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Third, firms should be able to demonstrate publicly that their conduct in the FX market is in line with the Code. A key part of the Code is the Statement of Commitment that is found in Annex 3 of the Code. This is a single, common basis by which each market participant can demonstrate that it commits to adhere to the Code2. It will be up to each market participant to decide whether and how to use the Statement. For example, some market participants may choose to publish their Statement on their websites, or provide a copy to counterparties when establishing trading relationships. Thus far, a number of the largest FX market participants have indicated that they will be signing the Statement by May 2018. The industry is also considering the development of public registers, which are essentially repositories where market participants can publish their Statements. Public registers can enhance transparency around the level of adoption of the Code, and can be a means to monitor the success of the Code over time. Feedback from market participants has indicated that there is a demand for public registers. Market participants that have signed the Statement can publicly demonstrate that they have done so on such public registers. Market participants can also use public registers to find out which of their peers or counterparties have signed the Statement.
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3/6 BIS central bankers' speeches Supporting adherence While the above reasons provide a strong foundation for the Code to succeed, the success of the Code will depend on widespread adherence by market participants. Hence, we should each ask ourselves what we can do to support adherence. There are three key elements in the adherence framework developed by the FXWG, which can support adherence at both the individual firm and industry levels. First, the Code has to be embedded into your practices. Training and education of staff will be particularly important to effectively embed the Code. There are ongoing initiatives at the firm level, and the industry should consider if there are system-level initiatives that could make sense. For example, industry associations could consider developing relevant training content that caters to specific segments of the FX market e.g. buy-side players or corporate treasuries. Second, there should be effective monitoring on how successfully the Code has been embedded. To this end, a number of adherence mechanisms have been developed to facilitate effective monitoring. For example, at the system level, the GFXC will use a broad survey of market participants to monitor adherence and adoption. The survey will take place annually and the first survey will be conducted in 4Q this year, to form the baseline for monitoring progress. At the firm level, we expect that mechanisms will be put in place to monitor how the Code has been embedded within internal practices.
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This being said, the exchange rate criterion, which relates to the Exchange Rate Mechanism (ERM II), falls well within the competence of central banks. I, therefore, propose to focus today on the implications of this criterion for the Central Bank of Malta. The implications of the single currency for exchange rate policy Exchange rate policy is determined by the Minister of Finance on the basis of recommendations made by the Central Bank. In practice, this means that the Bank must have a considered view on which exchange rate strategy is appropriate at any particular time. A key task of the Bank in the run-up to EMU, therefore, would be to assess the implications of the exchange rate criterion for the evolution of 1 European Commission, Directorate General Internal Markets. “The Internal Market – Ten Years Without Frontiers”. Brussels, January 2003. 2 Andrew K Rose, “The Effect of Common Currencies in International Trade: A Meta-Analysis”, (draft) University of California, Berkeley, 8 April 2002 3 Attila Csajbok, Agnes Csermely, “Adopting the Euro in Hungary: Expected Costs, Benefits and Timing”, National Bank of Hungary, Occasional Papers 24. BIS Review 8/2003 1 policy. This criterion requires, as a condition for joining EMU, that a country participate in ERM II for at least two years without resorting to a devaluation against the euro.
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The NPC has prepared a well-focused action plan after detailed deliberations with all stakeholders and is the apex body for payment system development policies and operations. I understand that India and some other countries too have NPCs. It BIS Review 79/2007 5 may also be important to set up a secretariat in one of the countries to lead the regional payment initiative. The SPC, as well as the task forces, should establish close links with international organizations such as the WB, IMF, BIS and also with other regional payment groups and developed country central banks for guidance and technical assistance. As I mentioned before, the ACU is the only regional clearing mechanism that exists today among SAARC member countries. It needs a clear reform agenda to mitigate risks involved in that system and ensure safe payment flows among the member countries. Already, a technical committee has been appointed under the Chairmanship of Sri Lanka to look into some elements of modernizing the ACU. The whole of yesterday we debated on some of the short-term measures that need to be introduced to the ACU clearing arrangements in order to avoid any disruptions to cross border flows. That committee too could report its recommendations to the SPC. There may be many other modifications, modernizations and reforms that need to be introduced at national and regional levels which will shape the annual work program of the SAARC regional payment initiative.
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For those of you unfamiliar with the expression “Bernanke put,” or more generally, a “central bank put,” this term refers to the concept that a central bank will allow the stock market to rise significantly without tightening monetary policy, but will ease monetary policy whenever there is a stock market “correction.” Given the extent of the drop in the stock market leading up to and following Standard & Poor’s downgrade of U.S. debt, combined with the FOMC’s commitment to hold short-term rates near zero until mid-year 2013, some cynical observers might interpret such a policy action as a “Bernanke put.” My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors. I believe my FOMC colleagues share this view. Connecting the dots Now, how do you connect the dots between Texas’ record of economic growth and my dissenting vote? Despite the fact that Texas has severely limited social services and an education system that faces great challenges, people and businesses have been picking up stakes and moving to Texas in significant numbers over a prolonged period.3 It should be noted that in the last census, Texas gained population and congressional seats, while California’s population growth and congressional representation was static and New York’s was diminished. Jobs have been created for American workers in Texas in several different sectors, not just in the oil and gas and mining sectors.
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In the same way as leaning against the wind with the policy rate can be justified by monetary policy reasons, so too can a policy that leans against the wind with regulations. How, then, would this time-varying application of regulations look in practice? One possibility is to raise the capital adequacy requirement, which would raise the interest rate margin and thus the lending rate. Higher capital adequacy would also lead the banks to increase their buffers and thus improve their resilience to loan losses. Another alternative to increase the interest rate margin would be to require a larger proportion of own funds from borrowers by setting a ceiling for leverage – such as, for example, the ceiling recently proposed by Finanzinspektionen – or amortisation requirements. Raising the requirements for own funds will primarily strengthen borrowers’ buffers against falling prices, even if lower indebtedness will also reduce the banks’ risks. In contrast to capital requirements, the regulations on loanto-value and amortisation requirements mean that it will not only become more expensive but also more difficult to raise loans. This latter suggests that such regulations could be analysed in terms of more explicit supply limits. However, today I have decided to discuss loan-tovalue and amortisation requirements in terms of a “shadow interest rate” in order to illustrate the connection between quantitative regulations and monetary policy. Rather than regulations, an economist may be more used to thinking in terms of Pigovian taxes as regards handling negative external effects.
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That was justified theoretically by appeal to the comparative advantage of monetary over fiscal policy in controlling nominal demand or to Ricardian Equivalence or to the argument that fiscal expansions were harder to reverse than initiate. 2. Monetary policy was therefore assigned the primary role in short-term aggregate demand management, with policy conducted through the manipulation of a suitable short-run interest rate. BIS Review 111/2010 1 3. The monetary transmission mechanism operated mainly through longer-term interest rates, asset prices and expectations of future inflation. Expectations of future policy rates were central and credibility was key. These channels might be augmented by a weak credit channel but the banking sector generally was conspicuous by its absence, particularly in the New Keynesian synthesis models, which also dominated thinking within central banks. The importance accorded to expectations led naturally to an increased focus on communication and transparency. 4. The conduct of monetary policy was best delegated to an independent central bank, free of short-term political considerations. That was buttressed by academic thinking which drew attention to the potential time inconsistency of optimal policy when expectations of future policy mattered and which suggested that monetary policy was best delegated to conservative central bankers with long horizons. 5. Intermediate monetary targets were not useful, because of their unstable link with the ultimate objectives of policy (though that did not preclude them being helpful at times as indicators of future demand and inflation).
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This has contributed to a well-diversified economic structure and has increased the resilience of the economy to external developments. The financial sector has also seen significant transformation. The restructuring, consolidation, and internal rationalisation of the banking sector is now virtually completed. Governance and risk management practices have also been improved while structural enhancements have been made in the capital market, significantly enhancing its role in the financial system. A comprehensive and robust Islamic financial system now also operates in parallel with the domestic, conventional financial system. Against the background of strengthened economic fundamentals and financial system, Malaysia has taken the opportunity to sequentially deregulate and liberalise the financial system. This includes the introduction of a new interest rate framework that is market-driven, 1/2 the liberalisation of foreign exchange administration rules to promote greater efficiency and enhance risk management in foreign exchange transactions, and the introduction of new foreign players into our financial system. In July this year, Malaysia adopted a managed float for the Ringgit exchange rate to better position Malaysia to respond to structural changes in the global and regional environment. Under this arrangement, the Ringgit is monitored against a basket of currencies of Malaysia's major trading partners. In this world of greater uncertainty, there has been significant focus on the issue of surveillance and risks and vulnerabilities. Experience has shown that surveillance has improved policy performance as well as the ability to take pre-emptive action to contain the impact of disruptive and destabilising developments.
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By the middle of the 19th century, aggregate real wages were rising in the US and UK. Yet despite increased demand for their services, unskilled workers do not seem to have shared in this pay rise. Higher demand for their services was more than matched by increased supply, both from child labour and from displaced artisans as they moved down the skill spectrum (Clark (2010)). As a result, their pay appears to have flat-lined. At the high-skill end, the supply of workers was also increasing as some workers skilled-up (Clark (2010), Wallis (2014)). Despite that, there is evidence the skill premium for clerks and other professionals rose through the 19th century. The net effect of these complex shifts was thus to widen the distribution of wages between skilled and unskilled workers (Katz and Margo (2013)). Income inequality rose. The pattern of labour’s share of the national income is also interesting. This appears to have fallen in the first part of the 19th century (Allen (2009)), as Chart 21 illustrates. Workers do not appear to have enjoyed the early fruits of the Industrial Revolution. That perhaps explains why David Ricardo entered the fray at this time. In the event, these concerns proved ephemeral. With a lag, the rising tide of productivity and incomes lifted all boats, whatever their level of skill. Inequalities in wages started shrinking and labour’s share of income began to rise, returning to their levels at the end of the 18th century.
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If the first part of the 19th century had seen substitution effects dominate, the latter half saw compensation effects in the ascendancy. Moving into the 20th century, and the third industrial revolution, these emerging patterns in jobs and wages have become clearer. Technology appears to be resulting in faster, wider and deeper degrees of hollowing-out than in the past. Why? Because 20th century machines have substituted not just for manual human tasks, but cognitive ones too. The set of human skills machines could reproduce, at lower cost, has both widened and deepened. Chart 22 shows the employment pattern in the UK over recent years, ranking professions’ skills by their average pay, while Chart 23 shows the picture for a set of countries over a similar period. They tell a striking and consistent story of mid-skill jobs being lost, counterbalanced by employment gains at the high-skill and, to lesser extent, low-skill segments of the workforce. The U-shape, or “hollowing out”, has deepened and widened. What has happened to these displaced mid-skill workers? Some appear to have “skilled-up”, typically through higher or further education. In the UK, total numbers in higher education have increased from around 130,000 in 1970 to over 2 million today. In the US, total numbers in higher education have increased from 2.4 million just after the Second World War, to over 20 million today. As in the late 19th century, this skilling-up has enabled workers to keep one-step-ahead of the machine. But some displaced workers have not been on the up-escalator.
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It must also be mentioned that, given the exchange rate developments, the increase in the oil price was less marked in Switzerland than in the US and in the euro area. Despite higher oil prices, inflation in our country has remained within the range that we equate with price stability. BIS Review 39/2004 1 Economic prospects For a period of one to two years, the development of inflation depends decisively on the economic outlook. Our economy has already been on a growth track for a year now. Real gross domestic product in the third and fourth quarters of 2003 grew at an annualised rate of more than 2% compared with the previous quarter. In the first quarter of 2004 the trend continued at a slightly weaker rate of 1.6%. Due to improved economic activity abroad and the favourable exchange rate, exports exceeded their year-earlier level by 7.4%. Equipment investment, which had expanded by as much as 7.5% in the final quarter of 2003, declined slightly due to special effects. The upswing has also made itself felt in certain domestic sectors. This is evident in private consumption, which increased by 2.3%. The uptrend, which had begun towards the end of last year, thus continued. Surveys confirm that consumer sentiment has improved. Construction investment also topped the year-earlier level by a hefty 2.8%. The expansion in mortgage loans by 5.5% confirms the revival in the construction and real estate sectors. The upswing is also evident from a stabilisation on the labour market.
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Jean-Pierre Roth: Recent financial and economic developments in Switzerland Introductory remarks by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Geneva, 17 June 2004. * * * The economy has developed in line with the expectations expressed in our monetary policy assessments of December and March. The economic recovery has increasingly gained hold in Switzerland and abroad and has become broader-based. Against this backdrop, we have reached the conclusion that the time has come for a slight tightening of monetary policy. The target range for the three-month Libor is being raised by 25 basis points with immediate effect and the Libor is being kept around 0.5%. This move reverses half of the latest interest rate cut of 6 March 2003; then the threemonth Libor was reduced from 0.75% to a historic low of 0.25% due to fears of deflation and the appreciation of the Swiss franc at that time. The interest rate range extends from 0.0% to 1.0%. Even after this adjustment our monetary policy will remain expansionary and continue to support the economic upswing. Let me offer some comments on our decision and the outlook for prices as summarised in the new inflation forecast. The graph provides you with the current and the last inflation forecasts. The dashdotted green curve is the March forecast, which presupposes that the three-month Libor rate would remain unchanged at 0.25% in the next three years.
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While they lasted these regimes provided a degree of nominal exchange rate stability which no doubt helped the internationally exposed sectors of the economy. But the price ultimately was substantially increased instability in the economy as a whole. 3 BIS Review 54/1999 Of course, some commentators have argued that the problem we had within the ERM was the exchange rate at which we entered rather than the form of the arrangements. I am not convinced. The divergence between our domestic policy needs and those in Germany was such that it seems unlikely to me that any plausible difference in the exchange rate initially chosen for the peg would have made very much difference. But in any event the range of uncertainty surrounding the choice of a sustainable peg is an important part of the problem with any pegged or fixed rate regime. The UK has not recently experienced a fully fixed exchange rate regime – although we remain a potential member of European Monetary Union. But the basic economic pros and cons of a fixed rate regime are somewhat similar. Essentially the very real advantages are nominal exchange rate certainty within the Euro-zone – which accounts for some 50% of our external trade as well as participation of the domestic economy in broader, more liquid, pan-European financial markets.
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Mr George outlines monetary and exchange rate policies for sustainable growth Speech by the Governor of the Bank of England, Mr E A J George, at The Central Bank Policies Conference, Macau, 17 May 1999. Mr Chairman, Ladies and Gentlemen, let me begin by saying that it is a real pleasure to be here with you today in Macau and to participate with such distinguished central bank colleagues in your conference. One of the very agreeable things about coming to the other side of the world to participate in an event like this is that it enables me to step back from the daily hubbub of my office, the financial markets in the City of London, and the media, and reflect in a broader way on what it is we are all actually trying to do. It is in fact much more agreeable than working! In a broad sense, of course, our ultimate objective as central bankers is clear, and it is reflected in your conference title when you talk about “leading the way to sustainable growth”. I would add high rates of employment and rising living standards to that objective. Very often in the past, certainly in my own country, but not just in my own country, that fundamental objective was seen to be largely a matter of demand management – of pumping up demand by expansionary fiscal and monetary policies – with too little regard to the structural, supply-side, capacity of our economies to meet that demand.
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The Riksbank has obtained greater independence in relation to parliament and this is why its management has been given greater breadth – five deputy governors compared with two previously. The change towards greater independence for the Riksbank coincided with the clarification of the bank’s monetary policy task. It is now written in the Sveriges Riksbank Act that the bank shall maintain price stability. This is a development that has also taken place in many other countries. Inflation was for a long time a major problem in many parts of the world, but since the shift in monetary policy towards a greater focus on price stability, inflation has been brought under control. In addition to Sweden, twenty or so other countries currently have inflation targets, although not all of them have chosen exactly the same system for inflation targeting. Sweden was one of the first in this context. The increased independence has entailed greater demands for the Riksbank to explain its decisions. When I worked at the bank prior to 1999, work had already begun on improving analyses and communication and aiming for increased openness. This is a continuous process. During my years abroad I have seen several examples of the prominent role played by the Riksbank in central bank circles, particularly bearing in mind that we are a small central bank in a small economy. The Riksbank is now regarded as one of the most open central banks in the world.
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The protection gap in Asia is set to widen for the following three reasons: a. First, the frequency and severity of natural catastrophes is increasing. According to UN data, the number of natural disasters in the Asia-Pacific has increased from an annual average of 44 disasters in the 1970s to 146 in the 2000s. b. Second, the wealth and value of assets at risk have also increased. Strong economic growth in Asia and growing urbanisation has led to the rise of small highly-populated megacities, many of which lie along areas that are exposed to natural perils. c. Third, insurance penetration is still low in Asia. Just over 8% 3 of natural catastrophe losses are insured in Asia as compared to 40% in developed regions. 9 ILS, together with other risk management solutions including reinsurance and government pools, have significant scope to play a larger role in reducing the financial impact of natural disasters. Globally, UK, Spain and France have already established natural catastrophe schemes that tap on a combination of traditional and alternative capital. 10 There are positive signs of change, with ASEAN making a push to address its rising exposures to natural catastrophe. Let me provide some examples of recent developments: a. ASEAN has commenced a holistic approach to disaster risk management through the ASEAN Disaster Risk Financing and Insurance (ADRFI) Programme. The Programme will strengthen ASEAN’s disaster risk management capabilities through: i. Improving data required for assessing disaster risk exposure and financing solutions. ii. Enhancing knowledge on disaster financing solutions through capacity building. iii.
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In particular, central banks have had little directly relevant past experience with the impact of such a reduction in holdings of domestic securities and in reserves. One relevant experience, of course, was the 2013 “taper tantrum,” which shows that markets can have outsized reactions to changes in balance sheet policy even before they happen. Moreover, experience with asset purchase programs, both here and abroad, clearly demonstrates that market volatility can ensue from balance sheet policy changes that market participants perceive as surprising, unclear, or rapid. All of this indicates to me that, at policy turning points like these, central banks should carefully and clearly communicate their intentions, provide as much transparency as possible, and make transitions in policy implementation as slowly as overall macroeconomic policy objectives permit. 1 / 15 BIS central bankers' speeches Policymakers have made it clear that balance sheet normalization is intended to operate in the background, and that the bar is high to making changes to the FOMC’s normalization plan. That said, the future is uncertain, and as a result the Desk will maintain an appropriate set of capacities should the FOMC deem something different be required to promote the Federal Reserve’s objectives. We will also continue to gather market intelligence, including through surveys of primary dealers and market participants and through a robust set of statistical data collections, to further policymakers’ understanding of market participants’ expectations for the balance sheet and to monitor market functioning. The rest of my speech will go as follows.
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13 The Policy Normalization Principles and Plans indicates that all FOMC participants but one agreed that they did not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings, and that the timing and pace of any sales would be communicated to the public in advance. Portfolio projections released in July 2017 do not include sales of any type over the forecast horizon. 14 Statement Regarding Reinvestment in Treasury Securities and Agency Mortgage-Backed Securities, September 20, 2017. 15 See, for example, Sack, The SOMA Portfolio at $ Trillion, July 20, 2011, and Bernanke, The Economic Outlook and Monetary Policy, August 27, 2010. 16 14 / 15 BIS central bankers' speeches 16 See Bonis, Ihrig and Wei, Projected Evolution of the SOMA Portfolio and the 10-year Treasury Term Premium Effect, September 27, 2017. 17 Kandrac, The Costs of Quantitative Easing: Liquidity and Market Functioning Effects of Federal Reserve MBS Purchases (2014). 18 The Treasury Borrowing Advisory Council considered this topic in its third-quarter 2017 meeting, including the potential impact of changes in central bank policy abroad. See the August 1, 2017, presentation by TBAC to the U.S. Treasury. 19 In addition to these topics, we are following closely the potential for the decline in the balance sheet to affect other aspects of the structure of financial markets or the banking industry.
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The central issue, however, is how more pronounced problems or crises for stabilisation policy are to be handled. One approach to this is to relate once again to our own experiences. As I see it, we have had to face problems of two types. One concerns a lack of knowledge about the direction in which the economy is moving. A dramatic example of this is the crisis in 1990, when neither the problem that was looming with the real interest rate nor the crisis in the financial system was identified in time by virtually any Swedish observer. The other problem is political and has to do with the difficulties in keeping policy sufficiently tight over the business cycle, particularly when demand exceeds long-term supply. A good illustration of this problem is the late 1980s. Perhaps one should mention a third problem, namely that automatic stabilisers affect demand regardless of the nature of the preceding shock. If demand in general has weakened on account of, say, a share price fall that has affected household wealth, all will be well; a part of the loss of demand will be compensated automatically. Things will be different if the shock comes from the supply side, for instance as an oil price rise or a change in productivity. There could then be grounds for a discretionary policy move to adjust demand to the change in production capacity; this could be more difficult in the absence of an independent monetary policy.
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1 2 Borio, C.: Monetary policy and financial stability: what role in prevention and recovery?, BIS Working paper No. 440, January 2014 BIS central bankers’ speeches
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23 For example, a money market mutual fund could choose to restrict its investments only to overnight reverse repurchase agreements provided by the Federal Reserve if it believed these instruments would continue to be supplied in the far future. 24 See http://www.federalreserve.gov/newsevents/press/monetary/20140917c.htm. 6 BIS central bankers’ speeches Conclusion I want to conclude by saying a few more words about the value of engaging broadly with the public, with market participants, with researchers both in central banks and in academia, and with our global central bank counterparts. The issues we will have to tackle are important and complex, and there is much to gain from different points of view. Market participants can provide a deeper understanding of financial market dynamics and shed necessary light on the impact and limitations of monetary policy on a practical dimension. As we saw today, researchers can provide empirical analysis as well as models that help us think about the impact and effectiveness of different tools or policies. Whether they work in central banks or academia, they provide a perspective that we need to take into account when thinking about our long-run framework. And, of course, we can learn from our peers in policymaking and on markets desks at other central banks. We may have tried things that worked very well, or did not work so well, and comparative experience can be extremely valuable.
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3 Speech made on 22 January 1988 during the celebration of the anniversary of the signature of the Elysée Treaty. 4 Speech assessing the German Presidency, before the European parliament – 29 June 1983. 3/3 BIS central bankers' speeches
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10 Neild (1964) and the National Economic Development Office (1965) used questionnaire-based evidence. A large proportion of firms in the sample claimed to use a pay-back criterion and of these the modal pay-back period was 3–5 years. Census evidence from this period indicated that the average useful lifespan of machines was over 15 years. The distribution of plant and equipment lives in Dean and Irwin (1964) implied a mean economic life of 34 years. 11 Sumner (1974) reaches similar conclusions. 2 BIS central bankers’ speeches mid-1970s, it was doused by a torrent of papers testing – and typically failing to reject – the efficient markets hypothesis. This new wave swamped empirical finance for the better part of a decade. In the late 1970s and early 1980s, the efficient markets paradigm appeared all-conquering as a description of asset price movements in practice.12 Research on the inefficiencies of capital markets became something of a backwater. The voting machine appeared to be delivering outcomes both democratic and socially beneficial. But beginning in the 1980s, a whole sequence of “puzzles” in empirical finance began to emerge. These were puzzles only in the sense of being deviations from efficient markets.
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These include targeted utility rebates that directly alleviate the higher cost of living for households. Similarly, SMEs received a one-off cash grant in this year’s Budget to help offset higher business costs. Implications for asset prices My third point is that it is important to respond appropriately to rising asset prices, including in the housing market. Following the recent financial crisis, major central banks reduced policy interest rates to historical lows. Credit growth in this region has recovered strongly, in Singapore and other Asian economies. There is a danger that systemic risk can develop and crystallise in a number of ways. For instance, low interest rates may encourage risky borrowing and lending practices, to create a build-up of leverage in households’ and banks’ balance sheets. Capital flows into Asia can also contribute to higher bank leverage, as well as asset price inflation, with the risk of sharp corrections in asset prices should these capital flows reverse quickly. Past experiences have shown that when highly leveraged asset markets correct sharply, they can lead to enormous stress on the banking system and significant collateral damage on the real economy. The views among central bankers have therefore increasingly shifted towards the need to take pre-emptive measures at an early stage. The global experience with monetary policy, however, suggests that broad policy instruments like exchange rates and interest rates have very significant collateral effects, and are often subject to long and variable lags before impacting asset markets.
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This blow required a quick and comprehensive response of the public authorities, both in terms of health and economic and social. In addition to fiscal easing measures, the Bank of Albania undertook a comprehensive package of measures to provide the necessary liquidity to the banking system, to boost lending and to control debt service costs. This package includes: 2/3 BIS central bankers' speeches reduction to 0.5% of the key interest rate and unlimited supply of liquidity to the banking system; temporary easing of banking regulations, to enable the temporary postponement of the payment of loan installments to customers in difficulty and the consensual restructuring of loans to customers with solid business prospects, helping business finances and increasing their chances of survival; elimination of operating costs of the electronic payment system, in response to the increasing demand for this type of activity; increase operational capacity to guarantee the supply of the economy with physical money. In response to these measures, financial markets continue to function normally, despite increased public sector demand for financing and increased uncertainty in the economy. They also enable and complement the fiscal package of the Albanian government. In economic terms, coordinated fiscal, monetary and macroprudential measures have partially mitigated the negative effects of the pandemic. However, the challenges ahead remain serious. In our judgment, the Albanian economy has the premises to successfully withstand this blow. However, this requires that all public actors and private sector operators make the right decisions, in a timely manner and in the most coordinated manner possible.
