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For the past 40 years, the most popular of those informational assumptions has been rational expectations (Muth (1961)). That, too, has dominated modern macro and finance for a generation. In its strongest form, rational expectations assumes that information collection is close to costless and that agents have cognitive faculties sufficient to weight probabilistically all future outturns. Those strong assumptions about states of knowledge and cognition have not always been at the centre of the economics profession. Many of the dominant figures in 20th century economics – from Keynes to Hayek, from Simon to Friedman – placed imperfections in information and knowledge centre-stage. Uncertainty was for them the normal state of decision-making affairs. Hayek’s Nobel address, “The Pretence of Knowledge”, laid bare the perils of over-active policy if we assumed omniscience (Hayek (1974)). For Friedman, lack of knowledge justified a k% monetary policy rule (Friedman (1960)). For physicist Richard Feynman: “It is not what we know, but what we do not know which we must always address, to avoid major failures, catastrophes and panics.” Through Arrow-Debreu and Merton-Markowitz, economists may have failed to heed Feynman’s catastrophe warning. Despite occupying a small corner of the profession, decision-making under uncertainty has begun to attract recent interest (Hansen and Sargent (2010)). That is in part recognition of the limitations of the rational-expectations-cum-general-equilibrium framework for capturing key elements of the current crisis (Kirman (2010)). More positively, it may also be because it yields powerful, and in some cases surprising, insights. Take decision-making in a complex environment. | We also project that during the first half of 2017 inflation will hit 3 percent and will remain in the neighborhood from then onwards (figure 5). It should be noted that private inflation expectations are consistent with this scenario, assuming that it will stand somewhat above 3 percent in one year and at 3 percent in two years. One important thing that distinguishes Chile from other economies, is that this process 2 BIS central bankers’ speeches where inflation has remained high for quite some time has not driven inflation expectations away from the policy target, which attests to the credibility of the Chilean monetary policy (figure 6). In line with earlier Reports, inflation remaining high for almost two years responds largely to the direct and indirect effects of the exchange rate depreciation, in a context where past inflation indexation and tight capacity gaps have kept non-tradable inflation at a high level. In the baseline scenario, core inflation will converge to near its historic average by mid-2017. This process will be largely determined by the fact that, beyond the usual volatility, no further depreciations are expected of the magnitude seen in recent years. It is worth saying that, with significant fluctuations, the peso/dollar parity has dropped since December and, at the statistical cutoff date of the Report, it was near its levels of August 2015. | 0 |
In line with this development, oil prices hovered above the previous assumption of oil prices at USD 55 per barrel in the Inflation Report of April. Our assumption for oil prices have been revised in line with the average of futures prices registered in the first half of July. Within this framework, oil prices were assumed to be USD 60 on average in 2009 and around USD 70 in 2010 and thereafter. On the other hand, projections for food inflation of 7.5 percent for end-2009 and 6 percent for the following years have been maintained. The impact of exchange rate movements on input costs since the last quarter of 2008 was offset by declining import prices. Therefore, import prices denominated in domestic currency did not display significant changes. While generating medium-term forecasts, it was assumed that imported input costs would increase gradually, in line with the anticipated slow recovery in global economic activity. 16 BIS Review 103/2009 Furthermore, revised forecasts envisage that world interest rates will remain low for an extended period of time. Regarding fiscal policy, it is assumed that fiscal discipline will be established within a medium-term program. Moreover, it is assumed that adjustments in taxes/administered prices in the second half of 2009 will add around 1.5 percentage points to 2009 inflation. | 8), which will be published in May. Discussion of the timetable for a potential Swedish EMU membership The timetable for a potential full Swedish membership of EMU will be determined by the political process. The Government Bill "Sweden and the Economic and Monetary Union" from 1997 states that if the government later finds that Sweden should participate in the monetary union, the matter should be put before the Swedish people. Pronouncements by, for instance, Prime Minister Göran Persson indicate that a referendum will be held next year. Other political leaders have expressed similar opinions. If the result is a "yes", then Sweden would put forward an application to the European Commission and the ECB for an examination of whether we fulfil the legal and economic convergence criteria. The economic criteria assessed are the inflation rate, long-term interest rates, exchange rate stability and the public sector's budget and central government debt. Following this scrutiny, the European Parliament and the European Council shall present their views on the reports made by the Commission and the ECB and after this the ECOFIN Council will decide on the Commission's proposal to allow Sweden to participate in the union. If Sweden is accepted, there will be negotiations on when entry will occur and at what exchange rate the krona will be fixed against the euro, which is decided by the ECOFIN Council. After this a national changeover plan will need to be drawn up. | 0 |
Cecilia Skingsley: A new playing field for monetary policy – what can a small, open economy expect? Speech by Ms Cecilia Skingsley, Deputy Governor of the Sveriges Riksbank, at Kammarkollegiet capital market day, Stockholm, 19 May 2016. * * * I would like to thank Mikael Apel for his help in writing this speech, Goran Katinic for help with the diagrams and Claes Berg, Hans Dellmo, Gabriela Guibourg, Ulf Söderström and Anders Vredin for useful comments. Any remaining errors are strictly my own responsibility. As difficult as it is to believe today, it was only ten years ago that monetary policy was considered to be a relatively straightforward and uncomplicated business. It was assumed that essentially all that the central bank needed to do was to set the policy rate so that inflation ended up close to the target at the same time as production and employment developed in a satisfactory manner. There was a widespread perception that the central banks had finally gotten a grasp of how monetary policy should best be conducted, and this, it was assumed in turn, was an important explanation for the “Great Moderation” – the fairly long period of unusual macroeconomic stability that preceded the financial crisis. How different the situation is today. Conducting monetary policy is now rightly seen as anything but easy by both central bank representatives and economic analysts in general. | The regulatory model for stablecoins could include different applications of these features – as long as it offers equivalent protections to those for commercial bank money. As part of this, a key requirement will be to ensure that, unless the stablecoin is operating as a bank, the backing assets for stablecoins cover the outstanding coin issuance at all times. An alternative to a private stablecoin, but not a mutually exclusive one would be central bank digital money in the form of a central bank digital coin (CBDC). Central bank money has a unique role in anchoring value and promoting confidence in monetary systems. A CBDC could therefore play an important role in sustaining, and potentially expanding retail access to central bank money. I have discussed the public interest in the safety and security of money. But there is another very important public interest in this area which goes to the heart of the monetary and financial system. I mentioned earlier that commercial bank money combines in one place – bank accounts – the store of value and means of payment functions of money and in doing so enables lending to the real economy. What if new forms of digital money – Stablecoins or CBDC – result in a large scale displacement of commercial bank money which means that a higher fraction of money in the economy must be backed by high-quality liquid assets rather than by loans to the real economy, with this being necessary to preserve the stability of a now more fragmented financial system. | 0 |
Looking at the size of the largest firm’s assets in relation to GDP across a spectrum of industries, finance is by far the largest (Chart 22). The extent of balance sheet growth was, if anything, understated by banks’ reported assets. Accounting and regulatory policies permitted banks to place certain exposures off-balance sheet, including special purpose vehicles and contingent credit commitments. Even disclosures of on-balance sheet positions on derivatives disguised some information about banks’ contingent exposures. This rapid expansion of the balance sheet of the banking system was not accompanied by a commensurate increase in its equity base. Over the same 130 year period, the capital ratios of banks in the US and UK fell from around 15–25% at the start of the 20th century to around 5% at its end (Chart 23). In other words, on this metric measures of balance sheet leverage rose from around 4-times equity capital in the early part of the previous century to around 20 times capital at the end. If anything, the pressure to raise leverage increased further moving into this century. Measures of gearing rose sharply between 2000 and 2008 among the major global banks, other than US commercial banks which were subject to a leverage ratio constraint (Chart 24). Once adjustments are made to on- and off-balance sheet assets and capital to give a more comprehensive cross-country picture, levels of gearing are even more striking. | Among the major global banks in the world, levels of leverage were on average more than 50 times equity at the peak of the boom (Chart 25). For a given return on assets (RoA), higher leverage mechanically boosts a banks’ ROE. The decision by many banks to increase leverage appears to have been driven, at least in part, by a desire to maintain ROE relative to competitors, even as RoA fell. For example, as Chart 26 illustrates, virtually all of the increase in the ROE of the major UK banks during this century appears to have been the result of higher leverage. Banks’ return on assets – a more precise measure of their productivity – was flat or even falling over this period. Between 1997 and 2008, as UK banks increased leverage, they managed to maintain broadly constant capital ratios by, on average, seeking out assets with lower risk weights (Chart 27). A similar pattern was evident among a number of the Continental European major global banks (Chart 28). | 1 |
Of course, the realized stream of income could differ substantially from these projections, depending on how interest rates and the balance sheet evolve. In any event, it is worth repeating that the realized income is much less important than the economic outcomes that are achieved from the programs. Conclusion I hope these comments have provided you with some insights into how the SOMA portfolio has been managed to date and some perspectives on its evolution going forward. In general, the Federal Reserve will continue to have a meaningful presence in the Treasury market and in the agency debt and agency MBS markets for a number of years. However, with effective communications about potential balance sheet actions and careful implementation of any such actions by the Desk, the markets should be able to adjust to the evolution of the SOMA portfolio without considerable problems. Thank you. 12 All SOMA income is remitted to Treasury after paying for the operating expenses and capital needs of the Federal Reserve. 13 Of course, the Federal Reserve is being compensated for assuming this risk in the same manner as other market participants, because the assets were obtained at market prices that embed premiums for the various risks involved. Our presence in the market likely reduced these risk premiums, but they appear to have remained positive on average for the assets purchased. 14 See “Domestic Open Market Operations During 2010”, a report by the Markets Group of the Federal Reserve Bank of New York, March 2011. | Being a senior manager in finance now brings the responsibility and accountability that befits what the best in the industry have long recognised: finance is a true profession. The Bank of England’s role in markets has been comprehensively overhauled. We’re replacing constructive ambiguity with open for business when we provide liquidity to markets. We’re working with others as One Bank to develop markets that support financial stability and the real economy. We’ve revamped our governance and we’re holding ourselves to the highest standards of accountability, including the Senior Managers Regime on top of parliamentary and public scrutiny. So a huge amount has already been completed to make markets fairer, more resilient, accountable and effective. These reforms are essential for the UK to remain the leading international financial centre. BIS central bankers’ speeches 3 They are essential not least because the size of the UK-based market-based financial system could increase from six to nearly 15 times UK GDP by 2050. But the journey isn’t finished. Today is a chance to take stock and reflect: not just on our achievements but on what we might have missed, overdone, or simply got wrong. Given the complexity and scale of financial reform, it would be remarkable if every measure were perfectly constructed. Or if they all fit seamlessly into a totally coherent, self-reinforcing whole. Authorities must have the courage to listen, the honesty to admit our mistakes and the confidence to set them right. | 0 |
This is that the new single-currency, euro, markets develop trading practices and standards of conduct, and the necessary infrastructure, that will genuinely facilitate integration. In terms of infrastructure, for example, real-time, same-day wholesale payments are essential to tie together money market activity conducted in different centres in the same instrument in the single currency; and similarly, linkages may also need to be considered between different settlement systems. Common trading practices, and market conventions, will also need to be developed. The lead here lies in many cases with market participants themselves, and with the systems they have developed to serve their trading needs. But it is a process we are very familiar with in London, where we have sought when necessary to encourage just such common initiatives in order to enhance the effectiveness of international trading activity in London. And with an eye on EMU, we have encouraged trading activity in the ECU, particularly in the money markets: hence, for example, the regular programme of monthly auctions for UK government ECU treasury bills, and the quarterly auctions of UK government three-year ECU notes, which have been running for some years. Because of the international flavour of our markets, and because we are conscious that these markets will want to trade the full range of euro instruments in London, we will continue to support initiatives aimed at achieving the necessary market structure where we feel we can make a contribution. Reforms in the London markets BIS Review 110/1997 -7- 35. | They will want to be able to offer their customers deposits and foreign exchange facilities in the euro, lending and borrowing in the euro, hedging and collateral in the euro and financing and settlement facilities. The London markets will need to be able to operate in euro from the outset across the full range of their wholesale activities, and practical preparations are now well advanced to achieve that by January 1999. 14. The Bank of England’s part in this extensive process of market-wide preparation, besides equipping ourselves internally for operations in the euro, is a co-ordinating one, in three main ways: • first, our job is to ensure that the necessary infrastructure is developed in the UK to allow anyone who wishes to do so to use the euro in wholesale payments and across the financial markets from the first day of EMU. • second, we aim to promote discussion between the EMI, national central banks and market participants across Europe about practical issues on which the market is seeking a degree of coordination. • and third, we provide information: for example, through a quarterly publication on Practical Issues Arising from the Introduction of the Euro, which is distributed to around 32,000 recipients, including 4,000 directly overseas. The next edition will appear shortly, neatly timed for people’s Christmas reading, and I confidently expect it to be on the best sellers’ list for the festive season. | 1 |
We view our policy as part of an overall economic policy aimed at creating conditions for sustainable long-term economic growth in our country. Thank you very much! 3/3 BIS central bankers' speeches | [4] The growing role of non-banks offers the benefit of diversifying sources of finance and can thereby help to ensure a smooth provision of funding to the real economy. [5] Evidence also suggests that a higher share of non-bank finance can help economies to recover faster from recessions,[6] when banks’ ability to lend may be impaired. [7] Crucially, however, the benefits of this diversification rely on making sure that the non-bank financial sector provides a stable source of funding, ensuring robust financing for companies in both normal and stressed market conditions. Liquidity and leverage – lessons from recent market events As the market footprint of non-bank financial institutions increases, new risks and vulnerabilities can arise. Let me discuss three in particular. First, the strong growth of the non-bank financial sector – especially the asset management industry – over the past 15 years has been accompanied by an increase in liquidity mismatches. A key contributing factor is that investors in open-ended funds – which account for the largest part of the investment fund sector – can typically redeem their shares on a daily basis without prior notice. This creates a liquidity mismatch especially in funds that invest in relatively illiquid assets, such as high-yield corporate bonds. Liquidity demand has become more procyclical as a result, especially during periods of financial market stress. During the pandemic, we saw how liquidity mismatches in open-ended funds increased demand for market liquidity, which amplified stress in financial markets. | 0 |
Today, they have sufficient liquidity to function without having to finance themselves via the SNB. This situation of excess liquidity is of a permanent nature. The transition from a liquidity shortage to excess liquidity does not, however, change the SNB’s monetary policy strategy, which is still aimed at stabilising the three-month Libor within the target range set by the SNB. The implementation of this strategy has nevertheless been 2 BIS Review 85/2010 adjusted to reflect the new liquidity conditions. In times of a liquidity shortage, the SNB must supply the markets with liquidity to keep the Libor at the targeted level. If there is excess liquidity, it must drain liquidity from the market in order to keep the Libor at the same desired level (cf. chart 3). This situation can be compared with that of a driver going up a mountain pass. Driving up the hill, he pushes on the gas pedal in order keep the vehicle driving at a certain speed. On the way down, however, he must step on the brake continue to travel at the same pace. Monetary policy with SNB Bills and reverse repos The SNB is not the only central bank that finds itself in a situation of excess liquidity. The majority of central banks which have taken unconventional monetary policy measures are in the same position. Central banks have a range of measures at their disposal to reduce this excess liquidity. | These doubts are reflected in a significant increase in risk premia for sovereign debt in these countries, which has prompted them to establish major cost-cutting programmes. This situation is weighing on financial markets, despite the relatively favourable reports of economic recovery at the global level. Indeed, current market uncertainty has reached a high level, although it remains lower than that observed during the recent crisis. To give an example, the VIX index (which measures uncertainty on the equity market) and the CDX index (which measures credit risk) are both rising again. However, they are still significantly lower than at the end of 2008, i.e. at the peak of the subprime crisis (cf. chart 1). The uncertainty associated with the fiscal situation of certain European countries has also triggered another rise in tension on the interbank market for US dollars. To counter this, several central banks, including the SNB, have reactivated swap facilities in cooperation with the Federal Reserve in order to provide dollar liquidity that may be required for the smooth functioning of the markets. In Switzerland, the interbank market has remained calm. Indeed, the ample supply of liquidity has reduced Swiss franc interbank rates. As can be seen in chart 2, risk premia on the Swiss franc interbank market have also declined. They fell by more than a half in May while, during the same period, US dollar risk premia on the interbank market in the US rose again. Alongside the uncertainty, investor risk aversion has grown over the last few months. | 1 |
The absence of a nominal anchor was one of the main reasons behind the pronounced swings in the real economy in the 1970s and 1980s. It was demonstrated that a long-run trade-off between inflation and unemployment does not exist. Today, monetary policy aimed at price stability is the norm, and in most countries monetary policy has been delegated to independent central banks. We have also learned that very high policy ambitions are not compatible with the way the economy really works. Attempts to control all the quirks of the economy will eventually undermine the intentions. In fact, by scaling back on overly high policy ambitions the overall outcome will be better. Today the beneficial effects of making full use of markets in resource allocation are again widely recognised. State ownership and “dirigisme” have been reduced. Competition has increased in most markets, though lapses do occur from time to time. Trade barriers have generally been lifted or reduced. Well developed financial markets help move capital across borders and between industries. Today’s economic environment has in many respects risen from the ashes of failed paradigms. In a sense, today’s regime resembles the one we had 100 years ago. From the mid-19th century until the outbreak of the First World War, capital markets were integrated across countries that had adopted the gold standard. Markets were largely deregulated. Cross-border financial capital movements were subject to little or no regulation. There was solid confidence in the gold standard as a nominal anchor. Inflation was low and stable, supporting economic growth. | BIS central bankers’ speeches 5 There are a couple of other difficulties related to the use of national policies. The shock absorbing capacity of fiscal policy is in too many instances limited by the narrow fiscal space existing before the crises. The recession has further eroded fiscal positions and fiscal rules have failed to tame unsustainable fiscal paths so that the ability of fiscal policies in the EU to deal with another blow of crises is quite limited. Also, a need for national macroprudential policy immediately opens the issues of harmonisation and coordination on the international level in order to avoid unintended consequences, which I will comment in more detail later on. Additionally, for macroprudential policy to be effective it must be intrusive, affecting the “normal behaviour” of agents and markets 19, yielding benefits in reducing long-term costs generated by the systemic risk that makes it hard to attenuate public interest thus creating a central bank’s legitimacy paradox 20. Unconventional expansionary monetary policy, which was pursued after reaching the zero lower bound, and out of the fear of “the risk of doing nothing” 21, may be risk-inducing by fuelling search for yield behaviour. Abundant liquidity and low borrowing costs have the capacity to generate bubbles, confirming a notion that rational individual decisions may lead to irrational social outcomes – albeit as a reaction to highly non-conventional policies. | 0 |
The crisis and the period before the crisis clearly illustrate the tendencies towards exaggerated cyclical behaviour that often characterise the financial markets. In periods of strong growth, there is usually an increase in demand for loans for corporate investments and property purchases. It also seems to be common for awareness of risks to decrease during such an upturn. Lenders often relax requirements for creditworthiness at the same time as they often take on too much debt themselves. When problems subsequently arise as a result of some borrowers finding it difficult to repay their loans, there can be an overreaction in the other direction, with severe credit tightening as a consequence. But systemic risk is not just a matter of a tendency towards exaggerated cyclical behaviour in credit granting. It is also a matter of how the concentration of risk and the links between different parts of the financial system at any given time affect the risk of a crisis hitting the system as whole. For example, several banks can take the same kind of risk or be dependent on the same funding sources. The high degree of interconnectedness in the financial system – between different institutions and between different markets– increases the risk of contagion when financial problems arise. 5 Circumstances that need not constitute a risk on the micro level can thus become risks on the macro level. Not knowing which risks will trigger systemic crises is in the nature of things. | I would first like to accentuate the widespread and laborious work carried out for many years, on both a national and international basis, to promote stability and prevent crises from arising, but without impairing the functioning of the markets. Experience shows that a necessary condition for avoiding crises is to pursue a fiscal and monetary policy that is aimed at creating stability and that inspires confidence. The common denominator for countries that have experienced financial crises is that the problems were based on mistakes in economic policy and deficiencies in regulatory frameworks. The financial market is often merely the messenger illustrating the fundamental problems. It is important that the choice of exchange rate regime is in line with the economic policy pursued and with the capacity of the economy to adapt. Countries that have experienced currency crises during the 1990s have had fixed, but adjustable, exchange rates. Today, therefore, an increasing number of countries choose to have either floating exchange rates with inflation targets, or completely fixed exchange rate regimes, such as currency boards. Experience also shows that it is necessary to have a general regulatory framework that is applied properly, and that contains norms and institutions, in order for both national and international financial markets to function well. Countries therefore cooperate in international organisations, such as the BIS, the central banks' organisation in Basel, to work together on producing norms for suitable regulations and norms in various fields important to financial stability. | 0 |
From the regulator’s perspective, 2 BIS central bankers’ speeches risk culture could be inferred and gauged based on the effective implementation and level of compliance by the risk takers and the frontline staff. To improve risk culture, Board and management must review the incentives and penalties in place and ensure that it is effectively implemented. Among the key questions that Board and management should be asking are; Does the performance management and compensation system reward good behaviour and punish bad behaviour? And how are audit and supervisory issues handled? As you already know, a weak risk culture may lead to staff resorting to “check the box” compliance exercise whilst a strong risk culture will judge the wisdom and decision of looking beyond the profit number and be able to see the medium and long term sustainability. On this note, allow me to share some of the key observations made by Bank Negara Malaysia during the recently completed AML/CFT Thematic Reviews on Banks and Insurance Companies. First, the good news. In general, we observed that there was greater awareness among Board and senior management on ML/TF risks and its potential implication to their reputation. From the AML/CFT policies and framework implemented, there was also shift towards risk-based approach. In most of the institutions reviewed, the management of AML/CFT was no longer viewed solely as a “Compliance” job but more aligned and integrated with the bank’s overall risk management function. | Encik Abu Hassan Alshari Yahaya: Financial crime and terrorism financing Keynote address by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia, at the 5th International Conference on Financial Crime and Terrorism Financing (IFCTF 2013), Kuala Lumpur, 23 October 2013. * * * It is a great pleasure for me to be here today and I would like to thank the Conference Organiser, the Asian Institute of Finance in collaboration with the Malaysia’s Compliance Officers’ Networking Group, for the invitation to deliver the keynote address at this 5th International Conference on Financial Crime and Terrorism Financing. I am happy to note that this annual conference has received strong response and continued to provide industry players with the developments in the area of financial crimes and terrorism financing and how financial service providers and relevant businesses and professions could continuously strengthen the capacity and capabilities in addressing these risks. I am glad to note that there has been an increased participation from the designated nonfinancial businesses and professions (DNFBPs) in this year’s conference. This reflects heightened awareness and seriousness by the DNFBPs to improve their compliance and understanding of their roles in combating money laundering and terrorism financing. I am also informed by the organisers that the Malaysian Bar Council, the Malaysian Institute of Accountants and the Association of Money Services Business have also reached out to their members to attend this and by accrediting this program as part of the continuous professional development. | 1 |
