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Both the banks and the supervisors conduct independent assessments of the impact of the stress scenarios on the various business lines of the bank. This approach provides a cross-validation of each bank’s analysis, while at the same time generating results that can be compared across the participating banks. Another important feature of CCAR is that the scenarios and the key aspects of the banks results are made public rather than treated as confidential supervisory information. This transparency is important for supporting market confidence in the banking system. Finally, a critical aspect of the stress testing process is the supervisory review of the capital planning process for each participating bank. This planning process is what reinforces and promotes a proactive stance by management to emerging risks. The structure of bank management compensation also could be designed to provide incentives that reinforce a proactive, forward-looking risk management approach. As I will discuss in a moment, sufficient long-term debt that can be converted to equity is an important element of an effective resolution mechanism for G-SIFIs. While the magnitude of this longterm debt needs to be sufficient to ensure that public funds are not at risk in the event that a resolution of a firm is necessary, making this long-term debt a component of management compensation might also be used to help reduce the likelihood of a default. Long-term debt provided by outside creditors exposed to risk of default can create useful market discipline. However, outside creditors do not have the same information or decision rights as inside management.
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In addition, international standards on margin requirements for non-centrally cleared derivatives have been adopted.3 By definition, bespoke derivatives cannot be centrally cleared and so do not benefit from the risk reduction and enhanced transparency associated with central clearing. To offset this, these derivatives will be required by regulation to have higher initial margin requirements, as well as variation margin. Despite these efforts, we still may not get the balance right in terms of the requirements applied to non-standard versus standardized, cleared contracts. One worry is that CCPs that are shareholder-owned and operated for profit may compete for market share by offering lower margin requirements on standardized products. This could strike the wrong balance between the private profit motive versus the public benefit of clearing. For this reason, I believe that all CCPs need to have strong governance and regulatory oversight. This must be harmonized on an international basis in order to prevent a potential race to the bottom. It is important to recognize that increased use of CCPs for central clearing also creates potential financial stability issues that must be addressed. While CCPs reduce aggregate risk, they also concentrate the remaining risk. That is, CCPs create potential single points of failure in global derivatives markets. CCPs need adequate capacity to absorb potential losses from the default of one or more of its members, and they need to have access to liquidity so that they can always fully settle their obligations.
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Institutions deemed as having higher risk are subject to more frequent onsite inspections. Let me cite some outcomes from our inspections. Institutions that have failed to meet our requirements have been warned or reprimanded in writing. A few have been required to appoint external consultants to conduct a thorough review of their AML/CFT frameworks; others have been asked to increase the resources devoted to this function. In a couple of cases, where the frameworks and procedures were adequate but ineffective management oversight resulted in inadequate implementation, we have asked the senior management to be replaced. In all cases, MAS informs the institution’s parent supervisor of our findings and concerns. Our supervisory approach aims to be preventive in nature. This means that sanctions can be taken against financial institutions for weak AML/CFT controls, even if no predicate offence has occurred. Having reviewed our regulations and our supervisory and enforcement actions, the FATF assessors concluded, “Singapore’s AML/CFT sanctions regime is effective, proportionate, and dissuasive”. In a nutshell, while a lot has been done, our institutions can always do better. MAS is reviewing whether we need to increase our supervisory intensity and is considering if we should make public, sanctions against persistently or egregiously errant institutions. Strengthened cross-border co-operation The third prong of our efforts is international co-operation.
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The most recent published data show that nearly half a trillion pounds of collateral have been delivered to the Bank in this way. The existence of a wide range of facilities, coupled with the presumption of access, has helped reduce concerns about the Bank lending “too little”. But at the same time, it has also strengthened safeguards against lending “too much”. Counterparties can see clearly that the Bank’s facilities are priced to incentivise the use of private markets in normal trading conditions. And the detailed pre-positioning process, underpinned by published collateral eligibility criteria, 2 See the Sterling Monetary Framework “Red Book”, at: http://www.bankofengland.co.uk/markets/Pages/ sterlingoperations/redbook.aspx. BIS central bankers’ speeches 3 provides assurance against the possibility that the Bank is taking sub-standard or overpriced collateral. The third lesson from the UK is that richer tools for LOLR require strong governance and accountability mechanisms, to reassure society that the central bank will operate according to clearly established procedures, and will report on its activities ex post. Assurance that the Bank will not lend “too much” under its published facilities (backed by its own resources) is provided through a combination of ex ante safeguards and ex post transparency. The ex ante safeguards include: the new liquidity, capital and resolution regimes; the link between access to facilities and the threshold conditions for supervisory authorisation; the requirement to pre-position collateral; and the pricing schedule.
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That said, there are some nascent signs that the economy may be doing better. For example, based on the first estimate, which is subject to revision, real GDP increased at a 2.8 percent annual rate in the third quarter of 2013, above the trend of the past four years. And the most recent payroll employment report showed a pickup in the monthly pace of job gains. The 3-month moving average rose back above a 200,000 pace after slowing to about 150,000 as of July of this year. I hope that this marks a turning point for the economy. But before we rush to this conclusion, a few more cautionary comments are appropriate. With respect to GDP growth, it turns out that inventory investment contributed ¾ of a percentage point to that overall growth rate. Thus, because this impetus from inventories will BIS central bankers’ speeches 1 likely reverse this quarter, the real GDP growth rate is likely to slow to around a 2 percent annual rate or a bit less in the fourth quarter. With respect to payroll employment, we have seen such bursts in payroll growth before over the past few years and have been disappointed when the pickups proved temporary and did not lead to a rise in the overall growth rate. But, I have to admit that I am getting more hopeful.
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However, the notion that the economy will grow more swiftly remains a forecast rather than a reality at this point. As is always the case, there is substantial uncertainty surrounding this forecast. Moreover, there is always the possibility of some unforeseen shock. Thus, we will continue to monitor U.S. and global economic conditions very carefully and will adjust our views on the likely path for growth, inflation and the unemployment rate accordingly. Regional economic conditions Let me turn now to the regional economy. A year has passed since Superstorm Sandy devastated the tri-state region. And even today, many of the hardest-hit places are still struggling to recover and rebuild from the storm. In fact, reminders of the storm’s damage remain visible in neighborhoods across Brooklyn, Queens and Staten Island, as well as along the coasts of Long Island and New Jersey. On a more encouraging note, however, the broader regional economy has proven to be remarkably resilient. After a brief dip following the storm, the regional economy quickly rebounded and has continued to add jobs at a reasonably good pace. Moreover, the region’s housing markets have continued to show steady improvement throughout the year. To help monitor the performance of the regional economy more generally, the New York Fed produces economic activity indexes for New York State, New York City and New Jersey. Based on these measures, New York City’s economy has continued to grow strongly throughout the year, and both New York State and New Jersey have seen some pickup in growth in recent months.
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Turning to the monetary analysis, broad money (M3) continues to expand at a robust pace, with an annual rate of growth of 4.7% in February 2017, after 4.8% in January. As in previous months, annual growth in M3 was mainly supported by its most liquid components, with the narrow monetary aggregate M1 expanding at an annual rate of 8.4% in February 2017, unchanged from the previous month. The recovery in loan growth to the private sector observed since the beginning of 2014 is proceeding. The annual growth rate of loans to non-financial corporations declined to 2.0% in February 2017, from 2.3% in the previous month, while the annual growth rate of loans to households remained broadly stable at 2.3% in February. At the same time, the euro area bank lending survey for the first quarter of 2017 indicates that net loan demand has increased and bank lending conditions have further eased across all loan categories. The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households and credit flows across the euro area. To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for a continued very substantial degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2% without undue delay.
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Incoming data since our meeting in early March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished. At the same time, underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend. Moreover, the ongoing volatility in headline inflation underlines the need to look through transient developments in HICP inflation, which have no implication for the medium-term outlook for price stability. A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration. Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.5%, quarter on quarter, in the fourth quarter of 2016, following a growth rate of 0.4% in the third quarter. Incoming data, notably survey results, bolster our confidence that the ongoing economic expansion will continue to firm and broaden. The passthrough of our monetary policy measures is supporting domestic demand and facilitates the ongoing deleveraging process. The recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Employment gains, which are also benefiting from past labour market reforms, are supporting real disposable income and private consumption.
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Such a system should offer a wide variety of financial services. Since providing the necessary financial functions is more important than the exact set-up of institutions, we should be flexible as to the means to achieve the desired services. In practice, most countries’ financial systems contain banks, other financial institutions, markets and exchanges, and payment and settlement systems. I will later elaborate on why the financial system must be well regulated and supervised, in accordance with modern and globally-acknowledged practices, for instance those formulated by the Basel Committee for Banking Supervision. Moreover, the development of a well-functioning financial system depends on a number of external factors, such as macroeconomic stability, an adequate legal and judicial structure, robust rules for accounting and auditing, and a financial safety net to deal with problems occurring in the financial institutions and markets. In my presentation today I will discuss all of these components and I will base it on my experiences of transforming the Swedish system from highly regulated and inefficient to a modern one that today competes successfully on the international scene. The Swedish experience might in some ways also be relevant for other countries, although one must always take into account the specific domestic circumstances. The basic conditions underlying a sound financial system are similar for all countries. I will first give an overview of the regulated system we used to have in Sweden and some of its objectives and consequences and I will then turn to deregulation and the challenges we faced.
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This in turn enables banks to differentiate good debtors from more risky ones, and charge them commensurate to their risk profiles. In view of bank oversight, the Bank of Thailand has reoriented its focus on supervisory framework away from solo-basis transaction-testing analysis, towards risk-based supervision on consolidated basis. To fulfill this objective, we have already issued guidelines on all key risk categories and undertaken internal reform and capacity building to meet the challenge posed by comprehensive risk-based supervision. An example in this area is the development of examiners’ manuals that are regularly revised to ensure consistently high standards of supervision. 4. Going forward Ladies and gentlemen, in the next few years, Thailand anticipates both opportunities and threats in the retail banking sector for existing banks in the light of the implementation of the Financial Sector Master Plan. As regards the focus of regulators, more attention will be given to watchful monitoring of the use of credit cards, monitoring of non-bank credit institutions, and observance of governance by market participants. The changing landscape of financial system to be brought about by the Financial Sector Master Plan will create opportunities for present market participants that have the courage to explore the niche and capability to satisfy the specialized needs of this group of customers. They come in the form of a new type of bank license - retail bank and other incentives. The tier1 capital requirement of 250 million baht for retail banks will be conducive to their specialized lending to retail customers.
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20 It would be premature to draw too close an analogy with climate risks, and it is true that court cases have, so far, largely been unsuccessful. Cases like Arch Coal and Peabody Energy – where it is alleged that the directors of corporate pension schemes failed in their fiduciary duties by not considering financial risks driven at least in part by climate change 21 – illustrate the potential for long-tail risks to be significant, uncertain and non-linear. And “Loss and Damage” from climate change – and what to do about it – is now formally on the agenda of the United Nations Framework Convention on Climate Change, with some talking openly about the case for compensation. 22 These risks will only increase as the science and evidence of climate change hardens. Physical risks from climate change will also become increasingly relevant to the asset side of insurer’s balance sheets. 23 While the ability to re-price or withdraw cover mitigates some risk to an insurer, as climate change progresses, insurers need to be wary of cognitive dissonance within their organisations whereby prudent decisions by underwriters lead to falls in the value of properties held by the firm’s asset managers. This highlights the transition risk from climate change. Transition risks The UK insurance sector manages almost £ in assets to match liabilities that often span decades.
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The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security. 8 So why isn’t more being done to address it? A classic problem in environmental economics is the tragedy of the commons. The solution to it lies in property rights and supply management. 2 For instance, the IPCC has stated “Warming of the climate system is unequivocal, and since the 1950s, many of the observed changes are unprecedented over decades to millennia”. See IPCC - Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (2014). 3 See www.metoffice.gov.uk/news/releases/archive/2015/Record-UK-temps-2014. 4 See IPCC (2014). 5 See IPCC (2014) which notes that the effects of anthropogenic greenhouse gas emissions, together with other anthropogenic drivers are “extremely likely to have been the dominant cause of observed [global] warming since the mid-20th Century”. 6 See, for example, Otto et al (2015). 7 See Munich Re, NatCatSERVICE (2015). 8 The report “Risky Business – the economic risks of climate change in the United States” (2014) suggests that in the USA $ worth of coastal property could be below sea level by 2100. Research by Lloyd’s identifies climate change as an important supply-side issue for food security. See www.lloyds.com/~/media/lloyds/reports/emerging%20risk%20reports/food%20report.pdf. This is consistent with the views expressed by Lloyd’s market participants surveyed by the PRA for its report to Defra.
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This will not last and the fiscal authorities need to factor this in when considering what needs to be done to put the federal budget deficit and the nation’s debt burden on a sustainable path. Second, I will argue that fiscal consolidation should take into consideration the offsetting adjustments needed to keep the economy on an even keel. While fiscal consolidation is a necessary condition for a healthy economy over time, it is not a sufficient condition. Fiscal adjustments require offsetting changes in private-sector spending and saving behavior, and in the trade sector. Prudent economic policies and international coordination can help ensure that such adjustments take place in ways that support economic activity (and, by extension also support government revenue). As always, what I have to say today reflects my own views and opinions and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. As we all are aware, the federal budget deficit is very high and the federal debt burden has climbed sharply as a share of gross domestic product (GDP) (Figure 1). Despite this, the net interest burden on the outstanding debt remains low as a share of GDP (Figure 2). This is due, of course, to the unusually low level of short- and long-term interest rates. These unusually low interest rates are the result of monetary policy actions taken by the FOMC.
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Philipp Hildebrand: (The) productivity (imperative) Summary of a speech by Mr Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, at Avenir suisse, Zurich, 24 September 2007. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Just a few years ago, the weak growth of the Swiss economy was a dominant topic in public debate. For four years now, the economy has been advancing strongly. Is this merely a cyclical boom? Or has structural change taken place, affecting both productivity and the associated potential growth path? This would have far-reaching implications, not least for monetary policy. A number of factors indicate that structural change is indeed occurring and that this could ultimately result in an increase in the underlying productivity trend. However, time lags and cyclical distortions make it difficult to identify such changes. BIS Review 104/2007 1
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But they entail several risks, and they could lead to significant concentration effects among a few dominant private networks: these would in practice “re-intermediate”, but without the trust and regulation associated with the architecture of the monetary and financial edifice that we – public and private players – have built together over a period of decades. In the face of this major challenge, we need to both innovate and regulate. For some, the conjunction between the two should be an “or”, considering them mutually exclusive: innovation in the form of a central bank digital currency would be an alternative, indeed the only alternative, to the unchecked development of decentralised finance. For me, the conjunction is “and”: the two pillars clearly work together to foster sustainable innovation; this is why the EU should at once (i) adopt the MiCA regulation on crypto assets in the first half of this year, (ii) prepare for a Central Bank Digital Currency, a e-euro, by 2026. But the worst conjunction would be “neither, nor”: revolutions always happen quickly, and we are at risk of neither innovating nor regulating in time. In that case we would have failed in our historical mission and jeopardised centuries of work building up confidence in our money. Page 8 sur 9 2/ Let me now turn to the second major transformation underway, the ecological transition, which is an absolute necessity at the global level even if Europe here lies ahead. Climate change is accelerating.
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For instance, the mission observed that in Mpongwe, in the 2011 farming season, the Food Reserve Agency (FRA) paid out a total of K52 billion (Kr 52 million) to small-scale maize farmers while an additional K7 billion (Kr 7 million) was paid to commercial farmers. Coupled with this, total sales from maize alone exceeded about K80 billion (K80 million) if total sales to agents other than the FRA was included. It was further observed that the district produces more maize than the other nine districts on the Copperbelt put together. In addition, it was noted that the payments made to the farmers were growing steadily as evidenced by the increase from K19 billion (Kr19 million) in 2010 to K58 billion (Kr 58 million) in 2011 while members of the Farmers Union had accessed about K2.4 billion (Kr2.4 million) in loans from banks outside the district for the 2010/2011 farming season alone. Furthermore, the Mission reported that 2,700 residents of Mpongwe, comprising Government/Civil Service employees and registered farmers use the financial services located either in Kitwe, Ndola or Luanshya. It must be noted that this number did not include other persons in the productive sector such as private businesses. Distinguished Guests, Ladies and Gentlemen, the report further observed that a total monthly wage bill of about K2.8 billion (Kr2.8 million) was paid out to the residents of Mpongwe in 2011. These funds did not include grants and other sources of funding utilized by various Government organs and private individual and businesses.
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To build a common analysis of balance sheet positions and a shared understanding of the implications of that analysis for the world economy, a trusted, independent and expert secretariat is needed to facilitate those discussions. Only if countries are willing to share confidences with each other - discuss their "policy reaction functions" - will international meetings justify their cost. Those three tasks do not exhaust the responsibilities of an international financial institution. From time to time, there may well be financial crises when it would be appropriate for the international community to provide temporary financial assistance to mitigate the costs of sharp adjustment in trade flows and output. But such a role should not be the principal focus of international monetary co-operation, and, as I have pointed out, it has not been the role for the IMF vis-a-vis any developed economy for many years. Moreover, nor is it likely to be true of many important emerging market economies in the future. As I argued in my K.B. Lall Lecture in 2001, following the Asian crisis of the late 1990s it was likely that countries might choose to build up large foreign exchange reserves in order to be able to act as a “do it yourself” lender of last resort in US dollars. It is now clear that this is exactly what many Asian countries have done. Nevertheless, it is sensible to provide the Fund with the capability to act when necessary. How should the IMF be reformed?
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They had the vision to put in place international institutions that might help prevent the disintegration of the open trading system that they saw as necessary to a revival of economic prosperity. We have not had to go through a time of economic disaster. We have had the opportunity to experience an extraordinary flowering of the international trading system, and the entry into that of the world’s two largest populations. The expansion of trade, the rise in the number of qualified people entering the world’s labour force, and the growing realisation that we can all benefit from trade has raised living standards and provided us with opportunities to reduce poverty around the world. That should make it easier, not more difficult, to design international institutions to sustain those developments. We will have only ourselves to blame if we fail to live up to that challenge and simply allow the IMF to evolve through a series of ever more bland communiqués and meaningless statements. Today, I have tried to challenge the thinking behind the slow progress in reforming the IMF. But that should not be interpreted as any criticism of the extraordinarily talented and committed people who work for the Fund. On the contrary, the responsibility for reform lies fairly and squarely with the shareholders – the member countries. Nor are the issues an arcane exercise in international finance. As Governor Deshmukh said in his speech in Savannah, agreements on the international monetary system and on trade go hand in hand.
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Pension funds – reacting with moderation and flexibility Ladies and gentlemen, the pension funds have not been idle in the last few years with regard to the challenges mentioned. As pension fund managers, you have shown moderation and great flexibility in initiating various measures to bring your pension funds’ income and expenditure into equilibrium over the long term as well. On the investment side, the exposure to fixed-income instruments has been reduced – given the persistently low interest rates – in favour of equities and real estate (cf. chart 4). Furthermore, the pension funds have again become more active abroad, and are keeping their liquid assets to a minimum. Indeed, liquidity as a share of total investment assets is currently at a historic low (cf. chart 5). You have also had to take action on the benefits side in order to balance income and expenditure over the longer term. These cuts are painful and have been directly reflected in people’s insurance certificates. One example is the sharp reduction in the conversion rate for non-mandatory cover. 8 Moreover, the technical interest rate 9 has been lowered by 40% in the last ten years. This took account of the probability that income from the ‘third contributor’ would also be greatly limited in future.
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At present a higher level of economic growth is thus required to change the level of unemployment compared to the average historical relationship since 1980. The time lag between GDP and unemployment also appears to have increased during the 2000s. Thus, it now takes longer before the full impact of a change in growth has an effect on unemployment in Sweden. What is different this time? Part of the explanation for unemployment not having risen as much as one might have expected given the historical relationship could be that not all of the economy has suffered. The main fall in employment has been in the manufacturing industry, while the services sector, which is more labour intensive, has fared better. Last year exports fell by a good 13 per cent, while retail sales, for instance, only slowed down slightly. This is probably because the Swedish export industry was hard hit by the large fall in world trade, while the large economic policy stimulation helped hold up consumption. Industrial production fell by around 25 per cent between the peak in November 2007 and the trough in May 2009. However, the fall in the production of services was just over 10 per cent between the peak in December 2007 and the trough in June 2009. In recent months production in both sectors has stabilised. This has also had an effect on employment, which fell much more in the manufacturing industry than in the services sector.
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7 The so-called stock-flow (or deficit-debt) adjustment reflects all those transactions and flows that are not reflected in the deficit, but are reflected in government debt (and vice versa), in accordance with the European statistical rules, including notably the requirement to finance the acquisition of financial assets. 25 3 Medium-term challenges 3.1 The changing role of fiscal policy in the crisis: from expansion to consolidation The pandemic is taking a high toll in terms of human life and, as I have already mentioned, the price is also high in terms of the loss of income of many households and firms. Against this background, there is a high level of agreement among political forces, social agents and economic analysts as to the need for an expansionary fiscal policy that prioritises providing support for households and safeguarding the productive system. The corollary of such a policy is, obviously, a very large impact on public finances. However, it is preferable to bear this cost as the consequences of fiscal policy failing to respond to the pandemic would have been much more severe. The recommendations of the different international organisations, and their own actions, as exemplified by the European Commission’s temporary suspension of the fiscal discipline rules, have also been in line with this consensus on the role of budgetary policy in this crisis, not only in Spain, but also in other economies.
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08.06.2023 7th ICO Sustainable Bond Forum Closing remarks ICO/ Madrid Margarita Delgado Deputy Governor First of all, thank you for the invitation to participate in this 7th ICO Sustainable Bond Market conference. I am sure that the various panels have addressed recent developments in social and green bonds and the latest innovative approaches in sustainable finance. It would be interesting to take a look at the conclusions of the first edition of this conference to see just how much progress has been made in this market; huge strides for sure. For example, through the development of new instruments to mobilise the financial resources needed to achieve a net-zero economy and the goals set by the Paris Agreement. However, I am convinced we would also find that some of the challenges are still with us today, probably including the ones I am going mention in this address. Recent evolution of sustainable bond markets Developments in sustainable finance markets have been very significant. In recent years we have seen a surge in new bonds and instruments. According to the latest Climate Finance Monitor published by the IMF:1 - After decreasing in 2022, issuance of sustainable debt in 2023 Q1, considering green bonds and loans, social bonds, sustainability bonds and sustainability linked-bonds and loans, was in line with issuance in the previous two quarters, but was lower than in 2022 Q1. It should be noted that this was at the time of the banking sector turmoil in the United States and Europe.
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And, in Sweden, the Riksbank has indeed important functions in this context, both in preventing financial crises and tackling them should they occur. In addition, the ongoing parliamentary inquiry into the Riksbank will examine this matter and others in more detail, and I look forward to its conclusions with interest. My discussion today has centred on my view that monetary policy and the policy rate are better suited to focus on an inflation target – and that good conditions exist for them to continue to do so. Of course, monetary policy systems and frameworks do not last forever. But, so far, I consider that there are good reasons to keep the one we have. 14 [20] References Andersson, Björn, Vesna Corbo and Mårten Löf (2015), ”Why has inflation been so low?”, Economic Review 2015:3, pp. 5–46. Blanchard, Olivier (2016), ”The US Phillips curve: Back to the 60s?”, Policy Brief No. PB16-1, Peterson Institute of International Economics, January. Borio, Claudio (2017), “Through the looking glass”, OMFIF City Lecture, London, 22 September. Borio, Claudio, Piti Disyatat, Mikael Juselius and Phurichai Rungcharoenkitkul (2017), “Monetary policy in the grip of a pincer movement”, paper presented at 21st Annual Conference of the Central Bank of Chile “Monetary policy and financial stability: Transmission mechanisms and policy implications”, Santiago, Chile, 16-17 November. Borio, Claudio and Philips Lowe (2002), “Asset prices, financial and monetary stability: exploring the nexus”, BIS Working Papers, no 114, July.
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Perhaps the best indicator of their vigilance against money laundering is the number of reports of suspicious transactions made to the Joint Financial Intelligence Unit (JFIU). These numbers suggest that institutions are certainly improving, as both the number of reports, and the number of institutions making reports, has been increasing over time. The number of reports made to the JFIU rose from only 264 in 1992 to 4210 in 1997. Our own on-site examinations also suggest that the level of awareness, and the training of staff, is improving. So, overall, institutions are doing well. However, there is always room for improvement, and I would urge those with responsibility for this area not to relax their guard. This brings me to my concluding remarks. I started out today by talking about the important elements of a control system, and how banking supervisors assess the effectiveness of institutions’ controls. I discussed some of the common threads of recent “problem bank” cases, and the control issues they highlighted. Finally, I stressed the importance of controls in the area of money laundering prevention. While I hope this was of interest to you, and at least gave you a slightly different perspective on some familiar issues, I think I should end by saying that I certainly lay no claim to having all the answers. Please do not sit back and expect the banking supervisors to issue guidelines telling you exactly what you need to do.
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From 1986, changes in the exchange rate or the prospect of changes in the exchange rate had implications for interest rates. A stable krone exchange rate was the nominal anchor. In Norway, this has been reflected in wage determination because labour cost developments among trading partner countries have been an important reference. BIS Review 11/2002 1 Exchange rates between major international currencies fluctuate widely. The US dollar has appreciated by more than 30 per cent since 1995. The German mark – the euro since January 1999 – has depreciated by about the same between 1995 and autumn 2000. The Japanese yen has been particularly volatile. Smaller countries have also experienced fairly wide exchange rate fluctuations. The Swedish krona has depreciated by more than 10 per cent since summer 2000. The Australian dollar has weakened by over 30 per cent since spring 1997. The UK, Canada and New Zealand have also experienced wide exchange rate fluctuations. The Norwegian krone exchange rate, on the other hand, has been relatively stable. 2 BIS Review 11/2002 Countries whose exports include a large component of raw materials tend to experience considerable volatility in their exchange rate. Australia is one example. Fluctuations in commodity prices entail changes in countries’ terms of trade, which measures the ratio of export to import prices. Changes in the terms of trade have an impact on the exchange rate, which in turn curbs the effects of changes in commodity prices on profitability in the business sector.