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Coping with the shock is within our means, if each of us will do our best and if we continue to guarantee with priority the monetary and financial stability of the country. Thank you! 3/3 BIS central bankers' speeches
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When China became a member of the World Trade Organization in 2001, its foreign trade was 30 percent of that of the US. The Chinese economy has since grown at an unprecedented pace. In 2013, China overtook the US as the world’s largest trading nation. Ample labour supply and low cost levels have given China and the other emerging economies of Asia strong competitive advantages in international markets. BIS central bankers’ speeches 1 The global flow of credit over the past 15 years has taken an untraditional direction – from relatively poor countries with strong economic growth to more prosperous, mature economies experiencing lower growth. For a long period, this shift contributed to substantial imbalances in the global economy. Ample supply of credit in western economies pushed down borrowing rates. Facing competition from Asia, it became relatively less profitable for firms in the west to invest in new productive capacity in their home countries. Instead, cheap credit was widely used to finance consumption and housing, particularly in the US and Europe. Banks and financial institutions were, in practice, free to fuel credit growth. In retrospect, it is clear that a vast amount of capital was squandered. Many businesses and a number of countries are struggling with high debt levels. Governments that ran economies on cheap credit are now paying a high price in the form of austerity measures and unemployment. In parts of Europe, unfinished infrastructure and empty buildings are not uncommon sights.
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In the discussion at Eidsvoll, Christian Magnus Falsen, a key member of the Constituent Assembly, said that no state can exist without a well-functioning monetary system. Another prominent member of the Assembly, Count Wedel Jarlsberg, insisted that the nation must have its own bank. The people’s elected representatives took responsibility for the monetary system, as stated in Article 75 of the Constitution: «It devolves upon the Storting to supervise the monetary affairs of the Realm». The Storting delegated the task of supervising the monetary system to Norges Bank, which was established in 1816. The king would no longer have the authority to print money at his own will. At its inception, Norges Bank’s head office was located in Trondheim, a twelve-day journey from the government in Christiania, and even farther from Stockholm, giving the central bank a geographical – and not just formal – distance from the government authorities. Much has happened since 1814. Norway no longer lags behind other western economies. Inflation is low and stable. We have established a clear division of responsibility for economic policy and well developed institutions founded on the Constitution written at Eidsvoll 200 years ago. Chart: Shift in the world’s economic centre of gravity In 1814, the great powers of Europe dominated world trade. The world’s economic centre of gravity has since then shifted westward. Today, in the 21st century, the centre of gravity is moving across the Pacific to Asia.
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The disturbances caused by the COVID-19 pandemic will inevitably delay many streamlining and integration measures, however. Nevertheless, merging the tasks of the Central Bank and the Financial Supervisory Authority into a single institution better enables us to face shocks like the current one and rise quickly and decisively from the downturn that lies ahead. I am convinced that, under these circumstances, the incontrovertible mathematical formula – that 1+1=2 – does not apply. The strength of the two institutions unified will be much greater than the sum of its parts. The new Central Bank is an institution that dares to act, can act, and will act. Although a number of policy actions have been taken in recent weeks, we have not emptied our toolbox – far from it. We have a number of other economic policy measures available and will use them if and when the need arises. We will do what is needed to face down the deep but brief economic shock currently threatening our country. Honoured guests: We thank you for listening. 4/4 BIS central bankers' speeches
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During this time the debate on financial reregulation has raged from public outcry over bonus compensation of bank CEOs to reregulation of financial services in the form of Basle III, Dodd Frank and similar regulations across the Atlantic. Under the current course, the trend towards tightened financial regulation is not likely to be reversed and we would all have to live to more regulation, though much of the new regulations were cure for diseases that were contracted elsewhere. 10. When speaking about financial regulation, I am reminded of the issue of transparency and governance. The investigation into the LIBOR scandal in major global financial centres and the consequent pursuit of similar investigation in regional financial centres point to the need for greater attention to market conducts. As market confidence is critical to the development of financial markets, any scandals may derail and set us back in the development process. We therefore have a duty to oversee that our markets function in a fair and transparent manner, to safeguard the reputation and trust of the users of financial services. In the past few years, the Bank of Thailand, with the help of key market participants, have put a great effort to promote our own reference rate – the BIBOR, so we have an interest to see that the market is transparent and inspire confidence among the users. 11. To enhance market conduct, the BoT in collaboration with the ACI are considering a code of conduct for FX dealers and brokers.
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According to a recent report of the United Nations Conference on Trade and Development (UNCTAD), Saudi Arabia emerged as the largest recipient of foreign direct investment (FDI) in the Arab world in 2006, attracting $ billion in FDI, an increase of 51 percent over 2005. The global rating agencies Standards & Poors and Fitch have also raised the sovereign credit ratings of the Kingdom to A+. Also, Saudi Arabia has been upgraded according to the World Bank’s Ease of Doing Business Index from 38th place to 23rd place in 2007. The Government has encouraged the establishment and growth of value-added industries in areas where the Kingdom has competitive advantages, namely, cheaper energy, strategic locations and availability of raw materials. King Abdullah has recently launched four megaeconomic cities in Rabigh, Hail, Al-Madinah and Jazan, which are expected to draw almost BIS Review 150/2007 1 SR 300 billion in investment and create more than a million jobs. It is worthy to note that these economic zones are located in the less developed cities and in areas away from the existing economically developed regions and are specifically selected to ensure that development and employment opportunities are spread around the Kingdom. An important indicator of progress made in diversifying the economy is provided by the trend in our non-oil exports. Such exports were insignificant in early eighties, but they have been rising sharply in recent years. Since 2000, they have risen continuously.
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The Saudi economy is an integral part of the global economy and is thus susceptible to systemic risks, although Saudi Arabia did not feel the financial turmoil and liquidity crisis experienced by the rest of the world as a result of the recent sub-prime crisis, we are, nonetheless, vigilant in our efforts to continually monitor the domestic market and to ensure continuation and stability of policies and regulations. I wish all success to your forum and a good stay in the Kingdom. Thank you for your attention. 4 BIS Review 150/2007
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We should also reassess the scope of 13 See National Audit Office (NAO), Annual Audit Report by the Auditor General: Public Accounts 2008, December 2009. Examples of inefficiencies and improper practices range from 28,810 cases of social security contributions worth EUR 4.5 million being in arrears, to the number of hospital meals charged in one hospital consistently exceeding the number of in-house patients, to cases of payments to government suppliers not supported by VAT receipts. 14 The welfare gap, i.e. the difference between all items of expenditure and contributions made in terms of the Social Security Act, 1987 has more than doubled in the last five years to EUR381.2million in 2010. The cost of pensions and related benefits is estimated at EUR 564 million and that of free hospitalisation and community care EUR 306.5 million. See, Ministry of Finance, the Economy and Investment Financial Estimates 2010, p. 294. 6 BIS Review 156/2010 social benefits, to distinguish between those that truly help to combat poverty and social ills and others that are not so effective in achieving the desired outcomes. Finally, I believe the time has also come to consider how to strengthen the budget process, drawing on models tested successfully abroad. These typically involve fiscal rules providing for limits on supplementary budgets, multi-annual expenditure ceilings and more transparency in fiscal policy making, as well as an independent monitoring agency. The pursuit of fiscal sustainability along such lines requires a broad political consensus.
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Michael C Bonello: Time for a reality check Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the annual dinner of the Institute of Financial Services, Saint Julian’s, Malta, 20 November 2010. * * * I would first of all like to thank the President and his Council for inviting me once again to address their annual dinner. Before I do so, I would like to commend IFS Malta for its unstinting efforts to promote higher levels of expertise in our financial community. The success of the foundation degree programme at MCAST and the new training programmes in Funds Administration, Anti-Money Laundering and Financial Crime Prevention are but two examples. I would also like to congratulate the Institute’s nominee, Mr Peter Calleya, for his election to the EBTN Executive Committee. The economic rebound should not give rise to complacency Last year I said that an improving external environment could benefit the Maltese economy. And indeed it has. The recession proved short and shallow, with a peak-to-trough decline in GDP of 3.4%, as against 5.3% in the euro area, and the GDP contracted by just 2.1% in 2009. In the first half of 2010 the economy grew by 4%, which suggests that the outturn for the full year could top 3%. This encouraging performance has prompted manifestations of the “Malta is different” syndrome, with suggestions that belt-tightening and structural reforms are for others, but not for us.
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It would be helpful if actual conversions happened reasonably frequently and not only in a rare crisis, demystifying the whole process. One 16 Admati, DeMarzo, Hellwig and Pfleiderer, 2010, “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive,” Stanford GSB research Paper 2065. 17 Duffie, 2010, “Contractual Methods for Out-of-Court Restructuring of Systemically Important Financial Institutions”, in Ending Government Bailouts as We Know Them, Scott and Taylor (eds). Hoover Press. 10 BIS central bankers’ speeches would also need to make sure that the maturity profile was such that no dominant amount of contingent capital was rolled at any one point in time. There could be an on-going process of monitoring, rather than particular trigger dates that may cause a focus for a “run” during times of stress. Stress tests could also be one of the tools to force conversion of contingent capital securities by bank regulators. In addition to the accounting based capital trigger, capital requirements could be expressed in terms of what scenarios a bank has to be able to withstand, with capital securities triggered when the existing common equity is not sufficient. One argument that has been raised against contingent capital, has been the lack of a natural investor base, reflecting market segmentation between “credit”, “rates” and “equity” investors. We believe strongly that market segmentation is an inefficiency which should not be taken as a given; there are already regular convertible debt securities with an investor base.
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From an investor protection standpoint, one may have drawn a sigh of relief, as any potential issues about misrepresented risk profile disappeared, but from a financial stability perspective, it was obviously disturbing. In a short space of time, billions of assets showed up on already over-extended bank balance sheets. One may think it somewhat surprising that (almost) all the banks decided to absorb their SIVs, especially since it must have seemed likely that the SIV structure would not come back any time quickly as a viable funding structure. We believe that the main reason for doing this was that not doing so would have sent a distress signal to the market. In other words, if a bank chose not to absorb this problem, the perception would be that they simply could not afford to do it, thus telling the market that they were in even worse shape than previously feared. There may also have been an element of “repeat game”. If one lets one’s investors take the pain, then they may not return for future transactions. It seems plausible that if the SIV crisis had transpired during a time when most other markets had remained functioning, the decision making process might have been very different. “Signalling” is at its most powerful when the level of uncertainty in the system is highest.11 10 The one notable exception was Standard Chartered, which let its “Whistlejacket” SIV unwind. 11 The issues arising from ABCP conduits were similar, although the structures were slightly different.
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The institutional arrangements that seem most relevant to monetary policy credibility and competence involve the degree of independence afforded the central bank, the design of the mandate or objectives given the central bank, the regime or instruments adopted by the central bank to pursue that mandate, the structure of the decision making process, and the degree of communications and transparency. I want to talk about this broad complement of the institutional foundations of a credible central bank, and I’ll do so in part by talking about the history of the central bank of the United States. For reasons that are simple and compelling, independence is a critical part of the foundation for a credible central bank. Independence comes in many forms, and some of the most important dimensions of independence are hard to discern from the legal underpinnings or the formal structure of the institution. Central banks with many of the formal or legal attributes of independence can make bad policy choices. Central banks without formal independence can make good policy choices and achieve sustained improvements in macroeconomic outcomes. What does independence mean and how do we know it when we see it? Why is it important and how does it affect the quality of monetary policy choices and outcomes? In its most basic sense, independence is the freedom to pursue a defined monetary policy objective without consideration of political or private interests, and without fear of subordination to other economic policy objectives.
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It was not until 1935 that Congress removed the representatives of the government from the seven-member Board of Governors and allowed the Federal Open Market Committee to take the form in which it functions today, which allows all seven governors and the president of the Federal Reserve Bank of New York a permanent vote with four of the remaining eleven district bank presidents voting on a rotational basis. Even after that important change in institutional independence, for significant parts of the succeeding decades, the Treasury played a major role in monetary policy, and monetary policy was often directed at accommodating the desire of successive Administrations for low interest rates and higher employment. It was only in 1951 that the Federal Reserve and the Administration took the next major step toward more independence. In what became know as the “Treasury/Fed Accord,” the Treasury agreed to step back and give the Fed more freedom to conduct policy, and the years of relatively low inflation and strong growth performance that followed for a time seemed to have vindicated the wisdom of that choice. But even after the Accord, monetary policy was characterized by periods of what was effectively a form of fiscal dominance. And even when fiscal policy was better, the Fed was at times under pressure to accommodate the objectives of the Administration with lower interest rates than might otherwise be appropriate for sustaining low inflation.
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William C Dudley: Still more lessons from the crisis Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Columbia University World Leaders’ Forum, New York, 7 December 2009. * * * It is a pleasure to have the opportunity to speak here this evening. I was a freshman here at Columbia nearly 40 years ago. I’m certainly glad to be back, but I must admit that there is a downside: It does make me feel a bit old in the process. Tonight, I want to talk about two broad sets of issues: First, the Federal Reserve’s role in responding to the crisis and the steps we must take to reduce, as much as possible, the risks of this type of costly and painful episode in the future and, second, the economic outlook for 2010 and some of the challenges that the Federal Open Market Committee (FOMC) faces in the conduct of monetary policy. The actions undertaken by the Federal Reserve over the past two and a half years have been critical to stabilizing the financial system and preventing the extraordinary distress in markets from causing a deeper and more protracted economic downturn.
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This again suggests that there is a role for supervision and regulation in the bubble prevention process. For example, it might be appropriate for the Federal Reserve – working with functional regulators such as the SEC (Securities Exchange Commission) – to monitor and limit the buildup in leverage at the major securities firms and the leverage extended from these firms to their clients and counterparties. Whether there is a role for monetary policy to limit asset bubbles is a more difficult question. On the one hand, monetary policy is a blunt tool for use in preventing bubbles because monetary policy actions also have important consequences for real economic activity, employment and inflation. On the other hand, however, there is evidence that monetary policy does have an impact on desired leverage through its impact on the shape of the yield curve. A tighter monetary policy, by flattening the yield curve, may limit the buildup in leverage. 1 Whether it would be more effective to limit leverage directly by regulatory and supervisory means or via monetary policy is still an open question. But it is becoming increasingly clear that a totally hands off approach is problematic. I also believe we could have done better in our supervision of the large complex commercial banking organizations.
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Øystein Olsen: Monetary policy and interrelationships in the Norwegian economy Address by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics (CME)/BI Norwegian School of Management, Oslo, 5 September 2011. Please note that the text below may differ slightly from the actual presentation. * * * When Trygve Haavelmo was awarded the Nobel Prize in Economic Sciences in 1989 for his pathbreaking work to quantify economic interrelationships, the Nobel Committee summarised his contributions1. First, empirical science must be based on theories which reflect reality. Second, data and observations must conform to theoretical concepts. Third, a methodology is needed which can be used to quantify and test theoretical relationships on the basis of empirical observations. The interrelationships in the Norwegian economy serve as a backdrop for my address. The purpose of the Centre for Monetary Economics (CME) is to be a venue where researchers and economists in banking and finance can exchange views and gather knowledge about the Norwegian economy, perhaps with particular emphasis on monetary policy. My contribution today will be an analysis of relationships between some key economic variables and how Norges Bank utilises that insight when setting the key policy rate. As Haavelmo described, theories regarding economic interrelationships can never conform fully with empirical observations. Nor can economists carry out controlled experiments in the same way as in the natural sciences. Nevertheless, Haavelmo was an optimist.
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The ultimate assessment is, as mentioned, a result of Norges Bank’s professional 9 The estimation is based on a one percentage point increase in the interest rate, followed by a gradual reduction in line with the response pattern in the model. The analysis shows the impact of the interest rate increase on mainland GDP for Norway and inflation adjusted for tax changes and excluding energy products (CPI-ATE). 6 BIS central bankers’ speeches judgement and will also capture considerations that are not sufficiently safeguarded by our models. As such, the models are only a tool. But, a model such as NEMO is a very useful tool for analysing developments and in interest rate setting. It helps us interpret and understand the dynamics of the Norwegian economy. The model apparatus is continually being developed. Among other things, we are exploring how financial markets and the linkage to the real estate market can be incorporated into such a model. Norges Bank’s response pattern expresses the assessments we make and how we set the interest rate to attain our objectives. We must use professional judgement and our experience of how the Norwegian economy functions. We attempt to incorporate our response pattern into NEMO by setting the interest rate in the model so as to stabilise inflation at target while reducing fluctuations in output and employment. The model can in this respect be a tool for ensuring consistency over time when we set the interest rate.
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This is why I welcome the introduction of a legislative bill on a financial stability council, which aims to provide a stronger foundation for systemic risk analysis and response and to guarantee access to the necessary information. Time will tell whether further steps are necessary. On 9 April, the Central Bank will publish its annual Financial Stability report, including a detailed analysis of the financial system and the risks affecting it. I will therefore be brief on that topic. The big picture is this: since Iceland’s outward-oriented banking system collapsed, a great deal has been achieved in terms of building up a financial system with a domestic focus. The banks’ balance sheets have grown stronger, non-performing loans are on the decline, foreign exchange mismatches have been reduced, equity has increased, and liquidity is strong. Corporate and household debt levels are falling. The regulatory framework for banking operations has also been improved based on the experience gained from the financial crisis, both with implementation of international rules deriving from the important cross-border collaboration that developed during the crisis, and with implementation of rules based more Iceland-specific risk. A good example of this is the new liquidity rules adopted by the Central Bank in December, which are based on the Basel III principles but include special ratios for foreign-denominated liquidity.
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Such a turn of events would have had severe effects on the real economy. In this respect, it is important to refrain from drawing too-sweeping conclusions from the banking collapse in Iceland, as the international part of Iceland’s banking system was so large and domestic banking operations were actually kept up and running at considerable cost. International cooperation on crisis management grew markedly in scope, particularly through collaboration among the G20 countries and at the International Monetary Fund. It encompassed a common perspective on fiscal measures to support the banking system and stimulate demand, and the provision of support to specific countries. Later on, emphasis shifted to the reform of the financial regulatory framework. That work is still underway. BIS central bankers’ speeches 1 But in spite of these measures, by late 2008 and early 2009 the recession on both sides of the Atlantic had become the deepest since the interwar years, and on a global level it was the most extensive and synchronised contraction in history. All of this affected the Icelandic economy, of course, but added to it were the collapse of Iceland’s banks, the plunge in asset prices, and the inevitable adjustment of domestic demand following the overheating in 2005–2007 – an adjustment that had begun before the banks fell. The contraction from the peak in Q4/2007 to the trough in Q1/2010 was the deepest Iceland has seen, at least in the post-war period. GDP contracted by nearly 12½%.
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These meetings enabled the members of the Committee to learn about the internal control systems and risk management procedures. Upon the proposal of the Inspector General, and following consultations at the Audit Committee, the Supervisory Council approved, for the first time, the level of tolerance to the operational risk at the Bank of Albania. The activity of the Supervisory Council has been faithfully published in our periodic press releases. 2. Monetary Policy of the Bank of Albania The monetary policy decision making is based on a comprehensive, consistent and transparent set of macroeconomic analyses and forecasts. They are supported by the whole range of information available at the time of decision making, and the expertise and judgement of the Bank’s experts on the trends of economic development and the monetary policy pass-through mechanism. I will elaborate on the underlying reasons of our decision making to maintain the accommodative monetary policy stance in 2017 and the assessment of its effects on the economy in the following. 2.1 Economic developments and monetary policy in 2017 The Albanian economy performed positively throughout 2017. The volume of economic activity trended upward, spare capacities in the labour market reduced, while the main indicators of economic and financial stability improved. Following are presented a few figures to illustrate it. According to Instat statistics, the volume of economic activity grew 3.8% in 2017, registering a positive dynamics compared to 2.2% and 3.4% growth in 2015 and 2016. The economic activity expanded on a broad base.
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Another example of product innovation is in the growth of investment products such as property securities unit trusts and listed property securities funds. A potentially exciting area for innovation is in the property derivatives market. Property derivatives offer the potential for property companies, asset managers, banks and investors to hedge or rebalance their property exposure according to their views on the market. A key criterion to develop the property derivative market in Singapore would be the existence of transparent, reliable and wellfollowed direct property indices, which serve as reference points or benchmarks for structuring of property derivative products. Given the prospects of the Singapore property market, industry players are currently studying the construction of property indices based on the Singapore property market. We are excited to see the introduction of these property indices which would enhance information on Singapore’s property market and provide benchmarks for structuring property derivatives and other innovative investment products. These developments will add to the breadth and depth of Singapore’s markets by providing investing and hedging tools for market participants in a cost-effective and flexible manner. Moreover, they would lead to development of expertise in product structuring as well as real estate portfolio analysis and performance measurement. 2 BIS Review 38/2007 Conclusion So ladies and gentlemen, general positive sentiments suggest that 2007 and the years ahead will be exciting for Asia and its property sector. I am certain that with judicious planning and sound execution, the sector will see strong growth, sustained by liquidity from the capital markets.
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A first source is the “too big to fail” (TBTF) problem – that the Swiss banking sector has several banks with balance sheets that are large in relation to GDP. A second key source of risk resides in the substantial imbalances that have been building up in Swiss real estate and mortgage markets and the high exposure of domestically focused banks to these markets. Let me mention here that other possible system-wide sources of risk discussed on the global level, in particular those in the “shadow banking” sector, are considered less of an issue in Switzerland. One reason is that shadow banking assets in Switzerland carry low to moderate bank-like systemic risks. Another reason lies in the fact that bond funds and other investment funds, which make up 60% of shadow banking assets in Switzerland, are supervised by FINMA. 8 Switzerland has made considerable progress in addressing its two main sources of risk to financial stability. With respect to the risks stemming from the real estate and mortgage markets, a countercyclical capital buffer (CCB) has been introduced. The CCB was activated on a sectoral level in early 2013 and increased in 2014, as a complement to further administrative and self-regulatory measures aimed at increasing the resilience of the banking system and preventing excessive credit growth. Experience with this policy mix has so far been encouraging, and has flowed into the preliminary assessment indicating that these measures have contributed to a recent dampening of corresponding market dynamics.
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Commodity prices remain high by historic standards, consistently with the strength of emerging economies, some specific supply-side elements and the depreciation of the dollar. Worth noting are the recent sharp increases in the international prices of some foodstuffs and the copper price peaking at $ per pound (figure 4). The baseline scenario in the IPoM we are presenting today assumes that some of these factors will persist over the projection scenario. In the case of copper, even if it will not be as high as today, it will exceed September’s projections, at $ and $ per pound in 2011 and 2012, respectively. The price outlook for WTI oil is also revised up from September, to $ per barrel in the two years. The baseline scenario for the international economy is good, albeit with important associated risks. We expect an average growth rate of 4.2% for the world economy over the next two years, fairly high by historic standards, but around 0.3 percentage points below the market consensus forecast. This differential is based on the effects of the financial turbulences in Europe, tighter fiscal adjustment plans in the region and the absence of a vigorous recovery of demand in developed economies. In addition, because of the inflationary pressures present in some emerging economies, it is obvious they cannot continue to grow at the same pace they did this year (table 1).
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We face a number of major challenges to sustaining this record. I want to focus on just a few of these those where the risks are highest and the return to sensible policies is likely to be highest. The first of these challenges is the combination of our fiscal and external imbalances. Both are unsustainable. Each magnifies the risk in the other. Fiscal deficits of the magnitude projected are large enough to damage future growth prospects of the U.S. economy, which in turn magnifies our vulnerability to a decline in the willingness of other countries to lend us their savings, which could lead to higher risk premia on U.S. financial assets, also damaging long-term growth prospects. It is important that the United States work to build more confidence that it will act on the fiscal front to achieve a better balance between our commitments and our resources, both with respect to the medium term and the longer term. Building a stronger fiscal cushion and strengthening confidence in our fiscal sustainability is critical to reducing the risk in the size of our external imbalance. A second important challenge involves sustaining a commitment to openness and market-oriented economic policies. The pressures that have accompanied the process of technological change and more rapid global economic integration have eroded the strength of the center of the U.S. political spectrum that has been the source of our commitment to an open trade policy.
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Both are intended to make Swiss franc investments less attractive, thereby easing pressure on the franc. This is important given that the franc remains significantly overvalued. Our expansionary monetary policy is aimed at stabilising price developments and supporting economic activity. Our new conditional inflation forecast suggests that inflation will rise faster over the coming quarters than we predicted in March, principally due to the significant increase in oil prices in the intervening period. The effect of this oil price rise on annual inflation vanishes after the first quarter of 2017. The new conditional forecast moves closer to that of the last quarter from then on, and is in line with it from 2018. This forecast shows that our expectations for the medium-term development of inflation and the Swiss economy remain essentially unchanged. At –0.4%, our inflation forecast for the current year is 0.4 percentage points higher than in March. For 2017, we expect inflation to be 0.3%, somewhat higher than assumed in the previous quarter. For 2018, we continue to anticipate inflation of 0.9%. The conditional inflation forecast is based on the assumption that the three-month Libor will remain at – 0.75% over the entire forecast horizon. Global economic outlook Since the assessment of the inflation and economic outlook for Switzerland is heavily influenced by economic developments abroad, let me now present our assessment of the global economy. The moderate recovery in the global economy is continuing, supported by ongoing highly expansionary monetary policy worldwide.
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Jean-Pierre Landau: The role of central banks – lessons Remarks by Mr Jean-Pierre Landau, Deputy Governor of the Bank of France, at the VIth International Symposium of the Banque de France on “Which regulation for global imbalances?”, Paris, 4 March 2011. * * * I am going to talk about the relationship between monetary policy and financial stability. This topic is abundantly debated. I will take, however, a modest approach and deal only with some operational aspects. These are, nevertheless, crucial since the essence of modern Central Banks is their operational independence. It is therefore relevant to ask how it might be affected or impacted by the search for greater financial stability. The starting point is that financial frictions matter. They matter both for financial stability, which is obvious, and for the transmission of monetary policy, a point which should have been obvious but was somehow forgotten. Prior to the crisis, most of our macro models tended to represent the transmission mechanisms through a simple, immaculate, intertemporal substitution effect whereby changes in policy rates would induce expenditures shifting across time. Money and financial institutions play almost no role in that mechanism, as credit was implicitly supposed to respond only to interest rate movements. What do the words “financial frictions” exactly mean? I will interpret those terms as encompassing the conjunction of maturity transformation and leverage which drives the expansion or contraction of financial institutions’ balance sheets, thus the overall equilibrium in credit markets, including securitized markets.
