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21 The results are much the same. On average, the dispersion in banking returns is statistically significantly lower than for non-banks, at the 1% level, both for UK and global institutions. And, in general, we observe a compression of returns during credit booms and a dispersion in busts. There is evidence of an increase in the degree of coordination of global banks’ activities after the financial liberalisation of the 1980s. This suggests credit cycles may have become increasingly synchronous globally. To test this formally, we construct pair-wise correlations between countries’ credit cycles for two post-war sub-samples, 1945–79 and 1980–2008. We plot the cumulative distributions of these cross-country correlations in Chart 16. The same technique can be applied to correlations between countries’ medium term fluctuations in GDP (Chart 17). In each chart, a shift to the right of the cumulative distribution indicates an increase in the degree of crosscountry correlation. Chart 12 Dispersion of equity returns of US banks and top 100 US PNFCs (by market cap) (1), (2) and (3) represent medium term credit booms. Outside of these areas represent medium term credit busts. Source: Thomson Reuters Datastream and Bank calculations. 20 Theoretical explanations have been put forward by, among others, Campbell and Cochrane (1999) and Mele (2007), who show that habits and cyclically asymmetric risk premia respectively may generate counter cyclical volatility in asset pricing models. 21 This global group of banking institutions included UK and US banks as a subset.
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I appeal for this decision to be made this week, if possible, for the sake of assuaging all concerns regarding BNB's governance. Ladies and Gentlemen, thank you very much for the confidence I’ve been given. Thank you for your attention. 2 BIS Review 104/2009
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A simulation of the instalments of a standard loan in CHF, RON and EUR respectively, extended in December 2008, shows that: (i) at the credit agreement date, the monthly instalments on CHF-denominated loans were lower compared with similar monthly instalments on loans granted in RON or EUR, and (ii) the impact of the change in the exchange rate and/or the interest rate was stronger on CHF loans than on those in the other currencies. The number of CHF borrowers is on the decline (by 31.8% in November 2014 compared with December 2008, i.e. by around 35,200). The drop is due to loan repayment, loan conversion into another currency, their removal from the balance sheets or their sale. The number of CHF borrowers fell at a faster rate compared with the household loan dynamics at aggregate level, the number of debtors moving down 15% between December 2008 and November 2014. The number of CHF loans witnessed a similar development. Credit risk associated with CHF-denominated loans is relatively higher compared with other currencies. In November 2014, the NPL ratio on household loans in CHF stood at around 12% versus 9.4% for all foreign currency-denominated loans to households, yet the dynamics were similar to those of foreign currency-denominated loans overall. BIS central bankers’ speeches 3 Recent studies also identify heightened risks and correspondingly high costs associated with CHF loans to unhedged borrowers at an international level, particularly in non-euro area countries. Individuals with CHF-denominated loans are not a homogeneous group.
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The main proposals by the Ministry of Public Finance to enhance Government Emergency Ordinance 46/2014 refer to: (i) rendering the rescheduling mechanism and the maturity more flexible vis-à-vis borrowers’ financial capacity, (ii) extending the scope of eligible debtors, (iii) simplifying the administrative procedures for loan rescheduling, (iv) strengthening borrower protection in relation to banks, which remain bound, during the rescheduling process, not to tighten contractual terms regarding the interest rate, the level of commissions, or fresh collateral. With a view to tailoring banking prudential regulations to the new financial market conditions, the NBR has initiated several legislative changes to facilitate the conversion of foreign currency-denominated loans into lei and to ensure the effective enforcement of Government Emergency Ordinance 46/2014 with the amendments proposed by the Ministry of Public Finance. Summing up, we at the National Bank of Romania remain open to dialogue for clarifying the issue of CHF lending, finding solutions and getting involved in accordance with the legislation in force. 10 BIS central bankers’ speeches
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A Financial Times report in 2008 found that most directors at several large and troubled institutions had no significant experience in financial services 8. An undue deference to management by directors was also prevalent in banks such as Northern Rock, HBOS and RBS, where the boards did not adequately challenge the management’s pursuit of aggressive, high-risk strategies. It is for these reasons that Bank Negara Malaysia undertakes rigorous and frequent supervisory engagements with the boards of financial institutions. Such engagements are crucial to developing a better understanding of board dynamics and their effectiveness in their governance role. As a matter of practice, prospective directors of financial institutions in Malaysia are subjected to close scrutiny through rigorous interviews by the Bank. This approach was also recently adopted by the UK’s Prudential Regulatory Authority 9. Governance arrangements in financial institutions must also be reinforced by a corporate culture which values and reinforces considerations for risk, ethics and compliance at all levels of the financial institution. This starts with the right “tone from the top”, whereby the board and senior management shape the core values for the firm. A common theme in the findings across various inquiries into the crisis is a breakdown in culture, where a disregard for prudence and ethics was tolerated. In some cases, individuals bearing red flags were not only ignored, but punished. The Financial Crisis Inquiry Commission launched by the US government chronicles two such instances 10.
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In the United States there seems to have been a further extension of the upward phase this year and a slowdown may be softer and more cautious than anticipated earlier. Even with stronger international growth, external price pressure is likely to be weak. For one thing, after the Asian crisis there is still some unutilised capacity on the whole in the global economy. Other factors are increased price competition and an expected appreciation of the krona. Economic prospects in Sweden also look brighter. Besides the positive cyclical signals from abroad and their expected effects on the Swedish economy, there is the stronger growth of domestic demand. Firms as well as households are optimistic about the future. There are a number of reasons for this. Real wages and employment are rising rapidly and public sector finances are becoming stronger. Fiscal policy in 2000 and 2001 is now assumed to be somewhat more expansionary. All in all, GDP growth is judged to be 3.6% in 1999, 3.8% in 2000 and 3.0% in 2001. These assessments are based on the technical assumption that the repo rate is kept unchanged. The strong growth trend means that in the coming years the economy’s unutilised resources at present will be utilised more quickly than the Riksbank envisaged earlier. Inflation is accordingly judged to move up somewhat faster than the Riksbank assumed earlier. In the main scenario the underlying rate of inflation, measured as UNDIX, is judged to be 1.8% twelve months ahead and 2.1% after twenty-four months.
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This showed that the negative interest rate, and our willingness to intervene on the foreign exchange market as necessary, are still essential in order to ease pressure on the franc, thereby stabilising price developments and supporting economic activity. Only in this way can we fulfil our mandate – to ensure price stability while taking due account of economic developments – in the interests of the country as a whole. In September, we also adjusted the basis for calculating the exemption threshold, which defines the portion of a bank’s sight deposits at the SNB on which we do not charge negative interest. This adjustment reduces the overall burden imposed on the banking system by negative interest to the minimum required for monetary policy purposes, 6 while taking account of the possibility that the low interest rate environment may persist worldwide for some time to come. While negative interest rates are unusual and should only be temporary, moderately negative rates are not fundamentally different in terms of their economic effects from interest rates above zero. As the negative interest rate has brought about an easing of financing conditions in the economy, companies are able to take out loans for investments at lower cost. For us, however, this so-called ‘interest rate channel’ is not of prime importance. Rather, it is the effect on the exchange rate that is decisive for Switzerland as a small open economy. With the negative interest rate, we can ensure that the traditional interest rate differential versus other countries is not eroded excessively.
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Page 7/8 these outgoings, either benefits could be decreased or the period of benefit payments could be shortened. We do not express any preference as to which of these mechanisms is used. Making such a choice always involves a delicate balancing of interests, which is a matter for political circles rather than the SNB. Under these circumstances, however, it is clear that there is unfortunately no easy, universal solution. Adjusting to the realities of the investment world and demographic change comes at a price. And something else is also clear: in a pension system like ours, in which the key parameters are defined in nominal terms, this price will keep rising until such time as the problems are tackled. But holding on to the status quo also comes at a price. For example, we are seeing a rise in redistributions from young to older insureds, which was never intended by the system. This is also why the term ‘lifestyle’, as used in the relevant article of the Federal Constitution, targets purchasing power rather than any nominal quantity. Workable solutions can be found At the start of my talk I drew your attention to an international ranking of pension systems (cf. chart 6). In other countries, too, the population enjoys rising life expectancy while savers bemoan the low interest rates. Denmark and Sweden, for example, which are now ranked several places ahead of our country, have implemented far-reaching and thus painful measures to stabilise and modernise their pension systems.
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In 2007, for instance, the US current account deficit stood at $ billion, while China’s surplus stood at no less than $ billion. Moreover, the deficits are also large in historical terms. A number of competing explanations have been advanced for this pattern of flows. First, it could simply reflect the juxtaposition of strong demand in the United States, coupled with China’s adoption of an undervalued exchange rate in order to accelerate the development of the traded goods sector and to soak up labour from the rural areas (Dooley, Folkerts-Landau and Garber, 2004). Second, it could reflect a “savings glut” in the surplus countries (Bernanke, 2005), resulting from a lack of an adequate household safety net in China, the accumulation of precautionary holdings of international reserves by several emerging market countries after the Asia crisis, and rational savings of the windfall gains from higher oil prices on the part of oil producers. Finally, it has been suggested that the United States holds a comparative advantage in the creation of “high quality” financial assets from real investments, leading to a direction of savings into the US financial markets (Caballero, Farhi and Gourinchas, 2008). Now while these flows are certainly likely to have added to the growth in credit, on the face of it they could only be a part of the explanation. For instance, the cumulative US current account deficit over the 2000-7 period was $ trillion.
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But just as there is evidence that increased financial intermediation is often a Good Thing, so there is also evidence from numerous past credit/asset price boom-bust episodes that a juxtaposition of rapid credit expansion and sharp asset price increases is often a harbinger of a painful bust to come. So everything hinges on whether the underlying developments are sustainable or not. The mistake of (most of) the economics profession, along with many others, was a failure to see what was really going on beneath the surface and to understand how disruptively things could unwind. But, as I shall explain, I believe that the standard tools of economic analysis, far from being proved redundant, can shed useful light on what went wrong. Macroeconomic antecedents The proximate causes of the present crisis undoubtedly lie within the financial markets. But it is worth dwelling briefly on the macroeconomic environment in the years preceding the crisis, which was conducive to the formation of what proved to be an unsustainable credit bubble. BIS Review 101/2009 3 The Great Moderation To begin with, this period was characterised by an unusually high degree of macroeconomic stability, with steady growth and low and stable inflation in most of the advanced economies; see for instance Fig. 4, which shows performance in the G5 countries before and after 1992 2 . There are three broad explanations for this “Great Moderation”. First, it could just have been a happy accident, if this was a period characterised by unusually small, or a benign sequence of, shocks.
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How has the last global financial and economical crisis impacted the Albanian economy, the regional economy and more priority the convergence process? Can we afford it? All these are very important issues on which I think we should stop and study in deep. They are subject of research work, whose findings shall light the orientation of economic and structural reforms. Given that, the Bank of Albania has joint the forces with the University of Oxford to carry out a scientific research dedicated to the finding of the answers for the above questions and other similar. Answers to these fundamental issues benefit not only Albania and its regional partners, but also the EU and its political and economical structures. I am confident that the European Commission may exploit the outcomes of these scientific researches to build up new anchors, as economic and political incentives in order to increase the efficiency of all regional sources. These studies shall help us to better see that: What and how should be done to return EU, its Pre-adhering Economic Programs and Fiscal Economic Programs into stronger external anchors for the national and regional policies. However, it is important to realise that international restrictions can not support the long-term sustainable prosperity in absence of internal anchors. BIS Review 117/2010 3 Obligations that may be imposed from Brussels or from other international organisations are indispensable as long the internal anchors are fragile.
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Given a small-sized and open economy, the increase and stability of exports is of outmost importance. Therefore, the research work, the reforms and the strategic decisions should be adopted in line with this target. In this respect, the role of banking systems acquires a particular importance, which should carefully identify the primary and profitable sectors and should provide their ongoing financing. Banking credit has been and remains one of the main instruments which shall provide the sustainable performance of the economic and financial activity at home. For this strategy to be successful, it must include as one of its substantial constituents the philosophy and priorities of the Western Balkan regional development. This need does not only derive upon the competition requirements and the achieving of the economy of scale, but also upon our common target for the European integration. During the recent years, I have continuously highlighted that the key of the successful integration in the European Union is the regional cooperation. There are many reasons backing the conclusion that our models of growth must be seen as complementary and not competitive to each-other. It is indispensable that the complete process of structural reforms takes place quickly and in a coordinated way, which precedes the membership to the European Union. Only in this way the whole region will converge naturally, avoiding episodes of misbalances within the bosom of the European family upon the membership. This will be a real contribution to the long-term sustainability of the European developments.
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This reflects a number of developments. First, the influx of workers from abroad, including from the European Union accession countries. The precise figures are very uncertain, not least because people come and go a lot, but recent research 4 estimates that 2005 probably saw the largest ever entry of foreign workers to the UK, totalling around 400,000 – equivalent to around 1.5% of total employment (although outflows have probably risen, too). In addition, older workers are increasingly likely to stay in work – people above pensionable age accounted for a quarter of the growth in the work force over the past year; and Government policies are encouraging people on benefit back into work. The result has been that the labour force participation rate, the number of people in work and the number who are unemployed have all been rising at the same time – a fairly unusual combination. A faster growing labour force potentially raises the amount the economy can produce. Rather like raising the economy’s speed limit, it implies that it can grow faster without hitting supply constraints and generating inflationary pressure. That may be the situation right now. In any event, putting all this together with the impact of energy-related price movements, I do not read the fact that inflation is currently above target as convincing evidence that the economy is overheating. 4 “Foreign labour in the United Kingdom: current patterns and trends”, John Salt and Jane Millar, Labour Market Trends, Office for National Statistics, October 2006.
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Public finances were hit hard when the banking sector had to be rescued in the wake of a bursting housing bubble, in which housing prices and bank lending had chased each other’s tails to form an unsustainable spiral. This was why these countries quickly encountered major problems in managing the growth of their sovereign debts, despite their relatively good position at the outset. An excessive build-up of debt – irrespective of whether it takes place in the private or the public sector – leads to problems sooner or later. Events in the euro area in recent years provide a frightening illustration of this. It is clear that the euro area is facing major challenges, not only for individual countries but for the EMU as a whole. The ECB, the EU and the IMF have implemented a range of support measures to come to terms with the acute problems. A number of new decisions and measures have also been announced within the EMU over the course of the year. However, it is important to point out that responsibility for managing these problems primarily lies with the politicians in the respective countries. Decisions are required at the national level, not only to resolve the problem of weak public finances but also to improve competitiveness (see Figure 6).
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Considering these figures, it is clear that Europe has the resources to face a manageable financing gap in some parts of the region. And yet, it is in turmoil. The answer to this paradox can be found by considering the true nature of the crisis. Most observers would simply see the fiscal imbalances in peripheral economies. These may have been the trigger. But we are now looking at a true financial crisis – that is a broad-based disruption in financial markets. To understand what is going on, it is necessary to take a step back. Europe is the most financially integrated area in the world. There is full capital mobility inside the EU. Financial regulation is almost totally harmonized, financial infrastructures and payment systems are closely interconnected. Europe is truly a single financial market and, more importantly, a truly single financial system. The single capital market has brought significant benefits to Europe. Capital has been flowing to peripheral countries, triggering investment and growth. Financial integration has supported and underpinned the broader process of trade and economic convergence. At the same time, capital mobility has been used to postpone fiscal adjustment. Capital inflows have fueled credit and asset booms. Current account deficits have been financed through fragile sources of funding. The easy access to financing has created insensitivity to current account imbalances which, in turn, have weakened the incentives for preserving or improving competitiveness. An integrated financial system may be efficient, but not necessarily robust.
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Strengthening the international infrastructure Integral to the efforts in the development of Islamic finance has been the development of the supporting international Islamic financial architecture. The establishment of the Islamic Financial Services Board (IFSB) in 2002 to set the prudential standards for Islamic finance, and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) established in 1990 has been key to ensuring the soundness and stability of the Islamic financial system. The IFSB and AAOIFI have had an important role in the harmonisation of prudential and accounting standards across the different jurisdictions. They are also instrumental in instituting international best practices in the global development of Islamic finance. The Islamic financial institutions are also subject to the requirements on anti-money laundering and anti-terrorist financing. Opportunities through greater international financial integration The globalisation of Islamic finance has gained significant momentum in this recent five years. While the early development of Islamic finance was domestic centric, its internationalisation is now manifested by increased cross border flows, greater participation in international Islamic financial markets, the increased presence of financial institutions in new jurisdictions and more recently, the increased number of Islamic financial institutions which have shareholders from multiple jurisdictions. Greater financial integration has essentially been facilitated by the more rapid pace of liberalisation that has been supported by the progress that has been achieved in the development of the international Islamic financial infrastructure. This trend has also been prompted by the need for greater diversification of risks in the management of funds.
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Svein Gjedrem: Ten years of inflation targeting strategy in Poland compared with the experience of other countries Presentation by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the conference "20 years after the collapse of the socialist economy. Transformation, economic growth and convergence in Poland and other Central and Eastern European countries ", National Bank of Poland, Warsaw, 5 June 2009. * * * Thank you for the invitation to speak at your conference. It is a pleasure for me to be here in Warsaw on this occasion. Norges Bank was given an inflation targeting mandate in 2001. Inflation expectations have been well anchored around the 2.5 per cent target rate in recent years. We practice flexible inflation targeting. The credibility of our inflation target has enabled monetary policy to support a stable economic growth path. However, like other countries, Norway was hit by the international economic downturn that followed the financial crisis. The estimated growth rate for 2009 is minus one percent. Preceding the downturn, we went through a long period of low CPI inflation. Headline CPI in Norway is strongly affected by fluctuating energy prices. An inflation measure that instead includes trend energy prices, CPIXE, illustrates how the inflation rate gradually has been approaching our target of 2.5 per cent. In this – until the fall of 2008 – rather benign macroeconomic environment, rising property prices, high credit growth and a low saving ratio posed a policy challenge – as in many countries.
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We still try to have a long-term perspective, and we will carefully consider the effects of measures already taken as we move along. Even with monetary policy able to counteract cyclical fluctuations to some extent, there is a limit to how much the one tool at the central bank’s disposal – the key policy rate – can accomplish. Regulations need to underpin the robustness of the financial system with respect to cyclical fluctuations. Supply side policy needs to support the capacity of the economy to absorb asset price fluctuations. BIS Review 69/2009 1 As for regulatory reform of the financial sector, I believe we both need to reconsider the structural elements and we need some new discretionary features. In order to limit excessive credit growth, the leverage ratio of banks should be contained, with higher capital requirements. The procyclical effects of such capital requirements need to be addressed. Since profits fall during a recession, capital requirements then tend to be more binding, reducing credit availability when it is most needed. The work aimed at changing the procyclical effects of capital requirements is still in its infancy. Banks’ incentives to increase loan provisions during upturns could be strengthened. This would smooth profits and hence make capital requirements less procyclical. Ideally, loan provisions should internalise some of the cyclical risk by being based on longer term risk assessments. In addition, one could reduce the procyclical effects of capital requirements more directly by making the capital requirements themselves more flexible over the cycle.
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The Federal Reserve Act limits the types of securities the Federal Reserve may purchase in its OMOs, and under its Authorization for Domestic OMOs the FOMC only authorizes transactions in us government securities, which includes Treasury and agency securities.1 The staffs that have direct responsibility for executing OMOs are known as “the Desk.” Until late 2008, the primary role of the Desk was to influence the daily federal funds rate by adjusting the aggregate level of reserves in the banking system through transactions in Treasury securities arranged with designated primary dealers–counterparties operating in the 1 For the full Domestic Authorization, see the minutes for the first FOMC meeting of each year. The minutes for the January 2012 FOMC meeting are as follows: http://www.federalreserve.gov/monetarypolicy/ fomcminutes20120125.htm. BIS central bankers’ speeches 1 government securities market. OMOs typically employ an auction format to ensure competitive bidding and are structured in a manner that minimizes disruptions to market functioning. The Markets Group has several other critical transactional responsibilities as well. It is responsible for lender of last resort activities in the New York Federal Reserve District, operating the discount window as a source of short-term loans for banks in sound financial condition but otherwise in need of funding. As fiscal agent of the U.S. Treasury, the Markets Group plays a role in conducting Treasury auctions and facilitates payments and other financial services for the Treasury. The Markets Group also provides important payment, custody and investment services for the dollar holdings of foreign central banks and international institutions.
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at the time the Federal Law on Currency and Payment Instruments enters into force. If the revision of the Constitution is approved, it will become effective immediately, which means that the SNB will be able to transfer its excess reserves as soon as the implementing bills will be ready. Should the revision of the Constitution fail to pass, the excess reserves would remain on the SNB’s books, and the Bank would then have the responsibility of managing them with the objective of generating more profit for the government. Nothing fundamental would change as far as the possible selling of gold is concerned : gold sales would remain on the agenda. With regard to the sale of gold, the essential element is thus that the Federal Law on Currency and Payment Instruments be passed. The amendment to the Constitution is only important to the extent that it determines where the excess reserves will be administered. 4. Perspectives for the SNB’s gold policy Ladies and gentlemen, I have been talking to you for twenty minutes now without actually giving you an idea what the SNB will concretely do. Given the political uncertainty which still exists regarding the process of demonetisation of gold and the transfer of excess reserves, you will understand that this is neither the time nor the place to set out a sales programme.
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In the UK, regulatory reporting was introduced in 1974. Returns could have around 150 entries. In the Bank of England archives is a memo to George Blunden, who was to become Deputy Governor, on these proposed regulatory returns. Blunden’s handwritten comment reads: “I confess that I fear we are in danger of becoming excessively complicated and that if so we may miss the wood from the trees”. 12 Today, UK banks are required to fill in more than 7,500 separate cells of data – a fifty-fold rise. Forthcoming European legislation will cause a further multiplication. Banks across Europe could in future be required to fill in 30–50,000 data cells spread across 60 different regulatory forms. There will be less risk of regulators missing the wood from the trees, but only because most will have needed to be chopped down. In the US, regulatory reporting has a history going back to the early 19th century. Nationally-chartered banks began to submit quarterly returns after the formation of the OCC in 1863. In 1869, following a legislative amendment, these became “call reports”, so named because banks were asked to report on surprise dates to prevent window-dressing. The Federal Reserve Act of 1913 required all state-chartered member banks to file reports with the OCC and in 1917 responsibility for collecting these passed to the Federal Reserve. By 1930, these reports might contain around 80 entries. Today, regulatory reporting is on an altogether different scale. Since 1978, the Federal Reserve has required quarterly reporting by bank holding companies.
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Studies of the behaviour of doctors illustrate this pattern (Gigerenzer and Kurzenhäuser (2005)). Fearing misdiagnosis, perhaps litigation, doctors are prone to tick the boxes. That may mean over-diagnosing drugs or over-submitting patients to hospital. Both are defensive actions, reducing risks to the doctor. But both are a potential health hazard to the patient. For 7 Gigerenzer and Brighton (2009). BIS central bankers’ speeches 5 example, submitting patients to hospital increases significantly their risk of secondary infection. Hospitals are, after all, full of sick people. Doctors unencumbered by a complex rulebook will have fewer incentives to act defensively. They may also be better able to form their own independent judgements when diagnosing medical problems, using their accumulated experience. That ought to more closely align a doctor’s risk incentives with their patient’s. The same is likely to be true of other professions, from lawyers to policemen to bank supervisors. Of course, simple rules are not costless. They place a heavy reliance on the judgement of the decision-maker, on picking appropriate heuristics. Here, a key ingredient is the decision-maker’s level of experience, since heuristics are learned behaviours honed by experience. A dog will outperform a puppy at frisbee-catching because it has had time to fine-tune its “gaze heuristic”. An expert baseball player or cricketer will outperform a novice sportsman for the same reason. So too will an experienced doctor or detective or fund manager or shopkeeper. These are “Five Commandments” of decision-making under uncertainty. That description is apt.
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A greater “meeting of the minds” is warranted especially now that the New Basel Accord includes explicit disclosure requirements intended to promote greater insight into a bank’s risk profile. Likewise, the Basel Committee’s treatment of provisions and the valuation of financial instruments must keep pace with changes in the relevant accounting standards. These and other topics constitute areas where supervisors and the accounting profession must continue to work toward convergence. The members of the Committee believe that market discipline, and hence financial stability, is strengthened when accounting and disclosure requirements reflect sound risk management principles and are consistent with the control practices that banks adopt. Consequently, we recognise our responsibility to participate actively in the development of national and international accounting standards. I must confess that, in Spain, part of this 4 BIS Review 42/2003 responsibility is perhaps a bit easier for me than for some of my fellow members of the Committee, since the Bank of Spain is not just a bank regulator, but also the national accounting authority for banks. Where the development of international standards is concerned, the Committee and its member organisations devote considerable resources and our staff’s time to share our perspectives as supervisors with those who make the rules. But the discussions between supervisors and accountants cannot be a one-way street.
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Such a basis will also provide legal clarity regarding the necessary access to EUwide macro-prudential information as well as to supervisory data concerning individual institutions, subject to adequate confidentiality arrangements. The next steps towards the implementation of the de Larosière Group proposals will require a number of legal, institutional and organisational issues to be addressed. In this regard, the ECB stands ready to contribute to the necessary preparations in a constructive and timely manner. We look forward to the communication from the European Commission and the decision of the European Council in June that will lay the foundations of a new system of macro-prudential supervision in the EU. Speedy progress towards that goal is of the essence, for the strengthening of macro-prudential supervision in Europe is an important and urgent policy objective – and one which the members of this Committee have strongly supported in a consistent and, indeed, visionary manner. *** Madam Chair, honourable members of the Committee, I would like to thank you on behalf of the Executive Board and the Governing Council for our enriching exchanges of views over the past five years. Owing to the forthcoming elections to the European Parliament, today’s presentation of our Annual Report is the last before your Committee in its current composition. I have always appreciated your cooperation and our fruitful dialogue. Thank you for your attention. I am now at your disposal for questions. BIS Review 49/2009 5
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On that basis, it was possible to build a whole architecture of asset prices, whose relative riskiness is determined according to the intrinsic characteristics of assets and investors’ risk appetite. The important word here is “relative”. To price financial assets, markets need a basis – a risk free rate. That basis has now been shaken. Immediate consequences seem benign in the US. Markets have judged, and rightly so, in my view, that there is currently no alternative to US debt as the most liquid market and it remains the ultimate benchmark for assessing risk. So, if anything, the downgrade of US debt was followed by new inflows into Treasuries and a decrease in US interest rates across the yield curve. At the same time, however, a pervasive uncertainty has been created, which might be BIS central bankers’ speeches 1 responsible for the strong decline in confidence and equity prices that has occurred over the last weeks. In Europe, of course, sovereign credit risk has had more immediate and dramatic consequences, with an abrupt increase in sovereign spreads for peripheral countries following the July 21st statement. It remains difficult to foresee how, in the longer run, markets will assess debt sustainability in different countries and jurisdictions. That assessment depends on a complex process, where, together with economic fundamentals, subjective probabilities, self-fulfilling beliefs and other influences play a major role. The certainty that debt would be paid in full strongly anchored market perceptions in the past.
