue represents more than 40% of household income. 4 political consensus and be accompanied by an efficiency review of public spending and the tax system, including all tiers of general government. Defining the plan early on would generate greater certainty and trust, which is particularly important against the current backdrop of monetary policy normalisation. The potential impact of the current climate of uncertainty on the banking sector calls for exercising extreme prudence Estimating the impact of the current setting on the banking sector’s profitability and solvency is more complex. First, the rise in interest rates will mean higher returns on new loans and likewise on existing loans at a floating rate. Thus, although the volume of credit will presumably moderate in the current setting, gross income will likely increase, particularly in the near term. However, financing costs will also be pushed up.

Indeed, after the Global Financial Crisis, the US suffered its worst recession since the Great Depression of the 1930s. In a desperate bid to stave off the recession, the US literally moved mountains, including introducing the unprecedented QE policy and splashing out $ trillion between 2008 and 2010 to cut taxes and implement other fiscal policy measures to prop up the economy. However, as we can see from Chart 1, the current recovery has been the weakest of all the economic cycles in the past 55 years. The average growth rate is just 2.2%, half the average rate of 4.6% in the previous recovery cycles. (Chart 1) 5. As for employment, the US has lost a total of 8.7 million jobs during the financial crisis and recession, with the unemployment rate peaking at 10%. Although employment bottomed out in 2010, and some 13 million jobs have been created since then, this only represents 4.3 million more jobs compared with the peak eight years ago in early 2008, and way behind the 8.8 million people who have been added to the labour force over the same period. In other words, while the US unemployment rate has declined to 5% recently, it does not mean the labour market has fully recovered. One of the main reasons for the faster-thanexpected drop in the unemployment rate is the dwindling labour force participation rate, from an average of 66% in 2007 to the current 62.4%, the lowest since 1977.

Just how sustained this pick-up proves to be will become evident in the coming months when the extraordinary fiscal and monetary stimuli weaken. Foreign exchange markets Fluctuations in the US dollar dominated the foreign exchange markets. After having lost considerable ground during the first half of the year, the greenback rebounded slightly by October amid growing signs of an acceleration of growth. Recently, the focus of market participants returned to the sustainability of the US recovery and the continued rise in America’s current account deficit. As a result, the dollar weakened again (see graph 2). Since the middle of the year, the Swiss franc has moved sideways against the euro. Heavier fluctuations were recorded vis-à-vis the dollar. With positive economic data emanating in the US from June onwards, the franc initially weakened before firming again as part of the general dollar consolidation witnessed since September. On the whole, the Swiss franc hardly registered any independent movements. It depreciated strongly during the first half of the year after our interest rate decision and has remained stable since the summer. In relation both to Switzerland’s 24 major trading partners and to the euro zone, the real exchange rate index of the Swiss franc is now slightly below its level at the beginning of 1999, i.e. at the time of the euro launch. Gold market Owing to the more favourable economic situation, raw material prices continued the rise which had started in 2001.

The three-month Libor remained almost constant at 0.25%. The global trend in capital market yields was chiefly determined by long-term yields in the US, which themselves were shaped by the recovery of the US economy. In the early summer, deflation fears had dragged the yield on ten-year US government bonds down to 3.1% - a level last reached at the end of the 1950s. In July and August, however, positive economic data pushed the yield right up to 4.6%. Convexity hedging was one of the factors contributing to the unusual scale of the turnaround. As interest rates fell in the early summer, the refinancing of existing mortgages - which is possible in the US at any time - had triggered extensive buying of government bonds. US investors holding substantial mortgage portfolios had to make these purchases in order to keep the residual maturities of their portfolios constant. When interest rates rose, therefore, the correction was similarly swift. In September, increasing doubts were voiced as to the sustainability of the economic upswing in the US: BIS Review 58/2003 1 compared with earlier cycles, the essential element of an improving labour market was missing. This led to a consolidation on the capital markets even though the economic indicators remained largely positive. With the first signs of the US labour market recovering at the end of September, coupled with rapid growth in gross domestic product in the third quarter (8.2%), the strength of the economic revival in the US economy was confirmed.

Dear Brothers, 2 BIS Review 14/2007 You all know the efforts made by Basel Committee to issue various standards governing conventional banking in the area of capital adequacy, corporate governance, and the principles of compliance, and others. These and other standards have helped create an appropriate environment for banking business which supports competition. On the other hand, a number of central banks in a number of Islamic countries, including SAMA, have established the Islamic Financial Services Board (IFSB) to promote establishment and development of Shari’a compliant financial services industry, characterized by prudence and transparency, through the adoption of existing or new international standards compatible with Islamic banking principles and methods. Since its establishment in November 2002, the Board has made great efforts in issuing international standards governing Islamic banking business through a number of committees and work teams in the membership of which SAMA participates effectively. Such standards will help setting up a strong structure to create robust banking entities able to compete in the international markets. The Board also makes great efforts in organizing conferences and workshops to promote awareness of the nature of Islamic banking. I can not, on this occasion, but thank the Board's members. Dear Audience Saudi Arabian Monetary Agency exerts persevering efforts to promote awareness and emphasize the importance of applying international standards that help manage risks, enhance competition and create strong entities. Therefore, this symposium is the first of its kind on Islamic Financial Services Board's standards which complement the guidelines of Basel II.

Hamad Al-Sayari: Islamic banking prudential standards Speech by His Excellency Hamad Al-Sayari, Governor of the Saudi Arabian Monetary Agency, to the “Symposium on Islamic Banking Prudential Standards”, Institute of Banking, Riyadh, 15 January 2007. * * * Ladies and Gentlemen, It gives me a great pleasure to address this honorable and distinguished attendance at this important symposium on “Islamic Banking Prudential Standards” organized by the Institute of Banking (IOB) in cooperation with the Islamic Financial Services Board (IFSB). The issue of Shari’a (Islamic Law) compliant banking is increasingly drawing attention of those concerned with financial stability, including international financial institutions such as the IMF, World Bank (WB), development banks, Basel Committee on Banking Supervision as well as supervisory authorities in the countries where Islamic banks operate. This is the result of rapid growth in the volume and scope of Islamic services offered in many countries. Those entities have shown a great interest in the growth and expansion of finance business compliant with the principle of avoiding interest and its impact and implications with respect to world markets and the global economic system. Currently, Shari’a compliant banking transactions have spread in most countries of the world through banks that totally comply with Shari’a or through Shari’a compliant windows offering all services, investment and commercial activities, leasing, investment funds and joint liability products. The Kingdom has been a forerunner country in supporting and encouraging Saudi banks to offer such products required by the Saudi market.