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In the period ahead, the one-week repo rate will remain our main policy tool, and we will continue to implement the monetary policy within a simplified operational framework. The inflation-focused monetary policy will be our strongest weapon that will serve as a shield against global fluctuations and financial market volatilities. Our determination to fight with inflation will secure the strength and prestige of the Turkish lira. 3 In the current period, high levels of inflation and inflation expectations require a tight monetary policy stance. The monetary stance will continue to be determined in view of inflation developments and inflation expectations, and at a degree of tightness that will rapidly restore the disinflation process and ensure its sustainability until we achieve our medium-term targets. Until there are strong indicators that point to a permanent fall in inflation, we will continue to set the policy rate at a level above inflation, in a manner to maintain the strong disinflationary effect. To sum up, we will make our decisions with a data-centered perspective, taking into account all macroeconomic data flow, inflation in particular. In the new period, we will make the best use of our corporate capacity to ensure a permanent fall in inflation. It should be noted that the stability to be achieved in the general level of prices will positively affect macroeconomic and financial stability through the fall in country risk premiums, the start of reverse currency substitution, the uptick in foreign exchange reserves, and a permanent decline in financing costs.
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Social progress is one of the key objectives of the European integration process: “The Union shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress … It shall combat social exclusion and discrimination, and shall promote social justice and protection, equality between women and men, solidarity between generations and protection of the rights of the child”. (Article I–3 of the draft European Constitution). Welfare is not only a remedy for the failure of insurance markets, but also a tool to promote inclusion, solidarity and a sense of fairness. In the three post-war decades (the so-called “Golden Age”), which especially in Europe were marked by high growth rates, use of advanced technologies, high growth employment, stable lifetime employment, welfare started to emerge, at different times and on different scales depending on the country, as an integrated system that protects its citizens from significant risks. The European model redistributes many more resources for social purposes than the US and Japanese systems: on the eve of the crisis, the total expenditure on pensions, unemployment benefit, for children and families was, in relation to GDP, more than twice that of the US and Japan. This can take different forms as regards the composition of social policies and the degree of labour protection.
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Mario Draghi: A route for Europe Address by Mr Mario Draghi, President of the European Central Bank, at the day in memory of Mr Federico Caffè, organised by the Faculty of Economics and the Department of Economics and Law at the Sapienza University, Rome, 24 May 2012. * * * A teacher, says Eco, “teaches that everyone must become individual and different”.1 Professor Federico Caffè, albeit with a coherent vision and deeply held convictions, was a teacher. He taught his students to think for themselves and did not pass on a binding creed. He helped his students – economists, thinkers, servants of the state and of the institutions, alert citizens – to discover themselves. I’ll start with the subject which, without a doubt, was the most precious to Caffè, namely welfare. Probably nothing in his intellectual heritage is more topical than this painful protest of his: one cannot, he would say, “accept the idea that an entire generation of young people should consider themselves as having being born at the wrong time and having to suffer job insecurity as an inevitable fact”.2 Work: a European matter “Full employment is not only a means of increasing production..., it is an end in itself, since it leads to overcoming the servile attitude of those who find it hard to obtain a job opportunity or live in constant fear of being deprived of one. In other words, the benefits of full employment are considered as well, and above all, in terms of human dignity.
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The IAFR, adhering to the principles of independence, transparency and accountability, will contribute to improving control over fiscal policy and to introducing greater budgetary discipline in all tiers of general government, in line with the Law on Budgetary Stability and Financial Sustainability approved in 2012. More specifically, and focusing on the budget for this year, the IAFR has recently published a report on macroeconomic forecasts (Informe sobre las Previsiones Macroeconómicas), endorsing the Government’s macroeconomic projections that underpin the draft State Budget and analysing the consistency of the projections made in previous years. Furthermore, by 15 October, the IAFR is to publish its report on the draft Budget (Informe sobre el propio Proyecto de Presupuestos), in which it will assess its suitability with a view to meeting the objectives of stability, debt and the rule that ties spending to economic growth. As regards the sustainability of public finances in the long term, the latest key development has been the approval and entry into force of the new revaluation index and the pension sustainability factor. The reform entails a structural change, since benefits are to be linked to the system’s ability to generate revenue. The information available on the budget outturn to date this year shows headway in the process of fiscal consolidation. The overall general government deficit in National Accounts terms was 3.43% of GDP to June, 0.5 pp down on the figure of 3.94% in the same period a year earlier.
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The adjustment in public finances undertaken by the Spanish economy is three-pronged: the gradual reduction in the budget deficit in line with the targets set, the strengthening of the fiscal governance framework and the reform of the pensions system. In light of the budgetary exercise under way, compliance with the fiscal commitments acquired at the European and national level should be the cornerstone of our budgetary policy. Fulfilment of these objectives will allow us to build on the gains in credibility already attained and to turn around the upward trend in the public debt/GDP ratio. Both goals are prerequisites for a durable economic recovery. BIS central bankers’ speeches 3 One of the main changes to the institutional framework of Spanish fiscal policy has been the creation and start-up of the Autoridad Independiente de Responsabilidad Fiscal (Independent Authority for Fiscal Responsibility – IAFR). The IAFR will be playing a most prominent role throughout the budgetary cycle, monitoring compliance with the principle of budgetary stability in the general government sector, in accordance with the provisions of Article 135 of our Constitution and with European regulations. In this way Spain is moving to enhance its economic governance, joining those EU countries – practically all of them – that have this type of agency.
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Based on the economic outlook, and aiming at further boosting the aggregate demand, the Bank of Albania cut the key interest rate by 0.25 percentage points to 2.75%, in the first 2 BIS central bankers’ speeches quarter of the current year. This cut followed the previous monetary policy easing in the second half of 2013. To strengthen and better transmit the monetary stimulus, the Bank of Albania’s monetary policy decisions were accompanied by continued liquidity injections and public guidance on the monetary policy direction in the near future. Our monetary policy has managed to control the inflation expectations of economic agents, keeping them anchored to our target. It has also mitigated the liquidity risk and inflation premia in financial markets, contributing to lowering interest rates in the interbank market, government debt securities market, deposit market and lek credit market. However, its transmission to higher lending activity remains incomplete. Interest on lek-denominated loans factors in the relatively high risk premia. Moreover, banks remain considerably conservative in terms of lending, by tightening the applied standards. This development reflects the financial terms in the euro area and the uncertainty perceived by financial agents in the domestic market. It is an impediment to the transmission mechanism and illustrates the need for reducing risk and improving the business climate in the economy. This commitment should be the scope of work for both public and private economic agents. Along with the conservative policies, lending continues to be affected by lack of demand for funds by businesses and consumers.
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From the financial point of view, the weak economic growth puts upward pressure on the budget deficit and public debt, and creates financial difficulties for businesses. These difficulties are reflected in higher non-performing loans in the economy, and negatively affect the banks’ willingness to lend. Such problems have been and continue to be present in the Albanian economy. However, new information signals that 2014 may be a turning point for the economic activity in Albania. The economic growth indices, businesses’ perception and financial markets performance improved faster than our expectations. Such a development, combined with the expected improvement in the world economic outlook, subdued uncertainties, improved business climate at home, implementation of stimulating macroeconomic policies, and acceleration of structural reforms, signals that the Albanian economy may gradually improve in the quarters ahead. The current risks to this scenario will remain present. In the following, I will dwell longer in describing the expected developments and related risks, while trying to highlight the policies that need to be implemented in order to avoid such risks. Annual inflation averaged 1.9% during the first quarter of 2014; this is upward compared to the rate recorded in the previous quarter. The annual rate of inflation was 2.2% in March, returning within the Bank of Albania’s target band. The performance of inflation during the first quarter of 2014 was largely determined by the prices of unprocessed foods. Prices of other items in the basket of goods were generally stable, providing a minimal contribution to annual inflation.
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A stable financial system cannot be based on questionable and opaque risk assessments. To regain confidence in these calculations, banks should make sure that their RWA calculations are transparent and traceable. In particular, they have to ensure that changes in RWAs over time, and differences in published RWAs between institutions, can be explained and economically accounted for. Third, the ongoing work on recovery and resolution plans should be pursued with total determination. If required for the guaranteed maintenance of systemically important functions, changes in the current organisational structure should be explored and initiated without delay. Fourth, on the regulatory side, further progress in defining the key elements of a viable resolution and recovery strategy for globally active banks is needed. In the absence of global bank insolvency legislation, this necessitates close coordination among regulators across borders. Specifically, further steps are necessary to guarantee that resolution measures – such as a bail-in – ordered by the home regulator are mutually recognised by foreign authorities. In this regard, it is encouraging that the resolution and recovery plans for our big banks are being developed in close collaboration with the foreign regulatory authorities concerned. Let me finish with some words regarding the cyclical risks. Mortgage volumes and real estate prices continue to grow at rates significantly above those justified by fundamental factors such as income and population growth. This means that the imbalances, which are already large, are increasing further.
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2 BIS central bankers’ speeches requirements by the end of 2014.4 At the same time, regulators are working on the establishment of resolution and recovery plans. When finalised, these plans should enable the regulators to secure the orderly resolution of a global bank in the event of a severe crisis and, in doing so, to make sure that systemically important functions can be maintained. As an important step towards this goal, FINMA has been authorised, since November 2012, to order a bail-in of creditors to generate the financial means necessary for restructuring a bank. Turning to cyclical risk, in June 2012, the Federal Council announced a set of measures consisting of three elements: (1) a permanent increase in risk weights for high loan-to-value mortgage loans,5 (2) a revision of the banking industry’s self-regulation guidelines for mortgage lending,6 and (3) the legal basis for the activation of a countercyclical capital buffer (CCB), as proposed in the Basel III framework. This instrument allows for a temporary increase in capital requirements when imbalances appear to be building up in the credit markets. It thus aims to increase the resilience of the banking system, and helps to lean against excessive credit growth. In February 2013, following a proposal by the SNB, the Federal Council activated the CCB, requiring banks to hold additional capital amounting to 1% of risk-weighted residential mortgage loan positions. Banks have been obliged to comply with this rule since 30 September 2013.
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Although my role has changed since then, my belief in the fundamental importance of this issue remains the same. Indeed, my conviction has been reinforced by the Banque de France’s own commitment to supporting VSEs, both at a central level and through its local presence in France’s regions. One of the main advantages of this nationwide network is that it makes it easier to listen to and support local businesses, the majority of which are clearly VSEs. Through its local branch network, the Banque de France is responsible for dealing with credit mediation applications. It provides valuable insight for economic and social actors by publishing statistics on VSEs, and is the only central bank in the Eurosystem to publish data in this level of detail. In addition, the Banque de France conducts studies into VSE finances and their positioning in the French economic landscape. Clearly, this symposium is not just a one-off event reflecting a passing interest in a subject that’s currently in the spotlight. In fact, it is part of an ongoing and enduring initiative, and will provide additional impetus to the work already being undertaken at the Bank. I shall come back to this in a few minutes. *** First of all, let me underline the importance of VSEs for growth and employment, and for the strength of our regional economic fabric.
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I shall follow your work and the results closely, and I hope you enjoy this excellent event. Thank you for your attention. 4 BIS central bankers’ speeches
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Numerous countries with highly expansionary monetary policies have witnessed just such a trajectory, and hence a marked rise in capital market debt, in the last few years. However in Switzerland, the opposite has occurred. As chart 2 shows, after peaking in spring 2011 at almost CHF 560 billion, the volume of all outstanding Swiss franc bonds trended sideways for four years, and since the introduction of negative interest in 2015, the total volume has even fallen by around CHF 40 billion. It is evident that the domestic segment has been steadily growing since the financial crisis. Let’s take a closer look at the domestic segment. Chart 3 shows the development of domestic Swiss franc issuance by sector. Three aspects are striking. First, this development is chiefly driven by Switzerland’s two mortgage bond institutions (mortgage bond bank and mortgage bond institute); these entities jointly account for around a third of the domestic segment. The strong rise in this sector reflects both the growth of the Swiss mortgage market and greater use of this refinancing instrument by the banks. From the banks’ perspective, it is preferable to borrow via long-term instruments such as mortgage bonds than to finance mortgage loans via customer deposits, as doing so enables better maturity matching on both the assets and the liabilities side. Furthermore, in the current interest rate environment, mortgage bonds offer banks better financing conditions than customer deposits. Second, domestic non-financial corporations (‘other corporations’, light blue) were a further important driver of the increase in bond issuance in the domestic segment.
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The main difference between this macroeconomic setting and that of the IMF or the European Commission is the lower decline in gross capital formation projected in the budget. Achievement of the targets set for 2013 may be jeopardised if tax receipts are affected by lower economic activity. Expenditure in the State and Social Security Budget is dominated by the interest on government debt, spending on contributory pensions and unemployment benefits. The sharp rise in these items reflects the increase in debt and the higher cost of new issues, demographic trends and the unfavourable performance of the labour market. To offset this expansionary trajectory, the Budget adopts an austere stance on other expenditure items, in particular the remuneration of public employees and real investment. Lastly, I must mention that the Budget for 2013 saw the culmination of one of the most important agreements of the Toledo Pact, namely the separation of the Social Security System’s funding sources: on one hand, contributory pensions, funded solely by social contributions and, on the other, non-contributory supplements and non-contributory pensions, funded by taxes. This separation, which began to be applied in 2002, will finally be completed in 2013. The bank restructuring process Finally, I would like to comment on the bank restructuring process under way further to the agreement entered into with the European authorities last July. Bank restructuring is progressing as scheduled.
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However, monetary policy can dampen the impact on output and employment in a transitional period. Chart: Labour costs relative to trading partners The policy rate has been cut and the interest rate differential between Norway and other countries reduced. Lower interest rates stimulate consumption and investment. The krone has depreciated markedly and has recently been at historically low levels. The depreciation of the krone is contributing to underpinning inflation and dampening the effects of lower oil prices on output and employment. Even though the cost level in Norway is still high compared with other countries, a weaker krone is strengthening the competitiveness of Norwegian firms exposed to international competition. At the same time, wage growth in Norway has moderated, and there are prospects that real wage growth in 2015 will be at its lowest in 20 years. Norway is therefore in a sound position to tackle the restructuring facing the economy. Conclusion The monetary policy instrument employed by Norges Bank is the key policy rate. With a wellfunctioning money and credit market, changes in the key policy rate will normally be transmitted to short-term and long-term rates. In recent years, a number of our trading partners have employed unconventional instruments to achieve a sufficiently expansionary monetary policy. This is not under consideration in Norway. We still have room for manoeuvre in economic policy. Based on our current assessment of the outlook for the Norwegian economy, there is little likelihood of a negative key policy rate in Norway. BIS central bankers’ speeches 9
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It is actually on a flatter slope than it was in the 1990s and that of other emerging economies 4 BIS central bankers’ speeches that have adopted measures to control capital inflows (figure 12). Still, it is important to be on the watch for excess flows that might incubate financial fragilities and exacerbate economic cycles, in which case it could be necessary to review financial regulations in place to avert any costly imbalances. Recent monetary policy decisions The scenario outlined in the latest Monetary Policy Report assumes that in the coming quarters the Chilean economy will grow in line with its potential. This will allow trend inflation, today in bounded levels, to converge and remain around the 3% target in the coming quarters. To achieve this objective, we have withdrawn some monetary stimulus, bringing the monetary policy interest rate (MPR) closer to the neutral range. Although this is the baseline scenario, the Report also indicated that inflation (and growth) risks were biased upward. For inflation, arguments were based on the combination of adverse supply shocks in energy and foodstuffs, the closing of output gaps and the strong dynamism of the domestic demand. Some of the aforesaid risks have eased. Private inflation expectations have moderated, consistently with MPR adjustments and the recent decline in oil prices and other commodities (figure 13). Anyway, commodity markets remain volatile, so it is premature to evaluate at what level international prices will settle.
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Banking institutions are facing competition not only from each other but also from non-traditional competitors such as non-bank financial intermediaries as well as from alternative sources of financing, such as the capital markets. Indeed, the Malaysian capital markets have broadened and deepened, and are now playing a more pronounced role than before in the financial intermediation process. In this respect, the challenges to the banking sector are manifold. On the funding side, consumers' continued interest in diversifying their investments in search of higher returns, have seen funds flowing directly into the financial markets instead of going into banking institutions' deposits. At the same time, companies are increasingly meeting their financing needs in the equity and bond markets, thereby reducing their reliance on banking institutions. This is evidenced by the growth of outstanding private debt securities or PDS in the market by 10.7% to RM160 billion as at end of 2004, accounting for approximately 25% of the total financing channeled to the economy. The challenge to banking institutions is to enhance their competitive edge by being cost efficient without compromising on the quality of their services. On the other hand, the disintermediation process also offers opportunities to banking institutions. In particular, they can enhance their income by cross-selling mutual funds products and increasing their role as advisors, arrangers, underwriters and brokers for corporate financing arrangements. There is also bancassurance and bancatakaful in the area of cross-selling.
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Given the importance of SMEs to the economy, a number of initiatives are being taken to foster the development of SMEs and improve their access to financing. In this respect, banking institutions have provided considerable support in terms of financing to the SME sector. Moving forward, the banking industry is expected to play a greater role in the development of SMEs, such as by offering a complete financial services solution as part of and in conjunction with their financing programs. Aside from the SME sector, banking institutions should explore other potential growth areas such as microcredit and agro-based financing, which are generally perceived as riskier and more costly than lending to larger firms. The challenge is for banking institutions to innovate and develop new form of financing arrangements and business models to exploit the opportunities offered by these market sectors. Strategic opportunities are also available from a larger marketplace as economic integration and regional linkages of markets in the East Asian region gather pace, driven by increasing regional trades and investment flows. In this regard, banking institutions should broaden their strategic outlook and expand their presence in the region to support Malaysian businesses and investors as they venture into new activities and expand their geographical profiles. Another strategic challenge facing banking institutions today is the growing and changing needs and expectations of consumers in tandem with increased education levels and growing wealth. Consumers are becoming increasingly discerning and have become more involved in their financial decisions.
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Sukhdave Singh: Global RMB – challenges and implications Keynote speech by Dr Sukhdave Singh, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the HSBC Forum: China Globalising: RMB Rising (Malaysia) – “Global RMB: Challenges and Implications”, Kuala Lumpur, 12 August 2014. * * * It is an honour and pleasure to be here with you this morning to talk about what is likely to be the most important development affecting the global monetary system since the introduction of euro. Should the RMB become a global currency, it will transform the global financial landscape. In fact, the RMB could potentially define this century, in the same manner that the US dollar dominated the previous century. In my remarks today, I would like to share some thoughts on the potential for the RMB to achieve the status of a global currency. Where it to do so, what will the potential impact be on the global monetary system? Finally, I will touch on the implications for Malaysia. The world is ready, is China ready? From where we stand today, the world is clearly ready for a global RMB. The question is whether China itself is ready. There is no question that the RMB would become an international currency. The only question is how big of an international currency. Will the RMB’s role in the international trade and finance reflect the status of China as the second largest, and soon to be the largest, economy in the world?
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However, a large part of these outflows have been official and they have not been in RMB. This in fact touches at the heart of what is known as the Triffin Dilemma. China has been sending USDs abroad because that is what it has been receiving through its current account surpluses and FDI inflows. Sometime in the future, China may develop a structural current account deficit, but I do not see that happening in the foreseeable future. Opening up the capital account and domestic financial system to non-resident investors could lead to even more foreign currency capital inflows. On both accounts, China will not only continue to export USD capital but could find itself confronted by persistent appreciating pressure on its exchange rate due to the high demand for RMB. Promoting RMB for trade settlement will only go so far in resolving this. If more of China’s trade is settled in RMB, less USD will flow in, and China would need to intervene less and would have less USD to send abroad. But the question remains, with more RMB flowing in through the current and capital account, how do you get more RMB out of China in the first place? There are in fact numerous possibilities for China to create a significant pool of RMB liquidity abroad without necessarily running a current account deficit.
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Stefan Ingves: The crisis in the Baltic – the Riksbank’s measures, assessments and lessons learned Speech by Mr Stefan Ingves, Governor of the Sveriges Riskbank, to the Riksdag Committee on Finance, Stockholm, 2 February 2010. * * * The crisis in the Baltic – the Riksbank’s measures, assessments and lessons learned It is not possible to provide a comprehensive reply to all of the questions discussed in connection with the crisis in the Baltic in the space of 15 minutes. I shall therefore give a brief summary of the assessments made by the Riksbank during the course of the crisis and something about the measures we have taken. In conclusion, I shall say a few words about the lessons that can be learned. Before I discuss the role of the Riksbank, I would like to point out that the responsibility for developments in the Baltic countries primarily lies with their own governments with regard to economic policy, and with the banks, which have a responsibility for understanding developments in the economy and taking sustainable, long-term action. People often seem to forget in the general debate that we are talking about three different countries here. Financial market participants also tend to see the Baltic countries as a unit, which makes it difficult to manage the crises in these countries. Of course there are many similarities between the countries, for instance, their economic expansion and decline. However, there are also important differences.
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Perhaps they must be based on a clearer interpretation of our mandate in the Sveriges Riksbank Act which currently states that we shall “promote stability in the payment system”. Perhaps we need to use more formal measures to a greater extent, such as expressing our recommendations in letters to the parties concerned. Regardless of the importance of clarity, it is always a sensitive issue to determine at what point the Riksbank can issue warnings regarding weaknesses in the financial system. This is of course even more difficult when it refers to another country. The Riksbank therefore also works through non-public contacts with other authorities in Sweden and abroad, with international organisations and with the Swedish banks. It is important to achieve consensus on the problems and possible measures. Of course, it is also very important to make our views public to put pressure on those concerned and to inform a broader public. – The Riksbank’s basic outlook is that we shall be as open and clear as possible. One lesson learned from both the global crisis and that in the Baltic countries is that the regulation and supervision of the financial sector must be strengthened. This entails, for instance, more and better capital in the banks, stricter requirements regarding the banks’ liquidity and risk management in general, as well as stricter supervision of large, crossborder bank groups.
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First, if the affected institution provides services that are of crucial importance to the national economy and which are generally indispensable. Second, if these services cannot be provided by other market participants at short notice – in other words, they are not substitutable. How pronounced are these two aspects in the banking sector? First, banks generally provide a wide range of essential services for the economy, such as lending or payment services. Second, these services are not easily substitutable, particularly at big banks. Banks are closely interconnected with each other, and with the rest of the economy. The result is that problems at one bank can spill over to other banks and the rest of the economy. The larger the bank and the higher its market share, the smaller the likelihood that other market participants will be able take over important functions at short notice in the event of a crisis. Thus, a bank’s size and market position are important indicators for assessing its systemic importance. Specific parameters are the bank’s share of domestic lending and deposit business, and its importance for payment transactions. Another widely used measure of systemic importance is the ratio of balance sheet total to GDP, as this is a good indicator of the bank’s interconnectedness and the (lack of) substitutability of its services.
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The mere assumption that a bank is too big to fail can be a self-fulfilling prophecy. 4 On the assumption that it will be bailed out if necessary, the bank may take on excessive risk much more readily, and focus its business model too heavily on debt-based growth. Thus, the bank becomes even bigger, thereby increasing the likelihood that the state will have to intervene in a crisis, so that the original assumption proves to be correct. Given this increased likelihood of a bail-out, the bank can now take on even more risk, and the de facto bail-out obligation becomes even more acute – a vicious circle. This bail-out obligation can result in very high and unforeseen costs to the state. The scale of these costs was highlighted by the global financial crisis, which at the time saw announced 2 3 4 For example, cf. International Monetary Fund (2014) for an estimate of the magnitude of this subsidy. Cf. Afonso et al. (2014). Cf. Alessandri and Haldane (2009). Page 4/14 state support for the financial sector in advanced economies amounting to some 20% of GDP (cf. slide 2). 5 State budgets, which are already under strong pressure from the recession associated with a financial crisis, can be overstretched by the cost of state support measures. And indeed, during the crisis, a number of countries did find themselves having to shoulder costs well in excess of their financial capacities. Ultimately, they coped by resorting to external support.
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The reform measures in the Payment Card Reform Framework (PCRF) implemented since 2015 have enhanced transparency and competition, bringing about a continued decline in the average merchant discount rates (or MDR). Merchants have benefited from lower cost of accepting card payments, with an estimated cost savings of about RM422.4 million from 2015 to September this year. Consequently, the annual growth of POS terminals has more than doubled from about 6.8% for the period between 2011 and 2014, to 17% for the period between 2015 and 2017. Key trends shaping our payment landscape today Since the Payment Forum in 2015, many developments have taken place in the payment landscape both domestically and internationally. Firstly, society has become increasingly digital and connected, driven by the Internet and mobile revolution. For a population of 32.1 million in Malaysia, there are 42.8 million mobile phone subscriptions while smartphone penetration stands at 70% and is increasing. Secondly, payment technology has become more advanced, scalable and increasingly low-cost. For instance, innovations in the area of merchant acceptance has lowered the cost for merchants to embrace electronic payments through the use of Quick Response (QR) codes. Likewise, the advancements in biometric and tokenisation technologies and the shift towards greater publication of Application Programming Interfaces have enhanced the ability of payment service providers to develop new use cases and deliver superior customer experience. Thirdly, the market players in our payment landscape have become more abundant, diverse and increasingly non-traditional.