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While markets are currently rewarding those countries which liquefy public debt, they seem to be aware of some inflation “tail risks” and hedge themselves through gold and the CHF – whose prices have reached historical highs. At this stage, therefore, the euro area is paying a double price. One for its mistakes and one for its virtues. The mistake, for governments, was to allow the piling up of debt through unsustainable fiscal policies over a decade, and then to create ex nihilo a doubt as to their ability to pay those debts. And we are also paying the price for our virtue and our refusal to liquefy our debt through massive monetization of our fiscal deficits. Will our virtue be rewarded at the end? I believe so and, to explain why, I need to take a longer-term perspective. In the next decade, the world will be divided into two: on the one hand, advanced economies, with high absorption capacity, low savings and high debt with ratios between 85% and 100%; and, on the other, emerging economies, with high savings, low debt (around 30% GDP on average) and less absorption capacity. Our common prosperity will therefore depend on our ability to create stable channels and mechanisms of financial intermediation between those two parts of the world. That, in turn, will crucially depend on the existence of assets that can be considered safe stores of value.
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I should emphasise, however, that the Eurosystem projections are built on the assumptions that the sanctions against Russia will remain in place over the full projection horizon, that the intense phase of the war will continue until the end of the year with no further escalation, that disruptions to energy supplies will not lead to rationing in euro area countries, and that supply bottlenecks will gradually be resolved by the end of 2023. 1 The reduction owed to the fall in both the services sector component (down 2.4 points to 50.6, a 15-month low) and the manufacturing PMI (down 3.2 points to 46.1, the second consecutive month in contraction). 1 However, a prolongation of the war in Ukraine remains a significant downside risk for growth, particularly if energy supplies from Russia are suspended and result in rationing for firms and households. Likewise, the war could also further dampen confidence and aggravate supply-side constraints, while energy and food prices could remain persistently higher than expected. A faster deceleration in global growth would also pose a risk to the euro area outlook. Indeed, given the high uncertainty surrounding the outlook, the June projections are complemented by a downside scenario that reflects the possibility of a severe disruption to European energy supplies, leading to further increases in energy prices and production cuts.
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At the same time, economic activity continues to benefit from the reopening of the economy (which is underpinning spending on services, in particular in the tourism sector), a strong labour market, the support of the savings built up by households during the pandemic and fiscal policy support both at the national and European level thanks to the implementation of NGEU-funded projects. Against this backdrop, the Eurosystem projections published in June envisaged real GDP growth of 2.8% in 2022 (albeit with 2 percentage points (pp) relating to carry-over from 2021) and 2.1% in both 2023 and 2024. These projections represented a further downward revision. For instance, compared with the December 2021 projections, the GDP growth forecasts for 2022 and 2023 were down by 1.4 pp and 0.8 pp, respectively. Meanwhile, last week saw the publication of the ECB Survey of Professional Forecasters (SPF) for the third quarter of 2022, conducted in early July. The results show a fresh downward revision of real GDP growth expectations from the second quarter, down to 2.8% for 2022 and to 1.5% for 2023 (down 0.8 pp on the previous survey), followed by 1.8% for 2024.
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To the extent this reflects improved credibility it implies less of a need for policy to respond to one-off hits to the price level. 17 Data from Bordo and Eichengreen (1999), updated from OECD and IMF sources. 18 The capacity of fixed-exchange rate systems to experience genuinely inflationary shocks – those that move wage and price inflation jointly – is also evident in Chart 2. The correlation between wage and price inflation was +0.6 during the classical Gold Standard; under inflation targeting it’s been -0.2. That may also reflect a more volatile environment for real wages shocks (i.e. to the terms of trade and productivity). Nor are floating exchange rates a guarantee of stable inflation: during the 1970s and 1980s, when there was no stable nominal target at all, this correlation rose to 0.9. But inflationary shocks appear better contained with a domestic inflation target than an exchange rate or commodity peg. 10 BIS central bankers’ speeches Chart 13 Inflation more persistent under fixed exchange rates Chart 14 UK inflation persistence fell after introduction of inflation targeting 1.6 Estimated coefficient in regression of UK inflation on lagged inflation, 20 year rolling window Consumption deflator 1.2 GDP deflator 0.8 0.4 0.0 1962 1972 1982 1992 2002 2012 Source: Bordo and Eichengreen (1999), IMF and OECD. Note: Blue shaded area represents +/- 2SD around diamond central estimate of a panel regression; sample 1960-2010. Source: ONS and Hills, Thomas, Dimsdale (2010).
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In practice people may take time to react to real income shocks; it’s also possible they expect some of the recent declines in energy prices to be reversed 10. But, in the data, there’s no correlation between household saving rates and changes in real energy prices, either here or elsewhere in the OECD 11. This suggests their effects on income are in general matched by equivalent shifts in real spending. Note that the UK is not the only place where consumer confidence has risen in recent months (Chart 10). 9 This point was made in a recent speech by the Governor (Carney (2015)) and, in an article, by Kristin Forbes (2015). 10 Forward markets discount an oil price of $ at the end of next year, quite a bit higher than the current spot price though still well below where it was in mid-2014 $ and $ respectively). 11 In regressions of changes in saving rates on the contribution to real income growth of energy and food prices, the estimated coefficient is close to zero and statistically insignificant in all 17 OECD countries for which we have data. BIS central bankers’ speeches 7 Nor is it unusual to see stronger demand at a time when these survey measures of household inflation expectations are falling. Typically, these near-term expectations surveys track actual inflation 12.
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However, since the introduction of the inflation target in March 2001, the average correlation has been about zero. This is a remarkable result and may indicate that the Petroleum Fund has shielded the nominal exchange rate from movements in oil prices. Therefore, there is cause for some optimism regarding the possibilities of isolating the mainland economy from variable oil prices in the short and medium run. In the long run, however, we cannot insulate the real exchange rate from developments in the petroleum sector or the use of petroleum revenues. I will return to this later. An increase in oil prices may nevertheless generate expectations of increased petroleum revenue spending ahead, particularly if high oil prices are assumed to persist. Such expectations may exert appreciation pressures on the krone. The chart shows that future oil prices 6-7 years ahead have increased more than spot prices since January 2004. This sharp rise may help to explain some of the appreciation over the past year. In addition, there may be expectations that developments will be more favourable in the Norwegian stock market than in foreign markets when oil prices rise. This may also have contributed to strengthening the krone. However, when estimating the future value of the Petroleum Fund, the expected decline in the level of production on the Norwegian continental shelf should also be taken into account. In addition, there has been a tendency lately to overestimate production when looking a few years ahead.
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The Storting (Norwegian parliament) has approved a fiscal guideline for the use of petroleum revenues. It states that, in general, petroleum revenue spending shall be limited to 4 per cent, or the expected annual real return on the Petroleum Fund over time. This fiscal rule shall ensure that the use of revenues in the Norwegian economy is at a level that can be sustained over time. The usefulness of a fiscal guideline is that it gives weight to long-term considerations when addressing day-to-day economic policy challenges. The fiscal rule stabilises enterprises’ expectations concerning competitiveness and the krone exchange rate, thus preventing abrupt and pronounced swings in the structure of the economy. If the government authorities disregard the rule, enterprises will lose an important reference. A policy rule can make matters worse if economic agents have drawn up longterm plans on a faulty basis. The fiscal rule for the budget states that the government can use 4 per cent of the Fund over time. This year, around 6 per cent of the Fund is being used. The deviation partly reflects an unexpected shortfall in tax revenues from the non-oil economy in recent years. The government budget deficit is the difference between total revenues and total expenditure. They each account for about half of total GDP in Norway. Even small deviations from expenditure and revenue projections can have a major impact on the deficit. Exchange rate changes will also lead to fluctuations in the value of the Petroleum Fund.
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This cannot go on for ever, and if there is a sudden turnaround it could have substantial negative effects on the real economy. This applies in particular if a situation were to arise where house prices fall and households’ net wealth shrinks. Once households have reached a situation where they consider that they need to consolidate their balance sheets by reducing their debts, it is difficult to break off this process with the aid of monetary policy. This can be clearly seen in the United States right now, for instance. I do not believe in a wait-and-see strategy that could mean that the repo rate needs to be raised even faster further ahead. A slightly higher interest rate now could make households begin to adjust and contribute to a more subdued development. To me, this is a wellbalanced monetary policy. This is fairly self-evident, but let me nevertheless emphasise: My aim is of course as always to try to attain the Riksbank’s objectives – that inflation and inflation expectations should be firmly anchored around the target and that developments in the real economy should be stable. But to achieve this, I would like to take into account risks that I perceive exist and to put them in a slightly longer perspective than the usual forecast horizon – as I currently see good reason to do this.
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If inflation undershoots the target at the same time as resource utilization is lower than normal, should it not be possible to keep the repo rate lower and thus have inflation closer to the target during the forecast period and more quickly return resource utilisation to a normal level? As I have described, I think there are fairly convincing reasons for the repo rate path described in the September Monetary Policy Update. The Swedish economy is strong and to attain the target a couple of years ahead we need only to start easing up on the accelerator. Because this is exactly what we are doing. The repo rate is being raised from an extremely low level and the repo rate path implies that we will have a negative real interest rate for a good time to come. This cannot be regarded as a contractionary policy – we are not slamming on the brakes. I have expressed some concern at recent meetings over what a lower repo rate path might entail. One view that I have put forward on several occasions is that monetary policy must manage risk. In this context it may be important not to treat the forecast period as separate and independent, but to try to take into account how decisions made now might affect developments beyond the forecast horizon. Of course it becomes more difficult to comment with any great certainty on what will happen the further ahead one tries to look.
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However, the balance of risks is complex. The Norwegian economy still features high capacity utilisation. The rate of increase in consumer prices was slower than expected in July, at a year-on-year rate of 2.7 per cent. Measured from June, the total index fell by 1.4 per cent. The decline, however, primarily reflects the decrease in excise duties, notably the reduction in VAT on food and petrol taxes. Excluding changes in excise duties and energy prices, the rate of increase in prices, as calculated by Norges Bank, was about 2.6 per cent. At the same time, there is a shortage of labour and labour costs are rising at a fairly rapid pace. The rise in service prices where wages are a dominant factor moved up from 6.3 per cent in June to 6.9 per cent in July. Credit growth is also high and growth in household loan demand is still on the rise. Against this background, there is a risk that domestic pressures may translate into stronger inflationary impulses than we have projected. On the other hand, growth in the world economy has slowed markedly, with the risk of even slower growth and a longer recession. Around the beginning of the year, most forecasters expected that the slowdown in the US economy would be relatively short and that the effects on the rest of the world would be limited. This picture has now changed.
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At a US Congressional hearing, Peter Fisher of the Federal Reserve qualified the interventions as successful because they had contributed to improving market psychology and reducing the implied volatility in the options market. Sveriges Riksbank intervened in the foreign exchange market in June with the aim of strengthening the Swedish krona. The Riksbank found that the Swedish krona was weaker than implied by fundamentals. This was followed by an increase in interest rates. The Bank of England has seldom intervened in the exchange market after the UK left the ERM in 1992. The currency crisis in 1992 appears to have reduced their faith in interventions as an instrument. However, the Bank of England has made it clear that interventions remain an instrument at their disposal. Canada has had a floating exchange rate for 30 years, and has used intervention operations actively in the 1970s, 1980s and 1990s. However, in 1997 the Canadian central bank was not able to prevent the depreciation of the Canadian dollar, and since then has not intervened. Australia still uses interventions, and the Reserve Bank of Australia maintains that they have benefited substantially from their intervention operations during the period with a floating exchange rate. New Zealand has not intervened after introducing an inflation target in 1990. An evaluation report on monetary policy in New Zealand, written by Professor Lars E. O. Svensson, supports the Reserve Bank of New Zealand's assessment that interventions would hardly have made a significant contribution to increasing stability in New Zealand's economy in 4 recent years.
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In nearly all cases considered to date, this leads to the conclusion that expectations of economic agents are identical or will converge over time. While this approach has given us invaluable insights in a multitude of models and applications, it faces a major empirical problem: in practice, economic agents hold widely 1 Guiso, Jappelli, and Terlizzese (1994). 2 Guiso and Parigi (1999). 3 Manski (2002). BIS central bankers’ speeches 1 differing views about the future path of economic variables, as I will illustrate throughout these remarks. Thus, recent research has focused on alternative assumptions regarding the nature of expectations held by economic agents. Measuring subjective expectations directly can inform our modeling assumptions on the information sets available to agents, and on the nature of the expectations formation and updating process.4 There are many Bayesians in the audience today. However, for the benefit of those who are not as familiar with Bayesian terminology, let me quickly define what I mean by “subjective expectations” or beliefs. This term refers to the personal probability distributions that individuals hold over uncertain events. Apart from the laws of probability and rules about how beliefs are updated with the arrival of information, there are no restrictions on these probability distributions, hence the use of the word “subjective.”5 Further, individuals might act according to their subjective beliefs without being able to fully articulate in standard forms their underlying probability distribution. Thus, a need arises to elicit these views in order to understand behavior more fully.
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For example, in this month’s edition of the SCE we ask respondents what they expect the rate of inflation to be “over the 12‐month period between May 2018 and May 2019.” Our testing suggests that respondents understand this format better than that of the 5–10 year Michigan question; consumers are better able to provide their expectations over a specific time period in the future, and there is little value in asking them about a longer time horizon. In addition, we believe that the one-year two-year-forward horizon adopted in the SCE is better suited to measure inflation expectations at the medium-term horizon that matters most for central bankers, since monetary policy is expected to exert its full effect within that time frame.19 With regard to question wording, it is important to note that the Michigan Survey asks about changes in “prices in general.” The HIEP tested three alternative wordings of a potential inflation expectations question: we presented respondents with questions about the change in “prices in general” (the wording used in the Michigan survey), the change in “prices you pay,” and the “rate of inflation.” Compared with the “rate of inflation,” the phrases “prices in general” and especially “prices you pay” induced respondents to think more about their personal price experiences and to focus on specific price changes for individual items, such 17 The Michigan survey’s precise question format is as follows: First, respondents receive the question “What about the outlook for prices over the next 5 to 10 years?
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Put differently, there is the risk that the deterioration in pricing behavior might spread to other sectors of the economy. This situation necessitates a measured, gradual and predictable phase of monetary tightening. The measured and gradual nature of monetary tightening is important in face of an already moderating economic growth while having a monetary tightening that is predictable is important to prevent undesired fluctuations in financial markets. 6 BIS Review 82/2008 Dear Guests, I would like to stress once more. Macro-economic stability is one of the key inputs of sustainable economic growth. Macro-economic stability cannot co-exist with high inflation. Countries that concede higher inflation for the pursuit of economic growth in the short-term are bound to be deprived of both in the medium-term. Policies to attain price stability will entail a cost in the short-term. We need to pay this cost to achieve price stability and ensure sustainable and high growth rates. If we hesitate today and step back from our ultimate target of price stability, we will still face similar problems in the near future, but possibly in worse circumstances. In conclusion, disinflation in Turkey is an on-going process. The disinflation process was disrupted over the past two years due to the extraordinary effects of supply side shocks and inflation targets were overshot considerably. In this environment, the Central Bank of Turkey has made necessary assessments and reacted accordingly. Within the framework of the monetary policy adopted recently, the target has been revised.
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The Bank also has a role in developing the financial system to promote growth. I would like you to follow me now through the details of our role on growth and hope to leave you with more confidence that Thailand is in good policy-makers’ hands. My talk today will cover three areas. Firstly, I would like to share Bank of Thailand’s views on Thailand’s current growth potential. Secondly, I would like to walk you through the current economic conditions and illuminate the role of central bank in returning balance in these situations. And thirdly, I will address the classical yet very current challenge of lifting growth through boosting productivity. I will share with you the opportunities we see for Thailand, involving the structural changes that are now underway, and the cooperation by the central bank, public and private sectors that will transform these opportunities into sustainable long-term growth. Ladies and Gentlemen, Having outlined our plan for today, I would like to begin with the concept of growth potential and its application to the state of Thailand’s economy. What do we expect to see from a Thai economy achieving true growth potential? Two components. First is growth at full sustainable capacity. We would expect to see factories producing their optimum output while hotels have the maximum number of guests that can be served comfortably, and infrastructure from roads to banking system able to lend full support. Second is lifting the long-run growth trend.
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Thus, now more-than-ever, macro-surveillance process, early warning models, stresstesting, ever more vigilant risk-based supervision, and strong internal risk management by financial institutions will be instruments crucial for safeguarding our financial stability. In closing this introduction, I am certain that this seminar will be extremely useful and provide an important opportunity for building a close network amongst supervisors in SEACEN, as well as for fostering a closer cooperation between regulators in our region and the US-OCC. So, without further ado, let me declare the second SEACEN-OCC Advanced Seminar on Quantitative Techniques for Macro Surveillance and Determining Resilience of the Banking Sector open, and wish you all every success in this seminar, as well as in your career, and have a pleasant stay in Thailand. Thank you. 2 BIS Review 98/2007
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In Thailand, there is an acute problem of skill mismatch; that is, skills produced through formal schooling are found to be different from those which firms find useful. Ladies and Gentlemen, Japan’s direct investment here has contributed to skill improvement for Thai businesses and workforce, mostly through learning by doing, training and other knowledge transfers. But beyond that, to reduce mismatch in demand and production of skills, Japanese firms can play a direct and beneficial role. The solution is to break down the barrier between work and school early on. Firms can get involved in training vocational students while potential workers can get a glimpse of what’s really needed out there in the real world. If done well, I think it gives incentive for firms to invest in training these students because it gives them the opportunity to identify and select the best workers before they enter the workforce. To the students, there are potential gains as an incentive as well. With the opportunity to be trained by the best and getting to know its corporate culture first-hand, student trainees are more likely to compete for limited hires by improving their performance. This sort of apprenticeship program has long been practiced in Germany, and has been shown to reduce skill mismatch in the workplace as well as improve firms’ profitability. Practiced here, it could also reinforce mutual understanding between Thai workers and the ways Japanese firms do business. That said, human capital development takes vast and continuous effort over a long period of time.
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BIS central bankers’ speeches 7 GDP growth in the euro area are to some extent counteracted by the good development of the economies in the United States, the United Kingdom and China. In the United States, GDP grew rapidly during the second quarter, and labour market data indicate that developments will remain strong. Prior to the next monetary policy meeting, we will of course continue to monitor developments in Russia and Ukraine, and we will analyse what they may mean for economic prospects abroad. With regard to developments in Sweden, GDP growth was somewhat weaker during the second quarter than we were expecting in July. Household consumption and housing investment remained strong, while exports remained weak. The indicators we have received regarding growth give slightly mixed signals. The business tendency survey, which summarises the situation for the Swedish economy, fell somewhat in July. On the other hand, the purchasing managers’ index for the services sector for the same month increased substantially. One can also note that the outcomes for unemployment received for June and July on the whole have been somewhat lower than the July forecast. The inflation figures for June and July show that both the CPI and the CPIF increased somewhat faster than the forecast in July. As you may note, the information received since the monetary policy in July tends to point in different directions, and it is too early yet to say how monetary policy will be affected.
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This exceptional intervention was necessary because AIG had engaged in the highly risky business of selling credit protection over the past few years, which left it vulnerable and very exposed to a turnaround in the US housing market. The uncertainty stemming from this situation gave rise to the risk of a domino effect, affecting one financial institution after the next. Fears that this effect could be fuelled by price manipulations and speculation resulted in a restriction of short selling, first in the United States and then in many other countries including France, the United Kingdom, Belgium, the Netherlands, Italy, Germany, Austria and Australia. It was against this backdrop that the idea of an "overall solution" emerged, marking a change in strategy compared to the case-by-case approach that had prevailed until then. This was the underlying rationale for the Paulson Plan adopted on 3 October. Three remarks on the latter: • The general idea behind the Plan is for the Treasury to purchase currently illiquid assets. It aims to rid banks of the bad assets weighing on their balance sheets, and to eliminate uncertainty about their real value and, in turn, about that of the banks themselves. Indeed, under the current accounting framework, these assets are marked to market, which means that any uncertainty about their value affects that of the financial institutions themselves. • The way in which the Plan is to be implemented still remains vague. One essential aspect is the price at which assets are to be purchased.
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In contrast, a little inflation “greases the wheels” of the economy, helping it to absorb shocks. One example of that is in the labour market, where workers usually resist reductions in their cash wages when economic conditions deteriorate. This behaviour can prevent the inflationadjusted value of wages from declining when demand for labour is weak, leading to 2 The volatility of inflation fell by around four-fifths in the Inflation Targeting (IT) era compared to the pre-IT era. The volatility of real GDP growth fell by around one-quarter. See also King, M (2007), “The MPC ten years on”. 3 The UK’s CPI inflation rate of 0.3% is accompanied by PCE inflation of 0.2% in the US and HICP inflation of – 0.3% in the euro area. 2 BIS central bankers’ speeches unemployment. If that is the case, it may be better for the economy as a whole if firms’ real labour costs can adjust over time through increases in prices – a little inflation – instead.4 A positive average inflation rate also gives monetary policy space to respond to negative shocks by cutting interest rates. That’s because in normal times the “equilibrium” level of interest rates at which the economy would tend to settle without generating inflation reflects, broadly, the rate of underlying growth in the economy plus the inflation target. The lower is average inflation, the less scope there would be for monetary policy to reduce interest rates in response to shocks before they approach zero.
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Commercial paper rates in the market were high and the issuers wanted to extend the maturity of their obligations. But since that time, purchases have slowed sharply. Following the introduction of the CPFF, commercial paper rates in the marketplace dropped below the rates charged by the CPFF. As a result, issuance into the program has collapsed because many issuers can now raise funds more cheaply in the private market. About half of the maturing paper in the CPFF has not been rolled over. As a result, the amount of CPFF holdings, which peaked at around $ billion in mid-January, has fallen by over $ billion, to below $ billion. To date at least, the CPFF has worked as planned and has been very successful in rehabilitating the commercial paper market. Second, the Term Asset-Backed Security Loan Facility or TALF will provide balance sheet capacity directly to investors beyond the banking and dealer community. This program is designed to restart the securitization markets. The TALF is being rolled out in two stages. In the first stage, which I’ll call TALF Version 1.0, the Federal Reserve will provide non-recourse loans to investors against AAA-rated consumer asset-backed securities collateral. Primary dealers will serve as the contact point with these investors to make it easier for the Fed to interface with potentially hundreds of investors. The AAA-rated securities eligible as collateral for this non-recourse lending program are used to fund a wide variety of consumer and business loans, including student , credit card, auto and small business administration loans.
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Thus, if the monetary base is growing rapidly, as it has been over the past year with the growth in the Fed’s balance sheet, the argument is that this growth will ultimately lead to inflation. This concern is not well founded because the Federal Reserve now has the ability to pay interest on excess reserves (IOER), and this tool allows us to prevent excess reserves from leading to excessive credit creation. It works as follows. Because the Federal Reserve is the safest of counterparties, the IOER rate effectively becomes the risk-free rate. By raising that rate, the Federal Reserve raises the cost of credit because banks will not lend at rates below the IOER when they can instead hold these excess reserves on deposit with the Fed. Because banks no longer seek to lend out their excess reserves, there is no increase in the amount of credit outstanding, no increase in economic activity and no risk that excessive credit creation will fuel an inflationary spiral. In the event that the ability to pay interest on excess reserves for any reason proved insufficient or the excess reserves themselves had unanticipated side effects that the Fed wished to mitigate, we are developing a number of tools that can be used to drain reserves. Two such tools are large reverse repos with dealers and other investors and term deposit facilities for banks. Finally, the Federal Reserve could always drain reserves the old-fashioned way, by selling assets.
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The vast bulk of the Fed’s portfolio is highly liquid – currently we hold $ billion of Treasury securities, $ billion of agency mortgage-backed securities, and $ billion of agency debt against about $ billion of excess reserves. All the excess reserves could be mopped up by asset sales alone if that proved necessary. The Federal Reserve has been very aggressive in responding to the financial crisis. We have rolled out numerous new liquidity facilities and have engaged in lending activity under Section 13(3) of the Federal Reserve Act for the first time since the Great Depression. These actions have been successful in mitigating the risks of financial collapse and a more severe 4 BIS Review 122/2009 contraction in economic activity. The financial system is now healthier and the economy is recovering. But despite these successes, we need to be clear that what has happened to our financial system and the economy is wholly unsatisfactory, and that a broad range of regulatory policies and practices need to be recalibrated to address the shortcomings of our financial system. With inflation low and long-run inflation expectations stable, and our ability to remove monetary accommodation in a timely manner intact, our near-term focus should be to keep significant monetary accommodation in place for an extended period in order to achieve our dual objectives of maximum employment and stable prices. Thank you for your kind attention. I would be very happy to take a few questions. BIS Review 122/2009 5
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Ida Wolden Bache: FinTech, BigTech and cryptos – will new technology render banks obsolete? Speech by Ms Ida Wolden Bache, Deputy Governor of Norges Bank (Central Bank of Norway), Oslo, 11 May 2021. * * * Accompanying charts of the speech. Introduction “No state can endure without a well functioning monetary system.” The quote comes from the Constitutional Assembly at Eidsvoll in 1814.1 At that time, it was imperative to restore the monetary system and establish our own national currency. Two years later, Norway saw the birth of its first bank – Norges Bank. For many years, it was the country’s only bank. Today, more than 200 years later, Norges Bank is the bankers’ bank and forms the core of a network of small and large banks spread throughout the country. But the number of physical premises is steadily declining, and our national currency – the krone – is predominantly a number on a screen rather than a physical handheld object. And if things develop as some might believe, tomorrow’s financial system will not be made up of banks, central banks and national currencies – but of electronic signals that transfer cryptocurrencies – from one digital wallet to another. To quote a well know Norwegian businessman: “The direction is clear: finance will be disrupted as surely as fossil fuels will be. The question is not if, but when. "2 I think there is little chance that cryptocurrencies will make banks and Norwegian kroner obsolete anytime soon, but the financial system will change.
