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And one segment where this may have a greater impact, and specifically alter the bankcustomer relationship, is that of payment services. Bank customers and technology: the payment services segment. Allow me to illustrate the changes emerging in this segment with a brief reference to the new Directive on payment services, known as PSD2, as I previously mentioned. 4/8 One of the most notable aspects of this Directive is that it definitively institutionalises the activity of the so-called third-party service providers, or TPP. The Directive acknowledges the right of holders of a payment account to expressly authorise a third-party entity, provided it is duly authorised, to order payments on their behalf and/or to consult certain information associated with this account. In the first instance, we are talking about what are known as “payment initiation service providers”, while in the second case they are called “account information service providers”. The latter offer users the possibility of gaining consolidated knowledge of the situation of the payment accounts the users have with different entities, thereby helping them with their financial planning. Conversely, payment initiation services arise as an alternative to the use of cards, for the payment of purchases made in e-commerce environments. They are consequently characterised by providing payment beneficiaries with the security that payment has been initiated correctly, acting as a spur for expediting the delivery of the good or service.
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I would like to take this opportunity to thank everyone in our banking community for maintaining services to your customers during these extraordinary times. The speed and agility you have demonstrated in delivering the relief measures has been particularly impressive. The resilience and resourcefulness of our banking sector put us in a strong position to handle the challenges that lie ahead. 5. Despite the ongoing geopolitical tensions, I have no doubt that Hong Kong will continue to perform its special role as an international financial centre. China remains the engine of global economic growth and the biggest provider of savings. The Mainland’s opening of its financial sector continues to offer new opportunities for the rest of the world, and Hong Kong is at the nexus of it all. While our banks must continue to stay resilient against the many challenges of our times, they also need to prepare themselves for new opportunities emerging from the transformations now unfolding in our region. 6. In today’s conference we are invited to look beyond our present difficulties, to envision a ‘Brave New World of Banking’ in an age of ‘Innovation and Transformation’. I congratulate HKIB on choosing such a forward-looking topic – one to which I have also been giving a great deal of thought. Taking up this theme, I will discuss three big transformations that are already happening, and talk about how the industry and how we at the HKMA are responding to them.
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Distinguished audience, To sum up, what can a central bank do to modernise the society in an emerging economy such as that of Moldova? Lots of good things, within the confines of the law and of its mandate. Nothing good beyond its mandate. Effective inter-institutional cooperation, within an optimum functional architecture, is a formula for successfully overcoming moments of crisis, including the situation generated by the COVID-19 pandemic. I therefore reiterate, with all conviction, the importance of preserving the independence of central banks and taking on their primary objective in full responsibility. This objective is the key element of macro-financial stability, to which also adds the symbolic role of originator of the horizon of hope, so necessary nowadays in all of our countries. I am convinced that the works of this conference will be a good opportunity to reflect on the topical matter regarding the role of central banks and the importance of their independence. On behalf of the Romanian central bank and the NBR Board, I extend the best wishes to you and your colleagues in the distinguished institutions that you represent. Thank you for your attention! 3/3 BIS central bankers' speeches
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Both opinions have high-profile advocates. As yet, we do not know who is closer to the truth and it will probably be some time until it will be possible to say with any great certainty. 9 The global level of interest rates will probably remain low for a long time Regardless of how the sluggish recovery from the financial crisis can best be explained, a central issue is that of how long the level of interest rates will be low. If the global interest rate were to start to rise fairly soon, this would increase scope for monetary policy – the problem would “solve itself”, so to say. However, empirical estimates suggest that the forces that pushed the global interest rate down will be relatively persistent and that the level of 9 One further hypothesis is that growth is being restrained by a decrease of productivity-enhancing innovations combined with various restraining forces (‘headwinds’) (see Gordon, 2102, 2015). Like secular stagnation, this is expected to affect the economy for a long time to come. However, unlike secular stagnation, there is no chronic deficit in the aggregate demand (no negative output gap), as it is the growth of potential output that is assumed to have slowed down. BIS central bankers’ speeches 7 interest rates will remain low for a fairly long time to come. 10 For example, Rachel and Smith (2015) estimate that the global real interest rate will be about or just below 1 per cent in the medium to long term.
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In addition, strategically important markets, such as telecommunications and broadcasting media have been opened up to competition. It is especially important that Sweden had a broad base of users of various technical systems at an early stage. A broad base is essential for users and producers to gain a real exchange from working in the networks comprised by the new technology. Ericsson’s successful broadening of its operations from fixed to mobile telephony and Sweden’s rapid licensing of first NMT and then GSM gave Sweden one of the world’s broadest bases of mobile phone users. The subsidised provision of personal computers to employees also broadened the user base and gave Sweden the highest PC density in Europe. This of course facilitated the use of the internet and thus the general e-mail revolution in Swedish companies and homes. The combination of internet usage and the high density of mobile phones means that mobile internet, despite its slow start, has already come further here than in the USA. Slide 4 shows a summary of Sweden’s position in various technological, network-based systems. As the internet is still in a phase of development, these figures can primarily serve as indicators of future growth. 4.
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Yet, this sector generates less than 20% of value added in the economy, while productivity of labour force employed in agriculture and their income per capital are half of other branches of the economy. In my view, the sustained and balanced development of the country clearly needs a higher attention to agriculture sector, for improving its production capacity coupled with the growing of rural area population’s welfare, and in turn promoting social equity. The agricultural sector faces many and complex problems of development. At a considerable degree, these problems are out the competence and expertise sphere of the Bank of Albania. However, I believe that the topic of our today’s discussion: support with funds and loans to the agricultural sector, deserves a higher attention by the banking system. Currently, agricultural sector benefits only 1.7% of the funding that banks provide to private business. This ratio has not change over the last decade, despite the novelties that banking system has offered to lending market, while it remains far from the real needs of this sector. Specific lending issues to agricultural sector have been identified, from some time now, but a part of them are yet relevant. Nevertheless, I think that some of them are towards addressing, while the other obstacles should become part of a critical assessment and their solution should be an integral part of our next work agenda.
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Similarly, a comprehensive review of the Spanish tax system is needed to ensure that the different taxes meet their goals in the most efficient and effective manner possible. A comparison between the Spanish tax structure and the European average reveals a smaller proportion of indirect tax revenue in Spain, with lower effective taxation on consumption 18 On average, in the period 2015-2019, public expenditure on education and public investment in Spain stood at 4% and 2.9% of GDP, respectively, 0.9 pp and 1.5 pp less than in the EU. 19 and a significant revenue gap in terms of green taxation. The White Paper for the Reform of the Tax System, published in March, presents a diagnosis of the Spanish tax system. The demographic trends that are expected over the coming years, particularly the spike in the dependency ratio,19 will place the pension system under considerable pressure. The reforms approved in 2011 and 2013 significantly enhanced the financial sustainability of the pension system in the medium term. However, should the pension system’s revenue not increase, the adjustment would be made chiefly by reducing the benefit rate.20 The first part of a new pension system reform was approved towards the end of last year. Among other measures, this reform indexed pensions to inflation and removed the sustainability factor. According to AIReF projections and the European Commission’s Ageing Report, the two measures mean that pension expenditure will grow by between 4.1 pp and 4.3 pp of GDP in the period 2019 to 2050.
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It is successful as we copy the institutional setup of the central banks of the developed countries, where the independence of central banking is recognized as one of the main preconditions for efficient conduct of the monetary policy and the exchange rate. Fortunately, political institutions in the country understood that, too, and therefore it is general assessment that today NBRM enjoys a significant level of independence, both formal and actual. However, it is most important that we are aware where and how much we lag behind the central banks of developed countries, how much we must work in order to reduce the gap and where we should arrive at. We should improve a number of contemporary analytical and research models and practices. We should expand our knowledge in the area of economic modeling and econometric techniques. As a matter of fact, in a month or two we start with regular training of the NBRM employees in this area, in a systematic and permanent manner. We are already preparing for outlining and implementing other monetary strategies, as it is imposed by the processes of globalization and integration of markets, the forthcoming very close full liberalization of the capital account, justifiably anticipated larger inflows of capital, which create new environment for our economy, together with the risks from instability and speculative pressures.
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So we had to take immediate action to stop certain FPS functions, to allow time for the e-wallet operators and banks to enhance their security measures. 12. This was a setback to a new system trying to gain acceptance and trust from the public – and this unpleasant surprise came along. But thanks to the cooperation of banks and ewallet operators, we found the cause of the problem quickly and fixed it. We also communicated with the public – quickly and openly – in order to rebuild confidence in the FPS. 13. Understandably, this led to a brief drop in FPS usage when the news first came out. But thanks to the quick fix and transparent communication, we saw customer confidence bouncing back quickly and strongly. Since then, we have seen strong growth in the number of FPS registrations. Right now, there are over 3.6 million registrations out of a population of just over 7 million. The penetration rate of our FPS is likely among the highest in the world. Transaction volume has been growing by nearly 10% per month, and last month there was an average of more than 140,000 transactions per day. 14. In all fields of innovation, many good ideas do not catch on at first. This is going to be the case with Fintech. Experience tells us that every good technological innovation needs good, and probably flexible, execution in order to win trust and acceptance. Importance of a change agent 15. This brings me to my second point, which is change management.
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Those observations and insights have brought to the fore the importance of leadership competencies in articulating the combination of essential skills, attributes and behaviours required by leaders for the successful and effective performance on the job. It is our hope that the ICLIF Leadership Competency Model will be a constant source of reference, inspiration and impetus to our leaders in building a dynamic organizational culture and in meeting future challenges. In order to better position ourselves in this more challenging environment, one that is more globalised, more integrated, more competitive and more complex, we need to play a more pro-active role in strengthening our own organizations, we need to prepare ourselves for difficult periods, we need to also contribute towards the development of the environment in which we operate, the markets and the 2 BIS Review 72/2004 financial infrastructure and finally and importantly we also need to invest in people, in their skills, to enhance our organisational capacity to bring about institutional development so as to enhance our respective organizational effectiveness. Leadership is an integral part of this process. Our investment in ICLIF hopes in some part to contribute to achieving these goals. Alumni members, distinguished guests, ladies and gentlemen, it is now my privilege and pleasure to officially launch ICLIF Alumni Association and ICLIF Leadership Competency Model. BIS Review 72/2004 3
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This is why some wholesale banking activity lends itself more naturally to the branch structure which allows funds to flow more freely across borders. This requires regulators to work together to manage cross-border challenges to financial stability – implementing common minimum standards, sharing information and 9 building confidence in how each other will behave when things go wrong . There has been a complementary effort to make it easier to resolve international banks via a ‘single point of entry’ (SPE). Overseen in its home jurisdiction, a SPE resolution would sweep up a group’s losses from around the world and bail in its creditors at the top. The group is recapitalised and does not go into disorderly failure. 7 See Woods, Sam: Contingency planning for the UK’s withdrawal from the European Union; 7 April 2017: “…the PRA will expect those EEA bank branches which have significant retail/SME transactional deposits to discuss with it whether they need to establish a subsidiary, if they plan to continue that activity in the UK after its withdrawal from the EU”. 8 See Bailey, Andrew; Free Trade in Financial Services matters; 29 September 2017. 9 See Carney, Mark; The high road to a responsible, open financial system; 7 April 2017. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 EMBARGO: not for release before 19:30 on Wednesday 4 October 2017 Against this grain, recently the European Commission proposed that non-EU groups above a certain size or systemic importance must establish a common ‘intermediate parent undertaking’.
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The inflation forecast is not only an important internal decision-making tool, but also a crucial communication device. Monetary policy has become considerably more transparent over recent decades. It is now commonly believed that open communication of monetary policy is beneficial to the stability and predictability of its transmission into the economy, and is also crucial for the accountability of an independent central bank. As a result, the inflation forecast, including its underlying assumptions and policy implications, is openly explained to the public. Nonetheless, we must always bear in mind that even highly developed, technically advanced and wellorganised forecasting procedures are not an automatic pilot for inflation-targeting central banks. They are no more – but also no less – than an important input into the monetary policy process. Eventually, the decision is always based not only on the central forecast itself, but also on the decision-makers’ discussions about all the associated risks. Good analytical tools, however, can be helpful even in this respect, by enabling the simulation of different alternative scenarios in a consistent manner. Let me now turn to the progress we have achieved so far in building our forecasting system at the Czech National Bank, where we now have nine years of experience with inflation targeting. The new regime was introduced in a challenging situation, after a period of currency turmoil in May 1997, which ended the fixed exchange rate period and resulted in higher inflation and rising inflation expectations. The economy needed a new nominal anchor in order to return to a disinflation path.
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The normalization process for monetary policy started in June with a 50 basis point hike and continued the following four months at the same speed. Between October and December the normalization pace was slowed down to 25 basis points. In January the Monetary Policy Rate was kept unchanged, but the Board has stated that it will be necessary to continue to reduce the monetary policy stimulus in the coming months. But, important risks persist on this scenario. As I mentioned at the beginning of my presentation, the risks in the external scenario are high, especially due to the fact that global recovery has been imbalanced between developed and emerging economies, with high commodity prices, low interest rates, a sluggish recovery of developed economies and a depreciated US dollar. Relevant risks include escalating financial tensions in Europe, persistent high unemployment rates in developed economies and sharper adjustments in some emerging economies that are facing inflationary pressures. Considering this risks and the fact that the real exchange rate had appreciated significantly, the Board of the Central BIS central bankers’ speeches 3 Bank decided, on January 3rd, to start a program of foreign currency purchases aimed at strengthening its international liquidity position. Thus, the Central Bank will hoard additional international reserves amounting to $ billion over the year 2011, via periodic purchases of foreign currency until the end of December of 2011.
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Depending on its design, such a rule book would either be permanently outdated and incomplete, because legislators cannot keep up with the rapid pace of innovation within the financial sector with meticulous regulation, or would have to regulate so rigidly that it would impose excessive restrictions on the functioning of the financial system. As is often the case, the most sensible option is in the middle. We need regulation based on principles which adapts to changes in banking and we need a supervisory authority that is capable taking action. Allow me to elaborate. • Good regulations must be adaptable. They must be just as applicable to different business models as they are to different sizes of institution – they must fit large and small institutions alike. Good regulations must adapt to changing circumstances without legislators having continually to improve on them. Accordingly, the rules must provide room for discretion in individual cases. • Good regulations must, however, also ensure a minimum level of planning and legal certainty for banks; that is the only way in which banks operate properly and provide their financial services over the long term. This holds particularly true of Europe, where banks play a greater role in financing the real economy than the capital markets.
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And yet, in many parts of the world, monetary policies remain somehow permissive. The reason for this paradox can be found in the dilemma faced by many countries, which maintain some link between their currencies and the US dollar, in order to prevent an unwanted appreciation of their exchange rate. However, according to Mundell’s BIS Review 63/2008 1 incompatibility triangle, a country cannot tie its currency to another currency and simultaneously conduct an independent monetary policy, when capital flows freely between countries. As a consequence, many emerging economies are currently led to partially "import" the US monetary policy although their situation and position in the economic cycle are fundamentally different. This situation could be very unstable and dangerous. First, real exchange rate appreciation – which is bound to occur anyway – takes place through increased inflation rather than nominal exchange rate appreciation. Indeed, inflation in many emerging countries is currently accelerating. Second, at the world level, we might be piling up inflationary pressures, which could develop further in 2009-10. There is an explosive mix of rising commodity prices and permissive monetary policies, which could create an ongoing spiral, and, if it were allowed to develop, would specially hurt the poor countries, most of which are net food importers. It is our common and joint responsibility to do everything in our power to avoid such an outcome. Let me now turn to another major challenge: the impact of financial innovation on the conduct of monetary policy.
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Another effect of financial innovation is thus to create asymmetries in the reaction of the economy to monetary policy: for example, the slow build-up of bubbles during periods of monetary easing followed by an abrupt retrenchment when monetary policy tightens. Note that there is currently a debate as to whether this inherent procyclicality of financial systems is amplified by our accounting and prudential regimes. Fourth, it may be that modern financial innovation creates new discontinuities in the financial system and dynamics. When conditions are less benign than usual, the transmission process along the interest rate curve becomes non-linear: a striking feature of this summer’s events was the surge in the short-term money market. Wider and variable spreads between term funding rates (of which many bank loans are priced off) and policy rates may reduce the efficiency of interest rate adjustments when needed. Innovation also reinforces the mechanism of the "financial accelerator", through which the level of asset prices influences credit distribution (through collateral values and, now, its impact on banks tier one ratio), then the real economy; and, in return, the real economy impacts asset prices and values. This spiral can go upwards, or, as we see now, downwards. Overall, I believe that central banks have coped well with these challenges over the past ten months. The monetary policy response has differed across industrialised countries, as warranted by the differences in economic situations and outlooks.
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The recently created instrument for convergence and competitiveness, while a step in the right direction, lacks stabilisation capacity. It does not incorporate some of the potentially most effective elements, such as European unemployment insurance and the use of European funds to mitigate the impact of specific shocks on certain economies. The lack of effective macroeconomic policy coordination mechanisms in the euro area is exacerbated when monetary policy comes up against its effective interest rate limits. As I said earlier, this circumstance might become more frequent in the future if we move into a more persistent setting of low rates. Moreover, it is in this setting that the effectiveness of fiscal policy may prove greater.13 There is thus a pressing need to create some type of common cyclical insurance mechanism in the euro area. This instrument would help automatically absorb adverse shocks at the aggregate level (symmetric) or idiosyncratic shocks in certain countries (asymmetric). Its dual aim would be to smooth effects in individual countries and safeguard the stability of the euro area as a whole. Some recent analyses suggest that it would be possible to design a mechanism which, without committing major funds (fewer than the current European budget) and without it entailing permanent cross-State transfers, would provide for a similar stabilisation capacity to that achieved with the US transfer system.14 The role of macroprudential policy We should not forget the role that so-called “macroprudential policy” can and should play.
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And the continuing efforts of the banking sector also represent challenges of their own: banks filed over 68,000 or 90% of the suspicious transaction reports (STRs) with the JFIU in a year. And that is just the STRs: we all know what that means in terms of the massive amount of data that banks are monitoring, screening and analysing on an ongoing basis. 5. The more difficult part of the answer to my question therefore means looking forward and requires vision and – dare I say it – aspiration – because we know that FATF evaluations represent a snap shot. There are always new and emerging risks, to which the HKMA and banks have stayed vigilant and agile; criminals are also exploiting new technology and innovations to create terrible harm to consumers and the integrity of the financial system. Banks that play a frontline role in combating that harm, not only by applying preventive measures when on-boarding customers, but increasingly through the value of information they are able to extract and feed into the AML/CFT eco-system and the close cooperation with the LEAs and the HKMA in converting STRs and intelligence into actions like arrests and asset recovery. 6. This is the challenge we face so we’ve taken a step back from the FATF evaluation report and asked ourselves some potent questions: is our system working as well as we would like it to be? Are the supervisory tools and techniques we have been using for years still fit-forpurpose? 7.
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At the same time, resources and appropriations for the supervision and control of foreign workers’ wages and working conditions have been increased. As a result, foreign suppliers of services are losing much of their competitive edge in relation to Norwegian enterprises. The latest Directorate of Labour figures show that seasonally adjusted unemployment was 3.4 per cent in September. This is in line with the developments we envisaged in the June Inflation Report (2/05). Statistics Norway’s Labour Force Survey (LFS), however, presents a somewhat less favourable picture of unemployment. Registered unemployment is on the decline in all regions. It took some time before unemployment began to decline in Central Norway, but during the last half year it has fallen substantially. The industry structure in Trøndelag is very similar to that of the country as a whole. Nord-Trøndelag is the country’s third largest agricultural county and employment in the primary industries is high. Even though the industry structure in the Trøndelag counties is not significantly different from the rest of the country, this region is nonetheless struggling with relatively high unemployment, even in periods of solid economic growth. Statistics Norway recently published a study that showed that the mobility in the labour market was lower in this region than in the country as a whole.1 Companies have, for example, not been inclined to recruit recent graduates. This is an important challenge for the regional labour market authorities. Information from Norges Bank’s regional network is important for Norges Bank’s analysis of the Norwegian economy.
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Far from putting on the back burner questions concerning Basel III and its application in Europe, that is to say CRD IV and its project to create a “single rule book” for European banks, I believe, on the contrary, these developments underscore the importance of better understanding the current reform and taking time to reflect, in order to ensure that the new framework for banking regulation and the distribution of supervisory responsibilities in Europe will deliver all their expected benefits. Before leaving you to discuss in greater detail the impact and stakes of the Basel III reform, I would like to make a few remarks on this topic in relation to the current environment. 1. Basel III and CRD IV represent a quantitative and qualitative leap aimed at addressing the shortcomings highlighted by the current financial crisis First, I believe that it would be useful to rapidly place the Basel III reform in its context, in order to fully understand its scope. Basel III is first and foremost a response to the financial crisis that started in 2007. This crisis and the subsequent wave of shocks to the banking system have not merely resulted in a temporary loss of output for the major advanced economies. They have also had a lasting impact on employment, industrial production, the confidence of investors and households, and needless to say on public finances, which make crisis exit even more difficult.
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higher wage claims. Indeed, despite large increases in oil prices inflation in OECD countries oscillated around 3 percent in the past year and core inflation (CPI excluding food and fuel) drifted from 2 percent to 1.8 percent in the same period 5 . However, in my view, further prolonged increases in energy prices, especially those stemming from supply constraints or related to political risk could result in more elevated inflationary pressures in the short term and could seriously harm global growth prospects in the medium term, also because they would contribute to further worsening of global imbalances. The issue of global imbalances has attracted enormous attention, both from academics, investors, policy-makers and, of course, central-bankers. You may find a detailed description of the issue of 1 International Monetary Fund, World Economic Outlook, April 2006. 2 European Commission, Directorate General For Economic and Financial Affairs, Economic Forecasts, Spring 2006. 3 See endnote 1. 4 Walton D. „Has oil lost the ability to shock?”, speech to the University of Warwick Graduates’ Association Senior Directors’ Forum at the Commonwealth Club, London, 23 February 2006. 5 OECD “OECD Consumer Price Index“, various releases. BIS Review 61/2006 1 global imbalances in my earlier speeches posted on the NBP website (www.nbp.pl publications speeches/lectures). Today I will only say that never in a human history has the largest economy run such a high current account deficit reaching 6.5 percent of GDP, not to mention that this economy is a provider of the global reserve currency.
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2 BIS Review 61/2006 entry into the euro area have made the Polish T-bond market, with the average daily net turnover of PLN 6 billion (the largest and the most liquid market in the region), more attractive to foreign investors. EU membership has enabled institutional investors, that are allowed to invest in instruments issued within the Community, to increase their exposure to Polish securities. In 2004, non-residents’ investments in T-bonds issued in Poland rose by about PLN 20 billion, and in 2005 - by a further PLN 7 billion. The beginning of 2006 was also marked by new records on the Warsaw Stock Exchange amid purchases made by foreign investors and domestic investment funds. In 2005, the number of IPOs amounted to 35 and the market capitalization increased by almost 50%. However, one should not take these favorable global liquidity conditions for granted. Federal Reserve has already raised the interest rate to 5 percent. The ECB is in the process of normalizing interest rates and the Bank of Japan has announced an end to quantitative easing and markets started to price in first increases of BoJ interest rate. This may expose some emerging markets, which have weak fundamentals to a change in investors’ sentiment, may lead to the depreciation of local EM currencies and a significant drop in market liquidity. 11 Some risks are also related to the changing structure of our financial markets.
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Mark Carney: Enabling the FinTech transformation – revolution, restoration, or reformation? Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London, Mansion House, London, 16 June 2016. * * * Given the tragic murder of Jo Cox MP on 16 June, at the Mansion House dinner in lieu of this speech, the Governor paid tribute to Ms Cox and the highest standards of public service she represented throughout her life. 1. Introduction My Lord Mayor, Chancellor, My Lords, Ladies and Gentlemen. Let me begin by thanking Andrew Bailey for his outstanding record of public service during his 31 years at the Bank of England. Andrew is an extraordinary public servant who has devoted his entire professional life to serving the people of the United Kingdom. During his career, he has worked across all of the Bank’s policy areas, combining leadership and innovation to deliver consistently the Bank’s policy objectives. His work in helping to manage the crisis and then to develop the post-crisis regulatory framework has been exemplary. He has made the Prudential Regulation Authority (PRA) a highly respected and effective regulator and built a team of exceptionally dedicated colleagues. I would like to thank Andrew for his counsel and support since I joined the Bank and wish him every success in steering the Financial Conduct Authority (FCA) at this vital time in its history.
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So earlier this year the Bank announced we would be drawing up a blueprint to replace our current real-time gross settlement (RTGS) system, now twenty years old. 48 institutions currently have settlement accounts in RTGS. All other users of the systems that settle across RTGS access settlement via one of four agent banks. 5 These users include over 1000 non-bank PSPs serving customers’ increasingly demanding standards, and many rely on major UK payment schemes, particularly Faster Payments (FPS). As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and goodwill of the very banks with whom they are competing. Re-selling services ultimately provided by banks limits these firms’ growth, potential to innovate, and competitive impact. 3 These PSPs include firms granted the status of either an e-money or payment institution in the UK. 4 Examples include From Stripe to Square, from Paypal to Ripple, from Applepay to Zapp. 5 Indirect access removes the need to build costly payments infrastructure – a potentially large fixed cost for young companies. 4 BIS central bankers’ speeches That is why I am announcing this evening that the Bank intends to extend direct access to RTGS beyond the current set of firms, allowing a range of non-bank PSPs to compete on a level playing field with banks. 6 By increasing the proportion of settlement in central bank money, diversifying the number of settlement firms, and driving greater innovation in risk-reducing payments technologies, expanding access should bring financial stability benefits.
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Timothy F Geithner: Implications of growth in credit derivatives for financial stability Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the New York University Stern School of Business Third Credit Risk Conference, New York City, 16 May 2006. * * * Thank you for giving me the opportunity to speak to you today. We're in the midst of a period of rapid growth and innovation in the market for credit derivatives, and the developments in this market have important implications for broader financial market functioning and stability. A vital and efficient financial system such as ours is defined by its ability to identify new ways to allocate capital and share risk, but often the pace of innovation in the instruments themselves outstrips the pace of improvement in the risk management and control infrastructure. The credit derivatives market is no exception to this general observation. In my remarks today, I'll focus on some of the implications of these changes in the credit derivatives market for the stability of the overall financial system. As with any attempt to explore the broader implications of rapid growth in a new market, I'll say more about what we do not know than about what we do know. I'll also highlight the need for continued progress in addressing the challenges posed by the rapid growth in this market.