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I also wish that our commitment to achieve future success of the industry as reflected in this event by the joint efforts and collaboration of the regulators, the industry, the market participants and the relevant parties will be further enhanced moving forward. In this regard, I would again congratulate AIBIM on its continuous effort undertake the initiatives in promoting Islamic finance, particularly by organizing this event. 2 BIS Review 115/2006 On this note, I wish you a successful and eventful week. Dengan lafaz Bismillahirrahmanirrahim, saya dengan sukacitanya merasmikan pelancaran "Kuala Lumpur International Islamic Financial Expo 2006". Thank you. BIS Review 115/2006 3
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But in order to compete well, you will have to be well capitalized, well organized with good governance and risk management processes. Number two, you can help establish market codes and practices that conform to world standards. The market needs rules to ensure smooth trades and dispute resolutions, and to guard against manipulation. The industry has an important role to play in the setting of rules and codes of conduct. Number three, you can help ensure that the market has a wide variety of products. We should aim for a market that can offer many kinds of contract, to serve those needing to unbundled or rearrange all kinds of risks at competitive prices. And lastly, you can build for yourselves a good analytical capability. It will prevent herd behavior, and help to stabilize the market. But more importantly, proper project analysis can ensure that capital is channeled only to the good projects. It can help prevent over expansion of businesses, over diversification and over enthusiasm that inevitably winds up as non-performing loans in the end. Ladies and gentlemen The task of the central bank in monetary policy is to ensure that it sets the right policy, and that its policy is transmitted through to the overall economy. The financial system through which their policy is transmitted must also be safe and sound. Non-bank financial institutions do indeed have vital roles to play here. BIS Review 48/2002 3
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5 Source: St.meld. 39 (1993-94). 6 Source: For Sweden: Jennergren and Näslund (1998). For Norway: Norges Bank, Moen (2003). 7 See Hoggarth, Reis and Saporta (2002). 8 Peek and Rosengren (2000) look at the loan supply shock facing U.S. firms borrowing from Japanese banks during the banking crisis in Japan. They identify a substantial impact on U.S. real estate activity from this supply shock. 9 See Ongena, Smith and Michalsen (2003) and Vale (2002). 4 BIS Review 58/2003 good advice, but there is a delicate balance between restoring private ownership quickly and trying to recover as much as possible of the government’s fiscal costs. The Norwegian banking crisis was handled swiftly and transparently and at relatively low cost to the taxpayers. Furthermore, the banks that came out of the crisis had trimmed their operating costs and established much better systems to evaluate credit risks. In one respect, we were rather lucky compared to others. The crisis built up gradually, so there was time to assess the situation and strengthen the defences of the financial system before the crisis became systemic. The banks’ equity capital provided the first line of defence and the banks’ collective guarantee funds the second when bank losses started to soar. The third line of defence - the Government Bank Insurance Fund - was only established when it was evident that the first and second lines of defence did not hold, but it was nevertheless established in time.
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The Central Bank incorporated these expectations into its baseline forecast, even though it considered them unrealistic. They assumed rapid cuts in the policy rate commencing early this year. The Central Bank considered neither assumption to be compatible with the inflation outlook. Thus the forecast lacked credibility, in the Bank’s own opinion. This prompts the question of what assumptions it is natural for the Central Bank to make about the policy rate in its baseline macroeconomic and inflation forecasts. Iceland is not the only country whose central bank has faced such a challenge. Several years ago, the Reserve Bank of New Zealand responded by using its own policy rate forecast as an assumption. The Bank of Norway followed suit two years ago and now uses a future interest rate path forecast by its Executive Board for its baseline forecast. Sweden’s Riksbank recently announced that it will use its own forecast for the repo rate path as an assumption in its inflation forecast. These banks have followed a similar course to the Central Bank of Iceland in developing the interest rate assumptions behind their forecasts. They have now opted to use the path that is forecast by those who actually determine the policy rate, partly because they did not consider market agents’ forecasts and expectations sufficiently credible. At the same time, these central banks have firmly stated that their policy rate forecasts entail no commitment to hold their rates to that path.
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It would, as many in this audience know, have major implications for the way we transact with each other and, more broadly, for the financial sector and the economy in general. The Taskforce’s conclusion is that we are not yet at a point where a firm decision can be made to implement a digital pound. However, in view of the likely need and the lead time to introduction, the Bank and The Treasury, will now proceed to the next stage of detailed policy and technical development of the digital pound - including the development of a technical blueprint. This stage will take around two to three years following which a decision will be made whether or not to proceed to the next stage and implement a digital pound in the UK. The work over the next two to three years will inform that decision and will reduce the lead time to launch should the decision at the end of this stage be to implement the digital pound in the UK, which could then be introduced in the second half of the decade. In this next stage of detailed policy and technical work, including the development of a technical blueprint for the chosen model of the digital pound, we will work closely with private sector partners on proofs of concept, experimentation as well as on the development of the blueprint Page 3 itself.
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In fact, a CBDC's potential contribution to boosting the strategic autonomy of the European Union, by offering a fast and efficient alternative to other payment providers, is one of the key reasons why the Eurosystem is assessing the issuance of a digital euro. But it is not the only one. The role of the euro as monetary anchor is not only being put to the test by these new developments, but also, and probably more importantly, by the natural evolution of society. The increasing digitalisation of every aspect of our daily lives is reducing the use of cash as a means of payment. Should it reach the point where cash is hardly used, the convertibility of central bank money and private money would be put at risk, affecting people's confidence in the latter. We believe that having a digital euro to ensure convertibility between these two types of money would underpin and protect the integrity of the euro as a unit of account. A digital euro could also foster innovation, increase the efficiency of payments, and reduce our current reliance on non-European payment solutions and technologies. I think the benefits of issuing digital central bank money for retail use are clear, but we cannot forget the other side of the coin. CBDCs come, indeed, with a number of challenges. The technical or operational ones, such as setting up a whole new payment infrastructure, giving digital access to central bank money to every citizen and delving into the intricacies of retail payments are obvious difficulties to surmount.
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The average price difference is 16 per cent, BIS Review 92/2001 1 which means that the difference is approximately 40 per cent larger than is the case between various states and regions in the USA. The price of a normal Volvo, for instance, can differ by 15 per cent or more from one country to another in Europe. Some of this difference is created by difference in cultures and languages, but new studies indicate that the actual psychological barrier involved in differing units of currency may bear a large part of the responsibility. The US economist Charles Engel, for instance, has calculated in extensive studies of price differences between the USA and Canada that a currency border creates price differences corresponding to a geographical distance of almost 8,000 km, even if the countries on either side of the currency border (as in the case of Canada and the USA) are entirely open to one another and share the same language and culture. The largest negative effects of having different currencies probably have to do with trade and resource allocation. In the same way that we believe inflation results in large national economical costs by creating uncertainty about future expenses and income, a fluctuating exchange rate does too. In addition, the allocation of resources in society is distorted by an exchange rate that is not fully motivated. The EMU has particular significance for trade.
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Ladies and gentlemen, Despite our progress, we should not settle for what we have achieved thus far. Much more can be done and need to be done to improve the sustainability of the Thai society as a number of challenges remain. Some of which leave us to question our collective actions as a society on how we allow these challenges to get out of hand. Allow me to highlight four challenges in particular: First, despite a more broad-based economic growth and a number of government policies targeting low income households, 2/6 Thailand remains among the world’s most unequal countries in terms of wealth, with the richest one percent owning more than half of total household wealth2. Meanwhile, low financial literacy and high household debt level continue to hamper the ability of individuals to pursue new opportunities and secure long-term financial security. These have curbed individual’s chance to improve her socio-economic status in the long-run. Essentially, widening wealth and income inequality is a major contributor to the fragility of the Thai society and is frequently used as an excuse to draw public support for a number of costly and unsustainable populist policies. Second, our labor productivity growth is moderating and should be emphasized. As an aging society with declining labor force, enhancing productivity is critical for the Thai economy to maintain growth. And yet a number of public policies have focused on creating short-term stimulus rather than on encouraging the necessary adjustments to address long-term productivity issue.
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Moreover, our educational standards have not been able to prop up our low productivity level and lag behind in many important areas. Without the necessary adjustment now raises the question of how Thailand could maintain our competitiveness going forward. Third, we have been too negligent on environmental and ecological issues. As a large portion of the Thai population remains in the agricultural sector and all of whom rely on quality natural resources for food and income, preservation of environment and natural resources should be our top priority. Our irresponsible actions—from massive burning of fossil fuels to excessive use of plastic containers—contributed to the overall deterioration of the global environment. And, as we have observed, climate change has resulted in increasing frequency as well as severity of natural disasters. The painful experience of the great floods of 2011 should be a case in point, as these floods were the result of rampant deforestation, new developments blocking natural water ways, and clogged drainage system from careless waste disposal. 2 Credit Suisse. “Global Wealth Report.” 2017. 3/6 Many other environmental issues continue to highlight our negligence. These include a recent report detailing Thailand as the new dumping ground for global electronic wastes; or that certain toxic chemical banned in a number of countries around the world is still widely used by farmers in Thailand. Fourth, entrenched corruption remains a major obstacle to achieving long-term focus. Paying bribes and granting favors are harmful practices that incur unnecessary costs and create distortions in resource allocation.
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By contrast, the inflation outlook has improved appreciably. This has increased the SNB’s room for manoeuvre. Finally, there is a risk that the financial crisis will cause a deterioration in financing conditions for the economy as a whole. These are the considerations that have prompted today’s decision to cut the three-month Libor target range by another 50 basis points. Given the expected deterioration in the Swiss economy and the imponderables linked to the long and variable monetary policy transmission lags, a further rate cut appears appropriate. With this action we are reducing, to the extent possible, the risk of an even more pronounced economic downturn. Inflation forecast chart How has our inflation forecast been revised? The dashed red curve on the chart represents the new forecast. It covers the period from the fourth quarter of 2008 to the third quarter of 2011, and maps the future development of inflation on the assumption that the three-month Libor remains unchanged at 0.5% over the forecasting period. For purposes of comparison, the dash-dotted green curve shows the inflation forecast of the September monetary assessment, based on a three-month Libor of 2.75%. The new forecast shows a rapid fall in inflation over the next few quarters. It drops back below the 2% mark as from the fourth quarter of this year.
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Jean-Pierre Roth: Recent economic and financial developments in Switzerland Introductory remarks by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the end-of-year media news conference, Zurich, 11 December 2008. * * * Our assessment of the economic and monetary situation has changed considerably since our last assessment of 18 September 2008. Already back then, we had emphasised that there were substantial risks attached to developments in the global economy, in financial markets and in energy prices. We had also stressed that our forecasts for economic activity and inflation in Switzerland involved considerable uncertainties. We had announced our intention to monitor developments closely, in order to react swiftly should the need arise. As you know, this eventuality did indeed materialise. This led us to relax monetary policy decisively as the uncertainties faded and the deterioration in the economic situation became more concrete. We first lowered the Libor target range on 8 October, by 25 basis points; then on 6 November, by 50 points; and a third time on 20 November, by 100 points. With the new cut announced today, the Libor target range now lies between 0% and 1%, reflecting a firmly expansionary monetary policy. Today’s press conference gives me the opportunity to explain in detail the rationale behind our actions. Since our assessment of 18 September, the situation has changed in three key areas.
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In keeping with such aim, the overall policy thrust of banking supervision and regulation will be to promote higher standards of risk management among banking institutions. Towards such end, the Central Bank has already implemented several measures to further strengthen the supervision and regulation and these include: (a) Introduction of enhanced minimum capital requirements, (b) Introduction of the market risk factor in the computation of capital adequacy, (c) Introduction of conditions for the quarterly publication of financial performance indicators, and (d) Introduction of provisioning requirements in the banking sector to cover potential credit risk. Prudential requirements imposed on banks will also be further strengthened in 2007. This will include the introduction of a general provision on performing advances and increasing the provisioning requirement for non performing loans; increasing the risk weights on residential mortgage loans and ‘other’ loans adopted in the capital adequacy computation; and the revision of the Single Borrower Limit in line with improved risk management by banks. In addition, the Central Bank intends to implement Basel II, the new international capital framework in 2008, with a standardised approach which will help better align a bank’s capital with its risk profile, enhance risk management and increase market discipline due to the need for greater market disclosure. Through such actions, it is expected to enhance the stability of the banking system and thereby provide greater confidence to all stakeholders and the general public.
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6 BIS Review 8/2007 Therefore, continued regulatory vigilance and timely interventions would be necessary to avoid and/or mitigate any harmful effects of all such threats. It should also be noted that a continuing high budget deficit could also pose a formidable challenge in the conduct of monetary policy, as such deficit requires borrowings by the Government from the banking system, making it difficult to maintain the monetary expansion along a pre-determined, tight path. As seen from the case studies of many successful countries, rapid infrastructure development is a strong contributory factor towards achieving sustainable high growth. However, the timely mobilisation of necessary resources for infrastructure development while maintaining budget deficits and debt at reasonable levels would be particularly challenging for a developing country like Sri Lanka. At the same time, maintaining a comfortable and reasonable level of foreign currency reserves in order to be able to mitigate the impacts of external shocks is also a challenging task for any developing country. Needless to say, it is vital to manage the foreign reserves at an appropriate level, while ensuring that the exchange rate fluctuations are within reasonable limits, in order to enhance the confidence in the economy. These and other challenges would need to be faced by our country and it is clear that our policies and actions would have to be so designed in order to deal with, and respond to, such challenges if we are to be successful. 5.
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U.S. inflation by most measures fell in half to an average for the CPI of about 2.5 percent. This positive inflation performance was more generalized across the major economies, with Europe and most all major economies experiencing a similar slowdown, and Japan, more famously, slipping into sustained deflation. • Third, U.S. economic performance during this period was characterized by lower overall volatility in growth and inflation. This moderation, economists call it the “great moderation,” was reflected in a reduction in quarter to quarter volatility in output by about half. This more even pattern of growth was evident across most components of GDP. Some of the other major economies also saw some moderation in the variability of macroeconomic outcomes, but the trend is not as pronounced or well established. • Fourth, productivity growth in the United States accelerated significantly with productivity growth in the non-farm business sector doubling from about 1.5 percent per year in the two decades up to the mid-nineties, to more than three percent on average over the decade since. This acceleration in productivity was not completely unique to the United States, but it has not yet been matched by the other major economies, though that may be in prospect. What accounted for these achievements? This is important to try to understand, because it is important to assessing whether these trends are enduring or temporary, and what types of policies are likely to sustain them.
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Timothy F Geithner: A view from the Federal Reserve Bank of New York Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Business Council of Fairfield County’s Economic Luncheon, New York, 19 January 2005. * * * Thanks for giving me the opportunity to speak to you today. I want to talk about the American economic agenda. And I want to start by looking back at the last decade or so, and the exceptional economic performance of the second half the 1990s in particular. What were the fundamental underpinnings of those achievements, and what are the principal challenges we face to sustaining those achievements? Let me begin by reviewing quickly what distinguished that period of U.S. prosperity, relative to the past in the United States and relative to the other major economies. There are four things in particular worth highlighting: • First, over this period of the past decade the U.S. sustained very solid growth in the range of 3.5 percent. This was not particularly exceptional relative to the preceding decade, but impressive relative to the other major economies, most of which saw a sustained slowdown in growth. Japan, for example, saw GDP growth slow from above 3.5 to just over one percent. Europe slowed from just under 3.0 percent to about two percent. • Second, we achieved very moderate inflation.
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It must invest to develop talent. Remuneration that is competitive is one part of the solution. Sadly, the remuneration of employees of takaful operators is not competitive. Among highly skilled employees, we estimate that those in the takaful industry earn 15% less than those in insurers. So long as this difference exists, it will not be the employer of choice for the best talent. The other part of the solution is in building skills and competencies. The industry needs to take this seriously if it wants to break new ground in realising the potential of takaful. Takaful operators must set a clear vision and culture of continuous learning and development. Programmes such as the Chartered Professional in Islamic Finance, Certified Shariah Advisor and Certified Shariah Practitioner play an important role in elevating the technical and ethical standards of the takaful workforce. The industry needs to get behind these standards and invest in upskilling employees across all levels, starting with those in key senior roles. This can take the form of sponsorships for professional qualifications, alignment of incentive systems and development pathways for staff. Agents are also an important component of the takaful eco system. Many of the imperatives that I mentioned earlier are also applicable to them. In particular, professionalising the agency force is a priority. The life insurance industry association is already taking steps to require agents to be accredited by the Financial Accreditation Agency. I hope to see MTA doing the same, and being proactive in providing the support and resources for its implementation.
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(2020), as of late 2019 central banks representing a fifth of the world’s population reported that they were likely to issue CBDCs very soon. [https://www.bis.org/publ/bppdf/bispap107.pdf] 3 “An Update on Digital Currencies”, a speech by Governor Lael Brainard at the Federal Reserve Bank of San Francisco, August 2020. [https://www.federalreserve.gov/newsevents/speech/brainard20200813a.htm] 4 “Payments in a digital world”, a speech by Christine Lagarde at the Deutsche Bundesbank online conference on banking and payments in the digital world, September 2020. [https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200910~31e6ae9835.en.html] 3 interoperability across borders. In this sense, I believe the role of international organisations and standard-setters, such as the BIS in its role as a hub for central banks, could prove essential. Cross-border payments: another topic of growing interest Regardless of its importance, expanding access to a central bank’s balance sheet by making a CBDC available to households and non-financial corporations is only one of many ways in which technological innovation may help enhance the monetary and payment system. Indeed, given how dynamic the payments market is nowadays, we need to keep abreast of and closely monitor any private initiatives that may overlap in the field of action of a CBDC. This is because they may ultimately prove to be equally viable options for achieving the same goals or remedying some of the common and long-standing shortcomings that traditional channels have faced. In that respect, the current landscape of evolving market infrastructures poses several telling examples, but in the interest of time I will concentrate today on one particular area, namely payments that have a multi-country dimension.
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Mr. Bäckstrom discusses the economic situation in Sweden Speech by the Governor of the Bank of Sweden, Mr. Urban Bäckström, at a seminar organised by The Swedish Shareholders Association, held in Malmö on 10/10/98. First of all I should like to express my thanks for the invitation to visit Malmö to discuss the economic situation. A major phenomenon in the current economic situation is, of course, the international financial turbulence. The crisis in the Japanese economy has been developing throughout the 1990s and the problems in Asia as a whole are now in their second year. The Asian crisis, which is having widespread real economic repercussions in that region, has in turn accentuated the problems in Russia and, to some extent, in Latin America, with associated contagious effects in Western financial markets. Stock exchanges have fallen around the world and some players in the financial markets have incurred losses. This in turn raises a number of questions about the global economic trend. How negative may the real economic effects become in the United States and Europe? What part are the central banks playing? The US Federal Reserve has recently lowered its instrumental rate and so have other central banks. Will that affect the Riksbank’s actions?
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The 75 basis point cut in the ECB main policy rate implemented in late 2011 has been accompanied by little reaction or even an increase of lending rates in countries under stress, whereas there has been a complete pass-through in euro area countries considered by the markets as financially solid (see slide 9). Self-fulfilling equilibria driven by break-up fears The third, and most recent, dimension of the debt crisis has taken the form of investor fears of a break-up of the currency union. Whereas exchange rate risk across euro area countries should have disappeared permanently with the creation of the single currency in 1999, there have been signs, especially over the summer, that investors have started pricing in redenomination risk. Investors require a compensation for the risk that the euro might not remain the irreversible currency of the euro area – at least in its current composition. Although it is difficult to disentangle redenomination premia from other sources of risks – and it requires econometric analysis – the inversion of the slope of the term structure of sovereign bond spreads 5 observed in early summer 2012, for instance, for Spain and Italy was consistent with expectations of imminent break-up risks. Market fears of a high probability of not paying back in full, or of equivalently to repaying in a different, lower-valued currency, command high spreads.
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In 2011, the effective policy rate has been the average of the current account rate and the maximum rate on 28-day certificates of deposit. Interest rates were then held unchanged and the neutral bias was retained at the MPC meetings in March and April. In June, however, the Committee indicated that, other things being equal, it was likelier to raise interest rates than to cut them at upcoming meetings, owing to strong wage 2 BIS central bankers’ speeches increases, marked depreciation of the króna, and rising domestic inflation. Consequently, it should have taken no one by surprise that the MPC should raise interest rates in mid-August, when the Bank’s forecast stated that inflation would gain momentum in coming months and the economic recovery would remain on track. And indeed, insightful analysts predicted a rate hike. In September, interest rates were kept unchanged and the positive bias was kept. It was stressed that the decision did not represent a change in policy. A number of observers speculated that it did, though, perhaps motivated by the increasingly uncertain global situation. This is probably why the Committee’s decision to raise interest rates in November took the market more by surprise than might have been expected. Before I explore the November interest rate decision further, I must mention two things. First, while Iceland was engaged in its IMF-supported programme, exchange rate stability was given priority over the determination of interest rates based on the domestic inflation outlook and economic conditions.
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Már Guðmundsson: Monetary policy Keynote address by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at a breakfast meeting of the Iceland Chamber of Commerce, 4 November 2011. * * * The Iceland Chamber of Commerce has a long-standing tradition of holding a breakfast meeting like this one on economic developments and prospects and monetary policy, following the publication of the Central Bank’s autumn forecast. As before, I would like to thank the Chamber of Commerce for this initiative, as there is a great need for informed discourse on monetary matters. In my speech a year ago, I discussed the progress made in stabilising the economy as is evidenced by the underlying current account surplus, the stable and subsequently strengthening currency, and inflation that was rapidly approaching the Central Bank’s inflation target. I mentioned, however, that robust recovery had not yet taken hold. It seemed to me then that the recovery had begun, and this has since been corroborated. At that time, GDP was projected to grow by just over 2% in 2011 – which was not considered terribly strong in view of the slack in the economy. I was concerned as well about the low level of investment and the prospect of weak export growth in spite of a very low real exchange rate. The inflation outlook seemed much better, though, due to a rising exchange rate and the slack in the economy.
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The MPC explained over a year ago that there were “limits to the extent to which above-target inflation [could] be tolerated” and that those limits depended on the degree of spare capacity in the economy. In March, eight months ago, it said in its Monetary Policy Summary that, if demand growth remained resilient, “monetary policy may need to be tightened sooner” than the market expected. Similar points were made in the intervening months. Yet, even as inflation rose, and the rate of unemployment fell further, interest-rate markets continued to under-weight the possibility that Bank Rate might actually go up this year. Chart 1 plots the cumulative change in the three-year sterling interest rate, over the past year or so, against what Chart 1: Interest-rate markets relatively unresponsive you might have expected to happen (based to upside surprises in economic data through 2017 1 on historic correlations) given the pattern of data surprises. There is always room for judgement about any individual interest-rate decision and not everyone on the Committee agreed with this one. After a long period of weak wage growth there’s certainly room for doubt, or at least caution, about the inflationary impact of lower unemployment. (For my part I think Sources: Bloomberg, Tradeweb, and Bank calculations. the evidence is still consistent with such an inflationary effect and I will say something about this later on.) 1 Cumulative changes in UK 3-year nominal spot rates.
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I wondered some years ago 2 whether such effects were at work after the financial crisis . Given the potential reallocative effects of any material change in the UK’s trading arrangements, it’s conceivable they could arise in this case too. Indeed it’s possible they could arise even ahead of the formal date of the UK’s departure. In September/ October a CIPS survey of procurement managers suggested there could be significant unwinding of supply chains through the course of next year: 40% of UK firms who currently use EU suppliers are actively looking for domestic alternatives; the equivalent figure in the other direction – the proportion of European businesses expecting to move away from existing UK suppliers – is 63%. A CBI survey in October found that, in the absence of a transition deal, 60% of firms would begin to activate “worst-case” contingency plans by the end of March 2018, a full year before the UK’s exit. Chart 3: Reductions in supply can add to It’s true that incremental changes in underlying inflationary pressure productivity can have knock-on consequences for wages, and for demand, that would blunt their impact on inflation. If in aggregate firms are less productive, they would probably spend less, including on pay awards. But to the extent those knock-on effects lag in any way, firms would also respond by raising prices. In other words, reductions in supply can add to inflationary pressure even as they also lower aggregate GDP. Chart 3 is an extremely stylised description of this effect.
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Capotă, L.-D., Giuzio, M., Kapadia, S. and Salakhova, D. (2022), “Are ethical and green investment funds more resilient?”, Working Paper Series, No 2747, November.
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In the United States, the tapering of unconventional monetary stimulus has proceeded as expected, but the financial markets could suffer significant stress episodes if events occur that might anticipate the timing of the announced increases in the Fed funds rate. In particular, in the present context of low long-term interest rates and limited sovereign premiums, there could be a drastic reversal causing important tension. This could have 6 BIS central bankers’ speeches effects on external funding costs and currency parities, with a heavy impact on emerging economies. Overall, the most likely scenario continues to assume that the US economy will bring a new boost from abroad and a more favorable scenario in the medium term. At home, one risk is domestic output and demand growing less than expected. As noted, the two have weakened beyond projections, coinciding with a widespread worsening of expectations. The baseline scenario estimates that this worsening will reverse gradually, which partly explains the growth forecast for consumption and investment in 2015. However, if such reversal does not occur, there may be a sharper and stronger adjustment in the labor market, which would negatively affect consumption and output. Furthermore, a worsening of business expectations could intensify the investment adjustment. Such a setting could also trigger a more intense rebalancing towards the tradable sector, thus moderating the domestic slowdown.