Currently, the Bank of Albania is working on the implementation of an instant payment infrastructure. This novelty in the field of payments aims at reaching those market segments which do not use electronic instruments. In the field of currency issue, in 2022 circulation of the new series of Albanian banknotes was completed with the denomination of 10.000 Lekë. The new series bears 6/8 BIS - Central bankers' speeches contemporary and sophisticated security features. An educational campaign on the use of the national currency accompanied the entire process. The Bank of Albania has scrupulously managed the international reserve, by observing the main objectives of liquidity and security. Despite the problems faced by international markets in the last year, the level of our foreign reserves is in compliance with our adequacy criteria and with the best international practices. The Bank of Albania has fulfilled its institutional obligations in the framework of the National Plan for European Integration. Since the opening of negotiations in July 2022, the Bank of Albania has intensified its participation and contribution in bilateral meetings with the European Commission, while it has continued economic and financial dialogue through the participation in joint committees with the authorities of the euro area market. Enhancing transparency and accountability through open communication has guided our relationships with the general public and with interest groups. Though, our decisions cannot be adequately conveyed in an economic environment, which is characterized by a limited degree of financial education. | I would also like to emphasise, that the normalisation speed in Albania has been lower than that implemented by our trading partners, due to the fact that fiscal policy has followed a consolidating trend throughout 2022, while a strengthening of the exchange rate has restrained transmission of imported inflationary pressures to the domestic market. The increase in key interest rates throughout 2022 and going forward, in the absence of these factors, would have been faster and more aggressive. Third, even with the presence of normalisation, the overall stance of monetary policy continued to remain accommodative for boosting both consumption and investments, as it provides better financial conditions for a more balanced performance of aggregate demand and supply in economy. The monetary policy has been transmitted smoothly across financial markets. Its transmission to the interbank market has been immediate and complete. It has been rapid to the government securities market, and it still continues to the deposits and credit market. Nevertheless, despite increasing interest rates, credit flows continue to remain positive and the Albanian banking sector continues to provide necessary funds to the economy for expanding activity and for meeting liquidity needs. The volume of credit to the private sector grew by 12.3%, on average in 2022, while credit portfolio quality remained at good levels, and the non-performing loans ratio stood at the lowest levels in the last decade. The financial sustainability of the banking sector and its positive approach towards lending was conducive to the continued support of the economy with funding. | 1 |
To this end, we now release copious amounts of information, including the forecasts of economic activity and the year-end level at which we see the rate on overnight money trading, as foreseen by each individual FOMC participant under his or her assessment of appropriate monetary policy. We call this exercise the Summary of Economic Projections, or SEP for short. We release it quarterly. I draw your attention to it because it has become something of a phenomenon among analysts preoccupied with the entrails of policymaking and has taken on a life of its own. You read about it in the papers and get analysis of it from market soothsayers. Yet, I want to caution you against becoming overly preoccupied with the FOMC’s SEP. In my less than humble opinion, it is a flawed tool. Let me explain why. Here is what the last SEP release for the fed funds rate looked like. It provided the FOMC participants’ projections for the overnight rate at year-end for the next three years and beyond to the “longer run,” as foreseen from March 19: 1 4 See “Forward Guidance,” by Richard W. Fisher, remarks before the Asia Society Hong Kong Center, Hong Kong, April 4, 2014, www.dallasfed.org/news/speeches/fisher/2014/fs140404.cfm. | If the dot chart creates confusion, one option would be to dispense with the exercise altogether. Having evoked Dr. Seuss earlier, I can imagine his bidding the dots farewell with some ditty like this: 2 “Standard Deviation of the Dots in the Dot Chart,” by Torsten Slok, Deutsche Bank Research, April 23, 2014. BIS central bankers’ speeches 7 Yet expressing the FOMC participants’ perceptions of, and possible reactions to, an assortment of future scenarios – however often the committee’s composition may change – does strike me as having some merit, if only to give markets insight into how the central bank might react under different circumstances. In the parlance of the trade, this is called “state-based” guidance. Yet here, too, we have struggled. For example, until two meetings ago, we used an unemployment figure of 6½ percent as a point sometime after which we would begin to consider pulling back on monetary accommodation, then decided this wasn’t quite the ticket. This may be a little more inside baseball than you expected to hear today, but here’s the point: Expect the Fed to continue refining its communications. We are getting better at it. But to invoke the immortal words from the chain gang captain portrayed by Strother Martin in the 1967 movie Cool Hand Luke: “What we’ve got here is failure to communicate.” We are working on it so that you and other bankers, market operators, businesses and consumers will develop the best possible insight into how your monetary authority will behave. | 1 |
Shorter transaction chains: Expanding direct access to non-bank PSPs, FMIs and foreign banks will reduce the number of intermediaries involved in a cross-border transaction, thereby making payments quicker and more transparent. 2. Enhanced competition and lower cost: Expanding access can level the playing field between banks and other PSPs and foster greater competition and innovation to give customers a greater choice of services and potentially lower prices. 3. Improved financial stability due to reduced tiering risk: The risk of spillovers of a direct participant’s default due to the transactions of indirect participants decreases. Page 5 These benefits needs to be balanced against risks such as additional counterparty credit risk and operational risk that central banks needs to be aware of and safeguard against when considering expanding access. The report discusses how these can be mitigated, for example setting minimum standards of resilience and security, and how to overcome potential barriers such as national legislation. How extending RTGS operating hours across jurisdictions can help improve cross-border payments The Building block 12 report examines RTGS operating hours. Limited RTGS operating hours across jurisdictions can lead to a delay in cross-border settlement, especially between countries with significant time zone differences. The report identifies the current “global settlement window”, between 06:00 to 11:00 (UK time) when the highest number of RTGS systems across jurisdictions are concurrently open allowing cross-border transactions to settle across those jurisdictions without delays. | The changing priorities and lifestyles of this new generation, growing wealth and increasing proportion of middle income population will also support continued and further growth in demand for investment-linked and wealth management products. As a result, the insurance industry has, and will continue to, expand its role beyond merely providing protection products. Against this backdrop, prospects for increasing the insurance penetration rate in our economies are clearly positive. However, this will hinge on the ability of the industry to respond to these changing demographics and dynamics in the financial system. In 2006, the insurance premiums averaged 2.95% of GDP in South East Asia as compared with 8.8% in the U.S. or 16.5% in the U.K. Compared to the BIS Review 134/2007 1 banking sector, the insurance industry remains relatively less developed and commands a significantly smaller percentage of the total financial assets of the region's financial system. To tap these opportunities, appropriate strategies, new thinking and approaches will be required. In this regard, a significant development has been the evolution of alternative distribution mechanisms for insurance products and services in the region, notably through bancassurance. Indeed, bancassurance has developed in a number of ASEAN markets into a viable alternative distribution approach to the traditional agency force. Perhaps, in those markets where the insurance distribution channels through agency force have yet to be firmly established, bancassurance could provide a quantum leap to allow insurers to rapidly widen their outreach by tapping into an established banking network and client base. | 0 |
A higher policy rate may also contribute to strengthening the krone exchange rate, which may curb imported goods inflation further out. Chart 3 Substantial labour shortages, but signs of cooling Activity in the Norwegian economy is high. Employment has risen over the past year, and labour shortages have become pronounced. Unemployment is at historically low levels. We are now seeing clear signs of a slowdown in the Norwegian economy. High inflation and rising interest rates have led to a fall in household consumption. Labour shortages appear to have eased somewhat. High electricity prices are also reducing profits for many firms. We projected a cooling of the economy in the course of autumn this year, but it now appears that the economy has passed a cyclical peak and that the slowdown may prove to be more pronounced. We have revised down our projections for economic activity ahead on the back of higher inflation in Norway and a weaker outlook for our trading partners. As things stand, prices will rise at a notably faster pace than wages this year. Many households will face a squeeze on their finances. Some people will find it difficult to cope with higher borrowing costs on top of the broad rise in prices. But most households have the finances to cover increased expenses. Next year we expect wages to rise at about the same pace as prices. Our projections for wage growth are in line with the expectations of the social partners according to Norges Bank’s Expectations Survey. | [3] Chart: Regulation on Monetary Policy So there are good reasons that low and stable inflation is a monetary policy objective. The operational target of monetary policy in Norway is consumer price inflation of close to 2 percent over time. We measure consumer prices using the consumer price index (CPI). The CPI seeks to measure the rise in prices facing households. The index is widely used and well known. Virtually all inflationtargeting countries have chosen to stabilise CPI inflation. The CPI is associated with considerable short-term volatility. In practice, we therefore use different underlying inflation indicators, for example the CPI adjusted for tax changes and excluding energy products (CPI-ATE). [4] Chart: Both domestic and imported inflation sources of inflation The extent to which monetary policy should respond to changes in individual prices does not depend on its ability to influence the source of the price change. The response depends on how long the disturbances are expected to last and the extent to which they fuel inflation via spillover effects on other prices and wages. The recent surge in inflation is to a large extent ascribable to factors beyond Norges Bank’s control. There is not much we can do to reduce energy and commodity prices, or to relieve bottlenecks in global markets. But by dampening the level of economic activity, we can help to counter spillover effects of increases in individual prices on other prices and wages. Furthermore, even though Norges Bank cannot influence global prices in foreign currency, we can influence the krone exchange rate. | 0 |
In order to avoid having crisis management being held up by conflicts of interests more than necessary, I am personally inclined to believe that a general key that is fixed once and for all is the preferred choice. Possible ways forward The title of this speech is a question: “Are we ready to deal with a cross-border banking crisis in Europe?” Regrettably, the answer is no! Before we can say we are anywhere near “ready”, we must deal with some serious challenges. In particular, we need to solve the problem of how to organise supervision, crisis management and crisis resolution for cross-border banks. Given the great complexity of the issue, achieving a practical solution will not be an easy task, and there is no altogether ideal solution. The amount of work that has already been set up for us on the European regulatory agenda is already quite staggering, which suggests that everything may not be achieved in the next few years. But we must not use this as an excuse for not starting to deal with these important issues. We can at least start the analytical process, take stock of the problems and examine the pros and cons of different solutions. The longer we wait to get this process started, the greater the risk that we’ll end up in a very serious mess. I, for one, certainly hope that we manage to have some solution in place before the next major financial disaster in Europe occurs. | The first dimension of these challenges concerns efficiency. So 2 BIS Review 39/2006 far, much has been done in order to create a harmonised regulatory framework that provides a more level playing field and reducing the regulatory burden on financial institutions by creating European passports for financial services, improving supervisory cooperation and convergence, etc. The second dimension, which I will concentrate on today, concerns financial stability. More specifically, I will focus on the challenges pertaining to our ability to manage financial crises in Europe. The increased risk of cross-border contagion means that it seems less likely that the next financial crisis in Europe will be contained within national borders, and much more likely that it will have far-reaching consequences in a number of countries. This basically means a greater need for coordination of information and decision-making between authorities in different countries. In a crisis situation it is important to know who will do what and when. Things can be seriously complicated by the existence of a number of potential conflicts of interest between the different countries involved. Moreover, as the actions of one authority could have effects on other countries’ financial systems, there are some obvious accountability concerns. The national authorities are only accountable to their respective national governments and ultimately their constituencies. The fact that integration of the banking sector started relatively early in the Nordic and Baltic countries means that we have encountered some of these challenges perhaps a little earlier than many other European countries. | 1 |
William C Dudley: The national and local economic outlook – an update Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the University of Bridgeport, Bridgeport, Connecticut, 8 April 2016. * * * Jaison Abel, Jason Bram, Tony Davis, Richard Deitz, Jonathan McCarthy and Joseph Tracy assisted in preparing these remarks. Good morning. I am very pleased to be in Bridgeport and to speak with you today. I would like to give a special thanks to the University of Bridgeport for their part in making this event possible. My visit today is part of our ongoing efforts at the Federal Reserve Bank of New York to better understand the regional economy. We plan trips like this so that we can meet with a diverse array of stakeholders in the region to gain insights and perspectives on the local economy. These trips also allow us to hear from Main Street about the major issues and concerns affecting people and businesses in the area. Fairfield County is our first destination in 2016, and this is the second time we have visited the area in the past three years. I am looking forward to meeting with a number of different groups today. After starting our day here at the University of Bridgeport, we will meet with an organization called The WorkPlace to hear about some of the nationally-recognized programs they have successfully developed to help the long-term unemployed find jobs. | The current number of long-term unemployed is still higher than the prior cyclical peak in June 2003, and is more than a million above the prior cyclical low in October 2006. Further progress on transitioning these unemployed workers back into jobs requires sustained effort on many fronts. Essential to this effort are programs such as the Platform to Employment developed by The WorkPlace. I am looking forward to my visit there later today to hear more about this program. The Platform to Employment program has been replicated in nearly 20 communities across the country from Newark to San Diego. Helping the longterm unemployed regain employment needs to be a priority for all of us. The ongoing challenge in reducing the number of long-term unemployed is also a reminder of the importance of financial stability and sustainable economic growth. Recessions can quickly undo years’ worth of hard-earned progress in the labor market. Making the financial system and the economy more resilient so we can avoid such deep downturns in the future is a responsibility that I take very seriously. Local economic outlook Turning now to the region, while Fairfield County’s economy has recovered from the Great Recession, its job growth has lagged behind both New York City and the nation. Only recently has employment approached its pre-recession levels, and it is still well shy of where it was back in 2000. Other barometers of the Fairfield County economy, such as home prices, also indicate a slow recovery from the recession. | 1 |
The reason for this is that a significant part of firm-specific variation in productivity is absorbed by firms in their profits or reflected in their prices. The reason is that firms’ profits and prices absorb a significant part of firm-specific variation in productivity. Many of the workers in the more productive tail of firms are being underpaid relative to their average productivity, which results in frontier firms making a larger profit share. The opposite is the case at the other end of the productivity distribution. 55 For example, Furman and Orszag (2016) There is time series evidence to suggest a strong historical relationship between aggregate productivity and real wages. For example, Castle and Hendry, Blundell et al (2013) and Disney et al (2013). 56 17 All speeches are available online at www.bankofengland.co.uk/speeches 17 57 This analysis focusses on differences in pay across firms. But what about pay within firms? We can examine this by tracking differences between the average pay in each company and the pay of their highest paid director. Chart 28 plots the median across firms of these series over time, while Chart 29 compares the variance of each series as well as the gap between average pay and the highest paid director. Since 1998, the variance in average pay and director pay has increased across firms, although it has fallen notably since the financial crisis. The median gap between average pay and director pay has followed a similar pattern. | Overall, this is akin to writing deeply out-of-the-money options, exposing the banking system to tail risk. That should not be too surprising given that commercial banks’ liabilities are money, and so they are in the business of providing liquidity insurance. But it does make it difficult for market participants to assess, and price for, how much risk there is, albeit contingently, in the system as a whole. Conclusion Many of the developments I have reviewed are, of course, good news. Most obviously, longer life expectancy! Greater macro economic stability; financial innovation distributing risk more efficiently – these are pretty good things too, including for you as corporate treasurers. As a result, some risks have been reduced or are now easier to manage. But risk management challenges do unquestionably remain for you as corporate treasurers. Some, such as those arising from pension provision, essentially boil down to your appetite for risk and the mix of business/financial risk you want. Others stem from a range of uncertainties in capital markets. When and how global imbalances will be resolved. Whether risk is underpriced. How still-new structured finance markets would withstand a marked pick up in defaults. You will each have your own list. Those uncertainties and risks have to be identified, priced and managed. The official sector cannot make them go away. But it is our mission to reduce uncertainties stemming from monetary policy and its implementation. Some important sources of uncertainty in the past were, in fact, avoidable. | 0 |
This means that while banks will, where needed, have to hold some capital above the Basel III transaction path for the reason that I 4 BIS central bankers’ speeches set out earlier, the FSA is allowing those banks that increase lending to a lower Pillar 2 capital buffer to recognise the benefits of such lending. I should add that the FSA has also altered its guidance to banks on the liquid asset buffers they need to maintain. This reflects the Bank of England’s stance on the potential access of banks to liquidity from the Bank, and a wider desire to reduce the incentives for banks to hold excessive liquid asset buffers for precautionary reasons. This action, too, has been endorsed by the FPC, and I hope it will support credit availability. In conclusion, I have tried this morning to set out how we are thinking about and then applying macro-prudential policy, going back to first principles. This is a new field, and as I said earlier, please bear in mind that in the early days of the low inflation monetary policy regime in many countries, it took time to refine the communication. But, beyond that, we also need to fill in what for me is the big gap at present, namely how we explain and calibrate the resilience objective in terms of capital. The FPC will focus on this at its next meeting. | Figure 1 Countries experiencing drops in real GDP in the fourth quarter of 2008 (*) (percentage of sample) 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 71 74 77 80 83 86 89 92 95 98 01 04 0 07 (*) Using the annualized quarterly GDP for a sample of 29 developed or emerging economies. Source: Central Bank of Chile. Figure 2 Monetary Policy Rate (MPR) Change in MPR MPR level (basis points) (percent) Japan U.S. Canada Switzerland Israel Hong Kong U.K. Sweden Eurozone Chile Czech Rep. Norway South Korea Malaysia N. Zealand Australia Poland Peru Philippines India China Colombia Mexico Indonesia South Africa Hungary Turkey Brazil Argentina Russia Iceland Chile Turkey N. Zealand U.K. India Norway Colombia Australia Sweden Israel South Africa South Korea Eurozone Hong Kong Brazil Canada Switzerland Iceland Poland Mexico Peru China Czech Rep. Indonesia U.S. Philippines Malaysia Japan Hungary Russia Argentina -800 -600 -400 -200 From 4 Sep. 2008 to 8 May 2009 0 200 0 2 4 6 8 10 12 14 At 8 May 2009 Source: Bloomberg. | 0 |
This will condition declining inflation pressures of the domestic economy, expected to balance the effect of foreign and administered prices increase. 4 BIS central bankers’ speeches | In total, more than 6,000 individuals have been trained under FICS, with about 2,600 of them assessed. We now have more than 300 individuals certified under FICS. Every craft has its master craftsmen. The financial industry is no different. To this end, IBF introduced the Distinguished Financial Industry Certified Professional, or FICP. The Distinguished FICP represents the highest certification standard under FICS: it is bestowed on those in the industry who are the epitome of professional stature, integrity, and achievement. IBF is proud to have added another 15 senior industry veterans to its cadre of Distinguished FICPs in October last year. Over the years, we have developed a growing network of FICS-certified professionals. This is an invaluable resource: a community of professionals whom we can actively tap upon as partners in our learning journey – participating at industry events or in FICS working groups. It has been about five years since FICS was introduced. It is now timely for a review of the FICS Standards. IBF will be working with its group of Lead Providers to re-look the FICS Framework and the Curriculum covered by the current Standards. Please come forward to give us your views. When we met at last year’s Conference, we had indicated that IBF will study the feasibility of introducing “common examinations” for the industry. I am happy to report that IBF has since worked with the industry to roll out the Corporate Banking Common Examination. | 0 |
The share of bad loans in banking portfolios also remains unchanged (sitting at 8.7%, excluding rehabilitated banks, in contrast to the previous level of 8.6%). The largest share of bad debt is to be found in the construction sector (27.3%), real estate transactions (13.5%) and wholesale and retail trade (15.1%). To a large extent, the realisation of risks in these sectors was caused by the reckless actions of not only borrowers, but also banks providing foreign currency loans to borrowers who do not have foreign currency earnings. The second point I would like to address is how banks manage risks that arise. The main tool of credit risk management for borrowers already experiencing financial difficulties is restructuring. In 2016, the Bank of Russia began collecting operational data from banks, analysis of which showed that banks actively use restructuring in their operations. The areas in which banks make concessions to borrowers are, once again, foreign currency loans to construction and real estate companies, as well as ruble loans to coal companies which faced difficulties in 2013–15 due to the decrease in coal prices. It is worth noting that the process of restructuring loans does not affect the stability of the banking sector, as the loans in question generate sufficient reserves. To summarize, I would like to note that the banking sector is entering a new phase, wherein priority will shift from active work on the debt problem to the task of finding new clients and projects for lending. | The same evening, 19 March, the Riksbank was able to publish the information that new dollar loans would be available with effect from the following week. Stefan’s telephone message was a small, but clear glimpse of light in the first weeks of the pandemic. Belonging to the narrow group with back-up from the US central bank, the Federal Reserve, regarding dollar liquidity was of central importance during the financial turbulence. The Riksbank, like other central banks, had taken a number of measures during the coronavirus crisis to manage the economic effects of the pandemic. But the number of measures also raises new questions. I would like to talk about one of * I would like to thank Björn Lagerwall for his help with writing this speech, and Emma Bylund, Charlotta Edler, Dag Edvardsson, Frida Fallan, Eva Forssell, Iida Häkkinen Skans, Pernilla Meyersson, Marianne Nessén, Åsa Olli Segendorf, Cecilia Roos-Isaksson, Mikael Stenström, Marianne Sterner and Anders Vredin for their help and valuable comments, and Elizabeth Nilsson for her translation of the speech into English. 1 [20] these today, namely how one can combine the Riksbank's strong independence with accountability in monetary policy. 1 My points can be summarised as: • • • • Our current monetary policy framework reflects a clear target, strong independence and a large measure of openness. Experience shows that our toolbox needs to develop over time. To manage our statutory task of maintaining price stability, we need considerable room for manoeuvre in monetary policy. | 0 |
Weak growth in Switzerland, however, may be explained mainly by the conspicuous productivity gap between the innovative export sector and the domestic sector set in its traditional structures. The reason for this lethargy of the domestic sector is a dense network of regulations which limit competition and obstruct technical progress. The result is an excessively high domestic price level from which not only consumers but also exporters suffer. Growth-promoting measures must therefore aim primarily at wedging impediments to competition in the domestic sector. BIS Review 49/2003 1 | This may sound pretty obvious, but I know that there are many of our managers who have no idea how some of our core departments function and cannot intelligently explain our role in the economy. This reflects badly on the Bank with regard to the calibre of its staff. The third point is that your understanding of core and other departments operations for that matter will facilitate staff rotation, a policy to which the Bank is commited. Finally, and most importantly, an understanding of core functions enables you to better understand and appreciate the mission of the Bank. This in turn facilitates a better understanding of the strategic plan. In closing, I wish to say that I know that the Bank has come a long way and has demonstrated marked improvements in the way that it conducts its operations and in the quality of its management. Director – Human Resources will show in his presentation on the change process in the Bank. Thank you. 2 BIS Review 125/2006 | 0 |