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Philipp Hildebrand: The virtues of flexible financial markets - a central banking perspective Summary of a speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the CFA Institute Annual Conference, Zurich, 22 May 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch) * * * Summary Rapid technological change and market liberalization have been the driving forces behind the remarkable evolution of global financial markets over the past three decades. The consequences of this development include a geographic rearrangement of global capital markets, a fast pace of product innovation and changes in the nature and composition of financial market participants. The benefits associated with today’s flexible financial markets are manifold. Financial markets have become much more efficient in allocating capital. New products enable a better distribution of risks and the liquefaction of previously illiquid assets. They have also increased market transparency. As a result, modern financial markets facilitated innovation and likely enhanced economic growth. Moreover, they have contributed to make economies more resilient to shocks. These extensive benefits notwithstanding, modern financial market also entails new risks. These risks tend to elicit calls for increasingly far-reaching regulation. While some regulation may indeed be required to guarantee the integrity of financial markets, the threshold for such regulation should be set high.
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Overall, this will provide solutions that reduce the use of resources and increase efficiency in the payment system. Cost coverage through high interest margins and float implies hidden costs for customers and makes it difficult to choose correctly on the basis of product costs and features. Therefore, there should be as much direct pricing as possible. The customer who chooses among various payment instruments should bear the cost of this choice. The production of payment services is characterised by economies of scale. Development costs are high and the requirements as to operating reliability and back-up solutions for the computer systems are stringent, while the cost of producing one extra unit is low. This applies in particular to the electronic payment services. We then face a classic pricing problem that is described in economic theory. If the price is set equivalent to the cost of producing the last unit (marginal cost), which in a certain sense is "correct" pricing with regard to efficiency, the manufacturer will not fully cover his costs. The manufacturer must then cover the remaining costs with the profits from other services. Innovation and development of new products are important driving forces behind increased efficiency in the payment system. In order to finance development activities, banks and producers of payment services must have a certain profit. Both direct pricing of payment services and other income may generate this profit. If the profit is to come from direct pricing, the income must cover more than the production costs.
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Svein Gjedrem: Uncertainty, economic models and monetary policy Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics/Norwegian School of Management, Oslo, 17 September 2007. Please note that the text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 15 August, Monetary Policy Report 2/07 and on previous speeches. * * * I welcome the opportunity this time to discuss with you at the Centre for Monetary Economics certain themes that are not related to the most newsworthy economic policy issues. I will discuss the following three themes: • the role of monetary policy • our view of economic models as a basis for interest rate setting • and finally, measuring inflation and uncertainty linked to the rate of inflation at a given point in time Let me start by discussing the role of monetary policy. The primary objective of monetary policy is to ensure that inflation expectations are low and stable. Expectations of low and stable inflation provide a nominal anchor. Economic agents’ inflation expectations influence the decisions they make today. Our experience – and the experience of other countries – shows that without a nominal anchor we cannot achieve stability in employment and output.
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Consequently, applying the policy rate or regulatory tools as the situation requires may be the most practical path. Let me now shift the focus from monetary policy to the work on financial stability, but the issue will still to a large extent be how to achieve a balance between financial stability and monetary policy. Challenges for regulatory design Not only the regulations but also the whole area of macro-prudential surveillance aiming at financial system stability have become a highly topical issue in the aftermath of the latest crisis. Prior to the crisis, financial regulation was excessively focused upon individual institutions under the erroneous assumption that the system would remain stable as long as the individual institutions were stable. Consequently, processes that created risks on the system level were ignored. I certainly welcome the current international discussion regarding the inclusion of more explicit systemic-risk preventive regulations, or macro-prudential regulation, in the regulatory framework. An important challenge for the design of a new regulatory framework will lie in finding an appropriate balance: On the one hand, the regulations will need to be sufficient to effectively reduce the risk of financial crisis; on the other hand they should not be so stringent as to impose unnecessary costs on the financial sector. It is a matter of finding the right level of regulation. In this context it is very illuminating to read the so called MAG and LEI reports which attempt to translate various levels of Basel III-regulation into estimated higher interest costs for the end-borrower.
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By conducting large-scale repo operations and purchasing sizable quantities of U.S. Treasury securities and agency mortgage-backed securities, we are providing funding and stability at a time of extraordinary volatility in markets.3 These actions averted a potential shutdown in the availability of credit, which would have made the current economic crisis even more severe. In addition to stabilizing financial markets, the Federal Reserve is standing up programs to support the flow of credit to households, businesses, and state and local governments. These actions will enable them to continue to do their work, both now and when normal life resumes.4 2/3 BIS central bankers' speeches Our efforts supporting the provision of credit include a number of programs aimed at different parts of the economy and work through different channels. One set of programs supports the availability of credit to households and businesses—importantly, including small and mediumsized businesses. A second set of programs targets the availability of credit to states and municipalities. Fiscal policy is also playing a critically important role. In particular, it can do what monetary policy cannot: provide for the public health response and transfer income to those most affected by the outbreak. Fiscal policy is also a vital partner in the delivery of our own programs, supplying the financial support necessary for the extraordinary scale of the credit facilities we’re operating. Conclusion I’ll conclude with this: These are extraordinary times, and the Fed is taking extraordinary actions to ease the economic pain.
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There are three key points that are closely related to good corporate governance and critical to any banking institution. The first is a rigorous internal control apparatus, which is essential to the sound and successful execution of banks’ strategic objectives. Second, each banking institution must have in place the technical systems and management processes necessary to identify the risks associated with its activities. Third, an effective risk management and control structure must be accompanied by the institutional management culture required to ensure that policies and procedures are translated into practice, with buy-in at all staff levels. Primary responsibility for ensuring that the bank has in place good corporate governance, rigorous internal controls and effective risk management lies with the board of directors and senior management. The task of the board of directors is to oversee the development of the overall strategy of the organization and the decisions made by senior management in pursuit of that strategy. The role of senior management, in turn, is to assure that day-to-day decisions made within the organization are consistent with the policies and long-term objectives of the board. With regard to the board of directors, I recognize that it can be difficult to elect members with the necessary skills and time to devote to overseeing the bank. While this can be a major challenge, it is obviously important that we get it right for the overall well-being of the bank.
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It is imperative that we stay on track in our goal to release a new capital adequacy framework by early next year, with a comment period and industry implementation to follow shortly thereafter. BIS Review 50/2000 4 Corporate governance My remarks thus far have focused on the need for a more risk-reflective capital framework. Clearly, a strong capital position is crucial to the sound operation of any banking organization. It allows banks’ board of directors and senior management to focus on strategic objectives and growth opportunities, supports the business activities of the organization, and provides the financial strength necessary to sustain the occasional losses that are inevitable in a business of taking calculated risks. In this latter sense, capital represents the last line of defense against potential loss-creating problems. But, I want to briefly address the first line of defense - effective bank management, which increasingly is an important element of today’s supervisory framework as banks’ activities and their associated risks become ever more complex. There are several aspects to effective bank management. The importance of good corporate governance cannot be overemphasized. Broadly speaking, corporate governance refers to the organizational infrastructure necessary to achieve a workable corporate strategy, to effectively implement that strategy, and to continually evaluate its risks and benefits to the organization. These basic infrastructural elements include: – independent and competent outside directors; – capable and experienced management; – a coherent corporate strategy and business plan; and, – clear lines of responsibility and accountability.
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Firms, including Italian ones, which have restructured and are exposed to international competition have become more productive, have started to regain market share, have improved their productivity and started to pay their employees higher wages. By contrast, firms which are protected from competition and benefit from having a monopoly or from national or local restrictions on trade, and perhaps even benefit from state aid tend to pass their higher costs onto consumers. I don’t need to tell you that there are some Italian firms which are flourishing without state aid, while others don’t have real growth opportunities and continue to be a burden on taxpayers because they receive support from the public sector. Finally, protection from international competition means higher prices, as quotas and tariffs are a form of taxation. This weakens consumers’ purchasing power, and particular affects the poor. There is really no need to favour price increases in these times of higher inflationary pressures. The fourth mistake that needs to be avoided is to intervene in financial markets without considering the perverse incentives that may result from these actions. Whatever measure aimed at supporting financial institutions in distress due to market turbulence should not allow those who have made mistakes to avoid paying the price for them. Should this happen, they would be tempted to do the same thing again. The measures taken in recent months by central banks, including the ECB, aimed at supporting market liquidity but, at the same time, not to relieve investors from solvency risks, go in this direction.
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I will not dwell on the benefits that citizens and firms gain from having a stable currency like the euro in such a financial crisis, even though they do not often realise them. It is important not to forget it. Let me just recall how the US recession in the early 1990s affected Europe in 1992-93, leading – in the presence of uncoordinated economic policies within Europe – to serious economic and financial turbulence. The ERM crisis and the exit of the Italian lira and the British pound in the autumn of 1992 as well as the widening of the fluctuation bands of the ERM led to large changes in competitiveness, with an overall contractional impact even on the stronger economies such as Germany. It is difficult to imagine what would have happened in recent months without the euro. If the past is a good guide to understand the future, we can be sure that Italian inflation and interest rates would be higher, with negative repercussions on consumption and investment. We can only guess what our oil bill would now be if we had a weak currency instead of the euro. Likewise, just imagine the situation for households having mortgage debt who would have to pay substantially higher interest rates. Monetary stability requires a monetary policy focused on medium-term price stability. Especially in a phase of higher uncertainty such as the one we are currently experiencing there must be no doubt about the priorities of the central bank, or about its strategy and independence.
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(iii) People tend to follow the actions of others. That can be an effective strategy. For example, on the game show “Who Wants To Be A Millionaire?”, the “Ask the Audience” lifeline has a 91% success rate, showing that there can be wisdom in crowds. 10 But experiments also show that a substantial proportion of people choose a glaringly incorrect answer to a simple question when told it is the answer others have chosen (even though the same question is answered correctly in isolation). 11 In a sporting setting, goalkeepers facing penalties tend to dive, rather than stay in the middle of the goal, more than the direction of penalties suggests is appropriate. 12 Such types of behaviour reflect the fact that people are unwilling to 6 See the collection of articles in Kahneman, D, Slovic, P and Tversky, A (1982). 7 For example, see Palm (1995). She found that those most affected by earthquakes were most likely to take out insurance afterward. But this effect faded as time elapsed after an earthquake. 8 For example, Malmendier and Nagel (2006) report that those who experience high stock returns during their life are more likely to hold stocks and report lower risk aversion; those who have experienced high inflation are less likely to hold bonds. 9 See, for example, Gigerenzer, G and Edwards, A (2003). 10 See Surowiecki (2004). 11 See, for example, Asch (1951). 12 See Bar-Eli et al (2007).
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Mervyn King: Uncertainty in macroeconomic policy making – art or science? Lecture by Mr Mervyn King, Governor of the Bank of England, at the Royal Society conference on “Handling Uncertainty in Science”, London, 22 March 2010. Accompanying slides to this speech can be found on the Bank of England’s website. David Aikman, Philip Barrett, Sujit Kapadia, Mervyn King, James Proudman, Tim Taylor, Iain de Weymarn and Tony Yates (Bank of England) contributed to this paper. * 1. * * Uncertainty and public policy Most questions of public policy relate to uncertainties. Answers depend upon an ability to understand and evaluate those uncertainties. Yet many commentators and members of the public want to believe in certainties. They want to cut through the thickets of caveats and technical difficulties to the “bottom line”. We see this in economic policy, weather forecasting and the interpretation of secret intelligence. Five years ago, the Bank of England and the Met Office held an informal seminar to exchange ideas on how to communicate measures of uncertainty to the general public. Although we failed to persuade broadcasters to explore the issues of economic and weather forecasting in more depth, the bilateral relationship which developed between the Bank and Paul Hardaker, who moved from the Met Office to take over the Royal Meteorological Society, flourished. Today’s conference is a tribute to Paul’s persistence. It could hardly be more timely.
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Another example is the construction and engineering firm Odebrecht SA using its subsidiaries and shell companies in the British Virgin Islands and Belize to facilitate at least $ million in kickbacks to government officials and political parties. The schemes involved paying consulting and agency fees to shell companies who then facilitated payments to government officials. The most prominent scheme involved Petrobras, the energy company majority owned by the government of Brazil. The U.S. government worked with law enforcement in Brazil and brought criminal charges against Odebrecht and was able to recover billions from Odebrecht and related entities to help offset the theft of national resources. And the FIFA Scandal put a spotlight on corruption in sports – there was a global cabal of FIFA officials directing corrupt payments to executives around the globe controlling “futbol” clubs, or media companies with broadcasting rights to futbol events. Although these payments did not steal government funds, they did impact nonprofit schools and futbol clubs that were supposed to be the recipient of much of these funds. Multiple officials from clubs around the globe were prosecuted in the U.S. for those violations. One common theme in cases like these is that they tend to occur in countries where the powerful can easily take advantage of limited or immature internal controls. As is typical with most classic fraud triangle schemes, these people had the motivation (greed or perceived financial pressure), opportunity (powerful positions with weak internal controls), and rationalization (they deserved the kickback for years of hard work).
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The result is that scarce resources are stolen in these schemes and the general population pays the price. Sadly, we have seen too many examples of this type of behavior. But banks in the United States are on notice. They are aware of their obligation to look for transactions that support corruption schemes, often involving agents and consultants receiving payments on large infrastructure projects. All too often these intermediaries are the conduit for kickbacks. 1/3 BIS central bankers' speeches The schemes to provide the bribes can be simple or complicated: cash payments; free family vacations; payments for personal credit card bills; payments to friends, spouses or significant others for non-existent services; payments to shell companies controlled by the government official; free cars or housing, or the rental or sales of these assets at below market values. The list goes on. Some clear examples of this type of egregious behavior include: 1MDB in which billions in debt guaranteed by the government of Malaysia was illegally siphoned off by criminal actors and corrupt government officials so that the country was left without the promised infrastructure. This was a brazen scheme carried out by corrupt government officials in multiple countries and was supported by corrupt bankers. In response, the U.S. and governments across the globe took strong action against the individuals and financial institutions involved and helped recover billions of dollars to offset losses from the scheme.
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The answer lies in the current Bank of Thailand Act which does not spell out or lay down mechanism for the central bank to achieve its independence. Governor and Deputy Governor are political appointees. They are appointed by His Majesty the King upon the recommendation of the Minister of Finance and approved by the Cabinet. There is no definite term of office. There are no protective clauses in the Act which clearly spell out causes for removal. The most popular reason given by the government when firing governors was one of “suitability”. None of the nine governors had the chance to resign from the office in protest of the Government policies as advocated by Dr. Puey. In the past 7 years, we have 5 Governors including the present one who has been in office for just over 1 year. However, it is important to note as well that sometimes the relationship between Minister of Finance and Governor of a Central Bank turned sour not because of policy conflict but because of personality mismatch that led to eventual conflict. For instance, the current Minister of Finance and the present Governor work well together and have great respect for each other. What then is the solution? I think the best solution is to legalize Central Bank independence by spelling out clearly in the Central Bank legislation the power, duties, responsibility and accountability of a Central Bank.
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A simple rough estimate can provide an impression of the effects on prices of a 15-per cent depreciation in the krona. Let us assume a pass-through to import prices equivalent to half of the change in the exchange rate. This means that they will rise by 7.5 per cent. 9 If one assumes that these prices constitute 30 per cent of the consumer price index (CPI), this means that consumer prices will rise by just over 2 per cent as a consequence of the change in the exchange rate. According to this rough estimate, the pass-through from the nominal exchange rate on the CPI is thus around 15 per cent. 10 As the exchange rate fluctuates substantially, it may nevertheless entail fairly large effects on inflation, although the calculations in the example can be taken with a pinch of salt. 11 9 We assume here that prices of imported goods in the consumer sector rise by 7.5 per cent. 10 A 50-per cent impact on import prices, which comprise around 30 per cent of the CPI, gives a 15-per cent exchange rate pass-through to the CPI. 11 See also the article “The path of the krona and inflation” in IR06:1 4 BIS Review 3/2010 The effects of the exchange rate on the real economy One can usually expect a weakening of the exchange rate to lead to a positive effect on net exports.
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Lars Heikensten: Risks and financial stability Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at the Department of Business Studies, Uppsala University, Uppsala, 7 October 2005. * * * Let me begin by thanking you for the invitation to your homecoming party, although I have never studied at the Business Studies Department at Uppsala University. I intend to take this opportunity to speak about the rapid developments in the financial markets over the past 10-15 years and to discuss the question of whether this entails risks being built up that will later result in serious setbacks. The trends and tendencies I intend to highlight today with regard to market agents’ behaviour may be primarily observed outside of Sweden’s borders – it is important to emphasise this. I have nevertheless chosen to discuss these partly because they can give us an idea of what might happen in Sweden in the long term, and partly because these tendencies may lead to problems in the international markets and thereby indirectly affect the Swedish market, too.1 What has happened on the financial markets? The financial markets have developed rapidly in recent years, and there are many reasons for this. Technological developments have radically altered the potential for making financial transactions. Developments in IT, for instance, have enabled large numbers of prices to be stored and extensive calculations can be made in various risk models.
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Navigating the Great Transition: An Emerging Market Perspective Speech by Dr. Veerathai Santiprabhob Governor of the Bank of Thailand School of International and Public Affairs, Columbia University October 5, 2016 Ladies and Gentlemen, It is a pleasure for me to be here in New York and to have a chance to participate in the policy discussion at SIPA. Given the increasingly complex policy challenges facing the global community, the contribution that SIPA makes in educating future leaders to serve the global public interest is critical. I would like to thank Professor Ito for inviting me. He was one of my early mentors at graduate school and I have benefitted from his many insights ever since. This coming weekend I will be attending the Annual Meetings of the IMF and the World Bank. As you know, this is one of the biggest global forums for addressing issues related to the global economy and world financial market. The discussions will be especially pertinent this year given the complex and highly unpredictable state of the world that we face. Former premier Wen Jiabao once described China’s growth performance as “unstable, unbalanced, uncoordinated, and unsustainable”. This seems like an apt description of the global economy at this juncture. Unstable because the proliferation of popular discontent fueled by rising income inequality amidst ongoing international conflicts have greatly elevated geopolitical uncertainty. Unbalanced because with anemic recovery of advanced economies, much of the growth in 1 the global economy continues to be driven by emerging markets.
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The goal of my speech, which is constrained in time to ten minutes is to stimulate discussion on what could be the implications of global imbalances on emerging markets, in particular what are possible EM scenarios in case of soft and hard landing of the global plane. As you will see later the range of possible outcomes depends on what is the actual cause of the emergence of the global imbalances. Let me briefly review the most popular hypotheses. How did we get into global imbalances? The need to identify the type of the flying airplane and its technical conditions implies that one has to understand the nature of global imbalances. And here we run into the first problem, as the top ‘aviation specialists’, including ‘pilots’ themselves cannot agree on that. I have identified at least ten major views about the nature of global imbalances, namely 2 : 1. emergence of the new Bretton Woods regime 3 .
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Even if the extraordinary context of the crisis might lead to further reflection on some of these established principles, the ECB has made a public commitment to respect these red lines, and for good reasons. Importantly, PEPP purchases are separate from and cannot be consolidated with APP purchases. This means that the PEPP remains a distinct monetary policy measure in comparison to the APP. In keeping with these safeguards the APP will also not inherit the features of the PEPP. The flexibility embedded in the PEPP cannot be unconstrained, and we must ensure that the ECB continues to operate within the limits of its competence. Collateral easing must be strictly temporary and not come at the expense of fragmentation Another aspect of our response to the crisis was the unprecedented set of temporary collateral easing measures that we announced in April 2020. These measures continue to support our liquidity operations and ensure continued collateral availability. For example, we decided to extend national additional credit claim (ACC) frameworks to include loans benefiting from public guarantee schemes related to the COVID-19 crisis even if they lead to increased fragmentation temporarily. We also took the decision to maintain the eligibility of issuers and marketable assets in the event of a deterioration in credit ratings during the crisis. The legality of these measures is ensured through compliance with all the generally applicable principles I mentioned earlier.
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Broadly speaking, this operational philosophy is guided by the need to steer the short-term interest rates in the interbank market close to the key interest rate set by the monetary authority. As such, it serves better to keeping the short-term horizon of the interest rates’ curve under check, making the conduct of monetary policy more transparent and providing clearer signals for the economic activity. Steering our operations to the stability of interbank market interest rates will serve to a more relaxed functioning of the interbank market and lowering of risk premiums. In addition, this operational target is well-framed in our mediumterm steering and commitment to adopting the inflation targeting regime, making up an important link of its successful adoption. Concluding my theoretical discussion of this change, I would like to underline that our longterm commitment to keeping our foreign reserve at optimal levels to cope with the shocks Albania may be faced with remains an unquestionable objective of our monetary policy. In an institutional aspect, I would like to note that such a move does not only attest to the level of maturity of our interbank market. It also crowns our constant efforts in achieving its utmost efficient management. In this context, the Bank of Albania has made utmost efforts to develop liquidity forecast models, to dampen the impact of fiscal flows into the money markets and to develop optimal procedures and modalities of interbank market interventions.
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The rapid transformation of economic structure and the development of interbank markets and economic agents were coupled with fundamental changes in the monetary policy transmission mechanism. The latter has now become more complex, involving more players whose sophistication is ever-increasing, and incorporating more instruments and financial contracts that are timely structured and indexed to different indicators. The Albanian economy is now economically and financially integrated into the global economy, having the characteristics of a market economy but at the same time featuring the typical challenges of economic management that such an economy entails. These changes have called for the constant monitoring by the monetary authority in order to make the necessary changes in the monetary policy regime and the operational aspects of its implementation. Against this background, the Bank of Albania has been committed to a process of constant evaluation of the interbank market performance and at the same time fine-tune its monetary policy regime. The Monetary Policy Document for the 2009–2011 Period was a major step in this regard. In this Document, the role of monetary aggregates as indicators of inflationary pressures in economy and as intermediate targets of monetary policy was complemented with a wide range of information provided by the real sector of the economy, which is systemized and finalized in the inflation forecast performance. This change was entirely based on the Albanian experience.
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In Europe, a series of initiatives, led by the authorities, are under way to revive the moribund securitization market but also to develop the private placements markets. On securitization, incidentally, allow me to note that it suffered unduly in Europe from the US experience, while having been much less prone to default. More generally, the European Commission’s Capital Markets Union project will support the increase in funding flows, the diversification of risks and a better allocation of resources. BIS central bankers’ speeches 1 This shift towards more market-based financing entails two main implications from a financial stability perspective: – First, the proliferation of regulation brings uncertainty to market participants. The analysis of the cumulative impact and the interactions between regulations is still in its early days but it must be continued. Vigilance is indeed required to ensure that the implementation of reforms does not result in a reduction of activities that are vital for financing investments and firms. I notably think of the market-making activity which shows signs of decline, partly due to the regulatory costs. This decline needs to be monitored in a financial system where we are promoting market financing and where market making is key for issuers and investors. – Second, the development of alternative sources of funding, outside the banking system, brings a necessary diversification. Yet the risks associated to disintermediation are clear, notably a limited assessment of risks by investors or less ability to address difficult situations and gaps in supervision.
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I suggest that each speaker delivers a 10-minute presentation before we start the actual discussion between the members of the panel and turn later on to the audience. Mrs Bair will speak first, followed by Mrs Novick, then Professor Philippon and eventually Mr Papiasse. Sheila, would you start? 2 BIS central bankers’ speeches
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David Clementi: The entrepreneurial economy - a collaborative approach Speech by Mr David Clementi, Deputy Governor of the Bank of England, at the ICAEW Conference, held in London, on 9 May 2000. * * * Ladies and Gentlemen, I am delighted to have the opportunity to address you at the end of - what I am sure has been - a thought-provoking day. For the Bank, this conference has a two-fold importance. First, it has, we hope, helped to promote discussion and, more important, action to strengthen entrepreneurial activity in the UK economy. But secondly, we are delighted to have this opportunity to work closely with the ICAEW, especially given the important role of your President as Chairman of our Non-Executive Directors. The Bank’s interest A good place to start my remarks might be to ask why the Bank of England, as a central bank, is interested in this subject. In fact the Bank has for many years taken a broad interest in the efficient functioning of UK industry, and especially in the provision of finance to industry. This falls within the third of the Bank’s three core purposes. The first of our core purposes is to promote monetary stability in the United Kingdom. A huge number of column inches in the press and elsewhere are now devoted to watching our conduct of monetary policy, as the MPC seeks to meet the Government’s Inflation Target of 2½%.
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While market failures in provision of small company finance will never wholly be removed, there is very little evidence to show that at least in the United Kingdom they are important in practice today. Nonetheless, it can only be helpful to improve the flow of information between business owners and finance providers, thereby ensuring a better appreciation by both of the relevant risks and rewards attached to particular business plans. The Bank has long been interested in the financing needs of small and medium-sized enterprises. Going back some way, an example of the Bank’s early involvement was our instrumental role following the Second World War in the formation of the Industrial and Commercial Finance Corporation - which evolved into 3i. We would not have described that then as seeking to promote the entrepreneurial economy, but that is precisely what it was. Our role has, of course, evolved since then, in particular highlighting the importance of information sharing and increased understanding between the relevant parties. The Governor has, since 1993, hosted an annual meeting bringing together some of the key players in the SME market. Finance providers, policymakers, business representatives and advisers join together to discuss the key issues relating to the financing of small firms. The main themes to arise from these meetings are published, under the editorship of Adrian Piper and his team, in our annual reports on ‘Finance for Small Firms’. The seventh such report was published in January this year.
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In the same way as the figures for GDP growth we usually discuss refer to real growth, which is to say growth adjusted for inflation, there is namely reason to adjust interest rates in the economy for inflation – in particular, to determine how much stimulus monetary policy is supplying. There are good reasons to subtract the effects of inflation on debts and saving. For example, a loan for an investment becomes less burdensome to repay the more the price of the goods the borrower is selling has increased over the period in question. And the lender, correspondingly, has reason to consider how much the money is worth when the loan is eventually repaid. Another way of putting it is that those borrowing and lending must consider how much of the amount lent they expect to be ‘eaten up’ by inflation. The economically-significant real interest rate is therefore the usual nominal rate with a deduction for expected inflation: Real interest rate = nominal interest rate – expected inflation How expansionary the interest rate policy is, which is to say how low the real interest rate level is, is thus determined both by the nominal interest rate level and by expected inflation. This also means that how expansionary the level of interest rates can be made is not just determined by how far the nominal interest rate can be cut but also by how high inflation is expected to be.