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This sharp deceleration is certainly worrying news, that should move us all, from political and economic venues, to combine our best efforts to restore the dynamism of the Chilean economy, especially considering that, as is our conviction, Chile has all the necessary tools at hand to ensure higher growth and thus improve the welfare of its inhabitants. In this context, the Central Bank has used monetary policy decisively and consistently with its mandate, always directing its efforts to achieving the price stability objective. We are also aware that monetary policy tools, however powerful, can smooth, but never flatten out, the economy’s cyclical fluctuations. What are the elements behind this weak economic growth? Our research identifies some factors that to some degree were expected – we have mentioned them in earlier Reports – and some unexpected ones, with effects that are yet to be assessed with accuracy. The expected factors include external developments. Chile is a small, open economy and, as such, is affected by the vagaries of the world economy. In this sense, and beyond the severe negative effects of the global financial crisis of 2008–2009, we must recognize that during the past decade the Chilean economy was blessed with a benign international scenario, with extraordinarily advantageous commodity prices and financial conditions. Notwithstanding, lately the high commodity price cycle has come to an end, hitting commodity-exporting countries including Chile. Meanwhile, although international financial conditions are still good, the process of monetary policy normalization in some large developed economies is expected to begin soon.
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Sustainable growth at its full potential requires that there must be a corporate reform that emphasizes flexible and transparent organization, sound corporate governance, and increased economic value-added through moving up the technological ladders. By so doing, we will be ready for the intensified battles of globalization. And these will be our Corporate Challenges in the New Millennium. So far, Thailand has made much progress in corporate restructuring. As of March 2001, more than 380,000 cases of debt restructuring have been completed, involving the credit outstanding of 2.1 trillion baht. Yet, we must not stop there. The true challenge of corporate reform remains to be tackled, should we want a vibrant and resilient corporate sector to emerge from the crisis. We have to move beyond the financial side of the corporations, move beyond the balance sheet cleaning up, and start to address the real issues that will determine the long-term competitiveness of the corporate sector and thus consolidate the economic recovery achieved thus far. I will not have time to cover all of the important issues of corporate reform, but let me mention a few. Corporate governance will be one of the major themes of an on-going corporate reform around the world in the years to come. By good governance, I mean transparency, competitiveness, and good BIS Review 41/2001 1 internal management, which include the relationship between the board of directors and managers as well as issues such as shareholder rights, management oversight, and information disclosures.
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Thus, Board Members may never be aware of the company’s problems. If and when they have been informed of the problems, it may already be too late, as evidenced in the case of Enron. It is for the above reasons that the authorities here in Asia, are pushing for the separation of Chairman and CEO positions so that they cannot be occupied by the same person in order to properly balance the powers and functions of the two roles. It is also fortunate for us that the practice of issuing stock options to directors of financial institutions is not yet widespread among banks in Asia. Ladies and Gentlemen, What I have highlighted is only one facet, and in fact only half of the story of good governance: that is what NOT to follow. Let me turn to the other issue of the missing link in the Western concept of governance. In the Western World, the focus of the governance structure is to protect the interest of the organization and its shareholders. It ensures that the management or staff would not abuse their organisation for personal gains. However, there is nothing in the Western structure of governance that talks about the need for the protection of consumers’ interests, and, more importantly, the interests of society at large. A corporation that grows sustainably does so because it has earned the recognition of its customers.
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Although we have seen significant improvements in the macroeconomic indicators, the levels of interest rates still remain high. This is a major concern to the Bank of Zambia and we have continued to engage banks through the Bankers Association of Zambia on this issue. Ladies and Gentlemen, it is worth mentioning here that one of the challenges that banks continue to face is the high levels of non-performing loans due to poor credit culture amongst some borrowers. It is therefore important that credit worthy customers are distinguished from BIS Review 30/2010 1 high risky borrowers in the banking sector. The Bank of Zambia through the Financial Sector Development Plan has in this regard established the credit reference bureau. The credit reference bureau will enable lenders to make decision based on information specific to each borrower ensuring that risk assessments of potential borrowers are not affected by the habits of other borrowers. Therefore, the pricing of risk will be more reflective of borrower’s particular circumstances. Further, the Bank of Zambia has made it mandatory for banks and other financial service providers to use the credit reference bureau before a loan is provided to any customer. Consequently any loans approved without passing through the Credit Reference Bureau will attract regulatory action. The Bank of Zambia also places great importance on the need to have knowledgeable consumers who play a key role in creating a competitive and fair business environment.
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22 As in most central banks, interest rate decisions in Norges Bank are entrusted to a committee. Committee deliberations are informed by advice given by the governor and deputy governor of Norges Bank. Norges Bank’s Executive Board has seven members. The number of committee members at other central banks varies between three and 22. 23 A committee of many members can draw on an ample supply of varied backgrounds and opinions, but a larger number will then also have to have a say in the final decision. While research has yet to determine the optimal committee size, Anne Sibert, one of the experts in this field, has said that the committee should be “dinner size”. 24 5. But groups are no guarantee for good decisions Norges Bank’s Executive Board can be described as a collegial committee. The committee seeks consensus through deliberations and its members stand behind the final decision. The deliberative process does not necessarily lead to a better decision. When the group members share the same world view and thinking, groupthink can lead the members astray. There is typically little dissent in discussions where participants think alike. The group can therefore be convinced that their common standpoint must be right. 25 Nor is it unusual for independent thinking to be lost in a group setting. At an internal conference, the research department at Norges Bank was divided into three groups tasked with answering three sets of questions.
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Overall, although, from an empirical standpoint further analysis is needed, it is difficult to reject the view that the policy of low interest rates contributed to the steady credit dynamics in the period preceding the crisis. Certainly, this is a theme that should be studied further in the economic literature in the next few years. 3. The new steady state Given that the financial crisis has demonstrated the excesses in credit developments in the past, it is necessary to identify a new, sustainable equilibrium point. To reach this steady state, important measures are needed in various areas, many of which are already in 7 Eventually, this required a clean-up programme with an estimated cost of USD 150 billion. 8 See, for example, A. Ashcraft and T. Schuermann. 9 Ben Bernanke, “Monetary Policy and the Housing Bubble”, a speech delivered at the Annual Meeting of the American Economic Association, Atlanta, Georgia, 3 January 2010. 10 T. Adrian and H.S. Shin, “Money, liquidity and monetary policy”, American Economic Review, P&P, vol. 99, No 2, pp. 600–605, 2009; J.B. Taylor, “The financial crisis and the policy responses: an empirical analysis of what went wrong”, National Bureau of Economic Research Working Paper Series, No 14631, 2009. 11 M.K. Brunnermeier, “Asset pricing under asymmetric information – bubbles, crashes, technical analysis and herding”, Oxford, Oxford University Press, 2001; R.G.
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But in another sense one can say that this is not the case, if the Riksbank – as an independent central bank – says that the purchases are made for monetary policy purposes. Monetary financing does not entail the purchases themselves. Under certain circumstances, purchases of government bonds can be monetary financing, but under other circumstances they are not. This is what makes it difficult to define the concept. It is important to understand that the Riksbank's government bond purchases do not mean that the state's costs of issuing bonds disappear. If the Riksbank purchases some of the government bond stock, then part of the state’s debt will be financed by private agents and another part by the Riksbank with central bank reserves. The state costs of the private part of the debt is the yield on the government bonds. The cost for the part the Riksbank has purchased is different however, and not as obvious. The state’s interest payments on the government bonds purchases by the Riksbank fall to the Riksbank. But the Riksbank is a public authority whose income and expenditure is a part of the state's total budget constraint. The interest the state pays to the Riksbank in other words falls to the state itself, the net cost to the state is therefore zero. However, the Riksbank pays interest – that is, the policy rate – on the central bank reserves that have financed the government bond purchases.
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That is less than the average growth rate of nearly 3% in the decade before the crisis but around the average growth rate in the last 60 years. It will, according to the OECD, be the fastest growth rate among G7 economies this year. Over the period, inflation has been pushed down to around zero by the strength of sterling and by the very sharp fall in the oil price. I hesitate to describe the oil price fall as an “unfortunate event”. Much of the fall is the result of an increase of supply, the product of the oil investment cycle that accompanied oil prices staying at over $ per barrel for much of the last ten years. That will have boosted consumption and supported growth in oil-consuming countries like the UK. But the speed and size of the fall has made the shock to inflation very abrupt and exposed weaknesses in oil-producing economies. And more worryingly some of the fall over the last 18 months has been due not to an increase in supply but rather to slowing demand in emerging markets especially China. This will have had an adverse effect on world growth. There are continued signs of strength in the UK economy. Consumer confidence is near record levels and business investment intentions are strong. Housing market transactions and investment are picking up. Credit has picked up and is growing around the rate of GDP. On pre-crisis metrics, there are signs of tightening in the labour market.
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The general improvement in the availability of foreign exchange necessitated the Bank of Zambia’s participation in the market. In this regard, the Bank recorded a net purchase of US $ million compared with net purchase or sale of US $ million in the third quarter. Balance of payments 35. Preliminary data show that Zambia recorded an overall balance of payments (BoP) deficit of US $ million during the fourth quarter of 2010, compared to the surplus of US $ million recorded in the third quarter of the year. This was largely due to the unfavourable performance in both the current account balance and the capital and financial account. 36. During the period under review, the current account surplus declined to US $ million from US $ million recorded the previous quarter, largely on account of a decline in the merchandise trade surplus and widening of the net income deficit. 37. The merchandise trade surplus declined by 9.2% to US $ million in the fourth quarter of 2010, from US $ million recorded in the third quarter, following an increase in imports, which outweighed the rise in exports. Merchandise export earnings, rose by 5.2% to US $ million from US $ million recorded in the previous quarter. This was due to an increase in metal exports earnings by 7.3% to US $ million from US $ million in the previous quarter. 38.
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Opening remarks at the £ note launch Speech given by Mark Carney Governor of the Bank of England Winchester Cathedral Tuesday 18 July 2017 1 All speeches are available online at www.bankofengland.co.uk/speeches I would like to express my gratitude to Dean Catherine Ogle for her generosity in hosting this event in the magnificent Winchester Cathedral. There can be no better place to unveil the new £ banknote, featuring Jane Austen, and there can be no th better time than today, the 200 anniversary of her death. This building, admired by Austen herself, commemorates her legacy and has become a place of pilgrimage for her admirers. The inscription on her grave, in the north aisle of the Nave of the Cathedral, attests to her character: “The benevolence of her heart, the sweetness of her temper, and the extraordinary endowments of her mind obtained the regard of all who knew her and the warmest love of her intimate connections”. A brass plaque on the wall alongside recognises her many writings. And the memorial window above them all, paid for by public subscription, testifies to the popularity and enduring appeal of her work. An appeal which draws a regular procession of tourists from all over the world. Banknote character 1 £ would have meant a lot to Jane Austen – about the same as £ would mean to us today. £ was half the annual allowance she received from her father while he was alive.
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That said, it is equally important for policymakers to ensure that mechanisms for swift NPL resolution remain appropriate, not only to prevent an accumulation of legacy NPLs in the banking sector but also to provide borrowers impacted by this pandemic an opportunity to bounce back once the crisis abates. Such a balanced approach helps to preserve the value and productive capacity of borrowers in turn limiting long-term damage to the economy. For Malaysia, work is underway to strengthen legislation which will expand the coverage of businesses that can benefit from court-sanctioned recovery mechanisms. This will help flatten the insolvency curve and avoid more permanent scarring, if NPL cases were to spike. Admittedly, this is an area where there are opportunities to do more and one where all of us can potentially learn from each other. Concluding remarks Let me conclude. Looking ahead, we are cautiously optimistic that the tide may be finally turning in this crisis. However, we certainly can’t conclude that the COVID-19 pandemic is firmly behind us. We humbly admit that the virus has wrong footed us several times. The hallmark of good policymakers is to, as the saying goes, “hope for the best, but prepare for the worst”.
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• Secondly, the emergence of a globalised market has quite naturally led to new developments in monetary policy instruments. The interest-rate instrument is overwhelmingly used to the detriment of quantitative and regulatory instruments. • Lastly, these instruments serve converging strategies. The ECB’s monetary policy framework, for instance, is based on an analysis of growth in the monetary aggregate – the EMU reference value for M3 growth is 4.5% – combined with a wide range of economic and financial indicators to monitor inflationary risks. In such a context, monetary policy acts as a stabiliser. Monetary policy alone cannot guarantee the stability of financial systems, which may be jeopardised by shocks from both the financial and the real economies. However, it must be stressed that an adequate monetary policy is a fundamental prerequisite to a smooth functioning of the financial cycles. An appropriate monetary stance –both in terms of interest rate and money supply – is crucial for banks and monetary participants to base their decisions on solid ground. The objective of price stability lowers economic agents’ uncertainty regarding future price developments. In addition, by committing itself to a long-term objective, the central bank reduces market uncertainty, which can be a source of disruption to the financial economy. Interest rates and money supply are less volatile as a result, which is of benefit to the long-term growth of the economy. However, for financial systems to be stable, monetary policy must be consistent with the other aspects of economic policy, that is, fiscal policy and structural programmes.
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• Furthermore, we also decided that at least until the end of 2016, we will continue to fully meet the demand of banks for liquidity in our refinancing operations – of course, against adequate collateral. • Finally, we have suspended the weekly operations to absorb the liquidity injected under the Securities Markets Programme. We took these decisions to enable our accommodative monetary policy stance to better feed through to the wider economy. Weak credit growth in the euro area, particularly to small businesses, has been a major headwind for the recovery. Indirectly, it has been a continuous drag on inflation over the recent past. In fact, despite significant reductions in policy interest rates and, overall, more contained macroeconomic risks, bank-intermediated credit growth remains subdued and lending rates for small businesses are well above the levels usually observed in similar phases of the business cycle. To address this challenge, our TLTROs are tailored to incentivise bank lending to the real economy in the euro area. The TLTROs will provide long-term funding to participating banks. This should ease their financing costs, allowing banks to pass on such attractive conditions 2 BIS central bankers’ speeches to their customers. This will ease credit conditions and stimulate credit creation. Moreover, the growth of our balance sheet as a result of a significant take-up in our TLTROs will put downward pressure on interest rates in the money markets. This will contribute further to lowering the banking sector’s funding costs.
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Trends which have been ongoing in the past decade, such as rising inequality in AngloSaxon countries and the current financial crisis, could determine, however, a shift in the preferences of the US population in favour of greater State intervention in sectors such as education and health care. This is, at least, what seems to come out from the election of the new US president. The reduced importance of the public sector as an automatic stabiliser could increase US business cycle variability and create the scope for more discretionary fiscal stabilisation measures. The preference for discretionary interventions is enhanced by the low tolerance in the US for protracted slowdowns of economic growth. This may hinge, inter alia, on the impact that economic slowdowns may have on social cohesion in an environment with fewer automatic stabilisers. Another reason may have to do with the frequency of the electoral contests, not only in the executive but also and especially in the legislative branch, where elections take place every 2 years. It is well known, in fact, that the economic situation has a crucial importance for voters. Ricardian equivalence is one widely debated aspect of the discretionary component of budget policy. It is worth pointing out that a financial agent adopting a Ricardian approach is capable of looking ahead and of understanding that higher government spending today will entail higher taxes tomorrow. Thus a Ricardian consumer does not easily alter his spending in response to fiscal injections.
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Conclusions In conclusion, if monetary and budget policies appear to be different on the two shores of the Atlantic, and indeed have been in terms of gradualism and activism, the reason does not necessarily lie in differences of conduct on the part of the economic policy authorities, but in differences in the way the economies are structured and in how they function. Let us take a look at the current monetary policy stance in the two economies, where the policy interest rate has been brought to 1% in the US, 350 basis points below the level one year ago, while in the euro area it was reduced to 3.25%, just 75 below the levels of one year ago. Anyone who, in comparing the different stance of monetary policy between the US and the euro area, fails to take into account the differences in economic structure and in the shocks hitting the two economies is making an error of judgment. In particular, the US economy has been hit by a major slump in the real estate market, which in Europe is restricted to only a few countries. The financial crisis, that started on the other side of the Atlantic but it has propagated rapidly on our side, is having a bigger impact on the US banking system’s capability to convey financing to non-financial firms on account of the different financial structure.
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I trust that in taking part in the competition you have been able to find out more about what we do at the ECB, why we do it, and how our monetary policy works. It seems obvious that you should know what we do at the ECB or what people do in their national central banks. But as a matter of fact, if you do polls, you would be surprised by the amount of confusion that people have. For example, lots of people, about one-third, think that central banks are like other banks, that they are by and large not very different from what other banks do. Now, you will be the selected category that will know that the ECB is a central bank and that central banks are different from banks. And even more importantly, through this exercise, you actually got to have, at a very young age, a European perspective. You understood what is still really missing from lots of people, who still think in terms of national borders. It is very important, of course, but it is not the only reality that we are living through. In fact, the European perspective becomes much more important as time passes. Why is that? Well, because there are many challenges that are in fact supranational by their very nature. That is to say, you can’t really respond to these challenges, and you can’t really address the problems at national level if they are supranational.
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For the advanced economies, it is the uncertainty about the timing of exit policy, and whether the commitment to fiscal consolidation by the major economies can be sustained given the adverse implications for growth. For emerging markets, there is uncertainty about the policy approach that emerging markets will use to manage large capital inflows particularly in Asia. This involves the policy choice between exchange rate management, monetary policy, and the use of macro-prudential and capital control. In my view, uncertainty about policy has been of most concern for financial markets, resulting in increased volatility and a constant shift in investor sentiment between risk aversion and risk appetite. As for Thailand, in addition to the global uncertainties, we also have our own home-grown uncertainty linked to domestic political developments, which have added another dimension of risk to economic recovery and to the prospect of Thailand’s growth in the longer-term. How has the Thai economy performed so far amidst all this risk and challenges? Today, an important decision was made by the Bank of Thailand’s Monetary Policy Committee to begin a process of policy normalization by raising the policy interest rate by 25 basis points to 1.50 percent. The decision represents the first increase in fifteen months since the policy rate was reduced cumulatively by 2.5 percentage points to cushion the economy from the global recession. But more importantly, it also marks an important turning point in our assessment of the economy’s growth and inflation outlook, taking into account the impact of the political situation.
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More recently, though, serious fiscal challenges have surfaced that are closely interrelated with the Island’s ongoing weak economic performance. Persistent deficits in the Commonwealth’s fiscal accounts as well as mounting deficits in the operation of the several major public corporations have substantially raised the Island’s overall level of public debt and led to serious concerns about whether the Island’s fiscal position is sustainable. In light of the fiscal pressures Puerto Rico now faces, the New York Fed is undertaking an update to our earlier report. In this new report, we plan to focus on Puerto Rico’s fiscal health. We will examine the factors leading to the sizeable buildup of public debt on the Island and the key variables that will determine its future trend. In some ways, the data on Puerto Rico’s public debt clearly define the fiscal problems the Island faces. But meeting with a variety of stakeholders, as I have on this visit, will help to inform our analysis and will provide us with concrete evidence of how these issues are playing out across the Puerto Rico economy. The clear challenge going forward will be for the Commonwealth government to continue to make progress on its efforts to raise its economic growth rate while at the same time to take credible steps to constrain the buildup of debt. The demanding choices Puerto Rico makes today will affect its long-run economic prospects and the future livelihood of its residents.
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I would like to reiterate: • that all European banks now have unlimited access to short-term liquidity, denominated in both euro and dollars, at a fixed rate; • that in all countries there are guarantee mechanisms enabling banks to ensure their financing and therefore to maintain their credit activities; • that banking systems are all being recapitalised at equivalent or higher levels than those prevailing before the crisis; • and lastly, that macroeconomic policy instruments are still available and could be used if economic activity were to decline durably. Moreover, for the past two months we have witnessed a reversal of the oil and food shock which strongly penalised economic growth during the first half of the year. Prices are now falling. If this trend continues, or even if it just stabilises, we can expect a gradual but marked 4 BIS Review 130/2008 slowdown in inflation. This should spontaneously give households extra purchasing power, contributing to a possible pick up in consumption. Together, these developments could stabilise the economy and allow a recovery in economic growth during 2009. We cannot, of course, predict a precise date or forecast the extent of this recovery. However, in my opinion, the prospect of a significant recovery in economic growth in 2009 is not being sufficiently taken into account, either by analysts or markets.
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The international recovery is progressing It is natural to begin a survey of inflation perspectives by touching upon the international economy. At the end of 2002, the Riksbank and other forecasters expected world economic activity to embark on an upturn. However, during spring 2003, we gradually had to revise down our growth forecasts. While a recovery in the world economy was still expected, it was now judged to occur at a later stage. The weak growth, however, prompted a shift to more expansionary economic policy in many countries. Both the European Central Bank (ECB) and the US Federal Reserve, as well as the Riksbank and other central banks, continued to cut key interest rates to historically very low levels. However, most factors now indicate that both the Riksbank and other forecasters were somewhat overly pessimistic in connection with the Iraq war, particularly regarding the view of economic developments in the US. During the second half of 2003, we have had reason to again revise up our growth forecasts for the world economy. What has happened then since December, when the Riksbank published its latest Inflation Report and forecasts? The most apparent and perhaps the single most important change in the world economy has been the sharp depreciation of the dollar, mainly against the euro. It is likely that the dollar’s weakening against both the euro and the yen is an effect of the US current account deficit, coupled with a growing deficit in the US federal budget.
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As opposed to the situation in the two most recent BIS Review 6/2004 3 wage bargaining rounds, unemployment has risen recently. There is neither any shortage of labour other than within very limited areas. It is also positive that the rate of wage increases last year was decelerating and that this was also the case for expected inflation. With the currently low rate of inflation, even limited nominal wage increases would imply higher real wages. The demands that have been put forward are also lower than what has been the case in recent years. At the same time, there is always the risk of disturbances from the negotiation process itself. Neither is it inconceivable that some of the productivity gains will be taken to justify a higher wage-payment capacity. In December, the Riksbank revised down its forecast of unit labour costs somewhat. Behind this was both a marginally more positive view of productivity growth and a small decline in the rate of wage increases. The data that has been received since December reinforces this picture. As I see it, there is probably reason now to further revise down the forecast of unit labour costs somewhat and thereby also the forecast for domestic inflationary pressure. Inflation and monetary policy That brings me to the inflation assessment. In 2003 average inflation was somewhat above target. However, the situation changed considerably over the year.
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The banks’ Denar credits increased by Denar 7,463 million, or by 27.8%. The increase was primarily due to the abolishment of the credit limits of the banks’ Denar placements at the end of March 2000, which was a period of significant credit expansion. It should be underlined that according to the supervisory examinations of the NBRM, the newly extended credits are granted to good clients. In December 2000, compared to the same month of 1999, the banks’ foreign currency placements to the nongovernment sector decreased by Denar 1,421 million, or by 17.2%. The fall was primarily due to the higher attractiveness of the banks’ Denar credits due to the higher interest rates. At the end of March 2000, the NBRM continued with further reforms of the monetary policy instruments, where the abolishment of the credit ceilings being the most significant one. Hence, the transition to indirect market-oriented instruments for monetary regulation has entirely been completed. Moreover, the existing monetary instruments have been improved in order to be modern and closer to those used in developed market economies. Within the framework of continuous and intensive efforts to lower the banks’ interest rates, the NBRM, in April 2000, decreased the discount rate and the Lombard credit interest rate by one percentage points, thus reducing them to 7.9% and 17.5% p.a. respectively. 1 On December 30, 2000, according to the new methodology, the NBRM gross foreign exchange reserves equaled USD 478.1 million.
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BIS Review 9/2001 3 Monetary Aggregates Taking into account the assumptions for the inflation rate, the real growth of the gross domestic product and the increase in the real demand for money in 2001, it is estimated that the nominal growth in the demand for money, expressed through the money supply M1 will equal 12.0%. In 2001, the money supply M2 – Denar component and the broadest money supply M4 should increase by 12.1% and 13.3%, respectively. The projected growth in the money supply will enable regular execution of financial transactions in the economy and adequate liquidity of the banking sector, and simultaneously, will not disturb the stability of the domestic currency. Reserve money and foreign currency net-purchase The stability of the monetary multiplier, in other words the existence of stable connection between the reserve money and the money supply has been taken as an initial presumption when projecting the reserve money. Accordingly, in 2001 the reserve money is planned to increase by 12.0% in order to meet the projected growth in the money supply. The reserve money issuance is planned to be carried out through the foreign exchange transactions of the NBRM. In 2001, the supply is planned to exceed the demand for foreign currency on the foreign exchange market.
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However, the reactivation of credit activity remains a challenging goal, which would require encouragement of the final demand and generation of business plans valid for bank financing, reduction of real and perceived risk in the economy, review of development strategies and commercial banks’ lending policies, as well as reduction of cost and non-cost elements in lending. All these factors are envisaged to gradually improve throughout the year; however, they will remain far from the pre-crisis levels. Bank of Albania’s monetary policy will continue to be prudent, chiefly oriented towards achievement of inflation target. The recent upward inflation trend might have been motivated by temporary-action and limited-intensity supply factors. The Bank of Albania has envisaged BIS Review 28/2010 1 that the exceeding of 4 percent inflation rate will be for a short period of time and will not be followed by steady inflationary pressures. Our projections show that consumer price inflation will fall gradually towards the 3 percent targeted rate during 2010. However, we remain committed to taking all appropriate steps to ensure this performance and meet our legal mandate for price stability in the economy. 2 BIS Review 28/2010
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Luis M Linde: Presentation of the Bank of Spain’s Annual Report for 2014 Testimony by Mr Luis M Linde, Governor of the Bank of Spain, before the Parliamentary Committee on Economic Affairs and Competitiveness, Madrid, 24 June 2015. * * * Ladies and gentlemen, I appear before this Committee on the occasion of the presentation of the Banco de España Annual Report for 2014. Let me begin by reviewing developments in the Spanish economy, the factors underpinning its recovery and the economic policy challenges of strengthening recovery. I shall then address aspects relating to the start-up of the Banking Union and the situation of, and outlook for, the Spanish banking system. Economic situation and outlook In mid-2013, the Spanish economy initiated a recovery phase that firmed last year and has continued to do so in 2015 to date. In 2014, GDP grew at a rate of 1.4% while employment did so at 1.2%, the first positive figure since the start of the crisis. In its Quarterly Report to be published tomorrow, the Banco de España will present a new set of macroeconomic projections. According to these, the Spanish economy will grow at a rate of 3.1% on average in 2015, an upward revision of 0.3 pp on the projections published in March. On the basis of this change, activity is performing better than projected three months back.