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But, I would be very cautious about extending last resort liquidity provision to financial institutions not engaged in banking activity, and where the particular justification for it, based upon banks’ distinctive functions and the distinctive characteristics of banks’ balance sheets, did not clearly apply. While I do not think such intervention can, realistically, be excluded altogether, I am concerned that an unduly liberal interpretation of systemic risk would increase the scope for moral hazard and ultimately weaken the safety and soundness of the financial system as a whole. Conclusion Mr. Chairman, my answer to your question Are banks still special? is essentially that while in some respects they may be less special than they were, they remain special nonetheless. They remain special in terms of the particular functions they perform - as the repository of the economy’s immediately available liquidity, as the core payments mechanism, and as the principal source of non-market finance to a large part of the economy. And they remain special in terms of the particular characteristics of their balance sheets, which are necessary to perform those functions - including the mismatch between their assets and liabilities which makes banks peculiarly vulnerable to systemic risk in the traditional sense of that term. Perhaps the day will come - and I do not at all exclude the possibility that other financial activity will continue increasingly to be carried on alongside banking activity, even on the same balance sheet, indeed I expect that to happen.
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We must not again find ourselves in a position where the authorities in different countries are developing as they go along how capital support should be provided: what triggers it, its terms, and who pays. I have aired the possibility of eventual losses falling on the surviving banking system, as a way of avoiding burdening the general taxpayer and as an incentive for firms to recognise and act upon their interest in the health of the system as a whole. But the more important point is the need to have a plan. And of course the fiscal support comes after drawings in any private sector provision of contingent capital. Banking and the credit system: might there be macroprudential instruments? At this point, I should issue another caution: that however all those issues are resolved, the banking-structure debate is resolved, I doubt they could prove sufficient to rule out bouts of instability, even crises, in the future. That is because I am doubtful that the tendency to excess can be curbed solely by addressing the circumstances of individual firms. Booms are spurred by plausible illusions and collective-action problems. The current crisis has, in my view, been at root a crisis of liquidity – of an over abundance of liquidity in the upswing, succeeded by a drying up of liquidity during the crash. Usually, material rises in asset prices are initially triggered by reasonable perceptions of a favourable shift in fundamentals.
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The network of trade unions and branches would provide the life insurance co-op with a clear advantage over private enterprise. 4. To ensure that the co-op would succeed, the realist in Dr Goh laid down a few principles for its operation. First, the co-op must be fully competitive with private enterprises and cannot expect privileged treatment from the Government. Second, the co-op must have effective management. Third, all levels of staff should be recruited based on merit and not affiliations with the labour movement or government. It was the steadfast adherence to these sound principles that has kept INCOME successful over the past 40 years. The growth of Singapore’s insurance industry 5. At INCOME’s 30th anniversary celebration, I had sketched out the changes in the global financial landscape, and how MAS had to liberalise the domestic insurance industry. Reputable foreign insurers were allowed to set up in Singapore or enter into strategic alliances with existing local insurers. The hope was for the entry of new players to engender competition, which would in turn promote greater innovation and raise the efficiency of the incumbent insurers. MAS also worked on deepening the local talent pool and fine-tuned the already prudent regulatory framework. 6. Ten years on, these efforts have yielded significant results. The Singapore insurance industry, which saw a number of acquisitions, consolidations and new entrants, experienced strong growth, with total assets tripling to $ over the past decade. The industry has also matured in terms of the breadth and depth of products and services offered.
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Central bank responses have also tended to adapt themselves to the structure of the respective financial systems, and to the specific dysfunctions and tensions. For instance, the fact that the banking sector plays a predominant role in channelling credit in the euro area economy — compared with the Anglo-Saxon model which is underpinned to a greater extent by the capital market — was from the outset a distinguishing feature in the design of the ECB’s response. Also, set against the strategies deployed by the Federal Reserve or the Bank of England, based principally on “quantitative easing”, the Eurosystem’s response has been more complex over time, adapting itself to the difficulties that have arisen at the BIS central bankers’ speeches 1 different stages of the euro area crisis, though seeking always to act on the segments of the transmission monetary policy mechanism that were seen to be most impaired. The perception that the interbank market had ceased to operate as an efficient liquidity distribution mechanism between banks meant that the liquidity-provision policy had to become more flexible. And, when the crisis worsened in September 2008, far-reaching changes had to be made to the monetary policy operational framework, to allow the ECB to meet the system’s gross liquidity needs, with a substantial expansion of the size of its balance sheet.
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Ex post assessments of policies are admittedly much further along in their development at the practical level, and their benefits as a part of the overall public policy process are wellestablished in the most advanced democratic societies. Yet they also come up against theoretical and empirical limitations that we cannot conceal. On this front, Spain is lagging behind our peers. And this is not because of a lack of know-how but rather, in my opinion, on account of the existing limitations in the current administrative, political and social ecosystem which do not sufficiently encourage the insertion of the assessment process into the public-policy-programme design and review cycle. True, there have been some promising developments of late, such as the mandatory periodic evaluations to assess the functioning of the minimum income scheme. Yet in much of the Spanish administrative apparatus there are still significant technical hurdles to building potential ex ante or, at least, ex post assessments into the design of public programmes. These impediments not only limit the general government’s own ability to conduct thorough assessments, but also prevent the findings of external assessments from being fully harnessed. Political action to address them is also an important long-term policy; for example, the creation of technical posts and hiring mechanisms that attract people with adequate training. Setting up agencies without long-term hiring plans does not work. Nor is it just a question of public-sector shortcomings.
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Citizens and markets are too often unsure about our capacity to act jointly in a spirit of common responsibility. We should prove them wrong. Let me conclude and come back to the subject of our debate, your resolution on our Annual Report for 2014. Let me assure you that we are reading this document closely. It reminds us of our duty as a public institution to conduct our business in a transparent and accountable manner. The publication of the diaries of Members of the Executive Board that starts this month is only one example of this. I am now looking forward to the debate and thank you for your attention. BIS central bankers’ speeches 3
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The majority of the key measures relating to securities market in the Action Plan are expected to be adopted before the end of this year or the spring 2004. Discussions and consultations continued in several crucial areas such as the overhaul of the Investment Services Directive - a cornerstone of the FSAP and a key area in terms of European financial integration and investors protection, post trading activities (clearing and settlement), the review of the capital requirements that apply to financial institutions and a framework for the supervision of the reinsurance sector. 2. Financial integration is an ongoing process with renewed challenges in a constantly changing environment We can easily measure the significant progress that have already been made in terms of financial integration. However, and this is the second topic I wanted to touch upon, in a constantly changing environment, and as the integration process deepens, new challenges arise that need to be addressed and taken duly into account in our reflection on the integration of European financial markets. Preserving financial stability is obviously among those challenges. In that regard, there are two specific and crucial issues on which we need to concentrate our efforts: the deepening of co-ordination among financial supervisors and the restoration of public confidence in financial markets. 2.1 Central banks, as well as public authorities and market participants, have a collective responsibility to find the ways to ensure that market globalisation goes along with financial stability. Financial stability is a complex concept.
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Overall, some of the main floating currencies may end up bearing a higher share of the adjustment on their shoulders than they should. Maintaining integrated global capital markets in an environment where such differences persist might not be sustainable over the long term. An orderly unwinding of global imbalances might therefore imply greater flexibility from countries with large current account surpluses and fixed exchange rates. I will conclude on a matter of debate for international financial stability for the future. As I have said, financial systems have become more efficient as a result of globalisation and innovation. But have they become more resilient, that is, more capable of absorbing shocks? None of us has the answer to that question now, but it will be interesting for central banks BIS Review 140/2007 3 and regulators to monitor financial developments in the coming months, in search of clues. Ladies and gentlemen, thank you for your attention. 4 BIS Review 140/2007
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The Zero Bound on Interest Rates and Optimal Monetary Policy, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 34(1), pp. 139-235. Fiorentini, G., A. Galesi, G. Pérez-Quirós and E. Sentana (2018). The rise and fall of the natural interest rate, Working Paper No 1822, Banco de España. Galesi, A., G. Nuño and C. Thomas (2017). “The natural interest rate: concept, determinants and implications for monetary policy”, Analytical Articles, Economic Bulletin 1/2017, Banco de España. García-Posada, M., S. Mayordomo and S. Ongena (2018). Holston, K., T. Laubach and J. Williams (2017). “Measuring the natural rate of interest: international trends and determinants”, Journal of International Economics, No 108, pp. 59-75. 18
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have also co-ordinated international efforts to tackle the problem in a comprehensive manner. This is essential given the trans-national nature of the threats. 8. The FATF – which is the international standard setting body – has also sought to develop more guidance relating to various sectors and entities. Many of you will be familiar with the FATF Recommendations on money laundering, terrorism financing and proliferation financing. In 2012, 1/5 BIS central bankers' speeches the FATF enhanced its Recommendations to put emphasis on effectiveness. That is, merely having rules in place is not enough. FATF also developed a more systematic framework for peer reviews. 9. Let me turn to developments in Singapore. 10. We have a comprehensive legal and regulatory framework, in line with global standards. We will continue to enhance our Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regime. 11. Last year, the MAS decided to consolidate some of our supervisory resources into a single AML department so that we can further deepen our technical expertise and focus in this area. This will allow us to better streamline supervisory efforts across various sectors of finance such as banking, insurance and capital markets. At the national level, the AML Department coordinates AML/CFT strategies across all economic sectors, together with other government agencies. 12. The financial sector is a critical component of our national AML/CFT defences. MAS’ framework involves four key elements: (a) Progressive Regulations (b) Intensive Supervision (c) Rigorous Enforcement (d) International Co-operation and Industry Partnerships 13. Firstly, on Regulations.
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Zeti Akhtar Aziz: Key issues confronting the financial sector in Malaysia Keynote address by Mrs Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Financial Industry Conference 2009, Kuala Lumpur, 17 November 2009. * * * It is my great pleasure to welcome you to our financial industry conference for this year. This conference takes place at a time when the global financial landscape is experiencing fundamental change. Even as we meet, events continue to unfold in directions that are likely to fundamentally alter the way in which financial institutions conduct their business. Reforms to strengthen the foundations of financial stability are wide-ranging to improve the supervision and regulation of financial institutions, and the institutional arrangements for coordination and cooperation in the area of surveillance and crisis management within and across jurisdictions. This Conference is organised by Bank Negara Malaysia to engage in constructive dialogue with the industry on developments affecting the international and domestic financial industry, focusing in particular on implications for financial institutions in Malaysia. Economic developments and outlook After a challenging beginning to this year, Malaysia is now gradually moving on a path of recovery supported by strong macroeconomic fundamentals and a sound financial sector. Economic activity has continued to show a marked improvement in the third quarter, with positive growth expected in the fourth quarter.
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The arrival of the euro marks a profound and almost certainly irrevocable change to the financial landscape – perhaps the most important event in the international monetary system since Bretton Woods in 1944. Instantly, a major new reserve currency has appeared; indeed the euro is already being used in international transactions more extensively than any currency other than the dollar. As the most international financial centre anywhere in the world, London’s business has already been profoundly affected by the euro. This is because, although the UK is ‘out’, London is ‘in’. The conversion weekend – the changeover from participating national currencies to the euro in wholesale BIS Review 43/1999 2 markets at the beginning of this year – was one of the biggest logistical operations that the London market has ever undertaken. It was also arguably more complex in London than in some countries in the euro area, because London traded in all the euro area national markets, and they all changed over to the euro in slightly different ways. And, though hard numbers are difficult to come by, we are confident that London is maintaining its market share. In exchange traded short-term interest rate derivatives – one of the few areas where we have precise figures – LIFFE has around 80% of euro business. On the London Stock Exchange, over 40% of turnover in the first two months of this year was in stocks of firms in the euro area.
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For that purpose, they will still want low cost trading and settlement mechanisms that minimise their exposure to counterparty risk and the impact on their balance sheets. So there are perhaps some tensions between the various forces at work here. To take another example, economies of scale in trading, clearing and settlement suggest that to minimise costs firms should encourage consolidation and integration of these activities within a market. Yet the major firms have, understandably, been very reluctant to allow the dominance of a single supplier. For example, EBS (Electronic Broking System) was set up by the major banks to offer an alternative system for foreign exchange trading. Ladies and Gentlemen, let me finish by saying that it is difficult to draw firm conclusions about the future structure of the financial services industry. If it was, strategic decision making would be easier than it seems to be. But financial service businesses based in the UK start from a strong position, and are well placed to thrive in an environment that will evolve at an increasing pace, become even more competitive, and place an even greater premium on innovation. The Bank of England will monitor and analyse the developments very carefully – both because we want UK financial services to thrive, and because in the pursuit of our financial stability responsibilities we need to be able to spot potential problems as quickly as possible. BIS Review 43/1999 6
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Household debt has increased at a faster pace than income in the last ten years. Norges Bank’s calculations indicate that the sharp rise in house prices in recent years may explain a large share of debt growth. Higher house prices have a fairly long-lasting effect on household debt growth. As a result, credit growth will remain high for a fairly long period even though the rise in house prices is expected to slow. Given the assumptions underlying our projections, it is likely that debt will continue to grow at a faster pace than disposable income through the entire projection period. As a result of high credit growth, the household debt burden has increased over the past year. The debt burden is currently record high. Due to unusually low interest rates, the interest burden is, nevertheless, relatively low. A normalisation of interest rates will increase households’ net interest expenses, but according to the projections the interest burden will not be higher than it was at the end of the 1990s. If there are expectations of persistently low interest rates, there is a risk that the debt burden may increase more than assumed in the projections. Net interest expenses will then also be higher than assumed. In addition, households will be vulnerable if unexpected disturbances result in higher than expected interest rates. Challenges ahead Oil gives us an economic base that is not available to many other countries.
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If oil prices remain as high for the foreseeable future, the funding requirement will be somewhat lower. To base decisions on this, however, would be a very risky strategy. Even though Norway’s petroleum wealth is substantial, it is our human resources that account for most of our national wealth. Even a small increase in the “return” on human capital might generate considerable gains. The return on this capital partly depends on our pension schemes and the application of social security rules. These should be designed in such a way that they provide incentives and opportunities to work. Labour market legislation must also promote production and employment. In May, the Storting (Norwegian parliament) deliberated the Pension Commission’s proposals for reforming the national insurance system. There was agreement on the main points but the specific design remains. If we succeed in reducing the growth in pension expenditure through a modernised national insurance system and other reforms, this will be an important contribution to addressing the fiscal challenges we are facing. This BIS Review is available on the BIS website at www.bis.org.
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Their business model is fascinating, Quaker-even, in its orientation. They offer only basic banking services, mortgages and small business loans, to people in a tight, locally-defined catchment area. All credit decisions are taken locally by people, not centrally by a computer. No bonuses are paid and no one has a sales-target. When the whole firm out-performs, a contribution is made to a pooled fund which is invested on employees’ behalf. The fruits of success are distributed equally and gratification is deferred. 6 BIS central bankers’ speeches For banking, this is back to the future. If that sounds attractive, then it is down to us – not regulators, not politicians, you and I – to deliver it. If as bank customers we want to change the culture of banking, then we should start by supporting those banks who are delivering that change. Putting your money where your mouth is would deliver far greater and more durable change than any amount of banker-bashing. Already there are some encouraging signs of the winds of change blowing through the system, not just from the new entrants but among the UK’s oldest banks too. The new heads of the UK’s biggest banks have committed to restoring trust in their institutions and improving their social usefulness. And those words are beginning to turn into actions. Barclays and today Lloyds are seeking to change their sales-oriented culture, returning to their Quaker roots. There is the quiet, but unmistakable, sound of a leaf being turned.
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At the same time, the ballooning of trading activities was starving basic banking of resources. In consequence, the offering to bank customers became a rather different one. The humble, regional loan officer was pensioned-off, replaced by a centralised credit risk model which neither answered back nor required a pension. Branches were closed in an effort to contain costs. Banking became a transactional business, underpinned by a sales-driven, commission-focussed culture. The down-escalator Nonetheless, as long as asset prices were rising, the cheap credit strategy seemed to be working like a dream. For those who had borrowed, debt was being inflated away, not by the traditional route of goods price inflation but by asset price inflation. The world was experiencing the biggest bank bubble, perhaps in its history. In 2007, that bubble burst. Asset prices and balance sheets collapsed. The dream turned into a nightmare, as asset price deflation combined with high debts to put many balance sheets underwater. As the most leveraged institutions on the planet, banks were deepest underwater. To prevent those institutions sinking without a trace, governments were forced to ride to the rescue. This support came from both governments and central banks, in both cases underpinned by the tax-payer. All in, this support to the financial sector amounted to perhaps as much as two-thirds of annual GDP in the UK and US, somewhat less (but still rising) in the euro-area. Those government transfers were not shared equally even across the financial sector, with a strong skew towards institutions deemed too-big-to-fail.
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What we saw in the international financial markets—after the bond markets’ crash in 1994 or the Mexico/Barings unrest in 1995—is an interaction between market tendencies in a more limited sense and weak public finances or other credibility problems. High international interest rates and currency unrest have aggravated the problem of public finances, BIS Review 56/1997 -7- so that on these occasions economies such as Sweden’s have moved from a virtuous to a vicious circle. Examples of how one could analyse exchange rate developments in the above terms can also be found in events of the last half-year. An explanation of developments with respect to the krona has to do with the position of the Swedish and continental economies in the business cycle. In recent months the dollar and the pound especially have appreciated relative to continental currencies. Monetary policy in the USA and Great Britain has been relatively tight. (Figure 4). This is still not the entire explanation. The krona has also fallen somewhat against continental currencies, especially during the winter and spring. In part, this has coincided with concerns with respect to the EMU process, possibly strengthened in Sweden’s case because Sweden’s position on the EMU issue is unclear. In addition there has been some uncertainty about the steadfastness of long-term economic policy connected with, inter alia, continued high unemployment. The studies that have been done by the Riksbank indicate that there is room for an appreciation of the krona.
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One of the strengths of the UK monetary policy framework is that MPC members are individually accountable for their decisions and votes. The resulting expression of different views, and implied necessity for debate among them, guards against the emergence of ‘group think’ and thereby helps improve the robustness of final policy decisions. Given different appraisals of the economic situation and outlook, these different views reflect different assessments of how the MPC should act to achieve its common goal. Because, even if MPC members are individually accountable for their decisions, they don’t get to choose the MPC’s objectives. They are individually responsible for the means, but not the ends, of monetary policy. The ends of monetary policy are handed to the MPC in the form of its remit, which achieves democratic legitimacy through its roots in legislation approved by Parliament. [4] That remit has three main elements. First, it establishes the primacy of price stability in the mandate for UK monetary policy. Second, that primacy takes concrete form in the 2% inflation target, which holds at all times. And third, the remit requires the pursuit of the inflation target to be achieved sustainably in the medium term, while avoiding excessive and undesirable volatility in output and employment. Given the current situation, pursuit of this remit faces risks on both sides.
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The SNB in the centre of political debate Nowadays, credibility is even more important because of the fact that financial markets are extensive and closely linked. In the past, central banks were able to demonstrate their regulatory power by intervening in markets to influence rates and prices, particularly exchange rates. These days, they face global markets where the relative paucity of their means requires them to use tact rather than force to achieve their objectives. To this end, they depend upon their credibility. This smoothes out price volatility and makes it possible for monetary decisions to impact fully on market expectations. In other words, credibility is a precious monetary policy asset. We need to devote all our efforts to maintaining it. The SNB cannot merely rely on the good results it has achieved in the past. It must be able to convince markets of its determination to deploy all the means at its disposal to maintain monetary stability in the country, now and in the future. Nowadays it is generally recognised that a central bank is only credible if it can deploy its resources without having to obtain prior authorisation from the government, and without the risk of being penalised by the state authorities. This is why it is essential that a central bank be independent. In Switzerland, the independence of the National Bank is guaranteed under article 99 of the Federal Constitution and article 6 of the National Bank Act. This legal framework is sufficient. However, credibility is not merely a matter of legal independence.
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Keynote address by François Villeroy de Galhau, Gouverneur de la Banque de France, Official Monetary and Financial Institutions Forum webinar, 25 September 2020 « ROLE OF CENTRAL BANKS IN THE HEART OF THE ECOSYSTEM i » Contact presse : Mark Deen ([email protected]), Déborah Guedj ([email protected]) Page 2 sur 10 Good morning and welcome to this webinar, jointly organized by the Official Monetary and Financial Institutions Forum and the Banque de France. What better way to demonstrate the digital transformation than holding an event in cyberspace. It has been common in recent years to hear about disruptive technologies but over the past 6 months, information technology has instead been a crucial source of continuity in a highly disrupted world. Digitalization is one among many factors transforming central banking and this will be my broader theme this morning. The ECB Strategic Review rightly launched by Christine Lagarde, with an explicit list of challengesii, is the opportunity to reflect on how the Eurosystem should respond to them. The shocks that have hit the economy in the past decade have been unprecedented, but in hindsight, many long-term structural shifts were occurring that have caused the unstable and complex situation we face today. Global natural interest rates had already been falling since the early 1980s driven by the demographic transition and risk-aversion in key emerging markets. Digitalisation and globalisation, combined, have been pressing for “lowflation”. Financial vulnerabilities were also steadily, but invisibly, rising since the socalled Great Moderation.
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Svante Öberg: Economic conditions for wage formation Speech by Mr Svante Öberg, First Deputy Governor of the Sveriges Riksbank, at the National Mediation Office, Stockholm, 16 June 2011. * * * The Riksbank’s task is to maintain a low and stable level of inflation. But the development of wages affects inflation and inflation affects the development of wages. Wage formation and monetary policy are consequently connected, and, consequently, the Riksbank monitors wage formation with great attentiveness. The message of my speech today can be summarised by two points: Wage formation has worked well since the mid-1990s, and my assessment is that it will continue to work well in the years ahead. But if wage increases were to be slightly less than the approximately 3.5 per cent per year that the Riksbank estimated in April, not only inflation and unemployment could be lower, but so could interest rates. I will start by taking a look back at wage formation over the last 40 years. Following this, I will address the economic conditions for wage formation in the years ahead. I will base this on the Riksbank’s most recent forecast for Sweden’s economy, from April. A look back at wage formation over the last 40 years Wage formation did not work well in the 1970s and 1980s Following the “record years” of the 1960s, a period of weaker development for Sweden’s economy began in the mid-1970s.
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But in the long term, this strategy was unsustainable. Expectations that increased costs could be compensated for though devaluations weakened the incentive for restraint in price and wage formation. Put rather simply, for a devaluation to be successful, price and wage increases after the devaluation must return to the same level as among competitors. Sweden never succeeded with this in the 1970s and 1980s. BIS central bankers’ speeches 1 The two larger devaluations of the early 1980s were followed by the deregulation of the credit market in the mid-1980s. This was followed by the dramatic expansion of credit and rapidly increasing property prices. This led to the overheating of the Swedish economy, a property bubble that eventually burst, and, subsequently, the banking crisis of the early 1990s. Following increasingly persistent speculation on a new devaluation, the fixed exchange rate was abandoned in November 1992. Wage formation has worked well since the mid-1990s Since the mid-1990s, conditions for the strong development of the Swedish economy have improved significantly, compared with the 1970s and 1980s. In particular, three important changes have taken place. Firstly, the framework for fiscal policy has improved. After the crisis and the large public finance deficit at the start of the 1990s, a new fiscal policy framework was established.
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25 All speeches are available online at www.bankofengland.co.uk/news/speeches 25 When there is an economic shock, the FPC can release the CCyB to 0%, reducing banks’ capital requirements. This frees up capital to absorb losses and preserve lending capacity. By continuing to lend, banks help to cushion the economic shock, and promote a quicker economic recovery. That is, the ability to cut the CCyB reduces GDP-at-risk, improving overall welfare.27 To give you some idea of scale, a cut in the CCyB from 2% to 0% today would preserve banks’ capacity to lend to UK households and businesses by £ By comparison, net lending was around £ over the past year. This is a stark departure from the pre-crisis framework. Banks’ capital requirements were determined by microprudential supervisors focussed on the safety of individual institutions. When shocks hit, this incentive created by a purely microprudential objective was more likely to motivate supervisors to conserve capital at all costs, with the consequence that banks restricted lending and exacerbated the macroeconomic downturn. The CCyB also supports the central GDP forecast by ensuring banks do not have to carry at all times sufficient capital for an elevated risk environment, with the associated knock-on to borrowing costs, investment, and output. For example, Bank of England work suggests that - had the current capital framework been in place before the crisis - the CCyB would need to have been between 3.5% and 5% to absorb losses.
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The key difference is that the inflation target is symmetric – the monetary policymaker’s loss grows equally when inflation is either under or over the target, whereas the macroprudential policymaker’s loss function is asymmetric – increases (ie deteriorations) in GDP-at-risk are far more costly than the benefits of the reductions in GDP-at-risk. The relationship between the primary objective of financial stability and the macroprudential policymaker’s loss function can be represented by a decreasing and convex function, 𝑓(·). This means the marginal gains from taking action to protect financial stability grow as GDP-at-risk increases. Conversely, the marginal benefit from reducing GDP-at-risk falls as tail risks decline. This is illustrated in Chart 7. Financial risks increase moving along the curve to the right. A policy to reduce GDP-at-risk (lines A) is more valuable to the policymaker at higher levels of GDP-at-risk (line B) than lower levels (line C). The weight the macroprudential policymaker places on the central GDP forecast relative to GDP-at-risk is also determined by 𝜙 (“phi”). 𝜙 is analogous to the monetary policy’s 𝜆, the weight monetary policymakers place on output stabilisation relative to inflation stabilisation. 𝜙 is strictly greater than 0, as dictated by the “stability of the graveyard” clause in the Act that the FPC should not take action detrimental to medium-to-long term growth.13 In its annual remit letter, the emphasis the government places on this clause, and therefore the FPC’s secondary objective, can be thought of as changing 𝜙.