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In the BIS Review 11/2002 5 agricultural sector, the number employed may be less than 50 000 person-years. Changes in industry structure, with an increase in the number employed in services and a decrease in manufacturing, will probably reduce the role of pay increases in manufacturing as a benchmark for wage determination. Wage formation and the labour market The structure of wage and income formation, the laws and rules governing the labour market and the social safety net are the main determinants of business costs and employment. If the cost level is too high, the business sector will find it unprofitable to employ everyone who wants to work. The business sector must restructure rapidly when real wages increase sharply. Many activities will no longer be profitable and will be shut down. This could lead to higher unemployment. However, lower employment will not necessarily be reflected in unemployment figures. We may instead see a flow of discouraged workers into, for example, disability pensions, early retirement schemes or different types of adjustment packages. The extent to which these schemes are used will depend on financial incentives and entitlement thresholds. 6 BIS Review 11/2002 In many European countries unemployment has remained relatively high. By contrast, the US managed to reduce unemployment rapidly following the period of high unemployment early in the 1980s. The labour market in the US is decentralised, with local wage agreements and market-determined wages.
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We recognised much earlier on that the inflation targeting framework is not well-suited to our domestic conditions as it can compound the risks of unfettered capital flows. Instead, we believed that destabilising capital flows need to be effectively managed to ensure orderly domestic conditions. It did not help that some economies even hosted illegal NDF activities that had grave spillover implications on neighbouring economies. The fact that multilateral institutions are oblivious to these damaging consequences to some of their member countries is very disquieting. A further point is the dangers that can arise when inflation targeting inappropriately shifts the burden onto monetary policy to solve problems that in reality, require much broader policy responses on the fiscal side. When much needed actions are postponed, it has important consequences for our long term growth potential. Inflation targeting framework falling under heavy scrutiny As it turns out, our choice of not conforming to the norm was not in vain. Inflation targeting is now under scrutiny as its merits are debated widely. Many of these discussions centered on the waning effectiveness of the framework and the need for additional policy instruments to make the framework effective. The sequence of events leading up to the Great Financial Crisis raised the argument that an exclusive focus on achieving the inflation target could cause policymakers to overlook other vulnerabilities, such as credit and asset price bubbles. Delivering on inflation targets itself has also presented new challenges.
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However, that being said, the domestic policymaker understands best the context of the local situation that the country is facing. There should be no doubt in this. Third, policymakers must not be afraid of instituting bold policies if they are deemed necessary. This is especially important during times of stress or market failures that risk the orderly functioning of the economy and financial system. Intervention in markets should not be a knee jerk reaction. As a matter of principle, public policies should always first strive to facilitate a selfregulating free market to correct itself. However, when markets fail, it is incumbent upon the regulator to correct market failures. This ought to be the cardinal rule, especially for small and open economies with sizeable financial markets. More often than not, corrective public policy can be unpopular among the masses, but it is important to not lose sight of the bigger picture, for the greater good. Often times, short-term pain is necessary for longer-term gains. Fourth, clear and transparent communication is crucial. Policies will not be effective if the motivations and understanding between policymakers and the public are not aligned. At the end of 2016, the Bank actively sought out the feedback of industries and market participants that were affected by the financial market development measures we introduced in November 2016. This became an important source of information for us to continuously fine-tune the implementation of the measures to help those affected to better adapt to the new environment.
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Being associated with money laundering can seriously undermine confidence in an individual financial institution and potentially in a financial system as a whole. We are presently seeing this demonstrated in the case of the Mexican banking system, which is embroiled in a money-laundering scandal. So what steps can a banking supervisor take to ensure that institutions are doing everything they can to protect themselves from being used for money laundering? The first thing is to make sure that the Guidelines issued to institutions are kept up-to-date as techniques and patterns of money laundering evolve, and to ensure that institutions revise their own internal guidelines accordingly. We have recently revised our Guidelines and issued them as a convenient booklet. I am pleased to say that demand for this has been high and we have issued over 5000 copies of the booklet. However, Guidelines need to be put into practice. To ensure that senior management are focused on the need for this, money-laundering controls are a regular agenda item for our prudential meetings with management. They are also a regular topic for our on-site examinations. During these examinations we review an institution’s policies and procedures, look at their records of suspicious transactions, and interview staff at random to check that they have been trained to identify suspicious transactions and to follow the appropriate procedures for account opening and customer identification. We may also commission external auditors’ reports if we think it necessary. So how do institutions in Hong Kong rate on combating money laundering?
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Perhaps the best indicator of their vigilance against money laundering is the number of reports of suspicious transactions made to the Joint Financial Intelligence Unit (JFIU). These numbers suggest that institutions are certainly improving, as both the number of reports, and the number of institutions making reports, has been increasing over time. The number of reports made to the JFIU rose from only 264 in 1992 to 4210 in 1997. Our own on-site examinations also suggest that the level of awareness, and the training of staff, is improving. So, overall, institutions are doing well. However, there is always room for improvement, and I would urge those with responsibility for this area not to relax their guard. This brings me to my concluding remarks. I started out today by talking about the important elements of a control system, and how banking supervisors assess the effectiveness of institutions’ controls. I discussed some of the common threads of recent “problem bank” cases, and the control issues they highlighted. Finally, I stressed the importance of controls in the area of money laundering prevention. While I hope this was of interest to you, and at least gave you a slightly different perspective on some familiar issues, I think I should end by saying that I certainly lay no claim to having all the answers. Please do not sit back and expect the banking supervisors to issue guidelines telling you exactly what you need to do.
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On the contrary, new barriers could be erected either in the form of capital controls or through national regulations forcing financial BIS Review 76/2010 11 institutions to ring fence local pools of capital and liquidity. There would be little convergence in domestic financial systems and regulations. Foreign exchange reserves would keep growing, both in absolute and in percentage of world GDP. This scenario may be seen as the only realistic response to increased diversity in a multipolar world. Such an evolution could also be defended on the ground that the assumed benefits of financial harmonization and integration have not really materialized (Rodrik et al. 2008). Furthermore, the crisis has shown that no financial system can claim to be intrinsically superior and countries could feel justified in adopting and promoting their own models. The systemic consequences, however, are not clear. In such a world, current account imbalances would be heavily influenced by public actions and policies. Regulatory competition would dominate the localization of financial activities and the allocation of savings. In the absence of some “rules of the game”, tensions would naturally arise between countries, most likely through conflicts about exchange rate regimes and policies. An opposite scenario would see the progressive opening of all capital accounts, together with some (more or less intensive) convergence in financial systems and regulations. This would allow for the emergence of a unified world capital market, an efficient allocation of savings across countries and a smooth financing of current account imbalances.
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the Bretton Woods, system was built around an elaborate framework of rules, disciplines and support mechanisms aimed at ensuring convertibility for the current account – but, crucially, not the capital account – together with fixed but adjustable exchange rates. All these conventions were enforced through IMF surveillance and were supported by IMF facilities BIS Review 76/2010 1 With the generalisation of flexible exchange rate regimes, and the ensuing changes in the IMF articles, the normative approach to the international monetary system was somehow weakened. Capital account liberalisation led to entrust international financial markets with the “disciplining” function. When it became apparent that the discipline would not be gradual and progressive, but, instead, often lead to abrupt capital flows reversal and crisis, the international community attempted to strengthen the IMF surveillance and develop its facilities so as to pre-empt such shocks and make them more manageable. That is, basically, where we are today. Everything must be done to ensure that IMF surveillance works. But, like any “disciplinary” approach, it meets with three essential difficulties: first, diverging interests between countries. At any single point in time, conflicts may arise as to how much adjustment is needed and by whom. Situations when all national policies naturally point in the same direction – such as in the first quarter of 2009 – are very exceptional. second, enforcement problems : the IMF has naturally more leverage on countries that need its help than on others.
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This forces the Riksbank systematically to consider whether there are any transitory factors that ought to be disregarded when deciding the repo rate. It also facilitates a correct evaluation of monetary policy. One risk with this arrangement is perhaps that the discussion may sometimes become rather technical and focused on details. Should or should not the index we use include a given tax change that alters inflation by one tenth of a percentage point? Continuous minor revisions of our target variable are also liable to make us less intelligible, which may ultimately render monetary policy more difficult to scrutinise. So we evidently face a difficult choice. Since the clarification, we have chosen so far to start from UND1X, which unlike the CPI excludes house mortgage interest expenditure and price effects of indirect taxes and subsidies. In addition, we present a more detailed picture of how we view certain price movements that could be regarded as transitory, for instance the recent oil price rise. There are those who argue that the Riksbank ought to disregard downward price effects from structural factors. Examples are effects on the price level from various deregulations and the increasingly strong international competition. Reasons for doing so are difficult to find. What matters is not whether a price movement is “structural” but whether it affects the path of inflation more fundamentally, that is, as a part of the inflation process. If it does, it ought to be taken into account when policy is formulated, regardless of whether its effect is downwards or upwards.
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There are many sides to this. One has to do with whether monetary policy ought to allow for other matters besides inflation, for instance the real economic situation or the risk of problems that might threaten financial stability. I shall be returning to that shortly. Another is the timing of an interest rate adjustment. It is, of course, primarily the inflation forecast that guides monetary policy. But there may be room at the margin for other aspects. Normally it is a matter of whether a measure can be taken a little sooner or later than otherwise. This may be desirable to ensure that the measure is well received in the financial markets, for example. On other occasions we have prepared the general public for future decisions in order to avoid unnecessary conflicts and discussions in society. When we raised the interest rate in 1997, for instance, the decision was timed with a view to sending a clear message in advance of the wage negotiations at that time. 4. Should we take output and employment into account? Price stability is the Riksbank’s policy objective. The antecedents to the Riksbank Act state that, without prejudicing this objective, the Riksbank should also endeavour to promote other economic policy goals that the Riksdag has established, for example a favourable development of growth and employment. One reason for focussing on low inflation is that most things suggest this is a prerequisite for a favourable long-term development of growth and employment.
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UNCITRAL was established by the General Assembly in 1966 with the general mandate to further the progressive harmonization and unification of the law of international trade. In 1996, UNCITRAL adopted a Model Law on Electronic Commerce. The Model Law is aimed at removing legal obstacles to the use of electronic communications. Thus, the Model Law provides that information shall not be denied legal effect solely on the grounds that it is generated, sent, received or stored by electronic means, and establishes rules for when an electronic writing and signature will satisfy existing legal requirements for writings and signatures. The Model Law also provides solutions for legal issues that arise in the use of electronic communications, such as the admissibility of electronic records and the attribution of electronic communications to particular parties. UNCITRAL, along with OECD and others, has now undertaken to explore possible legal rules underpinning digital and other electronic signature systems; specifically the cross-border recognition of electronic signatures. While the United States would have preferred UNCITRAL to have extended the work of the Model Law to cover additional contracting issues, a large number of other countries supported work on digital and other electronic signatures. The United States has chosen to fully participate rather than risk the emergence of rules which, while not binding on any state, might not be as supportive of market-based commerce as the United States believes it should be, and which would carry a UN imprimatur.
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Maiava Atalina Ainuu Enari: Educating individuals to manage their personal finances Opening remarks by Ms Maiava Atalina Ainuu Enari, Governor of the Central Bank of Samoa, at the MoneyPACIFIC “Money Guide” launch, Apia, 2 April 2014. * * * Members of the Diplomatic Community Youth and Education Directors of the Church denominations present today Our MoneyPACIFIC partners – Kim Hailwood and Becky de Beer-Lamont Distinguished Guests Ladies and Gentlemen It is indeed an honour for me to address this gathering today, at this important milestone in the partnership of the MoneyPACIFIC project and the Central Bank of Samoa. The MoneyPACIFIC Project was established in 2007 under the umbrella of the NZ-Pacific Remittances’ Project which stands to help reduce costs of sending money within the Pacific Region, and has concurrently worked hard to lift Pacific Communities awareness of the need to prudently manage their personal finances. We have worked closely with the MoneyPACIFIC programme over the recent years and we consider them a great ally in the promotion of financial inclusion and financial literacy here in Samoa. In a moment Kim and Becky will elaborate more on the MoneyPACIFIC initiative and its latest resource but before that I would like to take a few moments to talk a little bit more on why financial literacy is important to the Central Bank of Samoa.
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Philipp Hildebrand: Reflections on the gold market Speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the LBMA Conference, Montreux, 26 June 2006. * * * Introduction Thank you for giving me the opportunity to speak to you this morning. The last time a member of the Governing Board of the Swiss National Bank (SNB) had the opportunity to address this audience was in June 1999, when our present Governor Jean-Pierre Roth had the difficult task to explain why the SNB intended to sell 1300 tonnes of its gold reserves. Back then, the gold market environment was quite different: the price of gold had steadily declined to USD 250/oz and there were widespread concerns in the market place that central banks were intending to liquidate a substantial part of their gold reserves. In seven years, the market has, in many ways, come full circle: the price of gold climbed to above USD 700/oz before receding below USD 600/oz, levels that were last seen in 1981. Central bank activity in the gold market is not considered as a threat anymore. The agreements of 1999 and 2004 between 15 European central banks - the so-called Washington agreements - have removed much of the uncertainty regarding central bank sales. Indeed, market rumours today are arguably more concerned about central banks buying gold than they are about central banks selling gold. As many of you know, the SNB completed its gold sales program fifteen months ago 1 .
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Oil prices have increased sevenfold since 1999; industrial metals have increased threefold since 2001. Similarly, the extraordinary gold bull market at the end of the seventies occurred in the context of rising oil and commodity prices. This parallelism, however, is not perfect. The average correlation between weekly price changes of gold and oil throughout the last 20 years is a mere 0.1. For metals, the correlation with gold is slightly higher but remains below 0.2. Both correlations have varied heavily within the period; currently, they are clearly on the high side (Graph 1). Graph 1: Correlation between gold, metals and oil prices Gold - Metals (GSCI) Gold - Oil (Brent) 0.8 0.6 0.4 0.2 0 -0.2 Correlation of weekly price changes over a 1-year period -0.4 01.01.1983 01.01.1988 01.01.1993 01.01.1998 01.01.2003 Despite similarities in price movements, the gold market has a number of distinct features relative to other commodity markets. Arguably, the most important distinction is the fact that the ratio of available supply to annual production is much higher for gold than for other commodities. A significant proportion of the estimated 160,000 tonnes of all gold worldwide available in the form of jewellery, bars, coins, etc. (sixty times the annual mine production) could be brought to market at relatively low cost.
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Currency restrictions of the type we have seen some examples of recently therefore lead the country that introduces them into a deadend. When problems of this type arise in one country, the effects are liable to spread to other countries. Recently we have seen a global increase in various asset risk premia as a consequence of the turbulence in Asia and the problems in Russia. This has affected countries that geographically are a long way away from the countries in question. A part of the adjustment of risk premia probably represents a normalisation. It is not to be expected that stock markets around the world can generate capital gains year after year that deviate from the long-term development of corporate profits. Neither is it unreasonable that the terms on which countries borrow should become more differentiated than before to reflect the various risks involved. But adjustments of this type are seldom smooth. Exaggerations in one direction sometimes give way to excesses in the opposite direction. The so-called flight to quality that occurs in connection with financial turbulence in parts of the world is a sign that investors want a rapid reduction of portfolio risks. This leads to increases in risk premia. One way of adjusting portfolio risk is to sell shares and buy treasury paper. That is why financial turbulence often has a negative effect on shares prices, accompanied by a downward movement in long-term - and sometimes even short-term - interest rates.
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But if one looks closely, one will find that a good portion of this are raw materials, parts, and components produced in one country and sold to another for further processing or assembly for sale to a third country within or outside Asia. The production of goods for final consumption in Asia is still low, with the exception of Japanese and Korean brands. And while China’s imports from ASEAN have increased substantially in the past few years, their consumption is still mainly in food products, raw materials and low value added products. For luxury goods, their being brand-conscious, ASEAN products have not been able to compete well. This will change over time when Asian products gain more differentiation and sophistication. For example, at the moment, Thai palm oil is no different from Malaysian. There can be no mutual trade. But when it becomes part of the national cuisines, trade and exchange could occur. The more value is added, the more Asia will trade with each other for eventual consumption. But for the moment, the emphasis is more on cooperation than integration. So the second question: If this is so, why are there various monetary initiatives going on in Asia? The way I see it is that even though the level of economic integration is presently still not fully advanced, the financial linkage and contagion affect is very high. Part of this may have to do with the fact that Asian countries lend a good deal of money to each other.
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14 15 8 All speeches are available online at www.bankofengland.co.uk/news/speeches 8 In 2014, the FPC introduced the borrower-based tools to guard against an increase in the extent to which highly indebted households could amplify macroeconomic downturns. These tools could achieve this goal in a number of ways. By constraining the increase in the aggregate number of highly indebted households, the tools reduce the proportion of households that could have insufficient liquid assets or lose access to credit in the event of a shock. And by providing some check, in aggregate, on excessive credit growth relative to income, these tools could also provide benefits in the event of debt-financed overconsumption, if it were driven by highly indebted households or looser underwriting standards. Effectiveness of the policy Turning to the effectiveness of the policies, a key question is whether the risk of sharp consumption cuts in a downturn due to high indebtedness is lower now than it would have been if the policies had not been in place? To answer that question, we need to examine how the distribution of indebtedness on the stock of mortgages has changed over time. There is no way to examine that directly in the UK – unlike some other countries, we do not have access to comprehensive data, such as current income and debt levels, for all UK households. Instead, we use two approaches to estimate this: surveys and models combined with regulatory data.
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The banking sector in emerging market countries also tends to be more concentrated and represents a larger share of the domestic financial system, suggesting that problems there will have an amplified effect on the economy and on the fiscal costs associated with bank rescues. Causes of banking system problems Banking system crises have many and complex causes, both macro and microeconomic. Macroeconomic causes include exogenous shocks, sustained or sharp declines in real growth, accelerating inflation, deterioration in the terms of trade, and changes in the policy regime. Macroeconomic shocks also typically expose underlying microeconomic deficiencies in risk management practices and internal controls at financial institutions such as weak underwriting standards, insider lending, excessive credit growth and credit concentrations, interest rate and exchange rate mismatches, and fraud. They also tend to reveal weaknesses in financial system supervision and regulation. The threats to financial system stability are many and interact in complex ways. Policy responses Reflecting the many causes of financial system distress and differences in country conditions and institutional settings, responses to financial system crises typically have been varied and hybrid. Banking sector restructurings are art as well as science, and can be influenced by a host of factors, such as the depth and breadth of problems in the banking, corporate and household sectors. Other critical factors include the existence of adequate enforcement mechanisms to achieve corrective action and of financial markets that are deep enough to permit the orderly disposal of problem bank assets.
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William C Dudley: Key developments in the tri-party repo market Introductory remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Workshop on “Fire Sales” as a Driver of Systemic Risk in Tri-Party Repo and Other Secured Funding Markets, Federal Reserve Bank of New York, New York City, 4 October 2013. * * * Good morning. I am pleased to have the opportunity to open this workshop and discuss key developments in the tri-party repo market. In my remarks, I would like to give a brief overview of some of the problems that surfaced in this market during the financial crisis of 2008, recognize the improvements that have occurred since then, and most importantly, highlight significant vulnerabilities that still persist despite the progress we have made. While we can feel proud of the enhancements that are currently underway in the tri-party repo market, today I want to underscore the fact that significant work remains to be done. The tri-party repo market constitutes a vital component of the U.S. financial system. It plays an important role in providing financing for broker-dealers that make markets in Treasury and agency securities, and is an important mechanism that supports dealer intermediation of credit. The market also provides a secure investment vehicle for those that manage large amounts of liquidity and need an investment vehicle to park these monies.
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If industry is unable to play its role in achieving a holistic solution, regulators may find themselves forced to employ the specific policy tools at their disposal in their respective purviews to address the fire sale risk. While such an approach may indeed enhance the overall stability of this market, it could also lead to unintended consequences that include reducing the efficacy of the critical role played by this market in supporting the broader financial system. I am glad that you are all here today to work with us to begin to identify the best solutions to the problem of fire sale risk in the context of the tri-party repo market. I urge you to participate actively and express your ideas candidly. I am confident that we will come up with the best solution to this problem by working together. 2 BIS central bankers’ speeches
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Or the incentives, here in the USA, for Government Sponsored Enterprises such as Fannie and Freddie – massive players in global capital markets and so with a significance stretching beyond your borders – to take on more risk in lending to poorer households. Or for banks to badge illiquid ABS tranches as trading positions in order to benefit from much lower Trading Book capital requirements. Or for banks to move credit portfolios to off-balance sheet vehicles supported by liquidity lines against which no regulatory capital had to be held. I could go on and on. The microeconomics of finance matters hugely to stability. The faultlines of the system are sometimes obscure. And a macroprudential authority needs, therefore, to be attentive to the complex ways in which the different parts of the financial system interact, generating leverage and liquidity risk. Threats may often be buried in the complex details of the system – subprime CDO2, conduits and SIVs etc in the latest crisis; investment trust cross holdings in the 1920s – but the task is to make the connections without getting lost in the trees. Which brings me from scene setting to the real world of the new UK framework. The UK’s new Financial Policy Committee Who we are The FPC exists. We will hold our first formal policy meeting in June. We are a Committee of eleven.
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Secondly, due to the trade offs I described earlier, the government has proposed that the FPC be subject to a constraint that it should not act to preserve stability at the cost of significantly impairing the capacity of the financial sector to contribute to medium-to-long term economic growth. What this means in practice is that when faced with an immediate or incipient threat to stability, we must try to find a solution that avoids damage to long-term growth. That discipline is welcomed by the Bank. This is obviously all novel stuff. It is therefore helpful that the government plans to ask Parliament for a power periodically to flesh out the statutory objective, via a Remit from the Chancellor of the Exchequer – an arrangement that has worked well in the monetary field in the UK. It will enable practical lessons to be incorporated into the regime over time. Why is the UK’s macroprudential body separate from microsupervision? Most central banks have traditionally regarded their contribution to financial stability as deriving from their markets and banking supervision functions. That is explicit in the Federal Reserve’s 1913 statute, with which I began these remarks. And given the UK’s heavily concentrated banking system, effective banking supervision is obviously an essential precondition for preserving stability. But in terms of how organisations work in the real world, the flaw in relying entirely on this is that it assumes that those operational areas of the central bank will invariably make time and space to address the financial system as a system.
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In the UK, however, core inflation is now more than 1.5 per cent and seems to be on the rise. So far, moderate wage growth in both Europe and the US suggests that employees have not been compensated for the rise in energy prices. If the increase in oil prices is perceived as long-lasting, this may result in higher inflation expectations, higher wage demands and a more pronounced pass-through to other prices. Over the past few months, key rates have been raised in the US, Canada and New Zealand, while the UK key rate has been reduced by 0.25 percentage point. Key rates remain low among many of our trading partners. Market participants seem to expect a gradual increase in key rates in the period ahead, and at a somewhat faster pace than expected last summer. Towards the end of 2006, key rates in the US and the UK are expected to be around 4½ per cent. For the euro area and Sweden, key rates are expected to be considerably lower, at a little less than 2¾ per cent and 2½ per cent respectively. In recent months, global long-term interest rates have also edged up again somewhat. This reflects stronger inflationary impulses as a result of high energy prices. Market participants’ long-term inflation expectations, measured as the difference between nominal and real government bond yields, have shown a small increase since last summer. Low interest rates and expectations of continued low real interest rates are sustaining the cyclical upturn in Norway.
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Moreover, fixed investment in the petroleum sector has expanded sharply, which has led to rising demand for goods and services supplied by mainland enterprises. Mainland fixed investment also picked up after a period. Since the recovery started, quarter-on-quarter mainland GDP growth has averaged 3½ per cent annualised. Growth has been steady. The economic upturn has continued this year. On balance, demand is expected to remain relatively high in the near term. Expectations of continued low albeit rising interest rates and real income growth should support growth in household consumption and fixed investment ahead. Brisk investment growth in the petroleum industry, moderate wage growth and high profitability in many enterprises suggest further investment growth in the mainland enterprise sector. The economic upturn is now broadly based. In manufacturing, the order backlog is at a record-high level, which implies continued production growth over the next quarters. Statistics Norway’s business tendency survey for manufacturing points in the same direction. Activity has remained buoyant in the construction sector for a long period. New orders in this industry are rising, which points to a further increase in production. Growth in turnover in property management and commercial services has increased to a high level. Higher activity in goodsproducing industries and the prospect of solid growth in household demand provide a basis for continued growth in service industries. However, cost levels in the Norwegian business sector are high. This challenge may become more visible when the upturn slows.
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We want all three objectives to be met in an economy which is growing at its maximum sustainable potential. Excessive zeal in meeting any primary objective too quickly could act, not just to slow actual growth, but reduce sustainable potential and this is important to keep in mind. Cooperation and coordination are generated in the framework by several structures. Essentially, these are about information sharing. The most important is via cross-committee membership: the Governor chairs all three committees, and there is further crossmembership of internal members. And there is also joint briefing meetings/staff support. The Strategic Plan of the Bank announced earlier this year, is designed in part to enable the different policy functions of the Bank to work more effectively together, reducing overlap and exploiting synergies. A notable example of policy co-ordination across the Bank’s committees has been on the question of housing. Rising house prices could generate rising debt levels over time, creating 4 BIS central bankers’ speeches risks to monetary stability as well as financial stability and the safety and soundness of firms. But addressing this by trying to adjust Bank Rate would potentially adversely affect the whole of domestic demand at a time of economic recovery and low price inflation, and it could have needed a very large change in Bank Rate as it is not very effective in controlling house prices.
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Paul Fisher: Microprudential, macroprudential and monetary policy – conflict, compromise or co-ordination? Speech by Mr Paul Fisher, Executive Director for Supervisory Risk Specialists & Regulatory Operations and for Insurance Supervision of the Bank of England, at Richmond University, London, 1 October 2014. * * * The author is also chair of the ifs School of Finance. Any views aired in this speech are personal and should not be taken as a policy statement by the Bank of England. Nevertheless, the speaker is grateful to colleagues at the Bank for helpful comments, and to Andrew Hughes Hallett for his advice on policy coordination issues over many years, including comments on the content of this speech. Thank you for inviting me once again to speak at Richmond University. In the last year I have moved within the Bank of England from the Markets Directorate to the Prudential Regulation Authority (PRA) and from the Monetary Policy Committee (MPC) to the PRA Board. The PRA Board is one of our three formal policy committees, and makes the highest level supervisory decisions for those firms authorised by the PRA. That includes insurance companies, banks, building societies, credit unions and major investment firms. I have been attending meetings since June and will become a voting member in due course.