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MFIs’ lending to households for housing purposes and to non-financial companies, new loans and agreements, refers to monthly data. Repo rate refers to daily data and date of implementation. Sources: Statistics Sweden and the Riksbank BIS central bankers’ speeches 9 Figure 3. Inflation expectations Note. Per cent. Money market agents. Source: TNS Sifo Prospera Figure 4. The development of the repo rate Note. Per cent. Outcomes are daily rates and the forecasts refer to quarterly averages. Source: The Riksbank 10 BIS central bankers’ speeches Figure 5. Bond purchases 240 240 200 200 65 160 200 160 135 120 45 45 50 50 120 80–90 80 80 40 40 40 30 30 30 30 10 10 10 10 10 February March April Policy meeting July October 10 0 40–50 0 Note. SEK billion. Government bond purchases will continue until the end of June 2016. Source: The Riksbank Figure 6. Development of interest rates under a negative repo rate Note. Per cent. Interest rate to households, lending rate refers to loans for housing purposes. Sources: Statistics Sweden and the Riksbank BIS central bankers’ speeches 11 Figure 7.
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Through the transfer of the risk, the insurer reduces its longevity capital and risk margin[1], but takes on an exposure to the failure of its reinsurance counterparty. Chart 1 [see Annex] illustrates the impact of the transfer on the insurer’s capital position. The combination of adequate collateral, a high credit rating, and sufficient capital resources from the reinsurer means that the resulting counterparty risk capital charge for the insurer is typically low – an attractive arrangement. Reinsurance is an important component of well-functioning insurance markets, where reinsurers themselves have the financial strength to absorb the risks they are taking on. From a risk management perspective, it allows insurers to achieve the balance of underwriting and credit risk in line with their risk appetite while continuing to deliver for their clients. It allows reinsurers to gain indirect access to diversification or natural hedges that might not arise on their own balance sheet. For example, a reinsurer with large books of protection business featuring mortality or morbidity risk might welcome longevity risk as a natural (albeit not perfect) hedge[2]. Diversification of different[3] sources of callable capital also enhances the efficiency of insurance markets. All of these factors could help to improve the pricing that insurers can offer. However, in recent years, the UK life market has become reliant on this method of freeing up capital to improve pricing. We estimate that over 80% of new business since 2016 has been reinsured at industry-level.
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When this spread is high, it’s telling you that, unless you think rental prices are going to weaken, it’s prospectively cheaper to buy a house than rent one. You might in that environment expect the purchase price of housing to grow faster than usual. The blue line, which is average growth in house prices over the following five years, shows that this is what has tended to happen. For example, the house price boom in the early years of the millennium was preceded by a steep fall in longer-term real interest rates (driven, I would suggest, by a decline in the neutral rate of interest), through the second half of the 90s. That raised significantly the spread between rental yields and those on indexed government debt – when the spread was at its widest, in 1995, the gap between the two was 10% points. But that boom in house prices, in its turn, depressed rental yields significantly – to such an extent the spread over gilt yields fell to less than 4% points. Relative to gilts, houses were as expensive as they had been in the late 1980s. Even without the intervention of the financial crisis you might have expected much weaker growth of purchase prices over the following few years, and that’s what happened. However, we should be careful not to extend this pattern too unthinkingly.
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This decline in our balance sheet will actually occur without the Fed taking any specific actions. But it will occur slowly, and absent any action of the Fed’s part, the balance sheet will remain elevated for years. This expansion of the Federal Reserve’s balance sheet raises concerns for some observers and commentators. An important side effect of our asset purchases has, necessarily, been a dramatic swelling of so called excess reserves in the banking system. When the central bank 4 If the relationship is weaker, as some researchers suggest, even stronger growth would be required to reduce the unemployment rate to 5 per cent by year end 2013. For example, if the reduction in the unemployment rate resulting from real GDP growth of 1 per cent above potential is one-third of a per cent instead of one-half of a per cent, then real GDP growth of 6.25 per cent would be needed to reduce the unemployment rate to 5 per cent by year end 2013. BIS Review 62/2010 3 purchases assets, it credits the selling institution with reserves. Over time, banks could choose to lend out these reserves, which would turn the reserves into broader money – and a rapid expansion of the broader money supply would be inflationary. However, as Figure 10 suggests, the current problem is not a rapid expansion in lending and the money supply. In fact, quite the opposite; banks have been reluctant to lend.
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4 Such a growth rate has some historical precedent, as shown on the right side of the chart, but it is much faster than the growth rate in the past two recoveries. And to reach 5 per cent unemployment by 2015 would still take growth averaging 4.2 per cent per year – considerably faster than the average rate of growth after the 1991 and 2001 recessions. Given the need for very rapid growth to get unemployment back to 5 per cent, let me pose an oversimplified question – why would policymakers not keep monetary policy very accommodative, and fiscal policy very stimulative, until we had a sustained growth rate that brought the economy much closer to full employment? At least on the monetary side, one reason might be concern among policymakers that rapid growth would be inflationary. To explore that, let’s turn to Figure 7, which shows the total and core inflation rates, measured by changes in the CPI, with recession shading. What the chart shows is that inflation has declined in each recession, including this so-called Great Recession. It also highlights that inflation tends to continue falling in the early stages of a recovery. Figure 8 shows the change in the inflation rate from the business cycle peak. From the peak (shown at zero on the horizontal axis) the inflation rate is very restrained, and generally negative, for many months.
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(2018) and Kuttner (2018) provide an overview of alternative instruments introduced by the central banks in the US, the UK, Japan and the euro area. They also refer to different estimates of the effect of alternative instruments on financial prices and interest rates, the real economy and inflation expectations. See also Filardo and Nakajima (2018), Hesse et al. (2017) and Haldane et al. (2016). 6 Borio and Zabai (2016). 7 Cf. Borio and Zabai (2016), Filardo and Nakajima (2018) and Hesse et al. (2017). 8 Borio and Zabai (2016). 9 The arrangement allowed banks in Norway to enter into agreements whereby covered bonds could be temporarily swapped for short-term government securities. 9/9 BIS central bankers' speeches
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Zdeněk Tůma: The role of the EBRD in the transition process towards fully fledged market economies Statement by Mr Zdeněk Tůma, Governor of the Czech National Bank and EBRD Alternate Governor, at the 15th Annual Meeting of the EBRD Board of Governors, London, 22 May 2006. * * * Mr Chairman, Mr President, Governors, Ladies and Gentlemen, It is an honour to address the Annual Meeting of the Board of Governors in London and I wish to express my appreciation also to the Government of United Kingdom and to the City of London for their hospitality. We are today participating in the fifteenth Annual Meeting of the Board of Governors and we can look back on these years with considerable satisfaction regarding the role of the EBRD in the transition process towards fully fledged market economies. Many countries - including my country, the Czech Republic – have witnessed significant and considerable political and economic transformation. I am glad to say that the European Bank is one of those successful institutions that have significantly contributed to this process. The Board of Governors has today approved the Bank's strategy for the period 2006 – 2010 – the Capital Resources Review 3. The new strategy reflects the successful transition achieved in the “Advanced Countries” and the Bank's activities are being focussed towards the South-Eastern and Eastern countries of its operations. We support this move. In Central Europe the Bank focuses on just a few sectors today.
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As representatives of international banks, I know that consistent cross-border implementation of Basel II is a high priority not only because you want supervision to reflect as much as possible the manner in which your organisations are managed, but also because you may be concerned about supervisory burden. Let me assure you that it is also in the best interest of supervisors that we try to minimise as much as possible any duplication of effort and make the most of our limited resources. Having said that, I should also be clear that Basel II will never be implemented with 100% consistency across borders, just as Basel I is not currently implemented with 100% consistency. There are important differences in laws, financial markets and supervisory practices, among others, that make it impractical to expect that Basel II will look exactly the same in every country. The role of the AIG, then, is to share information and promote—not mandate or enforce—consistency in implementation of Basel II. It is clear that there is no “one-size-fits-all” approach to implementing the new Framework. Rather, implementation should be tailored to the specific circumstances of a bank and the jurisdictions it operates in. It seems to me that to enhance consistency we need to work on improving vertical co-operation, namely home-host issues, and also horizontal co-operation, that is to say convergence of practices. We think that the bottom-up approach is the most efficient and less prescriptive method of achieving these goals.
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This is to ensure that existing and future talent is fully utilised, and skill-related underemployment is kept at bay. The question is then how can Malaysia mould its social protection system to better protect and empower its workers and citizens? We can consider this through the lens of the 4Cs: Coverage, Consolidation, Conditionalities, and Comprehensiveness. On coverage, social protection must be deepened and extended towards the growing segments of informal and self-employed workers. Meanwhile, currently fragmented and overlapping programmes should be consolidated and rationalised, so as to channel funds to meet new needs of society, for instance better retirement aid. We can also impose conditionalities for various programmes to boost incentives and improve targeting capacity. Finally, there is a need for comprehensive active labour market policies to cater to the looming possibility of labour re-deployment under the fourth industrial revolution. Maintaining planetary health for sustainable economic growth This brings me to our third point. In our quest to transition to a high-income economy, we must do so without losing sight of the goal of prospering, thriving and living sustainably. Since last year, we have had to deal with a negative global shock in the form of Covid-19. The pandemic has taken a heavy health and economic toll, with profound effects on poverty. At the same time, displacement and disruptions due to climate-related events such as storms, flooding and droughts have persisted and intensified.
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Economic growth in the euro area has become more broadly based, as is reflected in private consumption and investment. At the present juncture, the outlook for the euro area economy is still very much influenced by the uncertainties surrounding the evolution of the world economy in 1999. These uncertainties have adversely affected indicators of industrial confidence in the euro area and have fuelled expectations of a slowdown in economic activity in the short term. In part, the deteriorating external environment, which has its origins in the Asian and Russian financial crises, places a BIS Review 9/1999 –7– high burden on overall growth prospects. The picture, however, is mixed. Order books and capacity utilisation point to a less optimistic outlook, while retail sales and the recent pattern in employment and unemployment suggest more favourable trends. Consumer confidence also remained high until late 1998. In general, this pattern of mixed evidence appears to characterise the economic situation in the euro area around the turn of the year, and we shall continue to monitor developments carefully. I should also like to emphasise that the Governing Council carries out a forward-looking assessment of inflationary pressures and carefully assesses risks to price stability, whatever direction these may take. With respect to the latest data on the HICP, the annual increase for November 1998 showed a further slowdown to 0.9%, compared with 1.0% in the two previous months. This development was in line with previous trends.
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Mr Duisenberg reports on monetary policy in the euro area Speech by the President of the European Central Bank, Dr Willem F Duisenberg, at the New Year’s reception organised by the Deutsche Börse, at the Chamber of Commerce and Industry, Frankfurt/Main, on 25/1/99. Thank you for the invitation to speak at this New Year’s reception. 1999 is a special year: the year in which the euro was launched, and the year in which it will have to become a stable currency. This is the challenge which lies ahead. The introduction of the euro was a very happy event for all involved. The euro is present on all major financial markets around the globe. Currency trading in euro has commenced and for three weeks now shares have been denominated in euro on most European stock exchanges. Although not yet embodied in the physical form of new banknotes and coins, there is no doubt that the new currency is set to play an important role, both in the euro area and beyond. The euro is a symbol of the achievements of Europeans in the pursuit of common goals. It is unprecedented in European history. After years of intensive preparations and successful efforts towards convergence, the single monetary policy for the entire euro area is being determined by the European Central Bank (ECB).
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What businesses banks chose to be involved in, and what business entities chose to own a bank, would be matters for themselves to decide. Over time, banks with the right configuration and mix of activities would succeed, while those without would fail or be eliminated by the competition. But regulators cannot leave it entirely to the market to sort out such matters, especially where the banks involved are not peripheral players but perform key roles in deposit taking and the payments system. Strong banks are important to the health of the financial system and to the entire process of credit intermediation. Regulators cannot guarantee that individual banks will never fail, but they have a duty to minimise the chances of a mishap and to maintain the integrity and overall stability of the financial system. A clear source of potential problems in this regard is the commingling of financial and non-financial activities within the same corporate group. Many regulators regard it as good banking and sound supervisory practice to require clear separation of the two. Firstly, separation will limit the risk of contagion from non-banking businesses to the bank. Banks with significant interests in non-banking activities are exposed not just to credit and market risks which are the primary risks of their business, and which the banks should assess and manage as part of their core competence. These banks will also be taking on the business risks of their non-financial activities.
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This is especially true for banks, which are operating in an intensely competitive and dynamic environment. They need to muster all their talents and energies on the financial business, instead of dissipating them over many different businesses. For these reasons, banks should not commingle financial and non-financial activities. However, this does not mean that banks must refrain from engaging in venture capital or merchant banking business, which involves taking an equity interest in a diversified portfolio of non-financial companies for some period. It is not uncommon for the merchant banking business of well-run, international banks to take stakes in non-financial companies for three to five years. These activities are natural extensions of the lending business of banks. They are, however, quite different from taking long-term strategic stakes in non-financial companies which tie a bank’s reputation to these companies. In addition to the separation of banking and non-banking activities, regulators in several developed markets have also advocated dispersed ownership of banks. Often this has been achieved by legislation or via the bank’s own memorandum and articles of association, which sets limits on shareholdings to prevent any single shareholder or group of shareholders from dominating the bank. The result has been a “clean” corporate structure for their banks, i.e. there are no cross-shareholdings between banks and non-banks, and there is clear separation of ownership from management. Practice in other countries The US is an example of a financial system which has prohibited commingling between banking and commerce, and required dispersion of bank ownership.
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But banks will need to be careful that this process is handled with tact and sensitivity. Otherwise, they may be open to accusations from sections of the community that they are neglecting their social responsibility by curtailing or increasing the cost of basic banking services to the economically disadvantaged. This was certainly the accusation made against the Australian banks after deregulation there. A further aspect is that the possibility of higher and more extensive charges for banking services will make it all the more important for the banks to deliver sufficient information to their customers about these charges. Let me clarify at this point the HKMA’s attitude to ethical matters and particularly the issue of “fairness” to customers. Our main responsibility under the Banking Ordinance is to promote the general stability and effective working of the banking system. In common with banking regulators in other countries, we interpret this to mean that our principal concern should be to determine that individual banks are financially sound and prudently managed. The aim is to reduce the risk of bank failure that would result in depositors losing money and threaten the stability of the banking system as a whole. We concentrate therefore on checking that the banks have adequate capital and liquidity and effective management and internal controls. However, this is not all that we do.
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The end-result is that the offending companies have been “named and shamed” by the Government and pressurised into paying billions of pounds in compensation. The reputation of these firms, many of whom are household names in the UK, has suffered as a result. This comes at an awkward time when banks in the UK and elsewhere are attempting to expand their bancassurance activities and to persuade the public to trust them with their long-term savings. Banks in Hong Kong will need to bear this lesson in mind as we embark upon the Mandatory Provident Fund Scheme. They will also have to be alive to the other types of ethical conflict that may arise as the banking environment becomes increasingly competitive and there is even more focus on the bottom line. The HKMA has already pointed out that as a result of interest rate deregulation that there will be both winners and losers among bank customers. Those with small balances and relatively large volume of transactions may find that increased fees outweigh the benefit of any increase in the interest paid on their deposits. As has happened elsewhere, banks may also become more selective in their choice of customers and the level of customer service may be affected if the number of branches is pruned to save costs. A move towards a user pays approach and a reduction in cross-subsidisation are manifestations of the greater efficiency that deregulation is intended to produce.
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This is partly due to the fact that international price pressure appears to be continuing. The good international economic activity is one reason why economic prospects remain favourable here in Sweden (Figure 11). However, this is also due to the expectation that growth in domestic demand will be strong. This in turn is due to continued good productivity growth and that the labour market situation is continuing to improve. Household consumption is also being stimulated by the fact that interest rates are relatively low. Little by little economic activity in Sweden will enter a calmer phase. One reason is that international growth will slow down and another is that monetary policy will become less expansionary. We are also assuming that productivity growth will in future slow down somewhat, which will mean that the economy approaches more normal growth figures in the long term. With the development now forecast, it is reasonable to expect that inflation will rise (Figure 12). Domestic production costs are expected to increase more quickly as the economic upturn begins to make a greater impact on the labour market and thereby the rate of wage increase. The fact that productivity growth will gradually slow down also means that higher wages will have a greater impact on companies’ production costs than has been the case in previous years. However, inflation is nevertheless expected to be relatively low during the greater part of the forecast period. A number of factors contribute to this.
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As officers at the frontline of risk management in the Bank, you are expected to be conversant with the risk management process that is being implemented at the Bank, and there is no better platform to provide that opportunity than now! To this end, the programme of that this workshop is organized in such a way as to be highly interactive. Therefore, I urge you to feel free to ask as many questions as possible. With these few words, it is now my singular honor and privilege to declare this workshop officially open. I thank you. 2 BIS Review 71/2008
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Logically, the Spanish economy has not been 4/6 immune to these developments, which have contributed to explaining the significant slowdown in our export markets in the past two years and the subsequent deceleration in exports. Moreover, the Spanish economy’s trade exposure to the United Kingdom is quite significant. Goods and services exports to the UK account for around 3% of GDP. In the specific case of tourism-related revenue, the main market is the UK, which accounts for around 20% of the total. The effects of Brexit have meant that, since 2017, Spanish goods exports to the UK have faltered, weighed down in particular by consumer durables exports, including cars. Along with these more conjunctural risk factors, there are others of a more structural nature. Specifically, despite the notable correction to date in the net international investment debtor position, it remains very high both in historical terms and in relation to our peers. The continuous generation of current account surpluses since 2012 to which I referred earlier has given rise to a cumulative net lending capacity of around 16 pp of GDP. However, the correction of the external debtor balance built up during the previous expansionary phase has been somewhat more modest; as a result, in the third quarter of 2019, the net international investment debtor position still stood at 79.5% of GDP, some 9 pp down on 2012 (though 18 pp down on the mid-2014 peak). In any event, the current level of external debt is a risk we should not underestimate.
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It is small firms (those with fewer than 50 employees) that have most stepped up their entry into foreign markets, although their contribution to total exports remains small compared with larger companies. At the same time, the number of regular exporting firms (i.e. those that sell their products abroad for four years running or more) has risen in this period by 32%. This increase has been particularly notable in target markets with high growth potential, such as North Africa, Asia and North America. The decision by a firm to begin to export entails fixed costs of a significant magnitude. This would suggest that, once these costs are assumed, the firm tends to remain in the market chosen. It also points to the fact that the broadening of the base of exporting firms might be predominantly structural in nature, as attested to by the fact that the persistent recovery in domestic demand since 2014 does not appear to have had a negative bearing on the number of regular exporting firms. 3/6 The Spanish productive system’s greater export orientation has boosted business investment. The evidence is that exporting firms have higher investment/capital ratios, whereby the broadening of the export base is estimated to have contributed to the buoyancy of investment in aggregate terms. As a result, the behaviour of investment during the recovery has been more favourable than that arising from the course of aggregate demand.
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While the ECB and the national central banks of the European Union will be heavily involved in the ESRB framework, it is essential to make a clear separation between macro-prudential oversight and monetary policy. The primary objective of euro area monetary policy will remain the maintenance of price stability. Financial stability lays the conditions for the central bank to pursue its task of maintaining stable prices. It is also the outcome of an environment of steady macroeconomic prospects and confidence, which only stable prices can ensure. Current challenges for European integration Ladies and gentlemen, although the financial crisis did not originate here, it has profoundly challenged the European economy – and it is continuing to do so. Economic and Monetary Union – in short: EMU – is a union based on two foundations: economic and monetary. These are two foundations that reinforce one another. Responsibility for the “M” is centralised and assigned to the Eurosystem with the ECB at its core, aiming to ensure price stability in the euro area over the medium term. We have defined price stability as an average annual inflation rate below but close to 2% over the medium term. How have we performed against this objective since the introduction of the euro? Based on current staff projections for this year, by the end of 2010, the average inflation rate in the euro area since the introduction of the euro is estimated to be around 1.95%.
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But we did not pursue this policy with the ultimate goal of reconstructing banks’ profitability. Rather, the purpose of our enhanced credit support has been to ensure the transmission of monetary policy transactions to the broader economy. Global economic governance The crisis has important implications for economic governance, and here remarkable efforts have been made or are under way. On the global level, the G20 has become the main forum for international cooperation, and a strong consensus has emerged within this group not only 2 BIS Review 59/2010 about the causes of the crisis but also about the appropriate policy responses. The G20 has been highly effective in addressing the global crisis. The more technical questions concerning regulation and financial stability are mainly delegated to the Financial Stability Board (FSB). The extension of both the membership and the range of tasks of the previous Financial Stability Forum have pushed the Financial Stability Board into a leading role when it comes to coordinating the reform of financial regulation. The European regulatory response to the crisis will include a new body that will provide macroprudential oversight and focus on the avoidance of systemic risk in the financial system of the European Union as a whole. This is the European Systemic Risk Board (ESRB), the establishment of which intends to make macro-prudential oversight operational at the European level.
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See, for example, George Benston (1989), The Separation of Commercial from Investment banking: The Glass-Steagall Act Revisited and Reconsidered, Kluwer Academic Press, Randall S. Kroszner and Raghuram G. Rajan (1994), “Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933”, American Economic Review, Vol. 84, pp. 810–32, Eugene N. White (1986), “Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks”, Explorations in Economic History, Vol. 23, pp. 33–55, and Charles W. Calomiris (2003), U.S. Bank Deregulation in Historical Perspective, Cambridge University Press. Marc Flandreau (2011), “New Deal Financial Acts and the Business of Foreign Debt Underwriting: Autopsy of a Regime Change” shows how the Glass-Steagall Act and other New Deal legislation conferred greater power on policymakers at the expense of international bankers and discusses some consequences for financial markets. Flandreau’s article can be downloaded from Norges Bank’s website: http://www.norges-bank.no/Upload/82434/EN/FLANDREU%20 Paper.pdf. In this area, there are few, if any, ultimate truths, and the pendulum appears to be swinging back again. In the US, the UK and the euro area, reintroducing some sort of separation between retail and investment banking is now being discussed (cf. the Volker Rule (US), the Vickers Commission (UK) and the Liikanen Plan (EU). Andrew Haldane at the Bank of England has recently discussed this issue in his speech, “On being the right size”, where he also outlines proposals for future banking sector regulation (see http://www.bankofengland. co.uk/publications/Pages/speeches/2012/615.aspx).
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Towards this end, Bank Negara Malaysia stands ready to extend our assistance in accessing the necessary statistics on broad market trends and developments, where appropriate, to support such research and development. The emergence of new delivery channels such as the internet and mobile phones have significantly altered the traditional banking-customer relationship. Technological development has also transformed the payment systems industry, with the introduction of new payment instruments and entry of nonbanks into payment services, thus facilitating the migration to e-payments. Additionally, we are among the first in the world to migrate, on a national basis, towards the use of chip-based ATM, payment and identity cards. Through greater research and development in understanding the customer's behavior and preferences, financial players can further capitalize on these insights to develop new and more innovative products and services as well as distribution channels to meet customer demand. BIS Review 63/2006 1 In Malaysia , the changing economic and financial landscape brings about many opportunities for new products and services. With the accelerating pace of financial integration, financial institutions are presented with opportunities to broaden beyond domestic borders to capture opportunities from regional markets. Infact, we are acknowledged as being in the forefront globally in Islamic banking and finance. But these opportunities cannot be fully seized without sound research and development work. Successful financial services players must leverage on technological expertise to deliver superior products and services.
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In the labour market, the gap is narrower, although still negative, of -0.7% and -0.8%, respectively, depending on whether it is measured in terms of total hours worked or number of people 11 See M. Obstfeld and H. Zhou (2022). “The Global Dollar Cycle”, Brookings papers on economic activity, BPEA Conference Drafts, September 8-9. 12 Non-resident tourism recovered across the board in the tourist-issuing markets, although more modestly in the case of non-European, particularly Asian, tourism. 5 employed, compared with the related slightly positive gaps (of 0.6% and 1.7%) observed in the euro area. The latest indicators show that activity has slowed Q3 data point to a rapid slowdown in the euro area countries. The Purchasing Managers’ Indices (PMIs) signal a contraction in manufacturing in the big euro area economies, while the Services PMIs point to a considerable slowdown, with a contraction in Germany and Italy. Looking to the coming months, the worsening outlook for households has prompted a downward adjustment to their plans to spend on consumer durables.13 Also, the rise in energy prices is having a very uneven impact. The decline in spending is proving more acute among households with a smaller liquidity buffer. These are mostly lower-income households which are also more exposed to energy price fluctuations. In Spain, employment’s momentum started to wane recently, albeit more so at the start of the quarter.
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The TPI seeks to ensure that our monetary policy stance is transmitted smoothly across all euro area countries, a prerequisite for the ECB to be able to deliver on its mandate. The ECB’s actions over this period must be understood in light of the new monetary policy strategy approved in 2021, which establishes a symmetric medium-term inflation target of 2%. This medium-term orientation means that rather than basing our decisions on the latest inflation figure, or even the inflation that we expect for the coming quarters, we base them on our projections over a two or three-year horizon. This is because our actions affect inflation very gradually, reaching their maximum impact after about two years. Maintaining a medium-term horizon in the definition and attainment of the target is particularly important in the face of certain kinds of shocks (such as adverse supply-side shocks, which push inflation and activity in opposite directions in the short term). Needless to say, predicting inflation over a two or three-year horizon is a very challenging task. Especially in a setting as uncertain as the current one. With this in mind, we use various indicators, such as surveys of professional forecasters and financial market prices. Key data include the ECB staff projections, which, in turn, draw on a huge store of economic and monetary analysis. These projections have gradually revised medium term inflation upwards. Thus, in September the average inflation forecast for 2024 stood at 2.3%, above our target and the December 2021 projections (1.8%).