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Having more money on deposit than is covered by the deposit 4/5 BIS central bankers' speeches guarantee scheme involves risk. Perhaps new private payment solutions may be able to offer some of these characteristics, but a possibility which is also being discussed is the introduction of electronic central bank money – in addition to cash. This possibility raises many questions which Norges Bank and other central banks are trying to answer. This is a long-term process and we do not yet know what the answer will be. Conclusion The Norwegian payment system was digitalised at an early stage and this has benefited private individuals, businesses and banks. We can be justifiably proud of our payment system. Digitalisation is now going through new phases. The deliveries of customer services and the underlying infrastructure are being separated from one another, and we are witnessing the arrival of new market entrants. Global platform providers are interested in the payment market. We must make full use of the opportunities to improve the payment system and we have made a start. Further changes will come. Today I have emphasised some of the tasks which the industry and Norges Bank must solve in the coming years: Introduce instant payments and develop a better solution through the BRO project. Mobile instant payments and BRO. Agreement on a single alias register as a common infrastructure. A more coordinated and systematic effort to reduce cyber risk. Managers and owners must be aware of their responsibility, also when operations are outsourced.
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Clearly, there is room to further unlock the potential of SMEs in Malaysia. While the banking system remains the main provider of funds to support the activities of the SMEs, there is the tendency for this system to focus on the more established SMEs. It can also be argued that the banking institutions also lack the appropriate skills and experience to develop and nurture the SMEs. This is where the presence of DFIs is so critical, that is to provide the complementary services, both financial and non-financial, particularly to support viable but smaller SMEs which are unable to obtain financing from the banking institutions. In Malaysia, there are at present two major DFIs specialising in supporting the development of the SMEs. These are Bank Pembangunan dan Infrastruktur Malaysia Berhad and the Credit Guarantee Corporation (CGC). Each of these DFIs has been assigned the specified mandated roles in assisting the SMEs in Malaysia. Bank Pembangunan is entrusted with the mandate of promoting entrepreneurial development by not only providing financial services to the SMEs, but also assume the nurturing and developmental role through the provision of advisory and consultancy services to this targeted group. Meanwhile, the CGC is mandated to assist the SMEs that lack track record and collateral to have access to financing, by providing credit guarantees to enhance the SMEs' accessibility to credit facilities.
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Thomas J Jordan: A changing role for central banks? Speech by Mr Thomas J Jordan, Vice Chairman of the Governing Board of the Swiss National Bank, at the Welcome Event Master of Banking and Finance, St. Gallen, 22 September 2010. * * * I would like to thank Dr. Claudia Strub and Till Ebner for their valuable support in drafting this speech. Introduction The economic cost of financial crises is enormous. The recent crisis highlighted the extent of systemic risk and thus the overriding importance of a stable financial system. It also demonstrated the inadequacy of the instruments and measures used until now to ensure financial stability. More effective measures are needed to check and prevent systemic risk. The key question is how should – or can – this be achieved in the future? In my talk today I would like to address this question by focusing on the role of central banks. Specifically, I will endeavour to answer the following question: To what extent will the lessons learned from this crisis affect or even alter the future role and tasks of central banks? I intend to examine this from three perspectives: In the first part of my talk, I will examine the extent to which central banks need to undertake a fundamental review of their instruments and objectives in the light of recent events. In particular, there is a need to analyse the effectiveness of the monetary policy strategies and instruments used to date, especially in periods of crisis.
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In my view, monetary policy measures and instruments alone are inadequate for the task of effectively checking and preventing systemic crises. In the second part of my talk, I shall therefore focus on the regulatory response to deal with potential instabilities within the financial system. One possible response to the inadequacies highlighted by the crisis would be to strengthen macroprudential supervision and regulation. In this case, the interaction between these measures and monetary policy would have to be borne in mind. Thirdly, institutional aspects play a key role in the restructuring of the regulatory environment. I will outline these briefly in the final part of my talk. Monetary policy after the crisis Let me start by reviewing the objectives and instruments of central banks in the light of recent events. Comparing today’s world with the situation a few decades ago, it becomes evident that much has changed. Deregulation of the financial markets has increased and globalisation has progressed extremely fast – in the real economy as well. The brisk level of trading made a significant contribution to the long-lasting worldwide upswing in recent years. This was supported by the credible policies pursued by central banks, which increasingly prioritised the goal of price stability, thus contributing to a global reduction in the level and volatility of inflation. The battle against high inflation appeared to have been won. Overall, this led to firm expectations of low inflation and a dramatic drop in risk premia in virtually all areas of the financial markets.
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Anita Angelovska-Bezoska: Statistical implications of the new financial landscape Remarks by Ms Anita Angelovska-Bezoska, Vice-Governor of the National Bank of the Republic of Macedonia, at a panel discussion at the 8th IFC Conference “Statistical implications of the new financial landscape”, Bank for International Settlements, Basel, 8–9 September 2016. * * * Contributors to the note: Ana Mitreska and Maja Andreevska. Since the burst of the crisis, central banking community has been providing unprecedented monetary stimulus with a view of influencing financial conditions and thus reviving the growth. The measures have gone far beyond the pre-crisis mode of operation. If conducting a monetary policy in the pre-crisis period seemed like steering a ship with rudder being enough powerful to protect against the waves, the waves that emerged in 2007–2008 were too strong and reliance only on the traditional instrument posed a risk of sinking. Thus, when the central banks approached/reached zero-lower bound, they were compelled to start experimenting with new policy tools such as balance sheet policies, forward guidance and in more recent period, even more extremely, with negative policy interest rate. Has this monetary accommodation served the purpose of influencing the financial and economic conditions? While there is ample evidence that the measures have succeeded in influencing financing conditions, so far there is not strong empirical evidence on their impact on output and inflation. In fact, despite the ample liquid and ultra-low interest rates, the output growth remains weak and inflation stubbornly low pointing to a weak monetary transmission mechanism.
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Finally, I am concerned about a potential interaction between the financial uncertainty associated with the tapering program and the political uncertainty about fiscal negotiations in the US in the coming months. To close our conference, tomorrow we will have a policy panel where three distinguished economists: Guillermo Calvo, Vittorio Corbo, and Maurice Obstfeld, will share their thoughts on the end of QE and its consequences for emerging markets. We have navigated through challenging times in recent years. The decisive action of policymakers worldwide has spared the global economy from further trouble. In many cases policy has had to go ahead of research. But we should take time to think hard about these events; their causes; their mechanisms; and the benefits and costs of the policies being implemented. This will allow us to finish the course and to derive important lessons for the future. I am confident that the discussion of the next two days will help us advance toward this goal. I would like to finish this presentation by thanking Claudio Raddatz, Diego Saravia, and Jaume Ventura for putting together an exciting program and all of you for coming to participate and share in the discussion. Thank you References Bianchi, J. (2011) “Overborrowing and Systemic Externalities in the Business Cycle,” American Economic Review, American Economic Association, vol. 101(7), pp. 3400–3426, December 2011. Dell’Ariccia, G., Laeven, L., and Suarez, G. (2013) “Bank Leverage and Monetary Policy’s Risk‐ Taking Channel: Evidence from the United States,” IMF Working Paper 13/143, International Monetary Fund.
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In contrast, the FOMC’s portfolio-oriented programs have been driven by a desire to expand and lengthen the maturity structure of the asset side of the Fed’s balance sheet in order to put downward pressure on longer-term interest rates. The accompanying growth of reserve balances has been a byproduct of those purchases, not a specified objective. Former Fed Chairman Bernanke referred to this approach as “credit easing,” in contrast to the BoJ’s “quantitative easing.” 9 The FOMC’s different objective for OMOs reflects the primary transmission channel through which LSAPs are understood to affect financial and economic conditions. Central bank purchases of longer-term bonds reduce the stock of such securities held by private investors. Accordingly, the purchases remove duration risk – and in the case of agency MBS, prepayment risk – from the private sector, which drives term and other risk premiums on those assets lower than they would otherwise be. 10 This re-pricing of risk ultimately puts downward pressure on long-term interest rates, an effect that spreads to other assets as some investors rebalance their portfolios. The term premium effect of the Fed’s purchases should continue to influence financial conditions as long as the assets remain in the SOMA portfolio, although the size of the effect will diminish over time as the risk associated with the portfolio diminishes. Some standard portfolio risk measures illustrate the degree to which the Federal Reserve has absorbed extra duration risk onto its balance sheet.
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And that might feed the illusion that, once the recession is behind, all countries will recover in the same way. But that will not be so. Each country has singular features that will prove pivotal when defining the path to follow once the crisis is over. Accordingly, my reflections will focus on what distinguishes us from others. The Spanish experience shows that, from 1985 to 2008, growth in the economy was outpacing the EU average, with the sole exception of 1992 and 1993. This spectacular growth over the past 23 years has allowed us to draw closer to the welfare levels enjoyed by the most prosperous EU countries. But what will happen to the Spanish economy when we emerge from the current crisis? Will we witness such satisfactory growth as in the past? The reply, as always in economics, is that "it depends". If we do what we have to do, if the necessary reforms are made, we will once again grow above the European average. But if BIS Review 18/2009 1 we do not reform we will probably grow at or below the EU average, with convergence with our main economic partners being checked. Yet if we have been able so far to advance without these reforms, is it absolutely vital to adopt them now? Before answering that, let us look at the causes of growth in the Spanish economy in recent decades.
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The exchange rate has, in fact, tended gradually to soften since last spring when the decision to go ahead with the euro was finally confirmed; but increasingly since the autumn the internationally-exposed sectors of the economy have been dealt a further massive blow as a result of global economic turbulence. This started, in fact, with the financial disturbances in Asia in the latter half of 1997, but even as late as the beginning of last summer it seemed as if it might have only limited impact on the overall world economy. The IMF, for example, was then still projecting 3-3¾% world growth in 1998 and 1999 respectively, which was certainly a setback compared with their forecast of over 4% just six months before, but it was hardly catastrophic. Since last summer it has become increasingly clear that things are likely to be significantly worse than that. The financial collapse in Russia, deepening recession in Japan, the long battle – then sudden defeat – in Brazil to hold its exchange rate, and fluctuating fears of possible knock-on effects on the major countries’ financial markets, all contributed to an increased sense of financial fragility, which has not been easy to contain, though I am now hopeful that we will be able to stop the financial rot.
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The strong exchange rate gave us somewhat more time than we would otherwise have had to bring about this domestic slowdown – it meant that monetary policy did not need to be tightened as aggressively as would have been necessary otherwise. But we could not avoid tightening policy altogether, even though we realised that this would be likely to increase the pressures on the internationally-exposed sectors, because in anything other than the short term that would have put the whole economy – including the internationally-exposed sectors we were trying to shelter – at risk of accelerating inflation. I would remind you that right up until the summer of last year we were seeing signs of increasing pressures in the labour market, even in the manufacturing sector – reflected in increasing skills shortages and recruitment difficulties, in the employment/unemployment data, and in gradually increasing pay settlements. The uncomfortable reality, as I’ve said very often before, is that monetary policy can only target the economy as a whole – it can’t seek to protect individual firms, or sectors, or regions, however much we might wish it otherwise. That – as I’ve discovered – is not exactly a popular idea, but there’s no question that that is the reality of it. Over the past year the world – and I mean the world – has changed very substantially.
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Furthermore, in economic terms, given that these deposits were used to a significant degree to finance illiquid assets outside Iceland, such a payment, if it had been possible, would have amounted to a net transfer of resources from Iceland to other countries – where the United Kingdom would have been prominent – at a time when Iceland was going through its deepest financial and economic crisis in the post-war period. That made no sense whatsoever! However, the preference given to deposits under the Emergency Act is a key element in the fact that recoveries on the failed banks’ estates will cover deposit claims from the foreign branches in full. In international discussion, there have been a number of misconceptions about this process. There have been claims that Iceland allowed its banking system to collapse, with what now seem reasonable results, and that others should consider doing the same. The fact is that Iceland kept the domestic part of its banking system running throughout, and at significant expense; otherwise, the consequences would have been dire. Some have claimed that the banks were nationalised. They were not. The failed private banks are private companies in winding-up proceedings governed by law. The Government fully recapitalised one of the new banks. The other two are private banks owned primarily by the estates of the old banks. Others have claimed that Iceland defaulted and got away with it. The opposite is true. The credit of the sovereign was preserved, and all debt obligations have been paid on time.
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We have been able to affect expectations for the following years through our communications. Other central banks that have not traditionally engaged in this type of communication have, as I mentioned earlier, experimented with different forms of rough ‘triggers’ of various kinds. The academic background to the concept is the insight that expectations of future policy rates are at least as important as their current level when it comes to affecting investment and consumption decisions. In normal cases, the central bank is assumed to be able to influence expectations satisfactorily through its systematic monetary policy. But when the policy rate reaches its lower bound, it is possible to communicate an intention to diverge from normal behaviour and keep the rate low for a longer period and thus substitute, to a certain extent, for an immediate policy rate cut. There has been, however, some discussion of how effective such communication actually is, particularly over longer horizons. 12 The Riksbank's method provides a more complete picture of how we see the situation and the development of the economy. But other ways of communicating about the future have their advantages. One variant of this is the state-contingent US approach: saying that the policy rate will not be raised until the outcome for inflation has reached 2 per cent. 13 In situations where the market does not share the Riksbank’s view of the development of inflation, the US way of communicating can provide more information than inflation and interest rate forecasts.
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But I firmly believe that if we had cooperated better, our countries would probably not have been as severely affected by the global repercussions of the credit crunch. To avoid this kind of cooperation failure, you need a clear division of roles and responsibilities. You need to share information and coordinate your actions. And to manage a crisis effectively, you need to be prepared. This requires planning ahead. By establishing, in normal times, what is usually referred to as a Domestic Standing Group – bringing together the supervisory authority, the central bank, the finance ministry and perhaps certain other relevant authorities – you can enhance preparedness by developing suitable crisis management tools and routines. Creating recovery and resolution plans together with the banks is another productive approach. By conducting crisis simulation exercises, you can also test these tools and plans on various possible crisis scenarios. However, as banking is becoming increasingly internationalised, merely cooperating within your own country will not be enough. Cooperation must also be extended across borders. This is particularly true for countries whose banking sectors have a high degree of crossborder activities. Spain and Sweden share this characteristic, despite the fact that banks in our countries run their cross-border activities in very different ways. But cooperating across borders is difficult. There are all sorts of reasons for this. To mention a few, legal barriers, political pressure or even language and habits may all prevent fruitful exchanges between countries from taking place.
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During my years at the IMF, I have seen this pattern repeat itself – and it is not a pretty sight. In Europe, we face a particular and somewhat peculiar cooperation problem. This is sometimes described as the trilemma of banking supervision. A trilemma is similar to a tradeoff, and means that you want to pursue three objectives but you can only achieve two of them. One needs to be given up. The three objectives in this context include, first of all, effective banking supervision and crisis management, secondly, national sovereignty of supervision and crisis management; and, finally, an integrated European market and all the benefits coming from more competition. In the EU, we have chosen the latter two – economic integration and national sovereignty of supervision and crisis management. This national sovereignty is manifested in what is known as the home country principle, meaning that the supervisory authority in the country where a bank is domiciled takes complete responsibility for the supervision of its branches abroad. This home country principle is combined with economic integration and allowing banks to establish operations across Europe. In choosing these two objectives, the third objective – effective supervision and crisis management – has been forsaken. This is clearly manifested in Europe’s current approach towards supervising banks and managing crises. Economic integration and the EU’s pursuit of a single market for financial services have meant that some banks have expanded beyond the means of their home countries.
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In terms of the outlook, a key issue that the Committee faces in deciding the appropriate stance of policy is the extent to which the current elevated levels of inflation will persist into the medium term. Our most recent projections, conditioned on market interest rates, existing fiscal plans and the futures prices of commodities, are shown in Chart 10. The central view is for inflation is to rise further in the near term as recent commodity price increases pass through, but then to fall back, particularly in 2012 as the rise in VAT to 20% drops out of the twelve-month comparison. It then continues to ease back, reflecting the continuing – though uncertain – drag from the margin of spare capacity in the economy. A number of factors will determine the rapidity of that return to target. Profit margins have been squeezed during the recession and businesses are likely to want to rebuild these as the recovery proceeds. But the real purchasing power of wages has also been severely squeezed and employees may also seek to recoup some of that. Ultimately this is about how the costs of the recession and the deterioration in the terms of trade associated with higher real import costs are shared out 7 , but during the adjustment phase it may be manifested in temporarily higher wage and price inflation. Consistently above-target inflation, whatever its cause, may also lead people to believe that it will remain high in the future.
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And businesses are unlikely to want to expand while capacity is lying idle and there is still much uncertainty about the outlook for demand. But the substantial depreciation of sterling – down nearly 25% since the start of the crisis – should, over time, help to boost the contribution of net exports to UK growth. We have seen some of the fruits of that in the robust performance of manufacturing over the past year. As I already noted, the economy began to grow again more than a year ago, in the fourth quarter of 2009. And over the first year of the recovery, growth was around the UK’s historical average rate. In part, that was on the back of the boost to growth from a slowing in the rate of inventory de-stocking. Given the prospective fiscal consolidation, the maintenance of such growth rates requires a pickup in the contribution of private domestic final demand and in net exports. In our November Inflation Report, our central view 3 , predicated on market interest rates, was for the recovery to be maintained, with the boost from a stimulatory monetary stance and from the past depreciation of sterling offsetting the continuing headwinds from de-leveraging and fiscal consolidation. Since the November Report, we have, of course, had the first estimates from the ONS of growth in the final quarter of last year. They suggest that the economy contracted by 0.6%. In part, that was down to the disruption caused by the snow.
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11 Specifically, Level 1 assets are entirely taken into account in the LCR (no haircut) and thus benefit from a more beneficial treatment in the LCR than in the Eurosystem’s collateral framework, while level 2 assets generally enjoy lower haircuts in the Eurosystem’s collateral framework than in the LCR. These differences certainly reflect the different objectives of the LCR and the Eurosystem’s collateral framework. 12 Central bank refinancing always benefit from a 100% rollover rate no matter the quality of the assets used in the transaction. A 100% rollover rate ensures equal treatment between central banks implementing monetary policy through repo operations and central banks implementing monetary policy through outright purchases of 4 BIS central bankers’ speeches depends on the opportunity cost of obtaining liquidity from the Eurosystem, there may be a number of LCR-constrained banks with large amounts of non-HQLA collateral that is eligible for monetary policy operations. Imagine a post-crisis monetary policy framework where the liquidity provision by the central bank would again be rationed and implemented through competitive auctions (instead of today’s fixed rate, full allotment). If some banks have no access to market repos using their assets as collateral (owing to concerns in the market place about country, counterparty or collateral risk), it will be likely that these counterparties will bid in the liquidity-providing monetary policy tender operations using this collateral in order to obtain cash to cover both their funding needs and their LCR.
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BIS central bankers’ speeches 7 fixed-rate, full allotment regime in its refinancing operations, offering unlimited liquidity to banks at a predictable cost against an expanded set of eligible collateral. The widening of collateral might be seen as a way to mitigate the adverse and destabilizing effects of shortterm funding “runs” relating to a deterioration of asset liquidity, but it can also be seen as a way to prevent large recourse to central bank liquidity by banks, who would otherwise be subject to funding outflows at a later stage of the crisis. Such a widening has to be accompanied by proper risk management measures, such as haircuts, to mitigate the increase of the risk profile of the central bank. The challenge for the central bank is to “buildin” the possibility to expand the set of eligible collateral while mitigating the incentives for banks to abuse it.20 Similarly, the LOLR’s function of providing emergency liquidity assistance has been criticised for provoking moral hazard by banks. Indeed, support that is considered as appropriate during the crisis might have perverse effects on the incentives of banks at a later stage. Banks may ex ante decide to take an excessive exposure to risk, knowing that the central bank will intervene if that risk materialises. Moreover, there is a fine line between liquidity and solvency needs, which in a crisis is often blurred. Central banks should therefore be particularly wary not to substitute for capital support that should be provided by shareholders, investors, or in last resort by governments.
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One simple method is to assume that potential output over time grows at trend because the labour force expands and productivity rises. Developments in the output gap provide a basis for assessing cyclical developments and can thus also shed light on domestic price and cost pressures in the economy. It is difficult to know how high capacity utilisation is at any given time. Output and employment figures are often revised and do not therefore always present an accurate picture of the current economic situation. Norges Bank therefore also uses a number of other indicators to take the temperature of the Norwegian economy. The period of strong expansion that began in 1997 came to an end in winter 2003. The Norwegian economy was hit by a pronounced downturn in the global economy. An economic turnaround has now occurred in Norway, with a soft landing after the long period of high domestic cost inflation and sluggish external activity. Output is showing a marked increase, but inflation is low. Monetary policy easing From spring 1999 to December 2002, the interest rate in Norway was fairly stable at between 5.5 per cent and 7 per cent. In other countries, the interest rate fell in 2000 and 2001 when the ICT and equity bubbles burst. The interest rate differential between Norway and other countries widened due to cyclical divergence. The expansion continued for a longer period in Norway, with strong wage and cost inflation. The 2002 wage settlement resulted in very high wage growth for the fifth consecutive year.
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A persistently high rate of increase in house prices can in isolation engender expectations of a further rise and can thus prove to be self-reinforcing for a period and push up credit demand. At the same time, the switch to a flexible inflation targeting regime reduces the possibility of exposing households to a double shock in the form of higher unemployment and higher interest rates, as was the case prior to the banking crisis in the beginning of the 1990s. If the economy is exposed to disturbances that may lead to higher unemployment, inflation will normally decline and interest rates will be lowered. High debt growth increases the vulnerability of households to economic disturbances. As a result of low interest rates, the household interest burden will remain fairly low in spite of high debt growth. It may prove to be particularly challenging for borrowers to assess their debt-servicing 4 BIS Review 53/2004 capacity over time in a period when the interest rate is abnormally low. Such a low interest rate also places particular demands on banks in assessing the creditworthiness of borrowers. The interest rate can be used to reduce credit demand. At present - with low interest rates abroad and a close link between domestic interest rates and the krone - a tighter monetary policy would restrain credit demand primarily because job security would be reduced as a result of a stronger krone. Summary of the situation in the Norwegian economy A turnaround in the Norwegian economy has occurred.
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William J McDonough: Issues in corporate governance Remarks by Mr William J McDonough, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the William Taylor Memorial Lecture, Washington, D.C., 29 September 2002. * * * I am honored this evening to be invited to deliver the William Taylor Memorial Lecture. Bill Taylor was a very special person. He was deeply committed to public service and to the well-being of this nation's financial markets in his many years as head of Bank Supervision at the Federal Reserve Board and as chairman of the Federal Deposit Insurance Corporation. For many of us, he embodied the ideals of a central banker and a bank supervisor: measured, professional, impartial, and unstinting in his willingness to go the extra distance in his search for the right answers to the problems he needed to address. His years in the bank supervisory community were cut all too short. We have sadly missed the benefits of his wisdom. This evening I would like to honor Bill's memory by talking about some issues I know would have been of profound interest to him. Specifically, I would like to focus my remarks on the elements that make for a sound banking and financial system and the issues that have been raised over this past year which have led many to question the quality and integrity of the information available to our markets.
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When anyone could log on to receive market information and trade in real time, wouldn’t traders flee the hurley burley and relocate to other, quieter and cheaper financial centres or even out of cities altogether? What seems to have happened is the opposite. The reducing costs of collating information and trading at a distance have led to operations relocating to London and the City becoming an even more important cluster for financial activity. The technology which could have allowed the dispersion of business has instead allowed greater concentration. 12 So whereas in 1997 the largest share of market turnover of Frankfurt’s Eurex market came from traders based in Germany (over 80%), the largest share in 2005 came from the UK (with over 45%). As more assets can be traded remotely, this may further drive the growth of centres like London with large pools of skilled financial workers. The growth of European capital markets relative to traditional commercial banking should reinforce that process. Historically, European and equity markets have been smaller relative to their economies than in the US. With around some $ trillion in assets, euro-zone financial markets are still significantly smaller than the $ trillion in the US. But Europe is closing the gap. In 2005 the 12 HM Treasury, “The location of financial activity and the euro”, 2003. BIS Review 29/2007 5 eurozone’s financial stock grew by over 20%, compared with around 6% in the US.
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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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A key next step will be for the U.S. and other major jurisdictions to put in place regulations and supervisory measures that will require non-bank counterparties of GSIBs to trade with the 2 BIS central bankers’ speeches GSIBs on terms equivalent to those found in the ISDA resolution stay protocol. This further step is needed in order to limit the potential for arbitrage within the market and to promote greater stability in the event of a necessary resolution. As we move this work forward, we should acknowledge and take stock of the significant advances achieved over the past few years, while at the same time remain focused on our responsibility to address the challenges that remain. Thank you for your kind attention. BIS central bankers’ speeches 3
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However, the current 10 For example, the output gap fell between 8 to 10 percentage points, which could explain, without lags, a decline of about 3 to 4 percentage points in inflation, by applying textbook Phillips curve or more complex estimations (Brayton and Tinsley, 1996) for the US, which are not very different from those of Chile. The actual decline in inflation in Chile has been about 10 percentage points. 11 The Fed does not have an explicit financial stability objective, although its role in this matter is widely known. See, for example, Plosser (2007). 8 BIS Review 113/2009 experience in many emerging markets is a demonstration that the objectives of financial stability and price stability can be preserved even under extreme tensions. In sum, conducting monetary policy through an inflation targeting regime, with flexible exchange rate, clear mechanics for exceptional sterilized intervention only when there are clear signs of misalignments, a countercyclical fiscal rule, and a strong financial regulatory framework has worked quite well to mitigate the effects of the worst crisis the world has faced in several decades. References Batini, N. and E. Tereanu (2009), “What Should Inflation Targeting Countries Do When Oil Prices Rise and Drop Fast?,” IMF Working Paper No. WP/09/101. Bernanke, B. and M. Gertler (1999), “Monetary Policy and Asset Price Volatility,” in New Challenges for Monetary Policy, Proceedings of the Jackson Hole Symposium 2005, Federal Reserve Bank of Kansas City, pp. 77-128.