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Charles Bean: Central banking in boom and slump Speech by Mr Charles Bean, Deputy Governor for Monetary Policy of the Bank of England, at the JSG Wilson Lecture in Economics, University of Hull, Hull, 31 October 2012. * * * Good evening! It is a great privilege to be asked to give this year’s JSG Wilson Lecture. Professor Wilson wrote extensively on many topics central to recent events, most notably money markets, monetary policy and banking. Given these interests, it is perhaps unsurprising that the Bank of England often fell under his gaze. Indeed, in his review of monetary policy in the 1960s, he was moved to remark that “the most notable contribution [the Bank of England] has made to the emergence of a new climate is in the matter of publicity and relatively frank speaking” (Wilson, 1966). I hope that I will live up to that pitch this evening, although I aim to demonstrate that our recent contributions have been somewhat more substantive than mere words! Last Thursday, we heard that the UK economy grew 1% in the third quarter. Yes, it was boosted by one-off factors relating to the Diamond Jubilee and the Olympics. But, even after taking those into account, the figure was stronger than expected. That was welcome news, for the past five years have not been easy. Following the bursting of the financial bubble, policymakers in the advanced economies have faced unprecedented challenges.
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This formulation mirrors that for the Monetary Policy Committee and should ensure that the FPC approaches its primary objective of ensuring resilience of the financial system in a way that does not unduly impede economic growth. Seven of the members of the Committee, including myself, are drawn from within the financial authorities: the Bank of England and the Financial Services Authority (FSA). 1 The remaining four are external members who bring special expertise and experience and can 1 At present they are: the Governor; the two Deputy Governors; the executive directors for Financial Stability and for Markets; and the Chairman and Chief Executive of the FSA. When the FSA is dissolved into the Prudential Regulation Authority (PRA), which will be part of the Bank, and the Financial Conduct Authority (FCA), these last two will be replaced by the heads of the PRA (who will be a third Deputy Governor of the Bank) and FCA. 2 BIS central bankers’ speeches reduce the risk of the “group think” that might arise in a committee comprised solely of insiders. There is also a non-voting representative from the Treasury. The powers of the Committee are two-fold. First, the FPC can issue recommendations. These could be general recommendations, for instance to financial institutions or the Treasury. Or they could be specific requests to the prudential or conduct regulators who would then be expected to comply with the recommendation or else explain why not.
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By contrast, demand for gas is expected to decline, in view of high prices and precautionary energy saving measures (following the EU agreement to reduce gas demand by 15%). In consequence, euro area economic activity is expected to slow in the coming quarters, as a result of the loss of purchasing power stemming from higher than expected inflation, the decline in business and consumer confidence and, in general, the greater uncertainty surrounding the economic effects of the war in Ukraine. Moreover, although supply bottlenecks are easing, they are still limiting activity among a large number of manufacturing firms in certain sectors. As a result, euro area GDP growth forecasts have been revised down significantly, especially for the remainder of 2022 and for 2023. The euro area economy is expected to grow by 3.1% in 2022 and to slow down markedly in 2023, growing by just 0.9% compared with 2.1% forecast in June. In 2024 GDP is expected to grow by 1.9%, short of the 2.1% forecast three months ago. 4 See M. Pacce, A. del Río and I. Sánchez (2022). “The recent performance of underlying inflation in the euro area and in Spain”. Analytical Articles, Economic Bulletin 3/2022, Banco de España. 3 Meanwhile, inflation continues to be driven by the surge in gas and food prices, demand pressures in some sectors owing to the economic reopening, supply bottlenecks and the depreciation of the euro.
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BIS Review 37/1998 ˝
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In particular, efforts have been taken to increase transparency, and develop and implement standards and codes to promote greater stability and enhance the robustness of financial systems to shocks. Efforts undertaken by international financial institutions include the IMF's Reports 1 The East Asian 9 economies are Indonesia, Malaysia, Thailand, the Philippines, Singapore, Korea, Chinese Taipei, Hong Kong and China. BIS Review 48/2001 1 on Standards and Codes (ROSCs), and the IMF/World Bank's Financial Sector Assessment Program (FSAP). Many developing countries, however, have expressed concerns over the tendency of these organisations to adopt a one-size-fits-all approach without taking into account the different circumstances and varying implementation capacity of the countries involved. In the banking industry, the Basle Capital Accord of 1988 was a landmark agreement which helped to increase the capital held by internationally active banks, and to create a more level playing field for banks under different jurisdictions. However, the rapid changes in banking and finance have led regulators to propose a New Basle Capital Accord which will establish a more risk sensitive and comprehensive capital framework, to benefit banks as well as improve safety and soundness of the financial system. The new Accord, however, poses challenges to Asian banks and regulators alike. The banks would have to develop more sophisticated risk management capability while the regulators would need to build up technical knowledge as well as supervisory resources to validate banks' risk management systems and determine if banks are sufficiently well capitalised on an on going basis.
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Interbank markets, which a few months back had to deal with serious liquidity problems, have continued to normalize thanks to the liquidity provision measures adopted by the authorities and the gradual recovery of expectations. On the other hand, institutions have been able to raise capital according to needs; the US Treasury even authorized some of the bailed-out banks to repurchase the preemptive stocks they issued when receiving the governmental support under TARP. One key factor behind this set of elements pointing at stabilization is, without a doubt, the scale of the monetary and fiscal stimulus packages that have been implemented in large parts of the world, in both developed and emerging economies. This is a significant difference between this crisis and the Great Depression. Although it has been claimed that the financial debacle we have experienced recently is similar in magnitude to the one that originated the Great Depression, the lessons learned from it have allowed policies to act much faster, with more effective and pragmatic responses. In those days, fiscal authorities tried to keep their budgets balanced, even when the economic depression had settled in, in 1937, thereby deepening the contraction of aggregate demand. In the case of monetary policy, the premature reduction of the monetary stimulus in 1936 contributed decisively to the recession of 1937-38. The current monetary policy has played its role in providing liquidity and generating an expansionary stimulus.
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These are often expressed simultaneously and are difficult to distinguish from one another, but I think there is a point in trying to keep the arguments separate. One sort of criticism is that a negative policy rate in itself is something unnatural and unhealthy. The other is that a negative policy rate is the wrong policy in the current economic situation. Let me discuss these arguments one at a time. Negative policy rate unnatural and unhealthy in itself? One can dispute whether a negative policy rate is unnatural and unhealthy, but it is certainly very unusual. This applies not only to policy rates but also to nominal interest rates in general. Prior to 2015 we had never had a negative nominal interest rate in Sweden. On the other hand, negative real interest rates, that is, nominal interest rates adjusted for inflation, have occurred now and then. The short-term real interest rate has been more or less constantly negative since 2009. If we look further back in time, negative real interest rates have not been so unusual either (see Figure 3). Of course one might think it rather unnatural to need to pay to lend money to someone, and to be paid for borrowing. But as it is usually our purchasing power that we are concerned with, it is not really clear, when one thinks about it, why it should be more unnatural to have a negative nominal interest rate than a negative real interest rate.
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The criticism lived on for quite a long time, but it was probably quite essential to demonstrate at that time that the inflation target was taken seriously. This was until now the only time I can remember that the Riksbank was urged not to do its best to maintain confidence in the inflation target. The criticism then was largely due to the inflation-targeting policy being so new – as I said, the inflation target had not yet even come into force. It is less easy today, after twenty years of positive economic developments, in which the inflation target has been a cornerstone, to see why the Riksbank is being urged to lower its ambitions. Perhaps it is because developments have been so positive for so long that one feels the existence of a credible nominal anchor is no longer as important. If so, I am convinced that this is a mistake. Difficult to see reasonable alternatives to the policy conducted But what about developments in household debt and housing prices? Don't they give a reason for changing monetary policy? The Riksbank has previously used the repo rate to try to subdue the upturn in debt and housing prices. But this was on a fairly modest scale and – above all – during a period when confidence in the inflation target appeared firmly rooted. 9 In recent years, on the other hand, there have been signs that this confidence has begun to be undermined, which has changed conditions rather drastically.
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As policy instruments are targeted to address systemic risk, assessing macroprudential measures in a consistent manner requires accounting for spillovers, including to the real economy, also taking account of their impact on various sectors as well as layers of interaction between those sectors. Conclusion Let me conclude. The ECB has been working hard on developing analytical tools for the effective implementation of macroprudential policy. The ECB’s new legal competences in macroprudential policy relate primarily to the power to top-up measures adopted by national authorities and the assessment of possible spillovers to other countries in connection with the reciprocity principle laid down in the legislation. In this vein, the ECB has been analysing the numerous macroprudential measures adopted by member states that, so far, we have decided not to aggravate. Concerning the governance framework, we have created an internal Macroprudential Coordination Group and established the Macroprudential Forum – integrating the Governing Council and the Supervisory Board – to discuss all matters related to financial stability and macroprudential policy. We are taking our new responsibilities very seriously. The robustness of our assessments is key and, for this reason, analytical and research work in the macroprudential policy area has been stimulated and has been fruitful, as evident in my 16 Gross, M. and J. Poblacion, (2015), “Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households”, ECB Working Paper No. 1881.
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Now the time has come—I would argue it came a while ago, but in any case it’s here now—the time has come for every firm with LIBOR exposure to actively grapple with the risks that are coming your way whether you like it or not. The way forward for the vast majority of LIBOR-based instruments is rapidly becoming clear. It’s easy and tempting to justify inaction by criticizing the available solutions as imperfect or as just too hard to do. But inaction at this point in the LIBOR transition is short-sighted and futile and only extends the uncertainty. We need decisive action by everyone in the market to avoid damage to individual firms and the financial system. 1 Raymond Check and Thomas Noone assisted in preparing these remarks. Mr. Held would like to thank his other colleagues at the Federal Reserve who provided comments and corrections. 2 2019 Outlook: Trends in the Capital Markets 3 See for example the FSOC’s Annual Reports for 2013 and 2018. 4 See Introductory Remarks by Federal Reserve Board of Governors Vice Chairman for Supervision Randal K. Quarles at the Alternative Reference Rates Committee Roundtable, July 19, 2018 5 Second Report of the Alternative Reference Rates Committee, March 2018 6 Reforming Major Interest Rate Benchmarks, 22 July 2014 7 Principles for Financial Benchmarks Final Report, July 2013 8 Information on the ARRC, including its announcements and publications, can be found at www.newyorkfed.org/arrc.
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Although such a euro area stance is prevailing, the contribution of individual Member States to the aggregate outcome is suboptimal. Some of them need to take additional measures to ensure compliance with the fiscal rules, while others have scope to use available fiscal space. In addition, all euro area countries should strive for a more growth-friendly composition of fiscal policies by prioritising public investment and reducing the tax burden on labour. The current political and economic momentum in Europe also provides an opportunity to strengthen our Economic and Monetary Union (EMU). Further integration needs to be achieved 2/3 BIS central bankers' speeches above all by implementing what has been agreed and by completing the common projects we have started. This includes completing the banking union and building a capital markets union. A more complete EMU, with further steps towards a deeper financial, fiscal and economic union, will be the foundation for a stable, flourishing and resilient euro area economy. That is the best contribution which Europe can make to global economic growth and financial stability. By delivering on its mandate, the ECB will continue to play its part in this endeavour. 3/3 BIS central bankers' speeches
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Anne Le Lorier: Regulating non-banks – ways forward and challenges ahead Speech by Ms Anne Le Lorier, First Deputy Governor of the Bank of France, at the ACPRBank of France Conference “Financial regulation-stability versus uniformity, a focus on nonbanks actors”, Paris, 28 September 2015. * * * Dear Ladies and Gentlemen, Dear Colleagues and Friends, On behalf of the Banque de France and of the ACPR, I would first like to thank very much the speakers and the participants in today’s conference for the quality of their presentations. Indeed, they helped us to have insightful debates on the ongoing efforts made to prevent systemic crisis as much as possible, strengthen the global financial system and its resilience i.e. its capacity to withstand systemic shocks. As illustrated today, this is not an easy task and the global regulators are facing many challenges in shooting at a moving target: the financial system not only adapts, but also transforms itself and anticipates regulatory changes, sometimes constructively, sometimes less, thereby continuously modifying the sources, the channels and the shape of systemic risks. Regulation itself can be ill-designed, too narrowly focused or can generate unintended consequences.
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During much of this period, banks internationally were engaged in a highly competitive ROE race. Therein lies part of the explanation for these high returns to labour and capital in banking. 4. Explaining aggregate returns in banking – excess returns and risk illusion How do we explain these high, but temporary, excess returns to finance which appear to have driven the growing contribution of the financial sector to aggregate economic activity? In this section we discuss potential balance sheet strategies which may have contributed to these rents. Essentially, high returns to finance may have been driven by banks assuming higher risk. Banks’ profits, like their contribution to GDP, may have been flattered by the mis-measurement of risk. The crisis has subsequently exposed the extent of this increased risk-taking by banks. In particular, three (often related) balance sheet strategies for boosting risks and returns to banking were dominant in the run-up to crisis: increased leverage, on and off-balance sheet; increased share of assets held at fair value; and writing deep out-of-the-money options. What each of these strategies had in common was that they generated a rise in balance sheet risk, as well as return. As importantly, this increase in risk was to some extent hidden by the opacity of accounting disclosures or the complexity of the products involved. This resulted in a divergence between reported and risk-adjusted returns. In other words, while reported ROEs rose, risk-adjusted ROEs did not (Haldane (2009)).
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Some of these trends in the value added and profits of the financial sector, and in particular their explosive growth recently, are also discernible in the market valuations of financial firms relative to non-financial firms. Total returns to holders of major banks’ equity in the UK, US and euro area rose a cumulative 150% between 2002 and 2007 (Chart 5). This comfortably exceeded the returns to the non-financial economy and even to some of the more riskseeking parts of the financial sector, such as hedge funds. To illustrate this rather starkly, consider a hedged bet placed back in 1900, which involved going long by £ in financial sector equities and short in non-financial equities by the same amount. Chart 6 shows cumulative returns to following this hedged strategy. From 1900 up until the end of the 1970s, this bet yielded pretty much nothing, with financial and non-financial returns rising and falling roughly in lockstep. But from then until 2007, cumulative returns to finance took off and exploded in a bubble-like fashion. Only latterly, with the onset of the crisis, has that bubble burst and returned to earth. (b) Measuring GVA in the financial sector To begin to understand these trends, it is important first to assess how financial sector valueadded is currently measured and the problems this poses when gauging the sector’s contribution to the broader economy. Most sectors charge explicitly for the products or services they provide and are charged explicitly for the inputs they purchase.
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Two priority areas: That evolving regulatory approach is underpinning our approach to two pieces of policy I know are of keen interest to BSA building society members – Basel 3.1 and our Strong and Simple regime for smaller firms. 13 UK Deposit Takers Supervision: 2023 priorities (bankofengland.co.uk) 14 The regulatory foundations of international competitiveness and growth − speech by Vicky Saporta | Bank of England Bank of England Page 7 Basel 3.1 In keeping with what I have set out, the PRA’s proposed approach to the Basel 3.1 standards15 maintains high levels of resilience and is aligned with international standards that we helped shape. The standards constitute a comprehensive package of measures that make significant changes to the way firms calculate risk-weighted assets for the purposes of calculating risk-based capital ratios. The proposed changes will make firms’ capital ratios more consistent and comparable. But we also need to make sure that the new rules work effectively, and in line with our objectives, both for banks and building societies. That is why we stressed in our recent Basel 3.1 CP that it was very much an open consultation and that we welcomed evidencebased analysis and feedback to help shape our final rules. Input from both the BSA and its members is core to that, and we are grateful for the feedback you have collectively and individually given.
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The actions we expect firms to take will be based on those judgements; Secondly, it is forward looking – assessing firms not just against the current risk environment but, as I have just outlined, on how existing risks may evolve and new risks emerge; and Thirdly, it is focused on the key risks – and that is where we’ll primarily dedicate our focus and attention. Across those three principles we will continue to apply proportionality. This means the supervisory focus on your firm will reflect your size and complexity. Bank of England Page 6 Although the key elements of our supervisory approach remain, we have made some enhancements, which we communicated to you in our January Priorities letter13. These include revising the way we categorise the ‘potential impact’ of firms and refining our schedule of ongoing core assurance work. We are communicating what this means to individual firms over the next year, through the supervisory communications we send. We also have some significant change taking place on the regulatory front. The Financial Services and Markets Bill, which is currently making its way through Parliament will – if passed into law – introduce a new secondary competitiveness and growth objective for the PRA. This would sit below our primary objective, to promote the safety and soundness of firms, and alongside our existing secondary objective to facilitate effective competition in the market for services provided by PRA-authorised firms.
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In effect, MAS front-loaded policy adjustment in Jan so that further adjustment was not necessary in Apr 27. Shift in monetary policy stance in Jan was measured: continuing to keep $ band on gradual and modest appreciation path to ensure price stability over medium term. Important to keep a medium-term orientation with regard to setting monetary policy 28. If MAS reacted to every short-term fluctuation in output and prices, it would risk introducing even more volatility to markets and economy. This is because: • 4 External shocks that could hit small open economy like ours can be very frequent BIS central bankers’ speeches • There are considerable lags in monetary policy transmission. Off-cycle policy shift therefore highly atypical and only sparingly used. 29. Current policy stance remains appropriate for ensuring medium-term price stability • Economy estimated to be close to its potential for 2015. • Labour market expected to remain at full employment • Core inflation, most relevant indicator for MAS’ monetary policy, expected to strengthen. Next monetary policy review is as scheduled in Oct. MAS’ financial performance 30. MAS’ P/L was almost in balance in FY2014/15, recording a small profit of $ billion. • In FY2013/14, we recorded a profit of $ billion. • Prior to that in FY2012/2013, recorded a loss of $ billion. 31. Why so volatile? Fluctuations in MAS’ profit figures from year to year is almost entirely due to currency translation effects, i.e.
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Both CPI-All Items inflation and MAS Core Inflation forecasts for 2015 were sharply down in Jan this year, compared to Oct 2014 when we last reaffirmed our monetary policy stance • Oil prices had fallen sharply – from $ in Oct 2014 to $ in Jan 2015 – and assessment was that prices were likely to stay low for at least a year. • Against backdrop of modest economic growth in 2014 continuing into 2015, wage growth was weaker than anticipated and so was pass-through into prices. 24. Waiting to adjust policy in Apr would have put MAS considerably behind curve and led to excessive speculation about a policy move. • We decided to adjust both inflation forecast and policy stance in a timely and consistent manner. 25. In Apr, MAS affirmed monetary policy stance. • This decision surprised some market observers, who had anticipated a further easing of $ policy. We made no change to policy stance in Apr because there was no change to forecasts 26. There was no ground for another shift in policy. • No reason to reduce slope of $ policy band further, given that core inflation was projected to pick up from Q4 onwards and economy remained close to potential. • No reason to shift level of policy band, as we did not envisage deflation or recession. • No reason to adjust width of policy band, which remained sufficient to accommodate volatility in foreign exchange markets.
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Located within the NBRM Library, the Center provides access to over 400 publications of the World Bank, electronic access to the World Bank databases, as well as a specifically authorized direct access to the electronic World Bank library, with a possibility to browse over 6,000 copies of professional literature. What makes this Center additionally useful for the public is that, within the cooperation with NBRM, it simultaneously provides the external users with an access also to the National Bank publications, in the form of annual reports and working papers, and to the professional literature that the NBRM Library has at its disposal. The access to all publications, as well as to the World Bank statistical database is open for all interested users in the Republic of Macedonia, because of which this Center can bear the epithet of a rich trove of knowledge, which is waiting to be used. Dear Ladies and Gentlemen, We live in an era of extraordinary dynamic changes. An era, where the already learned things outdate in no time, or become insufficient, while the crisis once again showed that the enigmas are far more numerous than the axiomatic truths. That is the reason that the investments in learning should be ongoing. As a Central Bank, we make constant efforts for knowledge improvement and elevation of the scientific and research capacity, not only within the Bank, but wider, as well.
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Pay gaps have not only been large but persistent, strikingly so among ethnic minorities, even once we make allowance for differences in skill and job attributes. This suggests, despite progress, much remains to be done. Third, even where we can “explain” pay gaps using various fundamental factors, this should not be taken to imply these gaps are necessarily justifiable. For example, consistent and large education and skills differences between cohorts could themselves be taken as evidence of a policy failure. So too might a preponderance of certain types in certain sectors or occupations. Fourth, consistent with that, our results suggest that existing pay biases can be amplified and exaggerated by the effects of age, the nature of the employment contract, educational qualifications and having children under the age of 2. On average, these too tend to further the pay disadvantage for women and ethnic minorities. In terms of policy implications, a number of important government initiatives are already underway, among central banks and more widely. The Bank of England began publishing its gender pay gaps in 2017 and has chosen voluntarily to publish its ethnicity pay gap too since 2018. In 2019, the median gender pay gap was 23% and the median ethnicity pay gap was just under 7%, reflecting lower representation of both groups at senior levels. Published pay gaps were a further useful prompt for action by the Bank. The Bank is committed to closing these pay gaps, including by setting stretching targets for representation, in general and at senior levels.
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The success of the SNB cannot be measured in terms of our annual results but by whether we fulfil our mandate, which is to ensure price stability while taking account of the development of the economy. In order to fulfil this task, the minimum exchange rate remains necessary for the foreseeable future. And so we return to the starting point of my presentation. I will repeat what I said before, that only the minimum exchange rate can prevent an undesired tightening of monetary conditions, should the upward pressure on the Swiss franc increase once again. Should it become necessary, we will therefore enforce the minimum exchange rate by buying foreign currency in unlimited quantities. BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches
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Firstly, it enhances the potential for higher global growth, while also contributing towards some rebalancing of the global growth. Secondly, the strengthened international financial linkages allows for greater potential for the diversification of risks. The increase in the Islamic financial products, the growing number of assets classes being offered, the increased cross ownership of assets all have expanded the possibilities for greater diversification of risks and the potential for return. Today, Islamic finance represents a multi-billion dollar industry which has a presence in many countries and more recently, there has been widening participation by established financial centres. There are now more than 200 Islamic financial institutions, some of which are global players, offering an extensive range of Shariah compliant products and services to a broad spectrum of consumers and businesses that transcends beyond the Muslim world. This global forum has aimed to bring together the industry practitioners, issuers and investors, the regulators, scholars as well as those in related services, including the IT services, legal, accounting and auditing professionals and those in human resource development. It is our hope that the deliberations today will play a catalytic role in building greater collective efforts through multistakeholder dialogues and network-building activities whilst discovering opportunities and also improving our understanding on important areas in Islamic finance. Ladies and Gentlemen, As we know today, there are already clusters of cross-border collaborative activities taking place on several fronts that serve to contribute towards increasing the international integration process of Islamic finance.
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Financial liberalization is now leading to banking internationalization where surplus funds flow crossborder to finance deficit units, i.e., international intermediation. In this background, it is now realized by Regulations that the high mobility of capital flows creates enormous risks to internationalized banks and to international systems, if the individual fund management systems of such banks are not sound. This requires Regulators to place even greater weight upon the efficacy of the governance systems since the failure of such institutions could be catastrophic to the well being of the entire global financial systems. In addition, the ill effects of money laundering, financing of illegal activities, and the financing of terrorism through the banking system are further risks that are faced by banks due to this growing internationalization. These too, need to be addressed by stakeholders who are involved in the development of the evolving systems. To deal with these challenges, Regulators now have to close ranks internationally as well, and attempt to harmonize prudential requirements to monitor risks of international financial conglomerates, and in this regard, we all must be somewhat relieved that the Basel capital accord has provided a clear framework for us to apply on the subject. As we all know, the Basel code of Corporate Governance for banks and financial institutions covers 8 principles. These are: • Principle 1: Board members should be qualified for their positions, have a clear understanding of their role in Corporate Governance and be able to exercise sound judgment about the affairs of the bank.
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Nevertheless, in our collective endeavour to pump the patient with as many drugs and tests BIS Review 24/2007 1 we could possibly administer (may be because we could avoid law suits relating to professional negligence by doing so! ), a plethora of new rules and regulations have been churned out and these keep being churned out at regular intervals. But, with all that frenzied activity, the vexed question that keeps on haunting stakeholders is: Will today’s regulations suffice to inoculate companies from crises in the future and keep them healthy? Will these rules help to maintain and sustain investors’ trust in companies? Will these laws and regulations help to stimulate institutions instead of stifling them? Will these efforts actually build trust and confidence in the overall system? Of course, we have to readily admit that if not for the quick responses in the aftermath of Enron and others, the damage could have been too much to bear. The repercussions and loss of confidence could have been too serious to contemplate. But, at the same time, a painful truth has also emerged. i.e., that laws, rules, regulations and Codes, by themselves do not ensure good corporate behavior. However powerful and strong the new vaccines appear to be, however effective the treatment seems to be, however professional and keen the doctor tries to be, new diseases will emerge. Some may be minor. But, ever so often, new strains will occur, that will place the system under severe threat.
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Benoît Cœuré: Monetary policy, exchange rates and capital flows Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the 18th Jacques Polak Annual Research Conference, hosted by the International Monetary Fund, Washington DC, 3 November 2017. * * * I would like to thank T. Kostka, A. Mehl, I. Van Robays and J. Gräb for their contributions to this speech. I remain solely responsible for the opinions contained herein. Central bank asset purchase programmes are often catalysts for significant cross-border capital flows. By compressing the (excess) return on domestic bonds, they encourage investors to rebalance their portfolios towards foreign, higher yielding assets.1 Such capital flows have reached historical dimensions in the case of the ECB’s asset purchase programme (APP), with both resident and non-resident investors moving out of euro-denominated securities and into bonds issued predominantly by the safest non-euro area sovereigns. I examined these flows in detail in a recent speech at the ECB’s Foreign Exchange Contact Group meeting.2 One intriguing observation I made in this speech was that there was no evidence of a causal link between such capital flows and exchange rate movements. Findings based on event studies instead suggest that, around the time of central bank asset purchase announcements, investors price the exchange rate mainly on the basis of the information these programmes provide to markets about the expected future path of short-term interest rates.
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Option-adjusted spread on index of high-yield bonds issued in the US and spread to maturity on index of leveraged loans issued in the US measured relative to the spot Treasury curve. 9 Graham and Leary (2011), Harris and Raviv (1991). Atkinson (1967), Bernanke et al. (1996), Greenwood and Hanson (2013). 11 The characteristic feature of cov-lite loans is not that they have fewer covenants, but that the requirements bind less often, and in particular only in response to particular events (such as additional financing). More traditional, “cov-heavy” contracts require firms to meet such requirements continually (Becker and Ivashina (2016)). 10 15 All speeches are available online at www.bankofengland.co.uk/speeches 15 If you think there are parallels here with the subprime mortgage boom in the U.S., ahead of the last crisis, then you’d be right. Those too were grouped together and sold to investors as packages of loans, diluting the ability and incentive to monitor individual risks; they grew extremely rapidly, particularly in the last year or two of the boom – and, as it happens, they accounted at the peak for a similar share of their underlying market (13% of total U.S mortgage debt). We should recognise that, in aggregate, corporate leverage in the UK has fallen since the crisis (Chart 17, which includes bonds as well as bank loans).12 As with mortgages, interest payments on those debts remain well below average and, if bond markets are anything to go by, will remain so for quite a while yet.