José De Gregorio: Chile and the global recession of 2009 Speech by Mr José De Gregorio, Governor of the Central Bank of Chile, at the seminar Los temas del 2009 (Key Issues of 2009), organized by the Instituto de Políticas Públicas Expansiva – UDP and Libertad y Desarrollo, Santiago, 20 March 2009. I am grateful to Mariana García and Enrique Orellana for their valuable comments and contributions. * * * The world is undergoing a major crisis and all economies, at different degrees, are being affected by the shrinking output in the developed world. What began as a crisis focused on the subprime mortgage market in the United States has swept over the rest of the financial systems of the developed countries and is significantly hurting global activity in a variety of ways. In fact, a surprising feature of this crisis is its high synchronicity throughout the world. Consequently, we are now facing a very complex outlook. It was only last September, when the crisis was still believed to be a problem which would chiefly affect developed financial markets, that consensus projections anticipated that the world (measured at market prices) would grow by 2.5% during this year. In March, consensus estimates foresee a 1.6% drop in global GDP. That is to say that, in six months, global growth projections for 2009 have dropped more than four percentage points (Table 1).

Although we cannot ignore the option of tightening monetary policy when faced with significant increases in asset prices, it is not so certain that these will give way with an increase in interest rates. This is particularly important in emerging economies, where a higher interest rate may raise incentives for carry trade and aggravate increases in asset prices. In order to avoid financial imbalances resulting from excessive and unjustified 2 We could state that, while the United States had an interest rate lower to that suggested by a Taylor rule (as suggested by Taylor, 2008), this was probably not the case in Chile, although I do not know of any evidence for or against this hypothesis. 3 According to Ahrend et al. (2008), between 2000 and 2003, Australia probably also had a rate below the one suggested by the Taylor rule. 2 BIS Review 41/2009 increases of these prices, the first line of defense should always be macro-prudential financial regulation and a thorough assessment of systemic risks, rather than changing the monetary policy stance.4 As I have already mentioned, a fast expansion of credit does not necessarily mean jeopardizing financial stability. What is indeed harmful, and may certainly foster the creation of bubbles, is an either implicit or explicit commitment to substantially ease monetary policy when asset prices fall, unless the financial system is actually believed to be under serious risk.

The neo-classical theories, not least those based on rational expectations, have provided a number of explanations for this. But that hardly means that Keynes is dead. Within a policy framework for macroeconomic stability and given sound, long-term rules for the market economy, there ought to be room for cyclical stabilisation, though not for fine tuning. With a fixed exchange rate regime, monetary policy has to concentrate on maintaining the given rate and leave the stabilisation of demand mainly to fiscal instruments. In the first place that implies creating enough room – sufficiently large reserves – for the automatic stabilisers to be able to act in downward phases. The European Community’s Stability & Growth Pact is designed to this end, for example. It is also a question of economic agents being able to rely on inflation remaining low. With a flexible exchange rate, a large part of the responsibility for stabilisation policy rests in practice with the central bank. Strong confidence in monetary policy and in the ability of the central bank to fulfil its objectives is of primary importance here. It will then normally be feasible to lower interest rates when economic downturns are imminent and vice versa. In that way, a policy focused on price stability will normally also help to stabilise economic activity. 4 BIS Review 81/2001 When opinions differ, it is now usually a question of practical judgements. Are the budget reserves sufficiently large for the automatic stabilisers to be given their head?

Built-in stabilisers did exist, for instance in the form of unemployment support, but the benefits were low in order to strengthen the incentive to search for new employment. This did work – when the upturn came in February 1922 the number of persons on relief work or the dole was over 100,000; by the end of 1923 the figure had dropped to 6,000 – but the flexibility did, of course, exact a price in the form of social hardship. Stabilisation policy’s emergence In contrast to the lack of an active economic policy in the period around 1920, decision-makers in the 1930s had high ambitions, underpinned by a nascent stabilisation policy theory. The course of economic events in connection with the crisis of 1930–33 partly resembled what had happened in Sweden a decade earlier. An international boom with unduly high hopes of future profits had led to markedly inflated asset prices. The party ended in a financial crash and Wall Street’s collapse in October 1929. A number of banks had to close their doors. On top of all this, the US Federal Reserve imposed credit restrictions. In Sweden, the depression was not as deep as the one in the early 1920s, though unemployment did rise to much the same level, about 25 per cent. The major difference was that the economy was successfully piloted past a steep price fall. Sweden left the gold standard in September 1931.

Charles Kindleberger’s seminal work on financial crises documents a number of credit-fuelled investment manias and bubbles in which the trigger was simply a change in sentiment about the value of the asset leading to the drying up of credit or greater fools prepared to finance further speculation.7 3 This may well have been because debt with compound interest grew much faster than the productive capacity of agrarian economies. See Hudson (2018). 4 A similar debt reset mechanism for the ancient Israelites, was provided by the Jubilee set out in the Old Testament. And when debt and credit technologies subsequently transferred to ancient Greek societies, similar problems emerged. See Graeber (2011) and Hudson (2018). 5 See Frank (1935) 6 See Cipolla (1982) 7 These are documented in the appendix of Aliber and Kindleberger (2005). 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 Whatever the trigger, the point is that widespread correction of debt and asset prices and consequent loss of wealth may not happen often but it does seem to happen periodically. In other words, it is not what today we would call a ‘bug’ in the system that subsequent improvements will correct. Rather, however unwelcome, it is a feature of the system. The question for those of us concerned with financial stability is not so much whether we can prevent such adjustments happening.