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That was not the Committee’s expectation a year ago when it believed the most likely outcome was for inflation to stay around 2%. And at that point many commentators were predicting cuts in interest rates in 2006. So what happened? Part of the story has been a further sharp rise in energy prices during 2006. But it is only a part. It is impossible to be sure what explains the rest of this unexpected drift up in inflation. But three factors seem to be relevant. First, the historically low level of interest rates and rapid growth of money and credit have contributed to rising asset prices and buoyant nominal spending, not just in the UK but around the industrialised world. Spending and capacity pressures in the UK economy recovered from the slowdown in 2005 faster than many had expected. Second, and a direct consequence of the first, is that inflation expectations have risen. Firms have been able to raise prices a little faster than before with the expectation that now those increases would stick. As the Birmingham Chamber’s own recent quarterly survey showed – “over half of the City’s manufacturers were intending to increase prices in the next three months”. One of the reasons for the success of inflation targeting is the anchor which it gives to inflation expectations. But, when inflation moves away from target, we must prevent the anchor from dragging. Expectations need to be firmly fixed on the 2% target.
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These situations require robust governance at board level. 22 IDC: Wordlwide Semiannual AI Systems Spending Guide (March 2019). See: https://www.bis.org/review/r180727a.pdf and Finastra, FTI Consuting Survey 2019. 24 McKinsey & Company research for the Future of Finance review. 23 8 All speeches are available online at www.bankofengland.co.uk/news/speeches 8 To ensure that the benefits of cloud computing are realised and the associated risks are well managed, the PRA will issue a Supervisory Statement in the autumn that sets out its supervisory approach. The Bank, together with the FCA, will also establish a forum to discuss the results of a survey that it has conducted on AI use in finance and determine an appropriate supervisory approach. The Bank’s management and analysis of data is critical to our effectiveness as regulators and to the City’s competitiveness. The Bank now receives 65 billion data points each year of firm-related information. To put that into context, reviewing it all would be the equivalent of each supervisor reading the complete works of Shakespeare twice a week, every week of the year. For firms, while the Cloud and AI have reduced the costs of storage and analysis, producing regulatory submissions is still labour intensive and costs the industry an estimated £ billion per year.25 This is the new frontier of regulatory efficiency and effectiveness. The PRA is exploring how new technologies could streamline firms’ compliance and regulatory processes while improving our ability to analyse relevant data.
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In return, we would be able to adopt similar supervisory policies, thus reducing damaging regulatory arbitrage possibilities and other risks associated with it. One implication of the supervision/regulation heterogeneity across counties in the region is the ineffectiveness of indirect measures to control for credit growth. Therefore finding ways and pushing homogeneity in this regard would at the same time be also important to compensate the lost effectiveness of monetary policy and the eventual demand pressures. There are also a few other ideas that stress the importance of pre-emptive regional cooperation, in bringing us as a region closer to fulfilling our target of European integration. By setting up and pursuing coordinated financial market development policies, we help to integrate our national financial markets into the international financial markets, and pave the way for other economic and social reforms to follow. The modalities of such cooperation vary. Ad-hoc periodical meetings of Governors in the region, supported by more frequent meetings in a technical level to support the discussion agenda, could be one way of approaching the objective for stronger cooperation. In addition, through a more consistent communication, we can try to identify particular issues which are relevant for our regional financial markets, and pose those issues to our counterparties, being common home country authorities, other supervisory authorities where we turn for assistance, or even professional organizations where our supervisory authorities participate. I am sure our concerns can be taken more seriously if raised as a region.
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The number of additional people wanting to work overwhelmed the longer-term effects of population ageing, which, all else equal, would have been expected to have removed around half a million people from the labour force (Chart 10). This expansion of the workforce is being driven mainly by women and older workers. Before the Great Recession, between 46% and 83% of those in the 50- to 64-year-old age cohort were active. Now it is between 60% and 89% (Table 1). In part this reflects a continuation of past trends within age cohorts, but it goes much further. 8 The greater risks and financial burdens that many are now facing are likely to be important drivers of the recent increase in the labour force. Changes to pension arrangements have encouraged people to work longer. 9 State pension ages are rising, and the default retirement age has been abolished. 10 6 The average of European Commission, OECD and IMF estimates of structural unemployment have increased from 8.8% in 2008 to 10.3% in 2013, reported in Draghi, M (2014), “Unemployment in the euro area”, Speech at the annual central bank symposium in Jackson Hole, August. 7 There is evidence of there having been an increase in skills mismatch both in the rightward shift of the euroarea Beveridge curve and as indicated by skills mismatch indices. See Draghi (ibid.).
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Consequently, longer-term inflation expectations became unmoored, and nominal wages and prices spiraled upward as workers sought compensation for past price increases and as firms responded to accelerating labor costs with further increases in prices. That wage-price spiral was eventually arrested by the Federal Reserve under Chairman Paul Volcker, but only at the cost of a severe recession in the early 1980s. Since then the Federal Reserve has remained determined to avoid these mistakes and to keep inflation low and stable.” [http://www.federalreserve.gov/newsevents/speech/yellen20110411a.htm] BIS central bankers’ speeches 5 Figure 15 shows two measures of inflation expectations, plotted alongside oil price movements. The red line shows what professional forecasters expected inflation to average over the next 10 years, at various points in time. Their expectations have declined somewhat over the past 20 years, but what is striking is the relative stability of their inflation expectations. In addition, there was no significant reaction to the oil price shock that we experienced in 2008. The chart also shows a second measure of inflation expectations – the University of Michigan Survey (the green line), which asks respondents about their expectations for inflation over the next 5 to 10 years.6 Again these expectations are not very responsive to movements in oil prices, and have remained quite stable over the past two decades. It is worth noting that countries can be affected quite differently by supply shocks. As Figure 16 shows, the importance of food in the “basket” of goods purchased by consumers can vary greatly by country.
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BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches BIS central bankers’ speeches 13 14 BIS central bankers’ speeches BIS central bankers’ speeches 15
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During the crisis, around 500 banks were resolved in the US without triggering financial instability. In contrast, one estimate puts the total number of banks resolved in the euro area in that period at around 50.25 5/9 BIS central bankers' speeches An orderly resolution of this magnitude was possible in the US because of confidence in a wellfunctioning resolution framework. And the presence of the Treasury backstop was fundamental in creating this confidence. Indeed, the FDIC ultimately did not have to draw on its credit line, but it was clearly reassuring to markets and to depositors that it had that option as a last resort. In fact, the FDIC has only borrowed from the Treasury once, during the savings and loans crisis in the early 1990s, and it repaid in full a few years later.26 This example underlines that the dichotomy between risk-reduction and risk-sharing that characterises the debate today is, in many ways, artificial. With the right policy framework, these two goals are mutually reinforcing. Public risk-sharing through backstops helps reduce risks across the system by containing market panics when a crisis hits. And a strong resolution framework ensures that, when bank failures do happen, very little public risk-sharing is actually needed as the costs are fully borne by the private sector.27 So we need to put first things first and complete the resolution framework in all its dimensions. And creating a properly designed European deposit insurance scheme would be an additional element that could further reduce the risk of bank runs.
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It is estimated that 49% of an unemployment shock is absorbed by the automatic stabilisers in the euro area, whereas the figure for the US is 32%.9 And studies have found a gradual convergence in labour mobility between Europe and the US, reflecting both a fall in interstate migration in the US and a rise in the role of migration in Europe.10 Where the euro area and the US differ more is in terms of ex ante risk-sharing – that is, insuring against shocks through financial markets. This was a concept that only appeared later in the literature on Optimal Currency Areas. 11 But it plays a key role in stabilising local economies in a monetary union, in two ways.12 The first is by de-linking consumption and income at the local level, which happens through integrated capital markets. If labour income falls during a recession, but the private sector holds a diversified financial 3/9 BIS central bankers' speeches portfolio, people can smooth their consumption with the financial returns they receive on assets in better performing parts of the union. The second way is by de-linking the capital of local banks from the volume of local credit supply, which happens through retail banking integration. Because local banks are typically heavily exposed to the local economy, a downturn in their home region will lead to large losses and prompt them to cut lending to all sectors.
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Although this announcement substantially reduced the probability of extreme events and led to an easing in the financial and credit markets, the economic situation in the monetary union remains vulnerable and the level of uncertainty is still considerable. A further source of uncertainty are the upcoming fiscal decisions in the US. Swiss economic outlook In Switzerland, real GDP in the third quarter increased again following a downturn, due to a temporary recovery in exports. For the fourth quarter, however, we again expect significant weakening in growth. Consequently, economic growth for this year is likely to come to around 1.0%, as forecast to date. For 2013, we expect growth of 1.0–1.5%. While the gradual revival in the global economy is having a supportive effect, the strength of the Swiss franc will hold back export momentum and corporate investment expenditure. Domestic demand is also likely to be restrained over the next few quarters. In view of the modest pace of growth, production capacity in Switzerland will probably remain underutilised in 2013. The rate of unemployment is likely to rise further. Given the fragility of global conditions, the downside risks also remain high for Switzerland. Monetary and financial conditions I will now turn to monetary and financial conditions, which are almost unchanged as compared to the situation in summer 2012. Interest rates in the Swiss franc money market continue to fluctuate around zero. Since mid-June, the three-month Libor has fallen from some 9 basis points to only 1 basis point. Interest rates in the repo market are predominantly negative.
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Accordingly, if banks incorporate climate-related risks into costs and capital, they indirectly become “facilitators” of change, by reducing the cost of financing of activities that contribute most to the sustainable transformation of the economy, while at the same time discouraging more contaminating activities. The role of investors I also wish to refer to the role that investors should likewise play as facilitators of this transition. Interestingly, the emergence of “green bonds”, which was not in response to any official initiative, came well before the Paris Agreement, which could be considered to mark the beginning of the involvement of the banking sector. In fact the history of green bonds began in 2007 with the first issue by the European Investment Bank. As you know, green bonds must be used to fund projects that are directly linked to sustainability, preservation of the natural environment and transition towards a lowcarbon economy. To achieve the green bond certificate, issues must satisfy certain principles, such as the Green Bond Principles (GBP) issued by the ICMA in 2014, to be verified by external appraisal. In general, green bonds are placed among investors with higher demand and lower costs than equivalent standard issues. The market has been particularly active in recent years, especially since the GBP were published in 2014. At June 2019, green bonds outstanding amounted to an estimated USD630 billion. I believe it is highly significant that this market has developed aside of official initiatives, based entirely on private standards such as the GBP.
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The authorities in many countries are working to enhance financial market resilience. Three changes are particularly relevant for the Norwegian banking sector: First, for a given risk assessment, capital requirements must be higher. Second, banks must not be allowed to reduce capital below a minimum level even if they extend loans that, according to models, seemingly involve low risk. Third, banks must build up strong capital buffers over and above the minimum requirement in normal times. Then banks would not have to increase capital when the turnaround occurred. On the contrary, they would be able to absorb losses, thereby avoiding the need to ration credit in bad times. Norwegian banks do not have sufficient buffers today to safeguard their own, their shareholders’ or the economy’s best interests. That is why the government is now supplying risk capital. There should be no doubt that banks have the capital they need. In addition, banks’ funding methods make them vulnerable. Earlier, Norwegian banks primarily obtained funds through deposits by households and enterprises. In recent years, banks have borrowed heavily in both domestic and foreign markets. During the crisis, this proved to involve high liquidity risk for banks. Long-term credit markets have now dried up. The government and Norges Bank have therefore taken on the role of lender. In the future, in regulations and in practice, deposits must again take precedence as the largest source of funding for banks. Bonds collateralised by high quality mortgages, so-called cover bonds, will probably also be important.
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To achieve this, policymakers will need to acknowledge the risk and come up with the appropriate safeguards. First and foremost for emerging markets is the continued strengthening of the domestic financial sector as I have noted, which is the key pre-requisite for raising the ability of the financial system and the economy to manage risk. Next, regional financial mechanism will also need to be strengthened to provide additional safeguards in the context of market surveillance and coordination of crisis prevention and resolution efforts. One lesson we have learnt dearly from the current crisis, as well as from the Asian financial crisis, is that globalized finance can be a source of serious risk to global economic and financial stability. Policymakers at the global level must accept this fact and be prepared to respond to it in a forward-looking way. I probably have used up the allocated time. Again, I want to thank the Central Bank of Peru and Reinventing Bretton Woods Committee for the invitation. It has been a pleasure, and thank you for your attention. 4 BIS Review 92/2009
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Across the market, reserve releases continue to run at high levels by historical standards. Insurers may be underestimating risks, particularly on new business. For example, they may be too sanguine about catastrophe risks, such as significant weather events. Terms and conditions are loosening. Insurers may be tempted to expand into new lines of business with apparently more attractive returns. But these may fall outside their knowledge and expertise. Over the course of 2017, we will carry out a number of supervisory initiatives to deepen our understanding of how individual insurers are being affected by these conditions. Our overall expectation remains that firms (and their Boards) are the first line of defence and accountable for the risks written on their balance sheets, regardless of distribution channel used. Where insurers participate in delegated underwriting arrangements, we will expect them to retain the ability to understand the impact of business written through these channels on their overall risk profile. Our specific work this year includes: Reviews of underwriting and exposure management for selected lines of business at a number of large London Market insurers. In the course of these, we will seek to understand how changes in terms and conditions are carried through to planning, reserving and capital assessment. Where these insurers delegate aspects of underwriting through broker facilities, managing general agents or other arrangements, we will also assess whether they have sufficient information and control to manage their risks effectively.
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As a result, in the long term, two different uses of the CBDC could exist side by side: one for payments between financial sector players (a socalled “wholesale” currency) that uses blockchain technology and all its possibilities, notably smart contracts; and another for the general public (a so-called “retail” currency) that is simpler and better suited to retail transactions. In this respect, financial institutions are much more digitally mature than private individuals as they already access central bank currency digitally via the bank accounts they hold with the central bank. In addition, following on from the questions raised by the Governor of the Bank of England, Mark Carney, on the idea of creating an international digital currency in response to the dominance of the US dollar, I think there would be some advantage in moving rapidly to issue at least a wholesale CBDC, as we would be the first such issuer in the world and would thus reap the benefits of having a benchmark CBDC. 2/ The issuance of a CBDC can generate significantpositive externalities by increasing the productivity of the financial sector and by extension the economy, and by shoring up confidence in the currency and in the financial system. But, in parallel, it is vital that we examine the potentially negative externalities that a CBDC could generate for liquidity, profitability and bank intermediation. In particular, we need to look very closely at the risks linked to large-scale and/or sudden conversions of bank deposits into central bank money.
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The highly fragmented banking system and relatively weak risk management systems within the domestic financial institutions which prevailed in Malaysia prior to the financial restructuring and reforms that were undertaken from 2001 would have rendered the implementation of Basel II extremely difficult, if not impossible to achieve without risking disruptions to the intermediation process. The financial reforms that were undertaken to strengthen the underpinnings of our banking system are therefore instrumental in facilitating the smooth transition to the adoption of Basel II in Malaysia without adverse market outcomes. In the more recent period, the Asian region as a whole has made significant strides towards strengthening market structures and institutional arrangements for financial stability. Two developments deserve mention, in view of their important contributions towards mitigating some of the concerns surrounding Basel II for emerging economies. First, in the decade following the Asian crisis, the emerging economies in Asia have extensively developed their bond and equity markets. Measured in terms of market capitalisation, East Asia's equity markets have more than trebled since 1997. The bond markets in the East Asian region have also seen significant growth during this period with significantly improved liquidity conditions in these markets. There is therefore now a more diversified structure in the financial system. Second, within Asia, the regional cooperative framework has been substantially strengthened to support financial sector development, surveillance, crisis management and capacity building.
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Benefits and likely risks brought by this major transition in global finance will be discussed in length over the next two days by academicians and policymakers in six different sessions. I BIS central bankers’ speeches 1 believe that this conference will produce fruitful and beneficial outcomes for global financial stability. I would like to thank our participants and distinguished guests for their contributions and for being here with us. 2 BIS central bankers’ speeches
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The five core areas are: – Minds Matter Solutions Matter Regulators Matter Talent Matters And Momentum Matters 36. Let me briefly talk about how each of these areas really matters in achieving our overall goal 37. First of all, “Minds Matter” refers to the importance of awareness. High awareness is essential for gaining buy-in across an organisation, and securing the appropriate resources to implement solutions. A fundamental step in promoting Regtech adoption is therefore to boost awareness of the benefits of Regtech adoption across a wide group of stakeholders, and to highlight the available use cases in the market. 38. One of our recommendations is to establish a “Regtech Knowledge Hub”. This is a centralised knowledge platform for sharing information on Regtech experience and potential usages. 39. There are also opportunities to expand the scope of Regtech events to reach different stakeholder groups. Therefore another recommendation is for a series of targeted Regtech events to be hosted to raise the industry’s awareness of this subject. 40. On our part as regulator, another way of boosting awareness is by issuing practical guidance to help the industry better understand how Regtech can be applied in Hong Kong. 41. Next, “Solutions Matter”. It refers to the importance of developing solutions that are specifically tailored to the banking industry in Hong Kong. So our second area of focus is to promote Regtech solution innovation. 42. We believe that competition is a key catalyst for innovation.
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Tarisa Watanagase: Strengthening the banking and financial sector – what needs to be done? Speech by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at Finance Thailand, a seminar organised by The Banker Magazine and Financial Times Business, Bangkok, 22 February 2010. * * * Ladies and gentlemen, First of all, I would like to thank The Banker Magazine and The Financial Times for the invitation. It is an honour, and indeed an opportunity, to join all of you here at this conference, and to share with you my thoughts at this very challenging juncture, not only for the global economy and financial system, but also at an important stage for development of Thailand’s economic and financial sector. The past three years have been one of the most turbulent periods in global economic development. On the global economy front, despite the signs of green shoots in the global economy, we are constantly reminded of the remaining fragility and vulnerability of such recovery in various hot spots around the world, with emerging new paradigm of risk, namely sovereign risk. For the global financial system, risk and challenges remain abound. The key challenge strikes at the heart of the global financial system – regaining trust. Trust in market mechanism, as well as its regulator, has been severely tested.
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It is not unusual for one to be turned away at customers counters on account of the lack of basic facilities due to for instance power failure or link failure when these can be mitigated where there are proper contingency plans in 2 BIS Review 111/2009 place. The Bank of Zambia will therefore ensure that sound business continuity plans are in place when evaluating new applications. Ladies and Gentlemen, as we develop these well meaning products, I wish to appeal to the service providers to ensure that investment in such infrastructure is complemented by investment in financial literacy. We need to ensure that we are providing individuals and communities with the level of financial education needed to grasp both the benefits and pitfalls of their easier access to financial services. This will in part minimize the risks associated with such innovative products as people will only make better judgments about their financial affairs if they understand the risks and returns associated with the product and services at their disposal. It is also apparent that financial illiteracy is more costly as people who make poor financial decisions will inevitably end up with a far lower standard of living than was otherwise achievable. Mr. Chairman, I wish to conclude by applauding Celpay’s initiative to host the first ever mobile conference in Zambia. The deliberations and recommendations of this conference will be keenly followed as the need to leverage access to financial services through the mobile phone is of paramount importance.
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It is worth reminding that this initiative has led to a considerable drop in charges for cross-border transfers in the euro under correspondent banking, although for the time being the drop is of benefit mainly to banks, and hardly at all to clients. SEPA consists of the following elements: the single currency, a single set of euro payment instruments – credit transfers, direct debits and card payments, efficient processing infrastructures for euro payments, common technical standards, common business practices, a harmonised legal basis, and ongoing development of new customer-oriented services. I am sure than many of you are wondering "Why SEPA?". To answer this question we have to think like Europeans. Currently, the euro area economy is unable to fully exploit all the benefits of the Monetary Union. Customers face difficulties when making euro retail payments to other euro area countries, as these payments often turn out to be more time-consuming. As long as this is the case, the euro cannot be viewed as a fully implemented single currency. Despite the introduction of the euro in 1999 and the development of TARGET, the common largevalue payment system for euro, low-value electronic payments (i.e. retail payments) continue to be processed differently throughout the euro area. Overall, the number and variety of payment instruments, standards and processing infrastructures for retail payments has not really changed since the introduction of the euro.
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A quarter century ago, a typical estimate of the neutral rate in the United States was 2 or 2½ percent—consistent with historical averages over the preceding half century. Since then, however, there has been a clear downward trend in neutral interest rates in the United States and other advanced economies, with current estimates ranging from 0 to 1½ percent.2 Three main global trends appear to account for the bulk of the decline in the neutral rate over the past quarter century. 3 One is demographics: populations are aging as people live longer and birth rates have fallen. The second is productivity growth, which has slowed around the world. 1/3 BIS central bankers' speeches The third is the heightened demand for safe and liquid assets, which has led to a wider wedge between yields on safe government securities or central bank reserves and yields on riskier assets such as corporate bonds. Importantly, the onset of these trends preceded the global financial crisis and they have continued even as countries have recovered. Although there is a great deal of uncertainty about the neutral rate, and conditions may change, a reasonable assumption is that it will remain low— not far from current levels—for the foreseeable future.4 What does a low neutral rate mean for monetary policy and the anchoring of inflation expectations? When a recession hits, central banks may not be able to reduce interest rates well below their neutral level to stimulate the economy as warranted because of the effective lower bound on nominal interest rates.
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Now that I am already way out on a limb, I should emphasize that my remarks reflect my own views and not necessarily those of the Federal Open Market Committee or anyone else in the Federal Reserve System. As a starting point, it’s useful to travel back in time to the 1980s and 1990s, when inflation targeting was introduced. The problem at the time was high and variable inflation that contributed to macroeconomic instability and unmoored inflation expectations, which in turn fueled high and variable inflation. To break this vicious cycle, numerous central banks instituted inflation targeting, or variants thereof, with a focus on bringing inflation down to a low level and fostering the establishment of stable, well-anchored inflation expectations. This strategy worked extraordinarily well in the decade preceding the global financial crisis, as central banks were able to achieve remarkably low and stable inflation, leading to a positive feedback loop between low inflation and well-anchored inflation expectations. Today, we face an altogether different set of problems stemming from a very low neutral interest rate—that is, the short-term real interest rate consistent with an economy operating at its potential alongside low and stable inflation. Ironically, the problem we need to solve these days is the risk of inflation that is persistently too low, rather than too high. Today’s low neutral interest rates reflect the culmination of trends extending back 25 years.
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To accommodate various stages of development in thinking and risk modelling, the New Accord offers three approaches for calculating a minimum operational risk capital charge. Two approaches - the Basic Indicator and Standardised Approaches - are, by design, simple and so inevitably are somewhat imprecise measures of operational risk. But when combined with the supervisory review process of Pillar Two 2 BIS Review 45/2003 and the transparency requirements laid out in Pillar 3, the Committee believes that they offer a reasonable point of departure and will spark additional efforts to refine banks’ approaches. For the most sophisticated institutions, the “advanced measurement approach” - or “AMA” - is the ultimate expression of the Committee’s goal to incorporate banks’ own sense of risk into the capital framework. Because the AMA is not subject to supervisory “floors,” the Committee expects it to serve as a true catalyst for innovation. We were pleased that the RMA Working Group on the Regulation of Operational Risk and others in the industry welcomed the Committee’s decision to allow banks to test a great variety of methodologies and measures under the AMA. Results of consultations From our review of public comments, and from our member agencies’ recent discussions with banks, we have noted a growing consensus that the revisions to the proposals have been positive. The operational risk framework has become more flexible, forward-looking, and better able to accommodate today’s best practices. Moreover, we are confident it is nimble enough to incorporate future advances.
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Since it appears unlikely that a large organisation would suffer high losses BIS Review 45/2003 3 from operational failures in many businesses or entities at once, some banks argue that capital requirements for a large and diversified firm as a whole might be less than the sum of capital requirements calculated for each individual entity. The Committee acknowledges the technical and practical challenges associated with developing and implementing AMAs for large, diversified firms. We are working to reduce unnecessary burdens on banks adopting them. While we have not made any decisions yet, this is an issue that we are still discussing actively with the industry. But we face even tougher questions if we consider the allocation of capital across not just legal entities, but also across national borders, as some have requested. This is a very difficult question to address in the Basel context. The Committee must respect the legal responsibilities charged to national supervisors in regulating locally chartered banks, branches, or subsidiaries. All bank supervisors must have access to sufficient, comprehensive and detailed information on a bank’s operational risk control structure, including its AMA, to evaluate the quality of risk management at banks they supervise. That may include a need for banks and other supervised entities to demonstrate the adequacy of their capital resources on a stand-alone basis. We are giving significant thought to the international implications of this issue, but I should caution that we may not be able to find a completely satisfactory solution at the Committee’s level.
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If developments move in line with our projections, the key interest rate may be reduced to 1 per cent in the latter half of this year. However, the projections are uncertain. An economic turnaround may occur faster than expected. The low interest rate level may lead to a situation where saving in Norway does not pick up as expected or that the krone depreciates markedly. In that case, the key rate may be set higher than projected at this time. On the other hand, there is a risk that the downturn in Norway will be more pronounced and longer, or that krone appreciates markedly. In that case, a stronger use of instruments may be appropriate. The downturn abroad and the unusual conditions in the credit market will mark the Norwegian economy for a period ahead. Mainland GDP is projected to decline by 1 per cent between 2008 ad 2009. Unemployment has increased since autumn 2008, but is still low. Unemployment is projected to continue to rise to the end of the year and into next year. Pay increases are moderate as a result of weaker corporate profitability, rising unemployment and lower inflation. Wage growth will show a considerable decline between 2008 and 2009. BIS Review 60/2009 3 Households have a dimmer view of the future than earlier, but the pessimism is no longer intensifying. This influences private consumption. Housing investment has also declined over a period, but house prices now seem to have stabilised, and perhaps started to rise again.