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Thus, any surprises in the evolution of the US monetary policy could affect 4 BIS central bankers’ speeches financial conditions – like they did in May of 2013 –, raising credit costs in world markets, reversing portfolio flows and depreciating emerging-country currencies against the US dollar. The beginning of a new cycle of quantitative expansion by the European Central Bank, plus similar announcements by the Bank of Japan, might reduce the likelihood and impact of these volatility episodes, depending on how these unconventional policies ultimately reflect in global lending conditions. A different risk has to do with the slowdown of emerging economies resulting in reduced capital flows. This because their assets become less attractive, all the more so in Latin America. A scenario in which the recent drop in commodity prices is prolonged or intensified, or where doubts about China’s performance resurge strongly, might trigger this kind of event. The scene may become more complex if at the same time long-term rates go up in the US, increasing the cost of external funding. It should also be considered that an increase in the cost of external financing could put upward pressure on local long-term interest rates. The decline in external and domestic long-term interest rates has motivated bond issues in both markets and local demand for type-3 mutual funds.
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Nor Shamsiah perseverance Mohd Yunus: Mastery, adaptability and Remarks by Ms Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 2018 Kijang Emas Scholarship Award “Mastery, adaptability and perseverance”, Kuala Lumpur, 21 September 2018. * * * When I entered university in Australia many years ago, the Times named the Computer the ‘Man (or in this case, Machine) of the Year’. It was a significant signal in public consciousness on the importance of the computer. The byline was, “The Computer moves in”. The world then, as is now, was a world in a state of constant change. Today, we see that technology is at the forefront in transforming almost every aspect of our lives. It is doing so at an unprecedented and relentless pace. This is exciting, but also for many, it brings about the feeling of trepidation, discomfort and uncertainty. Therefore, as both of you begin your next chapter of your life, I encourage you to make the most of your years in university, to not only excel in your chosen discipline, but also to absorb lessons that will serve you well in life. Let me just mention three today: mastery, adaptability and perseverance. First, on mastery. Even in a world where knowledge decays quickly, mastering a field of knowledge is the foundation in building one’s expertise and credibility. Mastery is not mere information accumulation. It is the ability to understand the inter-linkages between complex and evolving situations.
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Bandid Nijathaworn: Some thoughts on IMF reform on crisis prevention and crisis resolution Speech by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, presented to the G-20 Workshop on Reform of Bretton Woods Institutions, Tokyo, 28 February 2006. * * * Thank you Chairman, First, let me thank the Ministry of Finance of Japan for inviting me to this workshop on the reform of the Bretton Woods Institutions. This workshop is another reminder that the work on IMF reform is still ongoing. Next year will be a full ten years since the height of the Asian financial crisis. Over the past decade, many important ideas on the reform of the IMF have been advanced, but still there is no consensus on how the reform should move forward. I see today’s workshop as another opportunity to contribute to this ongoing debate. And whatever the outcome may be, the reform will certainly mark a critical turning point for the global economy, as the Bretton Woods Institutions attempt to adapt their roles and responsibilities to the forces of globalization. Today, I have been asked to speak on IMF crisis prevention and crisis resolution. Given the limitation of time, and the fact that the recommendations on these two issues have been many and are well-known, I thought the best way for me to add value to today’s discussion is to share with you our thoughts on the subject, as well as to make three specific points.
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The first point is how the Fund can improve its surveillance by focusing on how best to reduce the likelihood of crises in emerging markets, in particular, how to help emerging markets better cope with the challenge of the next crisis. The second is our view that the Fund’s surveillance and its works on crisis resolution should recognize the usefulness of national and regional self-insurance efforts that are being pursued by a growing number of countries. And the third is our suggestion that the Fund’s works on crisis prevention and crisis resolution can benefit from a clear separation of these two functions in terms of duties, responsibilities, and decisionmaking, so as to achieve greater effectiveness and accountability. To begin, the consensus seems to be that the Fund has not been doing a good-enough job on crisis prevention and crisis resolution. This is evidenced by a string of financial crises in emerging markets that had happened, which does not reflect well on the Fund’s surveillance mechanism. In addition, dissatisfactions were expressed in the Fund’s perceived lack of consistency and coherence in its approach to crisis resolution, in the shortcomings of its program design and conditionality, and most importantly, in the way political pressure from the major economies were allowed to influence the program content and decisions. In the Thai case, our own experience with IMF involvement was not dissimilar.
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A bank may thus seek to increase the expected return by taking on higher risk without having to pay for this in the form of higher borrowing costs. Market discipline is weakened when operators are sheltered from taking the full consequences of their own actions. This is referred to as moral hazard. The authorities must regularly undertake a critical review of regulations to determine whether they are formulated with a view to achieving the overriding objectives at minimum cost. 3. Work on crisis prevention since the banking crisis The lessons drawn from earlier banking crises are the primary means of preventing new crises. The debt crisis in the 1920s was at the root of the caution that continued to be exercised many years later. Operators are still cautious as a result of the banking crisis in the 1990s. The memory of earlier experiences fades over time. It is imperative to establish framework conditions that deter borrowers and lenders from taking excessive risk. The central framework conditions include effective legislation and regulations, a robust payment and settlement system, and effective supervision of institutions and markets. The capital adequacy regulations are more stringent today than when the banking crisis erupted. Sound capital adequacy strengthens banks’ capacity to bear unanticipated losses. The size of the banks’ capital base also sets limits for lending growth. The capital adequacy requirements are being revised. This will also have implications for Norway. The new Bank Guarantee Act is another important change to regulations. The Act provides for a deposit guarantee.
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Our point of view is that this process belongs equally to the Bank of Albania as the Resolution Authority and to the banks, 4/5 BIS central bankers' speeches which must include its results into their daily business. During the first cycle of this work in 2018, we have highlighted a number of issues that require particular attention in planning, as well as in their following up by the banks: The Bank of Albania must have access to qualitative data produced by banks, in order to select the appropriate resolution strategy. The exact identification of the bank’s operational system interconnected with the critical functions is important. The proper understanding of contractual agreements and their respective treatment is imperative, and, in particular The provision of resolution funding sources constitutes a challenge. Complying with the Minimum Requirement for Own funds and Eligible Liabilities (MREL), which underpins the application of the new essential resolution instrument, the bail-in instrument, remain the key challenge for the medium-term period. Complying with MREL is a challenge for countries like Albania, due to the capacity of the domestic market to absorb (acquire and maintain) the subordinate debt that may serve to fulfil the Minimum Requirement as well as due to the capacity of the banks to restructure funding resources, which currently consist largely of deposits. Consequently, to fulfil this obligation an interim period should be designed, without prejudice, in any case, to the main objective of resolution implementation. Finally, resolution is quite a challenging process for emerging and advanced economies.
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- by discouraging the repetitive and unjustified recourse to short-term contracts, including by some employees themselves, the recent unemployment insurance reform provides better incentives to work and to manage companies' human resources in a long term perspective. It will be necessary to assess whether it is both sufficiently effective and sufficiently fair. - of course, there remains the issue of wage increases when it comes to enhancing job attractiveness. These are currently highly expected by our fellow citizens in the face of the inflationary hump; but we must prevent the return of a general price-wage spiral, which would be a loss for all. Nevertheless, for certain jobs where there is a deficit not in skills but in attractiveness, wage increases and negotiated improvements in working conditions are the key. Page 12 sur 15 All these levers for influencing labour supply must be combined, instead of being too often opposed to one another in our public debate. They must be used with perseverance, rather than remain fleeting announcements. Only then can we find the other two missing thirds to gain the half point of potential growth in five years. Only then can we hope to achieve a 5% unemployment rate in ten years. And only then, and I'm coming to this point, will we finally be able keep our public spending under control. 2) Public finances and debt The figures on public debt are well known.
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I am passionately convinced of the need for a public service, and affected by its current crisis: its necessary modernisation, its re-legitimisation, recognition for civil servants, is not incompatible with its capacity to perform and innovate, on the contrary. The transformation of the Banque de France is a modest but real example. The idea is not to reduce public spending overall, but to stabilise it. Bringing spending growth down to 0.5% per year from 2023 onwards would lower the debt ratio to 100% of GDP in ten years, assuming the rate of tax and social security contributions remains constant - I insist on this condition; stabilising our spending in volume terms would enable us to reduce our debt even further, to 90% of GDP. The target to be set is obviously a matter for democratic debate. But the most important thing is that the targets set for this "overall spending limit" actually be respected, which unfortunately our country has never been able to do in the long term. The choice of priorities or savings to be made also legitimately belong to the political debate. I would just like to point out that the key issue of the quality of spending is the blind spot in our budgetary debate, whereas it can guide us here. Economic analysis shows that spending for the future – most investment, education, research – has a much better "multiplier" effect on growth over time than simple current spending.
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For discussions of how the crisis has affected views on monetary policy and the work of the central banks, see for instance Blanchard, Dell’Ariccia and Mauro (2013). BIS central bankers’ speeches 9 I began by noting how easy it is to get caught in what I called the prevailing paradigm. But if we had fastened in a monetary policy paradigm prior to the crisis, where we believed that we had found the right solutions, I think that we are now in a situation where there is an unusually large sense of caution when looking ahead. We have all been thoroughly shaken up. The crisis had not been predicted, and inflation targeting alone could not prevent it. We now need to learn lessons from this and to analyse in-depth the relationship between monetary policy and financial stability and how it can best be taken into account in monetary policy. At the same time, it is of course important to ensure that we don’t, as they say, throw the baby out with the bathwater, and that inflation targeting and all the good it has done are abandoned. It is without doubt a rather revolutionary period we are in and it will be very interesting to follow how central banks and their activities develop over the next ten years – even if I myself will be watching from the side-lines. Figure 1.
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Following in their footsteps, domestic conglomerates like Samsung and Daewoo started investing in film financing and video production. Korea’s experience above illustrates an important lesson for economic development. Properly structured development institutions can be a potent agent of change for private sector investment, drive growth, and forge inclusive societies. It can do a lot of good. But in reality, the real challenge is how to replicate the key factors that contribute to the success, and to achieve this more consistently across different political, economic and social contexts. With this in mind, let me outline the crucial factors that might help us understand this phenomena: a. First, a mindset shift to contribute more broadly to catalyse new growth areas; b. Second, the need to strengthen accountability frameworks; c. Third, the continuous cultivation of a strong culture of innovation; and d. Fourth, a robust corporate governance. Stepping up to the plate by further developing the non-lending roles More than ever, development financial institutions need to step up to promote new growth areas. They should perform a broader role to stimulate economic activity that would not otherwise take place. They could also improve the quality and scale of such activities. They can provide unique value propositions in terms of advisory and nurturing new growth sectors to become profitable and thus, attractive for private investors. I will highlight two successful examples. Firstly, in the Korean Wave example, they were the first to spearhead investments in the film and music industry.
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Australia is one example. Fluctuations in commodity prices entail changes in countries’ terms of trade, which measures the ratio of export to import prices. Changes in the terms of trade have an impact on the exchange rate, which in turn dampens the impact on profitability. The exchange rate acts as a buffer. In the 1990s, the BIS Review 20/2002 1 fluctuations in Norway’s terms of trade were especially wide. Changes in oil prices were an important reason for this. The krone exchange rate has not fluctuated much compared with other countries. The Petroleum Fund acts as a buffer against fluctuations in the oil price, because the Fund’s capital is invested abroad. This contributes to stabilising the krone exchange rate. We must, nevertheless, be prepared for fluctuations in the krone that are more in line with the fluctuations observed in other countries. Changes in the global economy can affect the krone exchange rate. The exchange rate may also react to and contribute to curbing the effects of domestic disturbances. The floating exchange rate is by and large a well-suited instrument for absorbing unforeseen disturbances to the economy. A stronger krone may, for example, prevent demand pressures from translating into higher price inflation. As history and the experience of other countries have taught us, the real economic losses associated with eliminating high inflation and curbing inflation expectations are considerably higher than those associated with a variable nominal exchange rate.
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Caleb M Fundanga: The new K10,000 banknote in Zambia Opening remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the official launch of the new K10,000 banknote, Bank of Zambia, Lusaka, 16 June 2008. * * * • Members of the Press • Official from commercial banks present • Ladies and Gentlemen I wish to welcome you all to the Bank of Zambia. The objective of this Press Briefing is to announce the introduction of the new K10,000 banknote in our economy. The new K10,000 banknote will be put into circulation as early as this week. By showing you the new K10,000 banknote first, we expect that you will, in turn, help us to inform the public about this new banknote. In order for us to help you understand the new K10,000 banknote, we have produced posters and will make a short power point presentation. The posters are showing the main public recognition and security features of the new K10,000 banknote. Let me from the outset inform you that although we are calling it a new K10,000 banknote, most of the features on the banknote are still the same as those on the current K10,000 banknotes. The differences can best be detected by comparing this new K10,000 banknote with the current K10,000 banknotes in circulation.
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If the fixed-income market is to perform its important function, more is needed than participants who set prices for the various assets. There must also be participants who trade actively at those prices. Neither must the counterparty risks be perceived as unduly high because that may deter participants from trading. Moreover, the market must be capable of handling large volumes without this by itself having an appreciable effect on prices. In other words, the market should be adequately liquid. Why is liquidity important for monetary policy? The answer is that in a liquid market, relevant news shows up quickly in interest rates. An adjustment of the Riksbank’s repo rate, for example, has a rapid pass-through to the short market rates, as well as to somewhat longer rates. This applies, of course, in so far as the repo rate adjustment takes the market by surprise. If market participants instead understand how the Riksbank interprets new information in the form of macroeconomic outcomes, they can draw conclusions about the Riksbank’s future actions. News is then reflected in the formation of interest rates at the time when the macroeconomic outcomes are known. The relevant interest rates also react quickly to various forms of information from the Riksbank. Somewhat longer interest rates may be affected, for instance, when we publish a repo rate forecast, a so-called interest-rate path that presents the Riksbank’s assessment of the future development of the policy rate. The conditions for good market liquidity include low transaction costs, management of counterparty risks and market transparency.
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Turning now to market transparency, what is the situation in Sweden? MiFID entails the introduction of rules for transparency before and after share trading. The requirement applies to all trading facilities and involves the publication of prices and volumes. So for shares there are no deficiencies concerning transparency in these respects. There may, however, be shortcomings in over-the-counter trading in interest-bearing securities and derivatives. A large proportion of fixed-income trading in Sweden is done by telephone rather than on a market. Derivative instruments can also be traded off-market. 8 If trading is arranged instead with an electronic facility, each order is matched against the best price and market access can be improved for new players. Still, there may be financial markets whose functioning is not improved by increased transparency. It should therefore be up to each market, including the Swedish fixed-income market, to decide which approach is most effective. What are the lessons from this argument? Well, in times like these, coloured by financial market uncertainty, there is much less propensity to take risks. Financial market participants are more interested in low-risk assets, low-risk markets and counterparties that they know and are safe. In a severe situation, this can mean that in certain cases trading ceases altogether because even small risks are perceived as too large. This is because the problems associated with counterparty risks and a lack of transparency become more tangible when markets are turbulent. Every measure by which the financial markets can be made to function even in turbulent times is welcome.
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The pall of misconduct in Fixed Income Currency and Commodity markets The shadow of the worst financial crisis in living memory has been significantly lengthened by a series of appalling cases of misconduct in Fixed Income, Currency, Commodity and other markets. Details of these began to emerge relatively late in the crisis, but they have proved surprisingly prevalent and persistent. And they have further eroded the trust of the general public in financial markets. Public outrage is based on the view that the rewards in finance are disproportionate and that the system is rigged. When people read of malpractice in financial markets, of trading profits being claimed through manipulation, collusion or dishonesty, they naturally wonder if they are one of the people who have been wronged. In fixed income, employees in firms around the world attempted to manipulate Libor, Euribor and other similar measures of short-term borrowing costs in order to benefit themselves or some other part of their firm’s business. In the United States and elsewhere, firms structured the mortgages or other assets used to back securitised assets, or misrepresented the nature of those underlying assets, in ways inconsistent with the interests of end investors. Regulators identified systematic attempts to mis-value and otherwise engage in market misconduct in relation to large scale positions in credit default swaps. In commodities markets, traders were found trying to manipulate physical or derivative prices, including those of gold, oil, lead, platinum, palladium and coffee.
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Comparing this set of conditions to that in 2010, the recent slowing of inflation has been less widespread across core goods and core services, and inflation expectations so far have declined less appreciably than they did in 2010. Thus, my best guess is that core goods prices will begin to firm in the months ahead as global demand begins to strengthen and inventories get into better alignment with sales. 1 2 CoreLogic Report Shows Home Prices Rise by 12.1 Percent Year Over Year in April. BIS central bankers’ speeches As is always the case, there is substantial uncertainty surrounding this forecast. Moreover, there is always the possibility of some unforeseen shock. Thus, we will be monitoring U.S. and global economic conditions very carefully and will adjust our views on the likely path for growth, inflation and the unemployment rate accordingly in response to new information. At its meeting last week, the FOMC decided to continue its accommodative policy stance. It reaffirmed its expectation that the current low range for the federal funds rate target will be appropriate at least as long as the unemployment rate remains above 6.5 percent, so long as inflation and inflation expectations remain well-behaved. It is important to remember that these conditions are thresholds, not triggers. The FOMC also maintained its purchases of $ billion per month in agency MBS and $ billion per month in Treasury securities, with a stated goal of promoting a substantial improvement in the labor market outlook in a context of price stability.
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For example, at any point in time, the Federal Reserve will likely need to contemplate a series of current and future policy actions in order to effectively influence the trajectory of the economy and better achieve the goals of monetary policy. In order for households, businesses and financial markets to conduct business in accordance with the Fed’s planning, the public must believe that the Fed will carry out these future actions as expected to achieve its well-understood objectives. Credibility requires a clear public understanding of the Fed’s policy objectives, as well as a belief by the public that the Fed’s actions are consistent with achieving these objectives. Lower levels of credibility would be associated with erratic and misunderstood policy actions that seemed inconsistent with the stated objectives of monetary policy. At this point, it would be useful to describe the typical way in which monetary policy is set by central banks with any eye toward discussing how deliberations should be evaluated for effectiveness and credibility. The policy decision process In setting monetary policy, a central bank like the Federal Reserve must deliberate systematically about a wide variety of important issues. Perhaps at the cost of oversimplifying, I will broadly characterize this deliberative process as consisting of four steps. First, members of the Federal Open Market Committee (FOMC) must have a clear vision of the goals of monetary policy.
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Charles L Evans: The Fed’s dual mandate responsibilities – maintaining credibility during a time of immense economic challenges Speech by Charles L Evans, President of the Federal Reserve Bank of Chicago, at the Michigan Council on Economic Education, Michigan Economic Dinner, Detroit, Michigan, 17 October 2011. * * * The enormity of the problem In the summer of 2009, the U.S. economy began to emerge from its deepest recession since the 1930s. But today, more than two years later, conditions still aren’t much different from an economy actually in recession. Gross domestic product (GDP) growth was barely positive in the first half of 2011. The unemployment rate is 9.1 percent, much higher than anything we had experienced for decades before the recession. And job gains over the past several months have been barely enough to keep pace with the natural growth in the labor force, so we’ve made virtually no progress in closing the “jobs gap”. With unemployment having lingered for so long at rates around 9 percent, it is perhaps natural that some would begin to think that nothing more can be done to improve upon this situation. However, I don’t agree. Before seriously contemplating doing nothing, it is important to realize just how enormous this economic problem really is. To put this in perspective, consider that prior to the recession, most analysts thought the long-run trend growth rate of GDP was about 2-1/2 percent per year.
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However, we should also keep in mind that globalization also presents some challenges and thus, it has made the job of policy-makers more difficult. Firstly, I would like to underline the concept of financial globalization. Thanks to financial liberalization and improvements in information and communication technologies, significant amount of capital has been flowing into developing countries, especially to those that offer high growth potential – helping these countries achieve relatively high growth levels. In the post-war period when globalization was not a popular buzzword, high growth rates were also observed in a number of countries, usually in the South Asia. However, these countries had something in common, which was high rates of savings. In countries like Turkey, where more than half of the population is 30 years old or younger and where savings rates are comparatively low; foreign savings, and therefore capital inflows are needed to maintain high levels of growth. In this respect, financial globalization has contributed to the convergence process among countries. Financial liberalization has also led to amplification of new and more complex financial products. As a side effect, these financial products have introduced new risks and fragilities to the financial markets. As financial markets have gradually become more integrated, the concept of financial stability has started to receive more attention and become one of the priorities of central banks.
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Durmuş Yılmaz: Global challenges and local response – monetary policy in Turkey Address by Mr Durmuş Yılmaz, Governor of the Central Bank of the Republic of Turkey, at a congress organised by the Turkish Economic Association and the International Economic Association, Istanbul, 25 June 2008. * * * Dear Guests, First of all, I would like to welcome you all to Turkey. I am delighted to be here to address such a distinguished audience in Istanbul. I would like to thank the Turkish Economic Association and the International Economic Association for organizing this Congress. Let me start my talk with the words of Josiah Charles Stamp, one of the former governors of the Bank of England in 1920s: “It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.” This quote will also be the theme of my speech today. Distinguished Guests, Although globalization had started in the second half of 1980’s, it has not yet reached its peak and we are still witnessing its evolution. As Thomas Friedman’s once said, globalization is making the world flatter. We witnessed record high growth rates around the world in that period; although there was also notable variation in the growth performances across countries. It will not be wrong to argue that globalization could be a powerful tool that may contribute to sustained development if it is combined with compatible policies.
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This is why some wholesale banking activity lends itself more naturally to the branch structure which allows funds to flow more freely across borders. This requires regulators to work together to manage cross-border challenges to financial stability – implementing common minimum standards, sharing information and 9 building confidence in how each other will behave when things go wrong . There has been a complementary effort to make it easier to resolve international banks via a ‘single point of entry’ (SPE). Overseen in its home jurisdiction, a SPE resolution would sweep up a group’s losses from around the world and bail in its creditors at the top. The group is recapitalised and does not go into disorderly failure. 7 See Woods, Sam: Contingency planning for the UK’s withdrawal from the European Union; 7 April 2017: “…the PRA will expect those EEA bank branches which have significant retail/SME transactional deposits to discuss with it whether they need to establish a subsidiary, if they plan to continue that activity in the UK after its withdrawal from the EU”. 8 See Bailey, Andrew; Free Trade in Financial Services matters; 29 September 2017. 9 See Carney, Mark; The high road to a responsible, open financial system; 7 April 2017. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 EMBARGO: not for release before 19:30 on Wednesday 4 October 2017 Against this grain, recently the European Commission proposed that non-EU groups above a certain size or systemic importance must establish a common ‘intermediate parent undertaking’.
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And we will reserve the right to set double leverage limits or apply 4 capital add-ons for group risk if we are not satisfied . We will expand capital and liquidity reporting requirements to assess whether firms are allocating financial resources appropriately in relation to risks across jurisdictions and currencies. And we will use the Senior Managers Regime to ensure somebody is responsible for making sure submissions are up to scratch. In doing this, we are getting to grips with an important geofinancial issue, and showing how we as a home supervisor can ensure that cross-border banks do not present excessive risks to financial stability. The host with the most The PRA is also responsible for the host supervision of around 170 international banks from over 50 jurisdictions. This includes every single foreign Global Systemically Important Bank and is more than any other EU country. International banks’ UK banking sector assets amount to more than twice UK annual GDP 3 This does not mean we favour a ‘sum of the parts’ approach to setting group capital requirements. For our proposals, see CP 19/17: Groups policy and double leverage and CP 20/17: Changes to the PRA’s large exposures framework. 4 Market discipline already imposes some constraints on the amount of double leverage a holding company can use. Credit rating agencies, for example, take double leverage into account when determining the credit- worthiness of holding companies.
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This is as good a time as any to remind everyone that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. The Economic Outlook If you do an online search about recent economic developments, the word “uncertainty” will come up a lot. And it’s true that uncertainty, both at home and abroad, is playing an important role in my thinking about the economic outlook and monetary policy, as I’ll discuss shortly. But when you take a step back and look at where things stand today relative to our goals, the economy is in a favorable place. The current expansion is the longest on record. The economy continues to grow at a moderate pace, as seen in the latest GDP numbers. And this growth has supported month after month of job gains and a pickup in wage growth in the past couple of years. Furthermore, the overall unemployment rate is near the lowest it has been in 50 years. And the benefits of the strong labor market have been broad across the population: Unemployment rates for African-Americans and Hispanics, while still higher than the overall rate, are near their all-time lows. These low rates aren’t just a fluke of how unemployment is measured in the official statistics—the broadest measure of underemployment, called U-6, is at its lowest level since 2000. These are all very positive signs when it comes to assessing our maximum employment goal.
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The economy is in a good place, but not without risk and uncertainty (there, I said it!). Persistently low inflation is a key area of my attention, with the core PCE inflation rate—which strips out volatile food and energy prices—running at 1.6 percent, nearly half a percentage point below our 2 percent longer-run target. 1/3 BIS central bankers' speeches On its own, inflation somewhat below our longer-run goal would not be such a big deal, especially with our economy strong. But the broader context is important. Ongoing disinflationary pressures from abroad, and the risk that inflation expectations in the U.S. may have drifted down after many years of inflation running below 2 percent, form an important part of this picture. If we look beyond the headline GDP figure, which remains good, there are more mixed signals coming from different sectors. Robust consumer spending is balanced by signs of slowing business investment. We’ve also seen a decline in exports and weakening manufacturing data, reflecting slowing global growth and uncertainty related to trade and geopolitical risks. I am carefully monitoring this nuanced picture and remain vigilant to act as appropriate to support continuing growth, a strong labor market, and a sustained return to 2 percent inflation. Monetary Policy Adjustments This brings me to our decision to lower the federal funds rate in July and how that fits into recent history. Cast your minds back to a year ago, when the Fed was continuing along the path of normalizing monetary policy.