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You may remember that there was a small Licensed Specialised Bank called Pramuka Bank, which failed in 2002. It was only in 2007 that the deposits of the Pramuka Bank were transferred to a new Savings Bank. In 2009, 8 financial institutions faced liquidity problems, mainly due to the collapse of the parent company of a particular group. Most of those financial institutions are still undergoing restructuring, as agreed with the Central Bank. In 2013, another small NBFI, namely, CIFL faced liquidity problems mainly due to mismanagement and non-commitment to corporate governance. The Central Bank is now in the process of restructuring this company under the consolidation programme. The important message that I want to share with you is that although the NBFI that failed in 2013 accounted for only 0.35 per cent of the assets of our financial sector, the publicity it created resulted in a huge uproar in the financial market and the economy. You can clearly see that transmission of information has become speedier in the recent years and such information is easily and widely accessible now compared to the past. The Managing Director of the IMF, Christine Lagarde also highlighted this fact when she recently spoke on “New Multilateralism for 21st Century”, from which I quote “We are living through a communications revolution, because information travels at lightning speed from limitless points of origin.
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Following the above forum, the first round of one-on-one meetings were held between 17 and 23 January 2014, with the Boards of Directors and senior management of banks and NBFIs, chaired by the Governor, to discuss their business plans under the newly announced plan and further clarify specific issues pertaining to particular institutions. Action 2: Communicating the mandate and time frame In line with the objectives of the financial sector consolidation programme, we provided the banks and NBFIs with a mandate to form internal steering committees to ensure a strategic fit by choosing a suitable partner and to ensure smooth transition to the new arrangement so that the process would ultimately generate synergies in the industry. Further, the relevant banks and NBFIs were requested to align their immediate future business expansion, new recruitments and other capital expenditure with the new developments and to submit periodic progress reports to the Consolidation Unit. We also requested the banks and NBFIs to formulate strategies to work in line with the time frame suggested by the Central Bank, which basically requires all consolidation plans to be submitted by 30 June and completed by end of 2014. Although this time frame was subject to criticism by some, we simply know by practice that unless we have a reasonable deadline, no plan would be effective. However, we maintained some flexibility in the time frame for the completion of mergers and acquisitions that are of a complex nature.
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Lessons must be learned from these episodes, most importantly by non-banks themselves, but also by: their counterparties; market infrastructure; their regulators; bank supervisors; central banks; and the global regulatory community as we continue our global efforts to ensure the resilience of the system of market-based finance. Transparency is an important first step. That enables the necessary next step of ensuring non-banks’ positions and interlinkages with the rest of the financial system can be comprehensively stress tested and understood in a system-wide manner. Non-banks themselves can use that understanding to increase their resilience and liquidity preparedness. Dealer banks and prime brokers equipped with better data on clients’ overall leverage and positions can strengthen their risk management. Given the need for a macroprudential perspective, our journey to better resilience of market-based finance must not end there. I’d like to thank Renée Horrell for assistance in drafting these remarks. I would also like to thank Naoto Takemoto, Gerardo Martinez, Pelagia Neocleous, David Baumslag, Pierre Ortlieb, Konstantin Wiemer, Edd Denbee, Daniel Wright, Will Rawstorne, Niki Anderson, Andrew Hauser, Lee Foulger, James Talbot, Sasha Mills, Jon Relleen, Andrew Bailey, Jon Cunliffe and Carolyn Wilkins for their helpful input and comments. The views expressed here are not necessarily those of the Financial Policy Committee. 1.
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[2] What does this episode remind us about the risks from non-bank leverage? Leverage is an integral part of the economy. It allows households to borrow to buy houses and smooth consumption. It allows companies to invest in projects or to smooth cashflows. It allows banks to finance these activities. In the non-bank financial system, leverage is used: to facilitate trading; to invest in companies and infrastructure; and to arbitrage price discrepancies and so improve the efficiency of financial markets. [3] Leverage is created in different ways. Its most obvious form is to borrow money to buy assets – ‘financial leverage’. But it arises also through ‘synthetic leverage’ using derivative instruments. This allows users to adjust risk profiles through a relatively small initial outlay, with future gains or losses contingent on changes in underlying market prices. Those future gains and losses create financial obligations – a form of contingent ‘hidden’ leverage if you like. It’s clear that leverage is a key function provided by the financial system in support of a thriving and productive economy. But it comes with inherent risks that need to be managed. A common factor across all the uses of leverage I have just described is that it can increase the exposure of the leverage taker to underlying risk factors – whether that be house prices, earnings, interest rates, currencies or asset prices. It follows therefore that leverage can amplify shocks to each of these risk factors.
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Page 1 Inflation is a ‘wicked problem’ − speech by Huw Pill Introductory remarks given at the Warwick Think Tank, Warwick University Page 2 Published on 16 February 2023 Speech Good evening everyone. It is a great pleasure to be here at the Warwick Think Tank today. Thanks to the organisers for the invitation to participate. I am sure that you have many questions about the outlook for the UK economy. We all do. I am looking forward to discussing those in a moment. But before we turn to that discussion, I thought I would kick-off with a few remarks about the framework within which monetary policy works. The first thing to say is that the objective of monetary policy in the UK is very clear. The Bank of England’s Monetary Policy Committee (MPC) has the objective of price stability. Through achieving price stability, monetary policy creates an environment in which firms and households can make the longer-term plans and investment decisions that generate the innovation, dynamism and productivity that ultimately drive growth and prosperity. Price stability has been operationalised in the form of an inflation target of 2% for the consumer price index (CPI). This target holds at all times. The MPC therefore needs to achieve this target on a sustainable basis: it is not a target for one moment or horizon, but must be achieved on an ongoing basis over the medium term.
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Given my assessment of the data as they stand and recognising the substantial policy tightening already implemented, in my view the MPC’s current priority must be to ensure we see the job through, so as to return inflation to target on a sustainable and lasting basis. It remains premature to declare victory over the unacceptably higher rates of inflation we have seen recently. Continuing to raise rates at the pace and magnitude seen over the past year would eventually – and perhaps soon – imply that monetary policy had cumulatively been tightened too much. Nevertheless, given where we stand, I still choose to emphasise the MPC’s need to be watchful for signs of greater-than-expected persistence in inflationary pressure. And I would flag the need for the Committee to maintain a readiness to act to address any such persistence should it emerge. We have long signalled how we assess the potential for inflation persistence: by looking at the strength of corporate pricing power along supply chains, by evaluating the tightness of the labour market, by weighing up wage developments and their implications for services price inflation. The past few days have yielded some new information along these dimensions. Tuesday’s labour market release pointed to signs that the UK labour market loosened a little in the fourth quarter, in line with the narrative underpinning the MPC’s February Monetary Policy Report.
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Today’s flexible inflation targeting regime establishes a firm framework for monetary policy and provides clear guidelines on how monetary policy is to respond in different situations. The fiscal policy authorities can thus internalise the monetary policy response pattern. This is only natural, since the mandate for monetary policy was laid down by the Government and the Storting. In other words, the proper framework is in place for delegating interest rate decisions, but the central bank’s response pattern must be known, so that the fiscal authorities can take this into account. Game situations that may arise with an independent central bank with an inflation target are further discussed in Leitemo (2000) and in Steigum (2000). Norges Bank analyses the inflation outlook three times a year in its Inflation Report. The Executive Board discusses the economic outlook at a separate meeting three weeks before the Inflation Report is presented. The following day, the Executive Board summarises its discussions and assesses the consequences for monetary policy for the next four months. This assessment constitutes an important internal reference when the Executive Board later makes a decision regarding the interest rate. It will also provide the basis for our external communication through speeches and the media. The key rate is assessed by the Executive Board every sixth week. Monetary policy decisions are announced in a press release followed by a press conference.
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Despite the weakened krona, the decrease in exports was extremely severe. It is natural to ask why. One explanation is that a large part of the decline in world trade affected investment goods and durable consumer goods such as cars. The purchase of these goods could easily be postponed when the crisis broke out. Such product groups represent an important part of Sweden’s exports. In could thus be said that Sweden was impacted particularly severely due to the composition of its exports. As I mentioned in my introduction, Sweden is a small, open economy that is highly dependent on exports. During 2009, GDP fell by over 5 per cent, the sharpest decline since the Second World War. Even if the krona was heavily weakened, this was not enough to prevent a major fall in exports. On the other hand, there are many indications that the weakening of the krona contributed strongly towards preventing inflation from becoming excessively low. Unlike abroad, where inflation became negative, inflation in Sweden remained around the target even during the most acute phase of the crisis (see Slide 6). Note that inflation in Sweden here disregards changes in mortgage interest expenditure – it is measured using the CPIF. This approach corresponds better with the way that inflation is measured abroad. 2 Developments in Sweden during the financial crisis differ in several regards from the crisis we experienced during the 1990s, when major problems were present in the Swedish economy before the crisis erupted.
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Reforms to the Banking System There now appears to be widespread agreement that efficiency needs to be improved in the banking system in order to lower costs and make domestic banks more competitive in relation to foreign competitors, which will seek a market share in Iceland. It is necessary to take advantage of the opportunity provided by the incorporation of the state banks into limited liability companies and the prospective sale of shares in them. Certain goals need to be kept in mind. Effective competition on financial markets needs to be secured, although the merger of institutions should not be excluded if it can improve efficiency and profitability. The important question arises whether the state as owner of three strong institutions should take the lead in the necessary restructuring or whether powerful institutional investors are needed to do the job. Foreign investors with experience in banking are one option. The latter approach may, however, prevent the Treasury from realizing the full value of its assets in the banking institutions. The wide distribution of share holdings will also undoubtedly be an issue in the debate. This is by no means a simple matter and desirable goals may not be fully consistent. The main goal must be to ensure effective competition and efficiency improvements in the operation of credit institutions.
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Higher living standards cannot be created by politicians out of thin air. As one of my predecessors, Mr Lino Spiteri, wrote recently, “They don’t make magic wands that work any more.” In the real world, a key precondition for prosperity is higher productivity. It should, therefore, be our common task, but particularly that of the political class, to promote policies and practices that are conducive to a more efficient use of the nation’s scarce resources. BIS Review 113/2006 5
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On the demand side, there can be little doubt that the increased demand caused by the integration of China and India in the world economy is a once in a century historical event. On the supply side, there has been a significant increase in exploration 2 BIS Review 61/2006 investment since 2002. 2 It remains to be seen whether the increased supply will be sufficient to bring prices down significantly. The depletion of easy-to-mine resources has contributed to a significant rise in extraction costs. Other factors might also push in the same direction: for instance, it is possible that the internalisation of external mining costs, previously born by society as a whole (i.e. through the degradation of the natural environment), might contribute to commodity prices remaining at elevated levels. With regard to gold, on the other hand, I am doubtful that the main source of uncertainty is related to surprises in future mining supply or fabrication demand. As I mentioned before, absent new vast discoveries, investment demand will arguably continue to dominate future gold prices. Third argument: today's commodity investment boom is structural and will be long-lasting Let's turn our focus to investment demand. In recent years, institutional and private investors appear to have rediscovered commodities as an asset class. According to some market estimates, investment in commodities has surged tenfold since 2003 and amounted to USD 120bn in May 2006.
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Miguel Fernández Ordóñez: Overview of the Spanish economy in 2006 Address by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, to the Governing Council of the Bank of Spain on the occasion of the presentation of the Annual Report 2006, Madrid, 14 June 2007. * * * Ladies and gentlemen, In 2006 the behaviour of the world economy and of the European economy in particular provided a highly favourable setting for the continuation of the Spanish economy’s 13-year-long expansion. The world economy grew by 5.4% last year, up even on the high rates of the previous two years, this being the most dynamic three-year period of growth for more than 30 years. The strong increase in oil prices in the first half of the year and the less expansionary stance of macroeconomic policies did not check this dynamism, which was moreover compatible with the containment of inflation rates worldwide and with a more favourable financial market performance. The geographical distribution of growth was more balanced and more favourable for the Spanish economy. The notable recovery in the euro area, along with economic firming in Japan, offset the slowdown in the United States. The contribution of the emerging economies to the global expansion, with China and India to the fore with growth of around 10%, remained a key factor. Latin America also grew satisfactorily and its inflation fell to all-time lows, against a backdrop of generally prudent macroeconomic policies which have contributed to a further reduction in the region’s financial vulnerability.
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It also permits appropriate account to be taken of the endemic pro-cyclical characteristics of the financial system and of boom-bust cycles in asset prices, and to consider under very specific, exceptional circumstances a policy of carefully leaning against the wind, despite the wellknown intrinsic difficulties of identifying misalignments in real time. The role of forecasts in policy making Inflation forecasts are at the centre of inflation targeting strategies. Policy discussion and communication are organised around the forecast process, and decisions are often explained on the basis of deviations of the inflation forecast from an inflation target at a 5 See, for instance, W.R White (2006): “Is Price Stability Enough?” BIS Working Paper, No 205. 6 Remarks at the Conference on Central Banks in the 21st Century, Banco de España, 8-9 June 2006. 4 BIS Review 132/2007 specific time horizon. The numbers, including the baseline scenario and risks, are owned by the policy-setting committee. The Eurosystem also produces macroeconomic projections. These are based on a combination of models and experts’ technical judgments and are owned by staff, rather than by the Governing Council. Twice a year, in June and December, projections are produced by the staff of the Eurosystem under the responsibility of the Monetary Policy Committee, which is one of the Eurosystem Committees composed of senior staff from the ECB and the national central banks.
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As a consequence, conduits and structured investment vehicles (SIVs), which were borrowing in this market to finance their holdings of asset-backed securities, started facing difficulties to refinance themselves. Tensions spread to the interbank markets of most OECD countries, as banks began hoarding liquidity to meet their liquidity support commitments with conduits and to put the underlying assets on their balance sheets. Moreover, banks curtailed interbank lending because of uncertainty surrounding the potential exposures of their counterparties. Since the summer, the global economy and the euro area have entered a period of increased financial market volatility, significant re-appraisal of risks and market nervousness. The Governing Council of the ECB is paying great attention to these market developments and, in particular, has acted swiftly to provide the liquidity that was needed to permit an orderly functioning of the money market, to reduce the volatility of very short-term interest rates around the minimum bid rate of the main refinancing operations, and to contain the risk that tensions in these markets would propagate through the banking system. The Eurosystem will continue to play its part to consolidate a smooth return to a normal functioning of markets. The Governing Council is also monitoring very closely the macroeconomic effects that the recent episodes of financial unrest may have on the prospects for the euro area economy. Sound fundamentals and the expected robust global growth should support a relatively favourable medium-term outlook for economic activity.
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But, there are also other parallels. This includes in particular the arrangements that made the banks’ real risk-taking more abstruse. The banks’ formal and informal promises of loans to special investment vehicles meant that the problems quickly bounced back into the banks' balance sheets. In the Swedish bank crisis one can say that the finance companies in some respects played a corresponding role to the special vehicle. It was the finance companies that primarily financed the expansion in the construction and property markets. The finance companies largely financed themselves in the short term by issuing so-called commercial papers in the BIS Review 30/2008 3 fixed income market. When the property market folded, it was a finance company, Nyckeln, which in September 1990 was the first to throw in the towel when it could not renew its financing. Other finance companies then followed suit. Many of the finance companies were owned by the banks. And the banks were tied by both formal and informal commitments. The losses therefore soon returned to the bank system. In 1991 it became apparent that the banks had substantial problem loans through their exposures to the property branch both directly and indirectly through the finance companies they supported. The bank crisis had become a reality. Perhaps you begin to see a pattern now?
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There is an evident risk that the crisis management can be prolonged by political negotiating games. When the stakes are high, there is a risk that many countries will choose to play their cards close to their chest as long as possible. In the worst case scenario, this could lead to crisis measures not being taken in time, which could have devastating results for all those involved. In September 2007 a Nordic-Baltic crisis exercise was organised around a financial crisis scenario. Taking part in this exercise were the central banks, financial supervisory authorities and finance ministries of all of the five Nordic countries and the central banks of the Baltic states. Without going into any details, I can reveal that the exercise brought to light many deficiencies in coordination – both between authorities within individual countries and across national boundaries. In particular, it showed that measures taken unilaterally by the authorities in one country can easily have disastrous consequences for financial stability in other countries. It also further emphasises the importance of continuing to develop the cooperation and ensuring that national regulations do not form an obstacle to cross-border crisis management. In a crisis it is essential that the authorities in different countries understand one another’s assessments of the situation and preferable that they can reach a common view. This makes demands for common criteria and joint terminology. It must also be possible to coordinate various measures across borders, such as emergency liquidity assistance and payments of deposit guarantee funds.
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Such reforms have ripple effects that go beyond economic benefit of a long run stable growth and financial stability. I believe that positive spillovers will be materialized in the South East European region’s prosperity and its economic and political integration in European Union. The Bank of Albania has been a constant generator and supporter of reforms both institutionally and as the provider of stable prices, sound macroeconomic conditions and financial stability. It makes an undeniable fact that financial integration which we are experiencing will be to the forefront of European Union integration process. It will ease the challenges and speed up the process of European integration which Albanians have embraced by wide popular consent. Like in many other transition economies banking reforms in Albania were implemented as an integral part of the structural reforms undertaken to transform the Albanian economy in a market oriented economy. Continuous improvement, along with approval and implementation of new banking legislation and supervisory regulation; liquidation and privatization process of the state owned banks; and foreign ownership; have change banking and financial markets. Foreign banks have been an important push factor toward increasing efficiency, number, quality, and coverage of financial intermediation. New entries, mergers and acquisitions are recently altering the market structure in both asset and liabilities. Reforms that brought big European players and their capital in the market, have further increased confidence in our economy and in the region as whole. However, the presence of foreign banks does not replace the need for legal and institutional framework.
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This is particularly important given the lack of well-developed road and rail networks of the region. Countries in the GMS are addressing this through various projects, the main one being the road corridors. The North-South Corridor which connects Yunnan in China, with Myanmar, Laos and Thailand has been completed. Also, the East-West Corridor which links Vietnam, Laos, Thailand and Myanmar is near completion. This will make the whole region more closely interconnected, hence investments in any of the GMS country stand to benefit the rest. 11. The final point is on the demand side. The GMS will enjoy a larger consumer market base with distinct needs and increased purchasing power. The AEC is home to over 600 million people. In tandem with this is the significant rise of the middle class population. The Asian Development Bank estimates that the share of ASEAN’s middle class is expected to increase to 65% by 2030.3 Moreover, ASEAN continues to pursue closer integration into the global economy through various Free Trade Agreements. This includes China and India, both superpowers at the crossroads of the GMS. Therefore, the AEC will also be an important gateway, connecting the GMS to major markets of the Asia-Pacific region. 12. The bright future is ours for the making. The GMS economies are blessed with abundant resources and promising growth prospects. With the realization of the AEC, the region’s opportunities will be multiplied. Yet there remain important challenges. The bright future is ours only if we work to overcome the challenges together.
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The conclusions I have drawn from developments during the 1970s and 1980s are that the economic policy conducted together with the functioning of the economy during this period could not lay a foundation for macroeconomic stability and good economic growth. Price and wage formation that got out of hand in the 1970s, a series of devaluations that created considerable pressure in the economy during the 1980s, deregulation of the credit market that triggered a large credit boom, which could not be counteracted by monetary policy as this was detailed to defend the krona’s fixed exchange rate, and a fiscal policy that could not withstand inflationary pressures. All in all, this led to repeated crises and finally to economic collapse. This leads me in to the next three episodes. The reform of wage formation Before I get into the changeover in exchange rate and monetary policy at the beginning of the 1990s, I want to mention two episodes that have contributed to making the changeover in exchange rate and monetary policy successful with regard to bringing down inflation to a level comparable with other countries. These are the reform in wage formation and the budget consolidation in the 1990s. At the end of the 1980s it had become increasingly evident that Swedish wage formation did not function in a manner compatible with macroeconomic balance.
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It was common for central wage agreements signed during the 1980s to contain price trend guarantees, wage development guarantees, earnings guarantees, checkpoints etc., which led to prices and wages pushing one another upwards in an increasing spiral. On 1 March 1990, the Government appointed the Rehnberg Commission to follow negotiations of new central wage agreements in the labour market and to act to achieve new agreements that would contain price clauses to replace the agreements for 1990 and new agreements for 1991 and lead to a radical reduction in total wage increases, including wage drift, during 1991. Based on the Commission’s proposals, stabilisation agreements were signed for the period 1 January 1991 – 31 March 1993 for just over 75 per cent of the labour market, which contributed to the rate of wage increasing falling from around 10 per cent in 1990 to 3 – 4 per cent a year during 1992 – 1993. After that, however, the rate of wage increase rose again to around 6 per cent in 1996. In April 1997 I was given the task by Deputy Labour Minister Ulrika Messing of making an inquiry into wage formation and mediation. When I was given this task, the social partners in the industrial sector had recently (in March 1997) signed a new cooperation agreement, known as the Industrial Agreement, whereby the parties took joint responsibility for wage formation in their part of the labour market and had agreed on a regulatory framework for negotiating wage agreements.
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Continued implementation of prudent monetary and fiscal policies, fairly favourable developments in the exchange rate coupled with pro-growth and pro-poor agricultural policies that have led to an increase in food supply and subsequent improvement in the country’s food security largely explain the favourable developments in inflation. For instance, the country recorded an increase in maize surplus to 250,000 metric tons (mt) this consumption period from 160,000 mt during the 2006/2007 consumption period. With respect to the money market, given lower inflation and yield rates on Government securities, commercial banks lending rates have been on the downward path. This can be illustrated by the nominal average lending rates which declined to around 28% in December 2006 from about 34% in December 2005, and further fell to 24.3% in September 2007. This is consistent with Government’s desire of making more funds available for priority sectors of our economy at reasonable cost, in line with the objectives the Fifth National Development Plan, 2006-2010. Ladies and gentlemen, testimony to this was the recent lowering of the statutory reserve ratio by the Bank of Zambia to 8% from 14% effective 1st October 2007. We expect this action, will release more funds to the commercial banks for on-ward lending to the priority sectors. Availability of investible funds to sectors such as agriculture, manufacturing, tourism and mining will stimulate further growth in the economy, create more employment and incomes, and contribute to alleviation of poverty.
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b) Credit Reference Law and Services Following the issuance of the Credit Reference Services (Licensing) Guidelines and the Credit Data (Privacy) Code, the Bank of Zambia has drafted the Credit Reference Law. The draft law is currently undergoing legal review and is expected to be effected in the course of next year. Meanwhile, the licensed credit reference bureau – Credit Reference Bureau Africa Limited (CRBAL) has not yet commenced operations as some commercial banks are yet to provide the required data to the CRBAL. c) The National Payment Systems Law The National Payment Systems Law has been enacted and became effective on 15 June 2007. The Law is intended to mitigate the shortcomings that were in the legal framework and provide legal backing to international best practices in the payment systems. To all of you gathered here, I would like to implore you, not to only inform the public about these and other developments but to interpret what these mean to ordinary Zambians. It is only when ordinary Zambians, who are the key stakeholders, have an unquestionable understanding of these developments that they shall fully support our developmental policies and strategies. Ladies and gentlemen, allow me to remind you that our quest for development will in no doubt be without challenges. The continued higher and unstable international oil prices poses one of the strong challenges to our targeted growth of 7% this year and end year inflation of 9%.
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Nominal wages do not readily fall. With some inflation, relative wages can change without a fall in nominal wages. There may also be rigidities in the pricing of goods and services. Some degree of inflation will thus oil the economic machinery. • In periods, inflation and economic growth will be low. It is then appropriate for real interest rates to be low, or even negative. Nominal interest rates cannot be set below zero. If inflation becomes entrenched at a low level or near zero, the interest rate will be less effective as an instrument. • There are different ways of measuring inflation. The consumer price index tends to overestimate actual inflation. The most important source of measurement errors is probably the difficulty of distinguishing between changes in the quality and price of goods. In other countries, findings show that the consumer price index overestimates actual inflation to the order of ½-1 per cent. The inflation target is a vehicle for, not an obstacle to, monetary policy’s contribution to stabilising output and employment. This objective is also expressed in the Regulation on Monetary Policy. If demand for goods and services is high and there is a shortage of labour, there will normally be prospects of higher inflation. When interest rates are increased, demand falls and inflation is kept at bay. If demand is low and unemployment rises, there will be prospects of lower inflation. The interest rate will then be lowered.
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The change in trade patterns has made a considerable contribution to the sharp decline in prices for clothing, footwear and audiovisual equipment. Rapid technological advances have also pushed down prices for audiovisual equipment. 2 BIS Review 16/2004 • Third, competition has probably increased in the retail industry and other service sectors in Norway in recent years. Initially, heightened competition affects companies’ profit margins. But enterprises will respond by reducing their costs. This will occur in part in the individual business, but subcontractors will also be required to reduce their prices and enhance efficiency. Therefore, increased competition usually triggers higher productivity growth in the economy. Low inflation may therefore be matched by growth in productivity. Prices for domestically produced goods and services are expected to rise towards the beginning of 2005 due to higher capacity utilisation in the Norwegian economy. Strong employment growth may contribute to somewhat higher wage growth than in 2004. At the same time, domestically produced goods and services are affected by exchange rate changes, albeit with a longer lag than is the case for imported consumer goods. There are clear signs that the global economy has passed the trough. However, while the outlook is brighter, price inflation is still low and interest rates are being kept unusually low. Economic growth is high again in the US, but there is still excess production capacity and very low inflation. Workforce reductions may no longer be as severe, but companies are still not hiring new staff.
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Countries in this situation remain BANCO DE ESPAÑA 11 TESTIMONY BY THE GOVERNOR OF THE BANCO DE ESPAÑA BEFORE PARLIAMENT IN RELATION TO THE DRAFT STATE AND SOCIAL SECURITY BUDGET FOR 2019 THE BUDGET DEFICIT TARGET AND THE FISCAL POLICY STANCE IN 2019 STRUCTURAL BALANCE CHANGE GENERAL GOVERNMENT STRUCTURAL BALANCE 0 CHART 10 % of GDP 4.0 -1 % of GDP 3.0 -2 2.0 -3 -4 1.0 -5 0.0 -6 -7 -1.0 -8 -2.0 -9 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2019 BANCO DE ESPAÑA (WITH 2019 STATE BUDGET MEASURES) 2011 2012 2013 2014 2015 2016 2017 2018 2019 1.3% DEFICIT FULFILMENT SOURCES: European Commission, IGAE, 2019 State Budget and Banco de España.