Over the same period, employment grew at its fastest rate over any peacetime decade since 1920, raising, probably temporarily, the growth rate of the supply capacity of the economy. Output growth was noticeably faster than its post-war average. Behind that expansion were three significant structural changes: one at home and two overseas. At home, there has been a sequence of reforms to the labour market which began in the 1980s and have continued since. Reforms such as the New Deal and Working Tax Credit have encouraged benefit recipients back to work. Changes to pay bargaining and a decline in the share of wage settlements covered by collective bargaining have made the labour market more flexible. Those reforms reduced the rate of structural unemployment. The two other structural changes reflect globalisation and the openness of the British economy. The first is the rise in the prices of the goods and, especially, services that we export relative to the prices of goods and services that we buy from abroad. The so-called terms of trade have improved markedly over the past decade. Countries such as China and India are now major players in the world trading system, and the prices of manufactured goods globally have fallen as a result. That has produced changes in the pattern of international trade, and in our own industrial structure. Although those changes were, and are, uncomfortable to make, they benefit us all as consumers. | Last year, non-oil import prices rose, depressing the growth of real take-home pay. And oil prices increased further. On the demand side, our central view remains a relatively benign one. The economy slowed in the first half of last year, led by consumer spending. But growth has begun to pick up. Averaging the growth rate of consumer spending over the final quarter of last year and the first quarter of this, shows that consumption growth has returned to not far off its long-run average. Export growth and business investment both seem to be recovering. So in its May Inflation Report, the Monetary Policy Committee had, as its central outlook, a return to steady growth with inflation close to the 2% target. But there are many risks and those have been bought into sharp focus by the recent financial market turbulence. And, just as for England in the World Cup, the threats come mainly from the rest of the world. The recent volatility in financial markets is reflecting the real risks which face us as, after a period of robust world economic growth, we approach a somewhat bumpier stretch of the road. A rebalancing of global demand is desirable, but the way ahead may not be smooth. One risk is that during the fastest three-year period of world economic growth for a generation, monetary policy around the world may simply have been too accommodative. In the main industrialised regions – the US, Euro area and Japan – official interest rates were very low for a long period. | 1 |
Therefore, I would like to invite all other stakeholders to be open-minded and very cooperative to boost lending to the economy. First, I would suggest to the business community to be more creative, transparent and formal in its operation. It should comply with all obligations arising from the contractual relations with the banking system. This should be broadly understood and accepted. A correction is necessary in the economy, first of all implying a rebalancing of prices. There may be no reduction in non-performing loans, increase in lending to the economy, improvement in business and bank balance sheets, unless collaterals are executed and, subsequently, fix asset prices are corrected. This process would release huge financial resources that would be a vital serum of fresh money injected back into the economy. With this fresh money we must encourage the creation of new and effective initiatives that yield swift return on investment. One of the lessons learned from the crisis is that any new healthy money should go to a healthy business initiative. We need to encourage highly productive sectors of the economy. This is the only way to ensure revitalisation of the economy and make it a dignified European partner. Second, I would like to encourage the banking system to be more dynamic, by looking continuously for worth-funding opportunities. Offer reliable funding packages by assigning priority to economic health of the country, which would, in turn, guarantee the long-term success of your business. | Our reserves currently amount to $ billion, the third largest in the world, after Japan and the Mainland of China. They are equivalent to more than seven times the currency in circulation, one of the highest levels in the world. Secondly, we pursue a prudent fiscal policy, with small government and no external debt. We have a simple tax structure, a low tax rate, and a public sector expenditure that accounts for only 18% of GDP. Thirdly, our financial system is sound. The banking system is strong and solvent, and well able to cope with the interest rate movements necessary under the currency board system. Capital adequacy ratios among locally incorporated banks average around 18%, and their problem debt ratio is about 3.7%. Our standards of prudential supervision are among the highest in the world. Fourthly, Hong Kong’s economy is flexible and responsive. Because they are governed by free market principles, the markets respond quickly to interest rate changes and other variables, making the economy resilient in absorbing external shocks and capable of adjusting efficiently to validate the linked exchange rate. These are Hong Kong’s economic strengths. Not all economies have them, or would necessarily wish to have them, but they have enabled us to maintain a monetary system appropriate to Hong Kong’s unique needs and capable of withstanding the storms that any open and externally oriented economy must necessarily expose itself to. | 0 |
But few would doubt in retrospect that the shift away from manufacturing to a higher value-added service-based economy has been beneficial and that it would anyway have been inevitable eventually. There would have been little advantage in trying to slow the process through actions of monetary or exchange rate policy. In other words, the long-term equilibrium path of the real rate is not necessarily flat. The trend path may, at any particular moment, be up, down or flat, while the actual rate constantly diverges from its equilibrium path because of random events such as unforeseen movements in nominal exchange rates or in cost and price levels at home or abroad, or because of the failure of market adjustment processes to work quickly enough. All of this can be quite aptly illustrated by looking at the path of the Hong Kong dollar's real rate since it was first pegged. The natural trend appeared to be upward, though not smoothly so, for the middle period of about ten years, but there is nothing here which tells us what will, or should, be the path from hereon. Against this background, monetary policy may not be expected to achieve much for competitiveness. But policy makers nevertheless have to choose. Should a fixed or floating rate be preferred? Fix or float? In theory, an advantage of floating is that it may allow for the nominal exchange rate to adjust continuously and precisely so as to keep the real rate at equilibrium - an ideal situation if achievable. | I have spent just over four and a half years as a member of the MPC and it has been a most eventful period to be involved with economic policy-making. My period on the Committee has been dominated by the global financial crisis and the major global recession it triggered in late 2008 and early 2009. However, the global recession is now behind us, even if we are still feeling some if its after-effects. Since the second half of 2009, the world economy has been in a recovery phase and the UK and most other European economies have shared in this return to growth. Indeed, the growth of the UK economy has tracked very closely the average performance of the European Union through the recession and into the early phases of the recovery, as Chart 1 shows. And current forecasts point to a continuation of this pattern this year and next. Chart 1 – UK and EU output growth, 1997–2012 Percentage change in real GDP 5 4 3 2 1 0 -1 -2 UK (exc. oil and gas) * -3 EU-27 * -4 -5 -6 1997 1999 2001 2003 2005 2007 2009 2011 *:2011 and 2012 are IMF forecasts. Forecasts for the UK do not exclude oil and gas. | 0 |
The journey to get there is not over and we have ground to cover. So, we will be as restrictive as long as needed in order to make sure that we reach that destination. Under the current parameters, 2.2% in 2025 is not satisfactory and it's not timely – which is why we are making the decisions that we are making today, and later on. At the end of June banks will reimburse € billion that they had borrowed under TLTRO, which was this very special facility that we had put in place to help the financing of the economy at the time of the pandemic. Those loans were granted for periods of three years and there were various operations in the course of the pandemic. The repayment which is coming due now, is known and has been known for a long time. Actually it was so well-known that it should have been a lot higher than that but we took measures in order to avoid that we had this sort of cliff effect of a massive reimbursement which would have exceeded € trillion. But banks know about it, they have known about it. They have done their funding plans in order to respond to the situation. In any event, we have the normal facilities available, whether it's MRO or LTRO if that was ever needed, just in case. The APP reinvestment will be completed at the end of June, and we will let run-off take place as of July. | Christine Lagarde: ECB press conference - introductory statement Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 15 June 2023. *** Good afternoon, the Vice-President and I welcome you to our press conference. Inflation has been coming down but is projected to remain too high for too long. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. The Governing Council therefore today decided to raise the three key ECB interest rates by 25 basis points. The rate increase today reflects our updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. According to the June macroeconomic projections, Eurosystem staff expect headline inflation to average 5.4 per cent in 2023, 3.0 per cent in 2024 and 2.2 per cent in 2025. Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation. They now see it reaching 5.1 per cent in 2023, before it declines to 3.0 per cent in 2024 and 2.3 per cent in 2025. Staff have slightly lowered their economic growth projections for this year and next year. | 1 |
And, lastly, while it is still early days, our judgements on the behaviour of the economy so far in 2018, and the effects of the snow, appear to have been borne out. Nevertheless, our view of the outlook and the prescription for monetary policy remains conditional on the data, how they evolve and what pointers they give to the future. It is likely that supply, demand and the exchange rate will continue to move around as Brexit negotiations progress and external conditions change. 17 And the data and the outlook will change to reflect all of these. 16 Again, for more details see Box 5, “How has the economy evolved relative to the February 2017 Report”, in the Prospects for Inflation section of the May 2018 Inflation Report. In fact inflation overshot by a little more than we had expected, partly reflecting the rise in oil prices over the previous year, demand rotated by a greater degree than we had expected, and productivity growth slowed by more than we had expected. And, as discussed above, demand fell back by less than we had initially predicted in the August 2016 Inflation Report. But the broad shape of the economic response to Brexit was in line with what we had forecast in February 2017. | 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. | 0 |
Flexibility is a critical element of the Federal Reserve’s approach to policy normalization. Policymakers have said that they will adjust the IOER rate and parameters of an ON RRP facility, and use other supplementary tools as necessary – including term tools – during the normalization process. In doing so, they will weigh the efficacy and costs of each of the tools in their arsenal to ensure that they are optimizing policy objectives while maintaining appropriate interest rate control. I’ll now explain our confidence in and readiness to implement this approach. 10 That said, to the extent that an ON RRP facility’s existence provides a credible outside investment option to money market lenders, it could potentially improve competition and support interest rate control even without large actual use of the facility. 11 These assumptions are derived from responses to the Desk’s Survey of Primary Dealers (December 2014), in which respondents expected liftoff to occur in the second quarter of 2015 and principal reinvestments of SOMA securities holdings to end two quarters later, and include a neutral assumption that the FOMC returns to a long-run operating framework with a relatively low level of excess reserves. Survey results are available at http://www.newyorkfed.org/markets/survey/2014/December_result.pdf. For more details on this projection scenario, please see the Report on Open Market Operations during 2014 (Federal Reserve Bank of New York, April 2015), available at http://www.newyorkfed.org/markets/annual_reports.html. | 4 BIS central bankers’ speeches • At the same time, rapid urbanisation is concentrating ever higher economic wealth in exposed areas. Eight out of the ten global mega-cities most at risk from natural perils are located in Asia. They include Jakarta, Kolkata, Manila, and Shanghai. This large protection gap in Emerging Asia presents the global insurance industry, confronting mature markets and excess capacity, with a significant opportunity to deploy capital for better returns. London and Singapore as complementary insurance centres International financial centres in Asia, like Hong Kong and Singapore, as well as domestic financial centres in China and Korea are well-placed to meet this growing demand for insurance in Asia. But international financial centres outside Asia – such as London – with the enormous breadth of their markets, depth of financial expertise, and connectivity with other financial centres – also stand to gain from Asia’s rise. On occasion one hears stories of London losing ground as an international insurance centre due to tightening regulatory standards and a shift in the global economic centre of gravity to emerging markets. But polls and expert opinion also predicted the recent UK election race would be neck and neck. On both counts, the numbers prove otherwise. • London is the undisputed global insurance market for specialty commercial risks – insuring highly exotic and bespoke risks from Formula 1 drivers to Cristiano Ronaldo’s legs. | 0 |
The MPC now views the economy’s potential growth rate to be around 1.5%, about 60% of its pre-crisis average. That diminished rate of supply growth reflects the climate of the past few years, with the shallowest investment recovery in over half a century, 12 lower growth in labour supply and modest productivity growth. By the first quarter of this year, UK GDP had increased by 1 percentage point less than the MPC had projected in May 2016. Factoring in the stronger-than-anticipated growth in the European and global economies and more supportive fiscal policy, the shortfall increases to around 1¾%-2%. 11 This was in line with the MPC’s standard approach to condition its projections on the government policy of the time. By contrast, growth in UK total investment outperformed the rest of the G7 in 2017. That reflected strong growth in spending on buildings. Dwellings investment (1.7pp) and spending on other buildings and structures (2.1pp) together contributed 3.8pp to total growth of 4.0%. 12 10 All speeches are available online at www.bankofengland.co.uk/speeches 10 Even without taking those additional factors into account, average household incomes are currently 4% lower than the MPC had expected prior to the referendum, equivalent to over £ per household. 13 Lambda: trade-off management in exceptional circumstances The MPC has repeatedly emphasised that monetary policy cannot prevent either the necessary real adjustment as the UK moves to its new trading arrangements or the weaker real income growth likely to accompany that adjustment. | Let me begin by discussing different types of measure more generally, and then I will say a few words on the quantitative effects of household indebtedness. Put simply, we can say that there are two different ways to manage the problems on the housing market: either attempt to increase the housing supply in order to dampen housing prices, or dampen demand for housing and mortgages by making it more expensive to borrow, or simply limit how much households can borrow. In terms of measures which subdue demand, it is important to differentiate between measures which affect all loans, or the whole stock of credit, and measures which only affect new loans, or the flow of credit. But let us begin with measures which affect the supply of housing. An increased supply of housing could dampen price increases – but it would take time! Structural problems on the Swedish housing market are the main reason why housing construction has been unable to meet rising demand. An increased supply of housing is a central piece of the puzzle, as it can subdue the increase in housing prices, which would also help to limit household indebtedness. However, the quantity of housing is not the only significant factor in terms of household indebtedness. It is also necessary to review how we can exploit the current housing stock more effectively. The distribution between purchased and rented housing is significant. | 0 |
Some players may want to avoid all exchange rate fluctuations for a time, while others are prepared to take this risk in return for a premium; by operating in the derivatives market they can arrive at the appropriate risk profile. Globalisation has led to increased competition across countries and markets and aided the emergence of new activities and structures. This in turn seems to have contributed to increased capital productivity—more can be done than before with a given capital input. It is just these factors—more efficient financial markets and higher capital productivity—that are often cited as the main forces behind the American economic miracle: the combination of high growth and low inflation despite low saving. Problems The globalisation of financial markets is also dogged by some problems. It affects the scope for national economic policies. Moreover, financial market prices tend to fluctuate widely, sometimes for little apparent reason. Before considering these issues, I just want to say a few words about the reality behind the notion of the financial market, which consists in practice of various categories of savers and borrowers. Besides private individuals, these include national, regional and local governments, small and large companies, high-risk hedge funds, banks, insurance companies and long-term pension funds. So the market cannot be reduced to what goes on in trading rooms, even though, for want of a better BIS Review 52/1999 2 alternative, television’s financial newscasting often visualises the market in such terms. | The players in financial markets had found ways of getting round the regulations, which in some cases had thereby become virtually toothless. In Sweden, for example, the capital controls had gradually lost much of their bite; companies were able to take up exchange positions, for instance, by shifting trade credits over time. There was also a growing awareness that economic growth would benefit from fewer controls. The interventionist line of economic policy had not been particularly successful. The pace of deregulation varied from country to country and the process was rather protracted. Britain and 1 BIS Review 52/1999 the United States led the way. Sweden was one of the last countries to abolish controls on crosscountry flows of short-term capital. Since the 1970s, financial market turnover has risen markedly and is now very much larger than the flows generated by global cross-country trade in goods and other services. According to the latest BIS study, from 1995, global exchange market turnover, for instance, was 1200 billion dollars, which is approximately five times the value of Sweden’s annual GDP. The figure is roughly twice the level at the end of the 1980s. A new BIS study, for 1998, is due next week and can be expected to show a further increase in global exchange market turnover. Equity and bond market turnovers have also risen rapidly. To some extent, the nature of the flows as well as the players in international financial markets have changed. | 1 |
The consequences of the historic failure of financial markets to price climate risk have been two fold. Much of the focus has been on the under-pricing of downside risk – to polluters, or polluted – and the potential for a ‘climate Minsky moment’: a sudden sharp downwards adjustment when that risk crystallises. But opportunities to improve climate outcomes have been under-priced too: making it harder to get the finance needed to drive positive change. Both sides of this equation need to change – and they are. The building blocks of change In what follows I want to cover those three key building blocks for an effective capital markets infrastructure that I mentioned at the start: climate disclosure; climate-linked capital instruments; and climate-focused asset allocation strategies. But before doing so I will note an irony – which is that the very need to have climate-specific tools reveals the immaturity of financial markets’ relationship with climate risk. In a world where climate risks were fully internalised, measured, priced and traded, there would be little need for dedicated climate financial infrastructure: climate risk would be factored into each and every risk and reward decision. Green bonds would just be bonds. And ‘impact investors’ could focus their efforts on other challenges, as market pricing would align the private and societal costs associated with greenhouse gas emissions. That ‘integrated approach’ is a worthy goal: the Holy Grail of market maturity. But we are some way from that today. | But amidst all this frenzied activity, the most pressing question is how to put all of this money to work in a productive way that appropriately reflects climate factors, but also continues to deliver the desired risk and return profile for investors. 36 https://www.ft.com/content/247f4034-4280-318a-9900-87608a575ede 16 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 16 Chart 14: number of launches of new Chart 15: AUM and flows into sustainability- ‘climate aware’ funds rated open ended funds Source: Morningstar Source: Morningstar, Sustainalytics, and Bank calculations. The nirvana is so-called ‘ESG integration’ – when climate is just one more risk factor in an otherwise fully integrated risk/return framework. Chart 16, drawn up by the Chartered Financial Analyst Institute and Principles for Responsible Investment, illustrates the sort of processes required, working outwards from research in the centre through security-level analysis to portfolio construction on the outer rim. It’s an impressive story – but the sheer complexity of the picture also rams home just how comprehensive full integration really is. Everyone may be talking about it, but few are actually doing it – yet at least. If that’s the ultimate goal, the challenge facing asset managers today is how to build robust but consciously partial or second-best investment strategies that bridge between investors’ desire to express a particular view on climate risk and return, and the practical limitations of today’s climate disclosures, climate modelling and asset universe. | 1 |
Compared with the March projections, the average inflation rate for 2023 is revised downwards by 0.5 pp. This is the result of a sharper-than-expected slowdown in energy prices and, to a lesser extent, in food prices. As with the euro area as a whole, there is still a great deal of uncertainty and the risks to the growth projections remain predominantly tilted to the downside. With regard to inflation, the Employment and Collective Bargaining Agreement recently reached by Spain’s main social partners includes recommendations for wage rises for the period 2023-2025 that somewhat mitigate the probability of second-round effects emerging via wages in Spain. Indeed, according to the data on the collective bargaining agreements registered up to May, the wage moderation continues.1 In terms of profit margins, the results of the Banco de España’s Central Balance Sheet Data Office Quarterly Survey (CBQ) show an uptick in 2023 Q1, although the margin on sales remains below its 2019 level. In any case, there is a high degree of heterogeneity across sectors.2 Recent developments in the banking sector With the context given so far, the most recent developments in the banking sector can be characterised by the following stylised facts. Financing First, financing in the sector is being influenced by the tightening of monetary policy. This has led to a reduction in Eurosystem financing,3 which has been offset above all by 1 The average wage rise agreed for 2023 stands at 3.3%, slightly above the 2.9% agreed for last year. | 6 Thus, between December 2021 and April 2023, the cost of deposits with agreed maturity increased by 0.65 pp for households and by 1.5 pp for non-financial corporations (NFCs), while the 12-month EURIBOR rose by more than 4 pp. 7 This cost of equity stands somewhat below the 7.2% seen in 2019, prior to the pandemic. 8 This ratio has fallen by around 30 pp since March 2022, at least partly in response to the Eurosystem’s gradual liquidity withdrawals. 9 Consolidated debt securities grew by 11.7% and represented 13.6% of total assets at December 2022 (10.7% in 2007). 4 2023.10 This was also the case for new lending, although it occurred more slowly in the housing segment than during past periods of monetary policy tightening. By sector, the stock of loans to NFCs and sole proprietors fell by 1.3% year-on-year in March, while loans to households dipped by 1.1%, with the stock of mortgage lending dropping by 1.6%. Credit quality Credit quality has continued to improve. In particular, the non-performing loan (NPL) ratio has maintained its downward movement, to stand at 3.4% in March, its lowest level since 2008 and 1.4 pp below its 2019 level. | 1 |
These buffers, created in periods of good economic conditions and necessarily associated with the adequate mechanisms to draw them down during recessions, may come in the form of non-distributable reserves to compensate economiccycle losses. Nevertheless, the possible advantages and disadvantages of such a measure should be accurately calculated and appropriately compared to those coming from other tools that act in the same way but affect the profit and loss account. 2 BIS Review 55/2009 We should not forget the interconnection that exists between valuation, leverage and procyclicality and how these issues should be properly managed under a macro-prudential perspective. The introduction of supplementary floors to capital requirements under a risksensitive approach, could be a safety net,. Setting limits on the build-up of leverage in periods of rapid credit growth can be seen as a way of strengthening the incentives for correct risk pricing of institutions, as well as a deterrent of excessive risk-taking. Furthermore, the development of valuation reserves should also be under our consideration as a way to mitigate the cyclicality inherent in risky and illiquid securities. Improvement of general stress test practices and their wide implementation, particularly during the most favorable part of the economic cycle, should also be included in our toolbox approach to fight against procyclicality. Solid stress test frameworks will allow assessing the adequacy of buffers, both in their construction and in their applicability over the cycle. Finally, remuneration schemes may be another tool for dampening the undesired cyclical fluctuations of banking activity. | In addition, Estonia has no problems with financing its external 2 BIS Review 91/2009 debt. Companies and people in Estonia have taken serious steps to pave way for getting through the global crisis and recovering growth. Therefore, the state needs to implement some important macro-level objectives to support the recovery of economic growth. Here I mean, above all, the readiness to join the euro area as well as medium-term and long-term stability of fiscal policy. In the current situation, accession to the euro area is Estonia's utmost short-term objective. The adoption of the euro will ensure the stability of the money used in Estonia and is extremely important for further reinforcement of the banking system and the investment climate. It can be said the clear perspective of joining the euro area is an absolutely necessary precondition at the national economy level for the permanent recovery of growth. Declining inflation has created all the possibilities in Estonia to meet the Maastricht criteria by end-2009, which makes it possible to join the euro area on 1 January 2011 at the latest. In this context and from the point of view of monetary and financial system stability, fiscal policy has two tasks in 2009. First of all it must be made sure that the current account deficit, which cannot be avoided in the prevailing economic environment, remains below 3% of GDP both this year and in 2010. | 0 |
Derivatives instruments are beneficial for all firms and the decision to use these instruments is largely shaped by the goals of the firm rather than its size. Here, I would like to touch upon a point about the information transmission function of derivatives markets. Derivatives markets offer economic agents the chance to price their expectations of the future. Thus, thanks to derivatives markets, expectations become measurable and through prices, more information concerning the future is shared with other economic agents. This structure enables a more effective resource allocation mechanism through more effective financial markets in the economy as a whole. Besides their contribution to the effectiveness of the resource allocation mechanism, the development of derivatives markets helps the financial sector to grow. Hence, derivatives markets contribute to the increase in national income and employment by indirectly encouraging more effective resource allocation and by providing value added. Derivatives markets introduce new investment instruments to the financial intermediary system, or in a broader sense, to the financial system. This, in turn, increases the number of instruments investors can use in order to diversify their portfolios and thus deepens financial markets. If we analyze what the diversity in investment instruments means for our country, we see that thanks to the derivatives markets, both real sector and financial sector investors will be able to manage their risks in diversity in line with the world markets and this structure will help our country to integrate with world markets. | The Bank of Thailand has been proactive in this aspect. We have already upgraded our cheque clearing system from paper-based to image-based system, namely ICAS in Bangkok and the Metropolitan areas and we will launch the ICAS for the entire country within next year, and the new version of BAHTNET system will also be launched next year. In addition, a policy to set up a system for local switching (i.e. a system for switching, clearing, and settlement of domestic payment transactions via local debit card) has been prescribed, and will come into force within 2013. • In Long Term (beyond 2015), ASEAN payment and settlement linkage should be explored. Currently, the Bank of Thailand is exploring the potential of linking our payment and settlement systems with that of other countries, such as the linkage with Hong Kong USD CHATS which aims to reduce FX settlement risk. The second consideration is new channel of payment and new technology Advanced development in Information and Communication Technology (ICT) has made it possible for money to move faster and more safely. Important development nowadays is ATM ASEANPay, operated by National ITMX, which already connects ATM system between Thailand and Malaysia. More connections will be made in the future, which will help facilitate retail payment and money remittance across ASEAN countries. Moreover, other payment channels and instruments such as e-banking, e-payment, and mobile payment will play an important role in enhancing efficiency and inclusiveness of financial services. | 0 |