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We therefore consider risks to price stability broadly balanced and mainly relating to the outlook for economic activity, higher than expected oil prices, as well as higher than expected indirect taxation and administered prices. • Since the beginning of the year, financial conditions have continued to improve gradually with corporate bond spreads, stock market volatility, money market term spreads and government bond spreads declining. Is this improvement genuine or is it due to policy measures by governments and central banks? If the latter was true this would be a classical case of moral hazard. These measures cannot be sustained for ever. In this sense, there is no room for complacency. There is rather the risk of a reemergence of moral hazard once temporary measures by governments and central banks are perceived by financial market participants as permanent. • Where do we stand with financial sector adjustment? Several estimates have been made, both by private and public sector institutions, of the potential losses to be absorbed by the financial system as a consequence of the crisis. Let me illustrate the situation with some key figures: for euro area financial institutions, we estimate the total losses over the period 2007-2010 to be around USD 650 bn. Write-downs on securities have so far amounted to over USD 200 billion. Banks have provisioned and written off over USD 150 bn of their loan exposure. Therefore we estimate further potential losses to be a little below USD 300 bn.
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Therefore it is natural that in the field of management science a great deal of research and study on how one can be successful in a highly competitive marketplace has been undertaken. I am no expert in this specialised field and thus not qualified to comment on a wide spectrum of management theories on the path to success. However, I have noticed that in recent years the “Blue Ocean” theory has gained a lot of popularity and support. I too have found considerable merit in this theory because, as the world has become more globalised and interconnected, capital, information and talent flows within and between markets have become much more efficient than ever. A profitable business would attract new participants or entrants, which would result in very fierce competition and the squeezing out of profitability. The Blue Ocean theory suggests that we should try to avoid a crowded marketplace by looking for new lines of business, new products and new markets. In taking the lead in a new market or new horizon, the enterprise can enjoy the first mover and BIS central bankers’ speeches 1 associated advantages, at least for a period of time. That theory encourages managers and entrepreneurs to think outside the box, and to innovate and explore new lines of business and products. This is all very well, but there is, in my mind, an important catch. We can all see what Bill Gates has done in creating Microsoft and what Steve Jobs did to the success of Apple.
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The first one relates to the comparability of the CNB’s forecast with the rest of the forecasts produced by the ESCB members. As I mentioned earlier, the CNB produces an unconditional forecast that includes a reaction function of the central bank. However, this is not the case with the rest of the ESCB members. Although there is a tendency towards the use of unconditional forecasts and the Bank of England and Sveriges Riksbank have started to use at least the trajectory of the short-term interest rate derived from the money market term structure instead of an assumption of a constant short-term interest rate as a base for their forecasts, conditional forecasting still plays a crucial role among the ESCB members. This, of course, seriously reduces the comparability of the results. Second, the forecasting system and the modelling framework have not yet been adjusted to our expected entry into the ERM II and the euro area. ERM II participation clearly raises the question of consistency between the “low” inflation environment required by the Maastricht inflation criterion and stability of the nominal exchange rate, both in a converging economy. Recent experience among the new EU member countries provides some evidence on the difficulties of fulfilling the Maastricht inflation criterion amid a stable exchange rate. The issue to be solved is to what extent the forecasting system should reflect the dualism of the targets, or whether the policy rule should consider the inflation target only, leaving the exchange rate as a fully endogenous variable.
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Looking at the short to medium end of the risk-free curve in more detail, our measures (including the pandemic emergency purchase programme, or PEPP) have contributed to a lowering of the medium and long segments of the yield curve compared to the pre-crisis path (Chart 7). Chart 7 EONIA forward curve estimated from overnight index swaps https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200519~e5203d3520.en.html 5/14 5/19/2020 Pandemic central banking: the monetary stance, market stabilisation and liquidity (percentages per annum) Sources: Bloomberg, Refinitiv and ECB calculations. Note: The latest observations are for 14 May 2020 (for realised EONIA). At the long end of the curve, the combined effect of our asset purchase programmes – comprising the asset purchase programme (APP) and the PEPP – is estimated to compress the term premium significantly by around 80 basis points at the ten-year tenor. Looking just at the decisions we have taken since March, the additional € billion APP purchase envelope for 2020 and the PEPP contribute to a further easing of ten-year rates by lowering the term premium by more than 10 basis points. The total effect of these decisions on longer-term interest rates is likely to be even more substantial, given that the PEPP not only works through the well-known channels of duration extraction and portfolio rebalancing, but also addresses risks to transmission in the euro area. To the extent that this lowers risk premia, interest rates in the euro area have declined even more strongly as a result of our decisions compared with plausible counterfactual scenarios.
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And notably, riskier forms of debt – those most sensitive to a change in market conditions – have recently been growing most rapidly. Issuance of leveraged loans and high yield bonds reached a record level last year. 8 6 Paragraph 5 of ‘Record of the Financial Policy Committee Meeting on 12 March 2018’, available here. See Chart 11 in Deloitte (2018), ‘The Deloitte CFO Survey Q1 2018’, available here. 8 Leveraged loans are loans to companies that typically display some of the following characteristics: high levels of indebtedness, a non-investment grade credit rating or ownership by a private equity sponsor. The latter is defined as bonds rated below investment grade. 7 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 Last year more than half of the issuance was used to refinance existing debts more cheaply. In the early stages of this year, however, there are signs of that changing. Issuance has been higher than in the same period last year and less is being used to refinance. 9 (slide 9) These forms of debt accounted for around only 10% of bond and bank loans issued to UK companies last year. But if the pattern of the first 3 months of the year were to continue, they would still – alone – add 3% to the overall stock of corporate debt this year. So recent developments demand careful scrutiny. If they continue, we’ll need to assess, in particular, whether they increase the risks faced by banks.
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So that market finance can continue to deliver for the economy in bad times, as well as a good. Thank you. 13 All speeches are available online at www.bankofengland.co.uk/speeches 13
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[6] The entire monetary and financial sector would be deprived of its anchor – central bank money – and would be exposed to potential instability. [7] It is also conceivable that non-European digital payment solutions and technologies operated abroad might dominate our payments market, as we are already seeing in some segments like cards and online payments. This risk would be exacerbated by the expansion of means of payment offered by big techs, which could use their very large customer base to their advantage. This would raise questions about our autonomy and privacy in payments. It could even endanger European sovereignty. [8] Moreover, the international monetary system may see the emergence of central bank digital currencies (CBDCs) in large economies. Such CBDCs would offer benefits in terms of efficiency, scalability, liquidity and safety that would support their attractiveness internationally. And they would have the potential to facilitate cross-border payments, which may enhance their role as a global payment unit. [9] In such a context, not issuing a digital euro could undermine the international role of the euro and create additional risks to sovereignty. This scenario is not imminent, but it could potentially materialise in the future if we do not start acting today. And if we don’t act, we will also see increasing confusion about digital money. Crypto-assets are a case in point. [10] Unbacked crypto-assets, for example, cannot perform the functions of money. They are neither stable nor scalable. Transactions are slow and costly.
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[20] A digital euro should enhance rather than constrain services and business options so that service providers can enrich their portfolio and develop new products and services around a digital euro to the benefit of their customers. In this light, we are stepping up our engagement with banks and other market stakeholders, including consumer representatives and retailers. We are listening carefully to their views. [21] Conclusion Let me conclude. We are designing a digital euro that would make central bank money usable for digital payments, giving Europeans a digital means of payment that they can use throughout the euro area for their everyday payments and supporting Europe’s societal objectives. Having digital money issued by the central bank and available to everyone would provide an anchor of stability for the payments market, preserving the coexistence of public and private money that has served us well so far. By distributing digital euro, intermediaries will play a key role. We are working to address at an early stage any possible undesirable consequences that may result from the issuance of a digital euro for monetary policy, financial stability and the allocation of credit to the real economy. Your role as co-legislators will be key to ensuring that the necessary regulatory framework is in place for both public and private forms of money in the digital age. For my part, I will continue to report to you regularly as we progress to the next steps in our investigation phase. I now look forward to our discussion. 1.
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Despite this, it is still too early to give the all-clear. Imbalances in the housing markets have stabilised at high levels only, and the risks of a further build-up remain substantial, not least given the current environment of negative interest rates. Should there be renewed signs of a further build-up, I am confident that we could contain the problem. With respect to the TBTF issue, the knowledge and awareness of the risks stemming from our systemically important banks have improved significantly. As early as in 2011, Switzerland adopted a package of measures to address the core problems in this area. 9 On behalf of the Federal Council, the effectiveness of the Swiss TBTF framework was assessed by a group of experts in 2014. Overall, the assessment indicated that the chosen approach was appropriate to address the TBTF problem. At the same time, the experts concluded – rightly in the view of the SNB – that even the full implementation of the framework in its current specification would not solve the Swiss TBTF problem entirely. Therefore, supplementary measures have been proposed. 10 8 FSB (2014). This FSB report states furthermore that “compared to the country’s banking sector, the size of Swiss shadow banking is considerably smaller – by more than five times.” 9 The package consists of four complementary measures, namely, significantly more capital of better quality, larger liquidity buffers, rules imposing sufficient diversification to reduce counterparty risk, and organisational measures.
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The Thai economy has done particularly well. For the past few years it has been the fastest growing economy in Southeast Asia. Through a series of bold initiatives, the Thai government has revived the rural economy, stimulated domestic demand, and repaid its IMF loans. This has bolstered confidence and got business moving again. Indonesia’s economy has improved significantly despite a complex political situation. Reforms were slow initially, as corruption and an unreliable legal system impeded progress. Nevertheless, Indonesia has made significant headway in financial sector reforms. IBRA accelerated the pace of its bank asset sales, while non-performing loans ratios fell from nearly 50% in 1998 to just 8% last year. Indonesia graduated from the IMF programme in December 2003, and has continued to maintain sound macroeconomic policies. While foreign direct investments remain slow, the oversubscribed $ billion sovereign bond sale in March this year is a vote of confidence from international investors. The challenge over the longer term is to attract enough investments to sustain growth and reduce unemployment. Overall, Asia is showing a new dynamism, and has put the financial crisis behind it. For all the difficulties that remain, this is probably the most promising region in the world. Asia’s strategic landscape Asia’s economic growth rests on the stability of the strategic environment in the region. Constructive and stable relations among the major powers set limits on rivalries and conflicts in the region, and enable trade and investments to flourish. The key post Cold War global geopolitical reality is America’s unique pre-eminence.
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The objective of the Monetary Policy Council is that the increase in prices, as measured by the consumer price index, should not exceed 2% in 1997. as in the medium term. 2. To meet this ultimate goal, the Banque de France uses two intermediate objectives, one of which is external and the other internal: - The objective of a stable external value of the currency: as it has been for ten years, the stability of the franc will be maintained against the group of the most credible currencies in the European Exchange Rate Mechanism. - An intermediate internal growth target for the money supply assessed by the development of the narrow and broad monetary aggregates: in 1997, the money supply should be able to show a medium-term growth trend of 5%. This figure is consistent with price inflation of no more than 2% and non-inflationary real GDP growth of about 2.5%, which could be exceeded, in view of the potential for growth to catch up in the medium term. The Monetary Policy Council has decided to simultaneously BIS Review 2/1997 -4- monitor the main narrow and broad money aggregates in order to obtain a concise estimate of all monetary developments. 3. Total domestic debt is an important indicator. It helps the Banque de France make sure that the economy is supplied with enough financing to grow, and it enables us to track developments in financing for businesses, households and general government simultaneously.
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In the last three years, potential growth has averaged a little more than 2% a year for the years 1994, 1995 and 1996. We can do better. We believe that our economy's potential non-inflationary growth is around 2.5% in the medium term, and this can be exceeded given the capacity for growth to catch up. The requirements for investment are financing terms, self-financing, competitiveness, and medium-term growth. We believe these requirements exist today. If I had to sum up briefly the message of the Monetary Policy Council, I would say: “The investment plans exist. The time has come today to implement them. Let us invest. It is the surest way for us to contribute to non-inflationary growth that creates jobs and thus to help in the fight against unemployment.” * * * French monetary policy is in line with the European strategy of the President of the Republic and the Government, and therefore with the creation of an economic and monetary union on 1 January 1996. The advance towards the single currency was decisively confirmed at the European Summit in Dublin, where an agreement was reached on the legal status of the euro, on the new European Monetary System and on the stability and growth pact intended to guarantee fiscal discipline in the Monetary Union.
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Figure 8 shows the forecasts for average CPI inflation in 2009 made by various forecasters during 2008 and 2009. 8 The figure shows that the pattern over time is roughly the same for all the forecasters. During the first half of 2008, most forecasters expected that inflation would be between 2 and just below 3 per cent in 2009, while the actual outcome was –0.3 per cent. The explanation for this overestimation is that the forecasters did not foresee that the financial crisis would take such a dramatic turn in the autumn and, consequently, that inflation would fall so quickly as a result of the Riksbank’s repo-rate cuts. Once the financial crisis was upon us and the dramatic downturn in economic activity that followed in its wake had begun, all of the forecasters revised their forecasts downwards quickly and substantially. From the beginning of 2009, the forecasts were gathered around the actual outcome. 8 12 The analysis is based on data gathered by the National Institute of Economic Research. One advantage of these data is that they show exactly when the forecasts were made. The forecast comparison covers ten forecasting institutions and their whole-year forecasts for GDP growth, the CPI and the percentage of unemployed. The ten forecasting institutions are: the Swedish Ministry of Finance, the Swedish Retail Institute, the National Institute of Economic Research, the Swedish Trade Union Confederation (LO), Nordea, SEB, Svenska Handelsbanken, the Confederation of Swedish Enterprise, Swedbank and the Riksbank.
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Thomas Jordan: Monetary policy and uncertainty Summary of a speech by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the University Freiburg im Breisgau, Freiburg, Germany, 15 January 2008. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * The economy is a complex system. Moreover, it is constantly changing as a result of technological advances and globalisation. Consequently, monetary policy operates in a very uncertain environment. The unforeseen and radical developments in the international financial markets emanating from the current crisis in the US housing and mortgage market have – once again – brought home the major role of uncertainty in monetary policy. We are uncertain about the exact way in which the economy functions, the current state of the economy and about future exogenous shocks. This uncertainty can express itself in the form of risk, with a known probability distribution. Alternatively, it may take the form of Knightian uncertainty, in which the probability distribution is unknown. It is the latter form of uncertainty which presents monetary policy with the greater challenges. Uncertainty is a reason why changes to the monetary policy instrument are generally applied only gradually and in small steps. However, if the economy is thought to be facing major threats, uncertainty may demand rapid and decisive action. Monetary policy decision-makers must be aware of uncertainty and the limitations of their knowledge.
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Third, getting a handle on – and where necessary – regulating, the risks in the so called “shadow banking” system: the ecosystem of non-bank financial firms that perform a similar role in credit intermediation to that played by the banking sector. And fourth, and perhaps most important, making sure that no institution, no matter how large, how complex, how international in its activities or to put it simply, no matter how systemic, is “too big to be allowed to fail”. Because if financial institutions can make themselves too big to fail, if they can ensure that if and when they get into trouble the taxpayer will have no option but to bail them out if, as the economists put it, they can ensure that their profits and their pay are private but if it all goes wrong the losses are “socialised” then history teaches us that this is exactly what they will do. III. What has been achieved? So, in these four key areas, what has been achieved? The inputs have certainly been impressive. From a standing start in 2009 the Financial Stability Board has driven the regulatory reform programme. Under the FSB, around 25 groups have been set up to run around 15 major workstreams.
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I will then discuss the risks and challenges facing the Thai economy, especially those relating to volatile international capital movements and their impact on the Thai baht in the short term and in building resiliency and enhancing productivity for the longterm. Ladies and Gentlemen, Let me start with the global picture. For a number of years now, we have witnessed strong global growth driven mainly by growth in the US economy and in emerging markets, particularly non-Japan Asia. During this same period, we have also seen growing global imbalances with the rest of the world financing the US’s growing current account deficits. There is yet no consensus on how this global financial imbalance will unwind, but everyone expects that a large dollar correction will be part of the unwinding process, which will impact on financial markets and exchange rates worldwide. My view is that we are likely to see more market jitters along the unwinding process of this global imbalance. Indeed, for the last couple years, we have already experienced large magnitude of capital fluctuations and exchange rate volatilities. This year alone, we have observed two episodes, in February and again in August, of the shift toward greater risk aversions, with sharp falls in the stock markets across the world, from New York to Shanghai, and Bangkok included. At this juncture, there seems to be an increasing disconnect between global growth and financial stability.
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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.
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6 I would therefore like to elaborate on the relationship between economic growth and ecological limits, as it has profound ramifications, including for central banks. A growing body of literature, including a recent academic paper in Nature Communications,16 suggests that it may be difficult to reconcile an ambitious mitigation of climate change with unlimited economic growth. Professor Dasgupta argues that this tension between economic growth and ecological goals becomes even more evident if we take into account other ecological disruptions than climate change, such as biodiversity loss. In his words, “our economic possibilities are circumscribed […] by the Earth system’s workings”. In order to make progress in the face of such challenges, we must diffuse many of the passionate and intransigent positions that often dominate in public debates. Let me mention two pitfalls we must avoid: ‐ ‐ that it is too late and we are doomed, or that we should stop doing everything we do: travelling, innovating, creating, and so on. Living within limits doesn't mean that we will not keep investing in innovation or that some economic sectors will not keep growing. In fact, some sectors, such as renewable energy, must grow if we are to meet this century’s formidable ecological challenges. that technological innovations and breakthroughs will eventually solve all our problems, and that we will not have to profoundly change the way we live.
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We remain ready to respond within a short time to any consolidating initiative of the public sector. Our easing measures will remain within the legal framework of Bank of Albania’s instruments and in line with the consolidated philosophy of central banks action. The monetary policy may prove successful only if its transmission mechanism is functional. In this context, the banking system plays a key role, as the first actor of the transmission mechanism. b) A prudent supervisory and regulatory policy. This policy maintains sound balance sheets of the financial system and the private sector. Thanks to the timely measures to manage credit, capital and liquidity risks, the Albanian economy has successfully withstood the shock from global financial markets and has now a consolidated financial stability and a banking system that is able to credit and support the Albanian economy. Maintaining banking sector stability is one of the two main priorities of the Bank of Albania. I take this opportunity to draw the attention of the banking industry executives, to engage BIS central bankers’ speeches 3 maximally to act in full compliance with the legal and regulatory framework and respect the standards for sound management of banking activities. Our objective remains unchanged; maintaining and strengthening public confidence in the banking sector. To this end, the banking system should: Verify constantly the compliance and strengthen the internal audit systems. Empower capacities for risk assessment and management. Maintain adequate capital and liquidity levels.
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Ladies and Gentlemen, in recognition of the need to provide a conducive regulatory environment which promotes sustainability, accountability, transparency and growth of the building society industry in Zambia, the Building Societies Act was amended in October 2005 to harmonise it with the Banking and Financial Services Act pending the modernization of the Building Societies Act under the Financial Sector Development Plan law reform programme. Ladies and Gentlemen, Bank of Zambia is concerned about the levels of lending interest rates charged by most financial institutions in Zambia, building societies included. With the achievement of relative macroeconomic stability in the recent years as evidenced by a significant reduction in the inflation rate to 11.1 percent as at June 2007, it is the expectation of the Bank of Zambia that all prudent lending institutions would make downward adjustments to their lending interest rates to make financial services accessible and affordable. It is also important to note that high lending interest rates can lead to high levels of delinquency. Ladies and Gentlemen, it is in this light that we anticipate that credit referencing services will help in reducing credit risk through the provision of widely accessible information on the loan repayment profile of borrowers. This should also provide another incentive for lowering of interest rates. Ladies and Gentlemen, in conclusion I wish to state that the Bank of Zambia is committed to broadening and deepening the financial sector through effective implementation of the Financial Sector Development Plan.
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Risks In the last part of my presentation, I would like to talk about the risks with respect to the inflation outlook in the upcoming period and provide some information pertaining to the probable monetary policy strategy should these risks materialize. The fact that inflation will remain elevated for some time warrants the close monitoring of price setting behavior. The combination of several unfavorable developments, such as unprocessed food and oil price increases, administered price hikes and base effects has led to a significant increase in inflation since the last quarter of 2009. Although these factors are temporary, they cause headline inflation to significantly exceed the inflation target, leading to an adverse impact on inflation expectations. Apart from items that are directly affected by cost push effects, current pricing behavior does not reveal any deterioration to the extent that might endanger the achievement of medium-term targets. However, I would like to remind you that monetary tightening may be implemented sooner than envisaged in the baseline scenario, should inflation expectations continue to rise and lead to a deterioration in general price setting behavior. Although downside risks regarding global economic activity have been decreasing, they remain a concern. Rising budget deficits and ongoing problems in credit, real estate and labor markets across developed economies continue to pose downside risks for the recovery in global activity. Should the global conditions deteriorate again, and consequently delay domestic recovery, the policy rate may remain constant for a longer period than envisaged under the baseline scenario.
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However, owing to the effects of tax hikes, increases in food and energy prices, and base effects, the inflation rate is hovering significantly above the target, which is having an adverse impact on inflation expectations, and leading to risks regarding pricing behavior. Therefore, the revised forecasts are based on the assumption of gradually withdrawing the excessive amount of liquidity provided to the market, and increasing policy rates at a measured pace starting in the last quarter of 2010. However, based on the prediction that resource utilization will likely remain at low levels for sometime, the baseline scenario envisages that the increases in interest rates would be limited with policy rates remaining at single-digit levels throughout the forecast horizon. As shown in the slide, inflation will follow a volatile path throughout 2010 owing to the base effects driven by the temporary tax cuts and unprocessed food price fluctuations that occurred during 2009 (Figure 34). The temporary tax cuts implemented in March 2009, which were withdrawn partly in June and fully in October, would cause headline inflation to increase during March and April, and to decrease during June, July and October of 2010. Accordingly, inflation is expected to increase slightly during the second quarter and then fluctuate at around 10 percent in the third quarter (Figure 34). Inflation is expected to drop significantly in the last quarter of 2010 and the first quarter of 2011 (Figure 34).
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This in turn may lead to lower inflation and economic activity and the central bank therefore wishes to lower the policy rate. For reasons of comparison, let us first assume that neither the central bank nor other economic agents recognise that stress may arise. The blue lines in the panel show the path for the key policy rate, the output gap, inflation and financial imbalances obtained in this case. Capacity utilisation increases and inflation returns to the target. At the same time, the low interest rate level leads to an increase in financial imbalances in the economy. If we use the framework I just described instead, the central bank will take into account the possible impact of financial imbalances on inflation and output and will therefore reduce the interest rate somewhat less. In this case, it takes longer for inflation to move up to the target. The policy stance also results in a somewhat weaker increase in activity. At the same time, the slightly higher interest rate contributes to dampening the build-up of financial imbalances. In this example, a higher interest rate does not provide any gains as the assumption so far is that financial stress does not arise. Let us now see what occurs if financial stress arises after a period, with all else being equal to the first scenario. Chart: Financial distress does arise The purple lines in the panel again show a situation where the central bank has taken into account the possible effect of monetary policy on risk in the financial system.
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When financial turbulence occurs, the economic setback is less pronounced and less prolonged than if the central bank had not taken this risk into account in monetary policy, as illustrated by the blue lines. The gain achieved from keeping the interest rate somewhat higher in the short term is in this case a more stable path for inflation and output over time. The interplay between the financial system and other areas of the economy is complex. This makes it demanding to predict the timing of crises and how they will arise. There is also considerable uncertainty linked to the consequences of a crisis on the wider economy. We may never achieve a fully precise understanding of these mechanisms. On the other hand, we cannot neglect the possible effects of monetary policy on the build-up of financial imbalances. Norges Bank’s modelling tools are continually being developed. Our model apparatus is also shaped by new insights about the functioning of the economy and how we can guard against the risk of financial stress. The aim is continuously to ensure that the models are the best possible support tools for monetary policy decisions. Formalising the framework along the lines I just presented can make it easier to recognise the line of reasoning and help clarify the choices we face. But the ultimate assessment will always be a result of Norges Bank’s professional judgement and incorporate knowledge and considerations that are insufficiently captured in our model. In this respect, the models are simply a tool.
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SPEECH DATE: 10 November 2016 SPEAKER: Governor Stefan Ingves VENUE: The Swedish Bankers’ Association bank meeting, Grand Hôtel, Stockholm SVERI GES RIKSBANK SE-103 37 Stockholm (Brunkebergstorg 11) Tel. +46 8 787 00 00 Fax +46 8 21 05 31 [email protected] www.riksbank.se Necessary reforms for a more stable financial sector Crises are expensive and should be avoided When financial crises afflict us it becomes obvious to all how much damage they cause. Unfortunately, this insight is often temporary, as it is easy – even a human survival instinct – to forget problems and leave them behind us. As a representative of the Basel Committee I therefore see it as an important task to remind you of how costly financial crises are to the national economy and how important it is that we have robust regulatory frameworks that reduce both the cost of crises and the probability that they will occur. Although we often see a return in the growth rate of the economy, crises usually lead to a permanent fall in GDP, which takes a very long time to recover from. Even today, almost 10 years after the financial crisis broke out, many countries are struggling with low growth, high unemployment and low inflation. In several cases they also have high sovereign debt. And in the case of Sweden, there is no other event since the Second World War that has affected Swedish GDP as negatively as financial crises.
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This is largely attained by the banks having the opportunity to calculate their risk-weighted assets, and thus capital requirements, using internal models. When the financial crisis broke out, however, it became clear that these models often underestimated the risks in the banks’ exposures. This meant that the capital requirement was lower than was appropriate. Many actors, both regulators and market participants, have therefore expressed doubts as to how well these models actually reflect the risks. In 2013, the Basel Committee therefore published a number of reports analysing what capital requirements the banks’ internal models generated. The reports show that there are major differences in the banks’ capital requirements. They also show that these differences cannot be explained by the differences in the underlying risk in their assets, but are instead due to the way the banks measure risk. The fact that this is so not only makes it difficult to compare capital requirements between the banks, it also reduces the credibility of the international capital regulations. The Committee’s current work therefore concerns to a large extent ensuring that the models used by the banks are reliable and reflect the risks in their operations in a correct manner. This work includes revising and to some extent limiting the banks’ scope to use internal models to calculate their risk-weighted assets and thereby their capital requirements. For instance, the Basel Committee is planning to introduce floors for a number of the parameters the banks estimate themselves.