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But, as I said earlier, it is quite conceivable that given the range and speed of regulatory reforms, there are parts of the framework that might not work in the way we intended. As I mentioned, the Open Forum on 11 November will be another opportunity to assess this issue. The aim is to bring stakeholders together from across financial markets to discuss how we build markets for the public good. Second, changes in market structure and the ability of technology to connect buyers and sellers may increase liquidity. There are a number of suggestions that with the growth of assets under management asset managers and institutional investors may in future need to deal more BIS central bankers’ speeches 5 directly with each other and might be better placed to take on some of their risks. Technological change would certainly make this increasingly feasible. It remains for me, however, an open question whether such liquidity would be resilient in times of stress. Automated markets may have driven down costs, but are possibly less resilient. Dealer-intermediated markets, on the other hand, may have become more costly, but possibly more resilient. In a forthcoming speech, my colleague Minouche Shafik will discuss the changes in market structure that we have seen since the financial crisis and what they mean for market functioning.
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Nominal interest rates were kept low although price inflation and the value of tax-deductible interest expenses rose. Frequent devaluations in the period from 1976 were ultimately ineffective with regard to preventing a relative decline in manufacturing industry. On the contrary, the devaluations proved to be self-reinforcing. Chart 7 Over a period of 15 years from 1973 to 1988 consumer prices in Norway rose twice as much as in Germany. In the same period, the value of the krone was virtually halved against the Mark. While we paid around 2 kroner for one Mark in 1973, 15 years later we had to pay close to 4 kroner. Since then the krone has remained relatively stable against the Deutsche Mark. Today the exchange rate is around 4 kroner and 10 øre. The last devaluation came in 1986 after the fall in oil prices. Thereafter, the krone exchange rate was fixed. The Norwegian economy had to go through a severe economic turnaround. Confidence in the krone had to be restored in order to avoid persistent inflation. This required very high interest rates. The Norwegian economy entered the worst recession experienced since the interwar period. Unemployment rose from about 2% in 1987 to almost 6% in the winter of 1992/1993. Many companies went broke and households were faced with debt problems. The financial sector was hit by crisis. The fixed exchange rate regime led to a gradual decline in price inflation, but not to deflation as was the case in the 1920s.
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BIS Review 7/2010 3 FOCUS: This problem will become even bigger if other countries – such as Bulgaria or Romania – introduce the euro. Trichet: Other European Union countries are indeed committed to joining the euro area. But only when the time is right. As you know, there are strict criteria governing the introduction of the euro, and these must be met in full. And they have to be met not just at a particular moment in time, but on a sustainable basis. The ECB is and will remain extremely vigilant in this respect. FOCUS: But what if new member countries doctor their figures – as Greece did – and trick their way into the euro area? Trichet: Let me be very clear on this. Never again will we accept budget figures that do not reflect the facts. Appropriate auditing must always be possible. As early as next month the European Commission will make proposals that will dramatically improve the relevant framework. This is absolutely critical. FOCUS: Your job and the crisis are both very demanding. Do you have the opportunity at all to see colleagues outside of work? Trichet: Yes, certainly. And that’s important, too, as the high level of mutual trust that exists within the ECB, between the members of the Executive Board and the Governing Council, is in my view absolutely fundamental. FOCUS: Is Frankfurt a good location for meetings outside of your official schedule? Trichet: I think so.
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It is not possible to determine precisely where this lower bound lies, but we are confident that we still have some room for manoeuvre to lower interest rates further, if necessary. Second, the transmission of negative interest to the financial system and the economy has some peculiarities. In our experience, the transmission to the money and capital markets of an interest rate change in negative territory operates in the same way as one in positive territory. 8 9 For instance, a study by the International Monetary Fund shows that the unconventional measures taken by the Federal Reserve at the height of the financial crisis played a decisive role in calming the markets. Cf. Roache, S. K. and M. V. Rousset (2013), Unconventional monetary policy and asset price risk, IMF Working Paper, WP/13/190, August 2013. For the lessons learnt from the financial crisis and proposals for future monetary policy frameworks, cf. Bindseil, U. (2016), Evaluating monetary policy operational frameworks, paper presented at the Economic Symposium of the Kansas City Fed, Jackson Hole, August 2016. Page 5/8 An example of this is the continued efficient operation of the repo market. By contrast, the transmission of negative interest in the banking system is varied. As interest rates on bank deposits largely remain at zero, lending rates, particularly mortgage rates, have also fallen less sharply than money and capital market rates. From the SNB’s perspective, this imperfect transmission to lending rates is not entirely unwelcome in the current economic environment.
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Not only the Riksbank, but also several other central banks have in recent years faced a situation where the economy has grown strongly, while inflation has been below target, despite very expansionary monetary policy. Let me therefore go on to discuss an important issue that has arisen due to developments in recent years, namely how to deal with a situation where structural changes contribute to inflation remaining low over a long period of time. In Sweden, the upswing in world trade has contributed to strong growth in Swedish exports. Over the past year, domestic demand has also developed strongly, partly due to stimulation from expansionary monetary policy. At the same time, inflation has been kept down by high productivity growth and weak growth in import prices. This is partly related to developments in economic activity. However, there also appear to be factors of a more structural nature behind the low inflationary pressure. This is probably to some extent connected to the fairly comprehensive investment in new technology. However, it is clearly also largely concerned with the effects of increased global competition. Our analyses thus indicate that the low inflation rate has in many cases been the result of a number of changes in the supply side of the economy. Our forecast is that growth in the Swedish economy will remain high over the coming years. We also envisage inflation rising as capacity utilisation increases.
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However it would be clearly a less pronounced one than in the pure cyclical case. 2 BIS central bankers’ speeches 3. Possible explanations for increasing credit-to-GDP ratios 3.1. Supply side considerations: Financial liberalization, the likely explanation for the 1970s and 1980s A first important reason for an increase in credit volumes can be found in an improved availability of credit. It is well recognized that quantity rationing is prevalent in credit markets.6 Technical innovation and regulatory changes have an impact on the extent of credit rationing and thus very directly on the volume of allocated credit. The financial liberalization of the 1970s and the 1980s and technical innovation in financial services that resulted are therefore natural and plausible explanations for the spectacular credit development observed internationally in the later part of the last century. Here, a permanent adjustment to a new plateau seems to be a viable explanation. This does not mean that such an adjustment process is innocuous from the perspective of financial stability, nor does it imply that the adjustment process cannot overshoot. Indeed, a higher credit-to-GDP ratio means a higher degree of leverage which, in all cases, is likely to increase the fragility of the financial system. 3.2. Demand side developments Second, structural changes in the demand for credit are also a conceivable driver of an increasing credit-to-GDP ratio. For example, an economy-wide perception of improved growth opportunities justifies a broad increase in borrowing to finance investment projects.
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One can thus rationalize an increase in the credit-to-GDP ratio in economies in the process of catching up with advanced economies. This is a plausible element of explanation for credit developments in the case of a country such as Japan in the 1960s and 1970s. It is, however, much less plausible in the case of mature countries such as Switzerland in the latter part of the period of observation (Figure 3). Other structural changes in credit demand are also conceivable. For instance, it can be argued that the financial liberalization of the 1970s and 1980s (together with related sociological developments) has significantly affected the public attitude towards indebtedness making it much more socially acceptable, in particular with regard to consumption financing. Further structural changes on the demand side, such as demographic transitions or an increase in idiosyncratic income risk could lead to an increase of credit demand for consumption smoothing purposes. It is difficult, however, to connect these theoretical considerations with the realities of developed economies in the last decades. In particular the demographic trends observed in advanced countries (also in Switzerland) would imply a structural shift towards less rather than more borrowing. 3.3. The role of the interest rate Third, the role of the interest rate deserves special attention when thinking about credit developments. The interest rate is of course an endogenous variable when examining the demand and supply for credit. Yet additional insights are possible when considering it separately.
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8 BIS central bankers’ speeches anyone who has ever tried to estimate equilibrium unemployment will agree with me that it is not much easier than estimating normal resource utilisation or the long-run sustainable GDP trend. Unemployment data is perhaps not revised as often and as much as GDP data, but this is not the only reason why estimates of equilibrium unemployment are extremely uncertain and difficult to use as a basis for economic policy decisions.18 ... as does the fact that more than one person makes the decisions However, the gap between theory and practice is not only about measurement and estimation problems. Problems of this type would be difficult enough to handle even if the monetary policy decisions were made by a single decision-maker. But in reality we are six individuals who decide on the repo rate. And as these issues are ultimately a question of judgement it is up to each member of the Executive Board to make his or her best estimate of which measure or measures of the development of the real economy he or she believes monetary policy should focus on to, as it says in the preparatory works of the Sveriges Riksbank Act, “support the objectives of general economic policy for the purpose of attaining sustainable growth and a high level of employment”. She or he may also make the assessment that factors other than the forecast for inflation and various measures of resource utilisation should in some situations be taken into account in the monetary policy decisions.
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Sound and safe cross-border consolidations would make banks better able to diversify their risks across the euro area, and channel savings more effectively towards investments across borders; this would foster the Financing Union I talked about. From a supervisory point of view, it involves supporting an approach on a consolidated basis by granting more waivers on liquidity and capital so as to allow more flexible capital allocation and limit ring-fencing. Swift execution of cross-border transactions is also essential: the implementation of a fast-track process by the SSM would address this issue. From a resolution point of view, internal MREL requirements could be a tool to facilitate the resolution of institutions, but they would become meaningless if calculated on a national basis. Indeed, having internal MREL in all countries could be an obstacle to the single market and European banking crossborder mergers. Finally, we should address business and legal impediments to cross-border mergers: information asymmetry, non-performing loans (NPL) or anti-takeover legal structures in different countries. As a first concrete step, I suggest that the EBA publish a comprehensive stock-taking of all the regulatory and supervisory obstacles to cross-border activities and mergers. The aim is crystal clear: within a Monetary and Banking Union, a cross-border merger must not be more difficult and cumbersome than a “domestic” merger. The logic of the banking union is that it should be considered for banking purposes as a unique jurisdiction. I would like to conclude by quoting one of the founding fathers of Europe.
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Alongside reinforcement of the capital base, liquidity also needs to be strengthened to increase the resilience of banks. Consequently, a comprehensive revision of the liquidity regulations for big banks is currently underway. Nonetheless, better capital and liquidity requirements do not rule out the possibility that banks will again face existential difficulties in 2 BIS Review 77/2009 the future. The SNB therefore considers all of the efforts that are going into facilitating orderly wind-downs of large international institutions in future to be just as important. The lack of any clearly defined and internationally coordinated wind-down procedure contributes to a de facto obligation on the part of the state to provide assistance to these institutions. Any rescue of a large financial institution brings more than just high costs. The “too big to fail” issue also has a tendency to harbour incentives for banks to enter into excessive risks. In Switzerland, the “too big to fail” question is particularly relevant and, in many respects, unique, given the importance of the big banks for the country’s banking sector and its economy. A clearly defined and internationally coordinated wind-down procedure would help to ease this problem. The interplay between national jurisdictions is, however, extremely complex, and finding a solution for a predefined and internationally coordinated procedure of this kind is correspondingly challenging and time-consuming. The SNB therefore believes that careful consideration must also be given to alternative approaches. These include rules governing the organisational structure of large financial institutions.
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BIS Review 3/2007 1 Flexible approach by CBSL In the process of adopting Basel II, CBSL will endeavour to adhere to the Basel criteria as far as possible and to retain the spirit of the Accord. However, certain modifications have been made and will also be made in the future to suit local conditions. Since Basel II provides a menu of approaches for the measurement of risk to suit the level of sophistication of the banks, it is suggested that the banks in Sri Lanka adopt the simplest approaches, initially. Credit risk For the measurement of credit risk under pillar I, we have requested banks to adopt the Standardised Approach, which is very similar to the existing framework or Basel I and requires very little modifications to the existing risk management systems by banks. The key to the success of this Approach is the rating of counterparts. The banks should, as far as possible, encourage developing a culture of credit ratings. CBSL will consider the representations made with regard to reducing the risk weight applicable to below BB-rated entities initially in order to inculcate the rating culture, but this should not be taken as the norm as we expect higher ratings to be considered for the purpose. The Basel II Framework provides a preferential risk weight of 75% for claims that fall within the regulatory retail portfolio. The qualifying criteria for retail and SME loans that would fall within this portfolio have been modified to suit the local conditions and agreed with the banks.
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But we are interested in growth and employment that is sustained into the medium and long term. And permanently low inflation is a necessary condition for achieving that. But, even if we agree on the objective, that still of course, leaves plenty of room for us to disagree about what that means for the actual policy stance - the level of interest rates - at any particular time. In fact, as you may have noticed, because we are wholly open about it, even the individual members of the MPC have been known to disagree about that - at the margin. Outside the MPC, a lot of people say to me - “OK I agree we don’t want to return to boom and bust, but you are still overdoing it. From where I sit, or from what I’m told,” they say, “we’re headed for recession just hours away”. Sometimes they imply by that that we are also going to undershoot the inflation target - sometimes they don’t much seem to care about inflation. Now there are always plenty of people who claim to know what’s going to happen to the economy, to know that interest rates are “clearly far too high” or “clearly far too low”, and the present time is no exception. It’s been difficult recently to hear yourself think above the deafening noise of opinions on the state of the economy, which, understandably, often reflect the situation in their particular neck of the whole economy wood.
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The implication is that you see a trade-off between inflation and the rate of economic growth, so that if only we’d let up a bit on controlling inflation then this country could enjoy higher activity and lower unemployment, which are the really good things in life - or at least we could avoid some of the worst damage that is currently being inflicted upon the whole of the agriculture, large parts of manufacturing industry and even some services sectors. And that might even be true for a time. The trouble is that, in anything other than the short term, it would be likely to mean more rather than less economic damage, and lower rather than higher growth and employment. Often in the past in this country we behaved as if we thought that promoting higher growth and employment - which of course is what we all want to see - was largely a matter of pumping up demand. We paid too little attention to the structural, supply-side, constraints. All too often we tried to buy faster growth and higher employment even at the expense of a bit more inflation. In effect we tried to squeeze a quart out of a pint pot. And you all know the result - rising inflation and a worsening balance of payments, which eventually could only be brought back under control by pushing up interest rates dramatically and forcing the economy into recession.
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One explanation of the relatively low level of overall investment in Sweden, which is one of the factors behind the current account surplus, is in fact the low level of investment in housing (see Figure 10). There are thus no signs that the credit growth we have experienced has financed a building boom or that it is associated with a low level of domestic saving. In recent years, the number of new-builds in the housing sector in Sweden has been around 20 000 per year, which a low figure in historical terms.13 The low level of new housing construction is thus an important factor behind rising house prices.14 12 When all of these three factors deviated significantly from their normal patterns at the same time, there was a 56 per cent probability of a substantial fall in housing prices. See IMF (2009), World Economic Outlook, October. 13 This is a level that over the last 50 years has only been lower for a few years during the 1990s (Statistics Sweden, 2012 “Housing construction low for a long time”, SCB Economic Indicator, no. 2012:92). 14 Peter Englund, among others, points to the low level of housing construction in Sweden as one of the reasons for the sharp increase in prices; see Englund, Peter (2011), “Swedish house prices in an international perspective”, Chapter I.1 in The Riksbank’s inquiry into risks in the Swedish housing market. BIS central bankers’ speeches 11 Figure 10.
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Inflation expectations themselves have been remarkably stable, including during the recent period when oil prices jumped to levels no one could have expected only a year ago. This, by itself, illustrates the credibility achieved by the Eurosystem of Central Banks, after eight years of existence. Second, European households and companies are reaping the benefits of that credibility. Long term interest rates stand at a low level, 40 to 50 basis points below the level in the United States. So, even after the recent increases in short term rates, monetary and financial conditions remain extremely favourable for investment and growth. And indeed, we might be witnessing in Europe a period of sustained and stable growth, at least if current projections and surveys are proven to be right in the coming months. A third benefit of the Euro is the boost it gives to financial integration in Europe. In many segments, European financial markets have reached the depth and liquidity which, up to now, were the preserve of dollar markets. This stimulates productive investment, helps in restructuring (as witnessed by the current wave of M&As) and, more generally, allows a better allocation of savings and sharing of risks. As a consequence, the euro is becoming extremely attractive, as a vehicle, a transaction, an investment and a reserve currency. As you may know, as central bankers, we remain neutral as far as the internationalisation of the euro is concerned. We are neither encouraging, nor discouraging the process.
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The effects of the interest rate decline on demand, output and employment have been pronounced. It has taken time for inflation to pick up. This partly reflects low external interest rates and high oil prices, which have moderated the impact on the krone exchange rate. Higher imports from low-cost countries, competition and improved efficiency in Norwegian production have also kept inflation at a low level. Initially, it was the fall in prices for imported consumer goods that pushed down underlying inflation. After a period, the rise in prices for domestically produced goods and services also slowed. This was due in particular to increased competition in some goods and service markets. At the same time, wage growth eased as a result of lower capacity utilisation in the economy. A more subdued rise in house rents also contributed. Inflation measured by the CPI-ATE reached its lowest level in the first months of 2004. Inflation remained at below ½ per cent until the end of summer and then picked up through the autumn. Inflation moved up primarily as a result of a slower decline in prices for imported consumer goods. The depreciation of the krone since the beginning of 2003 has contributed to these developments. In addition, the rise in prices for domestically produced goods and services stabilised, and towards the end of 2004 there was a tendency towards a higher rise in prices for these goods and services. At the beginning of 2005, inflation measured by the CPI-ATE was lower than expected.
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It’s also crucial that these efforts are coordinated at the global level, given the global dimension of the risks and the potential spillovers that can arise through interconnections between the real and financial sectors. In this regard, at the Basel Committee on Banking Supervision (BCBS), we are conducting a “gap analysis” to identify areas in the current Basel Framework where climate-related financial risks may not be adequately addressed or are not captured. This gap analysis will be comprehensive in nature, and will cover regulatory, supervisory and disclosure elements. Building on the analysis, we plan to explore practical solutions to address any identified gaps. In addition to a set of principles or guidelines on effective supervisory practices for assessing climate-related financial risks, the Committee will explore whether any policy measures under the regulatory framework should be taken, and how the Basel Committee could support international efforts related to the development of globally consistently sustainability reporting requirements. Importantly, any changes proposed by the Basel Committee to its regulatory framework would be in pursuit of its mandate to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. As to monetary policy, central banks should definitely be a part of this optimal policy mix as well. Here, it is useful to distinguish between central banks' monetary policy operations and those other operations not related to our monetary policy mandates. I will start with the latter, if only because it is easier to draw some conclusions in this case.
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Indirect data suggest that aggregate demand has carried forward positive growth rates, but growth remains significantly below the potential of the Albanian economy. Macroeconomic factors determining private consumption and investments, and a prudent fiscal policy sustain the assessment for contained growth of the domestic demand in the first quarter of the year. Moreover, in the absence of complete data and in real terms on developments in the external sector of the economy, assessments suggest that the contribution of foreign demand to economic growth will be lower than in the past year. Fiscal policy was subject to a consolidation nature over the first quarter of 2012, in line with its objectives to keep budget deficit and public debt in check. The contained fiscal approach has been reflected in minimum public expenditure in the first quarter of the year, with an annualised rate of 0.7%. Furthermore, low growth rates of fiscal revenues continued their trend, settling at 1.2% in this quarter. The budget deficit was ALL 11.5 billion, or about 2.5% down compared with the first quarter of a year earlier. Developments in foreign trade over the first two-month period of the year point to contracted trade exchange in annual terms. Value of exports in these two months dipped by 20.5% against the corresponding period of a year earlier, reflecting the moderation of foreign demand and price developments in global markets. On the imports side, their growth rates were significantly decelerated, reaching a nominal annual growth of 1.8% during this period.
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According to recent data from INSTAT, the Albanian economy accelerated the growth rate in the fourth quarter of the previous year, posting 3.8% annual growth. The economic activity upturn was driven mainly by output increase in the services sector. Value added of this sector surged 7.5% in annual terms, with a higher contribution by the branch of trade, transport and other services. Similarly, the construction and agriculture sectors posted BIS central bankers’ speeches 1 positive but low annual growth rates, 1.2% and 1.9%, respectively. Positive contribution to economic growth was also provided by the branches of extractive industry and the processing industry, but they did not manage to balance the significant contraction in the branch of “Electrical energy, water and gas”, which has resulted in negative contribution by the industry sector to the domestic product growth. From the perspective of aggregate demand components, economic growth in Albania continued to be driven by foreign demand also in the last quarter of the past year. Notwithstanding unfavourable developments in the global economy, net exports in real terms have shown higher growth rates in this period. In addition to foreign demand, the public sector demand provided a high contribution, in the fourth quarter of the past year, in the form of increased capital expenditure. In turn, private consumption and investments, while showing signals of recovery, were assessed as slow during the fourth quarter of 2011. Statistics on the real economy for the first quarter of 2012 are only partially available.
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Lars E O Svensson: Some problems with Swedish monetary policy and possible solutions Speech by Mr Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at the Fastighetsvärlden’s conference, Stockholm, 24 November 2010. * * * The opinions expressed here are my own and are not necessarily shared by other members of the Riksbank’s Executive Board or staff. I would like to thank Claes Berg, Karolina Ekholm, Stefan Gerlach, Jesper Hansson, Per Jansson, Pernilla Meyersson, Ulf Söderström and Staffan Viotti for our discussions and their comments. Johanna Jeansson, Lina Majtorp and Magnus Åhl have contributed to this speech. At the most recent monetary policy meeting in October, I entered a reservation against the majority decision. I, like my colleague Karolina Ekholm, instead advocated holding the repo rate unchanged and having a much lower repo rate path that rises steadily to a level of 2.7 per cent at the end of the forecast period. My reason for entering a reservation on this occasion and at earlier monetary policy meetings is because I see several problems with our current monetary policy. In this speech I shall present the problems I currently see in Swedish monetary policy, discuss these problems and describe the motives for my reservation, as well as proposing possible solutions to the problems.
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Sweden has suffered a pure demand shock through exports, but the Swedish economy has no comparable structural problems in the financial sector or elsewhere in the economy. One might then claim that the level of potential production and perhaps also its growth may have fallen more in the other countries than in Sweden. In that case, the output gap is more negative in Sweden than in the other countries, with the possible exception of the United Kingdom. Using the output gap as a measure of resource utilisation, the situation in Sweden does not look too good. Unemployment has increased in Sweden, the eurozone, the United States and the United Kingdom (see Figure 4). Since the first quarter of 2008, unemployment has risen most in the United States and around the same amount in Sweden, the eurozone and the United Kingdom (see Figure 5). The unemployment gap, which is the difference between unemployment and equilibrium unemployment, is shown in Figure 6. For Sweden I am assuming that equilibrium unemployment is 5.5 per cent, and for the other economies I have used common conventional estimates. We see that the unemployment gap is biggest in the United States, next biggest in Sweden and lowest in the United Kingdom and the eurozone. If we assume that equilibrium unemployment in Sweden is 6 per cent instead of 5.5 per cent, we have the same ranking for the unemployment gap.
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The Riksbank’s independence Legislation Public authority under the Riksdag, not the Government EU legislation Sveriges Riksbank Act and ban on instructions Goal independence The Riksbank’s goal Instrument Independence The Riksbank’s tools Personal independence How members are appointed and dismissed Financial independence The Riksbanks financing/budget Figure 2. Clearer independence in Sveriges Riksbank Act 1999 Swedish Riksdag Riksdag Committee on Finance General Council of the Riksbank Executive Board of the Riksbank 1 15 [20] Figure 3. Lower inflation since the inflation target was introduced CPI, annual percentage change 16 CPIF 1981-1992 Means: 7.4 Std. dev. : 2.9 12 12 8 8 1995-2021 (Apr) Means: 1.5 Std. dev. : 0.7 4 4 0 -4 16 0 80 84 88 92 96 00 04 08 12 16 20 -4 Source: Statistics Sweden Figure 4. Falling real interest rates Per cent 6 6 4 4 2 2 0 0 Sweden Euro area -2 -2 United States United Kingdom -4 96 00 04 08 12 16 20 -4 Sources: National central banks and the Riksbank 16 [20] Figure 5. Policy rates Per cent Sources: National central banks, Reuters and the Riksbank Figure 6.
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The new act was also needed to adapt the Riksbank’s activities to the requirements ensuing from Sweden’s membership of the EU. 8 How was the increased independence felt by the Riksbank? When one talks about central bank independence, one usually distinguishes between goal independence and instrument independence. This may sound cryptic, but goal independence means that the central bank determines its own operational target, which is to be attained to meet the legislator’s intention of price stability, for instance an inflation rate of 2 per cent. Instrument independence means 3 See Jonung et al. (2003). As early as in 1931-1937, the Riksbank was the first central bank in the world to have a price stability objective. After that, however, followed a period of 50 years with various fixed exchange-rate regimes. 5 See, for instance, the classical articles by Kydland and Prescott (1977), Barro and Gordon (1983) and Rogoff (1985). For more descriptive and explanatory reviews, see Apel and Viotti (1998) and Heikensten (2005). 6 A classical article on this subject is the one by Alesina and Summers (1993). 7 See, for instance, Fischer (2015) and Bernanke (2017). 8 The requirement for independent central banks follows on from Article 130 of the Treaty on the Functioning of the European Union and applies to all EU member states. The motives behind the EU legislation were in turn based on academic research and the experiences of ‘The Great Inflation’, the period when inflation rose in many parts of the world during the 1970s.
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In 2019, Facebook unveiled its Libra project that consisted of issuing stablecoins pegged to several currencies, claiming cheap and efficient payment solutions (including for cross-border payments) and greater financial inclusion. Around the same time the strange word "cryptocurrencies" appeared, a word that hurt the ears of politicians and central bankers. From time immemorial, money had been sovereign in order to be reliable and lasting. B. Disappointing learning years? Needless to say Libra had its risks. I will not list them all, but it raised very significant concerns about financial stability, money laundering, etc. The issues at stake reached far beyond mere financial regulation, and also included more acutely than ever the question of competition. This is when big techs entered their learning years in finance, confronting reality. Libra did not materialise, even after it was adjusted and rebranded as Diem. Existing stablecoins are issued by players other than big techs, mainly from the digital asset industry. Incidentally, after the failures and/or crimes committed by some of them, it is high time to regulate cryptos in full and to require licensing. Let us not kid ourselves into believing that we can count on the so called "crypto winter " which has actually lasted for over a year now, to make the problem disappear by itself. That would be a dangerous illusion and would further delay supervision that is so badly needed.v All jurisdictions agree in principle to regulate, under the common FSB umbrella.