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Growth in mainland GDP was revised upwards by an average of 1 percentage point per year for the period 1995-1999. The largest revision was for 1999. As late as in May 2002, we believed that growth in 1999 had been 1.1 per cent. The revised figures now show that growth was in fact 2.7 per cent. It is obvious that such revisions can have a considerable impact on the actual output gap. Norges Bank is currently systematising different vintages of national accounts figures. We can then go back and evaluate monetary policy in “real time” to learn how we should respond to uncertain data. Frank Knight (1921) differentiates between “risk” and “uncertainty”.12 With risk, we know the probability distribution for the potential outcomes, but with pure uncertainty we do not. Thus, there is risk, but not 10 In the opening address at last year’s Jackson Hole conference, Alan Greenspan expressed the following: “Uncertainty is not just an important feature of monetary policy landscape; it is the defining characteristic of that landscape. As a consequence, the conduct of monetary policy in the US at its core involves crucial elements of risk management.” 11 Orphanides, A. “The Quest for Prosperity without Inflation”, Journal of Monetary Economics, 50(3), April 2003, 633-663. 12 Knight, Frank H. (1921) “Risk, Uncertainty and Profit”. 6 BIS Review 6/2004 uncertainty, associated with the fall of a die, according to Knight. Thus, for a decision-maker, risk is far more manageable than pure uncertainty.
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Petroleum wealth and the krone exchange rate In the long term, the exchange rate tends to adjust so that there is a balance both within the domestic economy and in the current account. 4 4 The point for 2004 shows the real exchange rate with wage and inflation projections for 2004 from Inflation Report 2/04. BIS Review 47/2004 Petroleum wealth, defined as the value of oil and gas under the seabed and the value of the Government Petroleum Fund, provides the basis for substantial foreign exchange revenues in the years ahead. The relative significance of these revenues will nevertheless decline gradually. The share of Norwegian imports that can be financed by foreign exchange revenues from petroleum wealth will become increasingly smaller. Other export earnings must then be increased substantially. This will require a considerable improvement in competitiveness over time. Norway’s history as an oil nation goes back to the end of the 1960s. Rough estimates5 suggest that the real exchange rate that ensures balance in the external account when petroleum wealth no longer has the same significant role in the economy is more in line with the real exchange rate that we started with. This is shown in the chart, where the real exchange rate in the very long term will revert to the level prevailing before petroleum extraction began.
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The economic activity at home is backed up by an improvement of the overall global climate, during the last two months, by attempting improvement signs of lending activity and by the seasonal effect of summer time. Global economy is being characterised by a more moderated downturn of the economic activity at industrialised countries, accompanied with a growth of the world trading activity and low inflationary pressures at global level. Nevertheless statistical data regarding the Albanian economy still remain at low level, the indirect indicators suggest this later is characterised by a positive economic growth, but slower compared to the succeeding years. The low pace of both retail sales and budget revenues increase, the exports slowdown, the lower expansion of lending to the economy and business and consumer’s confidence indexes show that Albanian economy is going through a slower growth phase relative to the one of previous year. This situation is also mirrored on the low inflationary pressures, revealed by the low level of core inflation, which is a proper appraiser of the domestic demand pressures. In August 2009, annual inflation pointed to 2.2 percent, remaining within the targeted band of the Bank of Albania, but close to its lower limit. Seasonal tendency of prices’ behaviour was confirmed to have the same intensity even during this period, by keeping the inflation value at the same rate with that of the preceding month.
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Rapid trade liberalisation across Asia has improved market access. Rising incomes in the Asian region where more than half of the world population resides has generated a huge cumulative market. This increase in consumption demand has led to the development of an extensive modern retail sector across the region. Supported by stronger economic fundamentals, emerging economies are expected to grow at higher rates over the next five years compared to the period prior to the crisis in 2000 to 2008. The IMF projects that emerging economies in Latin America, the Middle East, Africa and Asia will, on the average, grow by 6.1% in the period 2010–2014, higher than compared to the period 2000–2009. Asia’s prospects during this period will be sustained by several structural factors. First, Asia has a favourable demographic structure with a relatively young population with a higher propensity to consume. The high savings rate in Asia also allows for higher consumption demand with more than adequate surplus to finance the required investments activity. In addition, financial intermediation in Asia is progressively deepening to meet the new financing needs of households and businesses. In this more recent decade, greater financial integration is taking place. This financial integration will result in a more efficient recycling of Asian savings into investments within Asia. It has been estimated that Asia needs to invest about USD 8 trillion in infrastructure development over the next ten years.
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Mario Draghi: Structural Reforms, inflation and monetary policy Introductory speech by Mr Mario Draghi, President of the European Central Bank, at the ECB Forum on Central Banking, Sintra, Portugal, 22 May 2015. * * * Accompanying charts can be found at the end of the speech. Summary Structural and cyclical policies – including monetary policy – are heavily independent. Structural reforms increase both potential output and the resilience of the economy to shocks. This makes structural reforms relevant for any central bank, but especially in a monetary union. For members of monetary union resilience is crucial to avoid that shocks lead to consistently higher unemployment, and over time, permanent economic divergence. It therefore has direct implications for price stability, and is no less relevant for the integrity of the euro area. This is why the ECB has frequently called for stronger common governance of structural reforms that would make resilience part of our common DNA. Structural reforms are equally important for their effect on growth. Potential growth is today estimated to be below 1% in the euro area and is projected to remain well below pre-crisis growth rates. This would mean that a significant share of the economic losses in the crisis would become permanent, with structural unemployment staying above 10% and youth unemployment elevated. It would also make it harder to work through the debt overhang still present in some countries.
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(a) Excluding Saudi Arabia due to unavailability of data. (b) Weighted averages use each country’s equity market capitalisation as weights. (c) Numbers may differ slightly to those in the text due to rounding. 20 BIS central bankers’ speeches
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Moreover, developments in the financial markets are very rapid and there is every reason to believe that the relationship changes over time. If one looks back at global developments over the past year, the financial markets appear to have coped with more and greater shocks than many would have thought possible. The IT and telecom bubble burst, a simultaneous international slowdown in economic activity began, Turkey experienced a financial crisis, the USA suffered terrorist attacks on 11 September and began a war against Afghanistan and the American energy company, Enron, collapsed. Finally, Argentina suffered a severe crisis. The private market operators were not saved by further measures from the IMF, as many had expected. However, not even all of these events together appear to have had any serious long-term effects on the global financial markets. In addition, it now seems as though the repercussions for the real economy were relatively slight, despite the fact that households and companies, particularly in the USA, were heavily indebted when the economic upturn began. Does this mean that we can now write down the risk of financial imbalances and crises delaying the economic upturn most analysts predict to be on its way? Have economic policy, the financial infrastructure and the behaviour of market operators been adapted to the globalised, technologically well developed financial markets to the extent that the contagion effects on the real economy of financial disturbances has declined significantly during the past decade?
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Although we have seen marked improvements in the critical areas of capital, liquidity, and resolution, we have not yet fully addressed the root causes of many of the problems that have plagued the financial sector. I am thinking of not only the excessive risk-taking and leverage in the run-up to the crisis, but also the repeated scandals related to LIBOR, FX, money laundering, sales practices; unfortunately, the list goes on and on. Underlying these scandals is often an inadequate corporate culture, where accountability and ethical conduct have fallen by the 1/3 BIS central bankers' speeches wayside. The good times we’re in can exacerbate these problems in three ways. First, there’s a risk of complacency setting in—an “if it ain’t broke, don’t fix it” mentality. Second, in a strong economy, the hard numbers that we tend to focus on when examining profits, losses, capital, and liquidity can look like everything’s coming up roses, even when an uncomfortable reality lies beneath. And, finally, culture is a long-run investment that takes many years to develop and requires constant reinforcement to preserve. If you let it erode, you can’t go to the market and obtain a new “culture” overnight. As I mentioned, establishing a more robust regulatory framework was absolutely necessary for a healthier, more resilient financial system. But, it is far from sufficient. The danger we face today is that people may conclude that the hardened defenses are enough, and other supervisory activities around culture, conduct, and governance are superfluous.
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The crisis severely eroded people’s trust in the industry, both here and abroad. Governments and regulators quickly got to work fixing the main deficiencies in the existing regulatory framework. These included requiring much stronger loss-absorbing capital to weather severe economic downturns, demanding greater liquidity cushions to withstand market and funding disruptions, and creating a robust resolution framework to protect both the economy and the taxpayer in the event of a failure of a systemically important firm. These changes were appropriate and necessary. We must not lose sight of their importance in safeguarding the soundness of the financial system and in ensuring that future generations do not have to suffer the economic trauma that we lived through this past decade. Bringing us to the present day, we are in a much, much better place, in terms of both the financial sector and the overall economy. We have a more robust regulatory regime in place, and banks are well positioned to survive future storms. Furthermore, our economy’s in great shape; we’re in the second-longest expansion in history, and economic data from both the United States and countries around the world continue to trend upwards. As a policymaker, solid growth, a strong labor market, and inflation near our target are all exactly what I want to see. Paradoxically, it’s precisely this sense that things have gotten so much better that worries me most.
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For instance, during the fourth quarter of 2008, the overall balance of payments deficit widened to US $ million from US $ million recorded the previous quarter. Merchandise export earnings declined to US $ million from US $ million realised in the third quarter of 2008 following a sharp reduction in metal export earnings. Metal export earnings declined by 23.1% to US $ million in the fourth quarter of 2008 from US $ million the previous quarter. Metal export earnings at US $ million in the first quarter of 2009 were 52.6% lower than the US $ million recorded in the similar period last year. A slide in both copper and cobalt export earnings owing to lower prices accounted for this outturn. Nonetheless, it should be noted that commodity prices on the international markets have since recovered considerably and have thus started to bring improvement in Zambia’s external position. Foreign capital inflow reduced Ladies and Gentlemen, the global financial crisis led to a decline in the foreign portfolio investment inflows as investors generally reduced their exposure to financial instruments from emerging markets. The risk aversion towards emerging markets thus led to a reduction in foreign portfolio inflows and holdings in Zambia’s Government securities. This resulted in a 2 BIS Review 161/2009 net outflow of foreign portfolio investment since funds that matured were not rolled over and new funds coming in were being scaled down.
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Participating will also have the added advantage to have first-hand knowledge of the decisions made in this context and thus avoid having partial and/or distorted information communicated by parent banks in accordance with group-level agendas. The second argument relies on the fact that, in many of the non-euro area new Member States, the domestic banking systems are dominated by banks headquartered in the euro area – in the case of Romania, for example, euro area banks account for 80 percent of the banking system’s assets; the same is true for the Czech Republic and Hungary (where foreign-controlled banks hold above 80 percent of total assets) and to a lesser – though still significant – extent in Bulgaria and Poland (around 70 and 60 percent respectively). Subsidiaries and branches of these banks are often important enough so that they are deemed systemic at the host country level, even though their balance sheets are small relative to their parent entities. Non-euro countries are therefore already well integrated into the European financial market. Clearly, the objective of preserving the integrity and ensuring the smooth functioning of the European financial market is not something that concerns only the euro area, but is relevant at the EU level. In this context, it is hardly surprising that Romania embraced the Banking Union idea – it makes perfect sense that the reality of a significant, even systemic, cross-border presence in the banking systems of non-euro area countries is matched by effective cross-border supervisory and regulatory institutions.
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Should the general economic situation indeed deteriorate further, the solvency of borrowers would also worsen. This would result in losses in the big banks’ lending portfolios. The effect on banks with a domestic business focus would depend on the extent of the deterioration in the international environment. Entering into risk is a bank’s core business and, as such, is desirable. What is important is that these risks can be both calculated and carried. However, experience shows that is not always the case. In each of the three most recent international financial crises, a Swiss big bank was particularly hard hit. Each time a crisis occurred an increasing amount of equity was wiped out. This should serve as a warning. If the wheels are not set in motion now, the impact of the next crisis could be even more severe. Should a big bank collapse, the consequences for Switzerland would be dire. Therefore, measures need to be taken now in order to ensure that the Swiss big banks are sufficiently BIS Review 80/2008 1 resilient in the future. The SNB and the Swiss Federal Banking Commission recognise a need for action in – basically – four areas: capital, liquidity, monitoring and crisis management. In our stability report we discuss measures in all four areas. Today I would like to focus on the most important measures in the area of capital. It is in the nature of the financial markets that there will always be crises.
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The guidance which CPSS/ IOSCO produce following the current consultation will need to be unambiguous. That work can build a solid defence against failure. But one of the central lessons of the crisis is that we must be able to cater for the worst, when all defences are breached. The FSB has therefore been consulting on how resolution regimes can be applied to CCPs (and other financial-infrastructure providers). I hope that G20 Ministers will keep the FSB’s feet to the fire on this. If CCPs are probably the most important example of where resolution regimes need to be extended, they are not the only one. Insurance is another. And you won’t be surprised to hear me say that, given the ubiquity of regulatory arbitrage, shadow banking and the world of funds and special purpose vehicles could be another. That makes it important that resolution is not the special preserve of the G20 jurisdictions. With many asset management vehicles domiciled in offshore centres, we are going to need them to get on the resolution bandwagon Conclusion To conclude, let me say just this. It is absolutely essential that the TBTF problem is cracked. Nothing is more important to the success of the international reform agenda. Without it, global finance would remain fragile; and to protect against that, the international financial system would balkanise as individual countries sought to protect themselves. The stakes are high.
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Andrew Bailey: It’s a recovery, but not as we know it Speech by Mr Andrew Bailey, Governor of the Bank of England, Mansion House, London, 1 July 2021. * * * Introduction Lord Mayor, there has been nothing usual about the last sixteen months. Even long-standing neighbours like the Bank and the Mansion House have had to resort to video conferences rather than popping round for a word. And one of the trickiest issues for all of us is dress code and etiquette – is this a ties on or off video, who knows? I can admit that I don’t seem to be a very good predictor of dress code. But you did throw me not long ago Lord Mayor, when we had a video call about an hour before we were both speaking at an event, and I can reveal that you were dressed in a Mansion House bomber jacket. So, white tie to black tie to bomber jacket. I should say that by the time of the event, the Lord Mayor had changed into something more conventional. The story so far Conventional is not a word I have used about the performance of the economy in the last sixteen months. Last calendar year, UK GDP declined by an annual growth rate of 9¾%, and based on our last forecast in early May we expect it to grow by 7¼% this year. It’s more meaningful to express the level of activity relative to the end of 2019 (pre-Covid).
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There are I think three reasons for this. First, it is in the nature of the shock – Covid itself does not destroy economic capacity over the longer term in the same way as a war, although of course the number of lives lost has been tragic. Second, the evidence here and in other countries indicates that the economic impact of Covid has attenuated with each successive wave – we are all by nature adaptive in our behaviour. For that reason, both in the UK and in a number of other countries, GDP releases during more recent periods of restrictions have typically surprised to the upside, relative to our expectations based on the effect of previous lockdowns. Third, the economic policy response has been designed to ensure that the longer term damage – often termed scarring – has been as small as can be. This has involved both monetary and fiscal policy pursuing their own independent objectives in a consistent and complementary manner. And just to be very clear on this point, when we use the tools of policy 1/5 BIS central bankers' speeches consistently, and the objectives of policy are consistent, there is no compromise of independence whatsoever. So, we find ourselves now in a situation where there is an output gap, or slack as it is also called, but it is nowhere near as large as would be implied by the fall in demand if this was a normal recession.
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On the positive side, net financial wealth of households has increased by 15 per cent since 2003 – it was estimated at € billion in June. On average, households have considerably more assets than liabilities, which suggests that household debt is within sustainable levels. So do you disagree with claims that we've started living beyond our means? As long as people can manage their finances, if they do not keep accumulating debt and repay their debts to banks, there does not seem to be a problem at the level of households. BIS Review 152/2008 3 At a national level, the picture is different – we still have a tendency to spend more than we earn as evidenced by the current account of the balance of payments and the fiscal position, which both show a deficit year after year. The prospects for changing this behaviour, at least at this point in time, do not seem very encouraging. These days we are seeing a growing chorus of people calling on the government to run an even larger deficit and to increase the public debt further. During a seminar last June, you said that automatic compensation for inflation, especially at the national level, was counterproductive. The government has calculated its COLA at over € a week. What do you make of it? When you have countries with wage indexation schemes that link wages to past inflation, there is always a danger of the two feeding on themselves and the creation of a wage-price spiral.
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Lastly, I must add ignorance as another essential cause of improper financial behavior. Even with a well-designed financial education program with meaningful messages and effective delivery channels, financial literacy cannot be achieved if consumers neglect the necessity and benefits of appropriate personal financial management. All in all, desirable financial behavior is sometimes well known, but less likely to be implemented by consumers themselves. It is similar to living a healthy lifestyle. We know that healthy food and exercise are good for us, but we don’t do it. Hence, a solution to the improvement in financial behavior remains a challenging puzzle for many of the policy makers and practitioners to find the right solutions for various groups of people. Ladies and Gentlemen, I truly believe that this seminar would allow an invaluable opportunity for us to learn how to solve these puzzles from honorable speakers who have come a long way to share with us their enriching experiences and lessons-learnt. The achievement of effective financial education and behavioral change would eventually drive the global community towards a more financial- literate and disciplined population who would help ensure sustainable growth and equality in our society. Lastly, I wish the seminar a great success. I also wish to express my sincere appreciation for all of your endless efforts in promoting financial inclusion and financial literacy. Thank you. 2 BIS central bankers’ speeches
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Simply ask the following question: If r* were close to its long-run historical value of 2 percent, would we expect to see the economy growing at only slightly above its potential growth rate? The fact that the economy is growing quite slowly despite a low federal funds rate and a very large Federal Reserve balance sheet suggests that monetary policy currently is not providing that much stimulus to the economy. In other words, the gap between r* and the federal funds rate is relatively narrow. Why is r* depressed and how is it likely to evolve over time? In my view, several short-term factors are restraining r*. First, the short-run r* is low because the foreign exchange value of the dollar has risen, reflecting both the fact that foreign economies are growing slowly and as well as an expectation that the monetary policies of the U.S. and other major economies will continue to diverge for some time. If foreign demand picks up and the dollar weakens, then r* would likely rise over time as the persistent drag from the trade sector lessens. Second, short-run r* is low because of the hangover of the financial crisis. For example, mortgage credit availability for households with low FICO scores is still very limited compared to pre-housing boom standards. This is constraining their ability to purchase housing, which holds back the pace of residential investment.
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Thus, projections for export-weighted global growth index for Turkey also pointed to a lower pace of growth for external demand (Chart 15). Hence, we based our inflation forecasts on an outlook of weaker external demand compared to the previous period. BIS central bankers’ speeches 7 Chart 15. Export-Weighted Global Economic Activity Index* (2009Q1=100) * For methodology, see Inflation Report Box 2.1 “Foreign Demand Index for Turkey”. 2010–II, Source: CBRT, Bloomberg, Consensus Forecasts 2011 October and 2012 January Bulletins. In sum, we revised our output gap forecasts upwards for the second half of 2011 considering the stronger-than-expected economic activity in the third quarter. Meanwhile, due to the deterioration in the global growth outlook, we estimate that aggregate demand conditions will provide a stronger support to disinflation in the medium term compared to the previous reporting period. We also revised our assumptions for commodity and oil prices slightly upwards. Considering the recent developments and futures prices, we revised our assumptions for oil prices upwards from USD 100 to USD 110 per barrel for 2012 and to USD 105 for 2013. Accordingly, our assumptions for import prices were also subject to a slight upward revision (Chart 16). In addition, we preserved our assumptions for the annual rate of increase in food prices at 7.5 percent throughout the forecast horizon. Chart 16. Revisions in the Assumptions for Oil and Imports Prices Oil Prices (USD/Barrel) Source: Bloomberg, CBRT. 8 Import Prices (2003=100) Source: CBRT, TurkStat. BIS central bankers’ speeches 3.
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The strength of the UK recovery and the fall in its unemployment rate suggest that the equilibrium real interest rate is now rising gradually back towards zero. The Ghost of Christmas Past should not be forgotten. A recovery may be gaining pace but our economies are a long way from normal. Leverage is still high and weak demand for advanced economy exports could persist for some time. The Ghost of Christmas Yet to Come suggests that it is unlikely that equilibrium interest rates will return to historically normal levels any time soon. This prospect puts a premium on macro-prudential policies and financial reforms to manage the associated risks without abandoning the need to keep interest rates in line with the equilibrium level. So while it is unsurprising that the ideas behind secular stagnation are being revived, it would be a mistake to rush to a more extreme macroeconomic response. There is a long history of pessimism in economics, from Thomas Malthus through Alvin Hansen to Robert Gordon. Such worries have proven misplaced in the past and scepticism is warranted now. Don’t forget that the US economy is more than 13 times larger than when Hansen first formulated his ideas. Similar performance must again be possible. Central banks are playing a catalytic role to help deliver it but their contribution will ultimately be limited. The most important drivers of long term prosperity will be measures taken by others to increase the growth of supply, particularly those that reinforce an open, global economy.
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This dynamic suggests scope for a strong recovery in which falls in unemployment are much more limited than usual. Potential growth in the UK could also be pro-cyclical but for different reasons. In Britain, the employment rate has fallen only a third as much as in the US (Chart 6). The flipside of that strength has been exceptionally weak productivity growth (Chart 7). Will UK productivity growth pick up alongside demand? The fundamentals are promising. Given the flexibility of its labour market, the continued openness of the economy and the credibility of macro policy, it is hard to think of any reason why there should have been a persistent deterioration in the rate of potential growth in Britain. This hypothesis holds particularly now that the UK financial system is beginning to function more effectively. Until recently, the weakness of the banking system limited the reallocation of capital and labour from less to more productive activities. Indeed, whereas half of all productivity growth at the economy-wide level in the years prior to 2008 occurred through this channel, reallocation appears to have made no contribution to productivity growth in recent years.5 There are other reasons to think that growth itself should bring a supply side improvement. As the economy recovers, investment should pick up and part-time workers should shift into more productive full-time work. With the sharp fall in real wages during the recession (Chart 8), employees effectively priced themselves into low-productivity work at a time of weak demand.
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We will need to think about the composition and structure of our balance sheet on both the asset and liability sides.19 This consideration will be important should large-scale asset purchases (LSAPs) become a more standard tool for central banks, which could happen if lower levels of equilibrium real rates imply an increasing frequency of very low overnight rates. Further, some analysts have argued that there might be a role for balance 16 To support the implementation of monetary policy and the analysis of money market conditions, the Federal Reserve began collecting transaction-level data on federal funds, Eurodollars, and certificates of deposits from a large set of domestic banks and agencies of foreign banks operating in the United States on April 1, 2014. In February 2015, the New York Fed announced plans to begin using the new data to calculate the daily federal funds effective rate and to begin publishing an overnight bank funding rate based on transactions in both federal funds and Eurodollar markets. See http://www.newyorkfed.org/markets/opolicy/operating_policy _150202.html and http://libertystreeteconomics.newyorkfed.org/2015/04/the-fr-2420-data-collection-a-newbase-for-the-fed-funds-rate.html. 17 A staff memo from 2008 suggested that in a floor system the level of excess reserves “might be on the order of $ billion but could be larger on some days.” For context, at the time, a number like $ billion would have been held up as an extremely large level of excess reserves, well beyond anything we might have seriously considered as the level of reserves needed to implement a floor on rates. See http://www.federalreserve.gov/foia/files/20080411.IoR.FOMC.Options.paper.public.pdf.
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Second, while the Federal Reserve has great confidence that our normalization framework will be effective at allowing us to raise money market interest rates when the Federal Open Market Committee (FOMC) determines it is appropriate, we expect to learn a lot about how money markets react to that framework as we move away from the current very low interest rates with a large amount of reserves in the banking system. We can then incorporate knowledge gained during our post-liftoff experience into our thinking. We have the benefit of not starting from scratch in this effort. There already exists a rich academic literature on monetary policy implementation frameworks, and we saw some relevant examples this morning. This literature dates at least back to the late 1960s, when Bill Poole developed a model that is still being used today.7 Recent developments have revealed that our money markets are not frictionless, and current research incorporates this reality of market segmentation. Some of the papers we have seen today try to contend with the effects negative rates did not require any changes in these central bank’s respective frameworks for policy implementation, although some legal and operational work was required. 7 William Poole, “Commercial Bank Reserve Management in a Stochastic Model: Implications for Monetary Policy,” Journal of Finance 23, no. 5 (1968): 769–91.
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Following the shutdown, a second phase now ensues in which the economy is gradually beginning to recover, in step with the lockdown-easing measures. Some key characteristics mark this second phase. First, uncertainty remains very high. There are still many unknowns as to how the disease will unfold. This uncertainty will adversely affect consumption and investment decisions and international trade. Second, minimising the risk of a second wave of the disease will mean retaining certain restrictions and health safety measures for some time. These circumstances will have a bearing on normal economic activity and will unevenly affect the different productive sectors. Third, we will also be able to see in this phase to what extent, despite the economic policy measures applied, the crisis is causing more lasting damage to different sectors, firms and population groups. Finally, signs are emerging that the pandemic may cause some structural changes, although these are difficult to define at present. In this second phase, the economic policy response must combine two objectives: to support the recovery (which advises not withdrawing the support measures prematurely, as that would increase the risk of economic growth enduring more lasting harm); and to help the economy adjust to the post-pandemic scenario. 1 This extraordinarily complex setting also necessitates the definition of a reform agenda aimed at tackling our economy’s structural challenges, which have become more pressing with the crisis. Lastly, nor should we forget that, after the pandemic, we will have our highest level of public debt in many decades.
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Investment grew by an estimated 12.8%, somewhat less than in 2003. GDP growth in the euro area is estimated at 1.9% in 2004 and growth prospects are lean for the years to come. This shows yet again the difference in the economic challenges faced by Iceland and the rest of Europe, since policies there aim at stimulating the economy, whereas Iceland’s problem is to try to prevent overheating. The widening current account deficit is also a cause for concern. Last year it is estimated at 70 b.kr., the equivalent of 8% of GDP. Exports increased by 12% in 2004 after being virtually stagnant in 2003. The strong value of the króna, robust private consumption and stepped-up investments in BIS Review 22/2005 1 aluminium-related projects are reflected in substantial import growth during the year. Merchandise imports were up by 23% in real terms, the sharpest increase since 1998. Roughly one-third of the current account deficit may be attributed to investments in the aluminium and power sectors. The current account deficit is forecast to widen even further in 2005, but will also peak this year instead of in 2006, as had been forecast earlier. Unemployment declined slowly last year despite brisk economic activity. It was not until the closing months of the year that labour market statistics indicated mounting pressures. Seasonally adjusted unemployment measured 2.4% in February and vacancies have soared. To some extent, growing labour demand was met with imported labour; issues of new work permits almost doubled in 2004.