There are several key benefits of issuing the Islamic Monetary Notes under this structure. It provides Islamic financial institutions an additional instrument to manage liquidity risk on a short-term basis. It is also a financial instrument whose structure has been widely used for retail banking and syndication products in the Middle East. Finally, it provides an opportunity for new investors to invest in Islamic financial papers in the Malaysian market, thus diversifying the investor base. As part of the initiative to be linked to the global Islamic financial markets, this instrument will be promoted to the international financial market. Islamic Derivative Master Agreement (IDMA) Recognising the importance to develop Islamic hedging products for Islamic financial market to mitigate investment risks, Malaysia has introduced the first global Islamic Derivative master agreement to document Islamic derivative transactions. The effort is initiated by Bank Negara Malaysia and driven by the financial industry via the Persatuan Pasaran Kewangan Malaysia. The implementation of the agreement is expected to improve the risk management practices, balance sheet management, increase fund mobilisation efficiency and enhance their investment banking capability of the Islamic banking institutions. With the introduction of IDMA, the rights and obligations of contracting parties are clearly stated, thus creating an environment that is more transparent. As IDMA also incorporates best practices in market conduct, this document serves as an important catalyst for the future linkages between financial markets that offer Islamic financial market instruments.

17 Second, as part of our broader SkillsFuture national initiative, MAS is partnering various other players to enhance continuous learning. We must in particular equip financial professionals with stronger digital skillsets: The Financial IT Academy (FITA) is delivering a digital transformation programme for midcareers that includes topics such as data analytics and agile development, to deliver software faster and with high quality. The Institute of Banking and Finance (IBF) will be offering new learning modules on a set of core capabilities covering data science, human-centric design, agile thinking, and cyber-risk awareness. To develop the cyber security talent pool in Singapore, the Info-comm & Media Development Authority (IMDA) and the Cyber Security Agency (CSA) have introduced the Cyber Security Associates and Technologists (CSAT) Programme1. The University of Pennsylvania’s Wharton School will also be launching a new executive education programme in Singapore focused on financial innovation. i) Called the Wharton FinTech Innovation Program for Financial Institutions, it is expected to launch in the second quarter of next year. ii) The Program aims to expose senior managers in incumbent financial institutions to current topics in FinTech. iii) Participants will learn to how to grapple with disruptive trends, and drive change and innovation across their organisations to compete in the FinTech space. We also want to ensure that professionals trained in ICT skills have good placement outcomes in the financial sector. We are doing this through the recently-formed Finance Committee of the Technology Skills Accelerator, or TeSA, programme.

Muhammad Al-Jasser: Overview of the Islamic banking industry Speech by Dr Muhammad Al-Jasser, Governor of the Saudi Arabian Monetary Agency, at The Fifth Conference for Islamic Banks and Financial Institutions, hosted by the Central Bank of Syria, Damascus, 15–16 March 2010. * * * In the Name of Allah, the Most Gracious, the Most Merciful Let me first thank the Central Bank of Syria, the official sponsor of the Fifth Conference for Islamic Banks and Financial Institutions, and, in particular, I would like to thank the Bank’s Governor, His Excellency Dr. Adeeb Mayalah. Ladies and Gentlemen, Islamic banking has grown widely in recent years and has extended to several international financial centers, which invested in this field, reflecting an increasing interest in financial Islamic products and services. Because of this interest, some of the international markets indices such as “Dow Jones” and “FTSE” have been launching indices for Shari’ah-compliant activities since 1999. According to the latest available data, the Islamic financial institutions’ assets exceeded $ billion by end of 2009, and they are expected to exceed $ trillion by end of 2010. In addition, issuance of Islamic Sukuk has risen fourfold over the last four years, exceeding $ billion by end of 2009. Islamic banks and financial institutions account for 15 percent of the Middle East top 30 banks’ assets. There are more than 430 Islamic banks and financial institutions in more than 75 countries and about 191 conventional banks have Islamic windows.

Many countries, especially in advanced economies have spent substantial amount of public funds to boost aggregate demand and to revitalize the financial system. Most of these countries have no fiscal resources left to put forward a similar stimulus package, if the world economy experiences another setback. Therefore it is of utmost importance to keep the recovery intact, which is already too fragile. Debt sustainability and fiscal imbalances stand out as the main challenges for many years to come. As the recent developments in the financial markets revealed, deterioration of sovereign creditworthiness can hamper macroeconomic and financial stability. Therefore, ongoing problems especially in some advanced economies, particularly in Europe should be resolved in a quick, effective and credible manner. However, we should also keep in mind that supporting global demand is a global responsibility. It is questionable whether emerging market economies would be able to fulfill the gap in global demand, while advanced countries stay on the sideline to clean up their balance sheets. Neither their share on global economy nor their economic and financial structure would be adequate to play that role. Especially emerging economies that are in deficit, still being in convergence stage, need to raise their production capacity to pay off their external debt accumulated during their catch-up. Therefore, I strongly believe that a holistic approach is a must. While developing any kind of policies, including fiscal tightening or restructuring, one should pay great attention to negative externalities these policies may cause on other economies. In particular, we should avoid beggar-thy-neighbor type of policies.

Each time, we gave visibility over the next twelve months; and we stuck to the provisional indicative timetable that we set without extending the time limits. I turn now to flexibility. Our sequence is clear but the details of implementation are flexible and state-dependent. We have included several options, such as the precise timing of the first increase in interest rates and the path of policy rates thereafter, or the pace of our reinvestments. There is much speculation for instance on the future trajectory of our interest rates; but at this stage, I don’t see any value in trading off our flexibility tomorrow against more clarity today. Beyond that, as Mario Draghi mentioned today, the question of TLTROs will need to be considered. In the face of uncertainty, one often hears reference to the celebrated Brainard 1 ‘conservatism principle’ (as reinterpreted by Alan Blinder 2. This is not, as the impression is sometimes given, a general warning to move cautiously when the world is uncertain. The Brainard ‘conservatism principle’ says only that you should move cautiously if you are uncertain about the effect of your policy instrument on your objective. But we should go beyond a static view of Brainard’s principle (which focuses on one single small step): a dynamic view would include the time dimension and consider how to manage and communicate a sequence of incremental steps. 2. How can we collectively respond to global tensions? There are increasing tensions in the global environment, starting with protectionism.