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On the contrary, one of the most important tasks with regard to the financial system is to facilitate risk-taking; to manage and redistribute financial risks. Methods for this have developed at an incredible rate over the past decade. The new possibilities for risk management have strongly contributed to increasing the efficiency of the financial sector and thereby the economy as a whole. However, it is important that the risks are managed carefully and that they are reasonable in relation to the capital allocated to cover them. They must therefore be clear and transparent to all involved. In this respect, the financial institutions and society as a whole have no fundamentally difference of interests. No one wishes to be surprised by risks they knew nothing about. The Riksbank also works on financial risk issues in many international contexts, in the Basel Committee, the IMF and on committees within the EU and ECB. As the financial markets to a large degree operate across national borders, it is often necessary to establish joint regulations and principles at international level. Throughout, the important issue is to weigh stability concerns against efficiency aspects, to find regulations that make the risks transparent and limit them in relation to the available capital. This should also be achieved without excessively encroaching upon the efficiency and development of the markets. My overall theme today is how the Riksbank views developments in the risk management field from the perspective of financial stability and efficiency.
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These are the generic skills that will become increasingly important across a range of finance jobs in the future. These are the skills our professionals will need to thrive and grow in a digital future. They will complement the domain expertise that are unique to industry segments. We developed with active industry collaboration, this new set of Standards which will focus on areas like data science, human centered design, tools for innovation, agile approaches to technology, and risk and governance in a digital world. We will not just learn to thrive in a digital world; we will also learn digitally! And so, to promote the learning of skills under the new Standard, besides the usual training programmes, IBF is developing Learn@IBF, a mobile learning app that will provide simple and concise information on these topics. You will get to see a preview of this app after this. I want to acknowledge our partners who helped to make this happen: Amazon, Facebook, IBM, Luma and Rainmaking Innovation as well as our institutes of higher learning, training providers and of course, all of you, our financial institutions who are part of the IBF Community. They provided and reviewed the content that will be posted on the app. 2/3 BIS central bankers' speeches The next step is for financial institutions to work with their staff, particularly those in jobs undergoing transformation, to help them explore possible pathways and acquire the skills they need for the future.
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With the onset of the monetary union, the goal was to provide access to Eurosystem credit operations to a broad range of counterparties, in contrast to some other central banks which rely on a few counterparties. Therefore, the collateral framework had to take into account the various national banking systems and financial markets. Some national central banks, for example, accepted credit claims as collateral, while others did not. Some countries had developed covered bond markets, while others only started to set up a respective covered bonds law later, and the same could be said for ABS. For a collateral framework, a common standard had to be found which embraces these national characteristics, while at the same time ensuring that sufficient collateral is available. Several of the measures taken in the crisis have added to this complexity. Therefore a challenge going forward is to make the collateral framework simpler and more transparent, without impacting the ability of counterparties to access our refinancing operations. I am confident that we will achieve this. Conclusion Ladies and gentlemen, 2014 has been a year of profound change. But what has been achieved so far is not enough. 2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track. Monetary policy alone will not be able to achieve this.
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Understanding developments in money markets is a crucial part of the Bank’s assessment of monetary and financial conditions. It is therefore of considerable importance to the Bank that robust, transparent measures of overnight interest rates are available. It is also in the interests of sterling markets more broadly that robust benchmarks are available. The two main existing sterling overnight benchmark interest rates, SONIA and RONIA, are based on the rates paid respectively on unsecured and secured deposits placed via brokers. The volume of transactions underpinning these benchmarks has fallen significantly in recent years, reflecting reduced money market activity as well as a decline in brokers’ share of that activity. The decline in transactions volumes raises questions about the long-term robustness of these benchmarks. That is of particular concern in respect of SONIA, which forms the basis of the sterling overnight indexed swap market, and is referenced in contracts with a gross notional outstanding value in excess of £ 1 2 See http://www.bankofengland.co.uk/markets/Pages/sterlingoperations/rfr/rfr.aspx. BIS central bankers’ speeches In our view there is a clear need for a more secure and broad-based source of transactions data to support robust overnight benchmark interest rates in sterling markets. Accordingly, we have reached the conclusion that the Bank of England should collect each day, from banks and building societies active in sterling money markets, data on their sterling overnight deposit transactions.
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Thus, the aim of maintaining the inflation target is not just about low and stable inflation being a good thing in itself, it also provides a means of ensuring that the policy rate can be used as a monetary policy tool. It is worth noting that this has implications for the argument that the central bank should not bother with inflation at all, but should focus on other things, such as solely balancing economic activity or dampening financial cycles. Doing this effectively requires using the interest rate and to use the interest rate we must have some average inflation. It may also be worth noting that there is an international debate that emphasises that as the neutral interest rate is historically low, even an inflation target of 2 per cent provides too little scope for monetary policy. The target, it is argued, should therefore be higher.9 I do not intend to bring up this debate now, but focus on 7 It is worth noting that it is not only the policy rate that is limited by a lower bound, the same applies to long- term interest rates. Quantitative easing, which aims to lower longer-term interest rates thus also becomes less effective in an environment with very low inflation, see Gagnon and Collins (2019). 8 See, for example, Broadbent (2015). 9 See, for example, Blanchard, Dell’Ariccia, and Mauro (2013), Ball (2014), Krugman (2014), Rosengren (2015) and Gagnon and Collins (2019).
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8 [15] The neutral interest rate has continued to fall and is currently at a record low level. Inflation and inflation expectations have systematically undershot the Fed's target of 2 per cent. Prior to the pandemic, unemployment in the United States had fallen to the lowest level in 50 years without any tangible impact on inflation. It is primarily two of the changes made by the Fed in its policy document that are central to my discussion here today. Firstly, that monetary policy shall be aimed at inflation overshooting 2 per cent for a period of time if inflation has previously undershot 2 per cent. Earlier target deviations will thus be compensated for by deviations in the other direction.16 This is new. In conventional inflation targeting, deviations from the target are regarded as bygones, which do not need to be compensated for. In his speech at Jackson Hole in August, Chairman Jerome Powell called this a “flexible form of average inflation targeting”. What the Federal Reserve is concerned about is the relationship I mentioned earlier, that is, that if inflation has not reached up to the target level on average over a long period of time, this risks sooner or later affecting the long-term inflation expectations in the economy.
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High vulnerabilities pose risks to financial stability ... To summarise, we are currently seeing clear signs of unsustainable mortgage lending on the one hand and heightened risks of a price correction on the other. I would now like to use the example of an unexpected and rapid rise in interest rates to illustrate why these vulnerabilities can pose risks to financial stability. Such a scenario could simultaneously lead to a materialisation of affordability risks and to valuation losses due to price corrections – two risks that can also be mutually reinforcing. First, let us consider the affordability risks. As shown on slide 4, these risks have been steadily growing over recent years and are currently at a high level. This means that a substantial number of borrowers could experience payment difficulties should interest rates go up, and this would have a negative impact on banks’ credit portfolios. An abrupt interest rate hike could also lead to widespread price corrections on the real estate market. A large proportion of mortgage loans in banks’ portfolios have an LTV ratio of between 60% and 80%. A ratio in this range normally ensures that a bank would not incur a loss in the case of an individual borrower defaulting, as the mortgage loan is sufficiently covered by the value of the pledged property. However, a marked and widespread price correction on the Swiss real estate market would reduce this security margin.
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Let me go over quickly these points: In order to fulfill this inadequate access to financial services by under-served consumers, the Bank of Thailand initiated a pilot project on micro finance in collaboration with commercial banks. Against misconception that micro finance is an unprofitable segment, this project aims to demonstrate that the coexistence of profitability and satisfied customers is possible with a right business model. Late last year, we invited foreign speakers to share with senior management of Thai commercial banks their experience in successful conduct of retail business in their countries. Following this seminar, a number of banks already expressed their interests to participate in this pilot project. One social aspect that has clear benefits to all parties concerned is consumer education. It has two major dimensions, one on the cultivation of responsible use of credits and the other the introduction of new financial products and channels of distribution. While the former can improve the overall risk profile of financial institutions’ retail portfolio, and thus lower the lending rates, the latter can potentially stimulate more demands and lower the cost of service provision. It is therefore the responsibility of lending institutions to convey clearly the message of ‘no free lunch’. In other words, prudent lenders must ensure that borrowers are fully aware of the financial obligation of their debt burdens and legal consequence of default. Failure of either party could tarnish the healthy usage of retail credit.
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For example, the Reserve Bank of New Zealand will in an extraordinary situation with a very sharp rise in asset prices consider extending the horizon for achieving the inflation target in order to dampen developments in asset prices. The purpose of this is to reduce the risk of a serious economic downturn at a later time. In Norway, we have flexible inflation targeting. We have chosen to incorporate assessments of financial stability in the interest rate decisions. This is primarily because developments in financial balances affect inflation and output over time. Through its work on financial stability, Norges Bank gathers information about the financial strength of the financial system and the financial position of households and the corporate sector. This information is useful in connection with monetary policy decisions. Integrating the objective of financial stability into monetary policy ensures that we are giving adequate attention to risks in the financial system. But it is important to remember that we have only one monetary policy instrument, the interest rate. Monetary policy should continue to focus on price stability. In the light of the experiences of different countries in the last 10-15 years, I am confident that flexible inflation targeting provides us with a sound framework for performing this task. 11 “Asset price ‘bubbles’ and monetary policy”. Remarks before the New York Chapter of the National Association of Business Economics, New York, 15 October. 12 Issing, Otmar (2003), “Monetary and Financial Stability: Is there a Trade-off?” Speech at the conference “Monetary stability, financial stability and the business cycle”.
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In the academic literature, some have suggested that the central bank can increase economic stability or reduce the negative effects of slow price adjustment by stabilising an index with fewer prices and weights other than those in the consumer price index.3 Prices that adjust slowly should have a relatively higher weight than prices that change quickly. Prices for goods and services where labour costs are a major component often adjust slowly.4 Labour costs are very important in these indices not only because they change slowly but also because they react to cyclical movements and are seldom exposed to extraordinary disturbances. 3 See Aoki, Kosuke (2001), “Optimal Monetary Policy Responses to Relative Price Changes,” Journal of Monetary Economics, Vol. 48, pp. 55-80, Arrazola Maria and José de Hevia (2002), “An Alternative Measure of Core Inflation,” Economics letters, Vol. 75, pp. 69-73, Mankiw, Gregory and Ricardo Reis (2003),“What Measure of Inflation Should a Central Bank Target?” Journal of the European Economic Association, Vol. 1, pp. 1058-1086, and Woodford, Michael (2003), Interest & Prices – Foundations of a Theory of Monetary Policy, Princeton University Press. 4 Angeloni, Ignazio, Luc Aucremanne, Michael Ehrmann, Jordi Gali, Andy Levin and Frank Smets (2004), “Inflation Persistence in the Euro Area: Preliminary Summary of Findings”, presented at the ECB’s conference on inflation persistence in the euro area, Frankfurt am Main , 10-11 December 2004. BIS Review 43/2005 3 Another topic currently of interest to academic research is whether a price level target may be better than an inflation target.
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Technologies under reviewed include biometrics for electronic know-your-customers, machine learning for alternative credit scoring models, and blockchain applications for cross-border payments, supply chain financing, and document authentication. Another way in which productivity is being enhanced is through improving regional financial connectivity. Recent efforts by banks in the region to partner and adopt the Thai QR code standard and blockchain applications for cross-border payments are examples of how financial innovations can help improve regional financial connectivity and facilitate smoother cross-border financial services. Let me now turn to building immunity, which is a significant imperative for the future VUCA world. With the vast amount of data and modern analytical tools available, resilience can be significantly improved. For example, banks can use transactional data to better forecast customers’ credit demand and credit risks. Regulatory agencies can analyze financial connectedness through network analysis to detect risk events and safeguard financial stability. The Bank of Thailand has employed a number of big data analytics to detect early signals of imbalances in the economy and respond pre-emptively should risks arise. Additionally, in this increasingly digital environment, cyber resilience and cyber security must be a top priority and all of us must be prepared to prevent and respond effectively to cyber threats. Adoption of modern technologies like biometrics and blockchains can help safeguard financial information and reduce the number and magnitude of fraudulent activities.
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In our part, last year the Bank of Thailand in collaboration with 15 Thai banks and the Electronic Transactions Development Agency, set up the Thailand Banking Sector Computer Emergency Response Team (TB-CERT) as a platform for banks and regulators to share information on cyber incidents and build standards and capacity for IT-personnel to handle new threats. Furthermore, to ensure that our legal framework fits with the current digital environment and can keep up with new innovations, the Bank of Thailand had proposed the New Payment Systems Act, which became effective in April of 2018. The Act unifies previously fragmented payment laws and regulations and empowers the Bank of Thailand to oversee development of the Thai payment systems and regulate new payment innovations and players. Moreover, our supervisory guidelines on management of information technology risks have also 4/6 been updated to ensure that banks have appropriate governance structure in place and can swiftly respond in the event of cyber attacks. These developments will contribute to safer environment for both service providers and customers. On inclusivity, despite high level of financial access in Thailand relative to other emerging countries, financial inclusion remains one of our top priorities. Various measures to promote financial inclusion have been implemented and many more are in the pipeline. The Bank of Thailand and the Thai Bankers’ Association will soon launch the Basic Banking Account scheme to improve financial access for vulnerable groups, especially those in the lower-income brackets.
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Hence, the farmers would concentrate on producing more of carrots and less of cabbages. But, when an economy is hit by inflation, all the prices would rise simultaneously, so both carrots and cabbages seem to be equally profitable. This would confuse the producers who would now be unable to make any choice between the two products. Hence, the much desired relative price change does not occur, when an economy has been hit by inflation. Instead, the absolute prices start to change and such changes do not provide the price signals for allocating resources. Fifth, continued inflation distorts the balance sheets of companies, especially the balance sheets of financial institutions. Companies may record profits in nominal terms, but a large part of such profits are eroded in real terms by inflation. When profits are adjusted for inflation, companies would find that their performance has not been so spectacular as has been depicted by the amount of rupees they have earned. In fact, their real position has pushed them backward to a lower level. Sixth, inflation very forcefully hits the vulnerable groups with a weaker bargaining power. Such categories include housewives, students, pensioners and workers whose salaries are not linked to inflation. It would lead to continuous agitation by these groups creating social and political dissension. The country, instead of using its resources for investing in long term growth generating projects, would have to spend its energy and resources for solving such social issues. Thus, inflation is the unrivalled public enemy number one.
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This is because when such adjustment is not made, though the amount of money received by way of interest may be high, its actual real value is lesser and lesser than before. It is tantamount to the awkward situation where savers pay interest in real terms to borrowers. Thus, inflation contributes to enrich borrowers at the expense of savers. The high borrowings so encouraged would further fuel inflation. At the same time, the much needed savings flow would dry up retarding the long term development. Third, arising from the same unadjusted interest rates, inflation discourages financial savings and encourages non-productive types of investments in real estate, gold, bullion and other types of precious metals. Bank deposits, stocks and shares are the main casualties, because their real value falls every year due to inflation. But, on the other hand, real estate and precious metals appreciate in value due to inflation. Hence, as an insulating measure against inflation, people would transfer their financial savings into such non-productive types of investments. But, for sustainable long term growth, the necessity is for savings in the form of financial savings and inflation would dry up that savings flow. Fourth, inflation distorts the resource allocation function of an economy. For the market system to allocate resources among competing uses, a price expressed in terms of another price called the relative price, should change. For instance, if the price of carrots increases relative to the price of cabbages, carrots would become more profitable than cabbages.
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Fiscal policies have supported jobs directly and buffered businesses and households from income shocks. Central banks eased monetary policies through interest rate cuts and financial asset purchases and provided sufficient liquidity for the smooth operation of financial markets. There is substantial uncertainty over the global economic outlook – largely because there is substantial uncertainty over the trajectory of the COVID-19 pandemic. If there are new waves of infection, it could lead to a return of containment measures that drag down economic activity again. Even if subsequent waves of infection are more limited, it is not clear if confidence in resuming normal economic activities will return fully. It is also not clear to what extent the destruction unleashed by the pandemic in the first half of this year has damaged the productive capacity of economies. The recovery will be uneven – across countries, across industries, and across time. 1 / 15 BIS central bankers' speeches There is wide dispersion in projected growth rates across countries. Those countries that are more successful in containing COVID-19 and have put in place strong policy support are likely to stage stronger recoveries. China is expected to grow by about 1% this year, which would make it the only large economy to record an expansion. At the other end of the spectrum, the Eurozone is expected to contract by about 9% this year, weighed down by the significant disruptions caused by the high rates of infection; and the global trade slowdown. The outlook for the US is mixed.
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CREDIT AND INSURANCE RELIEFS FOR INDIVIDUALS AND SMEs MAS has worked with the financial industry to put together a package of measures to help ease the financial strain on individuals and SMEs. The relief package was implemented over three tranches, as new needs emerged. It is aimed at helping individuals meet their loan and insurance commitments and supporting SMEs with continued access to bank credit. Let me spell out the various relief measures and their take-up rates as of the end of June 2020. Banks and finance companies have been providing reliefs for individuals with difficulty making their loan repayments: Nearly 34,000 mortgage loans now enjoy deferment of principal or interest payments or both, till end December 2020. Banks have also deferred both principal and interest payments on over 2,100 renovation and education loans. More than 6,200 applications to convert outstanding credit card and unsecured debt to term loans at lower interest rates have been approved. Over 3,200 motor vehicle loans and hire-purchase agreements have benefitted from a variety of repayment reliefs. 7 / 15 BIS central bankers' speeches Banks and finance companies have also been providing repayment relief to SMEs for their secured loans. More than 5,300 SMEs’ secured loans now enjoy repayment deferments. Beyond the relief package, banks have allowed some of their SME customers to defer repayment on their unsecured loans as well. Insurance companies have been providing reliefs for individuals and SMEs with difficulty paying their insurance premiums.
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As I have already said, we now have robust banks and, in Europe, the soon-to-be completed asset quality review, conducted under the aegis of the ECB, will help to guarantee this. However, this does not mean weaknesses have disappeared. They are still there, only in other parts of the system. At the moment, for example, credit activities are mainly concentrated in the hands of large asset managers who together manage portfolios of several tens of trillions of dollars. These managers are becoming increasingly sophisticated, and therefore more efficient, but at the same time they are getting bigger and bigger. They are judged on their short-term performances, often leading them to follow identical strategies, which in turn results in massive movements in the market. Some – though not all – transform short-term savings into structured products, a practice which, as the crisis has shown, can prove very dangerous. 4/ – Fourth paradox: our monetary policies are extremely accommodative, but inflation remains low and, in some cases, is even declining. Throughout the developed world, central BIS central bankers’ speeches 1 banks have slashed their policy rates close to the zero lower bound. Their balance sheets have ballooned under the impact of asset purchases and liquidity injections. But in all these countries, inflation rates are at levels considered too low with respect to the price stability target – in some cases dangerously so. In the euro area, inflation has been falling steadily for six months.
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Or, put differently, curbing the credit cycle appears to be an important ingredient of broadly-based macro-economic stability. In principle, monetary policy could be used to curb the credit cycle. In practice, the differing duration and synchronicity of the credit and business cycles means this is unlikely to work well. Pre-crisis experience illustrates well just that point. At the same time as the wider economy was operating in cruise control, credit markets were in overdrive. Hitting these two birds – one flying high, the other low – with one (monetary policy) stone would have defied even the most astute marksman [King, 2013]. What is needed, in these instances, is a second instrument. In the language of Tinbergen [Tinbergen, 1952], two cycles and two objectives call for two instruments. This is where macro-prudential policy comes in. One of the aims of macro-prudential policy is to act counter-cyclically on the credit cycle, constraining credit booms and cushioning busts BIS central bankers’ speeches 1 [Aikman et al, 2014]. In this role, macro-prudential policy is complementing monetary policy in its role of stabilising the macro-economy. Macro-economic policy then becomes, in effect, two-handed or ambidextrous. Since the crisis, this two-handed approach to policy has been taken up actively by a number of countries internationally [IMF, 2013]. For example, counter-cyclical prudential policy is now baked into new international regulatory rules. The so-called Basel III reforms introduced for the first time a “Counter-cyclical Capital Buffer” (CCB) to be adjusted to counteract the credit cycle [BCBS, 2010].
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Even worse, growth in the euro area has now all but come to a halt, and the currency union is faced with increasing unemployment. 2 Crowe et al (2011). BIS central bankers’ speeches 1 How to deal with systemic risk: The case for macroprudential regulation Let me proceed straight to the key problem at hand: the issue of systemic risk in financial markets. In general terms, systemic risk arises because an optimising financial institution does not fully account for the cost that its behaviour imposes on other financial institutions. That is, at heart, systemic risk originates in a negative externality imposed by individual financial firms on the system. The underlying sources of systemic risk can be either structural or cyclical. The structural dimension of systemic risk is linked to spillovers associated with three key properties of modern banking: high leverage, limited liability and interconnectedness. On its own, high leverage implies a higher risk of insolvency. Combined with limited liability, high leverage often leads to excessive risk-taking. This is because, with limited liability, the diverse set of stakeholders (managers, owners, creditors) benefits from the upside of risk-taking but does not fully bear the cost when these risks materialise. As a consequence, there are strong incentives to leverage the balance sheet beyond the level which would be chosen if the individual stakeholders were fully exposed to the associated increase in the risk of default.
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Being utilised little as resources for the economic and social development of the country, remittances may have led to individual, family or local dependency. During the first stage of transition in Albania policies for optimising the administration and utilisation of workers’ remittances for developing purposes have been completely lacking. A few sporadic measures have aimed at driving workers’ remittances into official channels and improving savings and investments incentives of emigrants in the country but have been by and large inadequate. More recently, the Albanian government has taken a more attentive approach toward remittances and their potential contributions in financing the growth and development of the country. With the assistance of the European Union by means of CARDS program, and the support of the International Organization of Migration (IOM), this year the Albanian government has compiled two important documents regarding migration and remittances issues, called: National Strategy of Migration and Action Plan. The main objectives are: (i) the review of remittances flows and (ii) the identification of political constraints and institutional and regulative framework that influence these inflows, in order to: • increase the volume of remittances; • help shifting them into formal channels; and • enhance their use in support of country’s economic growth. Bank of Albania role in achieving these objectives consists primarily in maintaining the macroeconomic and financial stability, which constitute important preconditions for the success of any policy related to workers’ remittances.
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To conclude my talk today, I would like to reaffirm that our fundamentals are strong and that we in Thailand will do our best to regain full potential to achieve sustainable economic development. BIS central bankers’ speeches 3 Let’s think about challenges of the bear during winter. Even while hibernating, the bear cannot stay perfectly still. It needs to move and keep its muscles warm to prepare for spring. Thailand’s current economic condition is like a winter, we stakeholders are the bear that is hibernating, and like the bear, we must prepare for the coming spring. If we keep playing our roles in managing the economic transition, we will all reap the benefits of the turnaround. Thank you. 4 BIS central bankers’ speeches
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This is not a widespread issue: the average NPL ratio is 5.4% in the European Union as of September 2016, and in many countries, including France and Germany, it is below 4%. But it is a challenge which seriously affects specific banks in certain countries, mainly Italy and Portugal. So this challenge is manageable, but it needs to be actually managed: the quicker the better. Recent initiatives by Italian authorities are a step in the right direction, with the active involvement of European supervisory authorities. Third factor: the digital transformation. It is true that digitalisation is disrupting traditional customer relationship models. But it also creates opportunities: for instance, more diverse and accessible financial services, more complete customer satisfaction, greater valorisation of data. Yet, in order to succeed in the digital transition, financial companies need first to place innovation at the heart of their strategic management; and second to examine ways of transforming their business models, mainly in Retail. Obviously these are difficult choices that need to be made by the companies themselves. The strategic way forward is not up to regulators, and will not be uniform. That said, let me share some thoughts with you. On the income side, the response could be twofold: diversifying the range of services – both proprietary and via partnerships – that are offered to customers; and adjusting existing pricing policies, with fewer flat-rate prices and more pricing by use.
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The Banking Ordinance is a complex statute of some 200 pages and it has been much amended since its original enactment in the 1960s. The mandate of the HKMA is, however, set out very plainly in section 7(1) of the Ordinance, which states that: BIS Review 39/2002 1 "The principal function of the Monetary Authority under this Ordinance shall be to promote the general stability and effective working of the banking system." We pursue this mandate through licensing criteria and ongoing supervision of banks. We complement this supervisory work with a variety of initiatives under the banking reform and other programmes, the ultimate intention of which is to promote general stability and effective working of the system. For example: • First, the deposit insurance scheme, now at the detailed planning stage, will promote the general stability of the system by protecting individual depositors up to a certain limit. • Secondly, the Commercial Credit Reference Agency, which is expected to be launched as a voluntary, market-based scheme in the not-too-distant future, will promote the effective working of the system - and the larger economy - by helping banks channel lending to creditworthy small enterprises. • Thirdly, public consultation by the Privacy Commission will soon commence on broad proposals for the sharing of positive consumer credit data - a facility which, when and if it is introduced, will help in addressing an issue of concern to banking stability: the dramatic rise in consumer defaults and personal bankruptcies.
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Less positively, a more difficult economic environment contributes to friction between banks and their customers, for example in the greater incidence of default on debt on the one hand and in the greater tendency among banks, in times of tighter margins, to go after that debt. Whether in good times or bad, a certain volume of complaints is a healthy phenomenon because it encourages improvements in service where complaints are upheld, and improvements in transparency where misunderstandings occur. On a subject so important as the way in which banks handle people's money, there will always be complaints, and we need to continue to develop our machinery for dealing with them. Let me deal quickly with the options identified by the HKMA in its survey last year which, if I read it correctly, the debate within the industry and the community is ruling out. The first option of these is the establishment of a separate banking ombudsman along the lines of the practice in some other jurisdictions. This is, in some senses, a Rolls Royce solution in that it would provide a separate agency, to process and resolve complaints, with powers to arbitrate in complaints and award compensation. It would, however, be a costly solution, and it would take a considerable time to implement. Under such a system, the process of handling complaints would probably also be quite resource-intensive, and it is by no means clear that it would be able to address the full range of complaints being made.
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Svein Gjedrem: Monetary policy and the economic situation Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Norwegian University of Science and Technology, Trondheim, 2 September 2003. The text below may differ slightly from the actual presentation. The speech is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 13 August and on previous speeches. The Charts in pdf can be found on the Norges Bank’s website. * * * The operational target of monetary policy as defined by the Government is inflation of close to 2.5 per cent over time. The inflation target provides economic agents with an anchor for their decisions concerning saving, investment, budgets and wages. The inflation target is a vehicle for monetary policy’s contribution to stabilising output and employment. This intention is also expressed in the Regulation on Monetary Policy. High demand for goods and services and labour shortages normally point to higher inflation. When interest rates are increased, demand falls and inflation is kept at bay. When demand is low and unemployment rises, inflation will tend to slow. Interest rates will then be reduced. Norges Bank sets the interest rate so that future inflation will be equal to the inflation target of 2½ per cent. The interest rate has been reduced since December last year in response to the change in the inflation outlook.