These tools can be broken into two groups: – Those that are intended to directly affect the build-up of imbalances: for example, the FPC’s ability to impose sectoral capital requirements and its power to limit loan-to-value and debt-to-income ratios in the residential housing market. – Those intended to improve the resilience of the financial system in the event of shocks and thus reduce the severity of a cyclical downswing, including the power to affect bank balance sheets through a counter-cyclical capital buffer, and a leverage ratio. • The Bank’s actions in the residential housing market in June 2014 provide an illustration of the benefits of directing targeted macroprudential policy tools at sectoral financial stability risks vis-à-vis raising interest rates. Motivated by concerns over the growth of household indebtedness, the FPC recommended that no more than 15% of mortgages originated could have a loan-to-income ratio above 4.5. And in response to fears that households on variable rate mortgages could struggle to meet mortgage repayments if interest rates rose significantly in future, the Bank recommended a minimum 3 percentage point interest rate stress be applied at origination. So in a first best world where the institutional set up and macroprudential tools are available, I would let them do the leaning first rather than 2 BIS central bankers’ speeches wield the heavy hammer of monetary policy. So far, this is the approach we have taken in the UK. | Attempts to attenuate the financial stability risks from this broad property price boom with targeted macroprudential measures resulted in a large number of measures being applied, even including LTV restrictions on stand-alone car parking spaces, to which the boom had spread. • If loose monetary policy can lead to a build up of financial stability risks, then the converse must also be true – tighter monetary policy can be used as a means of reducing financial stability risks. Most empirical estimates show that a temporary tightening of monetary policy can be expected to reduce real debt levels – and BIS central bankers’ speeches 1 hence the probability of crisis – by discouraging households and firms from increasing leverage in the medium term, even if the transmission (through reduced aggregate demand and a higher interest burden) involves a short-run move in the opposite direction (for example, Goodhart and Hofman (2008)). • This was recognised in the design of the UK Monetary Policy Committee’s 2013 guidance that it intended to maintain a highly accommodative stance of monetary policy until economic slack had been substantially reduced. Recognising the financial stability risks that could emanate from a commitment to maintain low interest rates, the MPC set a “knockout” whereby their guidance would cease to hold if the Financial Policy Committee judged that the stance of monetary policy poses a significant threat to financial stability that could not be contained by the combination of macro and micro prudential policy tools available. | 1 |
The global financial crisis that erupted in late 2008 had its influence on our economy by stiffening this cooperation. On the one hand, the system found itself in a difficult liquidity situation, while on the other hand businesses found it difficult to access markets. With some additional subjective reasons, the outcome of this was a deterioration of the system’s loan portfolio and companies’ liquidating capacity. Consequently, 2009–2010 marked a slowdown of lending growth to the economy, reflecting the increased prudence, fully justified by the system, and BIS central bankers’ speeches 1 business inability to earn a meritable new loan. The period coincided with a review of balances and portfolio restructuring, when possible with provisions, directly affecting the system’s financial performance. The Bank of Albania has played a major role as a guardian of the country’s macroeconomic and financial stability. Macroprudence has been the prevalent word in our communication with the market, authorities and the public. We have translated macroprudence as a need for more capital and liquidity, and increased banking system payment capacity. Consequently, the Albanian banking sector did not experience contracting. The Bank of Albania has provided and continues to provide the necessary liquidity to the banking system, to stimulate not only to the market but also to the entire economy. Prudent policies and timely legal regulations guaranteed effective banking supervision and enabled satisfactory businesses’ access to bank loans. | Besides a legal relation, the bank-client relation is a human relation, one of trust. When a business delays the payment of a bank loan instalment, it should consider its judgement on the bank if the bank delayed the payment of the matured interest to that business. Dear ladies and gentlemen, On behalf of the Bank of Albania, I would like to invite the communities present in this event to strengthen their communication bridges, which is of benefit not only to them but also to the economy in general. 2 BIS central bankers’ speeches | 1 |
Sometimes it is alleged that monetary policy is impotent in a climate of heavy capital inflows. Claims are also heard that the Central Bank’s monetary policy measures only exert an influence through the exchange rate and have no effect on long-term interest rates, and absolutely not on indexed interest rates. Certainly, a tight monetary stance does put significant upward pressure on the exchange rate, contributing to lower inflation in the short run. Central Bank policy rate hikes also have a very swift effect on the money markets, and interest rates on other instruments with maturities of a few months or years are soon influenced too. Central Bank policy rate decisions also have an impact on long-term interest rates, both indexed and nonindexed. All research in Iceland and everywhere else confirms this, but because the effect is transmitted with a long lag, monetary policy must be forward-looking. Interest rate decisions made today are not transmitted in full to long-term interest rates until one or two years hence. Thus the debate often focuses on the short-term effects of monetary policy, but people need to be patient and bear in mind the impact which does not emerge until well into the future. The Central Bank does not have the slightest doubt that interest rate changes in Iceland ultimately have the same effect as those in other countries, in other words that general economic principles apply just as much in Iceland as anywhere else. | The only conclusion that can be drawn from the massive growth in lending by the banks is that they have overstepped the mark. There is no question that this surge in lending is a major contributor to the current expansionary forces in the economy, which have fuelled inflation and call for a higher policy interest rate than otherwise. The banks are a pillar of the Icelandic economy. They insist that the Central Bank and the Government should act with restraint and promote economic stability, so they also have to make comparable demands towards themselves. In the long run, no economy can sustain this huge expansion in credit that originates in the banking system. Last week the Central Bank published its quarterly Monetary Bulletin in which it discusses economic and monetary developments and prospects and has published its new macroeconomic forecast. Without going into detail here, the broad finding is that robust private consumption will continue and investment will increase, especially business investment, for reasons including that aluminium-related projects have been stepped up for this year, as I mentioned earlier. Public consumption growth is expected to be modest, however. GDP growth will be 6.4% this year. It will be marginally less next year, when growth of private consumption and investment will also slow down. The positive output gap will widen considerably this year and in 2006. This year the current account deficit will peak at 12% of GDP, then shrink next year, contrary to previous forecasts. | 1 |
Certainly, a decline in NPL ratios will also be facilitated by an environment of stronger economic growth. In the euro area, such conditions of strong and sustained growth will require the ongoing cyclical recovery to be supported by effective structural policies. In particular, reform efforts need to be stepped up to improve the business environment, which in turn will help increase productivity, employment and growth – and also make the euro area more resilient to shocks. Fiscal policies should support the economic recovery, while remaining in compliance with the European Union’s fiscal rules. The full and consistent implementation of the Stability and Growth Pact is crucial to maintaining confidence in the fiscal framework and ensuring the sustainability of public debt. At the same time, all euro area countries should strive for a more growth-friendly composition of fiscal policies, prioritising public investment and reducing the tax burden on labour. A clear policy focus on the growth agenda will contribute to enhancing confidence and reducing uncertainty about the future. In the case of the euro area, a stronger and more complete Economic and Monetary Union (EMU) will also help improve confidence. The socalled Five Presidents’ Report – “Completing Europe’s Economic and Monetary Union” – 2 BIS central bankers’ speeches provides a roadmap for how to improve the architecture of EMU. | This was based on a comparison of 70 policy tightening episodes in 19 Advanced economies (AEs) and six Emerging Market Economies (EMEs). Strong growth and high job vacancies, as well as front-loaded rate hikes can help prevent a hard landing. Conversely, rapidly rising inflation, low term spreads and elevated debt levels raise the risk of a recession, especially if there are persistent negative supply shocks. Comparisons with the current conjuncture suggest a mixed prognosis across these factors. Overall, for the global economy to successfully stay on the ridge, inflation needs to peak soon, underpinned by improved demand-supply balance as multiple driving factors reequilibrate. This would lessen the constraints facing central bank’s responses – allowing the pace of monetary policy tightening to ease off by year-end. At that point, a relatively contained period of sustainable below trend growth should ensue with inflationary pressures gradually receding into 2023. If instead, the global economy veers off the ridge to a hard landing and equilibrating forces are stifled, the result will be higher inflation for longer, a more protracted period of monetary tightening, possibly higher unemployment, and mounting debt vulnerabilities. I note, but will not address here, that the Eurozone and other regions face additional idiosyncratic concerns which bear close monitoring. Singapore Economy: Some Pro-equilibrating Shifts Some growth moderation The Singapore economy is moderating, with average growth of 4.1% (y-o-y) in H1 2022. Following the strong rebound of 7.4%, last year, the economy’s output gap is estimated to be mildly positive at mid-year. | 0 |
2 See Giavazzi, F. and F.S. Mishkin (2006), "An evaluation of Swedish monetary policy between 1995 and 2005”, Reports from the Riksdag 2006/07:RFR 1, Committee on Finance. See also Sveriges Riksbank (2006), “Material for assessing monetary policy 2003-2005”, box in Inflation Report no. 1 and Sveriges Riksbank (2005), “Material for assessing monetary policy 2002-2004”, box in Inflation Report no. 1. 3 See the references in note 2. 4 BIS Review 52/2007 The Riksbank’s calculations imply, for example, that an interest rate a half a percentage point lower for six months would have led to lower unemployment corresponding to two or three tenths of a percentage point. However, I would like to emphasise that this type of calculation is very uncertain. Given this, I believe that monetary policy cannot be said to have contributed significantly to the high unemployment. What other possible explanations are there? What can explain the rise in unemployment? As I mentioned initially, unemployment was held down in the 1970s and 1980s with an economic policy that was not sustainable in the long term. I believe that this could have concealed structural problems in the labour market that only became visible when the economic policy regime was changed in the early 1990s. If one studies unemployment, particularly total unemployment, over a long period of time, one can see that it has shown a trend increase ever since the end of the 1960s. This also applies if one excludes the years after the change in economic policy regime. | Unemployment is instead determined in the long run by how well the labour market functions, for instance, with regard to matching unemployed persons and job vacancies. My main message here is that there is no clear-cut and stable relationship between inflation and unemployment, either in the long term or the short term. Simplified relationships between inflation and unemployment, such as the short-term and long-term Phillips Curves, may function as pedagogical tools. However, this type of simplified relationship is not practicable in determining how monetary policy should be conducted. Nor can such simple relationships be used to analyse to what degree monetary policy has contributed to higher or lower unemployment. Monetary policy is based on forecasts Let me go on to the next issue I intend to take up, namely the conditions under which monetary policy is conducted. This is an important aspect of a discussion of how far monetary policy can be considered to have contributed to higher unemployment. As monetary policy has an impact on demand and inflation with a time lag, the Riksbank must base its interest rate decisions on a forecast of future economic developments. All forecasts are uncertain. One therefore cannot expect that the Riksbank will always be able to exactly predict what will happen in the economy. It is also difficult to quickly bring inflation back on target once a deviation has occurred. This may also be unsuitable for real economy reasons. | 1 |
William C Dudley: Economic opportunity and income mobility Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Association for Neighborhood and Housing Development Annual Community Development Conference, New York City, 11 April 2016. * * * Good morning. I am very pleased to speak at the 6th Annual Community Development Conference. I would like to give a special thanks to the Association for Neighborhood and Housing Development for organizing this conference about issues of importance to the community development industry and to the future of New York City. At the Federal Reserve Bank of New York, we develop a wide variety of research and data products to gain a deeper understanding of regional economic conditions. We track the health of household balance sheets at the state and local level using data from the New York Fed’s Consumer Credit Panel. We also conduct an annual poll of small businesses to understand their credit needs and credit availability. My meeting with you today is part of our continuing efforts to understand what is going on at the grassroots level of our economy and to share insights from the New York Fed. The Federal Reserve has dual objectives, set by Congress, with respect to monetary policy – maximum sustainable employment and price stability. I would like to focus my remarks today on the first of these objectives. | We understand the importance of credit in allowing communities to grow, and the importance of the Community Reinvestment Act in requiring financial institutions to make investments in their communities. But, as my remarks here have indicated, credit is only one factor – and perhaps not the most important one – that affects the affordability of housing in our cities. I’ve addressed the importance of geographic mobility in supporting income mobility from the perspective of providing parents options for better neighborhoods in which to raise their children. Geographic mobility is also important in terms of individuals receiving the highest return to their human capital. Local economic shocks can depress employment and wages in some labor markets. This creates a strong incentive for individuals to move to an alternative labor market in order to more fully utilize their skills. Financial frictions to geographic mobility can reduce this movement of individuals across labor markets leading to less-efficient outcomes for the economy. Income mobility can be enhanced through policies that attempt to limit these financial frictions. This argues for avoiding, where possible, policies that create “in-place” subsidies where the household can access the benefits only while remaining in a specific location. The Federal Reserve has the twin objectives of maximum sustainable employment and price stability. Achieving the first of our objectives requires that every individual has the opportunity to achieve her full potential in life. Where you happen to be born should not determine your chance of living the American Dream. | 1 |
Importantly we – and you – can see how we are performing month by month in relation to our mandate. We also have a tested analytical framework. We model possible future outcomes and we look at the balance of risks around a central view. We can rely on experience and judgement to make regular policy decisions. And we can alter our policy decision on interest rates each month as the data and circumstances evolve. ii) Financial Stability and why it is different If financial instability occurs, costs to society may be high. Damage to our reputation could be potentially high too. Yet judging the optimal amount of resources to devote to prevent crises is problematic. What degree of resilience do we want? And what should we be prepared to pay for BIS Review 36/2005 1 insurance? This is a familiar problem in public policy – what is the optimal size of the fire brigade or army? The challenges we face in seeking to maintain financial stability are very different to those in the monetary policy arena. • Firstly there is neither a clear over-arching analytical framework nor a commonly agreed set of indicators of incipient financial instabilities. • Secondly the task is made harder because we are dealing with tail events – low probability scenarios – rather than central projections. It is about aberrant rather than normal behaviour and situations: less predictable and harder to model. | Rapid expansion of exports and moderate increase of imports led to improved trade and current account deficits, contributing to foreign currency demand and supply balancing and increased exchange rate stability. Monetary and fiscal policies have conveyed a careful macroeconomic stimulus. Withdrawal of the fiscal stimulus during the second half of the year, led to a more stimulating monetary policy, by reducing the key interest rate in July and a fuller introduction of it into the financial markets during the following period. Financial markets were characterised by an improvement of liquidity indicators and a decline in interest rates in almost all financial instruments. Furthermore, a prudent fiscal policy rendered budget deficit and public debt in line with 2010 forecasts. These developments are expected to be brought forward, in broad terms, in 2011 as well. Economic growth is expected to remain comparable to levels of 2010. However, it is expected to be driven by domestic demand to a large extent. The banking system is in a much better position compared with two previous years in terms of supporting the increase of domestic consumption and investment with funds. Moreover, inflation pressures are forecasted to be under control, budget deficit and public debt are expected to be further consolidated, and external position of the economy is expected to be more stable. Respecting this picture has important implications, which I will address later in more details, for policymakers and economic agents. Latest developments in global economy are characterised by continued economic growth in most developed countries and emerging economies. | 0 |
Mervyn King: Stocktake of the UK economy Speech by Mr Mervyn King, Governor of the Bank of England, at the East Midlands Development Agency/Bank of England Dinner, Leicester, 14 October 2003. * * * The Bank of England is back in Leicester. Between 1844 and 1872 there was a branch of the Bank of England in Leicester, located in Gallowtree Gate. Sadly it operated at a loss, in part because the Agent lived in style driving about town in a carriage and pair with two men in livery, and the branch was closed. Only six years ago did we re-establish our links with the City through the creation of a new Agency in the East Midlands. The purpose of that Agency - staffed by four members of the Bank who work in rather less style than their predecessors - is to listen to you and other businesses about what is happening on the ground. The reports of our Agents around the country are crucial to the Monetary Policy Committee. The information we receive from you, and our other eight thousand business contacts around the country, are key pieces in the large jigsaw puzzle of the UK economy that we assemble each month in order to see the big picture. Some of the statistical fog hanging over the British economy lifted a week or so ago with the publication of a new picture of demand and output over a number of years. | And output has risen in every single quarter since the middle of 1992, something that is true of no other G7 economy. Why were the 1990s so successful? And can that success continue? Four features of our economy lie behind this improved performance. First, the new monetary framework - based on an explicit target for inflation, a high degree of transparency, and, since 1997, independence of the Bank of England made it clear to everyone that monetary policy was, and would continue to be, targeted on maintaining low and stable inflation. Second, a substantial fiscal consolidation turned a deficit of 8% of GDP in 1993 into a sustainable position for the public finances based on a set of clear rules for government debt. Third, a continuing programme of supply-side reforms, over a period of 20 years, made it possible to reduce unemployment without generating higher inflation. Fourth, although the unexpected twists and turns of the world economy did pose real challenges to monetary policy, especially in the latter half of the decade, those shocks tended to average out over time rather than cumulate in either an upward or downward spiral. In other words, the economic surprises alternated between good one year and bad the next, rather than adding up to “one damn thing after another”. In that sense, Lady Luck smiled on us. Of course, we were not alone in enjoying the 1990s. | 1 |
At the national level, the PACTE Act proposes certain advances in life insurance, which is by far French households’ leading form of financial savings (EUR 1,700 billion at end-2018), in particular to promote the Euro-Growth Fund by making it simpler and more understandable for savers and to increase insurers’ investment in innovation financing. The French authorities are also very careful that the current review of the Solvency II Directive is favourable to the long-term investment of insurers in equities. At the European level [Slide 3], we need to build a real “Financing Union for Investment and Innovation” to better steer our resources – a savings surplus of EUR 345 billion in the euro area5 – towards equity and innovation. This Financing Union must bring together and amplify existing initiatives, the Capital Markets Union, the Banking Union and the Juncker Investment Plan. I would now like to answer my second question: is the diversification of sources of financing sufficient? From my point of view, the answer is no because diversification carries risks that need to be well managed. II. Diversifying sources of financing is a complex business whose success requires 2/4 BIS central bankers' speeches managing all the traditional and new risks faced by intermediaries A. First, there are the risks linked to fast-growing private sector debt Corporate debt in France is growing much faster than in the rest of Europe [Slide 4]. We are now significantly above the euro area average. | The aim, as I have said, is to enable the bank’s critical economic functions to continue, without taxpayer support, while it is being resolved. A great deal has been achieved. 10 All speeches are available online at www.bankofengland.co.uk/speeches 10 We now have agreed international standards covering the design of resolution regimes, the amount of ‘bail-inable’ resources banks must hold, and agreement with industry participants to ‘stay’ termination rights by counterparties in derivative and repo transactions if resolution is in train. Alongside this we also have international guidance on how to ensure continuity of access to FMIs as well as on the mechanics of executing a bail-in. The UK now has in place a comprehensive and effective bank resolution regime that implements the EU’s Bank Recovery and Resolution Directive (BRRD) and the international standards. The Bank of England has been established as the UK’s resolution authority with a wide range of powers to ‘bail in’ shareholders and creditors of failed banks. The biggest UK banks have begun to issue bail-inable debt at scale and are well on their way to meeting the target for loss absorbing resources in resolution. 7 Key policies and guidance to firms have been issued, notably on operational continuity and on the internal distribution of loss absorbing resources. Last October the Bank, with the publication of the Purple Book, the Bank set out in detail its approach to resolution and how it would tackle a failing bank. | 0 |
A floating exchange rate regime is the most adequate to prevent exchange rate policy from inducing currency 8 These authors find that only half of the accelerated expansions of broad monetary aggregates result in higher inflation, but the probability increases when this coincides with an asset price boom. 9 For an interesting discussion in the context of the present crisis, see Borio (2008). BIS Review 150/2008 5 speculation. The fiscal policy can also contribute to reduce foreign exchange pressures. However, these measures may not be enough, and thus in some exceptional periods, and with the purpose of preserving financial stability, an intervention in the foreign exchange market is warranted. 10 In Chile, since the floating exchange rate regime was adopted, this has occurred on three occasions, all deemed exceptional. To avoid conflicting goals, consistency between the intervention and the direction of the monetary policy is important, and to that end a first requisite is that the intervention does not have a specific point or range objective for the exchange rate. Finally, the current international financial crisis underscores the importance of having an adequate framework for international reserves management, as a key tool to cushion the impact of international liquidity shocks on the economy. The accumulation of reserves in Chile that begun in April this year was decided precisely to strengthen the liquidity position before the eventuality of a worsening of world financial conditions, which is what actually occurred in September. | See: Consultation Paper 5/12 ‘Implementation of Basel standards’; Dahl, D, Meyer, A, and Neeley, M (2016), ‘Bank size, compliance costs and compliance performance in community banking’, Mimeo; Dolar, B and Dale, B (2020), ‘The Dodd-Frank Act’s non-uniform regulatory impact on the banking industry’, Journal of Banking Regulation, Vol.21, pages 188-95; Elliehausen (1998), ‘The cost of banking regulation: a review of the evidence’, Federal Reserve System Studies No.171, pages 1-35; Feldman, R J, Schmidt, J, and Heinecke, K (2013), ‘Quantifying the costs of additional regulation on community banking’, Federal Reserve Bank of Minneapolis Economic Policy Paper 13-3. 8 Austen Saunders and Matthew Willison, ‘Measure for measure: Evidence on the relative performance of regulatory requirements for small and large banks’ (forthcoming). 7 6 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 6 contribution to the safety and soundness of small firms, a simpler regime will put in their place simplified or scaled back requirements. These will be less costly, but won’t make the firms they’re applied to less resilient. It’s worth saying here that a simpler regime will need to be assessed in the round. There are few, if any, requirements which make absolutely no contribution to small firms’ safety and soundness. That means that we may need to tighten some requirements a little when we simplify others in order to keep the overall level of resilience the same. But our expectation is that the resulting package will be less costly overall whilst delivering the same level of safety and soundness. | 0 |
Default on a mortgage carries much more risk for households – the potential loss of a home – than non-payment of unsecured debt. It’s just that this has become more the case in recent years. As outlined in the introduction, almost all the growth in unsecured household debt, relative to income, involves two relatively new developments that involve less pound-for-pound risk, at least for borrowers, than other forms of debt. Nor do they tell you anything about whether households are “living beyond their means”. One involves a change in the way people pay for cars. Conventional loans for car purchase have been around for a while. But over the last decade or so these have been overtaken by so-called “personal contract purchases” (PCPs) in which buyers make lower monthly payments but don’t own the car outright (there’s usually an option to buy at the end of the term, but the car is otherwise returned to the dealer). This is a highly contingent contract and, as far as households are concerned, it’s one that looks more like a rental arrangement than normal debt. The payments are mostly for depreciation, not pure interest. (They’re, in any case, set in advance and are therefore insensitive to subsequent changes in short-term interest rates.) The car owner can choose costlessly to walk away from the contract, at least once half the original price has been repaid. | 10 All speeches are available online at www.bankofengland.co.uk/speeches 10 Chart 11: LTVs high in late 1980s, lower today Percentage points 10 Per cent 95 LTV on new mortgage loans 90 85 80 Chart 12: The rental/gilt yield spread has been a good predictor of house price inflation 8 6 4 0 4 2 75 0 1995 12 8 Average 70 1985 Per cent 16 2005 2015 Sources: UK Finance Regulated Mortgage Survey and Bank of England. -4 Rental yield spread over government bonds (LHS) Average house price growth over the following five years (RHS) -8 -12 -16 -2 1987 1992 1997 2002 2007 2012 2017 Sources: ONS, Zoopla/Whenfresh, Land Registry, Bank of England, and Bank calculations. Another upside risk is a re-acceleration of house prices. I’m not so daring as to offer you a precise forecast. Let me just point to a couple of pieces of evidence about the housing market and let you draw your own conclusions. One is that housing is currently “cheaper” than government debt, at least on a very crude comparison of their yields. The red line in Chart 12 is the difference between the estimated rental yield on housing and the yield on 10-year indexed government debt, an indicator of the “neutral” real rate of interest. | 1 |