If systemically important domestic institutions expand abroad, central banks - with responsibility for financial stability - will have to assess the risks involved. In addition, structural changes also influence central banks’ role as “lender of last resort”. Although structural changes alter the risk profile of the financial system, they shouldn’t be viewed as negative. On the contrary, these changes may be necessary to reap the benefits of more efficient intermediation of savings and better risk management. Changes are thus something the authorities should facilitate and adapt to - through high quality supervision and surveillance and through regulatory changes if necessary. Currently a variety of regulatory initiatives are being discussed. Important examples are the EU Financial Services Action Plan, the revision of the Basel Capital Accord, and the different initiatives gathered under the heading of “New Financial Architecture”. However, as the current wave of consolidation progresses, the authorities must take the necessary steps to ensure an adequate level of competition. While executing this task, the authorities should recognise that the competitive environment of the financial sector has changed and will continue to do so. Furthermore, it is important that the market surveillance function is improved. Increased transparency and harmonisation of regulation and industry practices are particularly important in this respect. However, enhanced supervision, international cooperation and regulatory changes are not enough. Improving institutions’ own risk management systems is a key challenge. It is vital that these systems develop as the structure and activities of institutions change. 7.

3 All speeches are available online at www.bankofengland.co.uk/speeches 3 Building public understanding of what the Bank does – by engaging with people directly– is essential to our work. That’s because our policies work better if our objectives are clear and the British people have confidence that we will do the right thing whatever happens. Improving understanding of the Bank’s role is also part of being accountable to the people we serve. The Bank is at the heart of the UK economy. The responsibilities Parliament has given us are wide-ranging and the decisions we take affect everyone in the country. People deserve the information and tools to judge how well we are doing our job and to know that we are listening to your views. Today’s event is also part of a wider effort by the Bank to move beyond traditional modes of communication to speak more directly to the people we serve. While three hundred thousand people read the Financial Times, there are 30 million Facebook users in the UK. And while everyone knows it is good to talk, the Bank is learning how it can also be good to Tweet – our Twitter account has 227,000 followers, though that still leaves us a little behind Wayne Rooney’s 16.7 million. We are revamping our publications to make them more accessible, using icons and graphics to convey our messages on webpages designed for mobiles and tablets, rather than relying only on pages of words on paper.

The impact would continue to grow as the crisis persists, since the cash flow crunch would force companies – including those previously in a good liquidity position - to shut down for failure to secure financing; either due to increasing financing costs or the banks’ reluctance to finance amid fears of growing default risk during the crisis. This could lead to companies’ bankruptcies, which, due to the chain effect between economic sectors could thus result in a contraction in non-oil GDP. The Committee’s Mandate To counter the impact and repercussions of the crisis on the national economy, the Higher Steering Committee for Economic Stimulus (The Committee), formed by the Council of Ministers Resolution (455) on 31 March 2020, and chaired by the Governor of the Central Bank of Kuwait, adopted a proactive approach to realize economic stability throughout the crisis. It laid down and initiated economic stimulus measures to prepare for the economic recovery stage that shall Central Bank of Kuwait - Public ‫ عام‬- ‫بنك الكويت المركزي‬ -3- follow once we overcome this crisis. Immediately afterwards, a national economic and structural reform plan needs to be launched and adopted by all the relevant stakeholders. The Committee listed several measures and governing principles to serve as a framework for all its activities, and they are as follows: - - - - Introducing immediate remedies that provide practical and swift solutions to protect the national economy supporting economic reform and best possible resource allocation.

But they are using Regtech much less in their risk management and regulatory compliance activities, despite the many advantages that doing so could bring for them. 8. More generally, banks currently have little engagement with the wider Regtech ecosystem. We found that only 16% of banks are currently taking part in associations and industry 1/3 BIS central bankers' speeches groups and only 33% of banks are partnering with Regtech firms. So this is an area that definitely needs more work. 9. Our second action is to raise Regtech awareness among banks – in particular their awareness of the benefits, applications and solutions associated with Regtech. 10. Our Regtech Adoption Index told us that a massive 86% of banks consider one of the top public sector activities in this space should be to enhance the engagement between the banking sector and the Regtech ecosystem. 11. And this is where today’s virtual event comes in! It brings together banks, regulators, Regtech providers, industry associations, and representatives from other parts of the Regtech ecosystem. We see this as a perfect opportunity for banks to learn more about the potential benefits of Regtech for their own operations and also for their customers. 12. As part of the efforts to raise awareness, the HKMA has also been publishing a series of Regtech Watch newsletters since November 2019. This series of articles outlines the benefits of Regtech through providing high-level sample use cases for areas like Cyber Risk, Credit Risk, AML/CFT, and also Conduct Management. 13.

Accompanying this has been a sharp rise in the ratio of global wealth to income. Among Western economies, this ratio has roughly doubled since 1950 from around 200–300% of GDP to around 400–600% of GDP (Piketty (2014)). Among other things, this has been attributed to post-war capital market liberalisation causing an upward shift in asset prices. 1 Estimate based on aggregate assets of insurers, pension funds and mutual funds. BIS central bankers’ speeches 1 Looking forward, none of these global forces – population, ageing, incomes, wealth – are likely to go into reverse in the near future. Between now and 2050, life expectancy is expected to increase 9% (to 77 years), global population to rise by a further 30% and real GDP per capita to rise almost threefold. Wealth-to-income ratios, while high, remain below their peaks in the 18th and 19th centuries and so could rise further (Piketty (2014)). These trends will be given impetus by changes in the pattern of global growth. The fastest growing economies globally will be those where penetration of the asset management industry is lowest. Developing markets currently represent less than 20% of global personal financial assets, but represent 40% of global GDP. 2 By 2050, developing countries will represent 60% of global GDP. In China and India, personal financial assets have grown at a rate of 25% per year for the past 20 years. All of this suggests that the global asset management industry is likely to continue its upwards march, absolutely and relative to the economy.

But, as any self-respecting asset manager would tell us, past performance is no guide to the future. This is especially true in an industry as large and as rapidly changing as asset management, with asset portfolios becoming less liquid and more correlated and investor behaviour becoming more fickle and run-prone. Future illiquidity pressures in financial markets, generated by asset management distress or wholesale portfolio reallocation, may 5 4 Figure represents total assets, adjusted for equal and offsetting liabilities and non-controlling interests and excluding intangible assets and goodwill, as of June 2013. BIS central bankers’ speeches be larger and more potent. In other words, Black Swan risk in asset management may be real and rising (Taleb (2007)). Pro-cyclicality In practice, such adverse financial market dynamics are more likely to arise from asset managers behaving in a correlated fashion, perhaps because they face a common set of constraints or sources of stress. In this respect, it is possible to identify a set of market-wide conventions or regulatory practices which have the potential to drive common behaviour among asset managers and their institutional client base. These have the potential to turn idiosyncratic market frictions into systemic market failures. Around a year ago, the Bank began working with some academics and industry practitioners to explore these dynamics. In particular, it focussed on evidence of pro-cyclicality among insurance companies and pension funds (ICPFs) – their potential to amplify, rather than damp, the risk cycle through their portfolio choices.