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But it also meant that financial institutions were able to sell loans or take them off the balance sheet, which weakened lenders’ incentives to conduct prudent screening and constant monitoring of credit BIS Review 66/2009 1 risk. So underwriting standards and lending oversight declined, and contributed to the excessive credit growth in the second half of the 1990s. In sum, the observer would have concluded that the factors that fuelled the credit and asset price boom of the past decade also created the conditions for a bust. In mid-2007 we started to see the backlash. The start of the financial turmoil was sudden but not unexpected. The financial system as it worked over the past decade – with its flawed incentives and its overly complex products and with global imbalances as its macroeconomic backdrop – was no longer sustainable. The asset cycle turned, the weaknesses were exposed and investors suddenly lost confidence. After years of exceptional risk appetite and high profits, the pendulum swung in the opposite direction, as markets became extremely sensitive to financial risk. In September last year, the crisis escalated sharply. In particular, a major financial player collapsed, which was directly involved in about 30 large payment and settlement systems worldwide and had a balance sheet of USD 600 billion. Its failure turned a large-scale crisis of confidence into a global financial panic. Financial intermediaries restored liquidity buffers, tried to economise on capital and to scale down their balance sheets. They sold assets and tightened lending conditions.
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Thomas Jordan: The Swiss National Bank’s monetary policy after the discontinuation of the minimum exchange rate Speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the 107th Ordinary General Meeting of Shareholders of the Swiss National Bank, Berne, 24 April 2015. * * * Mr President of the Bank Council Dear Shareholders Dear Guests, dear School Students Since 15 January, the Swiss National Bank (SNB) has once again been coming to terms with a whole new set of challenges. On that day, the Governing Board decided to discontinue the minimum exchange rate because the international environment for the SNB’s monetary policy had changed dramatically. The end of the minimum exchange rate of CHF 1.20 against the euro has far-reaching implications for our economy. It is therefore understandable that our decision triggered strong reactions. Yet had we continued to maintain the minimum exchange rate for a certain period, the consequences for our country would have been much more severe. In my talk today, I would like to explain to you in detail our reasons for discontinuing the minimum exchange rate. The SNB attaches great importance to clarifying its monetary policy decisions. This is, on the one hand, an important part of our statutory duty of accountability to parliament. On the other, it is a prime concern of ours that the general public and, in particular, you, our shareholders, should understand our monetary policy.
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I will begin by talking about the prominent issues related to the discontinuation of the minimum exchange rate. This will be followed by our present assessment of the Swiss economy and price developments and an explanation of our current monetary policy. Alongside our willingness to intervene on the foreign exchange market as necessary, negative interest on SNB sight deposits plays an important role in monetary policy. I would therefore like to look at this subject in greater detail today. Rationale for discontinuing the minimum exchange rate Let us begin with the reasons for discontinuing the minimum exchange rate. In the course of 2014, there were growing signs that a US exit from a highly expansionary monetary policy was drawing closer. In the euro area, by contrast, there was increasing evidence that monetary policy would be eased further. Against this backdrop, the euro depreciated considerably against the US dollar. These diverging monetary policy stances in the major currency areas affected the Swiss franc in two different ways. Like the euro, the Swiss franc weakened against the US dollar. Against the euro, however, it gradually approached the minimum exchange rate of CHF 1.20. At that time, the weakening of the euro had not yet cast doubt on the sustainability of the minimum exchange rate. Consequently, at the monetary policy decision in mid-December, we made the decision to leave monetary policy unchanged. Shortly after our monetary policy decision, the economic crisis in Russia escalated.
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However, it is difficult at present, when the geopolitical landscape is very uncertain and constantly changing, to say what the significance of reshoring will be for central banks’ monetary policy and for the world economy more generally. Similarities with the 1970s But let us focus on the current situation. Inflation is now higher than at any point during the whole period we have had an inflation target. In that sense, it can be said that this is the first time that inflation targeting is put to the test in earnest ‘on the upside‘.6 In Sweden, inflation today is about the same as in the 1970s and 1980s, when average annual inflation was above 8 per cent (Figure 4). This is not the only similarity to that period. The high inflation at that time was triggered by similar factors to the high rate of inflation today. During the 1970s energy prices increased as a result of geopolitical unease and production disruptions in the Middle East, in a similar way as energy and commodity prices have now been pushed up in the wake of the pandemic and the war in Ukraine. An important explanation for the lastingly high inflation during the 1970s and 1980s was the expectations that economic agents had of future inflation. If households and companies expect inflation to be high going forward, this will affect the 5 There is research that suggests that due to demographic factors, the global real interest rate will actually fall further in the future; see Auclert et al.
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SPEECH DATE: 9 December 2022 SPEAKER: Deputy Governor Per Jansson VENUE: Swedbank Monetary policy when inflation is too high – prerequisites and challenges* “There are decades when nothing happens; and there are weeks when decades happen.” The words are said to be Vladimir Lenin's, but it is disputed whether that really is the case. Nevertheless, the quotation is very well suited to what I intend to talk about today. Once a year, I usually make a longer speech, which is also published on the Riksbank’s website. The most recent was in December 2021.1 My speech then was about the division of roles in macroeconomic policy, and my main message was that in the future fiscal policy needs to be more active than has been the case in recent decades.2 I emphasised in my speech that the inflation target needs to be symmetrical, that is, it is as important to counteract too low inflation as it is to counteract too high inflation. But at that time, too high inflation was not regarded as a particularly pressing threat, nor was it something I specifically mentioned in the speech. The situation has changed rapidly To recall how the situation looked at the end of January this year, one can look up the inflation forecasts of Swedish forecasters at that time. As energy prices had begun to rise, all forecasters believed that inflation in 2022 would be higher than the target of 2 per cent.
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21st ASEAN Banking Conference Governor’s Speech 28th November 2016, Anantara Siam Bangkok Hotel “TRANSFORMING FINANCIAL SERVICES TO MEET THE NEEDS OF THE GROWING ASEAN ECONOMIC COMMUNITY (AEC)” Chairman of the ASEAN Bankers’ Association Chairman of the Thai Bankers' Association Deputy Governor of the National Bank of Cambodia Chairpersons, CEOs, and Top Executives of ASEAN Banks, Distinguished Guests, Ladies and Gentlemen, Sawasdee Krub A very good morning to you all. It is a great pleasure for me to be here today to share with you my thoughts on the upcoming challenges for the ASEAN banking industry. Before I begin, I would like to thank the Thai Bankers’ Association for the invitation to this annual gathering of ASEAN bankers. Let me also extend a warm welcome to the executives of ASEAN banks who have travelled here for this special event. From my calculation, in aggregate, you all manage assets of around 120 percent of total ASEAN GDP. Ladies and gentlemen, We are going together through profound changes in the global economic environment. The economic condition called the “new mediocre” together with the transformation towards digitization have been key driving forces for a volatile, uncertain, complex, and ambiguous environment or the VUCA world in short. Against this backdrop, we as commercial bankers and regulators have to move together to ensure growth, prosperity, and sustainability for our region. Let me elaborate on the key issues we are facing. The “new mediocre” is a state of multiple “lows” – low-growth, low-investment, low-trade volume, low-interest rate, low commodity prices, and low-inflation.
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Prior to the introduction of the euro, the internal market came under pressure from exchange rate crises: national currencies sometimes fluctuated sharply in value. After the launch of the euro, the euro area enjoyed a number of calm years but, unfortunately, the member countries did not make use of this time to carry out the necessary reforms at national and European level nor, in particular, to put efficient crisis management arrangements in place. And the countries that experienced serious difficulties three or four years ago, such as Ireland, Portugal, Spain and Italy, are nonetheless beginning to recover, thanks in part to ECB policy. We also see that Germany, the strongest economy in Europe, is not experiencing any major disadvantage from that same ECB policy. Admittedly, it’s a continuous search for a policy that is as favourable as possible for everyone. What does one do with Greece, say, which has fundamental problems with its competitiveness? The Greek crisis would not have become so large if the European institutions had not been so weak and if more decisive action had been taken, with better crisis management. Are you surrounded by enough people who dare to contradict you? Do you speak to people who dare to question ECB policy? Oh yes, definitely. I listen to people who say that the ECB should take a different approach. I respect those opinions. We ourselves naturally reflect on whether our policy is correct.
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Nick Leeson, at the time a despised and corrupt rogue-trader, today a much-admired realityTV star and after-dinner speaker, had put a huge hole in the Barings boat. Over the weekend, then-Governor Eddie George tried hard to assemble a lifeboat. All visits to London Zoo were cancelled. But the lifeboat failed and with it Barings. That Barings was allowed to fail, and did so without rupturing the system, is a key lesson for today, to which I will return later. So what does this tell us about how the Bank of England’s role had evolved on entering the 20th century? The Bank now spoke and acted as steward of the financial system, marshalling its own and others’ financial resources to keep the financial system panic-free. The Bank was at the frontline of crisis management. But these episodes also contained lessons. When the first Barings crisis came, the Bank had been reactive and backfoot. It had been blindsided by the risk to its own and the financial system’s balance sheet. The Bank was finding its feet as a crisis-container. But in attitude and expertise, it was a world away from being an effective crisis-preventer. Supporting the economy Fast forward to the start of the First World War. William Lidderdale had been replaced as Bank Governor by Walter Cunliffe. Cunliffe was not what would these days be called an equal opportunities employer. The Bank’s staff rules were stifling and sexist – although were ahead of their time compared to other City firms.
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But when the landscape is dark and threatening, those charged with making monetary policy must comport themselves with a grace that reassures markets and the public that they are calmly in control of the sacred charge with which they have been entrusted. They must keep their “cool” even when the vast, infinite cry of the money changers reaches a fevered pitch, the economic seas are blue-black and the clouds in the financial markets are red as blood and tongues of fire. Presenting an image comparable to that of the visage depicted by Edvard Munch – of policymakers trembling with anguish at the daunting demands of their profession – would provide scant comfort to those who depend upon them to maintain their composure and skate ably across a cold and foreboding economic landscape, seeking to guide the economy to a better place. Central banks are just one vehicle for influencing overall macroeconomic behavior, in addition to influencing through regulation the microeconomic agents that transmit that influence to the markets – banks of deposit and other financial institutions. We work alongside another potent macroeconomic lever: fiscal authorities – governments that have the power to tax the people’s money, spend it in ways they deem appropriate, and create laws and regulations that influence microeconomic behavior. Unless fiscal authorities can structure their affairs to incent the private sector into putting the cheap and ample money the Fed has provided to the economy to work in job creation, monetary policy will prove impotent.
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Banks were stronger. In the UK they were three times better capitalized than at end 2008. And to be clear –very significant government support and central bank interventions were required. I’ll come back to this later. But there is one other reason for the missing panic that I want to focus in on. After the 2008 global financial crisis, the G20 put in place reforms designed to make the global financial system simpler - to untangle the spaghetti bowl of bilateral derivatives trades that had fed the 2008 panic.2 They incentivised - and for many products mandated - central clearing of derivative trades. Global clearing has as a result, grown significantly in the past decade. Today, about 60% of credit default swaps are cleared, as well as 80% of interest rate contracts, up from about 10% and 40% respectively in 2008.3 This brought greater stability to derivative markets by ensuring that if a major financial institution were to collapse, you needn’t worry about a domino effect – with the failing firm’s derivatives contracts potentially threatening the viability of any number of other firms.4 1 Ben Bernanke, Op-Ed at Brookings Institution, 13 September 2018 G20 Leaders’ Statement Pittsburgh Summit, September 2009. 3 Bank of International Settlements Statistical Release, November 2020 4 Although it’s not my focus today, reforms to bilateral derivatives trading have also helped to reduce the chance that bilateral contracts fuel a panic.
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The Rt Hon Sir Edward George GBE: Towards a safer banking system Speech by The Rt Hon Sir Edward George GBE, Governor of the Bank of England, to the Association of Professional Bankers Sri Lanka 12th Anniversary Convention, on 27 August 2000. * * * Mr Governor, Ladies and Gentlemen, It is an immense pleasure, and a very great honour, to have been invited to address this Annual Convention. The theme of the convention is “Towards a safer banking system”. It is a theme which gladdens my heart. The safety of the banking system is fundamental to financial stability in a broader sense. It is vitally important, of course, to you - as professional commercial bankers. But it is vitally important, too, to us, central bankers, because you simply cannot have monetary or broader economic stability, which is a key part of our responsibilities, without stability of the financial system - they go together like love and marriage! And monetary and financial stability are vitally important, too, to our societies at large and to the individuals that make up our societies - they are absolutely necessary, if not in themselves sufficient, conditions for the economic prosperity to which we all aspire. The question is what can we do - working together - to improve the safety of our banking systems.
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In short, the following is needed: • An insolvency regime which ensures that banks can be effectively closed at a low cost to the deposit guarantee system • An effective depositor protection with a quick pay-out to depositors and a credible financing • The ability to take special measures, such as guarantees, to avoid the failure of a bank threatening the financial system in its entirety • A broad tool box to be able to enforce, also in those exceptional cases, the principle that the state will not bear the losses of shareholders and creditors, where it should be possible to tie conditions to any guarantee issued and with the option of temporary nationalisation as a last resort. But drawing up a broad structure is perhaps the easiest part. After that, it is necessary to find a concrete legal framework. In the end, this responsibility falls on our governments. A few countries seem to have much of this in place already. And some have come quite far in this work and devote quite a lot of resources to the project. Those that have not I think are well advised to get started. It is just never a good idea to set up the fire brigade first when the city is on fire. 10 BIS Review 62/2008 But it is a delicate task trying to find an efficient and legally secure system which will also work cross border.
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One means is to fix a system that enables the authorities to take control over the bank and to write down not only capital but also claims in an orderly manner, while extending a guarantee to the new financing needed when the bank is under public control. The payments needed to maintain the stability of the financial system would be effectuated, while other payments could be temporarily stopped. A draft model for such a system was presented by the Banking Law Committee in Sweden in 2000 and the proposal is currently being considered by the Swedish Government. As I understand it, there is also work being done in other countries to bring about solutions that would mean that the authorities could claim in all credibility that it was possible to reduce claims even in more complex cases, where there was a risk to financial stability. Ideas that have been put forward include immediately being able to impose a partial payment stop on certain claims, haircuts, in connection with the authorities taking control over the bank and transferring the assets to a temporary bank, known as a bridge bank. To be effective, all these proposals make considerable demands for having IT systems in place that can quickly distinguish different types of claims. A number of other preparations are also required, for instance to be able to transfer contracts.
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Developments throughout the 1990s would seem to suggest that this channel is gaining in importance. However, it is difficult to quantify with any degree of accuracy to what extent monetary policy affects price expectations. The relationship between monetary policy and price expectations is probably fairly unstable. This will be dependent on confidence in the implementation of monetary policy. The Executive Board of Norges Bank currently assesses the Bank’s key rates eight times a year on previously announced dates. In addition to making decisions on interest rates, after each of these monetary policy meetings the Bank issues a statement on its assessment of probable interest rate changes in the future. At the press conference on 9 August announcing the most recent rise in interest rates, the following statement was issued: “today’s decision to raise interest rates brings the overall increase in interest rates to 1.25 percentage points from the beginning of the year. This represents a substantial step in the adjustment of the interest rate that is appropriate on the basis of the analyses in the June Inflation Report. However, the probability that the next change in interest rates will be an increase remains greater than the probability of a reduction”.
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Page 1 Competitiveness and productive investment: What parts do they play in the reform of insurance regulation? – speech by Charlotte Gerken Given at JP Morgan European Insurance Conference Page 2 Published on 14 June 2022 Charlotte Gerken talks about the goals of competitiveness and productive investment, and the impact these are having on the Review of Solvency II. She says that changes to regulations for UK insurers could help to achieve these goals. Then she focuses on: investment flexibility the valuation of liabilities process improvements Speech Thank you for your introduction and for inviting me to this conference. Since the Government announced the Solvency II review, there has been much emphasis on the desirability of reform to enhance the insurance sector’s competitiveness and its capacity to make productive investment. Today I would like to outline how competitiveness and productive investment relate to the Prudential Regulation Authority’s (PRA) approach to the review by focussing on three areas: 1. Investment flexibility 2. The valuation of liabilities 3. Process improvements To put the review in context, though: the core framework underlying the Solvency II regime and its principles are broadly fit for purpose, and are in line with existing and emerging international standards. The review does not involve tearing it up and starting again – not least because of the substantial sums invested by industry in the last decade in adopting it. Industry responses to HM Treasury’s Call for Evidence[1] were largely in agreement with this approach.
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This will support more informed and risk-aware decision-making at the top, while strengthening the risk mitigation culture, enhancing internal governance, optimising risk management cost, and promoting efficient use of resources, while building confidence of stakeholders and the community at large. As the key elements, new Risk Governance and Risk Management Structures, along the “Three Lines of Defense” model, are expected to be established, putting in place an overall Risk Management Policy Statement for the whole of the Central Bank. Priority will be attached to developing risk registers in line with internationally accepted standards and an incident reporting mechanism together with related IT infrastructure developments. Implementation of this throughout the Central Bank would help in inculcating a risk and compliance culture in the Bank. Further, a compliance framework will be developed in line with established global benchmarks, which will be implemented with a compliance tracking system of rating. 25 4. Policies to Strengthen the Broader Economy What we have deliberated thus far were the future plans and policies associated with the core functions of the Central Bank. In addition to these functions, we are also engaged in several other activities, which we refer to as ancillary functions and the agency functions carried out on behalf of the government. Currency Management As you are aware, the Central Bank has always taken measures to ensure the availability of currency for use by the general public and in 2017, we continued to do the same, while making all efforts to improve currency operations and processes.
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It is noteworthy that there has been a build-up of non-debt creating international reserves during 2017, with minimal impact on the exchange rate. Going forward, foreign exchange intervention policies will be adopted, which are consistent with a flexible exchange rate regime and supportive of improving foreign exchange market functionality. Maintaining a competitive exchange rate will be an important objective of the Central Bank. In line with this policy, we will continue to focus more on non-debt creating financial flows in building up reserves. Ongoing policy reforms of the government focus on boosting exports as well as attracting FDI. This gives greater salience to our agenda of maintaining flexibility in the exchange rate to boost competitiveness. The Board of Investment (BOI) has estimated FDI to have reached US dollars 1.5 billion in 2017, which will be a key milestone and could possibly be a turning point in FDI inflows. The commencement of the Hambantota Industrial Zone and the continuation of the Colombo Port City project are expected to bring significant FDI flows from 2018 onwards. Annual FDI flows of US dollars 2-3 billion are expected in the coming years. In addition to boosting growth and employment, it will also enhance external sector resilience by generating non-debt creating inflows and boosting exports. The Central Bank will continue to manage reserves in line with a model based Strategic Asset Allocation framework (SAA), to ensure foreign exchange reserves are managed with the objective of ensuring an adequate level of liquidity and a reasonable return in comparison to benchmarks.
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Attackers can carry out sophisticated and prolonged attacks that can be difficult to identify and defend against. According to a study by FireEye, the median time it takes to detect a cyber intrusion is 78 days. We need some common risk management standards in cyber defence. The risk management systems in financial institutions and regulatory and supervisory frameworks for cyber resilience are uneven and still evolving. There is no international equivalent of the Basel Capital Accord in cyber risk management. But given the clear and present danger that cyber risk poses, MAS has put in place a mix of mandatory requirements and best practice guidelines in this area. Given their role as repositories of public monies and conduits for payments, banks in particular must meet higher cyber security standards. MAS expects banks to: limit unscheduled system downtime of their critical IT systems to not more than 4 hours within a year; conduct due diligence on third-party service providers’ controls to safeguard customer information; and report all significant cyber incidents to MAS within one hour. But cyber risk management should go beyond banks. The connectedness among participants in the financial system means that a cyber-attack on one party can potentially escalate into a more systemic problem. We need to level up the cyber resilience of all financial institutions, not necessarily to the level of banks but at least to a basic level – what we call cyber hygiene.
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The Principles are centred on four pillars – fairness, ethics, accountability, and transparency. Hence, the short-hand name FEAT Principles. They are not prescriptive but represent an industry consensus that individual financial institutions take reference from when formulating their own data governance policies and practices. We believe that the FEAT Principles will help to promote public confidence and trust in the use of data analytics and artificial intelligence in our financial sector. Conclusion Let me conclude. Technology and Finance must come together. And they must do so in a manner that maintains Trust. Finance, Technology and Trust are like the three musketeers of old. Like Athos, Finance allocates resources to those who need it. Like Porthos, Technology represents the aspiration for Finance to innovate. Like Aramis, Trust engenders confidence in Finance. The motto of the three musketeers is: “Tous pour un, Un pour tous” – “One for all, All for one”. If Finance, Technology, and Trust can do the same, we can have innovation and dynamism with safety and stability. We can benefit not only the financial industry, but society at large. We can raise productivity, expand opportunity, and enrich the lives of our people. Thank you. 10 / 10 BIS central bankers' speeches
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The forces of innovation also raise a number of issues concerning the divergence of Shariah views underlying a number of the Islamic financial transactions. While such a divergence of opinions in Islamic financial transactions is not a new phenomenon, it has now prompted increased international dialogue among the Shariah scholars from the different parts of the world. It is the closer linkages between the global Islamic financial markets and the increased platforms for greater engagement on Shariah issues that will contribute towards promoting an increased common understanding and mutual acceptance on the rules, standards and Shariah views, and for convergence to occur. This would evolve global Shariah standards for the Islamic financial industry. As Islamic finance continues internationalise with expanding scale, there will be greater financial intermediation linkages among the East Asian, West Asian, and the Middle East regions – creating the "New Silk Road". While this New Silk Road of financial flows is enhancing connectivity between Asia and the Middle East, both regions have, as in the case of the old Silk Road, extended the New Silk Road to the rest of the world. Global investors 4 BIS Review 121/2008 and the international financial community have already drawn benefits from the increased diversification of investment activity to the two regions. The expansion of the interlinkages of intermediation to and among these regions would in turn contribute towards a more efficient allocation of capital in the global financial system.
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This growth is spurred in part by the growing funding requirements in emerging market economies, in particular, in Asia and the Middle East. This is reinforced by the continued confidence of investors in the Islamic financial instruments. Malaysia's Islamic finance journey Let me now turn to Malaysia's journey in the development in Islamic finance. Islamic finance in Malaysia first started as a strategy for greater financial inclusion, so as to have a greater outreach to the underserved segment of society to basic banking and insurance products that are compatible with Shariah principles. After three decades, the Islamic financial industry in Malaysia has evolved as an integral and competitive component of the overall financial system that operates in parallel with the conventional financial system. The Malaysian Islamic financial system is founded on three major strategies. Firstly, the Islamic financial system has been evolved as a comprehensive financial system that is diversified in terms of its institutions, markets and players. The Islamic financial system comprises the Islamic banking institutions, the takaful industry, the non-banking institutions and the Islamic money and capital markets. The supporting financial infrastructure includes the robust regulatory and supervisory framework that is reinforced by the legal and Shariah framework, the payment and settlement systems and the mechanism for the liquidity operations by the Central Bank. The assets of the Islamic banking system now comprise 16% of the market, while the takaful sector has garnered 7% market share.
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François Villeroy de Galhau: What can monetary policy do? Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the House of Finance Days of Paris-Dauphine University, Paris, 14 March 2016. * * * Ladies and gentlemen, It is a great pleasure for me to participate in this first edition of the House of Finance Days of Paris-Dauphine University. In order to “[imagine] the finance of tomorrow” – to quote the theme of this event – it is essential to understand all facets, and in particular to be able to decipher the prevailing environment. Through its three main tasks, the Banque de France plays a key role as, firstly, it implements monetary strategy, as a member of the Eurosystem alongside the European Central Bank in Frankfurt; secondly, it ensures financial stability, by supervising the banks, insurance firms and, more generally, the financial system; and, lastly, it provides an economic service to households and SMEs/VSEs. Today I will focus on the monetary policy that we conduct in the framework of the Eurosystem. Monetary policy has long been considered a technical or even an austere subject. But, since 2008, it has been far more widely discussed: central banks in different countries have played a major role, and a role largely hailed as positive, in exiting the crisis. Today, however, their actions to address the persistence of very low inflation are subject to debate. I would first like to talk about our objective, then our instruments and their effectiveness.
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The number of guarantees approved during the period amounted to 1,668 with a total value of Rls 644 million against loans to the tune of Rls1.6 billion granted by banks under the umbrella of the program, which benefited about 1,113 small and medium enterprises. This is in addition to loans provided by the Saudi Credit and Savings Bank, for financing young people and small enterprises, as well as the Centennial Fund, and Abdul Latif Jameel’s “Finance Program” that provides material support for youth’s projects and training courses. Dear audience, In conclusion, I wish to emphasize that the status of small and medium enterprises in the Kingdom still needs a lot of care and an appropriate environment to perform their required roles in the economy, especially in the field of Saudization of jobs. This important symposium may, hopefully, discuss this topic from its different aspects and provide the necessary recommendations to assist competent authorities in making appropriate decisions for this important sector. Thank you all for listening and wish you success. BIS Review 171/2010 3
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The annual return on the actual portfolio was ½ percentage point lower than the return on the benchmark portfolio. The results were not due to investment in high-risk fixed income instruments. At the end of 2008, as much as 64 per cent of the bonds in the Fund’s fixed income portfolio had the best BIS Review 58/2009 5 credit rating, AAA, 20 per cent had the second best, AA, while ten per cent were rated A. Five per cent of bonds were rated BBB. Only one per cent of the fixed income portfolio has a lower credit rating. Realised losses as a result of bankruptcies have been low. How then can an excess return become negative from one year to the next? The Fund’s fixed income portfolio is well diversified across different types of bonds and different regions and the active strategies had low correlation in normal markets. However, the financial crisis revealed that these strategies were exposed to more underlying, systematic risk. 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.
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The financial crisis showed that the entry of foreign banking groups into a domestic market, besides advantages, it is also associated with elements of risk, which must be addressed duly and timely. Third, the countries in our region have different needs for investments, highlighting those in road infrastructure, energy and health care. Also, demographic developments, including migration, and slowing population growth trend, have brought about increased costs of public pension schemes and other elements of social protection. Therefore, despite fiscal consolidation efforts, budget deficits have been present and steady all the time. During the financial crisis period, public authorities were committed to overcoming the situation. Almost all governments of the countries in the region were committed to implementing fiscal stimulus policies, aimed at increasing the support to the real economy and the financial system. Monetary policy followed an easing trend, cutting the interest rates and satisfying the interbank market needs for liquidity. Back to Albania’s case, I would like to emphasize that our experience in absorbing the impacts of the crisis proved successful. Albania, I think, is one of the countries that: Did not experience any bank failure or capital injection by the state; Courageously withstood the crisis of confidence in the banking system, where financial intermediation was never interrupted; The economy continued to grow in positive terms, albeit at a slower pace; Inflationary expectations remained anchored throughout all time.