However, despite improvements in growth witnessed since 1999, significant reductions in poverty will not occur without a significant increase in growth rates to above 7% on a sustained basis. One of the ways in which growth can be scaled up is through the employment of the vast African resources for the development of the continent. Prior to the global financial and economic crisis, the African continent experienced a surge in investment flows in many sectors including mining, manufacturing, tourism, transport and construction. This inflow of foreign capital helped to finance the development registered in Africa over the past decade. The inflow of foreign capital coupled with high prices of commodities on the global market led to high international reserve accumulation in most commodity exporting countries, including those in Africa. However, following the global financial and economic crisis the accumulation of international reserves declined as commodity prices plunged and foreign capital inflows, both private and public slowed significantly or were reversed. This has had a negative impact on the availability of resources to finance Africa’s development. The challenge going forward is recovering, maintaining and sustaining the economic gains and macroeconomic stability that African countries experienced before the crisis hit. In view of the anticipated reduction in aid flows and foreign direct investment, African countries need to give domestic savings mobilisation as much attention as the other foreign sources of development finance. | To this end, the Bank of Zambia will ensure that the Committee that has been spearheading the development of these guidelines become a permanent one and meet every so often to make the necessary changes in an inclusive manner. Accordingly, you are all urged to forward any contributions you wish to make on an ongoing basis. Ladies and gentlemen, allow me now to welcome and thank Mr Mervin King for graciously agreeing to officially launch the guidelines. Mr. King is internationally renowned for his work on corporate governance, and in particular for his work on the King Committee of South Africa which issued its first report in 1994. The King Report, along with the Cadbury Report of the United Kingdom and the Sarbanes-Oxley Act of the United States have become key references on the subject and it is for this reason that we feel both proud and honoured to have Mr. King with us today. BIS Review 119/2006 1 It is now my honour and privilege to call upon Mr. King to launch the Corporate Governance Guidelines. Mr. King! | 0 |
9 All speeches are available online at www.bankofengland.co.uk/speeches 9 (ii) Forward looking stress tests of the Bank’s financial exposures If the first case study illustrated an example where risk was already being actively evaluated, my second illustrates a completely new area of activity. The concept of enterprise-wide stress tests has transformed private sector thinking on risk management in recent years, driven in many cases by central bank regulators. The Bank of England conducts an extensive annual supervisory stress testing programme in the United Kingdom – and I note with interest the discussions taking place elsewhere in this conference on the potential to expand such exercises well beyond 11 banks, something we have also been considering . But, ironically perhaps, the Bank of England has not until very recently applied such techniques to its own balance sheet. That made sense when large-scale balance sheet expansions were expected to be rare and highly idiosyncratic. But the more permanent shift in the Bank’s firefighter role illustrated in Chart 5 suggests we need a more sophisticated, agile forward-looking way of evaluating the risks we might face, and (importantly) the resources required to deal with them. Development of a suite of stress tests has therefore been a core part of the early work of the new second line team. To shape this work, key judgments are required on ‘the 3 ‘S’s’: Scope, Scenarios and Severity. Scope describes the range of facilities that the Bank might be called upon to use. | This is by any standards a large portfolio – amounting to about a third of the total stock of conventional gilts in issue, with an average duration of 12 years, it has a so-called ‘PV01’ – or valuation 7 sensitivity to a one basis point movement in average interest rates – of about £ . Now an open position of this size would be many times larger than even the most aggressive traders in this room would dream about running themselves. Your natural instinct as a risk professional if you came across this in the private sector would probably be to seek an immediate reduction in the position, or a hedge in the market. But any attempt to do this would undermine the very policy objective of the Monetary Policy Committee in pursuit of their 2% inflation target: ie to induce a portfolio shift into riskier assets by removing duration from the market. As I noted earlier, this is a classic example of the central bank policymaker as fireman. What then is the role for the central bank financial risk function? For the new second line, it is a classical watching brief. Its first duty would have been to ensure there were sufficient resources to back the risk. In this case, that was achieved some years ago by placing the portfolio in a separate subsidiary of the Bank 7 For more details on the current composition of the APF gilt portfolio and the operations, see http://www.bankofengland.co.uk/markets/Pages/apf/gilts/results.aspx. | 1 |
With wide participation by banking institutions in Malaysia, Indonesia, Thailand and Singapore, such infrastructure can be extended to enhance the efficiency and cost-effectiveness of intra-region card electronic payments and remittances. The Real Time Gross Settlement (RTGS) systems of Bank Negara Malaysia (RENTAS) and the Hong Kong Monetary Authority, have been linked to facilitate faster and more efficient forms of payments. Further linkages could be pursued among the broader Asian community to link more RTGS systems, thereby facilitating faster and more efficient form of payments. Fourth, while greater financial integration brings about many benefits, its associated risks have to be anticipated and managed. In relation to this, cooperation among the region's financial regulators and central banks need to be further strengthened. There is already extensive cooperation and collaborative mechanisms in place. More specifically, there is improved regional surveillance that facilitates early detection of emerging risks and potential contagion at the regional level. In addition, institutional arrangements and a framework for financial crisis containment, management and resolution is now being put in place. These infrastructure have been reinforced by infrastructure development in the areas of financial markets, payments systems, and regulatory framework. With significant strides already accomplished, a key challenge for Asia will be in intensifying this positive momentum for cooperation and collaboration. Over the next few years, the focus will be on the implementation of the next set of recommendations that are embodied in the region's road map produced in 2006 , which outlines the strategic direction of regional cooperation. | One example is real time information about customer behaviour taken from computing devices embedded in everyday objects, such as mobile phones, home appliances and cars – the so-called internet of things. Together with digital distribution of insurance, these changes bring huge opportunities. For example, better information may bring improved pricing, wider availability of insurance, more tailored and relevant products, enhanced fraud detection and better customer service. At the same time, they are raising new questions and risks. Many are ethical and conduct related. For example, when designing a pricing algorithm what characteristics and behaviours of people is it acceptable to include? How transparent do insurers need to be to their customers about these algorithms? Where is the boundary between collecting data on behaviour to improve pricing and unacceptable interference in privacy? Is it acceptable to charge a customer more because their behaviour suggests they might be willing to pay more? All these questions highlight the growing importance of managing model risk, including these ethical issues. The US Federal Reserve System and Office of the Comptroller of the Currency published the seminal guidance on model risk management in 2011.4 Although targeted at banks, most of it is also relevant to any organisation making extensive use of models. Its recommendations cover model development, implementation and use; independent model validation, comprising evaluation of conceptual soundness, ongoing monitoring and backtesting; and effective governance, policies and controls, including the importance of a comprehensive model inventory and good documentation. | 0 |
6 All speeches are available online at www.bankofengland.co.uk/news/speeches 6 Some of these are on a slower track due to our work with insurers in response to Covid-19. Others have been brought into sharp relief by the crisis. I’ll focus on three. UK life insurers have been incentivised to invest in long-term, illiquid assets with higher yields for some time, given the low interest rate environment. As a result exposure to credit and other risks (e.g. property) has been increasing. This is further exacerbated by Covid-19 as wider economic disruption has impacted the underlying creditworthiness of some of these assets. The PRA has published several – one might say many - supervisory statements setting out how we expect firms to manage risks arising from such investment strategies. We’ve clarified how we expect firms to apply and model the matching adjustment4; taken a deep dive into liquidity risk5; and provided additional guidance on the practical implementation of the Prudent Person Principle 6, which is the part of Solvency II that deals with qualitative aspects of investment risk management. We will be publishing some further, important clarifications on the Prudent Person Principle at the end of this month. We expect firms to demonstrate that they have strong governance and internal investment limits that are effectively implemented; this remains one of our top priorities for supervision of the life insurance sector. | It’s therefore worth taking some time to think about what we as the prudential regulator and the insurance industry have already learnt from the current crisis –including how the Solvency II regime has responded. None of us knows how the full effects of the coronavirus pandemic will unfold. Our aim at the Bank, alongside colleagues at the FCA and within government, is to build a bridge across the economic disruption created by the pandemic and help UK businesses, consumers and the financial sector to the other side. Insurers will need to be on the front foot in identifying the potential impacts on their longer-term business models in order to meet changing customer expectations. Covid-19: what role has Solvency II played in the industry’s response? I have talked previously about the principles of Solvency II that the PRA supports - a whole balance sheet, market consistent approach to regulatory solvency, and focus on good governance and risk management 1. The adequacy of firms’ capital and risk management during this global, systemic event is certainly being tested. The information we have from the largest UK insurers shows the industry was well-capitalised going into this crisis and has so far remained so, with aggregate solvency ratios around 150% 2. But given the exceptional uncertainty generated by the current crisis, we expect insurers to increase their monitoring of the additional risks presented by Covid‐ 19, and where necessary to update their risk and capital assessments accordingly. | 1 |
Not only do Europe’s governments have far higher revenue as a percentage of their GDP, they also show a broader quota of social security contributions in respect of direct and indirect taxation (15% of GDP in the euro area, as against 7% in the United States), which tends to make the system more gradual. Fourthly, redistributive policies are also expressed in other ways than through government expenditure, for instance through the regulation of labour markets. On the basis of a series of indicators such as minimum wages, the legal safeguards protecting those in employment and the unemployment benefit replacement rate, the United States is at a lower level than the 20 average level for the EU. One way of measuring the magnitude of automatic stabilisers is the budget’s overall sensitivity to cyclical fluctuations in the economy, which can be expressed in terms of the elasticity of the primary budget balance (as a percentage of GDP) in relation to the output 21 gap, in other words the gap between real revenue and its potential level. If budget policy is anti-cyclical, the coefficient should be positive (in other words, it increases in a phase of expansion and decreases in a recession). An OECD study gives us a correlation of 0.48 for 22 the euro area and 0.34 for the United States. The lower overall budget responsiveness to the economic cycle in the United States can be ascribed both to lower current expenditure elasticity and to low tax responsiveness compared with most of the countries in the euro area. | On our continent, monetary and budgetary policies are often judged in relation to what is decided in the United States rather than in their own right. However, it is very rare that the opposite happens. Particularly at moments such as we are experiencing right now, one often hears people asking how come monetary and budgetary policies in the euro area do not closely follow the strategies implemented in the United States, without their pausing for a moment to consider whether or not those US policies are suited to the European economy. There is still a kind of unthinking reflex in Europe that prompts some people to believe that our economic policy authorities should adopt the same approach as the US authorities, and that we are making a mistake when we do not do so. This kind of asymmetrical assessment was perhaps alright under the Bretton Woods system, in which the European countries pegged their currencies to the dollar, and under the subsequent fluctuating system in which the individual European countries were relatively small, which allowed them to benefit from a certain amount of autonomy from the decisions reached on the other side of the Atlantic. But with the creation of the euro and the development of the euro area to levels akin to the US economy, it would have been rather ironic if economic policy decisions in Europe simply mirrored the conduct of other authorities. | 1 |
Beyond the direct trade policy shock resulting from a rise in import tariffs, two factors at least may amplify the decline in global GDP: a decline in investment demand caused by firms’ falling business confidence due to uncertainty, and a rise in the financing cost of capital due to an increase in actual or perceived borrower risk. According to Banque de France model estimates, the negative impact on GDP of higher import tariffs is 2 to 3 times larger when we account for these indirect channels. And this increase in uncertainty can produce front-loaded negative effects, even before the effective implementation of protectionist measures. That said, protectionism is first and foremost a negative supply-shock, with stagflationary effects. As such, the adverse effects of protectionism cannot and should not be accommodated by monetary policy. In spite of protectionist threats, the global economy continues to expand strongly, at 3.7% this year. We have used a lot in our latest IMF meetings, the nice French word « plateau » to describe global growth. But this “plateau” is not even: the strong acceleration in the US, even if it is temporary and fragile, is offset by a moderation elsewhere. In short, we are moving from synchronized growth to economic divergence. Consequently, countries might be suffering from the ongoing rise in US interest rates. Helene Rey’s famous paper in 20133 argued that floating exchange rates are not sufficient to give countries independence from US monetary policy if they have an open capital account. | There are increasing signs that the labour market is tightening and nominal wage growth is picking up: the Phillips curve is back to work, albeit a bit later than expected; and this should pass through to core inflation which has been lagging behind due to the temporary effects of the appreciating terms of trade and declining corporate margins. We at the Governing Council are thus increasingly confident in the sustained adjustment in inflation back to our objective, with our forecast for 1.7% in each of 2018, 2019 and 2020, vindicating our unanimous decisions in June. Alongside these positive developments, there are, however, growing uncertainties: protectionism – I will come back to this later; rising oil prices; the US policy-mix – a warranted monetary policy normalisation and a less warranted fiscal stimulus – with which many EMEs are struggling; and equity market valuations, that may appear more in line with economic fundamentals and corporates earnings after the latest correction, but remain volatile in part due to geopolitical risks as well. Within Europe, Italian fiscal policy is under investor scrutiny. And there is Brexit, although its direct effect on the euro area macroeconomy is likely to be small. How should we, as euro area central bankers, respond to this economic environment? By combining two apparently contradictory aims: clarity and flexibility. As regards clarity, our first duty as policymakers is to provide markers to help guide economic actors and financial markets in the increasing fog of uncertainties. | 1 |
A commonly recurring cyclical pattern is that productivity increases more quickly at the beginning of an economic upswing. Companies then normally have the capacity to increase their production with the existing resources. The need for resources then gradually increases and the companies begin to recruit new staff. Productivity growth usually falls then. When the economic cycle enters a downturn phase, productivity develops even more slowly. Another way of describing this cyclical pattern is to assume that the economy is exposed to technological shocks. This is how productivity is modelled in so-called real business cycle models. This is the case in Ramses, for instance, which is the general equilibrium model used by the Riksbank. But also by factors such as globalisation and new technology However, productivity growth did not fall back, but remained high in the latter half of the 1990s. There was only a marked reduction in connection with the bursting of the IT bubble in 2000 and in the following year productivity did not increase at all. Since then productivity has increased rapidly during the 2000s up to last year (see Figure 3). During the economic upturn in recent years it took longer before employment accelerated. Most indications are therefore that the strong productivity growth in recent years was not solely a cyclical phenomenon – it was also due to structural factors such as globalisation, use of information technology (IT), deregulation of product markets and innovations. Globalisation sharpens competition and pushes up productivity growth through a higher degree of specialisation and use of comparative advantages. | Additionally, we are confronting new risks, in the face of international tensions related to Iran’s nuclear situation and its impact on the oil market. These sources of uncertainty are beyond our control. Therefore, our role as policymakers in emerging countries is to preserve flexibility and space for policies that will enable us to respond to and buffer the financial and real effects that those risks pose on our economies. Over the last years we have gained credibility, flexibility and space to implement a macroeconomic and financial policy framework that will help us smooth out the economic cycle. This framework rests on four pillars. First, monetary policy management is based on a flexible inflation-targeting regime, conducted by an autonomous central bank and supported by a floating exchange rate system. Second, a fiscal policy that is accountable and predictable thanks to a structural balance rule. The significant amount of savings accumulated during the run-up of copper prices was a crucial factor in bolstering the resilience of the Chilean economy and in providing a countercyclical fiscal boost. Third, a high degree of commercial and financial integration with the rest of the world. Finally, a sound financial system, with globally integrated, well capitalized, and adequately-regulated banks. These elements allowed us to be less affected by the Great Recession than by previous episodes. In Chile, the effects of the world slowdown of the second half of 2011 and the financial turbulences coming from Europe have so far been limited. | 0 |
In our lives, there are many marshmallows to tempt us: Do I buy that expensive pair of shoes? How much should I spend on my wedding? Can I afford to upgrade my HDB flat? Should I take a holiday in Penang or Perth? Budgeting is critical to making financial decisions that work for us. One does not need to be a financial expert to do effective budgeting. Many regular people do this very well, on a weekly or monthly basis. They look at how much they have, what they want to set aside, and what they need to buy. They compare prices for the best deals, look out for bargains and sales, and stretch their dollar. Most important, they set a target for how much they want to save and stick to the discipline, buying only what they need and postponing the rest. Building up our savings puts us in a stronger position to plan for big ticket items such as buying a home as well as to meet emergency expenditures. Saving is key to funding longterm commitments such as our children’s education and our own retirement needs. Borrow responsibly Second, borrowing. Even with savings, most of us have to borrow at some point in our lives: to buy a house, pay for education, or meet an emergency. It is not wrong to have debt. But good financial planning is about keeping debt low and managing it well. | அதாவது, நமது வாழக்ைகப் பயணத்திற்கு நிதித் திட்டமிடுதல் அவசியம். இவ்வாறு திட்டமிடுவதற்கு, ெபாறுைமயும் முன்மதியும் அடிப்பைடப் பண்புகளாகும். The practical insights in Ponnaana Ethirkaalam are relevant not only for the Tamil or Indian community but for all Singaporeans. I understand the authors have plans to translate their book into English to reach out to more people. I congratulate MP Sellvem and Jaafar Ghany on their achievement and wish them every success in the launch of Ponnaana Ethirkaalam. Thank you. 4 BIS central bankers’ speeches | 1 |
The positive response by investors of these issuances with maturities of up to 30 years is reflected by its oversubscription of up to 10 times. A relatively recent form of finance that has been gaining attention recently is green financing. The market for green bonds tripled in size in from 2013 to 2014, with over USD100 billion of issuances expected this year . Of significance, the signing of the "Paris Agreement", a global action plan on climate change, by 195 countries in December of 2015 will serve to further accelerate the momentum of green financing. As the principles of Islamic finance share substantial synergies with the concept of environment-friendly and sustainable development, there is also tremendous opportunity for Islamic finance to develop instruments that can support the global demand for green projects. These forms of finance can be embraced and brought together to leverage in a mutually reinforcing manner to enhance their collective impact. Socially responsible investments in the West began as far back as the 18th century, while Islamic finance evolved in the Middle East and Asia since the 7th century, in which lending based on Sharia or Islamic principles included moral directives in the conduct of business. Reinforced by globalisation, society today is no longer defined only by national boundaries. Finance, and indeed responsible finance has also evolved to be global. The need for responsible and sustainable form of finance is recognised - and even deeply desired throughout the world. | Oversight programmes of this type are highly systematic and entail assessing the financial system on the basis of a set of robustness criteria. The Governor of the Riksbank, Stefan Ingves, was by the way one of the architects of the FSAP programme during his time at the IMF. In this context it can be mentioned that before the crisis the United States did not think it needed an FSAP assessment, but such an assessment was conducted in 2010. Another example of an attempt to integrate the macroeconomic analysis and the financial analysis is that since the autumn of 2011 the IMF has published a consolidated surveillance report in which the main messages from all of the surveillance reports are summarised together with recommendations on how to manage the risks.4 To further improve and strengthen the surveillance of the financial sector, the IMF recently presented a more detailed strategy for how to conduct this surveillance in the future. The aims of the strategy are for the IMF to improve its understanding of macro-financial relations, to become better at identifying contagion risks across national borders and to increase its cooperation with other organisations. This is no easy task and the work involved is far from complete. This is something that the IMF will need to develop on an ongoing basis. 4 This report was initially called the Consolidated Multilateral Surveillance Report (CMSR) but was renamed to “Global Policy Agenda” ahead of the 2012 Annual Meeting. | 0 |
Having learned by experience, however, economic agents will not believe this kind of promise unless the authorities commit themselves to delivering what they promise. In order to function, policy must therefore be timeconsistent and credible. In Norway, the devaluation decade from 1976 to 1986 may be an example of economic policy that did not fully recognise the role of expectations and the significance of credible policy rules. During this period, the krone was devalued ten times if we also include “technical adjustments”, which also implied devaluation. The many exchange rate adjustments in this period were in part aimed at remedying the deterioration of Norway’s relative cost level, which in turn was related to the government’s attempt to take responsibility for employment also when the social partners failed to do so. Gradually, expectations of a continued exchange rate policy that would maintain manufacturing’s cost competitiveness became widespread. This weakened the incentives for the social partners to keep wage and cost inflation at a reasonable level. The devaluations contributed to high inflation. When it finally became clear that this could not continue, it took many years before inflation was brought under control and interest rates in Norway could be reduced to the level of interest rates in other countries. The other lesson drawn from economic theory and economic policy in the 1960s, 1970s and 1980s was that in the medium and long term it is not possible to reduce employment by accepting somewhat higher inflation. | In the last Inflation Report, it was the Executive Board’s assessment that the projections conditional on the market’s interest rate expectations seemed to provide a reasonable balance between the objective of bringing up inflation, while avoiding excessive growth in output and employment. The previous Inflation Report, from July 2004, stated that “the most appropriate alternative now seems to be that the interest rate should be kept unchanged for a longer period than indicated by market expectations.” After this, we saw that interest rate expectations fell. By communicating our view concerning interest rate expectations, Norges Bank seeks to influence interest rate expectations. The objective is for interest rate expectations to be consistent with economic developments where inflation is on target over time and output is stable around its potential level. Most often, however, there will be a number of ways to achieve this. We need some references that provide some indication of whether a given interest rate path is reasonable. It is natural to turn first to monetary policy theory. In the theoretical literature, the trade-off between price stability and stability in the real economy is often described as a problem of minimisation, where the central bank wants to minimise a loss function, which includes variations in output and variations in inflation. The central bank shall then choose the path for the interest rate ahead that minimises the expected discounted “losses” in all future periods. In practice, no inflation-targeting central bank uses a loss function of this kind directly. | 1 |