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Dimitar Bogov: Republic of Macedonia – celebrating monetary independence Opening address by Mr Dimitar Bogov, Governor of the National Bank of the Republic of Macedonia, at the gala event on the occasion of the 20th anniversary of the monetary independence of the Republic of Macedonia, Skopje, 26 April 2012. * * * Honorable President of the Parliament of the Republic of Macedonia, Honorable fellow Governors of central banks, Distinguished guests, ladies and gentlemen, Let me wish you all a very warm welcome and thank you for accepting our invitation to attend this gala event on the occasion of our landmark anniversary – twenty years of the monetary independence of the Republic of Macedonia. On this day, April 26, we recall the numerous challenges that we faced, the numerous difficulties we have gone through in the past twenty years exactly. On this day, we are reminded that the beginnings were not easy and that those beginnings emerged in a period of, I can say without false exaggeration, huge enthusiasm of all individuals involved in creating our own independent state with all attributes that this state should have. In this reminiscence of the persons who were involved in the monetary independence, I especially feel the need to point out the name of the first Prime Minister of the independent Republic of Macedonia, the academician Nikola Kljusev, who played one of the leading roles not only for the monetary independence, but also for many other decisions of that time, important for the completion of statehood.
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Finally, I would add that we, at the National Bank, have learned a lot from the mistakes that economic policy-makers have done in the past. But, as confirmed by the history of our institution, monetary independence is perhaps the decision that best helped us to contribute to the improvement of the efficiency of the economic policies, and thus improve the living standard generally, in a state-making, institutional, economic and practical way. Long live this great anniversary! BIS central bankers’ speeches 3
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But still, being for the euro is simply a total political non seller. If I were to summarise the arguments against joining, be it on the side of the general public or professionals, they would be roughly threefold: A. The first one is sentimental rather than economic. We have been living with our Czech koruna, or crown, for quite some time and our country has a long history of monetary stability and stabilisation. By the way, we have had the same name for our currency ever since 1892, from the times of the Austro-Hungarian monarchy (the crown is a monarchist name – what a paradox in our republic) and there has never been any reason to rename it. The old adage says: If it ain’t broke, why fix it? If you have low and stable inflation on your own, you don’t need any credibility for your currency from abroad. B. The second argument is more economic. Money matters. And monetary stabilisation matters. If you have shocks in the economy, something has to move to offset the shock. Something has to be flexible. It is easier to accommodate shocks through flexible interest rates or a flexible exchange rate than through wages, unemployment or budget expenditure. We discussed yesterday how hard it can be if you don’t have monetary policy to adjust to shocks. This is a classical argument of monetary economics for the active role of elastic money when you don’t have flexible prices or wages. Simple as that.
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Our country was in the midst of solid economic growth and was experiencing a strong inflow of foreign workers. In the first three quarters, year-onyear growth amounted to 2.4%, buttressed by all components of global demand except construction. At the end of summer, however, the situation turned completely. The faltering international credit markets and the mounting uncertainty caused global trade to plummet and prompted a decline in growth in our export markets; indeed, most of our trading partners actually went into recession. In the fourth quarter of 2008, Switzerland’s GDP receded to 1.2% and unemployment, which had reached a low-water mark of 2.5%, started to climb again. In our quarterly assessment of last December, we predicted a 0.5-1% drop in GDP for 2009. In March this year, based on the latest data available, we revised the forecast downwards to a 2.5-3% decline. The SNB’s reaction In autumn 2008, as I said, we experienced an abrupt downturn of the economic cycle and, owing to plunging commodity prices, a spectacular change in the inflation outlook. Whereas inflation had been at 3.1% in July, price stability was entirely re-established from November onwards. This reversal forced the SNB to take rapid and decisive measures to ease its monetary policy. In a series of five steps between October 2008 and March 2009, we lowered the target range for the three-month Swiss franc Libor and brought down the market rate from 3% to 0.25%.
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And indeed not only are restrictions still in force in some areas of activity, but it is also proving necessary to reintroduce others as a consequence of the fresh outbreaks of the disease. In this context, the euro area outlook remains highly uncertain and the risks to the area tilted to the downside. At the same time, there are already signs that the pandemic may give rise to certain structural changes, although the full extent of these is, for the time being, difficult to know. In this context, for me the key for economic policies is to strike the right balance between supporting the recovery and spurring economic adjustment to the structural changes that will emerge after the pandemic. This means first maintaining support measures and avoiding cliff-effects. Indeed, after the pandemic many euro area countries will be facing the highest level of public debt in many decades. And facing this challenge will require a gradual fiscal consolidation programme once the economy moves back onto a sound growth path. In the short run, however, the damage caused by the premature withdrawal of support measures would exceed the possible cost of maintaining them until the recovery shows signs of sufficient strength. Notwithstanding, given the significant heterogeneity of the effects of this crisis, in particular in this recovery phase, support measures should be much more focused now and their timing adjusted to the duration of the crisis. In addition, we have to adjust the specific instruments used.
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The key difference with previous programmes is that purchases are now conducted in a flexible manner and fluctuations in their distribution will be allowed over time, among jurisdictions and across asset classes, with a view to preventing fragmentation in monetary policy transmission. 1 The volume of purchases initially announced under the PEPP was € billion for the whole of 2020. In June the term was extended up to at least June 2021, and the volume by a further € billion, making for a total of € trillion. The PEPP, together with the new purchases under the Asset Purchase Programme (APP), will increase the portfolio of the Eurosystem’s securities purchase programmes to around € trillion in June 2021. In early October 2020, net purchases of public and private sector assets under the PEPP had already reached € billion since its launch at the end of March, i.e. 42% of the current envelope. Today we can safely say that the PEPP has been clearly successful in curbing financial market deterioration in all euro area countries. This is particularly visible in sovereign yields, which are now close to their pre-crisis levels; but it may also be perceived in other market segments such as that for corporate debt. And, of course, this decline in the cost of sovereign debt has provided policy space for fiscal authorities in all euro area countries, enabling them to take unprecedented measures to sustain the income of households and firms.
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However, let us suppose that the appropriate and effective instruments for ensuring financial stability are not available, for instance because of serious problems with the regulatory and supervisory framework that cannot be remedied in the short run. In such a second-best situation, if there is a threat to financial stability, one may argue that, to the extent that policy rates do have an impact on financial stability, this impact should be taken into consideration when choosing the policy-rate path to best stabilise inflation and resource utilisation. Such considerations could result in a lower or higher policy-rate path than otherwise, in order to trade off less effective stabilisation of inflation and resource utilisation for more financial stability. 2 To the best of my knowledge, the evidence so far indicates that in normal times such a trade-off is very unfavourable, in the sense that the impact of policy rates on financial stability is quite small and the impact on inflation and resource utilisation is significantly greater. Then, in normal times an optimal trade-off would still result in policy rates directed towards stabilizing inflation and resource utilization with little impact on financial stability. In particular, it seems clear that monetary policy should not be used to target housing prices. A considerable amount of research has concluded that policy rates have a modest impact on housing prices but a substantial impact on output, implying high real costs for using the policy rate for this purpose (Assenmacher-Wesche and Gerlach 2010).
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Basel II principles require all banks to address all risks, such as credit risks, market risks, operational risks and others. The principles envisage that banks should have in place systems that would help identify, measure, monitor and make provisions for such risks. The domestic banks are aware of the importance that the application of the new standard should coincide with concentration on risk management in keeping with the best global practices by using the best technological solutions. Reviewing the topics of this Symposium and the quality of its speakers, I see that it broadly covers aspects and all types of applications of banking risk management as Basel II principles seek to highlight and address. In conclusion, I express my deep thanks to the audience and the organizers of this symposium, and we look forward to having positive contributions and outstanding papers, wishing you all success. Al Salumu Alaikum Warahmatu Allahi Wabarakatuh. IS Review 125/2006 1
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Secondly, banks should strengthen their capital and the liabilities susceptible to be used in the event of bail-ins in order to face on an optimal footing the regulatory challenges still pending, particularly in respect of resolution. Thirdly, the financial sector should strive in particular to enhance its reputation and to introduce measures mitigating the risk of misconduct. Fourthly, banks should address the challenge of increasing their profitability, although this cannot be at the expense of an undue easing of lending standards. Finally, and clearly not least importantly, the new technological environment, while a major challenge for the sector (in particular because of the emergence of new competitors and services), is also an opportunity that Spanish banks should take advantage of. Allow me to conclude by pointing out that, with a view to furthering the current growth phase and entrenching the Spanish economy’s potential, it is essential in my opinion to harness the still-favourable cyclical juncture to create budgetary space ahead of future recessions and introduce reforms to take over from the expansionary demand-side policies of recent years. It is likewise vital to address the challenges the banking sector has still to face, such as the reduction in non-earning assets, the improvement of its capital structure and profitability, the strengthening of its reputation and the optimal harnessing of technological developments.
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Finally, in order to endow the Economic and Monetary Union with greater stability and soundness ahead of future shocks, it is necessary to continue enhancing its design and governance as regards key aspects of the Banking Union and of the Capital Market Union, and the attendant implications for a future Fiscal Union. And with this final reminder of the importance of the European institutional framework for the economic future of our countries, it is an honour for me to give the floor to the Minister of Foreign Affairs, European Union and Cooperation, Mr Josep Borrell. Thank you. 7/7
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Second, a wide array of recent indicators suggest that the U.S. economy entered 2011 with substantial forward momentum. Real personal consumption expenditure (PCE) grew 4.4 percent (AR) in 2010Q4, led by spending on durable goods (Chart 9). The one-year, 2 percentage point payroll tax cut, part of the December 2010 tax package extending the Bush-era tax cuts, is likely to give a significant boost to real PCE over the first half of 2011, perhaps as much as $ billion. BIS central bankers’ speeches 1 Real exports have grown rapidly of late; growth has been strong among much of the emerging market world, and growth prospects among our major trading partners is promising (Chart 10). Growth of business investment in equipment and software has been well maintained and is likely to get an added boost in 2011 from the “full expensing” provision enacted late last year as part of the tax package. This and the export strength is reflected in high levels of orders and shipments of capital goods (Chart 11). Business investment in nonresidential structures, such as office buildings and hotels, hard hit by the recession, is still declining but at a much reduced rate (Chart 12). Business inventories are in good balance with sales, after a very pronounced inventory cycle (Chart 13). Reflecting these developments, measures of business activity in both manufacturing and nonmanufacturing have reached substantial highs and measures of consumer confidence have stabilized (Charts 14–15).
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The Federal Reserve responded to the slowing of the recovery in midyear 2010 by beginning a second round of large-scale asset purchase programs. Those purchases are resulting in a rough tripling of the Federal Reserve’s balance sheet (Chart 42). U.S. economic conditions are currently quite far away from levels consistent with the Federal Reserve’s dual mandate of the pursuit of the highest level of employment consistent with price stability. I’ve discussed the high unemployment and unused productive capacity in the United States. Let’s turn to inflation. While trend inflation is quite low at the moment, we see it likely to be near the low point of this cycle. The rate of inflation for nonenergy services is beginning to increase, led by faster increases in apartment rents (Chart 36). A firming of demand along with a decline of the exchange value of the dollar should begin to put upward pressure on nonfood, nonenergy goods prices. However, underlying inflation fundamentals suggest relatively low trend inflation for some time: A substantial amount of slack in the economy, reflected in the sharp deceleration of core services prices – and the United States is a services economy (Chart 35). Relatively wide profit margins, so that firms facing very competitive output markets are able to absorb changes in energy and commodity prices. Moreover, unit labor costs are still falling (Chart 37). Inflation expectations remain well anchored (Chart 38).
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A new agenda for change So while the architecture may remain fundamentally the same, the plumbing of the financial system has undoubtedly been improved. This is unromantic work, but when crisis hits in the middle of the night, and unpleasant odours emerge from the system, it is the plumber you call, not the architect. However, it is reasonable to ask whether these changes are sufficient to reduce the incidence of financial crises in the future and to enhance our ability to manage such crises as will, inevitably, occur. I do not propose today to try to cover all the issues that might be raised by that general question. I certainly do not plan to talk about fiscal and monetary policies, which are no longer my area of expertise. I will also leave to one side the important developments of bankruptcy and insolvency procedures. The IMF’s Sovereign Debt Restructuring Mechanism (SDRM) proposal seems to have been shelved for the time being but, judging from recent successful bond issues by Mexico and Brazil, some solid progress is clearly being made on collective action clauses which should allow for more timely and orderly restructuring of sovereign debt in case of problems. However, all of these subjects are, as we say, above my pay grade. I will concentrate instead on the regulatory dimension. I do not propose a very radical agenda. Regulators are not normally revolutionaries.
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And finally, these developments have been continuously reinforced by the strengthening of the financial infrastructure, the settlement system, the legal and regulatory framework to ensure the robustness and vibrancy of the bond market. Malaysia has benefited immensely from the development of the bond markets. As an important source of financing, it contributes to the economic growth process. It also allows for more efficient mobilization and allocation of financial resources. With greater efficiency in the intermediation process, it reduces the cost of financing. It also allows for the increased diversification of risks both for issuers and investors. In addition, it enhances financial stability through potential diversification, increased transparency and greater market discipline. The development of the bond market also enhances the transmission mechanism BIS Review 53/2008 1 of monetary policy. Finally, and most importantly, the more developed bond market has enhanced our resilience to the implications of increased volatility in the international financial markets. The Malaysian bond market has several distinguishing features. Firstly, it comprises both the conventional and Islamic bond market. Secondly, the secondary and repo market is now growing in significance. Turnover volume in the secondary market has been steadily increasing over the years marking the active participation in the bond market by investors. In 2007, total annual turnover volume increased by 46% to RM777 million. There is also an increased diversity of instruments being issued ranging from asset-backed bonds, bonds bearing features such as stepped-up coupons and "floaters" and pass-through ABS.
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As for global economic activity, the figures for the last quarter of 2016 show higher-thanexpected GDP growth in advanced economies, except in the United States; in emerging economies there were clear differences with robust growth in Asia, that prompted a moderate rise in international trade, and a further slowdown in Latin America. Similarly, indicators published in the first quarter have been somewhat more favourable than expected. In the euro area, despite the presence of the above-mentioned factors of uncertainty, the most recent economic developments show a firming of the recovery, although its strength across countries is uneven. The ECB's most recent projections in March indicate that the current phase of recovery will persist and that GDP growth in the euro area will continue to be underpinned essentially by domestic demand, with forecast growth rates of 1.8% and 1.7% for 2017 and 2018, respectively, similar to that observed in 2016. Euro area inflation climbed to 2% in February, mainly reflecting temporary factors linked in particular to energy prices, which will unwind over the year. In fact, headline inflation in the euro area slowed to 1.5% in March and core inflation (excluding energy and unprocessed food) stood at 0.7%. From a medium-term perspective, the ECB projection exercise points to inflation moving on a very gradual upward path, with the result that, towards the end of 2019, it would still stand below 2%.
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What I shall retain from that experience is that the key to the Fund’s results were its willingness and ability to react flexibly to the various circumstances, its readiness to recognize mistakes and change the course of action when necessary, and all this while sitting on a ticking time bomb. This flexibility bids well also for the future. The importance of adaptability in tackling future financial turmoil can never be sufficiently stressed. In a rapidly changing world, any silver bullet can soon lose its shine. No piece of advice is sure to preserve its value over time. What we must ensure, more than defining a set of measures written in stone, is preserving the capacity of the institution to quickly generate appropriate new responses to handle new situations. Financial support is the second aspect of the Fund’s role in crisis resolution. With the emergence of the new capital account crises, the need for Fund resources has sharply increased. The access limits to Fund resources that were conceived to tackle the more traditional “current account crises” became obsolete overnight. The decision-making process tilted completely from rules toward discretion. Multi-billion packages not only became common place; over the years, the burden of financing was increasingly put on the IMF. In many respects the situation became unsatisfactory. One can easily understand that setting strict limits to Fund financing may not be appropriate in capital account crises, as it may restrict the institution’s room for maneuver too severely.
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William C Dudley: The regional economic outlook Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Federal Reserve Bank of New York’s Economic Press Briefing, New York City, 26 August 2015. * * * Good morning and welcome to the Federal Reserve Bank of New York’s Economic Press Briefing. I am pleased to have this opportunity to speak with you today about economic conditions in our District. As always, what I have to say reflects my own views and not those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. Tracking economic conditions in our region is an important part of our work here at the New York Fed. We need to understand how the diverse economies in our District are performing—from the metropolis of New York City and its surrounding areas, to rural communities in upstate New York and the tropical island of Puerto Rico. I take all of this to the table when the FOMC discusses business and economic conditions and trends. In addition, we provide our regional analysis to the public so that everyone can benefit from our work. At today’s briefing, we will share some of this work with you. As president of the New York Fed, I believe it is essential to listen firsthand to a broad set of businesses and people in the communities we serve to get as comprehensive a picture as possible of how our region is doing.
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There are more such deals in the pipeline, and I urge Chinese companies issuing green and sustainability bonds or taking green loans to seriously consider doing so in Singapore. I look forward to our continued cooperation with Chongqing. I am confident that our initiatives under the CCI will help build a more resilient, digital and sustainable future for our two countries. 3/3 BIS central bankers' speeches
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The big questions now are about the extent of the slowdown and how long it will last. On an optimistic view we may be largely through the sharp downward stock adjustment, and with consumption so far holding up better than generally expected, and with the possibility that investment will recover as the spread of ICT through the economy resumes, US activity may pick up as we move, say, into next year. But the pessimist can point to the weakness of private sector saving, which could induce more cautious consumer behaviour; he can point to a possible overhang of past investment excesses; and he can point to the US external deficit which will need to be corrected at some point. BIS Review 56/2001 1 These adjustments might take place gradually over time, implying a more protracted period of relatively slow growth in the US Or, if you are really pessimistic, you might anticipate more abrupt adjustment, implying a period of negative US growth and global financial instability. The recent somewhat erratic recovery of US financial markets from their earlier gloom suggests that they may have begun to side somewhat tentatively with the optimists; but some of the survey evidence of consumer and business confidence, on the other hand, supports a more pessimistic view. The truth is that none of us knows with any great confidence just how the US situation will evolve. For what it is worth I remain modestly optimistic, but I am very conscious of the downside risks.
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Domestic inflationary pressures, including wage pressures, have so far remained reasonably subdued and it is crucially important that that should continue. But it does explain our caution in moving interest rates down. Somewhat similar concerns explain my reaction to recent speculation that the Government would now make a strong push for early entry to the euro. I take no position on the five economic tests which are a matter for the Chancellor. But I do see the present external environment – and in particular, as I said elsewhere last week, the euro's present weakness – as a potentially serious obstacle to early entry. So I very much welcome the considered and cautious approach to making the assessment of the five tests, which the Chancellor set out this evening. Most people agree that sterling's exchange rate on entry to the euro would need to be substantially lower than our present rate, which few would regard as sustainable in the medium and longer term. Given the euro's present general weakness, that could come about in either of two ways. If, achieving what was considered to be an appropriate entry rate against the euro – whatever that was precisely – involved a substantial depreciation of sterling's overall, effective, exchange rate (that's to say sterling's rate against other currencies generally), that would be bound to put strong upward pressure on our domestic rate of inflation.
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For example, we explore what the consequences would be if we were to raise interest rates rather than lower them. But our analyses convince us that we are following the correct strategy. Besides, that strategy has not been determined by Mr Draghi and a handful of ECB Executive Board members; it came about with the agreement of the large majority of the Governing Council, on which all national central banks governors in the euro area have a seat. I would never have imagined that the euro area could break up, as almost happened in 2012. Nor did I think it possible that the ECB would have to print more than an additional € trillion (i.e. € and pump it into the economy in order to respect its mandate. The ECB has acted resolutely but the story is not over yet. In order to emerge from the crisis, it is crucial that the other authorities also do their homework. It is not up to monetary policymakers to resolve structural problems. 2 BIS central bankers’ speeches
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Third, many of their transition projects are only marginally bankable. Regulatory and political risks heighten the likelihood of default, transaction lead times are long, projects require prohibitively large amounts of start-up capital, and there is limited access to expertise in project development and financing. The current model of multilateral bank lending is inadequate to mobilise the capital that countries need for their transition. A good part of multilateral bank lending goes to bankable projects that could well have been financed by private capital. Multilateral banks tend to prioritise projects with lower risks to support their mandates of macroeconomic stability and growth. But in truth, their capital is most needed for riskier projects that are only marginally bankable but can support the transition. What we need is public-private partnership in financing that is synergistic not duplicative. We need to make every dollar of public capital count. We need blended finance. Catalytic and concessional funding from the public sector, multilateral development banks, and philanthropic sources can potentially enhance project bankability and help to crowd in private capital. They can: mitigate a portion of project risks to improve the risk-return profile and attract a broader set of private investors; provide technical assistance at the project design stage to increase the pipeline of investable projects; and facilitate the development of a mature climate blended finance ecosystem in emerging markets and developing economies. Blended finance is not new but we need to scale it up and this requires a collective effort.
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Encik Abdul Rasheed Ghaffour: Revolutionising Microfinance Welcoming remarks by Mr Encik Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Global Symposium on Microfinance, Kuala Lumpur, 22 May 2017. * * * In biology, the transformation of a species is said to happen in rapid bursts. Imagine an ecosystem of marine life along a shoreline. For millions of years, it can remain relatively unchanged. But an extraordinary event – such as a sudden move in sea levels – can alter everything quickly. Within decades, fishes, mollusks and plants alike can dramatically change in size and shape. Ultimately, those that adapt emerge as the stronger species in the ecosystem. We are gathered here today in the very different context of microfinance. Nonetheless, parallels can be drawn with the theme of this event, ”Revolutionising Microfinance”. Think of the incredible pace of technological change in recent years. In 2016 alone, machine prevailed over man in the world’s hardest board game. Reusable rockets became a reality. Twitter helped a nation elect their president. For microfinance, that rapid burst of change is already upon us. It is therefore a great honour for Bank Negara Malaysia to partner with the World Bank in hosting this Global Symposium on Microfinance. We are privileged to have so many learned speakers here with us to share their invaluable insights.
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The focus of this Symposium – on insights, inclusion and innovation – underpins this adaptability. Insights – identifying with microentreprenurs As effective policymakers and practitioners, we need to have deep insights of our clients on-theground: the microentrepreneurs. This obligation begins with the awareness that the needs, tradeoffs and circumstances of microentrepreneurs are unique. They face very different financial constraints and in turn, very different choice sets. Hence, effective microfinance design that appeals to microentrepreneurs’ needs will not only require a rooted understanding of whether they have been good paymasters, who their other financiers are and how they conduct business; 1/3 BIS central bankers' speeches but also their specific background, problems and values. As we speak, predictive credit analytics are being developed using alternative data, such as psychometric assessments and other non-financial information. This may be particularly useful in the microsegment, where traditional data on creditworthiness are usually scarce. These insights can also be leveraged to design products that are tailored towards the distinct needs of microentrepreneurs. Improving user experience and confidence is equally important. Application procedures, user interfaces and operational processes should be simple and seamless. Most importantly, they should be appropriate to the circumstances of microborrowers for whom a loan may well be the first experience with a formal financial institution. How they perceive this experience can have longer term effects on the level of trust they place in financial institutions, and reinforce behaviours that will either encourage them to use financial services, or further distance them from the formal financial system.
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Considering the dramatic price increases on the Swedish housing market in recent years, this is a completely reasonable claim. The higher housing prices are, the greater the loan required to finance the purchase of a house or flat. Finansinspektionen’s mortgage survey shows that the debt ratio for new mortgage borrowers averages 370 per cent, which is a higher debt ratio than for existing mortgage holders. On the other hand, I do not think that the difference between new mortgage borrowers and those who have owned their homes for some time is as big as I had perhaps expected. This is because people who have owned their homes for a while have had the opportunity to reduce their debts. The fact that the difference is not bigger could indicate that the households reduce their debts at a relatively slow rate. Let me return to this a little later. The debt ratio is highest among low and middle-income earners One conclusion of the government’s inquiry “Over-indebtedness in a credit society” is that the highest debt ratios are to be found among those with the highest incomes. This is the picture you get if you look at the population as a whole, that is if you also include individuals who have an income but no debts. This means that the inquiry really shows that low-income earners do not take loans to the same extent as high-income earners. If we instead look at debts in relation to incomes only for those individuals who have debts we get a different picture.
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Joseph Yam: Financial market developments in Hong Kong Remarks by Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the Euromoney 40th Anniversary Gala Dinner, Hong Kong, 16 July 2009. * * * It is a great pleasure to be able to share the honour at this evening's Euromoney awards dinner with so many excellent recipients. And it is a particular honour to receive the award for "Outstanding Contribution to Financial Markets". This is a threefold honour. First, because it is awarded by Euromoney, a publication – or rather an institution – with a particularly strong relationship with central banks and markets in this region. Secondly, because the award is presented to the HKMA as a whole, as a recognition of the hard work of staff from all parts of the organisation who have helped develop financial markets. And thirdly, because the award highlights an area of our work that usually receives less acknowledgement than it should: the development of financial markets not just through encouraging product innovation, but also through laying down the infrastructure to enable markets to function and grow. It is, I think, entirely appropriate that this evening's event is being held in a restaurant on top of the Star Ferry Pier – as we are from time to time reminded by the swaying of the structure and the occasional battering from the ferries themselves. Transport links are a good analogy for financial infrastructural links. They involve both local and international networks.