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In my November 2013 speech, I noted that an important foundation for making the resolution of our largest banking firms feasible would be to require, at the holding company level, sufficient minimum amounts of long-term debt that could be used to absorb losses in a single point of entry resolution. Important progress has been made on this front, both in the form of the Federal Reserve’s recent issuance of a proposed rule to establish long-term debt and total loss-absorbing capacity (TLAC) requirements for U.S. GSIBs and the announcement last week by the Financial Stability Board (FSB) of an agreed upon international minimum TLAC standard. It is notable that in several important respects the proposed U.S. rules are stronger than the FSB standard. With these new proposed requirements, if losses were to wipe out a firm’s capital and push a firm into resolution, a sufficient amount of long-term unsecured debt would be available to absorb additional losses through a “bail in” process, recapitalizing the firm with no taxpayer BIS central bankers’ speeches 1 bailout and without generating systemic financial contagion. These proposed requirements should also improve market discipline by ensuring that each GSIB has a class of creditors who are clearly “at risk,” and therefore have an incentive to monitor the firm’s risk-taking. In my 2013 speech, I also called for further work to address the challenges in a resolution scenario posed by potentially disruptive close-out of cross-border derivatives contracts. Here too, important progress has been achieved over the past two years.
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Second, a set of resolutionrelated reforms are intended to limit the consequences to the financial sector if a failure by such an institution still were to occur. Given the limited time on this panel, I will not review in detail the post-crisis comprehensive capital and liquidity framework that the Federal Reserve has put in place. However, from the perspective of addressing too big to fail, it is important to highlight the Federal Reserve rule finalized this year that imposes risk-based capital surcharges on the handful of U.S. global systemically important banking organizations (GSIBs). Under this framework, a GSIB’s riskbased capital surcharge will reflect the degree to which its failure would impact the financial system. In effect, the risk-based capital surcharge confronts each U.S. GSIB with the choice to either reduce its systemic footprint or instead to hold more capital. The policy approach to too big to fail recognizes, of course, that we can reduce but cannot completely eliminate the possibility of a large financial institution’s failure. Therefore, a second aim of our post-crisis reforms has been to limit the adverse consequences that would result if a large financial institution were to fail. That is, large financial firms need to be capable of being successfully resolved without creating unacceptable collateral damage to the rest of the financial system and to the economy.
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One possible answer, of course, is that when Thomas Jefferson became President in 1801, he quickly realized that the economic consequences of dismantling Hamilton’s financial structure would be dramatic for his presidency, his party and the country. Moreover, there is evidence that Jefferson may have indirectly given a commitment to the Federalists to preserve at least part of the Hamiltonian financial system in order to break the political deadlock during the Presidential election. What is perhaps most remarkable, however, is that Gallatin seems to have come to appreciate the genius of Hamilton’s system and advised Jefferson accordingly. In an attempt to firmly discredit Hamilton, Jefferson – shortly after becoming President – asked Gallatin to examine the archives and uncover the “blunders and frauds of Hamilton”. After searching “with a very good appetite”, Gallatin went back to Jefferson with the following remarkable assessment: “I have found the most perfect system ever formed. Any change that should be made in it would injure it. Hamilton made no blunders, committed no frauds. He did nothing wrong.” Indeed Gallatin went on to say that Hamilton had done such an outstanding job as the first Secretary of the Treasury that he had turned the post into a sinecure for all future occupants. As for the Bank of the United States, Gallatin proclaimed that “it had been wisely and skillfully managed”. 28 4. What can we learn from Gallatin’s financial achievements today? What lessons can we draw today from Gallatin’s economic policies?
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Three areas in particular are discussed: • Data and Communications: to allow a better understanding of network dynamics following a shock and thereby inform public communications. For example, learning from epidemiological experience in dealing with SARs, or from macroeconomic experience after the Great Depression, putting in place a system to map the global financial network and communicate to the public about its dynamics; • Regulation: to ensure appropriate control of the damaging network consequences of the failure of large, interconnected institutions. For example learning from experience in epidemiology by seeking actively to vaccinate the “super-spreaders” to avert financial contagion; and • Restructuring: to ensure the financial network is structured so as to reduce the chances of future systemic collapse. For example, learning from experience with engineering networks through more widespread implementation of central counterparties and intra-system netting arrangements, which reduce the financial network’s dimensionality and complexity. Networks and finance are not complete strangers. There has been growing interest among network theorists in applying their techniques to financial phenomena over the past few years. For example, network techniques have already been applied extensively to the 2 BIS Review 53/2009 dynamics of payment systems and inter-bank networks. 1 But the financial crisis of the past two years provides both a greater body of evidence, and a stronger incentive, to apply the lessons from other network disciplines to the pressing problems facing financial policymakers today.
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But in the long run, attempts, for example, to make the economy grow faster than its long-term sustainable rate would only result in higher inflation without any change in output or employment. As I mentioned, the economy’s long-term capacity is limited by the size of the factors of production and their productivity. These factors cannot be governed by monetary policy. By changing the interest rate, the Riksbank can affect actual output growth in the short term but not the potential, long-term growth rate. Monetary policy can possibly indirectly lay the foundation for good growth in the long term by ensuring that our payment and price-setting system functions in an efficient and confidence-inspiring manner. What determines long-term growth? As you understand from what I have said this far, it is important for the Riksbank to make a good assessment of the Swedish economy’s potential growth capacity in order to conduct successful monetary policy. We therefore return to this issue fairly often in, for instance, our Inflation Reports. One difficulty is that potential output and potential growth cannot be observed directly in the same way as actual GDP and employment. Instead, the measure must be estimated using statistical methods and there are a number of these, each with its own advantages and disadvantages. In other words, there are several different ways of drawing the orange line in Figure 1, and the different methods have demonstrated fairly differing results. The Riksbank therefore uses several different methods of calculating the output gap.
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Inflation rates have been falling in most countries and they have registered appreciable expansion in economic activities with GDP growth rates averaging at about 5% in 2007. In addition, most countries have become more democratic in political circles, giving more say to the public on the running of governments and their institutions. Distinguished Participants, allow me now to turn to the subject we are gathered here for, that is, “Central Bank Governance”. Good corporate governance is generally acknowledged as BIS Review 26/2008 1 important in economic management. In this regard, Central bank governance is arguably defined by a number of key-concepts or pillars, which together should form the basis of an effective legal framework governing a central bank and on which central bank governance should rest, that is, operational independence, democratic accountability and transparency. Despite its common usage, it is not always very clear what central bank transparency amounts to. Generally, two definitions of transparency can be distinguished in the policyoriented literature. Firstly, central bank transparency is referred to as the activities of the central bank in providing information. Thus, in this case, transparency has been defined as the degree to which information on policy actions is available. However, a somewhat broader approach to transparency includes the public’s understanding of the decisions taken by the monetary authorities and the reasoning behind it.
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The picture for the petroleum and offshore supply industry is mixed. Operators’ production of oil and gas is high. Some sectors of the offshore supply industry experienced a difficult fourth quarter, but are more optimistic about this year. The maintenance and modification market is showing steady, although moderate, growth. Most companies report stable employment. Extensive rationalisation and restructuring measures are still on the agenda in organisations and enterprises, and so far, growth is being absorbed by excess capacity or by increased productivity. Wholesale and retail trade and the building and construction sectors are increasing their workforces. All industries continue to report that highly qualified labour is in ample supply. Of the Norwegian counties exporting traditional goods, Rogaland is the third largest. The public sector and some private service industries are as important for employment in Rogaland as they are in the rest of Norway, but the share of employment in these sectors is lower than the national average. Manufacturing and oil and gas production are important in Rogaland, but the internationally exposed sector is also relatively large. Employment in Rogaland is mainly concentrated in engineering, shipbuilding and construction of oil platforms. Many are also employed in the food and beverage industry, and Rogaland is an important farming county. The labour market in Norway has improved. The number of persons employed in Norway began to increase in summer 2003 and unemployment stabilised. Employment in distributive trades has increased.
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Svein Gjedrem: Monetary policy and the economic outlook Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at SR-banken, Stavanger, 19 March 2004. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 11 March, Inflation Report 1/04 and on previous speeches. The Charts in pdf-format can be found on the Norges Bank’s website. * * * The operational target of monetary policy as defined by the Government is inflation of close to 2.5 per cent over time. The target is symmetrical - it is just as important to avoid an inflation rate that is too low as an inflation rate that is too high. The inflation target provides economic agents with an anchor for inflation expectations. It therefore influences their decisions concerning saving, investment, budgets and wages. History shows that there is no long-term trade-off between lower unemployment or stronger economic growth and higher inflation. We witnessed this in the 1980s when growth was low and inflation high. The task of monetary policy is to provide a nominal anchor. Low and stable inflation is such an anchor. There are several reasons why it is an advantage for inflation to be higher than zero: • The structure of the economy is in flux. Demand for labour with different qualifications is changing. This requires changes in relative wages. There are rigidities in nominal wage growth.
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I was very keen to deliver this speech upon the invitation of my friend, Professor Otmar Issing. I profoundly believe that culture is at the heart of the European project. The cultural unity of Europe is based on the recognition of, and an openness to, its cultural diversity. Europe benefits greatly from the mix of cultures. This is the core concept of the ECB Cultural Days. 3. In times of crisis, culture can be seen as a luxury, a remedy or a refuge. The past two years must have been very difficult for you, presenting you with many challenges and a very heavy workload. What works of art helped you to unwind during this period? Particularly in very demanding and challenging crises, it is important to remain composed, to be able to stand back from immediate events and to develop as sound and as lucid a judgement as possible. I think that, in times like these, it helps more than ever to read a good Ismail Kadare book or a beautiful Heine poem, or to stand in quiet contemplation in front of a Caravaggio painting at the Städel. 4. Turning to the ECB Cultural Days: how did the idea come about and what is the connection between culture and central banking? I have always felt that there is a profound link between the European Union and its cultural identity. I trust this belief is widely shared by ECB staff and our Executive Board, Governing Council and General Council.
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Hence, it is crucial to continue our common discussions with the American authorities in order to limit redundancies and inconsistencies, of information decrease the risks of regulatory arbitrage or overlaps, whilst our common objective remains the safety and soundness of financial market infrastructures. Constructive dialogue between rule making agencies is essential. 2.2 In the field of regulatory and accounting standards, I would like to point out that convergence is highly needed in order to allow users of financial reporting, especially regulators, analysts, and market participants to draw relevant comparisons between banks. – Firstly, let me say briefly that the largest European banks have strengthened their robustness during the last two years and are, at least, as robust as their US peers1: • 1 The top European Banks have seen their revenues increase by 8.6% on average from 2009 to 2010 (up 2.5% for the main US banks over the same The following figures are based on calculations made with a sample of 17 large European and American banks: JP Morgan, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, HSBC, RBS, Barclays, Santander, BBVA, BNPP, SG, Groupe Crédit Agricole, UBS, Crédit Suisse, Deutsche Bank. BIS central bankers’ speeches 3 period). All banks have benefited from a decline in their costs of risk (–43% for US banks and –30% for European banks, from 2009 to 2010).
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In these cases, the existing general prudential framework requires that banks reclassify exposures as restructured or in default in a timely and adequate manner. The actions of the banks in this regard will also engage 2/3 BIS central bankers' speeches the supervisory process as important input information in the supervisory review and evaluation by the Bulgarian National Bank. The above outlines the framework for action in the short term. The main points of this framework are: continuing the previously adopted anti-crisis measures for as long as necessary, including with regard to the dividends, the risk exposures and the countercyclical capital buffer; maintaining the high capital and liquidity requirements, in this regard we are ready to respond to a scenario in which the banks may have to operate temporarily under the combined capital buffers requirement; and implementation of the newly adopted EBA framework for a moratorium on loan repayments. We are ready to activate additional measures if the development of the situation so requires. It is very important in the difficult environment, in which we find ourselves, and strongly committed to anti-crisis measures, not to lose our strategic focus, which is aimed at successfully continuing and finalising the project we started a few years ago for joining the euro area. The Bulgarian National Bank has serious responsibilities in this process and has been ceaselessly pursuing them.
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An efficient, productive and resilient financial system supports and contributes to economic growth and the overall well-being of the people. In contrast, financial busts can have a destructive impact on the broader economy, impacting the livelihood of ordinary people. This is the painful lesson from the history of financial crises. Despite the huge amount of resources being invested in compliance, we still uncover many banking, market manipulation and rigging scandals. These cases illustrate again that rules, although necessary, are not sufficient to maintain the integrity of the financial system. These cases have damaged the confidence and trust of society in the system. One solution for this is a stronger focus on ethics and professional standards to take into account how actions impact the wider society. In other words, financial institutions must recognise and embrace their role as responsible corporate citizens. This means: Establishing a framework that promotes ethical behaviour and decisions; Going beyond what the letter of the law permits, to understanding and complying with its ‘spirit’; and Seeking opportunities to add value and contribute to the well-being of society. 2/4 BIS central bankers' speeches Viewed from this perspective, the values of a responsible citizen are antithetical to money laundering, terrorism financing and illegal behavior. Anyone who is a responsible citizen will not engage in these activities and will actively seek to eradicate them.
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Jean-Pierre Roth: Switzerland in the midst of the euro area - situation and outlook Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the South Tyrolean Industrialists’ Association, Bozen, 14 October 2003. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * In the past decade, the European currency landscape has undergone fundamental changes. The European Central Bank today enjoys an excellent reputation as an independent central bank. Within a very short time, the euro has become most significant as an investment currency, and it continues to gain ground. Since 2002, from the time it took physical form, it has also been legal tender in twelve EU countries. The introduction of the single currency has also had manifold implications for Switzerland. First of all, the euro has made business for Swiss companies easier. Foreign currency management has been facilitated, and the danger of currency turbulences, as witnessed under the European Monetary System EMS, has diminished. The euro is used as a payment instrument in Switzerland approximately to the same extent as formerly the national currencies of our immediate neighbours. It is possible that it will yet gain some significance in this respect. There is no risk, however, of it superseding the Swiss franc as payment instrument. As an investment and issuing currency, the euro represents increased competition, but the Swiss franc will remain an attractive diversification currency.
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1 b) ... as their failure would come at too high an economic cost If a ‘too big to fail’ bank gets into distress, it jeopardises not just itself but also the stability of the financial system as a whole and, as a direct consequence, the real economy. The high economic costs can be illustrated using two mechanisms. The higher the bank’s market share of lending business, the greater the probability that the economy will not be provided with enough liquidity if that bank gets into difficulties. First, finding alternative credit providers will take time. Second, in the event of the failure of a systemically important bank, the assets of households and companies will – at least 1 So even though in most cases – including here – the term used is ‘too big to fail’, it is not just an institution’s size that makes it systemically important. In addition to size and market share, its risk profile, economic interconnectedness and (organisational) complexity are important variables. As a result, the terms ‘too important to fail’, ‘too complex to fail’ and ‘too interconnected to fail’ are also used. Page 3/14 temporarily – be frozen, with the attendant negative impact on consumption and investment. Here too, the maxim applies: the higher the institution’s market share of deposit business, the greater the fallout in the event of a crisis. The second mechanism is based on the fact that, as I have already mentioned, banks are closely interconnected.
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Regionally, we now have a number of financing arrangements, including the Chiang Mai initiative in Asia (established in 2000), the European Stability Mechanism (established in 2012), the Latin American Reserve Fund (established in 1991), the Arab Monetary Fund (established in 1976) and, most recently, the BRICS development bank (established in 2014)). Regional facilities now total around $ trillion. In addition, during the course of the crisis, bilateral foreign currency swap lines were agreed between around 14 central banks, in both advanced and emerging market countries. Although these swap lines were temporary, in October 2013 they were replaced by a set of permanent, and potentially unlimited, swap lines among a group of advanced economy central banks: the US, Canada, the UK, the euro-area, Switzerland and Japan. These four developments, in combination, are likely to have increased significantly the potential pool of liquidity insurance available to the global financial system in dealing with external financing shocks. The question is whether this degree of insurance has kept pace with the accompanying rising tide of global capital market integration. One metric for that is found by scaling countries’ foreign exchange reserves by a measure of financial globalisation – for example, total external assets (Chart 15). Despite the rapid rise in reserves, its ratio to external asset stocks has actually fallen since 1980, from 10% to around 8%. Second, official reserves have risen unevenly across countries: the degree of concentration in reserves has increased threefold since 2000.
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As the Riksbank and the banks must have personnel in place, the system is only open during normal office hours, and even if these can be extended by an hour or so, it is not likely that we will operate it 24 hours a day. At the same time, we want all payments in Swedish krona to be settled in Riksbank money. This reduces counterparty risk in the financial system. If, for instance, a private bank were to run such a system, all participants would have a claim on that bank before the payments are settled. If that bank were to go bankrupt, all of the money would be lost. That risk does not exist if the central bank runs the system. Additionally, it would be preferable if the system were run by a competition neutral actor in the form of the central bank. We therefore want to ensure that all payments in Sweden will continue to be settled with us. However, instant payments require systems that can manage payments around the clock. The European Central bank, ECB, is in the process of developing a new technical platform called “Target Instant Payment Settlement” (TIPS). This will enable instant payments around the clock and it will be operational at the end of 2018. It will also be prepared to handle other currencies than the euro, for instance the krona.
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Inclusion – expanding the reach of microfinance One of the key challenges for microfinance has been providing access to financial services where it is unavailable, but needed the most. Expanding the reach of financial services, and finding new ways to do so cost efficiently, lie at the very heart of efforts to increase inclusion. The right channels can also create emotional connections, not just geographical ones. Making it easier for borrowers to connect with financial institutions in ways that they feel comfortable with, can build affinities with financial institutions which in turn, encourages participation and timely repayments. Mobile banking is an excellent example. The portability, affordability and ubiquity of mobile gadgets effectively put a bank in everyone’s pockets today. The numbers are telling. Half the global population use mobile internet. We spend 4 hours on the phone and use 12 apps in a single day. The tremendous success of mobile banking in Africa has been hailed as a transformative platform for greater financial inclusion. If providers leverage digital platforms well, finance can literally be at the fingertips of the unbanked. Leveraging on digital platforms can also create a virtuous cycle. Over time, such platform providers will accumulate a wealth of data on customer preferences and behaviour. This can in turn drive drive analysis for new product offerings in the future. This is of course, highly contextual and an effective delivery strategy will likely differ across countries, communities and cultures.
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Led by innovation across the globe from Bangladesh to Brazil, microfinance has allowed previously excluded segments of society to grow incomes, build assets and ultimately improve their standards of living. With poverty eradication taking centre stage in the global public policy agenda, such in the United Nation’s Millennium Development Goals, these developments are welcome. Here in Malaysia, microfinance has been an important part of the development agenda. In 2006, the Bank introduced a comprehensive microfinance institutional framework to promote the development of a sustainable microfinance industry. This facilitated greater access to financing by micro-entrepreneurs with no collateral, supported by simple application procedures, minimal documentation and quick turnaround times. The microfinance landscape in Malaysia has evolved from being Government-driven into one with vibrant private sector participation. At the turn of the century, total financing outstanding of the sector stood at USD35 million (RM151 million). Since then, it has multiplied by more than 30 times to USD1.2 billion (RM5.2 billion) in 2016, collectively benefitting more than a million micro enterprises. Despite significant strides taken since the 1970s to develop more inclusive financial systems, including in the countries represented here today, our work in microfinance is far from complete. The full potential of microfinance is not realised until we observe direct linkages to welfare improvements in the micro segment and ultimately, sustainable growth. At the same time, microfinance is also evolving in an era of unprecedented technological change. Adaptability is key for microfinance to thrive and further propel itself forward.
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It is an assumption about the future conduct of the Board itself, because this is the instrument used by monetary policy. When we began publishing the Monetary Policy Report at the beginning of this decade, like many other central banks we worked on the assumption that the monetary policy rate would remain constant for the whole policy horizon. Even though this was not wholly plausible over a horizon of two years, it did seem to be not far off reality since the monetary policy rate was thought to be around its neutral level. However, this working assumption became extraordinarily unreasonable when, towards the end of 2002 and early 2003, the monetary policy rate fell well below its neutral level. That is why, since then we have taken as a working assumption a monetary policy rule that adjusts the interest rate in order to meet the target. 3 This does not involve a commitment to the future rate path but it serves to organize our discussions and deliberations. We communicate this path by comparing it (saying it is higher or similar, etc) to the implicit path seen in the forward curve and the expectations, and in general we indicate what this means in terms of possible rate changes during the year.
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Eddie Yue: Remarks at Media Standup Remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at Media Standup, Hong Kong, 2 October 2019. * * * Ladies and gentlemen, 1. Today is my first working day as the Chief Executive of the HKMA. Apart from the transition to a new position, I will also be faced with a challenging external and domestic environment. This includes the weakening of global economic momentum, uncertainties over the ChinaUS trade conflict and Brexit, unpredictable monetary policy stance across central banks especially in the US, and the social events in Hong Kong in recent months. All these have presented huge challenges and uncertainties for the Hong Kong economy. 2. Our key priority in the next few years is to maintain Hong Kong’s monetary and financial stability. 3. And, the foundation for this stability is the Linked Exchange Rate System (“the Link”), which has helped Hong Kong weather different financial storms since 1983. I’ve been involved in the operation of the Link throughout my career in the HKMA and I have also gone through two financial crises. I firmly believe that the Link is the most appropriate monetary system for Hong Kong. We see no need and have no intention of changing this well-established system. 4. Our banking system is also robust and sound. I’m confident that Hong Kong’s financial system is well positioned to cope with market volatilities. 5. We will also reinforce Hong Kong’s role as a premier international financial centre.
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All this has taken place against the background of various upheavals in the global economic and political environment, the war in Iraq being just one manifestation of this. The defining characteristic of Hong Kong banks during this difficult period has been their resilience. Despite the ups and downs, banks’ balance sheets have remained strong. For the locally incorporated authorized institutions, the aggregate capital ratio remains around 16%, twice the minimum international standard. Many of the smaller banks have ratios well above this. Capital strength has not been impaired by losses during this period. The banks have continued to make money and earn a reasonable return on assets from their Hong Kong operations, averaging 1 around 1.25% (before tax) over the last three years. However, this has not been easy to come by. Growth in mortgage lending, the mainstay of profits in the 1990s, has stagnated, and the spread on new mortgage loans has fallen to 2.6% below prime barely enough to earn a decent return on capital employed. Other sources of loan demand have also dried up as corporates have deleveraged since the Asian Crisis. So the banks have had to change their focus in order to generate revenue. Attention has switched to the liabilities side of the balance sheet as the banks seek to make best use of the large amounts of surplus funds that have built up. Banks have been managing down the cost of their liabilities in order to improve deposit margins.
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7 All speeches are available online at www.bankofengland.co.uk/news/speeches 7 In that regard, the growth of open-ended investment funds, many offering investors the chance to redeem their share in the fund at a day’s notice, is notable. They have more than doubled in size since the crisis. As they’ve grown, these funds have invested increasingly in illiquid assets. Open-ended mainstream equity funds have been joined by corporate bond, leveraged loan, commercial property and emerging market debt funds. That growth has been an important source of finance for our economy. For example, these funds hold at least a quarter of the additional corporate bonds issued by UK businesses since 2008. So their stability has economic significance. It has the potential to become a systemic issue. While there is a role for these funds in our system, they do have a structural flaw when they start holding less liquid and truly illiquid assets. Despite offering investors the chance to redeem their share at a day’s notice, they typically offer a price for the share based on the quoted market prices of the funds’ assets. But when you hold anything other than the most liquid assets, it can be difficult to realise those quoted prices in one day, especially if a fund is forced to sell in scale. It can take weeks or sometimes months. This isn’t a problem when some investors are buying in as others are selling out. None of a fund’s assets actually need to be sold to pay redeeming investors.
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These products were viewed as “safe” since, after all, the funds were only exposed for a short period of time, and in the case of repo, they were secured by collateral. On the demand side, setting aside any possible instabilities in this funding source, it was more profitable to use shorter-term funds to finance longer-term assets. In fact, the growing reliance on short-term wholesale funding to finance longer-term assets increased liquidity and maturity mismatch risk in the financial system. This was particularly dangerous because many of the assets being financed were structured-credit products, some of which were opaque, difficult to value and illiquid. In periods of market stress, these features increase the run risk by funding providers. BIS central bankers’ speeches 1 Short-term funding of longer-term assets is inherently unstable, especially in the presence of information and coordination problems. It can be rational for a funding provider to supply funds on a short-term basis, reasoning that it can exit if there is any uncertainty over the firm’s continued ability to roll over its funding from other sources. But, if the use of short-term funding becomes sufficiently widespread, the firm’s roll-over risk increases. In this situation, there is a strong incentive for each lender to “run” early if there is any uncertainty that could undermine the borrower’s ability to continue to roll over its funding from other sources.
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The Fed also backstopped the commercial paper market (formerly funded in large part by money market mutual funds) by introducing the Commercial Paper Funding Facility (CPFF). When wholesale funding for non-residential mortgage securitizations evaporated, the Fed rolled out the Term Asset-Backed Lending Facility (TALF). These actions ultimately stabilized funding markets and crowded back in private funds. But, they were an emergency response, not a sustainable long-term solution. After all, because most of the special Fed liquidity facilities were authorized under Section 13.3 of the Federal Reserve Act, they were required to be temporary in nature and to end when times were no longer “unusual and exigent.” Much has been done over the past few years to mitigate the structural flaws that make wholesale funding a point of weakness in the global financial system. The New York Fed, for example, has led a Federal Reserve effort to make the tri-party repo system more resilient to stress, while the SEC has taken steps to address risks associated with money market mutual funds. Nonetheless, some important issues and vulnerabilities remain. Moreover, because BIS central bankers’ speeches 3 the Dodd-Frank Act raised the hurdle for the Federal Reserve to exercise its Section 13.3 emergency lending authority, extraordinary interventions will be more difficult to undertake, perhaps causing investors to be even more skittish in the future. This is why it is essential to make the system more stable. To that end, I look forward to hearing the insights and suggestions that come out of today’s workshop.
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