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Banks must not be able to reduce capital below a minimum level even if they extend loans that, according to the models, seemingly involve low risk. Second, regulation must to a lesser extent contribute to amplifying cyclical fluctuations. With losses now rising, as a result of the abrupt and pronounced turnaround, banks must increase equity capital. Consequently, the rules governing capital requirements amplify cyclical fluctuations. The rules must therefore require banks to build up strong capital buffers over and above the minimum requirement in normal times. Then the banks would not have to 4 BIS Review 60/2009 increase capital when a turnaround occurs, but on the contrary be able to absorb losses. This will counteract the need for banks to ration credit in adverse periods. Many Norwegian banks do not have sufficient buffers today to safeguard their own, their shareholders’ or the economy’s best interests. Third, banks’ funding methods make them vulnerable. Earlier, the two main sources of bank funding in Norway were retail and wholesale deposits. In recent years, banks have borrowed heavily in both domestic and foreign markets. During the crisis, this proved to involve high liquidity risk for banks. In the future, in regulations and in practice, deposits must again take precedence as the largest funding source for banks. We also anticipate that bonds collateralised by high quality mortgages will become important. The credit swap arrangements can be seen as building a bridge to such a market.
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In parallel, the microprudential authority (i.e. Banking Supervision of the European Central Bank for significant institutions) has allowed banks to operate temporarily below the levels set for some structural requirements such as the capital conservation buffer, the Pillar 2 guidance (P2G) and the liquidity coverage ratio (LCR). Also, the possibility of covering part of the Pillar 2 requirements (P2R) with non-CET1 capital was envisaged. The purpose of these decisions has been precisely to help banks continue to provide the necessary financing to households and firms in such an adverse environment. 2 From a theoretical point of view, the easing of prudential bank capital requirements during a crisis gives rise to a dilemma. On the one hand, this easing may, as I have said, boost the provision of financing to the economy, but, on the other hand, it may, in certain circumstances, reduce the loss absorption capacity. According to our empirical analysis, the use of these buffers would allow banks to provide more financing to the real economy, which in turn has a positive effect on economic growth, boosting its recovery or moderating its downturn. And this positive impact on economic growth is of such a magnitude that it leads, in turn, to higher demand for credit and higher bank revenues, which ultimately translate into higher solvency levels too.
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In this connection, it should be noted that a large part of the adjustment in banks’ earnings in the first half of this year is due to the provisions made in advance for credit impairment 6 that has still not materialised, but will do so in the coming quarters. Specifically, Spanish banks have set aside almost double the amount of provisions they recorded in the same period of last year. This has significantly reduced their profitability, but it has also raised their capacity to absorb credit impairment, something that is particularly highly valued by investors in these circumstances. The message I wish to convey is that banks should persist with this early recognition policy, as it will subsequently facilitate their ability to continue to perform their function of providing financing to the economy. In short, especially if the crisis proves to be prolonged, banks must ensure proper and timely recognition of effective impairment of the quality of their credit exposures through compliance with supervisory guidelines. Global banking regulation Fourth, I would like to reflect on global banking regulation. As I mentioned earlier, the Basel reforms phased in over the last decade have attempted to incorporate into regulation the lessons learned during the global financial crisis. The first phase of the Basel reforms began in 2010 and was completed through a second wave of changes published in 2017. The initial phase was aimed at raising the level and improving the quality of banks’ microprudential regulatory capital.
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This would increase the potential for a more diverse range of products and services to meet the changing requirements in corporate, retail and investment activities. Given the universal nature of the Islamic banking licence, the attention given to the capacity for innovation will become an important defining factor in the progress of Islamic finance. With the rapid progress on the issuance of prudential and supervisory standards by the Islamic Financial Services Board (IFSB), Islamic finance is now governed by its own international best practices. The establishment of the Islamic Financial Services Board in 2002 was part of the efforts to strengthen the international Islamic financial architecture. Thus far, two standards have been issued, namely the standards for Capital Adequacy and the Guiding Principles for Risk Management for Islamic financial institutions. Bank Negara Malaysia will be implementing these IFSB standards for adoption by Malaysian Islamic banking institutions. The harmonisation of the prudential standards across borders will also enhance the process of global financial integration in Islamic finance. The Islamic financial institutions are also able to benefit from maximising their balance sheet structure, by leveraging on the Profit Sharing Investment Accounts in addition to their own capital. Under the IFSB Capital Adequacy Standard, the total risk weighted assets funded by the Profit Sharing Investment Accounts will be deducted in the determination of the overall Risk Weighted Capital Ratio of the institutions.
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With greater awareness and adoption in more financial centres, Islamic finance is poised to play a bigger and more central role in global finance. We look forward to WIBC Asia as a key platform that will buttress the development of Islamic finance as it takes root in the region. The industry, which is open to all participants, can only reach greater heights with your commitment and support. I therefore wish you a productive conference as you seek exciting new horizons for Islamic finance. 4 BIS Review 84/2010
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These principles on corporate governance are largely part of those adopted in 1999 and subsequently revised by the OECD in 2004. They include equal rights and a level-playing field for shareholders, the role of stakeholders, disclosure and transparency, and board accountability. Corporate governance has direct implications on the behaviour of the organisation towards its employees, shareholders, customers, partners, banks included. Poor governance reduces the potential and, worse though, can lead to financial distress and even fraud, while well-governed companies will usually be more competitive than their rivals and will be able to bring in investors who will invest their money in the companies’ future growth. I will also add that no matter how relevant formal rules are to the proper functioning of an economy, it is essential to trust in business partners’ word given and their honesty. Whenever this is missing, not only dealings in goods and services, but also financial transactions are hit hard. Given that integrity, confidence and reputation weigh heavily on the economy, everyone pins his hopes on the business sector. Future wealth depends now more than ever on how this issue is dealt with. This is why we can assert that, in extenso, good corporate governance underpins the integrity and efficiency of financial markets. Moreover, for the banking field, in light of recent developments, I truly believe that increased ethics is to be welcomed. Thus, good practices in corporate governance are an essential ingredient of wealth and sustainable growth.
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Gathering market intelligence in a more complex and transparent world Given its responsibilities for monetary policy, macro-prudential regulation and microprudential supervision, it is quite rightly expected that the Bank’s policy decisions are taken with a detailed understanding of the financial market context in which the Bank operates. Since its inception, the Bank’s market operations have long provided a key input to this understanding, by providing first-hand information from financial institutions. Between the years 1786 and 1989, this was epitomised by the “Senior Broker to the Commissioners for the Reduction of the National Debt.” Clad in a top hat, and invariably with a tightly rolled umbrella (see Figure 4 for an example), the holder of that position was responsible for announcing (in person) changes in the Bank’s minimum lending rate, and at the same time gathering opinion on the state of the gilt market. He was expected to report to the Gilt Edged Division three times a day, providing information about market activity, the quantity of buying and selling, and the gilt maturities and coupons that were in particular demand. He was also responsible for reporting on the mood of investors and advised the Bank on the appetite for stock, institutional cash positions and expectations. 9, 10 Even if top hats are a thing of the past, the essence of Market Intelligence (MI) gathering remains the same today: our staff maintain a regular dialogue with financial market participants to draw on their expert knowledge and perspective of the markets in which they operate.
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But the growth of the more opaque version of these products marks them out, and unmonitored excess could compromise these markets in the future. Recent history is rife with examples of where over-exuberance has led to opacity, severe market difficulties and financial instability (e.g. the rise of CDO2 in the securitisation markets). In such cases, the costs of collapse can easily outweigh the previous benefits. It is important that the authorities monitor the ETF industry and make sure that market participants understand the risks they may be running. It is for that reason that the interim FPC advised the FSA last week that its bank supervisors should monitor closely the risks associated with opaque funding structures, such as collateral swaps or similar transactions employed by ETFs. http://www.bis.org/publ/work343.pdf, http://www.financialstabilityboard.org/publications/r_110412b.pdf and the IMF’s Global Financial Stability Report (http://www.imf.org/External/Pubs/FT/fmu/eng/2011/02/pdf/0611.pdf) respectively). BIS central bankers’ speeches 11 Regulatory responses The financial crisis exposed a need to not just strengthen but to completely re-design aspects of financial regulation, to try to find a solution to “too big to fail” problem and hence minimise the chances of something similar happening again (if financial institutions could fail without large spillovers then much other regulation might be unnecessary). The resulting regulatory agenda is formidable – including agreeing the detailed rules supporting Dodd Frank in the US; EMIR and Solvency II in Europe; the new Basel rules on capital and liquidity including the SIFI surcharge internationally; the final outcome of the ICB in the UK; various FSB initiatives and many more besides.
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Indeed, recent MI has suggested that there has been some direct lending 9 And although the aggregate US corporate sector cash position is strong, it is likely to mask significant heterogeneity in the distribution of firms, with a disproportionate share of the cash held by the largest investment grade businesses. 8 BIS central bankers’ speeches activity to mid-sized corporates in the UK by non-bank institutions such as dedicated loan, private equity and pension funds (although the absolute amounts are still very small). Chart 13 Chart 14 Issuance of sub-investment grade corporate debt by region(a)(b) Corporate bond valuation measure(a)(b) Sources: Dealogic and Bank calculations. (a) Emerging economies includes Africa, Caribbean, Indian subcontinent, Latin America, Middle East, North Asia and South East Asia. “Other” includes Australasia and Japan. Includes issuance in all currencies. (b) 2011 data are to 3 June 2011 Sources: Bank of America Merrill Lynch, Bloomberg, Thomson Reuters Datastream and Bank calculations. (a) Shows the difference between actual and estimated equilibrium spreads as a percentage. Positive numbers represent overvaluation, negative numbers undervaluation. (b) Equilibrium corporate bond spreads are defined as the total estimated credit component plus a five-year rolling average of the illiquidity premia. Full details of the approach used for the decomposition of corporate bond spreads can be found in Churm, R and Panigirtzoglou, N (2005), “Decomposing credit spreads”, Bank of England Working Paper no. 253.
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The Great Recession and sluggish recovery that has followed has made it difficult for people to find jobs, and I’m sure you may be wondering about whether going to college will turn out to be a good investment, especially if faced with the burden of student debt, something we track quite closely. Let me reassure you, the benefits of a college degree remain significant. Research we have undertaken at the New York Fed shows that young people with a college degree are more likely to have a job and they tend to earn considerably higher wages than those without degrees – and this is true even for those who may be underemployed initially when they first enter the labor market after graduation. Although the labor market has been challenging for college graduates in recent years, I am confident that most will find work and transition into higher-skilled jobs as they gain experience and as the labor market improves. Now, I’d like to turn my attention to recent developments in the national economy. National economic conditions Let me begin by taking stock of where we are at the moment. Then I will address my expectations for the performance of the economy in 2014 and 2015. 2 BIS central bankers’ speeches Since the end of what is now called the Great Recession in mid-2009, the U.S. economy has experienced 17 consecutive calendar quarters of positive growth of real GDP.
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Earlier today, I met with a number of Queens business leaders, and the leadership of HANAC, the Hellenic American Action Committee. Following this visit to Queens College, I’m headed to the Queens Chamber of Commerce to meet with others in the business community. Subsequently, I’ll tour the manufacturing floor of Steinway & Sons piano factory. The agenda for these visits is always packed, but that’s part of the point – to meet with a diverse array of people in order to get a comprehensive picture of economic conditions and issues in the regions we serve and a fuller understanding of the major concerns. This is our second trip to the Borough of Queens in the past few years and recent trips have also taken us throughout our District, to Upstate New York, Northern New Jersey, Long Island, Fairfield County, Staten Island, Brooklyn and the Bronx. These outreach trips complement the ongoing efforts of the New York Fed to assess conditions in our region, which I will discuss shortly.
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Earlier this year, Bank Negara Malaysia has launched the International Centre for Education in Islamic Finance (INCEIF), an institute providing internationally recognised certification and programmes with the aspiration to strengthen the pool of specialists in Islamic finance. INCEIF offers an international professional certification programme for Islamic financial practitioners that includes a dedicated module on takaful. This complements Islamic Banking and Finance Institute Malaysia (IBFIM) and International Centre for Leadership in Finance (ICLIF) in providing adequate training at all levels to the industry players and technical programmes in Islamic finance. In addition, Bank Negara Malaysia has recently announced the Shariah Scholarship Award that is offered to local and foreign candidates to pursue post-graduate studies in the field of Shariah relating to fiqh muamalat (Islamic commercial jurisprudence) in recognised universities as well as to obtain the Certified Islamic Finance Professional offered by INCEIF. The Bank also offers Shariah Research Grant to research organisations and institutions of higher learning, both local and foreign, to undertake research in the areas of Shariah relating to Islamic finance, takaful and the Islamic capital market. All these initiatives are aimed to enhance the pool of talents, knowledge and research capacity in the field of Shariah relating to Islamic banking, takaful and the Islamic capital market. 2 BIS Review 84/2006 Ladies and Gentlemen, The growth and development that have been achieved thus far have provided takaful operators with greater opportunities or avenues to progress, both at domestic and international levels. HSBC Amanah Takaful (Malaysia) Sdn. Bhd.
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The takaful industry continues to exhibit good financial results each year, as reflected in the three-fold increase in total assets to RM6.5 billion in June 2006, as compared to RM1.9 billion five years ago. More significantly, average doubledigit growth rate of 18.9% for net contributions of combined family and general takaful in the past three years, demonstrated the high potential of the industry. Whilst sustaining the current pace of development, there still exists high growth prospect for the takaful sector, in view of the large untapped potential, with the market penetration rate recorded at merely 6.1% in June 2006. Ladies and gentlemen, Bank Negara Malaysia has laid down a number of initiatives to further enhance the competitiveness and growth momentum in the development of the takaful industry. These initiatives emphasised on enhancing operational efficiency, strengthening corporate governance and risk management as well as improving the market practices and consumer awareness. All players need to capitalize on these initiatives for the takaful industry to achieve sustainable success and unleash the potential gains of the Islamic finance in Malaysia and abroad. Allow me to share some significant developments that may shape the future direction of the takaful industry moving forward. Firstly, as the prudential framework evolves towards a predominantly principle-based and riskbased regulatory approach, there will be a greater emphasis on risk management, corporate governance and transparency so as to maintain investor confidence and public trust.
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The depth of Spain’s problems, along with the lack of a suitable European response, has led moreover to the crisis becoming systemic, acutely affecting countries with problems of a different nature and magnitude. True, there has been some progress in European governance in recent years, with the strengthening of procedures already in place, the design of new macroeconomic surveillance procedures and the implementation of new Treaties. These treaties include that establishing the European Stability Mechanism, and the Treaty on Stability, Coordination and Governance in the euro area, which makes provision for the so-called Fiscal Compact. But this progress has not been sufficient to stabilise the situation, partly due to the lack of broad consensus that is apparent in the stance and statements of different European authorities. In these circumstances, action by the European Central Bank has been key to easing the moments of greatest tension and extending the time available to adopt the necessary measures in other economic policy areas. Evidently, the ECB cannot resolve the serious underlying problems of this crisis, be they national or related to the European architecture. It can only address some of the manifestations of these problems, in particular those reflected in financial markets, with a view to smoothing the way so that governments can take the corresponding measures. Spain is a clear example of an economy in which Eurosystem action has overcome critical situations and has provided the time needed to set in train ambitious reforms in various areas.
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Nor can it be ruled out that the temporary tax increases approved this year may have to remain in place for longer or be replaced in time by other permanent measures. BIS central bankers’ speeches 3 I believe that in a country as decentralised as Spain, and in light of the deviations that arose in 2011, what was needed was to accompany budgetary consolidation with a significant strengthening of the institutional framework, so that all tiers of government might be called on to meet their commitments. Fortunately, the recently approved Organic Law on Budgetary Stability is a substantial improvement here. Moreover, it is fully attuned to the recent EU reforms on governance. Also, the agreement reached a few days back between the central and regional governments under the aegis of the Fiscal and Financial Policy Council on the deficit targets for 2012 and on the consolidation plans to attain these targets is excellent news. This lays the foundations for avoiding overruns such as those witnessed last year. What is crucial now is the swift and effective implementation of the instruments envisaged in this Organic Law, in particular the monitoring and control mechanisms for public finances at all levels of government, and those intended to enforce compliance with the targets set by all of them. The law proposes substantially improving general government transparency at the different stages of the budgetary process. In particular, timely detection of budgetary deviations is considered essential so as to adopt measures.
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Boards also need to be accountable and ensure that the risks associated with consumer financing are well understood and being effectively managed. The second area that is being closely monitored is residential property prices. The aim is to ensure affordable housing for the population and that imprudent financing to this sector does not become a source of financial instability. Generally, the price levels of properties in Malaysia have remained relatively stable, recording an annual increase of 5.6% in the first quarter and 4.2% in the second quarter of this year. At the national level, residential property prices have increased steadily in tandem with economic development and the rise in household income levels. This aggregate growth trend of this sector has remained largely manageable and residential property prices have not deviated from the long term trend. In the more recent period, however, certain specific locations, particularly in the urban centres, have experienced faster growth, both in house prices and the number of transactions. Supporting this trend has been the increase in financing for multiple unit purchases by a single borrower. This suggests investment activity that is of a speculative nature. BIS Review 146/2010 3 While Malaysia is not experiencing a general property price bubble, targeted pre-emptive measures are appropriate to moderate the increases in property prices that are evident in select locations arising from purchases that are speculative in nature. These measures aims to support a stable and sustainable property market, and to ensure that prices of properties remain affordable for the general public.
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The new funding ecosystem will thus need to provide comprehensive and flexible financial solutions to Malaysian consumers and businesses. Recognising the importance of having a payment system that is comprehensive and efficient to support the needs of the consumers and businesses in a high-income economy, the payment system infrastructure would be enhanced and more inclusive, capitalising on the advancements in technology as well as the high number of banking accounts and mobile phone penetration in the country. The focus will be on infrastructure developments necessary to provide the speed and efficiency while offering convenience to consumers and businesses. Electronic payments should be the preferred medium for all economic transactions. This includes having the infrastructure necessary for industry-wide mobile banking and payment ecosystem, including an extensive outreach of the point-of-sale terminal facilities. The pricing structure and a comprehensive awareness programme to steer desirable payment behaviour are also key areas that will be addressed in our next phase of the development of our financial system. The blueprint will also seek to extend the reach to the potential untapped market represented by the latent demand for financial services among the non-urban population and urban residents in the lower income group. The blueprint will endeavour to develop a conducive environment for the design of financial products and services and the utilisation of delivery channels will effectively overcome the barriers to financial access, particularly cost restrictions and physical accessibility.
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Some form of unforeseen event, such as changes in regulations or macroeconomic shocks, would probably be necessary to cause prices to fall sharply. The fact that interest rates will rise in the long term should be included in household expectations and can hardly be regarded as an unforeseen event in any economic scenario. The market for apartment buildings has also been characterised by rising prices since 1994. Regulations such as those on utility value, and the system of central rent negotiations, normally leads to stable, even developments in the prices of apartment buildings. However, the conversion of rental properties into tenant-owner associations has resulted in recent years in relatively sharp price rises for apartment buildings. Price developments can, of course, be affected by changed conditions such as a substantial increase in new construction or a rapid decline in demand. However, a low level of housing construction and a high demand for housing, particularly in metropolitan regions, indicates that this will not be the case. Conclusion The Riksbank’s work on monetary policy and financial stability emphasises the importance of transparency, clarity and predictability. These are also important factors in the securities markets in which mortgage institutions are active. I hope that mortgage institutions’ own actions, coupled with the new legislation, will help to render the market for housing finance more efficient. BIS Review 35/2004 3
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So, I invite you to come to Hong Kong, experience the vibrant ecosystem firsthand, put your most innovative ideas and best technology here, and take advantage of the many business opportunities. I promise the journey will be rewarding in many ways. 33. Thank you. Last revision date : 31 October 2022
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By imbalancing the asset portfolios of the institutional investors that sell us gilts, QE works in part through shifting the risk premia (broadly defined) on a wider class of financial assets. I would not expect that to be over and done with quickly. An analogy: it is sometimes alleged that the boom leading up to the crisis was in credit markets but did not really affect equity markets. I do not agree. Arbitrage does connect markets – eventually. The boom in Leveraged Buy Outs was precisely a mechanism for using underpriced debt to buy “cheaper” equity, which would have driven down the ex post equity risk premium had it taken its course uninterrupted by the crash. Similarly now, the effects of imbalanced investment portfolios will, most likely, spread through different capital markets – and so into wealth and the availability and cost of capital – gradually. A second mechanism, rather less remarked – except perhaps in international central banking circles – is how QE here and the injection of money by other central banks effectively contribute to the financing of the banking system. By buying assets from the non bank private sector, we increase deposits with the banks: broad money. We also put extra reserves – balances with the Bank – into the hands of the banks themselves. To the extent that those reserves holdings exceed individual banks’ demand for a liquidity buffer, they can use them either to expand lending or, alternatively, to repay (maturing) debt, and so help to deleverage their balance sheets.
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But is also makes the case for policymakers developing macroprudential instruments that could be used to lean against future credit booms and for making our financial system more resilient. If we could manage that, it might be the most significant extension in the overall international macro policy framework in a generation. Price stability, financial stability and sustainable growth. They need each other. 14 For example, see Reinhart C M and K S Rogoff (2009), “The Aftermath of Financial Crises”, American Economic Review: Papers and Proceedings 2009, 99:2, 466–472 and Hoggarth G and V Saporta (2001) “Costs of banking instability: some empirical evidence”, Bank of England Financial Stability Review, Issue 10, June. 10 BIS Review 21/2010 Charts Chart 1: UK GDP and sectoral output(a) Chart 2: World industrial production Contribution to annualised quarterly industrial production growth (pp) 15 10 5 0 -5 -10 -15 High Income Countries Developing countries excl China China World Total -20 -25 -30 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 (a) Chained-volume measures. GDP is at market prices. Indices of sectoral output are at basic prices. Source: World Bank Chart 3: Business investment to GDP ratio(a) Chart 4: Nominal GDP (a) Chained-volume measures. Recessions are defined as two consecutive quarters of falling output (at constant market prices) estimated using the latest data. (a) At current market prices.
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So we are not required to raise 1 This estimate is taken from the Bank of England Financial Stability Report, October 2007, Box 1 (Mapping the financial system). It comprises the estimates of total global securities markets, less bank deposits. BIS Review 22/2008 3 interest rates sharply to counteract the rise in inflation which we expect over the next few months. We can decide what is appropriate in the light of all the circumstances. And the purpose of the Open Letter regime is to give us an opportunity to explain how we propose to use our discretion. Over the years the MPC has explained that it seeks to achieve its inflation objective in the medium term by varying interest rates to steer overall demand relative to supply. If price and wage setters do recognise that the imminent pick-up in inflation will be short-lived, then the implications of the spike for monetary policy, and for the necessary balance of demand versus supply, should be limited. But if price and wage setters start to expect higher inflation to persist, then the Committee will need to restrain demand, and so generate some slack in the economy, in order to bring inflation expectations, and inflation itself, back down. Clearly therefore it is a matter of intense interest to understand how people form and revise their expectations. Unfortunately our understanding is very incomplete.
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BIS Review 22/2008 7 Chart 5: Commodity price developments US $ per barrel Index, 2000=100 100 90 Economist food price index (right hand axis) 80 Chart 6: GDP growth probabilities from February 2008 Inflation Report 250 200 70 60 150 50 40 100 30 20 50 10 Brent dollar oil price (left hand axis) 0 1990 0 1993 1996 1999 2002 2005 2008 Chart 7: CPI inflation probabilities from February 2008 Inflation Report 8 BIS Review 22/2008
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In my opinion, a good checklist for a policy-maker on monetary policy issues is what Donald L. Kohn at the Federal Reserve has put forward on several occasions. He considers that three conditions I mentioned earlier must be met before central banks “lean against the wind”. And these are the three arguments I mentioned earlier. The first condition is that it must be possible to identify a bubble sufficiently early and with sufficient certainty. Secondly, the assessment must be that there is a good chance that a slightly higher interest rate will really slow down the untenable developments. Finally, one must count on being able to gain “enough” by preventing a bubble in relation to what a tighter monetary policy might cost in the short term. I believe that most people will agree that these are sound conditions to use as a foundation. However, the views regarding when the conditions are actually met can vary. Professor Kohn’s first condition probably entails the greatest difficulty. Although we are constantly developing our forecasting methods and models and they are becoming increasingly sophisticated, I do not expect that we will be able to reach a stage in the foreseeable future where we can be entirely sure that something we assess as an incipient bubble actually is a bubble. This is largely due to the nature of things, or rather the nature of the bubble.
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This is a challenge that calls for the involvement of all levels of government. From this standpoint, it is very important to adapt the analysis of public finances and its economic policy implications to the current Spanish situation, marked by highly decentralised public spending. Leaving aside the transfers between different tiers of BIS Review 117/2006 5 government and interest payments, which reflect past financing patterns, the volume of spending by territorial governments is almost two and a half times that within the State sphere. Such a figure shows the enormous increase in the role of these agents, which has significant consequences for budgetary policy conduct, both in terms of its contribution to macroeconomic equilibrium and as regards its influence on the economy’s growth capacity in the medium and long run. From the standpoint of the contribution to macroeconomic equilibrium, the initial data on the regional governments' budgets for 2007 point to a balanced budget target for the year. We might wonder, however, whether the macroeconomic situation I have described, at a cyclical juncture marked by a prolonged expansion, would require the setting of somewhat more ambitious targets, in line with the spirit of the new Budgetary Stability legislation, even though these are only legally binding as from the 2008 budget. Also, from the standpoint of their contribution to long-term growth, the role of the territorial governments in managing the public spending items of most relevance for improving the Spanish economy's competitiveness acquires considerable importance.