As for the gains, most estimates point to rather modest gains in transaction costs. Nevertheless, recent research points to an increase in trade. The estimated effect ranges from “modest” to “very sizeable”, with the respective best estimates at 9 per cent and 40 per cent (Baldwin, 2006 and Persson, 2001, respectively). 2 It is my belief that as the current customs union in EAC evolves into a common market and later a monetary union, intra-trade flows will continue to grow at a rapid pace. Expressed as a percentage of their total exports, between 1991 and 2004, Kenya and Tanzania tripled their exports to EAC, while Uganda’s has gone from 1.3 to 14 per cent of GDP. Hopefully, the continued expansion of trade also will entail a diversification and therefore a more broad based expansion. Assuming that the above-mentioned gains increase the growth rate by a moderate two tenths of a percentage point per year, this would nonetheless over the course of just one decade translate into an approximate increase in disposable income of 2 per cent. For the average household, this would amount to almost thirty thousand shillings in Uganda. It should be noted that gains from increased competition could be accrued also by those countries which are from the outset relatively more efficient than the other countries in the monetary union. However, further complicating the analysis is the fact that the above-mentioned gains and losses vary with the country and area at hand. | After implementation of a monetary union The main challenges after forming a monetary union are how to preserve stability and promote efficiency. With regard to efficiency, the message under this heading is very much in line with the previous one; since presumably no market functions perfectly there will always be room for improvement concerning flexibility and integration. However, given that certain markets can be more politically sensitive than others, we must recognize that such changes can take considerable time to implement. The view on stabilisation policy as such does not change because of the creation of a monetary union. In general, normal swings in the business cycle are counteracted by automatic stabilisers in the public budgets that dampen oscillations. As the experiences from active fine-tuning are discouraging, the primary aim of active stabilisation policy should be to counter the occurrence of unduly large asymmetric cyclical fluctuations. Overall, the trend in monetary policy towards price stability targeting has brought down inflation virtually around the globe and thus one necessary condition for macroeconomic stability has been fulfilled. When discussing the role of fiscal policy, the analysis is facilitated through addressing the roles of the monetary union and the individual country separately. Stabilisation policy from a union point of view Viewing the monetary union as a whole, the euro area can serve as an illustrative example on a couple of aspects. Firstly, the common fiscal budget is very small in comparison with national fiscal budgets. | 1 |
Monetary policy To summarise, at the monetary policy meeting in July we had a situation with rising inflation and inflation expectations together with growth coming to a standstill in Sweden and abroad. Such a situation brings central banks face to face with difficult decisions. Either they tighten monetary policy despite a slowdown in economic activity, or they accept a higher inflation rate. This was the choice we faced in July. Given the course of events outlined in the Monetary Policy Report, the Executive Board decided to raise the repo rate from 4.25 per cent to 4.50 per cent, and we assessed that a well-balanced monetary policy entailed raising the interest rate a couple more times over the year. Events since the previous meeting in April provided justification, in my opinion, for raising the interest rate and the interest rate path. The primary reasons were that inflation had increased and by more than we had previously expected, that inflation expectations had increased and were above the inflation target and that expectations of interest rates abroad had changed from falling to rising policy rates. We had revised our inflation forecast upwards for both this year and next year, despite the higher interest rates. However, this did not mean that I disregarded growth and employment. The Riksbank’s task is to ensure that inflation is low and stable. If we moreover can support growth and employment without neglecting the price stability target, we will do so. | For the world as a whole, the IMF calculated that inflation will rise from around 4 per cent in 2007 to almost 5 per cent in 2008. Inflation expectations have also risen in several countries. The most probable development is that inflation will slow down next year. When adjusted for energy and food prices, inflation has been relatively stable. Normally, inflation slows down when growth slows down, even if this is with some time lag, and our forecast in the Monetary Policy Report is for growth in the world to be lower this year and next year. At the beginning of the summer we were also able to note that, unlike the situation in the spring, monetary policy expectations had swung towards higher interest rates in several countries. A tight monetary policy contributes to dampening inflation. But there is a risk that the inflation process will be more prolonged. It was estimated that growth in the world will continue to be relatively strong, despite a slowdown in the United States and the euro area. In a slightly longer perspective, when the slowdown in the United States and the euro area becomes an upswing once again, there is also a risk that the problem of rising commodity prices will return. Several emerging countries will experience rapid growth for some time to come. 2. Developments in Sweden Weaker growth and labour market in Sweden Growth will also slow down in Sweden. | 1 |
During time, the banking sector has increased the number of branches, has improved its products to the public and has increased its intermediating role to provide an important contribution in the economic development of the country. At the same time, the entrance of well-know European banking groups from Austria, Greece, Italy and France, has been associated with consolidation in the banking industry. As it is the case in the entire region, the banking sector dominates the financial sector in our country. Our supervisory work aims at adopting the best international standards in the field. As a result, our legal and regulatory framework is considered to be consistent in achieving our objective of a stable and sound development of the banking activity, and is continuously improved. From the practical aspect, we combine both regulatory and risk based supervision. BIS Review 43/2009 1 The data reported from the banking sector are analyzed off-site and verified on-site. We also try to stay in close contacts and cooperate with foreign supervisory authorities, as an important instrument in improving the effectiveness of the supervisory work. Nowadays, the assets of the banking sector represent around 87 percent of the country’s GDP. Loan portfolio has reached around 37 percent of GDP. Due to increasing competition after the privatization, its growth has been very strong in the last 4 years, albeit starting from a low base. Deposits represent around 80 percent of the banking sector liabilities, and the loan/deposit ratio stood at around 62 percent. | The recent IMF report that I mentioned earlier noted the strong performance of Malta’s financial sector but also stressed the importance of strengthening the resilience of the sector. 8 BIS central bankers’ speeches The elevated levels of credit and concentration risks call for stronger financial buffers, through higher provisioning and retention of profits. Such measures would strengthen the banks’ ability to absorb potential shocks and would also allow them to prepare themselves for compliance with stricter Basel III regulatory requirements. On the positive side, credit risk is being mitigated by prudent credit standards and cautious lending behaviour on the part of the banks. On the funding side, the resilience displayed by the banking system in the face of adverse international conditions is explained by the business model that has been a traditional characteristic of domestic banks, which rely strongly on retail deposits. Another indication of the overall prudent bias of the Maltese domestic banks is evident in the first chart presented earlier, which shows that leverage ratios of Maltese banks are considerably lower than in euro area in general. While the euro area average has declined on account of widespread deleveraging, the ratio remains significantly higher than the Maltese ratio, which has been quite stable. A further indication of the traditional funding model is the loan to deposit ratio, as shown in Chart 8, which is significantly low when compared with the major economies. This business model has served the domestic banking sector well. | 0 |
They are unlikely to be the right response to the fourth. The rise of the thinking machine means the future world of work will no longer require narrowly cognitive skills. And in a world of 100-year lives and 70-year careers, educational institutions will need to equip old and young alike with these skills. Developing cognitive skills in the young was a brilliant model for the past 300 years, but not one for our educational future. Many different models are possible. Elsewhere, I have called one possibility multiversities, as distinct from universities.44 The multi serves double-duty. It connotes the need for these new institutions to expand their disciplinary horizons and become less subject-singular. History shows that creativity breakthroughs are often sourced in straddling disciplinary boundaries, in being subject-plural. Creating the right environment for creativity often means breaking free from disciplinary silos. Indeed, if we are to embed a cross-disciplinary culture, we may need to rethink how we classify subjects. Traditional domain-knowledge may make less sense in a creative rather than knowledge-based economy. A new classification system might recognise subjects like creativity and digital literacy, emotional intelligence and empathy, entrepreneurship and design. These would, by design, straddle disciplinary boundaries. The multi also signifies the need to straddle generational, as well as disciplinary, divides. Education will need in future to cater for old and young alike, making lifelong learning a reality. Rather than the sequential model, with first education and then work, we would instead have a rotation model over a career. | This morning, I would like to talk about some of the changes we are seeing in the practice of risk management and reflect on important priorities for risk management as observed from our work at Bank Negara Malaysia with the financial industry. I will then offer some brief perspectives on business continuity management and close with some final thoughts on the prospects for the insurance industry in Malaysia to contribute towards the advancement of risk management capabilities across Malaysian businesses. Changing practices in risk management Since the financial crisis, risk management practices have come under intense scrutiny. The spectacular failures in risk management in the lead up to the crisis prompted deep reflections on what had gone wrong with risk management systems and practices – not least of all among companies that had invested heavily in sophisticated risk measurement and management systems only to have them ultimately fail to detect or control risk exposures. Closer to home, businesses in Malaysia are currently facing a set of challenging business conditions and some are likely to find themselves ill-prepared to respond to the challenges, with important implications for their future prospects. So what can we learn about the changing practice of risk management from these experiences? A first observation to my mind concerns the importance of building a strong risk culture supported by governance arrangements that are explicitly aligned to a firm’s risk appetite. | 0 |
Secondly, due to the development of the derivatives markets, the foreign trade level in a floating exchange rate regime will be the same as the level in a fixed exchange rate regime. Hence, exchange rate risk will not affect the level of foreign trade3. Turkish derivatives exchange (Turkdex) In this framework, the effective operation of derivatives markets is for enabling economic agents to hedge their balance sheets from exchange rate risks under the floating exchange rate regime. Macroeconomic stability and the structural transformation process have provided our economy with a 3 Baron D. (1976). Flexible Exchange Rates, Forward Markets and the Level of Trade. The American Economic Review. Vol. 66. No. 3. BIS Review 36/2005 19 sound environment for risk management. And, the establishment of the Turkish Derivatives Exchange has been an important step taken on the way. It would be useful to reiterate the potential favorable effects of derivatives markets on our economy. First of all, derivatives markets offer economic agents the facility of risk management and make their future revenue flows predictable. Moreover, expectations can be measured and reflected on prices through these markets. This, in turn, increases the predictability and efficiency of spot markets. In this way, market prices provide economic agents with accurate information and excessive volatility decreases. Analyzed in terms of their impact on the real economy, the use of derivatives markets increases resistance to shocks in the economy as a whole as it reduces weaknesses resulting from the imbalance on firms’ balance sheets. | The ratio of net public debt stock to national income declined to 64.5 percent end-2004 and the Treasury borrowed with a fiveyear maturity for the first time in the domestic market. Sustainability of debt will soon be taken off the agenda soon. In this framework, it will be possible for the risk premium and consequently real interest rates to go further down in the upcoming period, as public finance has been equipped with a sustainable structure 14 BIS Review 36/2005 with the continuation of tight fiscal policy and the launch of structural reforms in the areas of banking, taxes and social security. Graph 12: Budget Deficit, Primary Surplus and Domestic Debt Stock (% GNP) 80 70 Budget Deficit Primary Surplus 60 Domestic Debt Stock 50 (%) 40 30 20 10 0 -10 -20 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -30 Source: Turkish Treasury. Now, I would like to underline a specific point related to the current tight fiscal policy. As I have mentioned earlier, tight fiscal policy played an important role not only in alleviating the public debt problem, but also in the improvement of expectations. The key factor regarding the tight fiscal policy in the said period was the target of a high primary surplus. | 1 |
Christian Noyer: The situation in the euro area Introduction by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Paris Europlace Financial Forum Luncheon, New York City, 23 April 2012. * * * Ladies and gentlemen, It is a great pleasure for me to host this luncheon together with Lawrence Leibowitz. I would like to thank Paris Europlace for organizing this very interesting Forum and the NYSE for welcoming us here, at the very heart of the global financial world. I would like to focus my short address on the situation in the euro area where the important steps already taken to exit the crisis now need to be further enhanced. ********* 1. The important steps to exit the crisis already taken by the euro area are beginning to bear fruit. Indeed, when you compare the situation of the euro area in the first quarter of this year with that in the second half of 2011, the contrast is striking: Conditions in bank funding markets are much better. For instance, euro area banks have already issued about 70 billion euro in senior unsecured debt so far this year, which is well in excess of what they did in the whole of the second half of last year. | In any case, such reforms are a necessary foundation for dynamic and sustainable growth in the future and they must be vigorously pursued. There is no doubt that the euro area as a whole will benefit from these national reforms that represent a significant asset for us in the global economy. 2.2. The challenge for the banking system: continuing to ensure that the economy is properly financed while strengthening the financial sector The dilemma here is easy to understand: on the one hand, it is absolutely necessary to strengthen banks’ balance sheets to enable them to better absorb shocks, protect public finances and re-establish normal market functioning. On the other, a disorderly deleveraging would create enormous problems and add credit constraints to the many headwinds currently facing our economies. The euro area is currently making sure that these two objectives – although sometimes difficult to reconcile – are achieved. Banks are meeting their new capital requirements. The capital plans submitted to the European Banking Authority (EBA) indicate an intention to exceed the benchmarks set by 2 BIS central bankers’ speeches more than 20%. French banks already comply with the Basel 2.5 regulations. At the same time, bank lending seems to be stabilizing, although at a relatively low level. Banks are starting to assess their financial situation more positively and in many cases their willingness to grant loans is increasing. This would not have been possible without the strong support of the Eurosystem. | 1 |
Despite the increasing non-performing loan portfolio, banks have sufficient capital to address this phenomenon. I would like to elaborate more on this latter point. The performance of lending has become the focus of attention for policy-makers and economic agents. The slower economic growth was followed by sharp deceleration in lending. The reasons are quite understandable: on the one hand, businesses have reduced their demand for loans due to uncertainties relating to the sale of their own products; and on BIS central bankers’ speeches 1 the other hand, banks have been pursuing a more conservative approach to lending, being uncertain about the success of different business plans. Global theory and practice suggest that the investment and credit cycles progress in line with the performance of aggregate demand. In other words, we will see a stable recovery of lending only when economic growth recovers at a steady pace. However, as we have already stated, we believe that there is room within the Albanian reality for a better performance of lending. Channelling savings into profitable investments and supporting businesses with lending are the reasons for the existence of the banking system. We have been constantly emphasizing this message, and we have taken concrete steps, which have lowered the banking system’s financing cost and provided incentives for lending through an adequate regulatory environment. | It is always true that monetary policy is too restrictive for certain segments of the economy and too expansionary for others. Since there can only be one monetary policy for Switzerland, it must geared to the economy as a whole. Ensuring price stability in the medium and long term is the guiding principle. The SNB’s monetary policy strategy, however, is sufficiently flexible to react in an optimal way to uncertainties related to business cycle developments or the situation on the financial and currency markets. In implementing this policy, the SNB must be able to maintain its credibility at all times. Only then can it effectively – in the long term – fulfil its constitutional and statutory mandate of pursuing a monetary policy in the interests of the country as a whole. BIS Review 70/2010 1 | 0 |
Chart 19: Impact of monetary policy on wealth, across different UK regions (%) Chart 20: Impact of Bank Rate, across the income distribution (%) Impact as of 2012-14 (% of annual income) Impact as of 2012-14 (% of net wealth) Financial asset prices House prices Total Inflation effects Pensions House prices Inflation effects Financial asset prices Interest receipts/payments Macro effects on labour income Total 25 20 50 40 30 15 20 10 10 5 0 0 NE NW Y&H EM WM E LON SE SW WALSCO All -10 1 2 3 4 5 6 7 8 9 10 All Region in 2012-14 Income decile in 2012-14 Sources: ONS and Bank calculations Note: Chart shows average cumulative real impact of policy changes since 2007 as of 2012-14 as a percentage of net wealth. Sources: ONS and Bank calculations Note: Chart shows average cumulative real impact of changes in Bank Rate since 2007 as of 2012-14 as a percentage of annual income. | The Asian Miracle decades in the 1980s and 1990s were largely fueled by the industrialization, rapid capital accumulation, migration of cheap labour, urbanization, emergence of middle class, and hot money, largely supported by banks at the core of financial intermediary. The “miracles” eventually turned out to be a crisis in the making, and Asia had learned the lessons the harshest way. Fortunately, Asia has come a long way after the Asian Financial Crisis. A series of structural reforms were carried out to reduce structural weaknesses, improve growth potential and safeguard monetary and financial stability. Policies, including monetary and exchange rate policies, prudential regulations and supervision, as well as legal and market infrastructures, have been redesigned to prevent distorted incentives that could lead to vulnerabilities or building up of fragility in the system. Thus far, the Asian economies’ and financial systems’ resilience has been well tested by the Global Financial Crisis and its aftermath. However, against the backdrop of the increasingly volatile, uncertain, complex, and ambiguous world we live in today, we cannot be complacent and I think it is not an overstatement to say that the real challenges still lie ahead for Asian financial systems. Ladies and gentlemen, After the Global Financial Crisis, the persistently low-growth and low-yield environment has affected Asian banks in various channels. Deteriorating asset quality with higher credit costs tends to outweigh benefits of the lower funding costs, thereby squeezing profit margins. | 0 |
4 non-renumerated reserve requirement of 40% with a holding period of a year on capital inflows into the bond market and high-yielding deposits. It worked, and monetary transmission through the interest rate channel was restored. As a result, we also avoided the build-up of significant carry trade positions with the associated risk to financial stability. We see such instruments as temporary and only to be used as a third line of defence. Furthermore, it remains an open question whether they will be seen to be more in the nature of macroprudential tools or as infringements on our treaty obligations to maintain free capital movements. We are hoping that everybody has learned the lessons of the crisis where large and volatile capital flows played a key role.3 In concluding, let me come back to the IMFS and ask what I have said about the plight of SOFIEs means in terms of desirable reforms. First, we need to continue to adapt IMF surveillance and facilities and other parts of the GFSN to modern realities. Second, we need to further reduce financial regulatory flaws and gaps at the regional and global level regarding capital flows and cross-border banking. Third, we need to try to find ways to make central bank swaps a more transparent and reliable part of the GFSN. Finally, international organisations and treaties need to accommodate but monitor SOFIEs’ use of macroprudential and capital flow management tools. With time, we might develop a new consensus on the rules of the game. | The evidence suggests that foreign exchange markets exhibit excess volatility and that exchange rates diverge from fundamentals for protracted periods. In some sense, the existence of carry trade can be construed as evidence of this, as it involves betting that interest rate differentials are not fully compensated by exchange rate movements; i.e., that uncovered interest rate parity does not hold, except at long horizons, and then often through sharp and disorderly corrections. This, in turn, gives rise to two concerns: first, regarding detrimental effects on the traded goods sector , and second, on financial stability where volatile capital flows, currency mismatches, and rollover risk of foreign currency debt are among the key players. Adverse effects on financial stability can be particularly severe when a blocked interest rate channel and an erratic exchange rate channel interact badly with other economic and financial risks that can face small, open, and financially integrated economies – such as the global financial cycle, domestic financial vulnerabilities, and policy conflicts. We saw trends before the GFC that were consistent with this story. Data on longterm interest rates and spreads in small advanced economies and in many emerging markets economies showed strong and growing correlations with longterm rates and spreads among core rate setters (mainly the US and the eurozone), although still some way from the theoretical limiting case. The GFC reversed this process somewhat, as risk premia skyrocketed, cross-border banking partly retreated to home base, and restrictions on capital movements were in some cases reintroduced. | 1 |
CCP default management can and should be enhanced Before concluding, let me say a quick word on today’s third topic, the complex challenges CCPs face in managing defaults.10 CPMI-IOSCO is currently working on default management auctions, which is very welcome as this area of CCP risk management could benefit from further convergence towards shared best practices.11 The recent default at Nasdaq Clearing has certainly focused the minds of policymakers on this issue. There is much ground to cover for CCPs to converge towards best practices, from setting the right incentives for auction participants to properly calibrating their financial resources to cover concentrated positions in thin or illiquid markets. I am sure this workstream will yield valuable conclusions for both regulators and the industry. Conclusion In sum, today’s conference shows that we are continuing to ensure that CCPs steadily become more resilient and sophisticated in their role as systemic risk managers and so can truly manage any situation. At times, this requires imagination to understand the interaction of participant behaviours, complex portfolios and stress scenarios, which is a prerequisite for setting the right incentives. It also requires humility to understand the limitations of this exercise and the need for fall-back plans. Extreme and unexpected events do happen and the very purpose of CCPs is to act as a circuit-breaker during crises. For CCPs to perform this role as adequately as possible, all relevant authorities, including central banks, need to pull on the same rope. | Best practices and innovative products from one part of the region can also be deployed to other parts of the region, to tackle a common need or challenge. An area that has considerable potential, both to support, not only greater regional financial integration but also for the development of national financial systems, is the establishment of credit reporting infrastructure. For example, the implementation of the Central Credit Reporting Information System in Malaysia, one of the most comprehensive in the world, has had a profound impact in transforming the credit landscape in Malaysia by improving efficiency and productivity, enhancing access to financing, strengthening risk management and encouraging responsible borrowing. These benefits can be extended more broadly by establishing and linking up similar systems across the region through collaborative efforts. The potential also exists for similar infrastructure to be developed in the insurance sector which can serve to strengthen underwriting assessments, and allow loss data such as for catastrophes to be shared more efficiently. Importantly, developments in this area will greatly advance financial inclusion and contribute towards narrowing the development gap among and within ASEAN economies. Key achievements in financial integration Let me now turn to where we are in the financial integration process. Consistent with a flexible and pragmatic approach which has been adopted for ASEAN, implementing the integration process within ASEAN is grounded on the state of readiness of each member country. Member countries are given flexibility to ensure that the integration process is sustainable and meet national policy objectives. | 0 |
From that point on, expected returns on all assets would be lower. Higher saving was often touted as the possible reason for lower interest rates ahead of the crisis. At the time the argument was first made, during the early part of the last decade, the suggested “glut” in saving was often associated with the fast-growing East Asian countries. Some economists, notably Thomas Piketty, have suggested that, because the rich generally save more, widening income inequality may have contributed to the trend. Others have pointed out the importance of demographic factors. Whatever the underlying cause, the important point is that higher desired saving would tend to have a similar impact on the price of all long-dated assets, whatever their risk. That’s why it looks like a good candidate for the co-movement between equities and bonds evident in the early (pre-2001) part of Chart 2. The other determinants of asset prices – the level of, and uncertainty about, future economic growth – tend to have differing effects on the two asset classes. Lower expected growth will reduce investment demand and, by shifting that schedule to the left (Chart 3), will tend to reduce the equilibrium risk-free interest rate. Future profits will be discounted more generously, as before, but now the profits themselves will be lower. So despite a lower interest rate, and a rise in bond prices, equity prices fall on impact (Chart 6(b), which 5 Friedman and Schwartz (1963). | Economists and central bankers were remarking on the low level of real interest rates as early as 2005.1 The MPC discussed the factors behind the more recent decline, since the financial crisis, in the February 2014 Inflation Report, in the context of its forward guidance. My colleague David Miles went through some of these arguments in more detail in a speech in February this year. The debate about “secular stagnation” has also focussed a lot of attention on the issue. The only wrinkle here is to distinguish those factors that are good for risky assets from those that are bad – and, in doing so, to say something about distributional effects. I also want to caution against mistaking cause for effect and in particular, when it comes to asset prices, putting central banks at centre stage. Autonomous changes in monetary policy certainly can have an impact on asset prices. But that does not mean they’re the only thing that actually 1 Bernanke (2005). BIS central bankers’ speeches 1 does so. Over time, trends in real asset prices are determined by real (non-monetary) forces: we may occasionally be prominent actors but it’s someone else who’s written the script. | 1 |