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Contrary to the dynamics one would expect of an idealized perfect market, however, short-term rates have consistently traded at levels below the IOER rate, and Treasury bill and repo rates have occasionally gone negative, particularly when financial stresses increase the demand for very safe assets. Since IOER is available only to depository institutions holding balances at the Fed, many other money market participants cannot access it, either because they don’t earn interest on Fed account balances (like government-sponsored enterprises, or GSEs) or don’t have Fed accounts at all (like money market funds). Without such access, these institutions may have less bargaining power and may have to leave funds unremunerated at the Fed or place funds in the market at sub-IOER rates. This creates a potential arbitrage opportunity for banks, which can earn a spread between their costs of funds and their earnings on reserves, but not for other cash lenders. However, uncertain or rising balance sheet costs – likely related to new regulatory changes, including higher capital requirements, leverage ratio and liquidity requirements, and changes in the FDIC’s insurance fee assessment scheme – may have altered banks’ cost-benefit evaluations and tempered their willingness to arbitrage the differences in rates. Additionally, banks are reportedly unable to attract substantial funds because of lenders’ concerns regarding credit risks associated with uncollateralized lending and because lenders often distribute their investments among several banks, making their supplies of funds relatively insensitive to the interest rates offered by individual banks.
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Such inducements to control the velocity of the monetary base might expose the Fed to intense scrutiny and criticism. The big banks that park the lion’s share of excess reserves with us are hardly the darlings of public sentiment. Raising interest payments to them while scaling back our remittances to the Treasury might raise a few congressional eyebrows. And as to our repo operations, we have never implemented them on anywhere near the scale envisioned. Of greatest concern to me is that the risk of scrutiny and criticism might hinder policymakers from acting quickly enough to remove or dampen the dry inflationary tinder that is inherent in the massive, but currently fallow, monetary base. In the parlance of central banking, the “exit” challenge we now face is somewhat daunting: How do we pass a camel fattened by trillions of dollars of longer-term, less-liquid purchases through the eye of the needle of getting back to a “normalized” balance sheet so as to keep inflation under wraps and yet provide the right amount of monetary impetus for the economy to keep growing and expanding? The first law of holes I have great faith in the integrity and brainpower of my fellow policymakers. I am confident that the 19 earnest women and men that make up the FOMC will do their level best under Chairwoman Janet Yellen’s leadership to accomplish a smooth exit that keeps prices stable and the economy in a job-creating mode.
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A bank that is well capitalized can credibly state to its customers and clients that it can make good on its promise to pay. More and more, clients recognize this and differentiate among various banks on this basis. As financial services converge and competitive pressures increase, banks find that they must vie for capital, not only with their domestic and foreign counterparts, but also with investment funds, asset management firms, investment banks and insurance companies. This is equally true for emerging market banks that find they must compete with internationally active banks in what were previously thought to be solely domestic markets. These banks recognize that an adequately capitalized institution is a necessary, but not sufficient, condition to compete globally and to attract international funds and clients. It will be a challenge for these banks, and particularly those with high-risk profiles and opaque financial statements, to prove to clients, counterparties and stakeholders that they are operating safely and soundly. In the face of increasing competitive pressures, banks are focusing more of their attention on the role of capital, capital levels and targets, and how they relate to strategic plans and objectives. Many banks also are spending more time assessing their own risk profiles and evaluating the amount of capital they need to cope with adverse outcomes in normal times and under reasonable stress scenarios. The more sophisticated banks are in the process of developing internal systems and methodologies, including formal analytical models, that enable them to do this better.
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Still other banks have greatly increased their transaction processing, custody or asset management businesses, in the pursuit of fee income. Looking forward to the next century, I believe we will see major strides in the area that I suggest we call “e-finance”. More banks will venture into the relatively new world of on-line PC banking or will expand electronic bill presentment and paying services. Banks will be motivated to overcome obstacles such as systems incompatibility and consumer privacy concerns, to achieve greater operating efficiencies and to protect their valuable payments franchise. Going forward, on-line purchases and sales of securities by individuals also will continue to increase, producing a growing source of commissions for financial institutions. For most banks, these developments will mean a further increase in the diversity and complexity of risks to which they are exposed, including, but not limited to, credit, market and operational risks. The challenge for these banks will be to develop risk management systems that are rigorous and comprehensive, yet flexible enough to address the newer risks they take on as they expand into less familiar product areas. Today, I would like to highlight these risks and focus on how important it is for banks to integrate their risk management and capital planning processes. Also, I would like to focus on how the changing nature of banking is challenging supervisors to rethink their approach to capital regulation and supervision.
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The shift to a new policy took place between 1993 and 1995. 3 BIS Review 59/1999 However, it should be added with regard to the failed defence of the krona, that experiences of free capital movements were not especially extensive. The Government and the Riksbank and political analysts in Sweden did not have any experience of the conditions for economic policy in a globalised world. The new stabilisation policy regime The Government formulated the goal for monetary policy itself in January 1993. Inflation was to be maintained at two per cent per year with a tolerance interval of +/- 1 per cent. The goal is symmetric. It is as important to bring inflation up to two per cent when actual inflation is under two per cent as it is to bring down inflation when it is higher than the target. This can be said but a lot of practical issues remained to be resolved and the answers are not at all obvious: 1. How is inflation to be measured: by CPI, the GDP deflator, or some other measure of price movements? 2. Shall the Riksbank have other objectives besides price stability? 3. Shall policies be directed at controlling the money supply or inflation directly? 4. How is confidence to be established in the Riksbank’s policy and expectations about low inflation? 1. The inflation target The Riksbank’s objectives has been expressed in the following way in legislation: “The objective of the Riksbank’s operations shall be to maintain price stability.
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In addition, the Riksbank shall promote a safe and efficient payment system.” The first objective has therefore been made concrete by the Riksbank itself as 2 per cent inflation with a tolerance of one per cent upwards or downwards. The second objective, stability in the payment system requires monitoring of the “infrastructure” in the payment system and of the major institutions that could be associated with a systemic risk for the banking system. The second objective is hardly known although important and it will also continue to be the Riksbank’s responsibility if Sweden joins the monetary union, the EMU. The Riksbank has opted to measure inflation by the consumer price index, CPI. This measure has certain disadvantages, although it has the great advantage of being known and spread among the general public. “Inflation” is understood by the general public as a slow rise in CPI. The disadvantages with CPI are that the measure itself is affected by the policy carried out by the Riksbank. If inflation is low and risks turning into deflation, the economy needs to be stimulated. The Riksbank then reduces the instrumental rate to increase activity and capacity utilisation in the economy. However, the first thing that happens is that inflation is further reduced or even becomes deflation as interest rates fall and housing costs become lower. These are namely included in CPI. Only after some delay is there an effect on the level of activity and inflation in the right direction. This can lead to misjudged policies.
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• Last July 3rd, the CBC Board approved the release for public consultation of stage two of the FX regulation modernization. This regulatory reform consists of four stages, the first of which was enacted early this year, simplifying the compliance with, and reporting of FX transactions to the CBC. • This second stage will allow transactions in derivative products whose settlements or payments contemplate the physical delivery of Chilean Pesos. Additionally, upon the enactment of this regulation, non-residents will be able to open and hold an account in Pesos as well as ask for loans denominated in our currency, whether in the form of mutual, lines of credit, or other. • Although these regulatory changes are part of our 2018-22 Strategic Plan, and have an independent agenda of implementation, they are of extreme relevance to the operation of CLS. Without these amendments, foreign settlement members would not be able to manage their accounts in Pesos or have access to the credit lines in Pesos, that are fundamental to perform the payment to CLS. • Conversely, the FX changes should impact on the FX activity involving the Peso, increasing the systemic risk of settlement. CLS arises as the best-known alternative to mitigate those risks. Then, CLS is essential in this future FX context. VII. CLS and the current situation • Lastly, I cannot end my intervention without referring to the Covid-19 pandemic that is sweeping across our country and the world.
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Page 1 of 4 Central Bank of Chile July 2020 • Moreover, CLS improves the liquidity management of the financial institutions, particularly the banks that settle directly into the system, using an efficient multilateral net mechanism. • Additionally, due to the high standards of currency eligibility and the efficiency of the operative process of settlement, when a currency is part of CLS it gives a strong signal of financial development. At the same time, important international players that only traded if the payment is performed through CLS can incorporate the Peso into their portfolios, thus increasing market competition. • Finally, the CLS settlement of the Peso will improve the transparency of the currency markets’ transactions, incorporating over-the-counter transactions into an infrastructure, according to the international recommendations and principles. IV. Private sector involvement in the CLS system • An important part of the risk reduction and liquidity saving benefits is faced by the financial institutions participating in the system and, therefore, passing through to the rest of the financial markets, and ultimately to the users of the financial products, currency derivatives, and foreign exchange (FX) transactions. • Moreover, as a financial market infrastructure, CLS interacts with other financial institutions, particularly with banks. At CLS, banks play different roles, such as Settlement Member, correspondent or Nostro service provider, and liquidity provider. • The timely involvement of banks in the process is essential, considering the start of the implementation phase by the end of this year.
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In order to put this figure in perspective, it may be worth remembering that around 200,000 people in Sweden today are openly unemployed and almost 400,000 people of working age are on sick leave. For safety’s sake, I should perhaps also stress that it is a question moreover of a shift in the timing of an employment upswing, and not a question of jobs having been lost for good. Allow me to round off this discussion. In my opinion, the shift to low inflation has worked well on the whole, considerably better than most people thought. This does not mean of course that our policy at various times does not deserve criticism, and recently the Riksbank has undeniably fallen short of the 2 per cent target. This spurs us to deepen our understanding of the inflation process even more. Nevertheless, some of the criticism that has been levelled at the Riksbank has been out of proportion and ill-founded. The unemployment problem is so serious that it deserves a better discussion. The current assessment By way of conclusion, I shall now comment on the Inflation Report that we published today and the decision we made yesterday regarding the repo rate. The main scenario In brief, the main scenario described in the Inflation Report can be summarised as follows. International economic activity is expected to continue to strengthen this year. Over the coming two years, growth is expected to be robust, although it will probably be dampened somewhat.
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UND1X inflation is expected to be 1.4 per cent one year ahead and 2.0 per cent two years ahead, while the corresponding figures for CPI inflation are forecast to be 1.6 per cent and 2.5 per cent, respectively. This time, both the international and domestic inflation risks are judged to be balanced. On the international front, the main upside risk is that the oil price will develop more unfavourably and have greater contagion effects on other prices than is currently foreseen. The downside risks mainly consist of a number of financial imbalances that could contribute both to lower inflation and weaker economic activity. These include high house prices and an increase in household indebtedness in many countries, as well as the large deficits in the US federal budget and current account. On the domestic front, the risks are mainly related to productivity growth; more specifically to what extent the robust productivity reflects a more permanent structural phenomenon and to what extent it is due to cyclical 6 BIS Review 59/2004 factors. There is considerable uncertainty in this regard and there is a risk both of overestimating and underestimating future productivity growth. The balanced risk outlook means that the probability of inflation being higher than the forecast in the main scenario is judged to be equal to the probability of it being lower. In other words, the risk-adjusted inflation forecast is the same as the forecast in the main scenario.
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This view is confirmed by the apparent difference between the ongoing recoveries in the US and Switzerland. While in the case of the US economy, the recovery is at the moment essentially focused on larger firms with smaller ones probably suffering from restricted access to credit, in the Swiss case, any diverging trend between big and small firms is not of major importance. Rather, the difference is more accentuated for firms that are predominantly export-oriented as opposed to those oriented towards the internal market. On the export side, the ability of Swiss exporters to continue redirecting their efforts towards the more 2 BIS Review 33/2010 dynamic regions of the world economy, in particular Emerging Asia may be a crucial test. This region is leading the world in terms of economic recovery from the crisis. It is clear here that the proponents of a reasonable version of the decoupling hypothesis are on the winning side of the intellectual debate. On a global level, inflation pressures are expected to remain subdued in most economies. In advanced economies, headline inflation is expected to pick up from near neutral levels in 2009, but remain low in 2010. For Switzerland, the path of inflation in the short term will be largely dictated by recent movements in oil prices and associated base effects. Inflation will nevertheless remain positive throughout 2010. This follows a negative rate of 0.5% in 2009. Assuming that monetary policy remains unchanged, the SNB’s forecast show that inflation will reach 0.7% this year.
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These measures recognize that to avert or contain future financial crises, we need a financial system that can withstand large negative shocks. First, market participants must not have incentives to take excessive risks. Instead, incentives should reward actions that support economic growth and financial stability. And financial firms must set aside enough capital and liquidity so that when things go wrong they can absorb losses with their own resources. Finally, if these buffers prove inadequate and a financial firm veers toward failure, the official BIS Review 141/2010 5 sector needs the tools to wind them down in an orderly manner without having to make the terrible choice between a chaotic failure that harms the whole economy and a taxpayerfunded rescue. Conclusion I appreciate the opportunity to talk to you about how my job at the New York Fed ties in with your lives and work here in Upstate New York. The links are many, including How the Fed’s dual mandate for full employment and stable prices guides our actions and affects your lives; How we rely on understanding economic conditions in Upstate New York as input when we formulate our policies; and How our efforts to restore financial stability have provided a more solid foundation for lending to households and businesses – including small businesses.
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Sources: Central Bank of Chile and National Statistics Institute (INE). BIS central bankers’ speeches 11 Figure 10 Nominal exchange rate (1) (index, 2-Jan-2006= 100) Real exchange rate (2) (index, 1986=100) 120 120 110 110 100 100 90 90 90 80 80 80 70 70 140 140 130 130 120 120 110 110 100 100 90 80 06 07 08 OER 09 10 MER 88 92 96 00 04 08 RER 1990-2009 average 1995-2009 average MER-5 (1) Vertical dashed line marks date of publication of the September 2010 IPoM. (2) Information at 16 December 2010. Source: Central Bank of Chile. Figure 11 MPR and expectations (percent) 9 8 7 6 5 4 3 2 1 0 07 08 09 10 11 9 8 7 6 5 4 3 2 1 0 12 Forward September 2010 IPoM Forward December 2010 IPoM MPR FOS first half December 2010 EES December 2010 Source: Central Bank of Chile. 12 BIS central bankers’ speeches
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This is due to increasing competition from fintech companies that are able to serve SMEs and the underserved market more effectively as compared to a traditional credit intermediating bank. Tawreeq, for example, a UAE-Luxembourg fintech platform, – offers supply chain finance solutions including Shariah-compliant trade finance securitisation – to SMEs and their corporate partners. How do we lessen the risk of being overtaken by such competitors? One way is for the Islamic finance industry, to tap into the expertise of fintech companies – by exploring mutually beneficial partnerships – to develop innovative financial solutions for the international business community. In Malaysia, the Regulatory Sandbox is supportive for industry players to explore innovative ideas and test prototype of technology solutions for trade finance. Increasing trade flow of halal products – also offers large opportunities for takaful operators to develop innovative solutions for trade-related risks. A good example is trade credit takaful. This however, necessitates the development of requisite expertise within the takaful industry and the need to increase awareness among traders on benefits of trade credit protection. Global large infrastructure financing needs The third and final trend that I would like to highlight today is the large infrastructure development taking place to cater to the needs of increasing global population. Global infrastructure development financing needs is expected to reach USD94 trillion by 2040 and close to USD52 trillion in Asia alone 7.
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Finally, we turn to the layer at the base of the system – the Instruments, or forms of money that should confer the properties of a public good. 2/4 BIS central bankers' speeches The decentralisation of instruments is most clearly associated with the emergence of alternative currencies to those issued by central banks. Technology firms with large ecosystems, or technology itself can create new non-fiat currencies. While today’s crypto instruments (e.g. Bitcoin) have failed to become money, we should not discount the possibility of better algorithms leading to viable cryptocurrencies as a global medium of exchange in the future. But the widespread use of private cryptocurrencies could lead to an erosion of the nation state’s monetary sovereignty. This will in turn have implications for central banks’ ability to safeguard financial stability. As Mark points out, the continued centrality of public money in the financial system is key to safeguarding the soundness and stability of all money in the economy. A pre-condition for this is that state-issued currency remains the domestic economy’s predominant unit of account. The currencies of small, open economies may be particularly vulnerable to loss of monetary sovereignty. They do not have the global network effects that currencies of larger nations enjoy. Markus Brunnermeier and others have highlighted the possibility of “digital currency areas” that transcend national borders with even larger and more powerful network effects. Currency competition is not a challenge that we are unfamiliar with.
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By bundling financial and non-financial services, they are able to better meet the needs of consumers. Second, embedded finance by financial players. Regulated financial institutions are reinventing their business models and leveraging on technology to connect with customers at more and varied touchpoints. Financial institutions are “embedding” their offerings in an array of non-bank digital platforms in an attempt to reach new customers at lower acquisition costs. Embedded finance combines the benefits of platform economics with the trust premium that people still place with regulated financial institutions. Central banks and regulators should welcome both these developments. They offer the prospect of more efficient, more affordable, more inclusive financial services. 1/4 BIS central bankers' speeches But we need to be alert to new sources of risk. If the distributor and underlying provider of a financial service are not the same entity, who is accountable to the customer? As the number of 3rd-party intermediaries involved in a financial service grows, there might also be increased operational risks. We will need to adapt our regulatory approaches. Pay greater attention to market conduct, consumer protection, and technology risks. Regulatory frameworks will need to become more modular and agile. Entity-based regulation remains relevant for the provision of key services such as deposit-taking, insurance, and the offer of securities. But for the growing number of players who offer niche financial services, we need to rely increasingly on activity-based regulation. This is all still fairly familiar ground, as the fundamental structure of financial services remains largely intact.
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• Neither macroeconomic nor sector imbalances, of which I have spoke before, must be tolerated for too long. • The banks' risk management processes and procedures must be dramatically improved. This includes revision of the existing limits on the BIS Review 18/2009 banks' exposure to certain risks, improvement of the stress-testing procedures and elimination of the weaknesses related to risk management which arise from the investments in structural financial products. We, as National Bank of the Republic of Macedonia, have adopted new regulations related to these issues and we continue to work on that with our banks. • Strengthening of the principles for liquidity risk management, especially in crisis. Internationally, steps have already been undertaken. In April 2008, FFS prepared a Report and defined 67 activities for strengthening the markets and the resilience of the institutions. The Report pays special attention to liquidity, and on September 28, the Basel Committee on Banking Supervision announced the new Principles for Sound Liquidity Risk Management and Supervision. The responsibility is located with the banks and supervisors. We, as National Bank, have already passed new regulations for defining the main elements which the liquidity risk management system of each bank must incorporate. The aim is to ensure level of liquidity which the banks will be able to use as source for covering. • The transparency of the operations of the financial institutions must increase through the type and the scope of the data these institutions will disclose.
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For more information see: https://www.hyperledger.org/ 15 See FCA Discussion Paper on Distributed Ledger Technology (April 2017) at: https://www.fca.org.uk/publications/discussionpapers/dp17-3-discussion-paper-distributed-ledger-technology 8 All speeches are available online at www.bankofengland.co.uk/speeches 8 Figure 3: The Promise of FinTech As it does, risks will evolve. Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning. At the same time, the resilience of the system could also be built, through greater diversity in provision of financial services as well as increased redundancy. A host of applications could reduce costs, improve capital efficiency and strengthen operational resilience. The challenge for policymakers is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society. We are ideally positioned to realise FinTech’s promise in the UK. The Bank will work with the market and other authorities to build the hard and soft infrastructure the system needs to support innovation and growth, consistent with the City’s best traditions. 9 All speeches are available online at www.bankofengland.co.uk/speeches 9
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PCPs are also in the works for two more areas in banking – wealth management (which is rapidly growing) and operations and support (which is undergoing disruptive change). IBF will launch a dedicated career centre next month, to offer integrated support across career planning, skills development, and job placement. 8 / 11 BIS central bankers' speeches While the financial industry continues to create jobs on a net basis, there is a lot of churn and movement in the industry. Skills development, career pathways, and job placements need to be looked at holistically. IBF will leverage on its strong network with financial institutions to help professionals navigate and make their career transitions. IBF will also work closely with partner agencies – e2i, NTUC and WSG – to support financial sector professionals looking to move into other sectors. INNOVATION AND TECHNOLOGY The third pillar of the ITM is innovation and technology. Singapore has global mindshare today as one of the leading Fintech hubs in the world. Our FinTech agenda is well known and there will be other occasions to talk about the various initiatives. Today, I want to emphasise the central role played by regulation in promoting innovation and technology. To get innovation right, we must get regulation right. This is a creative tension – managing risk while facilitating innovation. It calls for a pragmatic and flexible approach; there is no one-size-fits-all approach. Sometimes, it means not rushing to regulate so that we do not front-run innovation e.g.
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AFA can also play an important role in driving higher standards of professionalism in the industry through the development and implementation of industry codes of conduct and ethics that are focused on the interests of clients. Well informed financial consumers The Bank is mindful that while great emphasis has been placed on the responsibility of financial service providers and intermediaries to ensure that the products recommended to consumers are appropriate to their needs, consumers are ultimately accountable for their own financial decisions. Our best efforts to improve the quality of and accessibility to financial advice would be incomplete without at the same time, equipping consumers with the knowledge, skills and tools to make informed financial decisions. These capabilities not only allow individuals to build, manage and preserve wealth, they are essential to help consumers protect themselves against poor market practices and to take appropriate actions when treated unfairly. Therefore, enhancing financial capability among Malaysians has been and will continue to be an important agenda of the Bank. Financial advisers have an important role in this effort given your unique vantage point as an objective adviser, and through the close relationships that are cultivated with your clients. We look to the industry to provide input and support to the Bank’s ongoing work to develop financial capability programmes that are tailored to the different key life stages of individuals from their days as a student, when they enter the workforce, when they start and raise a family, and in retirement.
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Growth is concentrated in the largest cities like New York and San Francisco, and those who benefit the most are those who already have high incomes.2 A large part of this is because current economic conditions favor highly skilled workers who tend to flock to cities. These big metropolitan areas are successful, but they also suffer from some of the starkest wage inequality in the country. By contrast, upstate New York is less unequal, but the disappearance of manufacturing jobs has held back growth. More equal wage growth is only good news if people have jobs. But many have found themselves in the position of leaving the area in which they grew up to look for work. The Albany area has bucked this trend. The mix of colleges and universities specializing in innovative subjects like nanotechnology, and high-tech businesses, alongside its position as a state capital, has created a real economic success story. I know there are a lot of students in the room, and choosing SUNY was a wise move. Investing in an education that equips you for the future will pay off over the long term. The Tale of Many Economies So what can the Fed do about this complex picture—the tale of many economies I’ve talked about today? 2/3 BIS central bankers' speeches Monetary policy is an important tool, but it alone cannot address all the economic issues that we face.
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John C Williams: A tale of many economies Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at University at Albany-SUNY, Albany, New York, 11 July 2019. * * * As prepared for delivery Thank you for that kind introduction and for having me to speak today. I’m an economist, so I naturally have a fascination with data, statistics, and what we can learn from them. But the reason I find economics so interesting isn’t the numbers or the charts—it’s how they shape the everyday lives of people. And that’s the reason running a Federal Reserve Bank is such a privilege. The work we do—our public mission—plays a big role in helping people get jobs, take out mortgages, or grow their businesses. Today I’m going to talk a bit about that work and the health of the economy—both at the national level and for this region, the Federal Reserve’s Second District. Before I go any further I need to give the standard Fed disclaimer 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. I’ve just referred to the Federal Open Market Committee and the Federal Reserve System, but I know it’s not always entirely clear to people what they are, or what they do.
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Most central banks in small, advanced economies instead have completely self-financed foreign exchange reserves in the magnitude of 10–12 per cent of GDP. Our borrowing of foreign currency has been criticised from time to time for raising the official measure of national debt, as well as the measure known as Maastricht debt, which is often used in international comparisons. This borrowing thus leads to a conflation of the Riksbank’s foreign exchange reserves and the public finances. Large-scale borrowing for the foreign exchange reserves is also a disadvantage from the perspective of preparedness. As foreign exchange reserves funded by loans involve refinancing risks, self-financed foreign exchange reserves could strengthen the Riksbank’s ability to act in a financial crisis. In light of this, it is reasonable to review the available alternatives for funding the foreign exchange reserves. One possibility would be to replace currency loans via the National Debt Office with self-financing through purchases by the Riksbank of foreign currency, paid for in Swedish kronor. In this case, however, it would have to be done in a way that minimises the effect on the krona exchange rate. 11 [13] Equipping ourselves for the future Let me now round off. These days, monetary policy does not only involve adjustments of the policy rate but also changes to the Riksbank’s holdings of various financial assets and the composition of the liabilities held by the Riksbank.
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This can be expressed as the central bank having responsibility for price stability, but, just as much, it is a matter of ensuring that there is an efficient payment system in the country. As I said, there is an international debate on the importance of being able to cut policy rates to far below zero, and it is being discussed how this could be achieved in practice with various technical solutions. 12 See, for example, Rogoff (2020). 13 See, for example, Brunnermeier and Koby (2018). 9 [13] Something possibly missing from this discussion is how the general public’s confidence in their country’s own currency/means of payment would be affected. If one unit of saved currency suddenly gives less than one unit of currency back, what would happen to the public’s willingness to hold that currency? Negative real interest rates are certainly nothing new, and this phenomenon has not been linked to any undesired effects on behaviour. Consequently, according to economic theory, negative nominal interest rates should not be any different as it usually assumes that it is real interest rates that are important to our decisions to consume or invest. However, this assumption is not undisputed, and there are plenty of examples to indicate that people often think in nominal terms.
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More broadly, the long-term implications for the UK economy of these arrangements bear examination. Within the objectives of the Solvency II reforms, it is not clear that the incentives of third-party capital providers are aligned with UK insurers’ role in making investments in UK based long-term infrastructure and productive assets. Both the PRA and insurers need to think about the opportunity cost of funded reinsurance – in terms of UK direct investments foregone – as well as the benefits and risks. Greater interconnectivity with wider financial markets Related to that point, the third area I would like to touch on is a key aspect of the changing Page 6 pensions and insurance landscape. One industry estimate, suggests that the UK life insurance industry could onboard more than £ of pension liabilities – and associated assets – over the coming decade[13] [14]. This is a big structural change in the control of long-term investments in the UK, and the decisions that insurers make now will have long term consequences for the performance and development of the broader economy. In line with the Government’s objectives for Solvency II reform, insurers’ investment strategies have an important role in supporting sectors that require certainty of funding over the long term, including education, social housing and infrastructure, and where financing the transition to net zero such as via renewable energy infrastructure and technologies requires patient and deliberate commitment. Making such investments can also generate a competitive advantage in a market where ESG credentials are increasingly valued by trustees[15].