The Bank of Zambia has continued to encourage local banks and other financial institutions to partner with international financial institutions and other banks in Africa, Europe and Asia. In this regard, in December 2007, the Bank organised a forum to exchange information on sources of finance in Lusaka. The forum was well attended and the international institutions showcased their products to their local counterparts. I am happy to note that institutions present here today such as Zambia National Commercial Bank, AFREXIM Bank, PTA Bank, ALS Capital and Loita Capital were all represented at the forum. I imagine that such fora are 2 BIS Review 77/2008 instrumental in structuring tangible financing agreements like the ones we are witnessing today. Finally, I would, like to request all parties involved in the management of these facilities to ensure that the funds reach the intended beneficiaries and that controls are put in place to avoid abuse. The beneficiaries should also ensure that their projects are implemented effectively and expeditiously without any delay. In this regard, may I request the Zambian Mining Services Companies and the Export Fund of Zambia to take necessary measures in a timely manner to fulfill the requirements for declaring these loans effective and for starting implementation. I would like to wish all those involved success in their management of the funds and implementation of the projects so that we can ensure that the development impacts expected from these important initiatives become a reality for the intended beneficiaries and the country at large.

Bear in mind then that Sweden is an industrialised country. Many of the member states of the IMF are poor and have even in calm periods unemployment of around 30%, a very strained government budget and limited opportunities to obtain foreign finance. Financial stability is even more important in these countries. Activities to prevent crises A large part of the IMF’s activity centres around preventing crises arising. Globalisation has meant that this work has become increasingly important. Few people want to trade with a country that is insecure, and even fewer to lend money there. Since the flow of information is increasing and capital can swiftly be moved between countries, economic crises can arise more quickly in the event of indications of problems in a country. They can also become deeper and spread to regions farther away than previously. The value of a stable, long-term economic policy has therefore been reinforced. Briefly, the IMF’s preventive work involves spreading knowledge, giving advice and creating norms. Spreading knowledge means that the IMF continually monitors trends in the world economy, conducts research and spreads knowledge to national governments and the general public. Knowledge about where the economic risks are has a stabilising effect on markets and also allows countries to tackle their problems. The IMF continuously surveys economic trends in each member country and also gives regular advice on economic policy on issues concerning, for instance, exchange rates, inflation and the financial market. Most countries receive a visit from the IMF every year.

For some time, efforts have been under way worldwide to reform major reference interest rates such as Libor. These reforms aim to put existing benchmarks on a more solid footing and, where necessary, to develop alternatives. In the case of Libor, these reforms are still ongoing. In the context of these reforms, a decision has already been made to discontinue the TOIS fixing on the Swiss money market and replace it with SARON at the end of 2017. This is due to the fact that, despite various reform attempts, the volume of transactions underlying the TOIS reference rate has remained too low for efficient price formation. Transaction volume is not expected to be an issue with SARON. Unlike the TOIS fixing, which is calculated using data contributed by a panel of banks, SARON is based on actual market transactions and binding quotes. This fact reinforces trust in SARON and makes it more attractive as a reference rate for all money market transactions. Progress has already been made in establishing SARON on the Swiss money market. For some weeks now, it has been used as the reference rate for interest rate derivatives; hence, quotes for SARON interest rate swaps (SARON swaps) are already being offered. We can observe this in chart 4, which plots the curves for TOIS and SARON swaps. We see that the yield curve for SARON swaps already covers all maturities. Moreover, the SARON yield curve is below the TOIS curve.

Overall, these patterns of credit growth support the idea that the weakness of banks at the end of the Great Recession has been a contributing factor to the slow recovery of the U.S. economy since the recession. These patterns are consistent with evidence provided in the work of Carmen Reinhardt and Kenneth Rogoff, and in that of Christina and David Romer, 2 BIS central bankers’ speeches indicating that the severity of recessions and strength of the subsequent recovery are associated with the amount of financial distress experienced in a financial crisis. 1 There is also a strong likelihood that decreased credit demand – for example, from households whose homes fell in value below what they still owed on the mortgage – also has played a part in the slow growth of credit in this expansion, as has been expressed in the work of Atif Mian and Amir Sufi. 2 Nevertheless, the patterns that I have reviewed here point to an adverse impact from a relatively weak banking sector on credit supply. However, it also suggests that the recent improvement in banks’ financial condition should provide support to credit growth going forward, which in turn would provide support to the economic growth we project over the medium term. As I noted earlier, one area where credit has flowed freely is student lending.

This virtually eliminates the possibility of one person holding a double role as both general manager and as chair of the Executive Board. The executive director’s investment mandate sets rules for the Fund’s choice of investments and risk limits for NBIM’s investment management. The financial crisis revealed that the risk measures used previously, and which were based on what was regarded as best international practice, were inadequate. The Executive Board has therefore also set supplementary risk limits, for example for the size of the percentage deviation between the actual portfolio and the benchmark portfolio, the degree of leveraging and liquidity requirements for the Fund’s investments. The mandate is also intended to ensure that active BIS Review 53/2009 1 risk positions are taken in a balanced manner and to avoid active strategies with a considerably skewed outcome set. NBIM’s monthly and quarterly reports to the Executive Board are to reflect the guidelines in the investment mandate. The results for 2008 were influenced by the global financial crisis. The total return on the Fund was a negative 23 per cent, the weakest in the Fund’s history. There was a negative return of 41 per cent on the equity portfolio, while the return on the fixed income portfolio was close to zero. The real rate of return after costs has been one per cent since 1998. International stock exchanges lost more of their value in 2008 than in any other single year in recent history. Absolute results, especially with regard to equities, were highly abnormal.