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As a first pragmatic step, for host supervisors, it is necessary to establish an intermediate holding that consolidates all financial activities, in order to submit systemically important players to requirements. Agustín Carstens elaborated yesterday on the "segregation" and "inclusion" approaches. In addition, regulation of big techs in finance should go beyond traditional regulation of finance. Let me explain: big techs pose at least three new challenges. That of competition - as they are already much more concentrated than existing financial institutions, and the network economy tends to establish "the winner takes most" rule. That of data protection and privacy, of course. And finally, that of operational risk and cybersecurity. However, in each of these three fields - competition, data protection and cybersecurity - there is no international body, unlike in finance. And the national - or European - authorities that do exist are still hardly used to cooperating with each other. To develop cross-border and cross-domain cooperation, the scope is wide but essential: the OECD, the BIS and the FSB can and must be sandboxes. As a beacon of hope, Europe is showing the way on all these common challenges.
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The types of misuse of statistics listed by Wikipedia are as follows: 2 BIS Review 36/2009 • First, the statistician may discard the unfavourable data and make use only what is favourable for him to prove his point. • Second, in field surveys, the statistician may ask loaded questions in order to elicit an answer of his choice. • Third, the statistician may tend to over-generalise facts and make wrong conclusions. • Fourth, the samples used may be biased. • Fifth, the causality outlined may be fallacious. • Sixth, the data may have been manipulated in order to show a result favourable to some interested party. • Seventh, data may be dredged or mined in order to find a correlation that would not be there. How to gain credibility for statistics? All these instances of the misuse of statistics make the statistics less reliable and suspicious. The governmental statistical agencies throughout the globe are criticised by public on this ground. Once the organisations lose credibility regarding the compilation of statistics, it would be very hard to regain trust and confidence of users. The statistical bureaus run by former Soviet Union and its satellite states have been subject to this criticism. The way to avoid this criticism is to adopt global best practices with regard to compilation and dissemination of statistics. It requires countries to adopt a code of ethics and practices when it comes to dissemination of information.
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Statistics do not have a heart or a religion When we express our personal experiences, we step into a dangerous territory. Our personal experiences are guided by our emotional and subjective feelings. When we share them with others, we are inviting them to accept our emotional and subjective feelings as if they too have experienced the same. This is where we run into problems. Unless others too have the same emotional and subjective feelings, there is no reason for them to accept our experiences as their experiences. Hence, statistics to be shared by everyone should necessarily be based on objective considerations. In other words, statistics should not have a heart. Its religion should be pure objectivity. It should convey facts as has been observed by an individual free from personal biases or prejudices. Only such an impersonal statistical framework has the capability of serving people intending to use them for making judgments about the real world. How economic development occurs? An economy has to play a specific role towards its members. It has to produce and supply goods and services as demanded by them having consideration for timeliness, quantity and quality. When an economy produces these goods and services in larger and larger volumes year after year, new wealth is created, raising the well-being of its members. The continuous creation of wealth by people in this manner raising the overall welfare levels brings about what is called “economic development”.
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Minouche Shafik: Goodbye ambiguity, hello clarity – the Bank of England’s relationship with financial markets Speech by Ms Minouche Shafik, Deputy Governor for Markets and Banking of the Bank of England, at the University of Warwick, Coventry, 26 February 2015. * 1. * * Introduction I’d like to talk to you this evening about the Bank of England’s relationship with financial markets. In particular: how we use our balance sheet and how we gather market intelligence. I appreciate my saying that may immediately make you regret giving up your Thursday evening to hear a central banker speak! But let me make the case that the central bank’s balance sheet and the way we understand financial markets is at the very heart of modern policy making. And let me also argue that the journey from “constructive ambiguity” toward greater clarity around how we interact with markets is essential for the effectiveness of a modern central bank. The Bank of England’s balance sheet is the means by which we create money and hence the source of our monetary policy responsibilities. It is the vehicle through which we provide liquidity insurance to the financial system, a crucial part of our financial stability objective. And it is the point at which the implementation of macro policies meets the micro-reality of interactions with individual institutions. In all of these the Bank has proven agile in its ability to respond to the financial crisis and the changes in its responsibilities.
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19 To assist more borrowers, CCS is working on expanding its services. It will offer a centralised repayment solution to those who have accumulated substantial unsecured debts above their annual incomes. Under this new repayment solution, borrowers will not have to approach multiple creditor banks to negotiate how to reduce their debts. Instead, CCS will coordinate across all of a borrower’s creditor banks, and work out a centralised repayment plan. This centralised repayment plan will take holistic account of the borrower’s income, expenditure needs, and loan obligations. All the leading retail banks have agreed to come on-board CCS’ centralised repayment solution by the first quarter of next year. Thrust three: empower individuals to take charge through financial education 20 The third thrust is to reach out to more Singaporeans to empower them with the knowledge and skills to better manage their finances, and especially to avoid excessive borrowing. (a) 2 An integrated consumer education campaign, that explains the problems that result when debts get too high, will be launched by MoneySENSE next year. The The number of reported unlicensed moneylending and related harassment cases has declined 23% from 10,840 cases in 2012 to 8,306 in 2013. BIS central bankers’ speeches 3 campaign will use multiple media channels to reach out to different segments of Singaporeans. (b) We will reach out to Singaporeans where they work and live.
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Ravi Menon: Singapore's FinTech journey - where we are, what is next Speech by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Singapore FinTech Festival - FinTech Conference, Singapore, 16 November 2016. * * * Ladies and gentlemen, good morning and welcome to the inaugural Singapore FinTech Festival. We have more than 11,000 participants from more than 50 countries, attending one or more of the many events lined up over these five days. Technologies Transforming Finance Financial technology or FinTech is transforming financial services, in a way not seen before. We have unprecedented mobility. The smartphone is becoming our bank. People can consume financial services on the go. We have unprecedented connectivity. The Internet has compressed time and space. Interaction is real-time and unconstrained by physical boundaries. We have unprecedented computing power. The devices in our hands or on our wrists are literally pokemons – pocket-sized monsters that pack more data and more processing power than super computers just a couple of decades ago. Digital payments are becoming more widespread, propelled by advances in near-field communications, identity authentication, digital IDs, and biometrics. Blockchains or distributed ledgers are being tested for a wide variety of financial operations, to make them faster, more robust, more efficient: to settle interbank payments; to verify and reconcile trade finance invoices; to execute, enforce, and verify the performance of contracts; to keep an audit trail and deter money laundering. Perhaps the biggest potential is in what is called Big Data.
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We are beginning to aggregate and analyse large data sets to: gain richer insights into customer behaviour and needs; detect fraud or anomalies in financial transactions; sharpen surveillance of market trends and emerging risks. Big data is in turn being driven by advances in: sensor networks and natural language processing to gather information from a wide universe of sources; cloud technologies to store and retrieve large volumes of information at low cost and ondemand; learning machines and smart algorithms that can continuously adapt and improve on their decision making with every iteration. 1/9 BIS central bankers' speeches Smart Financial Centre Vision Be it countries, businesses, or people – those who are alert to technology trends, understand their implications, and harness their potential will gain a competitive edge. To be sure, many of these technologies are disruptive to existing jobs and existing business models. But if we do not disrupt ourselves – in a manner we choose – somebody else will – in a manner we will not like. Last year, MAS laid out a vision for a Smart Financial Centre, where innovation is pervasive and technology is used widely. Since then, MAS has been working closely with the financial industry, FinTech start-ups, the institutes of higher learning and other stakeholders towards this shared vision. MAS’ role in supporting this FinTech journey is two-fold: provide regulation conducive to innovation while fostering safety and security; and facilitate infrastructure for an innovation ecosystem and adoption of new technologies.
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In addition to earnings, equity must generate a reasonable surplus so that the Riksbank has profits that can be used to build up equity in the event of losses. The Inquiry’s proposals restrict the Riksbank's equity to SEK 60 billion, calculated only using inflation. As I have said, one interpretation of this is that the Inquiry sees a return to a steady state in which the balance sheet should be small – and, in such a world, a small amount of equity is adequate, assuming that the real interest rate returns to at least 1 per cent and that adjustments to the repo rate are enough to achieve the monetary policy objectives. The proposed act certainly makes it possible for the Riksbank to ask to raise the capital ratio, for example if seigniorage should fall or the real interest rate become lower. The problem is that, if the earnings capacity is initially set to just cover expenditure, there will be no scope to use the profit to build up equity independently. If revenues fall because real interest rates are low, it will not matter if target equity is higher – the Riksbank will make losses until the framework triggers a recapitalisation. When it comes to allowing for a larger balance sheet, the problem is that risks can increase quite quickly – and then, the Riksbank could find itself in a situation where retained profits are not enough to build equity up quickly enough.
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Now we need to make progress in the other areas that remain unfinished, notably in terms of economic and institutional convergence. Still, I recognise that we cannot have a purely economic perspective on the questions facing our Union. While economic integration produces more jobs and growth on aggregate, this does not completely solve the problem that drives dissatisfaction with the euro and the EU. There is also the problem of distribution: who gains and who loses from that process? For example, higher labour mobility across countries might reduce unemployment, but it can also stoke fears about immigration and create insecurity for low-skilled workers. Opening up a previously protected sector might reduce costs for consumers, but it can also leave citizens employed there with an uncertain future. So, if we are to build lasting confidence in our Union, we still need to address this tension – to reconcile the economics of integration, which is about efficiency, with the politics of integration, which is about equity. 2 BIS central bankers’ speeches This is a complex issue, but a solution can be summed up in one word: skills. Theoretical and empirical research both suggest that recent technological change has been skill-biased. In other words, production technology has shifted in a way that favours skilled over unskilled labour, by increasing its relative productivity and therefore its relative demand. Equipping workers with the right skills therefore makes the economy more efficient and creates new job opportunities.
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Malaysia also made significant investments in talent development for the financial services sector. Given its significance in defining performance and resilience of the financial sector, comprehensive institutional arrangements have been put in place for all levels of the industry; at the entry point, at the working and specialist levels, at the professional level and at the leadership levels including for the boards of financial institutions. Finally, as the financial system became more regionally and internationally more integrated, regional financial stability arrangements have also been established. These included advancing collective initiatives in the areas of regional surveillance, the development of regional financial markets and payments infrastructure, and cross-border supervision. Forums for assessment of risks to regional financial stability have also been initiated, and work on establishing an integrated crisis management and resolution framework for the region is in progress. As part of these initiatives, a regional support mechanism has also been established. With these pre-conditions in place, Malaysia commenced initiatives to internationalise our financial system beginning 2003. The internationalisation of the financial sector entailed the advancement in two main areas; financial sector liberalisation and capital account liberalisation. In pursuing greater regional and international financial integration, the aim was to enhance the diversity of the financial system in terms of its product offerings, to improve further the competitiveness of the financial system and to strengthen our economic linkages with the region and other parts of the world. The financial sector liberalisation involved increased foreign entry and participation in our financial system.
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Zeti Akhtar Aziz: Global financial stability and the internationalisation of financial systems in emerging economies Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the EuromoneyQatar Conference “Global financial stability and the internationalisation of financial systems in emerging economies”, Doha, 11 December 2012. * * * It is my honour to be here in Doha to speak at this Euromoney-Qatar Conference on “Global Finance Re-designed”. I wish to thank the Qatar Central Bank for the invitation to speak at this event. In this current global environment, the unprecedented and wide ranging global policy responses have yet to produce financial stability and a sustainable recovery of the global economy. The intensification of the globalization of finance in this decade has resulted in an even more connected and interdependent world. While the financial systems and economies in most parts of the world felt the effects of the recent global financial crisis, it has not discouraged the pace of internationalization of financial systems, in particular, in emerging economies. My address this morning will be on financial stability and the internationalization of financial systems in emerging economies. My remarks will cover the benefits and challenges of such internationalization, the lessons that can be drawn from the recent global financial crisis, the Malaysian experience on the internationalization of our financial system. Benefits and challenges of internationalisation of financial systems While there are significant benefits from internationalization of financial systems, the resulting increased international financial integration brings with it new risks and challenges.
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Plus, some short-term elements, for example in January and February the exchange 1 As stated in a box in this Report, from now on, and with the purpose of enhancing the transparency the Board’s vision about the economy and the path of monetary policy, it has been decided to add a third year in the projections published on each opportunity. Thus, starting in March 2018, every Report will include the growth and inflation forecasts for the next three years: the current year and the next two. These forecasts will continue to be reported in two ways; the estimated variable in the baseline scenario. For inflation, it will remain a specific number, while for growth it will be a range, as it is now done for the present year and next. This change adds to those adopted in March 2016, when the Board decided to extend by one year the growth forecast for activity. 2 rate decrease coincided with carry trade operations, foreign flows for company acquisitions, pension fund portfolio adjustments and the entry into the market of the funds from the issuance of public debt. All this has led the peso to appreciate more than other comparable currencies (figure 6). However, some of these factors have a transitory impact, with rapid trend shifts over a few days, making it difficult to establish a clear direction. Therefore, the peso has been very volatile in recent quarters, with peaks of over CLP650 in December and lows of less than CLP590 in February.
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Muhammad bin Ibrahim: New and emerging Islamic finance jurisdictions – opportunities and challenges ahead Remarks by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia, at the 11th Islamic Financial Services Board (IFSB) Summit, Session 5: Panel Discussion on “New and Emerging Islamic Finance Jurisdictions: Opportunities and Challenges Ahead”, Port Louis, Mauritius, 22 May 2014. * * * I have taken great liberty in making my remarks today. I must admit these remarks are very much Malaysian-centric. I shall try to synthesise some of the lessons learnt by Malaysia that might be useful to new and emerging Islamic finance jurisdictions. These lessons are by no means exhaustive. Let me start with some points to set the context of my remarks. For new and emerging Islamic finance jurisdictions, they can learn from the experiences of other more established Islamic finance centres. These jurisdictions have the opportunity to jump start into 30 years of modern Islamic finance practices. They could move fast, avoid expensive pitfalls and adopt best practices. I will raise nine points that I hope will provide some perspectives on the issues raised. Islamic finance is for all (Gain acceptance). Islamic finance is for all. Its appeal extends to a larger global community, regardless of their faith and origins. Islamic finance is not only for the Muslims. Islamic finance cannot be successful if it is only supported by Muslims. Many now recognise that the inherent characteristics of Islamic finance are consistent with universal values.
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This would result in monetary policy no longer being centred on price stability and thus on sound money. 11 Switzerland has been able to manage the additional debt well thus far thanks to the fact that its public finances were in good order when the crisis hit. That said, the coronavirus crisis has fuelled aspirations here, too. There have been mounting calls for the SNB to make massive additional profit distributions. However, there are two things to bear in mind here. On the one hand, the size of any distribution depends on the earnings potential of our investments. And on the other hand, a central bank’s equity must be sufficiently high to cover the risks in its balance sheet. 12 Ladies and gentlemen, a monetary system has to take account of the changing needs of the economy and society over time, and the evolving environment in which it exists. However, it is also important to note that it is an order that has developed over the course of history and any ill-considered interventions could entail serious consequences for our country and the population as a whole. Swiss monetary history has been characterised by a wide range of changes, but the desire for sound money has been a constant throughout. Today’s paper money system with central bank money and banks’ book money has stood the test of time.
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During that period, she confronted many of society’s biggest challenges – for example introducing legislation to tackle domestic violence, to eradicate modern slavery and to counter terrorism. Never afraid of a challenge, she stepped into the breach to become Prime Minister following the referendum. The Prime Minister and her Government are committed to making the most of the opportunities that Brexit brings, and more fundamentally to working to build a stronger, fairer and more prosperous country for all. Please join me in welcoming the Prime Minister, Theresa May. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6
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The combination of less balance sheet exposure to exchange rate changes, less refinancing risk in debt structures, stronger fiscal and financial cushions, a large stock of reserves available to absorb shocks, and more flexibility for policy means that future sudden changes in financial flows should not precipitate the damaging runs on the financial assets of the country that they have in the past. Ultimately, this should mean that volatility in capital flows will cause less damage to real economic outcomes in emerging markets. The declines in real GDP associated with emerging market financial crises have been alarmingly large. In the crises of the late 1990s, the ensuing contraction in real GDP exceeded 10 percentage points in some economies and approached 20 in others. If the progress we have seen over the last several years is sustained, the incidence of financial crises in emerging markets will be lower, and the dynamics significantly different. Where these balance sheet improvements are most advanced, future financial distress will look more like what we typically see in instances of financial stress in the major economies - substantial asset price volatility and the potential for substantial financial losses, but less in the way of a significant disruption to either short-run or longrun real economic growth. This is of course a probabilistic judgment, not a certainty. The strong growth performance and greater financial resilience of emerging market we've seen this decade provides some support for this judgment.
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These challenges lie less in the types of things that can be captured in a financial ratio or balance sheet, or in changes to the risk premiums attached to the financial claims on the country. They lie more in the realm of improving how markets work and how efficiently resources are allocated. These factors include the development of the types of institutions that are the subject of DeSoto's work or the reports. They involve the development of the legal system and World Bank's Doing Business its ability to ensure that property rights can be established and that the protections they engender can be enforced. They are about creating the conditions for more competitive domestic financial and product markets by reducing barriers to starting and building a business, and by building better transportation, power and telecommunications infrastructure. And they are about broadening access to and improving the quality of public education. Allowing competitive pressures to operate is undoubtedly the best way to foster the investment, innovation and risk-taking that is central to raising an economy's long-run sustainable growth rate. But markets can't solve all problems, and they don't always function perfectly. This means that the policy imperative isn't simply to reduce regulation; it is to improve the design of the regulations that are important to dealing with market failures. Finally, future growth outcomes will depend importantly on the success of governments in fostering the development of the domestic financial system.
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8 The Herfindahl-Hirschman Index (HHI) is defined as the sum of the squares of the market shares of all firms within the industry, where the market shares are expressed as fractions. As a general rule, an HHI below 1,000 signals low concentration, while an index above 1,800 signals high concentration. For values between 1,000 and 1,800, an industry is considered to be moderately concentrated. See ECB Banking Structures Report, October 2014. BIS central bankers’ speeches 5 during the crisis, with negative spillovers to credit. Thus, there would be macroeconomic benefits not only to within-country consolidation, but also to cross-border consolidation. In a single market, we would expect the private sector to drive such a rationalisation process, especially given the efficiency gains that can be reaped from cross-border M&A in terms of, among of things, information technology and corporate overhead costs. 9 There are several explanations for why this has not happened, but part of the reason seems to be the effect of a fragmented supervisory and resolution regime, which raises the costs of entry for crossborder banks and reduces the economic synergies of integration. For example, industry surveys suggest that an important factor in low cross-border M&A before the crisis was opaque supervisory approval procedures. The high compliance costs created by different sets of national rules and interacting with several different authorities also affected the deal economics.
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Within the Bank, the Financial Stability Committee occupies a similar position in relation to financial stability as the MPC does for monetary stability. Bank staff present papers to the Financial Stability Committee evaluating the overall conjunctural position and reviewing issues of specific concern. The staff assessment of financial stability is shared with the Treasury and FSA and discussed with them in the Standing Committee, set up under the MoU, that meets each month to monitor financial stability and to consider issues of common concern. The objective is to identify sources of instability before problems emerge, to be in a position to take preventative action or to respond quickly in the event of trouble. The Bank sets out to articulate publicly its financial stability role and to communicate current concerns by the publication semi-annually of the Financial Stability Review. Each edition includes an overview of financial stability providing an assessment of current threats to the system, ranging from imbalances 1 BIS Review 70/2000 in the major industrialised economies or debt structures in EMEs, to sectoral issues such as equity market volatility or gearing in the telecoms industry. While other commentators may talk of economic miracles, you can rely on central banks to find disaster waiting in the wings! But if surveillance feeds off central bankers’ capacity to worry, then crisis prevention and crisis resolution, working on rules to minimise the risk or the cost of a financial crisis, may be the only prospect for us to get a decent night’s sleep.
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), which have increased their exposure to risk transfer instruments, even though their investment policies remain fairly conservative. Third, banks themselves may, via credit derivatives, improve their risk management. They diversify their risk profiles by gaining exposure to companies or sectors in which they do not have customer relationships and by hedging risks while retaining customer relationships. Credit risk transfer mechanisms are also used by banks to deal with single-name concentration risk. Consequently, major improvements in risk measurement have been made. From a prudential viewpoint, the Basel II framework takes better account of risk mitigation techniques employed by banks, including the use of credit risk derivatives, and applies specific treatment to securitisation. BIS Review 33/2007 1 2. But this evolution should make us more – not less – vigilant regarding the assessment and tracking of risks. The wider benefits that CRT can bring should not give rise to a false sense of security. Risks do not disappear as a consequence of their transfer. Banks need to pay attention both to "residual risks" (e.g. tail or extreme event risks) and all of the risks (e.g. operational risk, documentation and settlement risk, legal risk) arising from the use of CRT. Furthermore, the growing complexity and volume of CRT transactions call for enhanced monitoring. Actually, understanding where risk ultimately lies and how risky exposures can build up is an essential prerequisite for safeguarding financial stability. The argument is fourfold: First, historically low interest rates and abundant liquidity have prompted an intense search for yield.
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History has shown that it is precisely in good times that the seeds of financial distress develop. In the present context of the desperate hunt for yield, risk transfer markets may encourage investors to take on more risk. Therefore, financial innovation should not only concentrate on extracting yield but also on pricing risk at a sustainable level. This is one of the most demanding challenges of the coming years for both the private sector and the public authorities. BIS Review 33/2007 3
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This very fact that intellectual inputs from research are a precious resource in times of stress and multi-faceted uncertainty confirms me in my view that central banks’ investment in economic research, be it in-house or through partnerships with academia, is a very valuable asset. Therefore, I also warmly welcome this conference as being one brilliant illustration of the benefits brought by our three years long partnership with Toulouse School of Economics (TSE). Note however that, while the organization of high-level academic conferences has been an important achievement within this partnership, it is not the only one. Indeed, many avenues of fruitful collaboration have developed. Two series of regular joint seminars, one on monetary economics, the other on financial stability, and several workshops have notably contributed to strengthen the links between Banque-de-France and TSE researchers and stimulate the scientific and policy debates. I would also like to take this opportunity to thank Jean Tirole for his personal involvement in the exchanges with Banque de France. Last but not least, let me also advertise the new Banque de France – TSE Senior and Junior Prizes in Monetary Economics and Finance which purpose is to distinguish outstanding contributions by academics. The first prizes will be awarded for the first time on 16 March 2012. In the remaining of this address, I will first discuss the sovereign nature of the current crisis, its origins, implications and the associated challenges. Then, I will focus on the response of the Eurosystem to this crisis. 1.
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I would like to recall again that, in the euro area, banks are the main channel for mobilizing domestic savings and financing investment. This explains why ECB’s non-standard measures have primarily aimed at enhancing access of the banking sector to liquidity and at facilitating the functioning of the euro-area money market. Given the topic of the current conference, I would like to take the opportunity to elaborate on one of these non-standard measures, namely the Securities Market Programme, or SMP. Sovereign yields are central in the transmission of monetary policy, in particular because government bonds provide a floor to the private-sector funding costs. This is the reason why we launched the SMP. 2 BIS central bankers’ speeches I insist that, through the implementation of all its non-conventional measures – including the SMP – the Eurosystem has fully played its expected role as a lender of last resort (LLR), by which I mean that we have and we will intervene to stem liquidity crises that threaten the stability of the banking system. Having said that, it is clear that engaging in large-scale asset purchases of sovereign bonds is well beyond what should be expected of a central bank’s role as a LLR. Moreover, largescale asset purchases are not without risks. While they may help to alleviate upward pressures on long-term interest rates in the short run, they could also affect price and financial stability in the medium-run, by endangering the value of the central-bank money.
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And the impact of these efforts on emerging markets can be quite unpredictable and inconsistent with economic theories, due to the international currency status of the US dollar and the safe haven status of US dollar investment. Distinguished audience, Against the background of quite an unpredictable external environment, I believe that the Thai economy would still turn in reasonable growth rate for the year 2011. On the demand side, I see consumption and investment continuing on the rise. Consumer spending is expected to benefit from a high level of farm income from rising output and agricultural prices, high employment, and good consumer confidence. Meanwhile, investment by the private sector is also expected to grow, though at a slower rate than the periods following the crisis recovery. Currently, business sentiment and future investment plans are still showing an improving sign. And, public investment spending remains a key factor to keep demand momentum going forward. What we need to assess more cautiously is the future export performance. Of course, our export sector would be affected by the slowdown in the global economy to the extent that a large proportion of final demand for Asian and Thai exports remains in G3 economies. Having said that, I believe that exports will continue to grow along with world trade as long as the US and EU growth slowdown does not cause another global recession. I also want to stress that the process of export diversification in Thailand has advanced continuously in terms of markets and products.
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This produced an acceleration of some Lm7 million in the rate of increase of pension expenditures. Pension reform, which is vital for the long-term sustainability of public finances, should be implemented this year. Everybody has had a say and there is now a comprehensive, balanced set of proposals which answer to the widest possible range of concerns compatibly with having a viable system. It is time to move on to other pressing issues. 9. Property values continue to increase against a background of a rising volume of bank credit that is being channeled into construction and house purchase. Are there grounds for concern? Property values are estimated to have increased by about 9% in 2005. Although this represents a slowdown from previous years, it is still in excess of recent inflation and occurred despite a continuing high vacancy rate. The ready availability of credit contributes to rising property prices. While the volume of bank credit to the construction industry was more or less flat last year, borrowing to finance the construction or purchase of housing went up by 21% to Lm653 million. These numbers, moreover, must be viewed in the context of total household borrowing. Consumer credit, including through credit cards, increased by 13% in 2005 to Lm91 million. This is an area where the banks are marketing their products rather aggressively, encouraging borrowing for consumption rather than for investment purposes.
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Abdul Rasheed Ghaffour: Solutions for safe, adequate, affordable housing for all Opening remarks by Mr Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Cagamas - World Bank Affordable Housing Conference "Solutions for Safe, Adequate, Affordable Housing for All", Kuala Lumpur, 2 April 2019. * * * Thank you for inviting me to deliver the opening remarks for this conference. The issue of housing affordability is close to everyone’s heart. Having a family myself, I can truly understand the need and desire to own a safe, comfortable and affordable home. As such, I am pleased that the public discourse on this issue around the world and in Malaysia has been gaining traction over the past few years. This reflects the significance, concern and gravity of the situation. To ensure a fair standard of living, the United Nations recognises the provision of adequate housing as a necessary objective to pursue. Adequate housing includes ensuring affordability, habitability and accessibility, all of which are issues that this conference seeks to address. In my remarks today, I will touch on the responsibilities of individuals, the private sector and policymakers to realise the agenda of affordable housing, mainly from Malaysia’s perspective. For any individual, irrespective of income level, one of the biggest investments he or she will make in life is the purchase of a home. The downpayment and monthly mortgage represents a significant commitment, where for many, may even span a lifetime.