The first concerns the state of the securitisation markets and that for covered bonds in particular. In Europe, the ECB routinely takes covered bonds and other private sector securities as collateral in all of its operations. And there is a perception of state support for the covered bond market, perhaps because covered bonds have often been issued by quasi-state banks. The Bank is occasionally lobbied by industry representatives to offer more support to the covered bond market. I want to make three points in response. First, that RMBS and covered bonds are already eligible collateral in both the Indexed LongTerm Repo operations and in the Discount Window Facility alongside a range of other private sector securities. 15 It is only short-term OMOs, which are conducted for monetary policy purposes, where such assets are not eligible. In order to help manage the risks arising from securitised assets, and to help improve market functioning by establishing higher standards, the Bank will be demanding detailed disclosures – to the Bank and publicly – on the underlying assets and structures. This transparency initiative has generally been welcomed by investors and we hope it will encourage the establishment of viable securitisation markets in future. 14 Further details are available on the Bank’s website at http://www.bankofengland.co.uk/markets/marketnotice100719.pdf. 15 A bank may not submit its own covered bonds in Long Term Repos, only those of other issuers. But it may submit either in the DWF. | To make the choice of path regarding digitalisation of the payment market easier, we need a clear Swedish stance that is based on political priorities and decisions. This includes a review of the Sveriges Riksbank Act that clarifies the Riksbank's mandate. It is also important to cooperate with other public authorities. The e-krona would have points of contact with many other authorities, for instance the tax account, to which all those who are to pay tax receive access, functions as a form of state money. It is possible that the best solution would be to build an e-krona system together with other authorities. It would also be good if the legislation in this field in Sweden was updated to take into account the fact that payments will in future be made digitally. If the means 8 See, for instance, Project Jasper https://www.payments.ca/sites/default/files/29-Sep-17/jasper_re- port_eng.pdf, Project Ubin http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/ProjectUbin.aspx and Project Stella https://www.ecb.europa.eu/pub/pdf/other/stella_project_leaflet_march_2018.pdf. 4 [9] of payment issued by the Riksbank is not generally accepted, it will be difficult for the Riksbank to perform its task of promoting a safe and efficient payment system. According to the Sveriges Riksbank Act, the Swedish krona, in the form of cash, is legal tender. But at the same time, it is possible to waive the obligation to accept cash by, for instance, putting up a sign that cash is not accepted. As the use of cash is declining rapidly, it is urgent that the legislator takes a stance on what status in the law legal tender shall have. | 0 |
The fact that forecasters revise their assessments is not at all strange, as new information is received all the time. This indicates that as the conditions for the real economy change and new information is received the forecasts for the repo rate path need to be adjusted. There is nothing particularly dramatic about this. It applies to all market agents, to the major banks, to the Ministry of Finance and also to us at the Riksbank. The great uncertainty factor means that all forecasters should be humble, but this should not prevent them from making forecasts. I would therefore like to emphasise once again that the repo rate path we present in the Monetary Policy Report is a forecast and not a promise. The Riksbank cannot undertake, regardless of what BIS Review 62/2007 3 happens in the economy, to follow the path published. The interest rate path is quite simply the best assessment we can make at a given point in time, given the information that is then available. New information may change the picture of the economy and then the Executive Board will have to rethink how we set the repo rate. The reason why we have chosen to publish our interest rate forecast despite the uncertainty over the future is largely because we believe this is the best way of explaining our thoughts on monetary policy. It also makes it easier for us to justify forecasts and interest rate decisions and to outline alternative scenarios for the repo rate. | And the second is the improved communication between policymakers and market participants, which has allowed the bond market to form its own expectations about policy direction and to respond accordingly. These two qualities, in my view, are positive for the development of the bond market in the longer-term. Outlook and developments in the bond market This year the Thai economy will continue to expand, driven by momentums in domestic demand and export, including the launching of new infrastructural projects. Higher investment will imply higher funding requirement. Given ample liquidity in the system, funding investment expansion domestically should be a preferred option to funding it from abroad. Domestic funding will help make the domestic credit market competitive while helping to avoid the unnecessary pick-up in external debt. It is in this context of domestic resource mobilization that the bond market can have an important role to play. BIS Review 29/2005 1 This is to say that while bank credit will continue to be a major intermediary for investment finance, the need for long-term investment financing will offer considerable opportunity for the bond market. On the supply side, the fixed income market can be an important channel for long-term capital mobilization, while on the demand side, there will be ample demand to invest in fixed income instruments from domestic institutional investors. It is in this context that the current efforts to develop the domestic bond market by the Government are timely, and this priority now ranks high on the Government's agenda. | 0 |
It is the challenge of ensuring that the strength of the infrastructure of controls within financial institutions will stay abreast of the pace of change in the complexity of risks and the tools we have to manage them - a process that we as supervisors will actively reinforce. A second issue relates to the degree of concentration in some core financial intermediation functions. The two largest government-sponsored enterprises in the mortgage market now hold 36 percent of Agency mortgage-backed securities, as compared with less than 10 percent at the end of 1993. The BIS Review 33/2004 3 exposure of banks to these GSE’s, primarily through holdings of the GSE debt funding these MBS positions, is as a consequence very large. Two institutions now account for essentially all of the market for the clearing function for government securities and agencies, as well as for tri-party repo activity. A relatively small number of institutions now account for a large share of activity in the over-the-counter derivatives business generally, as well as in certain categories of risk-transfer instruments. These developments have different sources. Some are the result of public policy choices. Some are the consequence of the economies of scale inherent in these businesses. Overall, we have a very competitive financial system, with a larger diversity of institutions, and therefore a stronger overall system of financial intermediation. | In concert with better risk modeling, securitization and credit derivatives have facilitated the dispersion of credit risk across firms and across sectors of the financial system. These changes have led to significant risk transfers within the banking system, as well as a net transfer of credit risk from commercial banks to other financial intermediaries. As a result, we believe we are seeing a more efficient risk allocation within the financial system as a whole, since risks can be transferred to firms where they will diversify, rather than reinforce, risks arising from core businesses and to parts of the financial system that are significantly less leveraged than banks and securities firms, such as institutional investors and mutual funds. These risk management advances have been accompanied by the growth of key derivatives markets that have lowered the costs of hedging market-price-sensitive positions and activities. One important example of this is the growth of the market for long-dated swaps, which are now used by banks to hedge mortgage securities and whole loans. The notional value of long-dated interest rate derivatives (those with maturities of more than 5 years) has more than tripled since the end of 1998, considerably faster growth than for comparable shorter-dated instruments. The growth of these markets reflects a very substantial increase in hedging capacity, and this “wider pipeline” seems likely to facilitate the ease with which the market adjusts in conditions of stress. Growth in these OTC derivatives markets has been accompanied by welcome improvements in market practice. | 1 |
the result of large purchases of sovereign bonds by Asian central banks and oil- exporting countries. Depending on which hypothesis is true, the implications for the monetary policy are different. If the long-term rates go down as a result of poor growth prospects, the current short-term interest rates should be lowered respectively so as to prevent possible deflation. If, however, specific factors related to globalisation or decrease in the risk premium are the cause of persisting low long-term interest rates, the short-term interest rate should be higher in order to achieve appropriate restrictiveness of the monetary policy 24 See Corbo V., Landerretche O., Schmidt-Hebbel K. “Does Inflation Targeting Make a Difference” in: N. Loayza and R. Soto (red.) “Inflation Targeting: Design, Performance, Challenges” (Central Bank of Chile: Santiago 2002). 25 Gürkaynak R.S., Levin A.T., Marder A.N., Swanson E.T. “Inflation Targeting and the Anchoring of Inflation Expectations in the Western Hemisphere”, forthcoming in Mishkin, Frederic and Klaus Schmidt-Hebbel (red. ), Series on Central Banking, Analysis and Economic Policies X: Monetary Policy under Inflation Targeting (Santiago, Chile: Banco Central de Chile), 2006 and Gürkaynak R.S., Levin A.T. Swanson E.T. “Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the U.S., U.K., and Sweden”, Federal Reserve Bank of San Francisco Working Paper 2006-09, March 2006. 26 For example a question whether monetary policy should burst asset bubbles was hotly debated during the large European Central Bank conference on 16 to17 March 2006. | Remarks given at a panel to launch the third annual America’s Pledge report, at the 25th Annual Conference of the Parties Mark Carney Governor of the Bank of England US Climate Action Centre, Madrid 10 December 2019 I am grateful to Jennifer Nemeth for her assistance in preparing these remarks. 1 All speeches are available online at www.bankofengland.co.uk/news/speeches Introduction The Accelerating America’s Pledge report comprehensively documents the scale of change that is needed across our economies to put emissions on a trajectory consistent with building a net zero economy. That will require a more sustainable financial system. Changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset. Firms that align their business models with the transition to net zero will be rewarded handsomely. Those that fail to adapt will cease to exist. Now is the time to ensure that every financial decision takes climate change into account. For that change to happen, we need to focus on the three Rs – reporting, risk management and return. First, reporting In 2015, G20 leaders tasked representatives from the public and private sectors to review how the financial system takes into account climate risks. We established a Task Force on Climate-related Financial Disclosures (TCFD), chaired by Mike Bloomberg. Four years on, the TCFD has generated a step change in both the demand for and supply of climate reporting. The demand for TCFD disclosure is now enormous. | 0 |
In order to reap the benefits from economies of scale and scope, Nordea has chosen to concentrate its different functions, such as treasury operations, credit decision-making and risk management to specific centres of competence within the group. It is therefore questionable whether the different entities within the group really are selfcontained, even if they are legally independent subsidiaries. With this structure, it is also less likely that the group as whole can survive a failure of one of its entities. Hence, operationally and in economic terms, Nordea increasingly resembles a bank with a branch structure. A consequence is that the present regulatory structure may be less well-suited for efficient supervision and regulation of the group. A fourth challenge is that the practicalities of supervision and crisis management are greatly complicated as the number of relevant authorities increases. In normal times, this means that the regulatory burden for the financial firms increases. Also, the need for supervisory cooperation increases, which demands new supervisory procedures and the creation of common supervisory cultures. In times of financial crises, sharing information and coordinating action becomes a difficult priority, especially since time is a scarce resource in crises. A fifth challenge is that conflicting national interests emerge as banks become truly crossborder. The national authorities have a national mandate and are responsible to the national government or parliament. They are therefore unlikely to take the full external effect of their actions in other countries into account. | The Ministry of Finance now assesses the value of the government’s share of the remaining petroleum wealth at NOK 3.6 trillion, which is about NOK 550 billion lower than the Ministry’s estimate one year earlier. Chart: Ownership interests In summer 2007, the Ministry of Finance decided to increase the allocation to equity from 40 per cent to 60 per cent and reduce the allocation to bonds correspondingly. Surging oil and gas prices, high oil production and favourable economic conditions for the Norwegian economy led to high transfers to the Fund in the course of 2007 and 2008. Equity prices fell sharply through 2008. It was against this background that the Fund purchased equities for more than NOK 1 trillion between summer 2007 and summer 2009. With a fall in value of 23 per cent or NOK 630 billion, it is understandable that the results in 2008 attracted considerable attention. The most important development for the Fund was perhaps a doubling of its global equity holdings. After earning high returns in the past year and a half, the Fund has also recovered the losses. Chart: Nominal interest rate level and cost of equity capital 7 See “Future management of the Government Petroleum Fund”, Norges Bank’s letter to the Ministry of Finance of 10 April 1997 and “An analysis of the Government Petroleum Fund’s equity allocation”, Norges Bank’s letter to the Ministry of Finance of 15 March 2001. 8 If 1997 is included, the figure is somewhat higher. The money-weighted average return is somewhat lower. | 0 |
The reason, of course, is that there is no simple, direct, link between our essential instrument - the short-term interest rate - and our objective, the rate of inflation. BIS Review 23/2002 1 Interest rates essentially affect the demand side of the economy. They do not directly influence the supply side, which depends upon a whole host of structural characteristics of the economy which are largely beyond the direct reach of monetary policy. What we have to do in managing short-term interest rates is to keep overall demand growing broadly in line with the underlying - sustainable supply-side capacity of the economy as a whole to meet that demand. In other words we are trying to maintain overall, macro-economic, stability in a much broader sense, in the medium- and longer- and not just the short-term; and the Government's inflation target is the criterion against which our success, or otherwise, in achieving that broader macro-economic stability is to be measured. Our problem is that we don't know with any great precision or confidence exactly what is happening on the supply-side - that's to say precisely what rate of growth we can hope to sustain. We don't know precisely either what is currently happening, or what is likely to happen, looking forward over the next couple of years or so, to overall, aggregate, demand. And we don't know precisely what the full impact of a change in interest rates will be on aggregate demand, or how long it will take before that full impact is felt. | I'm bound to say I welcome that distinction because the fact that the Government sets the target for monetary policy means that it is unambiguously committed to what we are tasked to do, and that, in turn, helps in some degree to distance the Bank from political debate. But there are two necessary consequences of this arrangement. The first is that you need independent, technical, experts to do the technical job entrusted to the MPC - not people appointed for their political convictions, nor representatives of particular economic or social interests. In that respect I think we have been extremely well served: the members of the Committee have been invariably well qualified for the technical jobs they've had to do; but more than that they have typically known enough, including about the inevitable uncertainties I have referred to, to know when they could be reasonably confident in their views and when they were guessing - as we all have to do at the margin. The Committee has been divided, generally very narrowly divided, in its forecasts and policy judgements more often than not since we started. That is both natural and healthy. But what is important is that the debate has typically been measured and reflective - and remarkably free of acrimony and dogma. And that to my mind is fundamental to the strength of the process. The second corollary is that the MPC process should be transparent and that its members should be individually and collectively publicly accountable for their decisions. | 1 |
But I do believe there are areas in which change could beneficially be made, which would have the effect of strengthening the international financial architecture, to the benefit of us all. There are four areas in which I would like to see further improvements. First, we need a comprehensive set of international accounting standards which attract broad support, and high quality independent audit to help enforce them. Second, the role of the Financial Stability Forum could be developed and strengthened. Third, and linked to that change, there are gaps in the global regulatory system which could and should be plugged. Fourth, we need to find ways of bringing developing economies more closely into the process of setting standards. I will say a word or two about each of these suggestions. (i) Accounting and auditing Accounting standards are the foundation stone of the financial system, and of financial regulation. Without accounting numbers in which investors can have confidence regulation, cannot hope to be effective. And those accounts must be audited objectively and independently. Since the reformation of the International Accounting Standards Board three years ago a determined effort has been under way, led by Paul Volcker and David Tweedie, to complete the standard set and BIS Review 25/2003 3 secure broad agreement to their acceptance around the world. They are now close to success, but there are some difficult obstacles still to be overcome, notably the question of the treatment of financial instruments (IAS 39). | In the ASEAN-5 economies, food accounts for about a third of the consumption basket, much higher than advanced economies. Given this high weight of food, food price increases have a strong direct impact on headline inflation. 11. Second, strong inflows of capital adding to asset price and domestic demand pressures. Low interest rates in the advanced economies have prompted global investors to seek higher returns in emerging economies, especially in Asia. 12. Third, Asia’s strong recovery from the crisis has led to high rates of capacity utilisation and tightening of labour markets. This has prompted a gradual build-up in wageprice pressures. 13. I do not want to minimise the inflation risks in Asia – no central banker would take a light attitude towards inflation risks – but I do want to put the issue in perspective. 14. Some of the price pressures facing Asia are no doubt structural. We can expect the relative price of food – and commodities in general – to increase over the medium to long term on the back of growing global demand especially in the emerging economies. Likewise, capital will continue to flow from advanced economies to emerging economies, reflecting growth differentials and a shift in global portfolios towards higher yielding Asian assets. These two factors will be a source of inflation bias in emerging Asia over the medium term. 15. But a good part of the inflation in Asia is also temporary. | 0 |
Four Rs: Creating the conditions for long-term sustainable growth in the life annuity sector – speech by Charlotte Gerken | Bank of England 2. PPF7800 Index March 2023 update 3. Risk Transfer Report 2023 - Hymans Robertson 4. Pension Trustees: The Planning Puzzle | Charles Stanley (charles-stanley.co.uk) 5. Defined benefit bulk annuity market favours full scheme transactions as funding levels improve (xpsgroup.com) 6. Report of the Member Options Working Party - Actuarial profession 7. Illiquid assets throw UK pensions off balance - Risk.net 8. Asset managers cut debt in pension scheme investing strategies | Financial Times (ft.com) 9. Shifting up a gear – WTW 10. Insurance supervision: 2023 priorities (bankofengland.co.uk) 11. Who’s concentrating? Trends in the life insurance sector and the need for strong reinsurance and investment risk management − speech by Charlotte Gerken | Bank of England 12. Why private equity sees life and annuities as an enticing form of permanent capital | McKinsey Page 10 13. UK pensions implosion could end with a deals boom | Financial Times (ft.com) 14. Buy-in and buy-out volumes £ in the first half of 2022 - Hymans Robertson 15. bulk annuity provider ESG index - WTW (wtwco.com) 16. Insurance Stress Test 2022 feedback (bankofengland.co.uk) 17. The groups are due to report in early Q2. The inputs from these groups will be a consideration amongst others as we work through potential proposals and their workability. 18. | In this connection, we also believe that it is crucial that banks should review and revamp their incentive systems so as to avoid rewarding staff on the basis of sales volume and commission earned, which would 4 BIS central bankers’ speeches nurture a tendency to push financial products to customers to meet business targets without giving sufficient regard to the interests of the customers. This change in the incentive system to reduce mis-selling is taking place in the more advanced markets, and Hong Kong must not lag behind if we wish to continue to pride ourselves as one of the leading international financial centres. In terms of helping the customers to become smarter and more responsible, we need to enhance the financial literacy of our citizens. Surely there is plenty of scope to include financial literacy education in our school and university curriculum. In addition, the HKMA, in collaboration with key stakeholders such as the Consumer Council as well as the Investor Education Centre set up by the SFC, is going to launch a new public education programme that seeks to help bank customers become “Smart and Responsible”. The first of a series of programmes will be rolled out in the next few months. Ladies and gentlemen, I am sure all of you are frequent users of banking services. | 0 |
Be it the not-always-proper manner of fulfilment of the Maastricht criteria by accession countries or the revision of the Stability and Growth Pact or the purchase of government bonds by the European Central Bank, we have repeatedly seen how things that are initially unthinkable become reality over time. I am doubtful that investors, who are well aware of Europe’s relationship to the rules, will change their attitude as a result of the fiscal pact. My overall view on the current design of the Facility is none too optimistic. To enhance its ability to face the debt crisis, we need to find a clear consensus on its mission. We need to precisely identify whom it is supposed to help, under what circumstances and to what extent, and to derive from that the amount of funding it needs. This will predetermine the solutions to all the issues surrounding its operation. We have time to solve all these problems, but not much time. Thank you for listening. BIS central bankers’ speeches 3 | Based on what I’ve said today, let me identify four such questions: - First, do we understand why intermediaries struggled to make effective markets in core government bond, money and foreign exchange instruments at crucial moments during the crisis? Was it simply the sheer scale of the shock, combined with the operational challenges of remote working? Or did regulatory constraints also play a role? If there are circumstances where our traditional counterparties aren’t able to intermediate, do we need to fix that at source? Or do central banks need to change the design of their balance sheet facilities more profoundly to fill that gap? - Second, are we comfortable with the central role played by highly-leveraged but thinly-capitalised non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify instability so starkly? - Third, how do we deal with the risks posed to financial stability by the structural tendency for Money Market and some other open-ended funds to be prone to runs, without having to commit scarce public money to costly support facilities? - And, fourth, how can we ensure timely transition away from LIBOR, whose weaknesses were highlighted so starkly by the crisis? The Bank’s Financial Policy Committee will be reflecting on these and other issues in the months ahead. Closer to home, there are lessons too for us in some of the ways of working that we’ve been forced to explore whilst in lockdown. | 0 |
Firms should use the design of the CBES and the underlying NGFS scenarios to inform their own scenario analysis, build their understanding of the climate risks they face, and enhance their climate risk management capabilities. I hope it will act as a catalyst, increasing firms’ knowledge of the risks they face, and incentivising them to take steps to address these risks. In turn, this will require firms’ clients in the real economy to improve their understanding of how climate change and the transition to a net-zero economy could impact their businesses and operations. Lessons learned from the CBES will also be shared with the NGFS as part of the collaborative approach taken by central banks, and on that note, I want to commend the ACPR’s recent publication of its own ambitious scenario exercise for the French financial system. 3 Through both its scenario work in the NGFS, and its internal analysis, the Bank has developed a clearer understanding of where climate knowledge gaps persist and what these might mean for our objectives. For example, there is particular value in the deepening of our understanding of the macroeconomic implications of climate change and the pathways to net-zero. It is for governments to set out a pathway to net-zero and the policy levers that will be used to deliver it. But as central banks, we will need to understand any implications of the transition for the economic outlook and our potential policy responses. | Gent Sejko: Transparency, communication and the importance of the media partnership Address by Mr Gent Sejko, Governor of the Bank of Albania, at the end-of-year meeting with the media and the Governor’s Award ceremony, Tirana, 13 December 2019. * * * Dear ladies and gentlemen, Welcome to the Bank of Albania, to spend some time together as the year end approaches. Sadly, the atmosphere at the end of this year is different from previous ones, following the devastating earthquake, which hit Albania in late November. In the aftermath, we are all heartbroken by the tragic loss of 51 lives, with hundreds of others injured and many buildings, which have collapsed or have been heavily affected by the strongest quake in decades. Yet, beyond the material consequences and psychological shock, this tragic event foregrounded another – somewhat dormant – dimension of our society: solidarity and unconditional support for each other. We all witnessed an impressive demonstration of voluntary support from fellow citizens to those affected by the devastating earthquake. In this extraordinary situation, the media played a key role in promoting solidarity and alleviating the human pain caused by this natural disaster. In light of this event, and in retrospection of 2019, let me express my sincere thanks and heartfelt gratitude to the media, to those who are present here tonight, and those that were unable to attend, for their invaluable work, reporting news truthfully and in real time. | 0 |
Total merchandise export earnings rose by 71.2 percent to $ million in 2010 from $ million recorded in 2009, following increases in both metal and non-traditional export earnings. Metal export earnings rose by 81.6 percent to $ million in 2010 from $ million in 2009, of which copper export earnings were US $ million and cobalt export earnings were US $ million. This was explained by the rise in copper and cobalt production following increased capacity utilisation at various mines and higher global market prices. Exports of non-traditional products registered a growth of 34.3 percent to $ million in 2010 from $ million the previous year. This was driven by higher exports of copper wire, cane sugar, burley tobacco, cotton lint, electrical cables, gemstones, maize and maize seed, and wheat and meslin. Total merchandise imports grew by 40.3 to $ million in 2010 from US $ million in 2009. Exchange rate Following strong macroeconomic fundamentals and increased supply in foreign exchange, the Kwacha performed favourably against all the major traded currencies in 2010, except for the South African Rand. The Kwacha appreciated by 4.7 percent against US dollar to trade at $ from $ in 2009. Similarly, the Kwacha appreciated by 6.0 percent against the British Pound and by 8.0 percent against the Euro to trade at £ and € respectively. 2 BIS central bankers’ speeches However, the Kwacha registered a depreciation of 8.8 percent against the South African Rand. | Fiscal sector developments Fiscal prudence has improved over the past years, with domestic revenues performing well following higher collections of value added taxes, as well as income taxes from mining companies. This in effect has also been seen in increased government expenditure on growthsupporting activities such as infrastructure and social sector spending. Over the last few years, Government has also reduced its borrowing from the banking sector, thereby avoiding the crowding out of the private sector and contributing to downward movements in interest rates. Financial sector developments The overall financial condition and performance of the financial sector in 2010 was satisfactory, as reflected in adequate capitalisation and most financial institutions meeting their minimum regulatory requirements. The banking sector was adequately capitalized and asset quality, liquidity and earnings performance remained satisfactory. The Bank granted a licence to International Commercial Bank (Z) Limited, bringing the number of commercial banks operating in the country to 18. Similarly, the overall financial performance and condition of the Non-Bank Financial Institutions (NBFIs) in 2010 was fair. On average, the leasing finance institutions and bureaux de change sub-sectors reported adequate capital, fair asset quality, liquidity position and earnings performance. Prospects for 2011 Several indicators point to continued strong economic performance in 2011. Real GDP is projected to grow by at least 6.8 percent and will continue to be driven by strong performance in the agricultural, mining, construction and tourism sectors. | 1 |