Correlation was not expected to be high between investments in, for example, Japanese inflation-indexed government bonds, bonds issued by international organisations such as the European Investment Bank, European covered bonds and US mortgage-backed bonds. These experiences and the abrupt turnaround in market liquidity suggest that active management of the fixed income portfolio should be limited and measured on the basis of a number of criteria, as laid down by Norges Bank’s Executive Board. The Fund currently has extensive holdings of bonds that are difficult to trade in today’s market. Realised losses related to these investments have, as mentioned above, been limited. The flipside of large book losses is that this portfolio has a high return, reflecting not only the increase in credit risk but also high liquidity premiums and fears and uncertainty in the market. The return, measured as the difference in the effective interest rate between the actual portfolio and the benchmark portfolio, is now close to two percentage points. History has seen a number of deep financial crises, and market conditions will return to normal in time. The final results of the management of the Fund’s fixed income portfolio since the beginning of the financial crisis cannot be deduced from the quarterly results while the crisis is at its BIS Review 53/2009 3 most intensive. Values are not lost as long as borrowers fulfil their obligations. The Fund is prepared to retain ownership of a large volume of bond holdings until they mature in a few years.

Credit derivatives form one potential growth area. Credit risk is an important issue for banks, particularly in Asia. Before credit derivatives were invented, banks generally had to stop extending new loans or services to customers to whom they had excessive exposure. This worked against the banks’ efforts to maintain valued client relationships. Credit derivatives provide banks an alternative. Banks can now repackage and divest excess credit risk exposures, and continue to service their clients. MAS has studied how credit derivatives should be captured under the existing capital adequacy framework for banks. It has circulated draft guidelines to industry players and associations for comments. MAS has now finalised the guidelines,4 which address capital treatment for three main credit derivative products: the credit default swap, the total rate of return swap and the credit-linked note. The guidelines reaffirm the principle of maintaining capital for risk exposure. If banks assume credit exposure via the use of derivatives, they will be subject to capital charges. But if banks use credit derivatives to hedge their underlying risk exposures, they will be granted relief, depending on the degree of risk transfer. For example, where the hedge is imperfect, because of mismatches in maturity, asset or currency, regulatory relief will still be available, albeit to a smaller extent. A second promising area is that of securitisation. Like credit derivatives, securitisation allows banks to manage their credit risk and capital more effectively. In its basic form, securitisation involves pooling assets in a special purpose vehicle, which is then funded by issuing securities.

The implementation of this strategy is funded through levies on the financial BIS Review 139/2010 1 services industry and through partnership programmes with a range of stakeholders, including financial services providers. There appears to have been little contestation of the strategy, with broad support from the industry, the Treasury and other stakeholders. In South Africa, the Financial Services Board (FSB), the regulator for non-bank, non-credit financial services, has developed and championed two national strategies; a strategy developed in 2001 and a revised version in 2008. The 2001 strategy received limited support from stakeholders and the FSB revised it in 2008. However, the revised strategy did not receive much support and is currently under review. Contestation of the South African strategies arose mainly from the fact that the FSB is not the regulator for the banking sector, and banks were against having their activities regulated through a non-bank regulator. Contestation also came from civil society organizations and other regulators, in particular, the credit regulator. Ghana has had an approved strategy for financial literacy and consumer education since January 2009. In the first attempt, largely consultant driven, it appears there was insufficient stakeholder buy-in. However, in the second process which was driven through the Ghana Micro-Finance Institutions network, there appears to have been sufficient stakeholder buy-in, and in due course, the Ministry of Finance accepted responsibility for the strategy and has been tasked with its implementation.

Earlier this year, the Federal Reserve issued guidance for the largest firms that outlined five “capabilities” that should be at the top of the list of “to dos”: • Collateral management: firms should have effective processes for managing, identifying and valuing collateral it receives; • Effective management information systems (MIS) around payment, clearing and settlement activities: firms should have a comprehensive understanding of obligations and exposures associated with payment, clearing and settlement activities; • Stronger analytics around funding: firms should have the ability to analyze funding sources, uses and risks of each material entity and critical operation, including under stress; • MIS by legal entity: firms should have demonstrated MIS capabilities for producing key data on a legal entity basis; and, • Arrangements for shared or outsourced services: firms should have robust arrangements in place for the continued provision of shared or outsourced services needed to maintain critical operations. While there are many other areas that supervisors/regulators and legislators need to continue to work on to make cross-border resolution a reality, these five areas are ones that we have highlighted for near-term focus by firms. Another important element to preventing the failure of a firm is ensuring that firms can respond to any weakness by having recovery plans that are implemented well before resolution becomes necessary.

Caleb M Fundanga: Framework of cooperation between the Bank of Zambia and the University of Zambia Opening remarks by Mr Caleb M Fundanga, Governor of the Bank of Zambia, at the signing ceremony of the Memorandum of Understanding between the Bank of Zambia and the University of Zambia, Lusaka, 30 June 2010. * * * The Vice Chancellor, University of Zambia – Prof. Stephen Simukanga The Deputy Governor – Administration and University Council Chairperson – Dr Tukiya Kankasa-Mabula Distinguished Professors and Lecturers from UNZA Colleagues from the Bank Members of the Press Distinguished Ladies and Gentlemen; It gives me great delight, on behalf of the Bank of Zambia, to welcome you all to this important signing ceremony of the Memorandum of Understanding between the Bank of Zambia and the University of Zambia. The MoU that we are about to sign today provides a framework for the support to the Economics Department and Research activities in the Department. Ladies and Gentlemen; the Bank of Zambia continues to view the University of Zambia and the Copperbelt University as strategic partners in the economic development of Zambia. It is for this reason that the Bank has for several years now been involved in the support of various capacity building programmes at the two tertiary learning institutions.

It is not even certain that the measures directed at these systemically-important banks would focus on higher Core Tier 1 capital requirements, although this is likely. Decisions on these matters are not expected until the summer. However, if the major Swedish banks are considered to be among the banks concerned they should make provisions for further increases. It is not unreasonable to assume that their total capital requirement could end up somewhere between 9.5 and 12 per cent – at least. According to our own calculations practically all of the major Swedish banks currently have capital levels in this range. The minimum level for Core Tier 1 capital may of course be affected by the decision on the use of convertible debt instruments. At present, the discussion concerns whether this type of instrument could be used for the increase for systemically-important banks. However, this is still an open question. One method is to require, let us say, six per cent in coco bonds over and above the 12 per cent added up here. The total potentially available share capital would then be 18 per cent. In connection with this I would like to mention that the Basel Committee has already decided that this type of convertible instrument must be used for Tier 2 capital and that part of Tier 1 capital that does not consist of Core Tier 1 capital.