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So far, more than 3600 people have completed the modules and a substantial number of them, one in five, have decided not to proceed with the purchase. This points to two things. Firstly, the module is successful in nudging participants to reassess their existing financial obligations before they can take on more than what they can handle. Secondly, it reinforces the need to continue pushing for financial education. Individuals need to know their capacity, and what they can afford before undertaking a commitment of this magnitude. We have established that every individual needs to play their part to ensure that they are fully aware of and are able to undertake the commitment of buying a house. However, the responsibility does not reside with the buyers alone. Industry players in the private sector also 1/3 BIS central bankers' speeches have a role to play to support the national agenda of affordable homes. As one of the core players in the housing market, developers have a significant role to play. In providing the supply of homes for the public, developers should seek to provide homes at an affordable price point. Using international affordability metrics, houses in Malaysia are considered to be “seriously unaffordable” with a median multiple of five times. This, in turn, affects home ownership. Take the latest data of unsold residential properties of about 171,000 units. About 74% of them are priced beyond what ordinary Malaysians can afford.
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The broader economy should see a recovery in the second half of this year alongside strengthening global demand and further progress in our vaccination programme. Trade-related activities such as manufacturing and wholesale trade will be supported by resilient global trade flows and robust upswing in the global tech cycle. Modern services, particularly the financial and ICT sectors, are set to expand at a firm pace this year, amid a pickup in credit intermediation activities and the ongoing digitalisation of business processes which has been accelerated by the pandemic. Moreover, compared to a year ago, Singapore is much better equipped to handle the pandemic, with more effective testing and tracing, swift isolation of infected cases, and vaccination. Singapore’s GDP growth could exceed the upper end of the 4 to 6% forecast range, barring a setback to the global economy. Last month, the official forecast range was maintained at 4 to 6% in light of the deterioration of the domestic COVID-19 situation and consequent Phase Two (Heightened Alert). MTI, together with MAS, will review the forecast range in August when preliminary estimates for Q2 GDP are available. The resident unemployment rate should continue to gradually decline. Total employment expanded by 14,000 in Q1 this year, the first expansion after four consecutive quarters of contraction. The Phase Two (Heightened Alert) measures and continued restrictions under Phase Three (Heightened Alert) however will have a transitory impact on employment in the domesticoriented services sector.
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Assets under management in Singapore grew by 17% year-on-year, to $ trillion as at end-2020, driven by strong inflows into traditional and alternative investment strategies 10 as well as valuation gains 11 across major asset markets. The FinTech sector has also continued to do well. Investments in FinTech firms based in Singapore reached a record $ billion in 2020, an increase of more than 30% from 2019. In the first quarter of this year, FinTech companies here already raised more than $ million. The financial services and FinTech sectors created 2,500 net jobs last year. We expect the financial sector to continue to create good jobs this year. Financial institutions expect to create about 6,500 new hiring opportunities 12 this year, with strong demand in areas such as technology, wealth management, corporate banking, and insurance. 13 The financial services sector has exceeded both the value-added and employment targets set by the Industry Transformation Map (ITM) for 2016–2020. Growth in value-added during this 5-year period averaged 5.4% per annum, above the ITM target of 4.3%. The sector, together with FinTech, added an average of 4,700 net jobs per annum, above 7/9 BIS central bankers' speeches the target of 4,000. MAS has started reviewing the ITM strategies and targets for the next 5 years. MAS has been studying in depth how the financial services landscape will transform and what Singapore must do to remain competitive in the coming decade.
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And announced in the Green Finance Strategy that from this year the FPC remit letter will require that they have regard to the COP21 Paris Agreement when considering how to advance objectives and discharge their functions. In taking these actions, the Government has in effect reduced the FPC’s discount rate on climate-related financial risks. This means that GDP-at-risk will now grow more quickly in the FPC’s loss function. And by responding to this, the FPC will reduce climate-related exposures, and the private financial sector will help to pull forward the adjustment to net zero for the economy as a whole. There are three main areas macroprudential policymakers can act. 33 On reporting, climate disclosure standards under the TCFD must be enhanced to be as comparable, efficient and decision-useful as possible. And we need to develop pathways to mandatory climate disclosures. To manage risks, disclosures need to go beyond the static to the strategic. The Bank of England with the PRA and FPC will run the world’s first integrated bottom-up climate stress test for banks and insurers, including the catastrophic business-as-usual scenario, the ideal – but still challenging – transition to net zero by 2050, and the late policy action climate ‘Minsky moment’ scenario including economy-wide disruption that a delayed and disorderly transition will bring. Our stress test of the world’s leading international financial centre will show how major financial firms expect to adjust their business models, as well as the potential collective impact of these responses on the wider economy.
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22 All speeches are available online at www.bankofengland.co.uk/news/speeches 22 Chart 15: FPC housing tools more efficient than monetary policy for addressing the same risks Risks increasing as the GDP-at-risk tail grows larger 1yr ahead median GDP growth 4.0 forecast (%) 2004 If FPC housing tools had been in place 2004 2007 2014 3.5 3.0 2000 2015 2006 2.5 2005 If monetary policy acted to achieve same reduction in GDP-at-risk 1998 2001 2003 2017 2.0 2016 2010 2002 2013 1.5 2018 2008 2019 2011 1999 1.0 0.5 3yr ahead 5th percentile GDP growth estimate (%, cumulative) 2012 0.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 The FPC’s structural and cyclical bank capital requirements The UK’s bank capital framework optimises the FPC’s objective function by balancing the impact of higher capital on GDP-at-risk with the impact of higher capital requirements on the central GDP forecast. 𝑇 min ℒ𝑡 ≡ 𝐸𝑡 {∑ 𝛽 𝑖 [𝑓(𝐺@𝑅𝒕+𝒊 ) − 𝜙𝑦𝑡+𝑖 ]} 𝜌𝑡 𝑖=0 The capital framework includes structural requirements that are not designed to vary systematically over time, and a cyclical requirement that varies with the financial cycle to match the level of resilience with the level of GDP-at-risk.
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These include (1) closer integration of global economy through stronger trade and financial linkages, (2) increasingly large and mobile capital flows due to lower costs on cross-border investments, (3) rapid spread of information made possible by advancement in technology, and (4) more pronounced reactions on the part of market participants in times of heightened uncertainties ever since the onset of the global financial crisis. The interplay between market players’ expectations, their self-fulfilling nature and spillover effects paves the way for market exuberance in response to a trigger event. As a clear case in point, the recent ups and downs of financial markets upon new information the market perceives from each round of the Fed’s announcements highlight the role of “shifts in beliefs” on market volatility. What made the post-2008 period particularly vulnerable to such self-fulfilling global turmoil is the current stage of the world economy characterized by lingering structural weaknesses of the crisis countries and limited policy space that reduce the potential of macroeconomic stabilization policy. All of these factors reinforce the role of global shocks and contagion through real linkages as well as expectation channel in transmitting volatility around the world. Notwithstanding the turbulence of the global economy, Asian economies had proven to be resilient in the face of negative external developments, with favourable macroeconomic performance and well-maintained stability during the past period, thanks to the region’s flexible policy framework, robust financial system, and improved risk management as lessons had been learned from the crisis of 1997.
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Making headway towards sustainable growth Ladies and gentlemen, The success of Asian economies in weathering the global financial crisis is certainly commendable. But it would be a mistake to be lulled into complacency by this success of short-term volatility management. In particular, there remain important long-term challenges to the sustainability of growth in Asia. Indeed, latest economic indicators already pointed to a BIS central bankers’ speeches 1 less upbeat growth trajectory of the Asian region including China. The apparent slowdown in Asia, despite gradual improvement of the advanced economies, lends support to the idea that Asia also has its own structural bottleneck issues to deal with. The time is ripe for all parties involved to look beyond short-term fluctuations and give serious consideration to longer-term structural issues that are holding back Asian potential growth. This is the second topic of my talk today: what can Asia do to sustain its high pace of growth in the post-crisis world? Since the onset of the global financial crisis, most policy responses in emerging markets have been focused on demand-side management, through monetary or fiscal policy stimulus. But boosting demand alone could only get us thus far. The real lift of potential growth of the economy must essentially come from supply-side progress. This refers to either the more abundance or the better use of capital and labor inputs in the economy.
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Bank supervision added value by assuring counterparties and market participants that banking entities had clean and accurate balance sheets by forcing the timely recognition of losses. More recently, in response to the development of rating systems, the supervisory effort has shifted to the evaluation of the credit risk management process, and specifically the quality of each bank’s internal credit rating system. As supervisors we are no longer solely concerned with whether a bank has properly rated a troubled credit. Rather, we are now focused on the extent to which the bank can properly distinguish between loans across the spectrum of credit quality through its ratings, and whether these ratings are adjusted on a timely basis according to changes in a borrower’s performance. With Basel II, there are requirements for a meaningful differentiation of risk, for credit ratings with integrity, and for a warehouse of data to support the ratings (and requirements to ensure that historical data horizons cover appropriate economic downturn conditions). Moreover, banks will be required to test their rating system’s performance, resulting in more accurate ratings and capital assessments. In addition, through Pillar II, banks will be required to benchmark the results of their Pillar I credit assessments through rigorous stress testing.
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Zeti Akhtar Aziz: Brief overview of the Islamic financial system Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the launch of Commerce Tijari Bank Berhad, Kuala Lumpur, 15 April 2005. * * * Bismillahirrahmanirrahim Y.Bhg. Dr. Rozali Mohamed Ali, Group CEO, Commerce Asset-Holding Berhad (CAHB) Ladies and Gentlemen, “Significant milestones have been achieved in our endeavour to build a comprehensive, efficient, dynamic, robust and resilient Islamic financial system. The Islamic financial landscape is now at the threshold of a new level of dynamism. The entry of foreign Islamic banking players, the transformation of Islamic banking windows into Islamic subsidiaries, the increasingly more vibrant Islamic financial markets, the enhanced inter-linkages with the global financial system, the enhanced consumer awareness, the strengthened regulatory, legal and Shariah infrastructure as well as the more conducive tax environment have culminated to open up new frontiers for the Islamic financial services industry in Malaysia, promising significant opportunities that will further enhance wealth creation and the potential for growth and development of the nation.” Ladies and Gentlemen, It is my pleasure to be here today to commemorate the official launch of “Commerce Tijari Bank Berhad”. Indeed, the emergence of Commerce Tijari Bank Berhad in the Islamic financial landscape will further enhance the diversity of the players in the Islamic financial system and will contribute to spur the growth of the Islamic financial services industry.
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Per Mr. Yam gives a broadbrush picture of Asian monetary co-operation Jacobsson Lecture given by Mr. Joseph Yam J.P., Chief Executive of the Hong Kong Monetary Authority in Hong Kong, on 21/9/97. Introduction 1. Good afternoon. On behalf of the people of Hong Kong, particularly those of us at the Hong Kong Monetary Authority, let me extend my warmest welcome to all of you to Hong Kong. For those of you who have visited Hong Kong before, perhaps many times, I hope you are pleased to see that Hong Kong, as a Special Administrative Region of the People’s Republic of China, remains as vibrant and dynamic as you have known in the past, retaining much of its free market characteristics, under the principle of “one country, two systems”. 2. It is a great honour and privilege for me to be invited to give this year’s Per Jacobsson Lecture. As a Managing Director of the International Monetary Fund (IMF), Mr Per Jacobsson led a life that was dedicated to the promotion of both European and later international monetary co-operation. It is only befitting that a lecture held in Asia in memory of this great man should address the topic of Asian monetary co-operation. This is also a subject that has been brought to sharp focus in the light of the recent turmoil in the currency markets of Asia. 3.
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But the relevant perspective is that of co-operation and not of “autonomous” infighting between the representatives of free enterprise and those of Hobbess Leviathan-type of government. Against this background let me take a bird’s eye view of some challenges that regulatory and oversight authorities should tackle to facilitate initiatives to resolve the identified issues. A first challenge is the need for a common approach of the regulatory and oversight authorities. This need arises from several factors. For instance, clearing and settlement of securities transactions occur in different institutions located in different jurisdictions. The whole infrastructure underlying these transactions has reached a global dimension. Over the past decades cross-border infrastructures have deployed their activities essentially as a complement to domestic systems, but I expect them start playing a more powerful role at a domestic level as well. The common approach to regulate and oversee cross-border securities clearing and settlement systems, which I have referred to previously, is being worked on. The various standards and recommendations that have been issued recently is proof this. Some may set the accent on the divergences, misinterpretations or on the incompleteness of these standards and recommendations. I do not refute them but I also see the value added of sharing the same language to tackle complex issues. Regulatory and overseers tend to adopt a pragmatic approach where one authority takes on a leadership role and consults with other relevant authorities.
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In time, we will consider the case for reducing the 2% threshold to further enhance financial stability. Payments fraud and economic crime are becoming increasingly sophisticated, and the Bank as operator of CHAPS is engaging in initiatives to tackle these threats. The Committee on Payments and Market Infrastructures (CPMI) has developed guidance on reducing the risk of wholesale payments fraud related to endpoint security.10 The Bank is currently undertaking a number of initiatives to strengthen our position and support our CHAPS Direct Participants in line with CPMI strategy, which includes adjusting our CHAPS rulebook to focus on detection, prevention and response to security issues as I described earlier. 10 https://www.bis.org/cpmi/publ/d178.htm 5 All speeches are available online at www.bankofengland.co.uk/news/speeches 5 At the level where fraud is most likely to touch on end-users, Vocalink piloted an anti-money laundering tool known as Mule Insights Tactical Solution (MITS)11 for a number of Faster Payments participants. MITS can retrospectively track fraudulent payments as they move between customer accounts, thereby helping to quickly identify and highlight to Payment Service Providers any suspected ‘mule accounts’. They can then take action to block funds and close these accounts, making it more difficult for fraudsters to undertake scams. We are currently in the exploratory phase of a pilot to use MITS on a subset of CHAPS data. The additional insights generated should help participating Direct Participants to better tackle further fraud activity.
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We are also focused on how as operator of CHAPS the Bank can support UK-wide efforts to tackle economic crime. The recently published UK Economic Crime Plan12 noted the role that the Bank can play in this regard, including by enabling enhanced payment data through the development of interoperable message standards and by promoting wider adoption of Legal Entity Identifiers. These initiatives will help to promote greater transparency in ownership of legal entities and support detection of financial crime. Minimising impact of incidents Resilience is key to payments, and we need to be ready to respond to the unexpected. That is why we have not stopped at prevention. We are also proactively thinking about how to respond when incidents occur; how to reduce the impact and any spill-overs to the wider ecosystem; and of course how we can recover quickly (for FMIs this means within two hours under most scenarios as set out in CPMI guidance). Furthermore, like other systemically important systems, we are preparing to meet the Bank’s forthcoming operational resilience policy that will apply equally to the Bank as the operator of CHAPS as it does to payment systems recognised for statutory supervision. Our mandate for promoting the stability of the UK’s financial system means we are not only interested in the resilience of CHAPS, but also the settlement of all payments critical to the economy. In an increasingly fastmoving financial system, being able to guarantee that critical payments settle on the same day is crucial.
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Taking these changes together, that is, higher expected growth in the developed economies and lower growth in the emerging world, considering their relative weights, drives our forecast for Chile’s trading partners marginally up for 2014 and 2015, to an average of 3.8 percent (3.7 percent in December). The financial conditions facing our economy have not changed materially since December, while the terms of trade have worsened. Overall, compared with recent years, our external scenario will be less favorable this year. This because, on the one hand, foreign interest rates have risen as has risk aversion towards emerging markets. On the other hand, the price of copper has been falling for some months. In fact, at the statistical close of this Report it had dropped past the barrier of 3 dollars per pound. Our baseline scenario foresees that the pound of copper will trade at an average of 3 dollars in 2014 and 2.85 dollars in 2015 (table 1). As I said before, in the past few months output and demand growth fell short of our forecasts in the previous Monetary Policy Report, particularly in investment-related sectors. Output grew 4.1 percent annually in 2013, with a sharp deceleration during the second half. One determinant was the behavior of sectors unrelated to natural resources, especially those associated with investment such as construction and part of trade and manufacturing. Among the components of demand, gross fixed capital formation posted the sharpest downward adjustment.
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Assuming that developments in Swedbank’s and SEB’s other markets continue to be relatively good, however, the bank groups should be able to cover most of the losses from the Baltic region with the earnings from the remainder of their operations. Swedbank and SEB have subsidiaries in the Baltic countries, while Nordea has a branch. According to EU regulations, the authorities in the country where subsidiaries are located have responsibility for their supervision, while the home country authorities have the responsibility for branches and for the bank group as a whole. Around 80 per cent, equivalent to SEK 320 billion, of the Swedish banks’ lending to the Baltic countries is in euro. These euro are lent almost exclusively in the international loan markets by the parent bank in Sweden. BIS Review 11/2010 1 The Baltic economies developed rapidly after these countries gained their independence, although there have been some setbacks. This development was supported by extensive inflows of capital from abroad, particularly after EU membership in 2004. Much of the money came from neighbouring countries such as Finland and Sweden. The average standard of living for the populations in the Baltic countries increased rapidly from 41 per cent of the EU average in the year 2000 to 62 per cent in the year 2008.
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This approach clearly showed its limits during the financial crisis. The financial fragmentation of EMU during the financial crisis was partly a result of the initial choices concerning EMU’s institutional architecture – to be precise, its minimalist design which left economic and financial policies mostly at national level. This was maybe due to an overriding faith in the efficiency of financial markets that – even though not shared by all of EMU’s founding fathers – prevailed in Maastricht. It has to be acknowledged, however, that over the following years, financial market integration in EMU and at global level, accelerated at a speed that was hard to grasp in those early days after the creation of Monetary Union. The introduction of the single currency gave a major impetus to financial integration in the euro area. Financial integration was impressive in terms of quantitative indicators but it was not sustainable – it proved to be shallow and reversible. In fact, it even contributed to the rapid contagion in the early days of the crisis.1 We learned the hard way that a single currency requires a financial system that is sustainably integrated and, indeed, as single as possible. Much has been done to correct the initial design failures of EMU. Along with the introduction of the euro, the EU’s Financial Services Action Plan was launched to provide an overall framework for the integration of financial services in Europe.
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17 Asdrubali, P., B. Sorensen and O. Yosha (1996), “Channels of Interstate Risk Sharing: United States 1963– 1990”, The Quarterly Journal of Economics, 111(4): 1081–1110. 18 Hsu, P., X. Tian and Y. Xu, (2014), “Financial Development and Innovation: Cross-Country Evidence”, Journal of Financial Economics 112: 116–135. 19 Kremer, M. and A. Popov, (2018), “Financial Development, Financial Structure, and Growth: Evidence from Europe”, Special Feature A, ECB Report on Financial Integration in Europe. 20 Claessens, S. (2016), “Regulation and Structural Change in Financial Systems”, in The Future of the International Monetary and Financial Architecture, ECB Forum on Central Banking Conference Proceedings, 188–222. 21 Da Rin, M., G. Nicodano and A. Sembenelli (2006), “Public Policy and the Creation of Active Venture Capital Markets”, Journal of Public Economics 90:1699–1723. 9/9 BIS central bankers' speeches
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04/12/2020 "Gearing up for New and Evolving Jobs in Financial Services" - Remarks by Mr Ravi Menon, Managing Director, Monetary Authorit… Speeches Published Date: 26 November 2020 "Gearing up for New and Evolving Jobs in Financial Services" - Remarks by Mr Ravi Menon, Managing Director, Monetary Authority of Singapore, at “Growing Timber” MAS-IBF Webinar Series on 26 November 2020 Good morning and thank you for joining us. MAS and IBF are launching today the “Growing Timber” project – a series of monthly webinars and events focused on jobs and skills in the financial services sector. Jobs – the Central Economic Challenge of Our Times In August this year, at the Jackson Hole Economic Policy Symposium discussing the economic challenges facing the world, Senior Minister and Chairman MAS, Mr Tharman Shanmugaratnam, said: “The central problem is in creating enough jobs in the first instance, and in raising the quality of jobs for more people over time”. https://www.mas.gov.sg/news/speeches/2020/gearing-up-for-new-and-evolving-jobs-in-financial-services 1/18 04/12/2020 "Gearing up for New and Evolving Jobs in Financial Services" - Remarks by Mr Ravi Menon, Managing Director, Monetary Authorit… I can’t agree more: jobs are the central economic challenge of our times. The success of economic policy is not measured by how well financial markets are doing, not by how well companies are creating new products, not even by how fast GDP is growing. The ultimate measure of economic success is this: are we creating enough good jobs for our people?
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3/4 BIS central bankers' speeches *** Dear participants, I avail the opportunity for addressing to this Conference and highlighting the importance of sharing knowledge and experiences among us on such an important theme. I would like to conclude my speech by thanking you again for the invitation! 4/4 BIS central bankers' speeches
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Last but not least, if Switzerland were to give up its monetary independence by pegging the franc to the euro or by joining the euro area, it would lose its privileged status and, consequently, Swiss interest rates would increase to European levels. Since higher interest rates mean lower asset prices and lower levels of investment, and also higher mortgage rates, the Swiss are understandably not keen on giving up their national currency. Since any major decision in Switzerland has to be approved in a public referendum, the prospect of EU and euro membership in the near future is thus highly unlikely. Given our exposure to global economic and financial shocks, and their arguably smaller importance for the euro area, pegging the Swiss franc to the euro is not a realistic option. Flexible exchange rates give us the room for manoeuvre we need. • What has our experience been of coexistence with the euro so far? Very positive. Rather than crowding out independent currencies, the euro has stabilised the monetary scene in Europe. In fact, the franc is less volatile today than it was before European monetary integration. The price of the euro in Swiss francs these days is about 3% lower than it was in 1999, in other words, almost unchanged. We did have periods, however, when the franc was under pressure, especially after September 11 and before the outbreak of the war in Iraq. The safe-haven function of the franc then triggered a 10% appreciation in our currency against the euro.
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The uncertainties due to commodity price fluctuations also stand out as an important issue for the monetary policy communication and expectations management by the central banks. Structure of the commodity price dynamics is also of great importance for they constitute an input for the monetary policy decisions of the central banks. For example, the sources of the commodity price fluctuations and the nature of the shocks are extremely influential for the determination of the policy responses to these fluctuations. Similarly, not only the level but also the volatility of commodity prices can have a significant effect on the macroeconomic activity. For example, a shock affecting the level of crude oil prices may have a different effect on economy, if it is observed in a period where the volatility of prices is also higher. BIS central bankers’ speeches 1 Inflation IV III Growth I II As I have briefly mentioned before, an increase in the commodity prices creates downward pressure on the growth prospects, and upward pressure on inflation. In Turkey, the investment incentive package that was announced yesterday will support our economic growth through the supply side, and the tighter monetary policy will eliminate the inflation risks. The sessions on each day of the conference will provide platforms for studies which are of very rich content and great potential benefit for policymakers. For example, macroeconomic effects of the commodity price dynamics and possible corresponding policy responses are among the main themes elaborated during the conference.
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But, with accelerating inflation in the economy as a whole, the effect would have been tantamount to real exchange rate appreciation, which would in any event have damaged their competitive position and so provided at best only short-term relief even to them. And it would not in that case be possible to reverse that effect through exchange rate adjustment. The fact is that there are no easy answers or ideal solutions to the one-size-fits-all problem at the Eurozone level, without substantial - and sustainable convergence between our economies, although coping with such tensions as may emerge within the Eurozone - with or without the UK - is likely to be easier in a context of structural, supply-side, flexibility and adaptability in labour and product markets. Now, many people in the Eurozone acknowledge these concerns. But they are inclined to argue that if a country participating in the monetary union were to find itself in an unsustainable situation, and given that it would have no macro-economic way out - through exchange rate adjustment, or independent monetary policy action, or fiscal stimulus beyond the limits of the Growth and Stability Pact - and given limited labour migration or fiscal redistribution at the pan-European level - then it would have an overwhelming incentive to undertake the supply-side reforms which have proved so BIS Review 71/2000 2 difficult to introduce up until now.
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Many of them need to use instruments to manage or hedge their RMB exposures. All these RMB related financial services and products can only be developed by the markets and financial institutions because they are closest to their customers and understand their needs best. That is why it is so important for the HKMA to collaborate with our official sector counterparts in Australia to create this private-sector led Dialogue. The first Dialogue was held in Sydney in April last year, which was highly successful. I am very pleased that it is Hong Kong’s turn to host the second Dialogue and I am confident that it will be equally if not more successful. I note that today’s Dialogue has a very rich agenda and I look forward to hearing useful and practical ideas and suggestions on what the private sector can do on its own or in collaboration with the official sector to further develop the offshore RMB markets in Australia and Hong Kong. 8. Thank you very much. 2 BIS central bankers’ speeches
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In the future, the Bank might, for example, increase haircuts during “peacetime” if liquidity in the secondary market from a particular type of collateral became impaired; or if the Bank concluded that, as the upswing of a credit cycle developed, risk was plausibly becoming underpriced and so was not properly reflected in the valuations of instruments it was accepting as collateral. Whether or not that would be enough of itself quell a cycle is obviously uncertain; but it would help to protect us against risk and would give a signal. In short, haircut policy matters. Pricing But the Bank does not believe that haircuts can be relied upon on their own to produce the appropriate incentives for banks’ liquidity management. Price matters too. Bagehot said that the rate should be “high”. But since he wrote in the context of the Gold Standard and of domestic financial crises that were typically accompanied by external (or capital account) crises, his notion of a “high rate” was bound up with the central bank tightening monetary conditions to stem the outflows (of gold). But it is clear enough that, although he did not in fact talk of “penalty” rates, the relevant measure for him was the rate charged by the central bank relative to that prevailing in the market in normal conditions, ie before a crisis breaks. The Bank has adopted, and promulgated, a fee structure for its liquidity-insurance facilities that increases as banks’ borrowing increases and/or is made against riskier, less liquid collateral.