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We absolutely must keep a clear line around central banking. 26 Which brings me to the third “instrument” I want to say something about today. Capital of Last Resort However much the authorities do to forestall or alleviate a crisis by providing liquidity, I fear that we cannot rule out that very rarely the banking system will end up needing to be supported by some ultimate source of capital. We absolutely must be prepared to let banks fail when, in systemic terms, it is safe to do so. Such decisions call for technocratic judgment. But, as we have seen, sometimes disorderly bank insolvencies would bring systemic distress. For that reason, at least three things follow. First, each country needs a Special Resolution Regime for distressed banks, and probably more widely; we cannot rely on general insolvency law to help control threats to system stability. Thank goodness, the UK now has such a regime for banks, and the Bank will draw lessons about whether it needs refinement over time. Second, given the prevalence of internationally active banks in a globalised economy, national authorities just must be able to work together – in reality; when it matters – to control the resolution of banks whose activities cross borders. 27 And third, as by now 26 This was re-affimed recently in a joint statement by the US Federal Reserve and the Department of the Treasury (www.federalreserve.gov/newsevents/press/monetary/20090323b.htm).
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It is part of the supervisors’ job to take that wider, systemic view and sometimes to curb practices which even prudent banks might, if left to themselves, regard as safe.” See, Blunden G, “Supervision and Central Banking”, Bank of England Quarterly Bulletin, August 1987. 8 Page 206 of the 1999 paperback reprint of Bagehot (1873), “Lombard Street” in the Wiley Investment Classics series. 9 For example, see Eddie George’s 1993 lecture “The pursuit of financial stability”; Mervyn King’s September 2007 letter to the Treasury Select Committee, “Turmoil in financial markets: what can central banks do?”; and, most recently, the document on the Bank’s liquidity insurance facilities, “The Development of the Bank of BIS Review 67/2009 3 some difficult issues around the transparency of collateral policy, and about how to avoid incentivising imprudent liquidity management. The time-consistency problem and collateral policy Like so much in central banking, time-consistency is at the centre of it. That a time-consistency problem can bedevil monetary policy is well known 10 , and motivates an institutional framework in which independent central banks have clear mandates for fighting inflation. Much less is said about what might be equally serious time-consistency problems in the sphere of financial stability. They can be especially apparent in central banks’ collateral policy. Given banks’ incomplete cover against their maturity mismatch, central banks have long stood ready to “discount” – or lend against the collateral of – certain assets in unlimited amounts.
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It is surprising that this issue is still outstanding, despite the fact that it is more than ten years since the bank crisis occurred and despite a draft bill being taken up for consultation five years ago. We play a central role in the monitoring work and concentrate our task to assessing how the financial system functions and what risks might arise. Our Financial Stability Report is very important here. The aim of this report is to identify potential risks and to influence market operators with good analyses. The third part of the stability work – crisis management – arises because the central government might need to take action to avoid a crisis that threatened the stability of the system. In order to manage a crisis, the central government must be able to assess what consequences will arise if an institution suffering problems should become bankrupt. If these consequences are judged to be serious, the central government must also be able to take measures to alleviate the effects. In extreme cases the central bank can act as “lender of last resort” (provide emergency liquidity assistance, ELA) if this is necessary to prevent the bank system from collapsing. A lot has happened with regard to stability work since 1997 and the work changes continuously as the world around us changes. For instance, the increase in the banks’ operations abroad means that foreign borrowers also need to be analysed to a greater extent. In addition, the stability work must follow the increasing integration of the financial markets.
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Stefan Ingves: The Riksbank's role in the economy Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at Umeå University, Umeå, 6 February 2006. * * * Let me begin by thanking you for the opportunity to come here and talk to you! Travelling around the country and meeting representatives of different regions, industries and sectors of society is an important part of the openness the Riksbank wishes to maintain. These trips provide us with input for our discussions at the bank, while we build up confidence in our operations. This is my first public appearance as Riksbank Governor, and it feels good to stand here in front of students, teachers, local politicians, regional business representatives and other Umeå residents. I hope we will have a stimulating discussion and I will certainly do my best to answer your questions. Introduction After living and working abroad for many years, it is an honour, as well as exciting and a pleasure to be back in Sweden and at the Riksbank. The bank I left some years ago is now different in many ways. The most important change is that the Riksbank has been governed since 1999 by an Executive Board, consisting of a Governor and five deputy governors, which makes all of the strategic decisions, including monetary policy decisions. Previously the interest rate decisions were formally made by the General Council, which now instead appoints the members of the Executive Board.
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5 All speeches are available online at www.bankofengland.co.uk/speeches 5 1980s, to around $ over the past decade (Chart 1). Chart 1: Weather-related losses worldwide (1980-2017) $ billions (2015 values) 350 Uninsured losses 300 Insured losses Moving average total economic losses (a) 250 Moving average insured losses (b) 200 150 100 50 0 1980 82 84 86 88 90 92 94 96 98 2000 02 04 06 08 10 12 14 16 (a) Total Economic Losses = Insured + Uninsured losses. (b) 10-year moving average Source: Munich Reinsurance Company, Geo Risks Research, NatCatSERVICE General and reinsurers insurers have long deployed sophisticated modelling of climate and weather-related physical risks, and have adjusted their cover and business models accordingly. Lloyd’s of London underwriters, for example, are required to consider climate change explicitly in their business plans and underwriting models. Their genius has been to recognise that the past is not prologue and that the catastrophic norms of the future are in the tail risks of today. For example, by holding capital at a one-in-200 year risk appetite, under a forward-looking capital regime, UK insurers were able to withstand the events of 2017, the worst year on record for weather-related insurance losses at around $ Given evidence that suggests increasing levels of physical risk, insurers will need to consider the potential impact of more intense and clustered weather-related events.
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Whether it concerns developing a European system of financial supervision or setting up a Systemic Risk Council under the auspices of the ECB and the ESCB, these ideas are truly conducive to greatly strengthening the surveillance of risks both at individual institution level and for the European financial system as a whole. The reforms that I have just described should make it possible for the incentives of financial system players to be compatible with the stability of this system. The crisis has highlighted two types if not of incompatibility, at least of divergence that need to be corrected. First, within the financial industry itself. Financial innovation and developments in the business models of financial intermediaries have weakened credit discipline in favour of a strict return-oriented discipline. Regulators are working on correcting the regulatory sources of these incentives, which are dangerous for financial stability. I am thinking notably of the work aimed at reducing regulatory arbitrage and at countering the short-termism encouraged by certain prudential and accounting provisions. Second, we need to reconverge the incentives of private- and public-sector players. Their divergence is a natural phenomenon in periods of economic and financial boom. In these periods, regulators and supervisors find it harder to limit risk-taking when the risks to financial stability are unclear and competition is fierce. Maximising profit and competition considerations stand in the way of prudence and the prevention of financial imbalances. Countering these forces requires in particular the implementation of an independent macroprudential policy.
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A key impetus behind these centers is to bring together a group of individuals with different skills, interests, and experiences in an environment that encourages independent and innovative thinking. These individuals bring their unique questions and knowledge to the task of finding new ways of using the enormous amount of electronic data that exists today, as we did with the CCP. In addition, they can collaborate to identify efficient ways of creating new data, as we did with the SCE. A second lesson is that it is important to offer clear incentives for data innovation. Giving researchers the flexibility and the resources to use new unique data in their research and policy analyses is a strong motivating factor. In fact, we have found the availability of unique data to be an important recruitment and retention tool for talent in research. A final lesson is that data innovation can be costly, both in terms of required staff hours and effort and in direct cost, especially when it involves data purchased from vendors or data collected through surveys. The gains should therefore be carefully weighed against the overall costs. Data stewardship Data innovation as I’ve described it here comes with some costs. In an environment with rapidly growing numbers of large and complex datasets, efficient data utilization requires an ability to easily find, trust, use, and share the data.
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Ardian Fullani: Overview of Albania’s latest economic and financial developments Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the joint press conference of the IMF mission, Albanian Ministry of Finance and Bank of Albania, Tirana, 2 October 2012. * * * Dear journalists, During the last two weeks, intensive discussions have taken place between the IMF mission and Albanian authorities. As a key player in drafting and implementing macroeconomic policies, the Bank of Albania has been active in these discussions, sharing its vision on current and expected developments in the Albanian economy and concerns surrounding it, as well as optimum measures to address them. The Albanian economy is increasingly facing the economic growth challenge. While the Albanian economy enjoys consolidated macroeconomic stability and sound financial foundations, aggregate demand has been weak during the first nine months of 2012. Both domestic demand and foreign one suffer from high uncertainty, relatively tight lending standards, and limited space for discretionary and stimulating policies. In the global context, the Albanian economy encountered a difficult setting, characterised by economic growth problems, high risk premiums in financial markets and decreased appetite of these markets to invest in emerging economies. In the domestic context, the economy continues to face relatively low consumption and private investments, as well as an absent stimulus by the public sector as a result of the increasing orientation of the fiscal policy towards maintaining long-term stability of the public debt.
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Ladies and Gentlemen, this event, also marks a new chapter for one of Zambia ’s oldest banks. Barclays Bank Zambia has been in the country for over a century having opened its first branch in June 1918. Today, the bank has a widespread presence across the country with 41 branches, 103 ATMs, and other digital service delivery channels. It employs in excess of 800 staff. Distinguished Guests, Barclays Bank Zambia is one of the biggest banks in the Zambian banking industry and plays a significant role in the market through the various products and services as just indicated. It is our expectation that Absa Group Limited, the parent company of Barclays Bank Zambia Plc, will continue to build on the foundation and heritage that has been established over the last century. The bank is expected to remain a committed partner in driving financial sector development and supporting the country’s economic development. Distinguished Guests, with the risks to economic growth projected to remain elevated, allow me, to take this opportunity, to urge Barclays Bank Zambia and Absa Group Limited to explore ways in which the bank can assist in addressing some of the challenges facing the country, such as, load shedding, as this has potential to further negatively impact the country’s economic growth. It is our expectation that Barclays Bank Zambia will come up with products and services that will contribute to the enhancement of alternative energy sources to mitigate the threat on economic growth and indeed financial stability arising from load shedding.
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From mid April onwards, the national central banks of the Acceding Countries will participate - as an observer - in meeting of ESCB Committees (in extended composition) and meetings of the General Council. Enlargement involves a number of technical efforts from the side of the ECB and the national central bank, in terms of adaptations to the infrastructure, but also creates a new dimension to economic convergence and monetary stability in the European Union. I am, however, convinced that the Eurosystem will also master this challenge, as it has done before, on occasions, which demanded even more breath-taking efforts. Ladies and gentlemen, I should now like to conclude. Again, my gratitude goes to His Excellency Carlo Ciampi and Governor Antonio Fazio. I am deeply convinced that this meeting of the Governing Council will contribute to the team-sprit of the Eurosystem and hence will be one more step in the direction of a united Europe.
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It is especially so considering that the shareholders who elect the board are generally a diffuse group with little economic incentive or capability to monitor the corporation closely - until, of course, something goes terribly wrong. Added to these challenges is the difficulty of finding qualified directors who have the time to devote to the affairs of the company and who are willing to face the risk of shareholder lawsuits. Some qualified directors may be reluctant to serve for fear that the potential bad performance of the firm will damage their reputations. The irony is that directors who are most qualified may be the least willing to serve because of the opportunity costs of the time they must spend and the potential threat to their reputations. Given what has transpired over this past year, there may in fact be a need to reconceive the role of directors. Some firms reportedly are already moving away from the tradition of choosing the CEO of another company as a director to choosing people who are equipped with more specialized and technical knowledge. Still open, however, are questions concerning how much time directors should devote to their duties and what the appropriate remuneration should be. 2. Executive Compensation I have already publicly expressed my views on the trend toward excessive executive compensation. As I argued earlier this month, I can find nothing in economic theory to justify the levels of executive compensation that are widely prevalent today.
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It is well known that the process of transition will entail two types of risks to the financial system: (i) on the one hand, the physical risks caused by the direct effects of climate change, as a result of the gradual increase in temperature, or more frequent or more severe climate events such as storms, flooding or natural disasters; (ii) on the other, the transition risks, which refer to the potential effect on specific bank borrowers of the regulatory measures aimed at sustainably transforming the economy, technological changes, and changes in customer behaviour and preferences driven by greater environmental awareness. This leads me to the second element: the contribution of banks to the transition of the economy. Of course, if banks incorporate climate-related risks into costs and capital, they indirectly become “facilitators” of change, by reducing the cost of financing of activities that 3/5 contribute most to the sustainable transformation of the economy, while at the same time discouraging more polluting activities. At the same time, we should stress that the change of production model will also entail opportunities for economic agents, which banks and companies should seize. By way of example, to achieve the EU's 2030 targets agreed in Paris, it is estimated that, for the EU as a whole, there is a need to fill an investment gap estimated at 260 billion EUR per year.
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That makes it unlike normal downturns, in which the economy usually experiences a period of above-average output growth during the recovery period, thus making up much of the lost ground. The tendency for economies to suffer substantial persistent losses relative to a continuation of their pre-crisis trajectory is a common feature of downturns after banking crises. That is illustrated in Chart 6, which shows the spread of outcomes for the shortfall of output relative to a continuation of its pre-crisis trajectory across 88 past banking crises in different countries3; the blue swathe covers the central 50% of cases, while the grey swathes take in the central 80% of cases. There is a considerable diversity of experience, but the average outcome – given by the purple line in the middle of the swathe – shows a persistent output shortfall of about 10%, even seven years after start of the crisis. In other words, the typical banking crisis results in a substantial persistent depression in activity relative to what might otherwise have taken place. The red line shows the central path for the level of output, relative to a continuation of its pre-crisis trend, from our most recent projections (the dash denotes the forecast period up to and including 2013). As you can see, that path lies quite close to the average experience from this sample of past banking crises. There are a number of reasons why output losses after banking crises have tended to be much more persistent than after normal economic downturns.
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The strong trend is mainly due to the expansion of domestic sectors, not least in retailing. The development is not dramatic but Statistics Sweden does report a 12-month increase in retail sales of 3.3% in November. According to the Wholesale & Retail Research Institute, this was followed by a good Christmas season. The contribution to growth from investment also seems to have been favourable. As a result of all this, employment is rising more markedly than in recent years and this in turn led to a drop in unemployment during 1998. Current inflationary pressure is still low. The rate of CPI inflation remains negative and the December out-turn was lower than expected: the level of consumer prices dropped 0.6% from December 1997, as against the fall of 0.3% that had been foreseen in the Riksbank’s latest Inflation Report. However, this is partly a consequence of the Riksbank’s repo rate cuts, which have brought house mortgage rates down. So while we lowered the repo rate in the light of favourable inflation prospects, the cuts have had the initial effect of depressing CPI inflation even more. This has been accompanied by a further decline in commodity prices. But underlying domestic inflation (UNDINHX) in December was unchanged from the preceding month at 1.6%, though this was still somewhat below our forecast. US equity prices a possible risk The global financial unrest subsided towards the end of 1998. Interest rate differentials between different market segments narrowed again and stock markets stopped falling.
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Housing transactions and mortgage approvals have started to show signs of life. House prices have picked up. A healthy housing market is good for our economy and will help to support the recovery. Most importantly, it will underpin further increases in house building, which has played an important role in driving the economic growth we’ve enjoyed this year and which, as a nation, we need to see. It will foster greater labour mobility by allowing people to move more easily to where new jobs are being created. It will help to support consumer confidence. But let’s not be naive. Anyone with more than a passing interest in British economic history is aware that the UK housing market has a sort of microwave type quality to it, with a tendency to turn from lukewarm to scalding hot in a matter of a few economic seconds. The Bank is fully aware of this risk. The good news, however, is that it’s far better equipped to respond to these types of risks than in the past. In particular, the new Financial Policy Committee (FPC) – the sister Committee to the MPC – has explicit responsibility for maintaining the resilience of the financial system. And, together with the other regulatory bodies, the FPC has the policy instruments which can address potential excesses in the housing market – and in other markets – which pose a threat to the stability of the financial system.
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To repeat, inflation has been above the 2% target for most of the past five years. There are good reasons why policy wasn’t tightened in order to bring inflation back to target more quickly. But ultimately, the MPC will be judged by the success of our actions, not the elegance of our arguments. We need to demonstrate our commitment to bring inflation back to target and to keep it there. But we have also needed to trade off the speed with which we bring inflation back to target against the support that monetary policy can provide to the recovery. The MPC’s forward guidance gives greater clarity about our view of the appropriate trade-off. More important for us today, our guidance is rooted in the recognition that it’s a long way back to the economy being fully recovered. The damage and losses associated with the financial crisis and the years of frustration and disappointment that followed won’t be reversed simply by one or two quarters of strong growth. Our guidance makes clear that we intend to maintain the current exceptionally stimulative stance of monetary policy until we’ve BIS central bankers’ speeches 5 seen a sustained period of strong growth and the margin of slack in the economy has narrowed significantly, as long as this does not pose risks to either price or financial stability. As you may know, our guidance was framed in terms of so-called thresholds and knockouts.
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The sustainability of nominal convergence itself presumes that sufficient preliminary progress has been made towards real and structural convergence (and namely having set a fully-fledged market economy, catching-up in income and productivity levels, as well as economic and social infrastructures, upgrading of the legal system…). Conversely, a sustainable catching-up process requires macroeconomic stability. Therefore, nominal and real convergence should be pursued in parallel, and are not antagonistic. – Secondly, I noted that several accession countries have already expressed their intention to join ERM II rapidly after EU entry. This intention is to be welcomed, although it should be clear that ERM II membership needs neither to happen immediately after EU accession in all cases, nor to be limited to only two years, which is the minimum before adopting the euro. It would be totally misleading to consider ERM II as a mere “waiting room” before the euro. On the very contrary, ERM II membership allows countries to retain some limited exchange rate flexibility during the catching-up process and offers a meaningful, flexible and credible framework for increasing nominal and real convergence with the euro area, and for helping determine the appropriate level for the eventual irrevocable fixation of parities, in the best interest of candidate countries themselves. To enter the Eurozone is a very important, very grave and irrevocable act. Neither the accession country concerned nor the Eurozone could afford the risks associated with a mistaken decision. – Thirdly, accession countries must strengthen their fiscal and external positions.
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The amendments made in the Law of the Central Bank of Turkey in 2001 have been a turning point and instrumental for the efforts to maintain macroeconomic stability. With these amendments, achieving and maintaining price stability is stated as the primary objective of the Central Bank and the Bank acquired its instrumental independence. In fact, the independency has given the Bank the opportunity to set its policies for longer terms, free of political cycles and pressures. As an assurance given to the public to ensure the long term price stability objective, the independence of the Central Bank of Turkey together with its transparent and effective communication policy have increased the credibility of the monetary policy. Besides, the new monetary policy framework implemented first as implicit and then as full-fledged inflation targeting regime together with the floating exchange rate regime have contributed a lot to the decline in dollarization since 2002, as the literature 10 suggests. In this respect, we can observe the findings of the portfolio approach in Turkey very clearly. To be more specific, the volatility of exchange rates has increased due to floating exchange rate regime on the one hand and inflation and its volatility have declined significantly on the other.
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Additionally, some firms are considering how to expand analysis to more indirectly impacted sectors, such as transportation and industrials, or to move beyond lending exposures to trading positions. Finally, firms are evaluating how to best execute on public commitments to transparency in the climate space. Nearly all global systemically important banks, including all eight U.S. G-SIBS, have signed onto the Task-Force for Climate-Related Financial Disclosures (TCFD), and many of these have started disclosing under this framework to various extents.5 Firms continue to be challenged in the identification and measurement of climate risk embedded in their portfolios, however, so these disclosures may take some time to develop as the industry considers how to 2/4 BIS central bankers' speeches establish common standards. Role of Supervision I’ll turn now to the perspective of a bank supervisor.6 In the context of climate change, in my view, bank supervision should focus on ensuring that appropriate risk management frameworks are in place, rather than using supervisory tools for broader objectives. That is, supervisors can focus on identifying and managing risks, both microprudential and macroprudential, that emerge along a transition path to a more sustainable economy. Bank supervisors, however, are not in the position to advocate for, or provide incentives for, a particular policy outcome. Those broader policy goals are the purview of elected officials and governments, and policymakers. Supervisors can and should use our oversight tools to ensure financial institutions are prepared for and resilient to all types of relevant risks, including climate-related events.
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All kinds of regulatory arbitrage, which would enable firms to relocate to other jurisdictions to bypass national regulations, should be avoided. In this regard, the European Union is currently building a harmonized regulation. Last September, the European Commission launched its proposal for a “Markets in Crypto-Assets regulation” (also known as MiCA). If this proposition is adopted by the EU, companies that issue crypto-assets or provide additional services will be subject to the same requirements, under the watch of supervisory authorities. For example, the crypto-assets intended as a means of payment will have to provide a predictable redemption right in sovereign currency for asset holders, which is deemed necessary for the protection of consumers. At the international level, a cooperative framework is gradually setting up in order to deal with the challenges raised by stablecoins. 2. Supporting initiatives to strengthen Europe’s sovereignty in payments such as EPI The second response is to support private initiatives that can have a constructive impact on market functioning, payment systems efficiency and help address European sovereignty in payments. The best example of this is the European Payments Initiative (EPI), a project led by a set of major European banks and processors aiming at creating a unified, innovative and autonomous European payment solution. The Eurosystem, as well as the European Commission, has been in support of this work right 2/4 BIS central bankers' speeches from the start. 3.
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This conflict has not been talked about much, if at all, even in central banking forums; but it is, I am quite sure, one important contributing factor to the making of financial crises. Financial intermediaries are often, and rightly so, rewarded handsomely for their innovative efforts, which, it is claimed, bring a higher rate of return for those with surplus money and a lower cost for those in need of money; in other words, a narrowing of the intermediation spread, or greater financial efficiency. But there is an internal contradiction in this phenomenon. Greater profits for financial institutions and larger bonuses for those employed in them mean, to me at least, BIS Review 106/2009 1 a widening, rather than a narrowing, of the intermediation spread; in other words, lower financial efficiency. Yet we do observe greater profits and larger bonuses in the financial system along side (probably apparent) improvements in financial efficiency. For example, the innovative effort variously described as "securitisation", "originate-and-distribute", and "credit risk transfer" did raise the rate of investment return and lower the cost of credit. The explanation for this, if I may venture a guess, is in the time dimension. The observed narrowing of the intermediation spread comes at the expense of, or presages, a future, possibly sharp widening that often occurs in the context of a financial crisis.
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Henrique Meirelles: Challenges for monetary policy – Brazil and the international context Speech by Mr Henrique Meirelles, Governor of the Central Bank of Brazil, at the Conference “The Impact of Brazil on the Global Scenario”, São Paulo, 10 July 2008. * * * In mature economies, the years from the beginning of the 1990s to mid-2007 were characterized by low GDP volatility and low inflation, circumstances that led prominent economists to name the period as the era of the “great moderation”. That environment resulted from better monetary policy, a fact that translated into credibility gains for central banks, globalization and advances in productivity linked to information technology developments. At the time there was a substantial consensus that the emergence of Asia, particularly of China and India, would contribute to keep global inflation permanently under control. Thanks to cheap labor and the intensive use of new technologies on the production process, China – and to a lesser extent India – exported deflation (or at least disinflation) to the world economy through a consistent decrease in their export prices. There is now growing evidence that this era might have came to an end with the unbalances between the expansion of global demand and supply. Moreover, there are also signs of increasing labor costs in China, due to both changes in labor legislation and increasing shortages of specialized workforce. In the benign environment that prevailed through mid-2007, central banks of mature economies engaged in neutral or even expansionary monetary policies for relatively long periods.
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The time to push ahead on tackling climate change Speech given by Andrew Bailey, Governor of the Bank of England Corporation of London Green Horizon Summit, Mansion House 9 November 2020 1 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice It is a great pleasure at least to have the opportunity to meet virtually. Today, I want to focus on how we ensure that we get back to the vital subject of tackling climate change and the role of the financial system. First, I want to say what a pleasure it is to be sharing a platform today – so to speak – with Mark Carney. As I have told Mark quite a few times, timing is everything, and midnight on March 15th was an interesting choice of date to hand over as Governor. But let me also say that in everything that has happened since at the Bank we have benefitted from the many things that Mark did during his term, and for that we owe him great thanks. Mark has gone on to push forward his deep commitment to tackling climate change, and the role of the financial system in doing that. There have been times since March when we have faced very stark decisions in the face of the Covid crisis. We decided in the spring to prioritise preserving people’s jobs and livelihoods in this emergency, and as far as possible the businesses that provide employment and the life blood of the economy.
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Lars Heikensten: Monetary policy and wage formation in Sweden Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, at the Office of Labour Market Policy Evaluation (IFAU), in Stockholm, on 5 May 2000. * * * Let me start by thanking you for inviting me to this seminar. Few things are more important for the Swedish economy today than to ensure that we have a well-functioning wage formation system and labour market. In my introductory speech today I will discuss four issues. First, I will present the argument for adopting price stability as the Riksbank’s chief objective and say some words about the Swedish debate on this matter. Then I will comment on developments during the last decade, when we abandoned the high-inflation policy of the 1970s and 1980s. My third subject will be the current monetary policy situation and the choices that we now have to make. Lastly, I will comment briefly on wage formation and the labour market in the light of this situation. Discussion of the price stability objective In the early 1990s, there was a shift in Sweden’s economic policy towards establishment of a low-inflation regime. A few years later, price stability was established as the objective of monetary policy. This change was the result of a realization among policymakers that the policy of high inflation and recurring devaluations that had been pursued in recent decades had failed.
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