The aim is that the banks must reduce the differences in maturities between their assets and liabilities and their dependence on shortterm market funding. To achieve this, the banks must match their funding and lending to a greater extent than they do today. Assets with short maturities can have short-term funding while long-term illiquid assets, such as mortgages, will need more long-term and stable funding. All funding with a remaining maturity of more than one year will be counted as stable funding. This is a sound and important feature of the new Basel regulations. And it will probably affect the Swedish banks’ business models. Currently, none of the four major Swedish banks meet the structural liquidity measurement requirements (Net Stable Funding Ratio). This is mainly because they largely fund their lending through short-term market funding. The banks will need to think again here. In addition, a number of the Swedish banks do not meet the shortterm measurement (Liquidity Coverage Ratio) either. These banks must, before the LCR is introduced, either strengthen their liquidity buffers, for example by buying government bonds, or reduce their short-term net outflow. A weakness of the new standards is, however, that they do not contain any specific rules for matching maturities per currency. This is something Swedish authorities should look at more closely. Two thirds of Swedish banks’ market funding is in foreign currency. A certain proportion of this is converted via the swap markets to SEK and then lent.

Given the disappointing fiscal developments in some countries and the challenges which have emerged to the EU fiscal framework, we welcome the moves to correct or prevent excessive deficits, i.e. the implementation of excessive deficit procedures in the case of Germany and Portugal and the early warning issued to France. Countries with remaining imbalances are urged to prepare sufficiently ambitious consolidation plans for their forthcoming stability programmes. Emphasis should be placed on a growth-oriented consolidation policy that strengthens the productive forces of the economy. The Governing Council considers the recent Commission communication to be a good starting point for rebuilding confidence in the budgetary framework. As already reflected in the Statement on the Stability and Growth Pact of 24 October 2002, we fully support the Commission's main objective, namely to improve the implementation of the Pact within the existing framework of rules. Finally, I should like to stress again that there is still an urgent need to implement decisively the structural reform agenda. We note with some concern the slow progress in many euro area countries and call on governments to take determined action. The medium-term impact of these reforms on the economic growth potential of the euro area is likely to be substantial. A prompt implementation of structural reforms in the labour, product and financial markets is particularly important at this juncture since it would contribute to strengthening confidence in the euro area, thereby also supporting economic activity in the short term. We are now at your disposal for questions. 2 BIS Review 72/2002

Instances of “follow-the-leader” behaviour occur not just in bullish stockmarkets but also in the currency market when many countries with different conditions are lumped together in a general assessment. Market players must assess each country separately. Central bank interventions under certain circumstances are uncommon with a flexible exchange rate regime but they do occur. I cannot exclude the possibility of the Riksbank intervening again if this were to be called for. Growth in the industrialised countries may thus be affected by the real economic crisis which has hit the emerging markets and resulted in a sharp fall in output there. The magnitude of such an effect will be highly dependent on confidence - confidence among households and firms so that they are prone to consume and invest, confidence among banks so that they are prone to provide credit. The Riksbank’s appraisal In the Riksbank’s most recent Inflation Report we counted on an OECD area growth rate of around 2 per cent in the years ahead. It should be borne in mind that this figure represented the latest in a series of downward revisions over the past twelve months. Since the publication of the September Report, our assessment of tendencies in the rest of the world has not changed. Considering the mechanisms to which I have just referred, however, it is not surprising that our Report highlighted the risks associated with the external situation. This situation is unusually difficult to evaluate and has to be followed closely.

Last year’s anti-pandemic restrictions led to a drastic shrinkage of demand in most sectors. Businesses suspended operations and purchases of raw materials and components. People did not buy tickets or holidays because of travel bans. When restrictions started to ease, demand was quick to recover. It was helped by loose monetary policies pursued by all central banks — to the effect that loans were increasingly affordable — and fiscal stimulus. However, a rebound in demand came with a change in its structure. For example, it spurred demand for telecommunications equipment as many people needed fast internet to work 1/4 BIS central bankers' speeches remotely. Supply, that is production, cannot quickly adjust to these changes. In these conditions, demand exceeds potential output and triggers an inevitable rise in prices. This true of many sectors. Some central banks hold the view that this is a temporary situation and no monetary policy response is needed. Those are the central banks of countries where inflation was very low for many years. Their case is utterly different. We had also enjoyed low inflation, which only had lasted four years. But the current rate of inflation is double our target, and food inflation has unfortunately increased to double-digits. Importantly, in this short period of close-to-target inflation, people’s perception of it remained unchanged. Domestic inflation expectations — that is the way people perceive current inflation and what to expect in the future — is a reflection of peoples experience with the long years of high inflation.

The latter is driven by, among other things, shrinking numbers of labour migrants coming to Russia for seasonal work. What is our concern? First, the lower a person’s income, the greater the share of food in their consumer basket. That means inflation hits such consumers in the first place. If we tolerate high inflation now, the least protected groups will suffer. Second, inflation expectations are accelerated by rising prices for food products that people buy every day: I have mentioned their effect. More so, last year’s loose monetary policy drove a reduction in deposit rates, making savings unprofitable. This year, a tougher monetary policy has pushed up interest rates, and deposits have been gradually growing again. We have raised the key rate several times this year to 7.5%. We have been raising the key rate gradually as we needed to make sure that tightening policy does not hinder economic growth and that inflation growth was really not a short-term episode, but that unfortunately, inflationary pressure is increasingly persistent. On this subject, I would like to raise the question of who wins and who loses from high and low interest rates. In general, this is a key point to understand the nature of monetary policy and key rate changes. High interest rates and low inflation benefit depositors, bond holders and those whose core income is fixed wages, pensions and social benefits.