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In practice, given the lumpiness and finite nature of this market, I see strong incentives for insurers to stretch their supply capabilities in the short term, to capture as much of the new business while they can, before leaner years arrive. So, let us move to the main course, and examine three areas where we see this stretch arising in practice. An expansion of risk appetites As deals become larger and increasingly focussed on buy-outs of complete schemes, we observe BPA writers expanding their risk appetite, sometimes outside their current core expertise. Firstly, our supervisory work suggests there is an increased appetite to insure deferred pension scheme members: the younger, not yet retired individuals. They bring several additional risks for insurers Page 4 including much greater uncertainty in the longevity risk, as assumptions have to be made over a much longer period of time, together with risks stemming from policyholder options, such as cash commutation, flexibility on retirement age and transfers outs[6]. This appetite is supported by reinsurers, who provide both pricing expertise and capital. Secondly, the disruption in the UK gilt market last autumn resulted in some pension schemes being overweight in illiquid assets[7] as gilt values fell significantly, and schemes sought to reduce their leverage under liability driven investment strategies[8]. We see insurers increasingly developing solutions to accept illiquid assets as part of the BPA premium, as pension schemes may be reluctant to dispose of these assets in the open market, potentially at a large discount.
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Some analysts have suggested that, because of capital market integration, real interest rates will equalize around the world, thus reducing the ability of national Central Banks to control inflation. However, this need not be the case. Indeed, the classic Mundell-Fleming analysis concludes that monetary policy should be more effective, rather than less, in the case of international capital mobility, although it can operate through different channels of transmission including the exchange rate. Furthermore, in many emerging countries, strong capital inflows confront monetary policy with a dilemma between pursuing internal and external objectives, in a context of rising inflationary pressures. Taming capital inflows would call for a relaxation of monetary policy, at the risk however of compromising on the domestic objective of maintaining low inflation. Sterilisation cannot always be relied upon to resolve this dilemma as it is likely to be ineffective in the long term and fuel other imbalances such as excessive accumulation of foreign exchange reserves. A second question is the potential for global contagion. As a direct consequence of cross-border financial integration, local price or liquidity shocks are more likely to spread around the globe. Large-scale liquidity creation resulting from monetary (or exchange rate) policy in one country may fuel asset price bubbles elsewhere. One current example might be seen in carry trades, which have become a major driver of a number of currencies, including the yen. Therefore, distant events can have sharp impacts, even on local institutions or investors. New contagion channels have emerged.
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Any new available information is accurately processed and impounded in asset prices, leading to more accurate pricing of assets and risks. And the permanent quest for arbitrage opportunities has fostered crossmarket and cross-border strategies also leading to more consistent pricing. Allocative efficiency, that is the market’s ability to allocate resources in a way that maximises the welfare attained through their use, has also improved: for a given investor, there is a wider and more diversified range of investment opportunities than ever before. Operational efficiency has so far gained from globalisation, since the cost of financial operations has quickly fallen, due to productivity gains in the financial sector stemming from the scale and scope of economies and the intense competition between markets and intermediaries. Nevertheless, this overall trend towards efficiency occasionally bumps into puzzles that are not readily explained by economic theory. For instance, the longstanding question as to why capital does not flow, in net terms, from rich to poor countries has not yet been clarified since it was first addressed by Robert Lucas. It has recently been supplemented by the so-called “allocation puzzle”, highlighting the fact that capital seems to flow toward economies with relatively low investment rates. Convincing explanations for these puzzles certainly require taking into account market imperfections (such as credit constraints), differences in financial infrastructures as well as growth externalities (such as human capital). Another salient feature of financial globalisation is the rapid maturing of emerging economies and markets.
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The Asian financial crisis of the 1990’s has been described by some as being the most severe in its depth and regional coverage. Looking back, I think three important lessons clearly stand out. The first is the risk associated with liberalizing capital flows without adequate safeguards and proper policy framework. Important in this context is the need for greater policy and economic flexibilities to help manage the effects on macroeconomic stability from persistent capital inflows and possible subsequent reversals. Also important is the need to have in place a credible crisis prevention mechanism that will allow timely liquidity support to be mobilized. As for the financial sector, the lesson learned is that a resilient and robust financial sector is key to avoiding crisis. The foundations for a resilient and robust financial sector are in the strong framework for prudential regulation and supervision, greater transparency and good governance, as well as a balanced financial sector. This last point applies particularly to well developed capital markets that can allow financial risks in the economy to be spread out, shared, and more efficiently managed. And the third lesson is the need to have in place an effective mechanism of economic and financial surveillance to identify potential risks, especially those relating to financial sector and capital flows issues, which are the two most important risks for emerging markets. All three lessons are now well known. And we have seen conscious efforts by national governments and IFI’s such as the IMF to take heed of these lessons.
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Also, it would be useful if the Fund could develop its own in-house view of a benchmark risk scenario which then can be used, or shared with members, in stress-testing the vulnerabilities of their economies and financial sectors. I probably have used up my allocated time. I hope my remarks have been useful. Again, I would like to thank the Independent Evaluation Office for the invitation. Thank you. 2 BIS Review 95/2006
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In the case of the most vulnerable banks – which accounted for little more than 20% of the system – these developments ultimately threatened their viability, generating appreciable risks to continuing financial stability. As you all know, this situation could only be resolved through the contribution of significant public funds, most of which under the financial assistance programme and financed, therefore, with European funds. Thus, through the Fund for the Orderly Restructuring of the Banking Sector (FROB) the State has since 2009 contributed a total of € million in various forms of capital. The industry has also contributed to the recapitalisation of vulnerable banks by providing, through the Deposit Guarantee Fund (FGDEC), a total of € million, on top of the € million 2 BIS central bankers’ speeches provided to the FROB in 2009. Also to be added here is the value of the various guarantees granted on the different sale processes involving State stakes, discounting the consideration obtained thereon. All these calculations are detailed in the related information regularly published by the Banco de España.1 Clearly, then, the public effort for the recapitalisation of the system has been considerable.
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A key development that could play a significant part in shaping banks’ balance sheet management policies is the forthcoming introduction of the minimum requirements for lossabsorbing capacity in the event of resolution of banks. These requirements, which are being analysed at a global level by the Financial Stability Board and, at the European level, by the 2 See the Financial Stability Report, May 2015. BIS central bankers’ speeches 5 European Banking Authority, aim to make it possible to handle the failure of credit institutions while minimising the need for public support. This legislation will foreseeably prompt important changes in the composition of banks’ liabilities which, in addition to a minimum volume of instruments eligible as regulatory capital, will have to include other instruments that may be converted into capital in the event of failure. These requirements could be especially demanding for institutions with lower levels of own funds and greater objective difficulties for issuing debt instruments on the markets that meet the new convertibility requirements. Accordingly, despite their indisputable achievements, Spanish banks as well as other European peers must continue to strengthen their own funds and, where appropriate, to make the transformations necessary to allow them to raise on the market the funds needed to comply with the new regulatory conditions, both in the prudential sphere and in that of resolution. ii) Profitability The second key challenge for credit institutions is to restore acceptable profitability levels.
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The measures taken by our trading partners to enhance confidence in their financial systems and adjust the macro-financial imbalances hamper monetary policy transmission in the economy. They heighten public concern and undermine its confidence in the future. These are the very reasons preventing the banking system to finance the economy and the government at lower interest rates and, consequently, the central bank’s monetary policy transmission to easing the monetary and financial conditions. What is currently happening represents higher risk premium in the countries of the region for all the reasons referred to earlier, rather than an increase in real interest rates. Concluding, I would like to clarify that central banks should make their utmost to preserve the frail macrofinancial balances and bolster public confidence in institutions and the financial system. In this context, the Bank of Albania, as to date, will continue to foster macroeconomic and financial stability in Albania. This is our major obligation arising from the Constitution and relevant laws. We are committed to meeting this obligation with dedication and meticulousity. We are fully focused on these two major objectives, just like a good captain focusing on the horizon, rather than on the hands laid on the ship’s wheel. The Bank of Albania believes that, by guaranteeing these two vital pillars to the stability and prosperity of the economy, we have provided the best contribution to achieving higher economic growth.
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We are well aware that crises that incorporate a significant financial downturn are usually deeper and longerlasting. The health crisis will directly affect the profitability of the European banking sector. Such profitability was already low before the crisis broke, and events have highlighted the need to tackle even more urgently certain challenges, such as those associated with digitalisation, the management of cybersecurity risks, reputational risks and those relating to climate change. This underscores the importance of making further headway in improving banking efficiency. Given the extraordinarily prevalent role played by this sector in the Spanish and European economy, how successfully these challenges are resolved will notably influence the intensity and sustainability of economic growth in the coming years. The importance of an extension and selective adaptation of national stimulus measures In the national economic policy arena, achieving the dual aim of supporting the recovery and smoothing the adjustment of the economy to the post-pandemic scenario calls for two actions. First, the authorities must extend and regularly recalibrate some of the 6 measures already applied, which will have to be more closely focused now on the groups of firms, sectors and individuals most affected. And further, their design should enable the structural adjustments needed ahead of the new post-pandemic environment to be brought about. Allow me to illustrate this idea in relation to two measures that have been particularly important in recent months: the policies on guarantees and on ERTEs.
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Henry Ohlsson: Decision today, consequences far into the future Speech by Mr Henry Ohlsson, Deputy Governor of the Sveriges Riksbank, at a breakfast event, organised by Swedbank, Stockholm, 18 March 2016. * * * I would like to thank Bo Enegren, Hanna Köhler, Gustaf Norrefeldt, Cecilia Roos-Isaksson, Marianne Sterner and Ulf Söderström for their help with this speech. Accompanying figures and the table can be found at the end of the speech. Some of the decisions we make only have significance for the here and now. Others may have consequences for many decades to come, in some cases for the rest of our lives. Our choice of education and purchase of a home are examples of decisions that have considerable significance over a long period of time. For a person who puts themselves in debt through decisions with long-term consequences, it is of course important how high the interest rates on the debt are. And this does not concern the interest rates paid now or in the medium term, but also interest rates several decades ahead. In recent years, interest rates have been at their lowest level in modern times. Several other central banks have done as the Riksbank and cut their policy rates below zero, and government bond yields at longer maturities are now at historically low levels. This is partly due to the prolonged recession following the financial crisis.
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Piketty, T & Zucman, G (2014) “Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010”, Quarterly Journal of Economics, 129(3),1255–1310. Rogoff, K (2015). “Debt supercycle, not secular stagnation”, VOX, CEPR’s Policy Portal. Summers, L. “Reflections on the new ‘Secular stagnation hypothesis’”, VOX, CEPR’s Policy Portal, 30 October 2014. Waldenström, D (2015) “Wealth-income ratios in a small, late-industrializing, welfare-state economy: Sweden, 1810–2014” Department of Economics, Uppsala University, Working Paper 2015:4, October. BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9
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Ásgeir Jónsson: Address – 60th Annual Meeting of the Central Bank of Iceland Address by Mr Ásgeir Jónsson, Governor of the Central Bank of Iceland, at the 60th Annual Meeting of the Central Bank of Iceland, Reykjavík, 7 April 2021. * * * Madame Prime Minister, Chair of the Supervisory Board, honoured guests: This year, 2021, can be called the Triple Crown of anniversary years for the Central Bank of Iceland. In 2021 we commemorate three earlier milestones in the Bank’s history – 1961, 1981, and 2001. The Central Bank became an independent institution in 1961 – and on this day, in fact: 7 April. So we are celebrating the Bank’s 60th anniversary today. Until 1961, central banking activities in Iceland had been in the hands of two commercial banks: first Íslandsbanki and then Landsbanki Íslands. The establishment of the Central Bank was an element in the broad economic reforms introduced in the early years of the so-called Viðreisn government coalition – reforms that released Iceland from capital controls, goods rationing, and repeated currency exchange rate adjustments. But 60 years is not an advanced age if we consider that Iceland became a sovereign country 103 years ago. With the grant of sovereignty in 1918, the Icelandic króna became an independent currency. It was not until 43 years later that a separate central bank was tasked with the conduct of monetary policy. It should come as a surprise to no one that economic policy was fairly unsuccessful over that time.
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These data series R sometimes are constructed using different base years, making comparisons of series even of the same variable problematic. Besides weak data series, there is also the problem of coping with lags in monetary data. The computation of the estimated supply of total reserves (OSR), on the day of OMO market often involves several days lag. This means that to be able to obtain OSR, where “t” is the OMO market day, the compiler must be able to project both the sources and uses of monetary base, several days prior to 2 BIS Review 45/2007 the OMO market day say OSR . The techniques for doing this are yet to be fully developed in all t-3 WAIFEM constituent countries. • Determination of public sector borrowing requirement The primary target for OMO is the difference between the estimated supply and demand for money under equilibrium conditions. But in arriving at the ultimate target for OMO, the excess supply needs to be adjusted to accommodate public sector borrowing requirement in the period. Thus there would be need to make the problematic forecasts of government cash revenue and expenditure, including float items. In this regard some of our member countries, notably Ghana have taken considerable strides through the application of some appropriate software. • Capacity for econometric forecasting Familiarity with the use of econometric techniques is a sine qua non for liquidity forecasting.
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In 2006 the fiscal deficit ratio dropped below the 3% reference value for the first time in several years, with the structural balance net of temporary measures shedding around 3.7 percentage points since 2003. The debt ratio also trended downwards and is expected to fall below the 60% limit by 2009. As the base effect of the energy price hikes started to abate, moreover, the HICP inflation rate has stayed below the EU reference value since last November. Meanwhile, the Maltese lira continued to trade at the central parity rate against the euro in ERM II and the long-term interest rate converged further towards the reference value. As for the economic recovery, although this partly reflects stronger demand in Malta’s main trading partners, it also owes something to the reforms implemented in recent years. These included measures aimed at increasing participation in the labour market and improving its functioning. School curricula have been modified and training opportunities broadened. There has also been heavy investment in ICT infrastructure and education, as well as better targeted financial and technical support to SMEs, including a privately-managed venture capital institution. On the fiscal front, steps have been taken to reform the pension system and to avoid abuse of the social benefit system and tax evasion. In some areas, however, the pace of reform has been modest and the Central Bank of Malta has repeatedly called for the remaining weaknesses to be addressed.
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Michael C Bonello: Malta's economy on the path to the euro Remarks by Mr Michael C Bonello, Governor of the Central Bank of Malta, at a Round Table organised by the Austrian National Bank, Brussels, 13 June 2007. * * * This Round Table is being held shortly after the release of the Convergence Reports which the European Commission and the European Central Bank prepared at the request of Cyprus and Malta, and the recommendation of the Commission to the EU Council to allow these two countries to adopt the euro on 1 January 2008 on the grounds that they have achieved a high degree of sustainable convergence. And yet, only four years ago as Malta was preparing to accede to the EU, qualifying for euro area membership seemed a distant and uncertain prospect. This evening I propose to illustrate the nature of the challenge that Malta faced, how the task has been approached and what measures are being taken to ensure a smooth integration into the euro area. The Central Bank of Malta has been at the forefront in advocating an early adoption of the euro, and for good reason. With a GDP of around € billion and a population of 400,000 living in an area of 316 km2, Malta is the smallest and most densely populated EU Member State. It has no natural resources and is one of the most open economies in the EU, with average import and export-to-GDP ratios of over 80%.
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European banks would also face impairment of their corporate bond holdings under these scenarios, further reducing their profitability and solvency. As already mentioned, the impact would be uneven across economic sectors and geographical areas, and therefore the effects on banks across different countries would also be uneven. A very important point here is that banks’ potential response to the materialisation of risks is not currently modelled in these stress tests, since the aim is to show what would happen precisely in the absence of any such response. In reality, however, banks can be expected to respond to the increase in the probabilities of default associated with the materialisation of physical risks in the event of inaction, which would exacerbate the negative implications for activity in these areas. The possibility of response makes the climate stress test methodology even more complicated, but it is a key element which will have to be incorporated in future. In addition, the ECB is currently conducting bottom-up stress tests in which banks will assess their exposure to climate risks. The exercise began with a questionnaire for banks, the aggregate results of which are due to be published in the summer. At the Banco de España we have also carried out top-down stress tests to assess the resilience of the Spanish banking sector to climate-related transition risks,17 and we are currently carrying out various empirical analyses to approximate the potential impact of the physical risks.
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With over half of total trade in Asia being intra-regional trade, and with this proportion still on an increasing trend, economies in the region are becoming increasingly interdependent among themselves, arguably more so than each of them depends on the developed economies in Europe and America. By comparison, the degree of financial integration in Asia is disproportionately low. For example, all of the Asian economies have probably lent more individually to the United States than they have collectively to other Asian economies. 4. Whether we like it or not, we now find ourselves in the unenviable position of holding a substantial part of our savings in the financial liabilities of an economy that does not save, fearing that a diversification of a small part of such holdings might lead to a sharp fall in the value of the rest, thus shooting ourselves in the foot. We also find ourselves somewhat stuck with recycling a large part of our savings through the developed markets back into the region in a much more volatile form, occasionally creating havoc in our monetary and financial systems. 5. We find ourselves - we are told - contributing to the global imbalance by saving too much and spending too little, although those that tell us pay little attention to the fact that we do have typhoons and heavy rains, earthquakes and tsunamis, and we need to ensure that we are able to help ourselves as much as possible in case of need.
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There are several measures that have a greater effect on house prices and household borrowing than the policy rate, and at the same time entail lower costs for the real economy. In general, the problem needs to be analysed and specified, for instance, in the form of which market failures or which externalities or which consumer protection inadequacies it entails, to determine what measures can be used to deal with the problem closest to its source and at the lowest cost. The most suitable measure is probably one that is currently under the jurisdiction of another government agency, and not the Riksbank. To avoid the current problems with large differences between the repo rate path and market expectations, the decision-making process should start with forecasts for inflation and resource utilisation conditional on market expectations of interest rates in Sweden and abroad, that is, forecasts for the repo rate and policy rates abroad that are in line with market expectations according to implied forward rates in Sweden and abroad. The Riksbank used to make such forecasts earlier, before forecasts conditional on an own repo rate path were introduced, and the Bank of England and the ECB make such forecasts now. The methods for producing these forecasts may need improvement. The forecasts can then be used as a starting point for assessing whether a repo rate path that deviates from market expectations is necessary to best stabilise inflation and resource utilisation.
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Widespread theoretical and empirical research shows that changes in policy rates have little effect on house prices, but a substantial effect on production, jobs and unemployment. A typical conclusion is that, all else being equal, an increase in the policy rate of 1 percentage point reduces house prices by around 1.5 per cent, but at the same time reduces GDP by around one third, that is, about 0.5 per cent. So to reduce house prices by 15 per cent may require raising the repo rate by as much as 10 percentage points. But this would cause GDP BIS Review 158/2010 3 to fall by around 5 per cent. These estimates are of course uncertain, but nevertheless imply very high real costs in terms of GDP. 2 If house prices and household indebtedness would be regarded as a problem, there are more effective instruments than the policy rate, which also have less negative effects. Some examples are the mortgage ceiling introduced by Finansinspektionen (the Swedish Financial Supervisory Authority), a mortgage tax or limited tax deductions for mortgages, a property tax, a reserve requirement for mortgages, and so on. As a comparison, a higher repo rate functions not only as a tax on mortgages, but also a tax on loans for production, investment and trade. This in turn leads to the large costs to the real economy I mentioned earlier. Are house prices and household indebtedness a problem?
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Islamic finance in 2008 and beyond remains positive despite the current challenging global financial environment. The viability and competitiveness of Islamic finance is derived from several factors. It is from its ability to meet the changing demands of the economy, from its cost competitiveness and from being supported by a well developed legal, regulatory and supervisory framework. But more importantly, are the fundamental Shariah requirements of Islamic finance that support its viability and stability. Shariah is the key pillar of Islamic finance from which Islamic finance derives its unique characteristics. The Shariah injunctions require that Islamic financial transactions be accompanied by an underlying productive activity. In Islamic finance, there is always a close link between financial and productive flows. Moreover, under the risk sharing principle BIS Review 6/2008 1 required, Islamic financial institutions will share the profit or the loss incurred by the entrepreneur. There is an explicit sharing of risk by the financier and the borrower. This arrangement will thus entail the appropriate due diligence and the integrating of the risks associated with the real investment activity into the financial transaction. In this arrangement, the real activity is expected to generate sufficient wealth to compensate for the risks. In contrast, conventional instruments generally separate such risks from the underlying assets. As a result, risk management and wealth creation may, at times, move in different or even opposite directions. Conventional financial instruments also allow for the commoditisation of risks.
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But a more careful analysis shows that other factors played an important role, such as the rapid growth of new financial instruments, the increasing presence of very active and highly leveraged financial market participants. Moreover, ample market liquidity also reflected an increase in risk appetite and a rise in leverage. And the recent market developments showed that an abrupt and sizeable increase in risk aversion caused an evaporation of liquidity in many markets and a rise in market volatility. Therefore, although financial globalisation can play a role in containing market volatility, it cannot be expected to have a dominant and permanent impact. Impact on financial stability – the financial market turmoil What are the broader potential implications of financial globalisation for the stability of financial systems? How are real and financial shocks likely to propagate across borders and asset classes in a financially integrated world? On the one hand, there is obviously an augmented risk of cross-border contagion of asymmetric shocks to the rest of the world if cross-border asset holding is widespread. On the other hand, this risk has to be weighed against the positive side of the very same coin, which is the benefit gained from an increase in international risk-sharing by means of diversification. The resilience of financial asset prices to negative shocks is improved when the market is more liquid and the investor base more heterogeneous.
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The current inflation rate does not therefore provide sufficient information to determine the level at which interest rates should be set now. Our analyses indicate that a substantial share of the effects of an interest rate change will occur within two years. Two years is thus a reasonable time horizon for achieving the inflation target of 2½ per cent. Using this time horizon, we avoid substantial variations in output and employment. A shorter horizon than two years would result in wider swings in production. Credit developments and developments in equity and property prices influence inflation. With an inflation targeting regime, we take these variables into account to a certain extent when setting interest rates. Equities and dwellings account for a substantial share of household wealth. Higher equity and house prices increase the value of this wealth. The increase in wealth can relatively rapidly result in rising consumption. Several studies indicate that an increase in the value of housing wealth is more likely to lead to higher consumption than a corresponding increase in the value of equity wealth. Higher prices for commercial buildings may be passed on in the form of higher prices for goods and services. Developments in asset prices can thus affect inflation more directly. In Norway, a high proportion of households own their own dwelling. Even when we include securities funds and some insurance claims, Norwegian households’ housing wealth is far higher than their equity wealth.
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When we probed survey respondents about their understanding of changes to “prices in general” (the Michigan Survey question), we found that a significant fraction believed we were inquiring about the prices they themselves recently paid – often prices that had increased or decreased markedly, such as those for food or gasoline. This tendency to think more about prominent price changes in one’s own experience is less common among respondents with higher financial literacy. By contrast, when we asked about expectations for the “rate of inflation,” respondents tended to think less about a few salient price changes specific to their own experiences and more about price changes across a broader set of items or about changes in the cost of living – a result that aligns more with economists’ definition of inflation as a sustained increase in the overall price level. Asking about the rate of inflation directly therefore produces answers more consistent with the concept of forward inflation expectations of interest to central banks. Chart 4 plots the time series of median responses from our experimental survey to a “prices in general” question and a rate of inflation question. One can see that the median expectation for the rate of inflation question is less variable. We also find that the dispersion of responses is significantly larger with the “prices in general” question.
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14 Øksendal, Lars Fredrik (2008), “Monetary policy under the gold standard – examining the case of Norway, 1893-1914”, Working Paper 2008/14, Norges Bank. 15 See Bjerkholt, Olav and Jan F. Qvigstad (2007): “Introduction to Ragnar Frisch’s 1933 pamphlet Saving and Circulation Regulation”, in Revisita di Storia Economica, Banca d’Italia. 16 See Eitrheim Øyvind., Jan T. Klovland and Jan F. Qvigstad (Eds.) (2004), page 293: “Historical Monetary Statistics for Norway 1819-2003”, Occasional Papers No. 35, Norges Bank, Oslo. 17 However, they were more flexible in September 1931. It only took seven days for Norway to follow the UK’s lead in abandoning the gold standard. 18 There was a consensus on parity policy in the 1920s. See for example Hodne, Fritz and Ola Honningdal Grytten (2002), pages 111-112: Norsk økonomi i det 19. århundre (The Norwegian economy in the 19th century), Fagbokforlaget and Skånland, Hermod (1967) “Det norske kredittmarked siden 1900 (The Norwegian credit market since 1900) Samfunnsøkonomiske studier No. 19, Statistics Norway, Oslo. See also Mykland, Knut (ed.) Cappelens Norgeshistorie, Vol. 13 page 86. 19 For further discussion of parity policy and Norges Bank’s role, see Ecklund, Gunhild J. (2008), pages 46-51 and 67-71: “Creating a new role for an old Central Bank: The Bank of Norway 1945-1954”, Series of Dissertations 2/2008, BI Norwegian School of Management, Oslo. 20 This link to gold was not as strong as when the obligation to redeem in gold applied.
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In total, more than 6,000 individuals have been trained under FICS, with about 2,600 of them assessed. We now have more than 300 individuals certified under FICS. Every craft has its master craftsmen. The financial industry is no different. To this end, IBF introduced the Distinguished Financial Industry Certified Professional, or FICP. The Distinguished FICP represents the highest certification standard under FICS: it is bestowed on those in the industry who are the epitome of professional stature, integrity, and achievement. IBF is proud to have added another 15 senior industry veterans to its cadre of Distinguished FICPs in October last year. Over the years, we have developed a growing network of FICS-certified professionals. This is an invaluable resource: a community of professionals whom we can actively tap upon as partners in our learning journey – participating at industry events or in FICS working groups. It has been about five years since FICS was introduced. It is now timely for a review of the FICS Standards. IBF will be working with its group of Lead Providers to re-look the FICS Framework and the Curriculum covered by the current Standards. Please come forward to give us your views. When we met at last year’s Conference, we had indicated that IBF will study the feasibility of introducing “common examinations” for the industry. I am happy to report that IBF has since worked with the industry to roll out the Corporate Banking Common Examination.
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