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Frankly, it has been shocking over the past year or so to discover how many medium-sized banks and building societies did not hold government bonds or other very high quality assets; or, if they did, how many did not have a regular presence in the gilt repo market or even had no capacity to repo at all. Turning up in the core secured-funding markets for the first time for years is an absolute give away of distress. All that has to change. Market-maker of Last Resort What I have said so far could be mistaken to imply that only banking markets matter. That would be misleading. The capital markets obviously matter too. Indeed, the current crisis has illustrated just what a mess can result from liquidity draining out of those markets. Market liquidity is endogenous: participants thinking that it might dry up can contribute to its doing so. In the early phases of this crisis, by virtue of holding large “trading” books that were marked to market, banks and other traders found themselves having to make very large portfolio write downs in the face of sharp rises in liquidity premia in asset markets. As highly-levered institutions, those mark-downs depleted their net worth to the point of imperilling solvency. That caused a retrenchment in the availability of credit, helping to plunge the world economy into recession, and so impairing the value of more traditional loan books, in a vicious spiral. So it would have been better if, somehow, we could have preserved the liquidity of the markets.
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Diagram 2: ”The IT-bubble” 800 800 700 700 Affärsvärlden: IT-index 600 600 Index 500 500 Nasdaq: Nasdaq: Composite 400 400 300 300 200 200 Dow Jones: Industrials 100 0 96 97 98 USA Dow Jones Industrial Average, close daily [index 1996-01-02] 99 00 100 01 0 Sources: Hanson & Partners AB. USA Nasdaq Composite index, close daily [index 1996-01-02] BIS Review 90/2001 1 One is what has happened to the discussion about the “new economy”. Swedish media are mentioning the subject less and less (Diagram 1). I believe that mirrors how people’s interest in general has waned. And considering how rapidly and extensively prices have fallen for IT and telecom shares, one is inclined to the view that all the talk about the third industrial revolution was really something of a dead end (Diagram 2). That leads on to my other question, namely the part that technological breakthroughs play for corporate profits and thereby for the return on equity. Where did the “new economy” go? Concerning my first question, perhaps it is not so surprising that we now hear less and less about the “new economy” than we did last year. Share prices for IT and telecom companies have fallen markedly. Many people have lost a great deal on their investments. We hear or read about redundancies and cutbacks in this sector almost daily.
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Diagram 3: United States: real profits (S&P 500) 1 00 Trend 1.5% per year 10 1 1 87 0 18 80 18 90 1 90 0 1 91 0 1 9 2 0 1 9 30 1 9 4 0 1 95 0 1 96 0 19 70 19 80 1 99 0 2 00 0 Source: Shiller. The profits of listed companies can, of course, rise comparatively rapidly in the short run. If the profit share moves up from, say, 30 to 35 per cent, this implies a temporary increase in profits of 15 to 20 per cent, spread over the years when the profit share is elevated. Such a temporary increase in the profit share has not been uncommon in connection with technological breakthroughs. It occurred in Sweden in the 1990s and also early in the twentieth century in the era of electrification. 4 BIS Review 90/2001 The profit share followed a rising path up to the end of the 1910s and this was accompanied by higher GDP growth (Diagram 4). It is perhaps hardly surprising that this led many shareholders to believe that profit growth would continue to exceed the historical trend in the longer run. That did not happen. An elevated profit share tends to fall back sooner or later and corporate profits then return to their longterm path.
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In an attempt to protect their own real income from the unavoidable impact of higher external prices, the longer that firms try to maintain real profit margins and employees try to maintain real wages at pre-energy price shock levels, the more likely it is that domestically-generated inflation will achieve its own self-sustaining momentum even as the external impulse to UK inflation recedes. Monetary policy cannot prevent the loss of real national income stemming from the deterioration of the terms of trade. That is a real shock, with real consequences that ultimately monetary policy cannot offset. Nor can or should monetary policy seek to influence the distributional impact of the terms of trade shock on specific sectors or regions. As a relatively blunt instrument, monetary policy is not well suited to such a task, which would any way extend beyond its established mandate. [8] What the Bank can do – and indeed must do, if it is to achieve its price stability mandate – is ensure that any self-sustaining momentum in inflation at rates above the 2% target is squeezed out of the system by constraining demand relative to supply as necessary. ‘Multiplicative effects’ and Says’ Law This naturally leads back to where I started: while pricing power in tight goods and labour markets can be analysed as a source of inflationary pressure distinct from energy price rises, these two factors can – and do – interact with one another.
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Implicit in the concerns about second round effects discussed here is the fear that domestic actors will resist that switch in the composition of demand by seeking to maintain their income and spending levels at pre-shock levels, which is inconsistent with the necessary and inevitable adjustment to the real shock to the economy and can ultimately lead to inflation. 9. As discussed in footnote 8, the composition of demand across domestic and external sources is also important for adjustment to real exchange rate shocks. In this regard, the ability and willingness of domestic firms and households to substitute away from more expensive natural gas imports – both to other sources of energy, and also to non-energy goods and services – can influence the adjustment and its potential inflationary consequences. This was discussed in Box B of the MPC’s November 2022 Monetary Policy Report.
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In the current crisis, monetary policy is said to have played a role in contributing to excessive risk-taking behavior in the period leading up to the crisis, but monetary policy is also powerful in handling the economic and financial downturns through aggressive actions on interest rate and the provision of liquidity. This shows that it is crucial to get the stance of monetary policy right early by formulating monetary policy in a forward-looking manner. This, of course, is easier said than done. And the last lesson is communication. One lesson we learnt clearly from the crisis is that policy actions alone cannot ensure a successful outcome without the support of an effective communication strategy. In this crisis, the Fed has demonstrated the importance of this to the highest level through its ability to articulate its understanding of the situations, to communicate the rationale for the use of unconventional measures, its approach to making the results of the stress-testing exercise public, as well as its ability to manage market expectations while maintaining policy credibility. All these have been instrumental to the success so far of the Fed’s policy response. It is, therefore, clear from the crisis that wellexecuted and credible communication can help anchor market expectations. Let me now turn to my second remark on strengthening the monetary policy framework. I agree much with what has been said about the need to improve bank regulation and supervision going forward, especially to reduce procyclicality in the financial system.
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But for monetary policy, the framework can also be strengthened to increase its effectiveness in safeguarding price and financial stability. The first is that good macro-surveillance process is a must to help identify key risk that might be developing in the economy. This surveillance needs to cover both developments in the real economy and in the financial markets so that any potential risk to financial stability can be identified early. Second is the need for a disciplined decision-making process that takes into account information from the surveillance process in the deliberation of monetary policy. One key common weakness in the past has been the limited use of information on the financial side in the formulation of monetary policy. Third, in order to deal effectively with both price and financial stability, the thinking now is to focus monetary policy on its core function of maintaining price stability, while financial stability objective is best served by ensuring a robust and efficient financial system through strong bank regulation and effective supervision. Nonetheless, to the extent that developments in the financial sector may have systemic implications, monetary policy can be combined with macroprudential measures aimed at reducing risk to financial stability at the source. An example of this is excessive credit growth in a certain sector that can be discouraged by tightening up the relevant lending standards. A number of SEACEN economies have adopted this approach, especially for housing loans.
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We are also seeing signs of spillovers to other parts of the economy, with recent survey data pointing to some moderation in the services sector. 1/5 BIS central bankers' speeches Yet, consumption has held up fairly well: labour market conditions have continued to improve, encouraging consumers to remain confident and to continue to spend. The prolonged slowdown in economic activity has nevertheless been affecting price developments, which remain subdued. According to Eurostat’s flash estimate, inflation stood at 1.0% in November. Whether we look at surveys or market-based measures, inflation expectations are at or close to historical lows. What can the ECB do in a weaker economic environment to fulfil its price stability mandate? First of all, monetary policy can respond effectively even when growth is being dampened by external factors. And it can do so by ensuring favourable financing conditions for all sectors of the economy and providing visibility on those conditions into the future. Backed by a steady flow of credit on affordable terms, households and firms can consume and invest more. Such support for internal demand reinforces the services sector in particular, which is the most labour-intensive part of the economy. That helps to protect jobs and incomes and thereby sustains consumption – partly offsetting the external shock. We are seeing this mechanism in action today: the relative resilience of services so far is the key reason why employment has not been affected by the global manufacturing slowdown.
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Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement by Ms Christine Lagarde, President of the European Central Bank, at the ECON committee of the European Parliament, Brussels, 2 December 2019. * * * Madam Chair, Honourable members of the Economic and Monetary Affairs Committee, Ladies and gentlemen, I am very happy to be back before this Committee for my first regular hearing as ECB President. I want to express my personal and sincere gratitude to this house for the support I received during the appointment process. And I look forward to a constructive and positive relationship between our two institutions going forward. The connection between the ECB and the European Parliament is especially valuable today as a means to reinforce trust in European institutions. In the euro area, support for the single currency has grown steadily in recent years, rising from a low of 62% in 2013 during the crisis to an all-time high of 76% today. Trust in the ECB has grown in that time as well – but its recovery after the crisis has been less dynamic.1 My predecessors at the ECB were alert to this and already acted to address the challenge. The ECB’s accountability practices have evolved2, as has its communication strategy.
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Our currency, the ringgit, has been subjected of market volatility throughout this episode of global economic uncertainty. While most emerging markets currencies depreciated following the reversal of capital flows, the extent of ringgit weakness has gone beyond fundamentals and rational thinking. While market liquidity remains sufficient, on certain days, FX spreads have widened to 100 pips in the interbank market, and led to spikes in the movements of the ringgit exchange rate. Market volatility has almost doubled from around 8% to 14–15%. I believe that the recent adverse market conditions with thin liquidity in the FX market have been exacerbated by irrational market behavior and risk aversion. In the current market environment, our own analysis has revealed that the higher interbank volume and the higher market volatility were due to this risk aversion. A small client’s order gets passed around among interbank players like a “hot potato”, and the exchange rates move each time it changes hand. These irrational behaviors have significant repercussions on the real sector of the economy. Banks, fearing rapid movement in the ringgit, quoted widen spreads to corporates and this gets amplified when corporates themselves get increasingly nervous and rush to fulfill their foreign currency requirements. As a result, trades in small volume can lead to a disproportionate impact on the exchange rate. This is in contrast to Malaysia’s strong economic fundamentals, steady and sustained growth, high level of international reserves, low unemployment and a resilient and diversified financial system, etc.
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First, given the unpredictable and dynamic nature of the financial market, there is urgency for us to keep our fingers on the pulse of the market and have access to real time information. 2 BIS central bankers’ speeches There is much scope for cooperation between the central bank and industry players in this area. In addition to being familiar and observance of the rules and regulations of the financial market, we expect market participants to know the details of their clients’ transactions to aid us in understanding the nature of the market conditions. Everyone has an important role to play in maintaining the stability of the market and remain vigilant on all financial market activities. This is necessary to prevent activities that could threaten financial stability and create unnecessary volatility, or incidents that could damage the integrity of our domestic financial market. Secondly, while I’m on the topic of enhancement of market stability and integrity, I should stress on the importance of upholding individual ethics and professional conduct. The market is made up of individuals including institutions. The glue that binds individuals and institutions that constitute the market is TRUST. A case in point, on rate rigging, several global banks paid hefty fines to regulatory authorities because of individuals rogue traders. Many dealers were convicted of wrong doings, and investors are still taking lawsuits against the banks. TRUST was violated. While no Malaysian dealers were caught red handed in market misconduct, we should not be complacent.
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Had we not done this, constant nominal interest rates amid falling inflation rates would have led to higher real interest rates and undermined anaemic growth even more. This would have significantly increased the risk of deflation. This is just as harmful as accelerating inflation. As Walter Eucken said: “Deflation distorts the price framework just as much.”1 1/5 BIS central bankers' speeches Thus, price stability for the ECB means that we have to protect European citizens not only from inflation rates that are too high, but also from a deflationary spiral. This is reflected in our quantitative definition of price stability: an inflation rate of below, but close to, 2% in the medium term. We therefore acted in order to abide by this symmetrical mandate on price stability. But we are aware that we cannot lower our interest rates to an unlimited extent.2 As from a certain level, it becomes more attractive to keep cash – despite the associated costs – than to pay negative interest rates. And even if this point has not yet been reached, we are bearing in mind that further rate cuts into negative territory may have non-linear effects. The reactions of people in extremis cannot be anticipated. But we can also influence market interest rates in other ways. Thus, for example, with our asset purchases we have pushed the yield curve down.
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A little bit of stodginess? Speech given by Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee Cumbria Chambers of Commerce, Kendal Friday 13 July 2018 1 All speeches are available online at www.bankofengland.co.uk/speeches “In my view both as a citizen and as a policymaker, a little stodginess at the central bank is entirely 1 appropriate” Alan Blinder’s 1999 advice to central bankers, quoted above, was not, I am pleased to say in these fitness conscious times, an injunction on the appropriate nutrition for monetary policy makers. Rather, it was advice on how to respond to uncertainty or, to be precise, the need for caution when faced with a particular type of uncertainty – uncertainty about the impact of monetary policy on the key variables in the economy it seeks to influence. But I would like today to look at the case for ‘stodginess’ when faced with uncertainty more generally about possible changes in how the economy works and the ‘model’ of the economy that policymakers necessarily have in their minds. Uncertainty, as I have noted before is the natural environment of monetary policy. There is a large academic literature on the optimal way for policy to deal with different types of uncertainty. But I would like to look at these issues first in the context of my time on the MPC and then in relation UK monetary policy going forward.
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This has allowed U.S. businesses to restructure their balance sheets, manage their earnings per share through share buybacks financed with bargain-basement debt issuance, bolster stock prices through enhanced dividend payouts and position themselves for financing growth once they see the whites of the eyes of greater certainty about their economic future. By driving nominal interest rates to half-century lows, we have also reduced the hurdle rate by which future cash flows of publicly traded businesses are discounted. Thus, through financial engineering, we have helped bolster a roaring bull market for equities: The indexes for stocks have nearly tripled from the lows reached in March 2009. Alongside these signs of rebound have been some developments that give rise to caution. I have spoken of these in recent speeches, echoing concerns I have raised in FOMC discussions: • The price-to-earnings (PE) ratio of stocks is among the highest decile of reported values since 1881. Bob Shiller’s inflation-adjusted PE ratio reached 26 this week as the Standard & Poor’s 500 hit yet another record high. For context, the measure hit 30 before Black Tuesday in 1929 and reached an all-time high of 44 before the dotcom implosion at the end of 1999. 1 • Since bottoming out five years ago, the market capitalization of the U.S. stock market as a percentage of the country’s economic output has more than doubled to 145 percent – the highest reading since the record was set in March 2000.
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As a general rule, then, the further into the future a commitment extends, the vaguer it tends to be. Along these lines, the FOMC periodically reiterates its commitment to do what it is legally mandated to do: pursue full employment, price stability and a stable financial system. But getting from there to an actual prescription for the funds rate isn’t straightforward. If it were, FOMC meetings wouldn’t take eight-plus hours of discussion and hundreds of pages of briefing materials. Delphic forward guidance is less binding than Odyssean guidance. Like the responses of the oracle of Apollo at Delphi, it is more obscure, more enigmatic. It amounts to saying, “Here’s what we think we are going to want to do if the economy evolves as we currently expect.” Delphic guidance clarifies your current thinking about future policy without making any promises – even contingent promises. Our current FOMC statement is chock-full of Delphic guidance.
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At the same time, an increase in life expectancy for each cohort will reduce the annual pension. This motivates the individual to remain in employment and to ensure that the system is sustainable. The National Insurance Scheme’s expenditure is financed directly over the central government budget. Decisions about national insurance benefits have a substantial influence on future taxpayers. These costs are not transparent when the budget is decided. Developments since 1967 show that such a pay-as-you-go system is not robust. Benefits change over time and costs can easily be pushed into the future. The alternative is a system where pension expenditure is covered by accumulated capital, i.e. a funded system. In a funded system, a decision to increase pensions or reduce the age of retirement will require the allocation of capital today to cover future expenditure. Such a fund provides a measure of the cost of increasing pension expenditure. Our pension system is complicated. In addition to the National Insurance Scheme, many other operators, including the central government, have established additional pension schemes. There are different rules for coordination and entitlement. Any shift to a fund-based system for the National Insurance Scheme will probably require transitional rules for many years ahead. However, I believe that it will be possible to find solutions to these practical problems. Distributional and practical considerations imply that minimum benefits in the pension scheme cannot depend on earlier employment, but should apply to everyone.
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An increase in unemployment that is due to a higher rate of increase in labour costs than implied by productivity growth cannot be offset by low interest rates or higher public spending and tax cuts, but requires changes in the functioning of the labour market. There is an important interaction between monetary policy and fiscal policy. According to the new guidelines for fiscal policy, petroleum revenues are to be phased in approximately in pace with the expected real return on the Government Petroleum Fund. This guideline implies that fiscal policy will contribute to stimulating aggregate demand in the Norwegian economy every year for many years ahead. The guideline also implies that the use of petroleum revenues will increase as long as the Petroleum Fund is expanding. Variations in oil prices are accompanied by considerable fluctuations in government petroleum revenues from one year to the next. It is important to prevent these fluctuations from spilling over to the mainland economy. Public expenditure and taxes that vary in relation to oil prices would result in an unstable economic environment. Financial markets would be marked by uncertainty and 4 BIS Review 11/2002 turbulence, with an increase in the risk premium on Norwegian securities. This would have resulted in higher and more variable interest rates. The risk of financial crises in Norway would also have increased because the cyclical fluctuations in the Norwegian economy would have been more pronounced. It is therefore an advantage that fiscal policy is now predictable and anchored in a longterm strategy.
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We had to expect that this increase would lead to a deterioration in the competitive position of Norwegian manufacturing, either through higher wages or through an appreciation of the krone exchange rate, and with Norway’s relatively higher wage growth, competitiveness has been weakened by approximately 15 per cent since the mid-1990s. The krone exchange rate has been influenced by high oil and gas prices and prices for other Norwegian export goods. Monetary policy has also influenced the path for Norway’s relative costs, but the nominal value of the krone is about the same as ten years ago. Strong growth in public expenditure and expectations of moderately higher growth in the use of petroleum revenues now seem to have been factored into the cost level. Even at the beginning of the oil age in Norway in the early 1970s, the relationship between the use of petroleum revenues and changes in industry structure was raised as an issue. Manufacturing industry was scaled back in waves in the course of this period. The last wave occurred around the turn of the millennium, but a substantial decline also occurred in the periods 1977 to 1984 and 1987 to 1992. Prior to these periods, the manufacturing sector’s competitiveness deteriorated. Today, about 55, 000 fewer persons are employed in manufacturing than was the case in 1998. The share of our imports that can be covered by current petroleum revenues and some of the Petroleum Fund will gradually diminish. Competitiveness must therefore be improved.
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Like China, income disparity is a major problem. Reforms will be uneven and politically complex. The Indian system, with its decentralisation of power, makes change more difficult. Navigating the bureaucracy and its regulations requires connections, skill and lots of patience. However, while the pace may fluctuate, reforms are irreversible. Whichever party is in power will have to deliver the economic goods. This, together with the desire not to be left behind by China, will ensure that India stays on the path of reform. 22. India has many strengths, not least of which is its deep source of human capital, including a large pool of well-educated English-speaking professionals and workers. India has a young population, much younger than Japan's and China's. 55 percent of Indians are under 25 years old and 40 percent under 15. 23. India has carved a niche for itself as the world's back office and a global software centre. India is also working hard to change its investment outlook. In 2004, Foreign Direct Investment (FDI) into India was $ billion, less than 10 percent of China's $ billion. Under Prime Minister Manmohan Singh, fiscal consolidation has shown progress. Customs duties have been slashed. Another significant initiative is the development of Special Economic Zones, where superior infrastructure, flexible investment laws and special incentives are designed to draw in foreign investments. 24. There is strong competition among Indian states and cities for investments and to outperform each other. Recently, the Chief Minister of West Bengal called on me.
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Aggregates, as I have said, can hide a multitude of sins. Household debt came down post crisis in most advanced economies – falling from 83% of GDP in 2009 to around 73% today – and has grown very slowly, if at all, since, moving within a percentage point for the last five years.12 11 The Euro area is perhaps something of an exception, given that Euro members issue debt in a common currency rather than a national currency. This removes the exchange rate and inflation mechanisms for correcting debt values that can operate when sovereigns issue in their own currency and makes the adjustment mechanism of default more likely, as was seen in the Euro crisis. 8 All speeches are available online at www.bankofengland.co.uk/speeches 8 Financial sector debt in advanced economies has also grown very slowly after the very painful deleveraging of the financial sector during and after the crisis. This reflects greater risk aversion in the banking sector reinforced by the much higher level of capital banks are now required to hold against losses, a very positive development for financial stability. Corporate debt in advanced economies, however, is a more mixed story. It has not grown much overall over the past 5 years. But within that, over the past 3 years its growth rate has accelerated in some countries – particularly the US and France. And perhaps more importantly, while the totals may not be changing much, the riskiness has been increasing.
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Google and Facebook may be at the top of their industry now, but remember there were Yahoo, MySpace and Friendster. I am very sure somewhere in some garage, killer apps are being developed to rival current industry leaders. The fourth observation is that shifts in consumer needs and expectations will play a key part in the finance revolution. 91% of Malaysians today have a smartphone and 83% will look on the internet to research new products and services. Finance and business models will need to be redeveloped around changes in consumers’ lifestyles and expectations. For example mobile banking in its traditional sense does not work anymore in this country as smartphone penetration is quite high and the public is generally receptive to new ideas and innovations. The transformation of finance and technology will also usher in an era of increasingly educated, empowered and activist consumers, who will scout for the best prices and services. Globally, around a third of consumers would consider banking with a technology giant (e.g. Google, Amazon or Facebook), potentially due to perceived personalisation and better customer experience. The fifth observation is that technology could be the catalyst to propel finance as a great social equaliser of the future. Advancement in technology will enhance financial inclusion by addressing information asymmetry and reducing the cost of extending finance to previously underserved groups. This could grant access to around 2 billion people globally who remain unbanked today, enabling them to save, invest and uplift their livelihood.
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Chairman, the 2009 Finscope Survey highlighted a number of barriers to financial inclusion, which were broadly categorized into The physical access or proximity to financial institutions Affordability of financial products BIS central bankers’ speeches 1 Appropriateness of financial products Regulation barriers such as know your customer requirements Chairman, we know, for instance, that the apparent high cost of providing banking services to a population that is largely subsistence and therefore financially challenged excludes many from accessing financial services. Brick and mortar establishments are expensive to set up and even when they are set up, distance to the nearest branch for many, particularly for those in the rural areas becomes a problem. The findings relating to the cost of providing financial services contained again of the Finscope™ Zambia Survey (2005) goes some way in underscoring the nature of the problem. The survey found that about 32% of the banked reported that it costs them between K5,000–K10,000 to get to their bank while about 26% spend between K11,000–K25,000. At these cost levels it is not difficult to see why certain segments of our population do not actively seek financial services. The mobile payment system does therefore address some of these challenges and consequently can be an important platform for expanding the delivery of financial services. In some respects it complements conventional financial services or products. In other respects it makes up for the weakness of the conventional financial service providers.
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This process has accelerated the fragmentation of production across borders, requiring additional efforts to adequately measure the value that each country contributes to the production chain of goods and services. This process of productive integration is known as Global Value Chains (GVC). In this context, the scope of idiosyncratic shocks has global repercussions, affecting the different economies involved in the GVC. As we noted in our latest Monetary Policy Report, the escalation of the trade war between the US and China has coincided with the continuous deterioration of various indicators of expectations and slowed down industrial prospects, investment and international trade figures. In fact, global trade is growing at its slowest pace since the Global Financial Crisis of 2008-09. Our own calculations, using panel data of 28 economies, confirm that statement. Since the beginning of the confrontations, countries integrated into GVC would have had an additional slowdown in their exports, as well as weaker manufacturing prospect (PMI). On the side of prices, fragmented trade and digitization have been associated with both more synchronized global inflation and a stronger external impact on domestic prices. In addition, digitization allows prices to adjust rapidly to shocks to—or changes in—demand. The producers of statistics are an essential actor measuring this process and should make additional efforts to improve quality and timeliness while safeguarding the credibility of the statistics. International guidelines and recommendations are necessary, but not sufficient, to capture the particulars of each country.
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Monetary and macro-prudential policies: The case for a separation of powers Speech given by Ben Broadbent Reserve Bank of Australia, Sydney via videolink from Bank of England 12 April 2018 I have benefitted from helpful comments from my colleagues at the Bank of England. I would particularly like to thank Mette E. Nielsen, Richard Harrison, Lien Laureys, Roland Meeks, Ambrogio Cesa-Bianchi and Matthew Corder for their valuable research assistance. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Monetary Policy Committee. 1 All speeches are available online at www.bankofengland.co.uk/speeches Periodically, public services in Britain are criticised for what is described as a “target culture”. The charge is that, because they’re asked by politicians to concentrate on the more prominent and observable objectives of the job, public services can pay too little attention to its less visible requirements, even when those are equally important. If you ask doctors to prioritise a reduction in waiting lists they might then spend too little time with individual patients. If they’re judged only by exam results there’s a risk that schools “teach to the test” and neglect the broader aspects of education. What these jobs have in common is that they involve multiple objectives, some of which are more easily measured than others. Many jobs are like this and economists have suggested that this can explain why, in the real world, performance-based pay contracts are much less prevalent than one would expect.
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I also think there’s an additional justification for separation in many of these cases, and for monetary and macro-prudential policies in particular. It’s essentially a matter of accountability11. I think there’s little doubt that, over any limited period of time, monetary stability is more easily measured than financial stability. The MPC’s primary target is inflation, as measured by the rate of change of the Consumer Prices Index. We get to see the CPI every month, it’s never revised, and it’s therefore reasonably clear over time whether the target has been reached. Judging the MPC’s performance is in reality a little more complex than this. Policy takes time to work, so it’s inevitable that intervening shocks will prevent inflation from being exactly at the 2% target all the time, even if that were the sole objective of policy. In addition, the MPC’s remit involves a secondary objective, subject to the primary inflation target, to stabilise the real economy. If they occur, the MPC is asked to identify tradeoffs between the two. However, when that has happened – for example, following the sharp fall in sterling that accompanied the result of the UK’s EU referendum – I don’t think it’s been insuperably difficult to explain the policy approach. People can then monitor how the economy is performing, relative to our earlier projections. We on the MPC, for our part, can use surveys and market prices to gauge very regularly, in “real time”, what’s happening to inflation expectations.
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