Singapore’s financial system has, by and large, weathered the crisis well. However, we must not be complacent and we need to prepare ourselves to respond to any future challenges. There are three areas which MAS has been working on and which we will continue to focus on in the coming year: first, sustaining macroeconomic stability in the postcrisis period; second, strengthening the financial system; and third, maintaining the growth of Singapore’s financial services sector. Sustaining macroeconomic stability in the post-crisis period 4. The strong pace of growth seen in the first half of this year is not expected to be sustained. Growth is likely to have peaked at the middle of this year, and will moderate to a more sustainable rate, as external demand slows after the post-crisis bounce from stimulus measures and inventory effects wane worldwide. For 2010 as a whole, the Singapore economy is expected to expand by 13 to 15%. 5. After two quarters in negative territory, headline inflation turned positive in Q1 this year and reached 3.1% in Q2. For the rest of the year, headline CPI inflation is expected to rise, reflecting higher car and commodity prices on a year-ago basis. However, the outlook for underlying price pressures remains largely unchanged from MAS’ monetary policy review in April. Despite stronger-than-expected GDP growth, the pass-through of domestic business costs to retail prices due to tightening factor markets is expected to be moderate, alongside the slowing in the economy.

On the contrary, inflation has now been so low for so long that I am concerned that it risks becoming a problem in itself, as inflation expectations are adjusted to a lower level. For these reasons, I have considered a further cut in the repo rate to be justified. But a majority of Executive Board members have assessed that this is not justified, because an even lower repo rate is thought to increase household debt, which is in turn assumed to increase their vulnerability and thus the risk of shocks leading to a deep recession. It is, of course, important to consider how concerned one should be over household indebtedness, not just the Executive Board of the Riksbank, but the Government and the Riksdag (the Swedish parliament), as well as the banks that lend money to Swedish households and Finansinspektionen (the Swedish Financial Supervisory Authority), which supervises these banks. My own opinion is that the high housing prices probably mainly reflect a shortage of housing and are thus not to be regarded as a price bubble. However, if the supply and demand situation changes, this could very well lead to falls in house prices in some situations. And even if such price falls are justified, they can entail problems for macroeconomic developments.

Institutions should thus make allowances for less favourable future scenarios of access to these international markets than those seen in recent years. The expansion of activity during 2005 was not restricted, however, to credit extended; banks also offered a wider range of non-typical banking products, such as insurance, and mutual and pension funds. Likewise, activities pursued abroad contributed to making bank balance sheets more dynamic. In this respect, the geographical composition of Spanish deposit institutions' financial assets abroad changed considerably last year. While Latin America continues to hold a relevant position, the European Union has become notably more prominent, and now accounts for the highest proportion of assets. In 2005 Spanish deposit institutions’ results, the first line of defence against potential difficulties, posted sizeable growth rates, confirming the sound position seen in previous years. It should not be forgotten, however, that a greater degree of dispersion and volatility is to be expected further to the application of the new accounting principles introduced by Banco de España Circular 4/2004. In any event, the considerable increase in business volume, the greater leverage of credit institutions and the drive to contain operating cost increases have allowed high profitability ratios to be maintained, despite the moderation of the financial margins. The clearest expression of this was the return on equity; once again in 2005, its spread over long-term public debt continued to widen.

That all shows how important it is for the economy to have flexible price- and wagesetting mechanisms. And there is a general need to reinforce the capacity of the productive system to compete, through improvements in specialisation, efficiency and higher productivity gains. As earlier indicated, the growing mismatch between household and corporate expenditure and income last year has been accompanied by fresh increases in these sectors' debt. What has proven conducive to this has been the maintenance of financial conditions which have continued to be markedly loose for the situation of strong demand pressure in the economy. This growth in household and corporate liabilities is naturally bearing on the financial position and burden of both sectors. The financial pressure borne by households has, however, been alleviated by the increase in their net wealth, sustained by the growth of stock market prices and, above all, of house prices. In the case of companies, the notable increase in profits has strengthened the sector's capacity to withstand the increase in their financial commitments. Accordingly, the financial position of both sectors, considered overall, remains sound and does not therefore pose a serious obstacle to the continuity of the economic upturn currently in train. The foregoing should not, however, conceal the evident fact that the expansion of domestic spending, particularly in the case of households, will not be able to base itself for much longer on growth in debt at rates such as those currently seen.

As the balance sheet increases in size, the potential costs increase in terms of market functioning, risks to financial stability, and the path of future remittances to the U.S. Treasury. Second, there is a limit on how far the expectations channel can be exploited. As I discussed earlier, since the current FOMC cannot bind future FOMCs and the economic outlook is highly uncertain, it isn’t reasonable to expect that policies that affect expectations many years in the future will have a powerful impact today. I believe that the effectiveness of the expectations channel decays as the length of the horizon extends. Third, monetary policy is only one leg of the stool necessary to generate a vibrant and sustained economic expansion. In particular, as noted earlier, the health of the financial system is critical. For without it, the monetary transmission channels will be impaired and monetary policy will be less effective in influencing the cost and availability of credit. Similarly, it is critical that fiscal policy be set appropriately. This means the short-term impulse needs to be properly calibrated to the current set of economic circumstances (not 9 With respect to borrowing costs, this is particularly true in real terms. BIS central bankers’ speeches 7 too much restraint) and the long-run budget trajectory needs to credible and consistent with fiscal sustainability. Finally, removing structural impediments that hinder growth and economic rebalancing are also important.

Only if a central bank does what it promises to do will expectations be solidly anchored. Of course, this does not mean mechanically following a set policy trajectory regardless of how the outlook changes, but it does mean that the stance of policy over time must evolve in ways consistent with the criteria established in the guidance. It is important to communicate how policy will respond to changing economic circumstances over time. This is particularly important when the outlook changes, because expectations about how policy will respond can be an important self-stabilizing element of monetary policy. In this regard, a framework that ties the use of policy tools explicitly to economic outcomes has many advantages. Good public communication is also important. For example, press conferences offer an opportunity to ground the policy actions and stance in a framework that is explicit about how the central bank plans to achieve its mandated objectives. Asset purchases are an effective tool Credibility requires taking action in the present as well as providing guidance for the future, and we are fortunate to have learned that asset purchases can indeed be an effective tool to support growth, employment and inflation expectations at the zero bound. While I believe that managing expectations is crucial, I am somewhat skeptical of the view that forward guidance on the policy rate alone is sufficient in these circumstances. This is particularly the case when guidance extends out several years in the future.