Working from such a low level of interest rates, we do not know for sure whether those effects remain the same, given pressure on the incomes of savers and high debt levels of borrowers: further cuts in rates may not feed through to higher consumption in the normal way and some of the effects could even be perverse. We may well find that getting rates back to normal is part of re-establishing economic activity at potential in due course. If monetary policy is limited in terms of its ability to generate growth, what else could we do to support the real adjustment of the economy? In the banking sector we have been particularly active. The Funding for Lending Scheme has been extended until the end of 2014, and amended to provide additional incentives to lend to SMEs and to non-bank providers of credit to the real economy. The FPC’s capital recommendation should be seen as complementary – seeking to spur the increased capitalisation of the banks’ balance sheets so they are seen as safe and sound and hence have market access to reasonably priced funding in the future, while using our facilities to make sure they have access to sufficient reasonably priced funding in the meantime. The banks are responding, quite rightly, by not adjusting their strategic balance sheet aims of running off weak portfolios, often commercial property related, but they are maintaining or increasing lending to their core customers. Some are consciously rebalancing their books between retail and corporate lending. | Since US banks are increasingly engaged in securities areas, their functions are also subject to the Securities and Exchange Commission (SEC) and consumer lobbies. Regulation may be based on product types such that each regulatory authority specialises in one financial product. Under this framework, a securities regulator will concentrate in the oversight of securities activities, irrespective of the type of financial institutions that are carrying out this business. Functional regulation is generally conducted by two separate regulatory bodies, an investor protection arm and a systemic stability arm. The investor protection arm deals with retail depositors and small investors to ensure fair conduct, equitable competition and customer protection. The systemic stability agency, on the other hand, looks at the larger players and wholesale activities. It would also be responsible for the safety, structure and functioning of all payment systems and financial markets. Preventive measures include capital adequacy requirements; constraints on connected lending and other rules aimed at preventing insolvency; and an official safety net such as lender of last resort or deposit insurance. This approach follows the Goodhart (1995) model, which suggests that the difference in focus and function of investor protection and systemic stability is large enough to justify two separate regulatory bodies in each country to share the regulatory responsibilities. According to Goodhart, the formulation of rules for the safety of the system should be the responsibility of the systemic stability arm. | 0 |
Interestingly, the controversy over this issue, which has now happily subsided following the success of the operation, was then more intense outside of this region than within, and was especially strong in the developed markets. I would attribute this difference in sentiment to the relative lack of appreciation, outside of this region rather than within, of the predicament that smaller, open markets face in the increasingly liberalised international financial system. Hong Kong supplies a particularly striking example of this vulnerability. Our markets are very free and open. They are big and liquid enough to attract substantial international capital. But they are also small, by comparison to the developed markets and the amount of international capital flowing around the globe, seeking opportunities for profit. They are small to the extent that the prices of those markets are capable of being pushed around by big players, particularly those in a position to influence market sentiment. Being a very externally oriented economy, we pursue an exchange rate policy that promotes a stable external value for our currency to provide for predictability for all those who engage in economic activity relating to the predominant external sector. In pursuing this policy, 1 BIS Review 47/1999 we have gone as far as to adopt currency board arrangements that operate with a high degree of transparency while eschewing the exercise of discretionary monetary management. This eclectic combination of characteristics and policies, which is quite a common feature of economies in this region, offered great temptation to market manipulation. | Mr Yam discusses financial stability, region and international co-operation Speech by the Chief Executive of the Hong Kong Monetary Authority, Mr Joseph Yam, at the 32nd Asian Development Bank annual meeting, in Manila, the Philippines, on 2 May 1999. Introduction I am delighted and honoured to have the opportunity to speak to this distinguished international audience. The theme of the forum is regional monetary and financial co-operation. From the point of view of time, venue, sponsors, and participants, it would, I think, be very hard to come up with a more appropriate topic than this. In terms of timing, our region is currently, we hope, moving through the final stages of a period of financial and economic dislocation that has taught us a number of lessons. The most important of these lessons, in my view, and one consistent with the aims of this forum, is that we need to intensify international and regional co-operation to reduce the risk of such crises occurring again. The venue for this forum, Manila, is one of the oldest international financial centres in Asia: it has also been the starting point for a number of important modern regional initiatives. Manila has given its name to the recently established Manila Framework, within which central banks and finance ministries in the region meet to promote regional co-operation on financial matters. The beginnings of systematic economic co-operation can also be traced to Manila, with the establishment here, in 1966, of the Asian Development Bank (ADB). | 1 |
If you have debt approaching 100% of GDP, you have to reduce it to be less vulnerable. Are you worried by the political uncertainty? Political uncertainty is an important factor because we always need stable governments capable of taking action. And this is of course quite obvious: we don’t have the political stability necessary to put into place the necessary measures and policies, including a budget. What do they think here in Frankfurt about the fact that the budget has been deferred since the time when you were still a minister? Spain has continued to reduce its public debt. It could have been reduced more, but it could also have been reduced less. In any case there is one fundamental factor: the growth differential. In the Spanish economy, this now comes from a financial sector that doesn’t have the same doubts hanging over it as it did five to seven years ago. And it is competitive. The most important thing, in contrast to the previous and other growth cycles, is that it is growing without an increase in loans and without a real estate bubble. With lending growth that is below nominal GDP and a current account surplus in the balance of payments. As long as these two things continue, the Spanish economy will keep growing faster than the rest. The recommendation, which is also valid for Portugal, Greece and Ireland, and even for Italy, is this: stabilise the banking sector and the credit markets. And maintain competitiveness. Then you will do better than average. | For instance, banks and insurance companies are searching for growth through the diversification of their activities in such a way that they can no longer be considered as homogeneous institutions falling within the scope of one economic sector and one supervisory system! These conglomerates aim to exploit the synergies that exist among banking, insurance and investment. This market evolution towards huge financial conglomerates, with integrated product development is slowly blurring the traditional boundaries between banks and non-bank financial institutions, on the one hand, and the supervision of these institutions, on the other. In spite of these trends in the international financial markets, regrettably, supervisory systems, in our sub-region, are mainly structured along the traditional boundaries demarcating banks, insurance companies, investment and micro-finance institutions. These integration changes represent major challenges to the supervisors of the different sectors, especially as the financial institutions become more complex in their structures and operations. BIS Review 12/2005 1 Notwithstanding the foregoing, the sluggish growth of our economies in the sub-region has also created a difficult operating environment for financial institutions, especially banks. As a result, this has contributed to the mushrooming of non-bank financial institutions, such as, micro-finance. It is a fact that the financial sector in our sub-region is dominated by commercial banks, which have continued to service only a small section of the population. The majority of the people are denied access, largely, due to numerous reasons, including perceived risks, high costs involved in dealing in small transactions and the inability to provide marketable collateral for loans. | 0 |
22 Of course, it is crucial to evaluate policy and require it to be effective, whether the policy is state contingent or time contingent. 23 My impression is that the issue of whether fiscal policy should play a more active role and whether the fiscal frameworks should be reviewed is starting to be raised more and more in the economic policy debate: see, for example, Calmfors (2021) for Sweden and Ubide (2021) and Lane (2021) for the euro area. This is also underlined by the fact that the ESO, the Expert Group for Public Economics, is planning a study in this field; see https://eso.expertgrupp.se/pagaende-projekt/. However, it should be pointed out that this study will only refer to the interaction between monetary policy and fiscal policy in times of crisis, which I do not think is sufficient. A month ago, representatives of the government parties also argued, in a newspaper article, that the review of the fiscal policy framework planned for 2025 should be brought forward (Svenska Dagbladet, 2021). In the Statement of Government Policy on 30 November, Prime Minister Magdalena Andersson argued that Swedish public finances are so strong that shifting from a surplus target to a balance target is justified. There are also, of course, 12 [17] To be even more concrete, one idea could be to give the Swedish Fiscal Policy Council, or some other body, the task of continuously evaluating whether fiscal policy is keeping to the announced plan and delivering the expected results. | I think this is something we may now need to reconsider for at least a couple of reasons. Monetary policy and fiscal policy are probably more dependent on each other than we usually think, and this dependence has become even clearer as the macroeconomic environment has changed quite a lot in recent decades. For quite long periods, it may indeed work well if monetary policy is focused on maintaining the inflation target and fiscal policy on keeping track of public finances – that they manage their own business, so to speak. Indirectly, the two policy areas nevertheless provide valuable support to each other. Assume, for example, that inflation begins to rise rapidly and risks becoming persistently too high, and that the central bank therefore raises interest rates in order to dampen demand in the economy. The higher interest rate increases government interest expenditure and weakens public finances. Of course, how much depends, among other things, on how large the debt is from the start and by how much the central bank raises the interest rate. If the economic agents trust that fiscal policy will stabilise public debt, they will expect taxes to be raised or expenditure to be reduced, or both. They will adjust their behaviour accordingly and 9 A policy regime with active monetary policy and more passive fiscal policy is sometimes called a regime with ‘monetary dominance’; see, for example, Leeper (2018, 2021). 6 [17] hold back on their consumption and investments in preparation for the expected tightening. | 1 |
In 2009, Bank Negara Malaysia entered into a Currency Swap Agreement (CSA) with the People’s Bank of China, which was renewed in 2012 with an expanded amount of RMB180 billion, with the objective to ensure a ready supply of renminbi in the domestic financial markets to meet the demand by businesses. Efforts were also made to enhance the transparency in the exchange rate between renminbi and ringgit transactions. In 2010, a direct market quote of renminbi against the ringgit was initiated in the Kuala Lumpur interbank market as well as in the interbank foreign exchange market on the China Foreign Exchange Trade System (CFETS). With these developments there is now a direct renminbi/ringgit quotation in the spot market and a renminbi/ringgit forward exchange rate for the Malaysian market. To further facilitate transactions, the real time gross settlement (RTGS) payment system in Malaysia has also been expanded since 2012 to include settlement services in renminbi. The size of renminbi trade settlement in Malaysia is expanding progressively reflecting the shift among both Malaysian and Chinese companies across the commodity, manufacturing and services sectors. There are also now 19 financial institutions that facilitate renminbi trade BIS central bankers’ speeches 1 settlement, double the number in 2009. There is also a growing interest in raising financing in renminbi in the Malaysian bond market. In 2011, Khazanah Nasional Berhad successfully issued the world’s first offshore renminbi sukuk in 2011 and subsequently Axiata Group Berhad issued the world’s first rated renminbi sukuk in 2012. | And I believe it is particularly worth noting that investment in equipment ended the year at a rate of increase of close to 9%, highlighting the robustness of business activity in the closing months of 2007 against a backdrop of sound corporate earnings and a favourable demand outlook. The demand for housing, which had moved onto a mildly slowing path in mid-2006 in response to higher borrowing costs and lower real estate appreciation expectations, appears to be showing greater sensitivity to the deterioration in agents' confidence, according to the latest available information. Recent figures reveal a loss of momentum in activity and employment in the construction and related sectors, as they do more generally, but on a lesser scale, in the rest of the economy. In any event, when considering the ongoing adjustment in the residential sector, which was largely inevitable following a prolonged phase of growth in supply, we should not overlook the considerable forces underpinning the demand for housing in the medium term in Spain, which should help temper the scale and intensity of the adjustment. The performance of trade in goods and services with the rest of the world has been relatively favourable in recent quarters, and has helped net external demand to make a positive contribution to GDP growth and, therefore, to alleviate the loss of momentum in domestic demand. I would highlight the resilience of exports in the past year, despite the significant appreciation of the euro and the somewhat diminished dynamism of export markets. | 0 |
I note with interest that your own assessment is that the best option for the futures and options business in London would be for EMU to go ahead and for the UK to participate in the first wave. It is a moot point as to whether the impact on the profits and bonuses of derivatives traders will be the number one criterion in the minds of Labour MPs when they come to reach a view on EMU, but I will certainly draw it to their attention if you would like me to do so. BIS Review 67/1997 -3- By contrast, you are slightly, though not exaggeratedly pessimistic about business opportunities in London if EMU goes ahead with the UK a ‘slow track’ country. I regard this as a pessimistic assessment, and will attempt this morning to persuade you that you are wrong. My first point, and perhaps the strongest, is that uncertainty about UK participation in EMU has persisted now for a considerable number of years - perhaps indeed since the late 1970s when the UK government’s response to the original EMU plan was distinctly lukewarm. And certainly no British Prime Minister has given an enthusiastic endorsement of the most recent Delors Plan for EMU, at any stage. | In the last few months the expected future correlation of the deutsche mark/dollar and lira/dollar rates has strengthened, suggesting a stronger market expectation of those currencies being part of the first wave. Very recently, a few doubts seem to have emerged about the project itself, though it would seem that, according to the market, the most likely outcome remains that a euro of some sort would start on time. I recognise that this is a difficult background against which businesses need to plan. Our own advice, which we have maintained for some time now, is that it is prudent to plan on the basis that the euro will begin on 1 January 1999, as set out in the Treaty. As far as the position of the UK is concerned, the option remains open, the policy remains what the French call ‘le wait and see’. But the new Chancellor, like the old, has acknowledged that there are considerable difficulties to overcome if the UK is to be a first wave member. This is not a tidy position to be in, perhaps, but against the uncertain background, it nonetheless has a certain practical appeal. But taking my prudent assumption - that EMU will go ahead - what can we say about the impact on the London market in general, and on the futures and options business in particular? | 1 |
The implementation of this system reduces costs and the necessary time in managing cash in banks' windows, unlike the payments previously conducted in cash desks with high commissions applied on the processing between corresponding banks. Also, the use of electronic payments have recorded a positive increase. Based on the preliminary calculations by the Bank of Albania, in 2022, the Albanian citizens have conducted averagely 16 electronic payments in a year, thus considerably exceeding the 12 payments target. Absolutely, these achievements reflect the measures taken by the banking system through significantly expanding the necessary infrastructure and services in this regard. In view of these developments, the same intensity is needed for the realisation of projects, as: open banking; instant payment, and the transition to ISO 20022 communication standards, which will digitalise and modernise the overall market and will create potentials in the framework of the integration process with the European Union markets. Last but not least, we should further intensify and enhance collaboration in the framework of the National Financial Education Strategy, which is a crucial mechanism for maximising the expected effects and the implemented measures so far in view of financial digitalisation and inclusion. *** Dear banking system executives, Notwithstanding the challenges and hardships caused by the soaring inflation during this year, forecasts for the Albanian economic growth remain positive. Nevertheless, tackling this challenges needs a coordinated and carefully parametrised response, by the monetary policy instruments coupled with an effective and visionary collaboration of all market actors. Let my brief some challenges foreseen for 2023. | This decision was taken on the grounds that the evidence continues to support the assumptions which have formed the basis of the derivation of the reference value since 1999, namely those relating to trend potential output growth of 2-2½% per annum and to a trend decline in M3 income velocity of ½-1% per annum in the euro area. We will issue a separate press release this afternoon explaining in greater detail the background to this decision. When comparing current developments with the reference value, it is important to remember that the reference value is a medium-term concept. Short-term movements of M3 do not necessarily have implications for future price developments. Moreover, deviations of M3 from the reference value must be analysed in conjunction with other real and financial indicators in order to understand their implications for price stability. Turning to the most recent data, in the period from August to October 2002 the three-month average of the annual growth rate of M3 was 7.1%, unchanged from the previous three-month average. M3 growth has been influenced considerably by portfolio re-allocations in an environment of general uncertainty and particularly by stress in financial markets. At the same time, it also reflects the low level of interest rates in the euro area which makes the holding of liquid assets relatively attractive. There is ample liquidity in the euro area. However, in the light of the sluggish economic growth, it is unlikely that this excess liquidity will translate into inflationary pressures in the near future. | 0 |
[Otherwise] it would be unrealistic to expect the Community to be able to square a circle that has never been squared.”6 The early 1990’s were indeed difficult times for the European monetary system: several countries were forced to realign their exchange rate or to withdraw As 2/8 BIS central bankers' speeches from the mechanism, like for instance Italy in 1992. It was that same year, with the Maastricht Treaty, that Europe chose to move forward towards a European monetary union. Tommaso Padoa-Schioppa was right in his belief and in his recommendation to create the euro. The euro has proven to be a great success which has delivered material benefits. First, price stability, which is the main objective assigned to the Eurosystem, and which directly benefits euro area citizens’ purchasing power. In the 18 years since the introduction of the euro (1999–2016), inflation has stood at 1.7% on average, compared with 4.6% in the 18 years preceding the introduction of the euro (1981–1998). Second, lower interest rates, which are the corollary to the confidence that investors place in our currency, and which can be measured by the decrease in long-term interest rate spreads vis-à-vis Germany, amounting to between –1.5% for France and –3.7% for Italy. Third, internal exchange rate stability, and a greater international role. Today, the euro accounts for 20% of international reserves, second only to the dollar. And an internationally recognised currency generates economic gains: financial markets are more attractive to domestic and foreign investors, more liquid, and thus more efficient. | In view of all these complications I believe we have succeeded in devising a suitable new voting system which should muster the unanimous support of the Council and eventually be ratified by the Member States. I know that it is not as simple as we would have liked. It is, however, as simple or complex as any other rotation system and fairly similar to the system operating at the Federal Reserve, where the presidents of Federal Reserve Banks are also allocated to groups and exercise their voting right in the Federal Open Market Committee (FOMC) with different frequencies. I hope that our exchange of views later on will help to clarify any other outstanding issues. BIS Review 8/2003 3 | 0 |
Policy makers in Asia are well aware of the complications and costs involved in sustaining their current regimes. Many are moving toward permitting more flexibility against the dollar, and even in their effective exchange rates. Few however are comfortable with the prospect of accepting large short-term volatility and large movements over time in their effective exchange rates. They are looking for a world in which they can have more monetary policy independence, progressively more financial integration with the globe, and face less risk of large destabilizing moves in the major currencies and less vulnerability to acute pressure on their own currencies. The exchange rate system among the major currencies provides a desirable degree of flexibility in real exchange rates. Although the process of cooperation among the G-7 has not eliminated the large swings in exchange rates associated with large changes in fundamentals among the major economies, it has had some modest success in avoiding more damaging movements. This cooperative framework, characterized by a pragmatic approach to promoting greater stability in exchange markets, offers a reasonable model for cooperation among the major currencies and those of the emerging world. The challenge ahead is to help manage the transition to the monetary system that provides for more flexibility in the exchange rates of all the major economic areas, and this has to be handled with care. | Chart: Productivity growth in advanced economies Productivity growth has been declining in advanced economies since the beginning of the 2000s. The willingness to invest has been low since the financial crisis. To what extent this is related to the economic downturn remains to be seen. Better times may eventually entice investors, but it is also possible that the substantial changes in the global economy have had a more lasting effect on the willingness to invest and the growth capacity of western economies. Chart: Real wages in mainland Norway, the US and Germany A demanding restructuring process is underway in the traditional industrialised countries. In the US and Germany, real wages have barely risen since the turn of the millennium. Income inequality has deepened. This may in part be related to the global change in the price of labour. In other countries, particularly in Europe, economic restructuring is throwing a large number of people into unemployment. Over 26 million people are now unemployed in the EU today, almost 10 million more than in 2007. Low growth, high unemployment and high debt levels are not a good combination. Even though there are signs of a moderate revival of activity abroad, growth may remain low for a protracted period. Chart: Real wages and productivity for mainland Norway Real wage growth in Norway has diverged substantially from that observed in Germany and the US. This is attributable to the sharp price rise for Norwegian goods in recent years. Norway’s terms of trade have improved. | 0 |
Stable economic policy interacts with structural changes and IT In order to see why the Swedish economy is doing better than it has been for a very long time, we need to consider how economic policy has been realigned in the past decade and a half. Credit and currency markets have been deregulated, the tax system has been reformed, components of the system of transfers have been modified and competitive pressure has increased. All this has helped to improve the workings of our economy. Moreover, price stability is now monetary policy’s statutory objective and it has been explicitly assigned to what has become even a formally independent central bank. Low inflation is admittedly not an ultimate objective for economic policy in general. It serves instead as an instrument. All those who experienced the economic situation in Sweden in the 1970s and 1980s know that inflation can never be associated with an economic development that is lastingly favourable. That is why price stability is an integral part of any economic policy’s strategy for rising prosperity and high employment. In order to provide a stable and credible framework for the new direction of economic policy, the government budget was successfully consolidated. Difficult political considerations and decisions were involved in this process and opinions may differ about particular items or aspects of the consolidation policy; but that does not detract from the main impression of a successful outcome in the sense that economic policy’s commitment to stability was rendered credible. | Replenishing their inventories, companies substantially increased their demand for commodities worldwide. Russia is a major producer of key commodities. High demand for Russian exports spurs economic growth this year. As companies complete their inventories, the effect of this factor will be tapering off gradually. The growth of oil export quantities will also be supported by the easing of the OPEC+ oil production cuts in response to the recovery of demand. Taking this into consideration, we have raised the oil price path in our forecast by 5 US dollars per barrel in the next three years. According to our preliminary estimates, the expansion of oil output under the new OPEC+ agreements will add about 0.1 pp to GDP growth this year and 0.2–0.3 pp next year. Another important growth driver is domestic demand, including both consumer and investment demand. Considering these trends, we have revised our economic growth forecast for this year upwards from 3–4% to 4–4.5%. After the recovery, the economy will expand at a pace close to its potential. We forecast that GDP will equal 2–3% in the next two years. The possibility to achieve higher economic growth rates will depend both on the expansion of production and logistics capacities and on labour resources, their expertise and performance. T hird. Monetary conditions have been progressively adjusting to the earlier increases in the key rate, but are still accommodative. | 0 |
Gai, P and Kapadia, S (2008), “Contagion in Financial Networks”, mimeo, Bank of England. Gallegati, M, Greenwald, B, Richiardi, M and Stiglitz, J (2008), “The Asymmetric Effect of Diffusion Processes: Risk Sharing and Contagion”, Global Economy Journal, Vol 8, Issue 3. Galvani, A.P and May, R.M (2005), “Dimensions of superspreading”, Nature, Vol. 438: 293296. Haldane, A (2009), “Why Banks Failed the Stress Test”, http://www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf. available at Kelling, M.J, Woolhouse, M.E.J, May, R.M and Grenfell, B.T (2003), “Modelling vaccination strategies against food-and-mouth disease”, Nature, Vol. 421: 136-142. King, M (2008), Speech to the CBI dinner, Nottingham, Tuesday 20 January 2009, available at http://www.bankofengland.co.uk/publications/speeches/2009/ speech372.pdf. Kinney, R, Crucitti, P, Albert, R and Latora, V (2005), “Modeling Cascading Failures in the North American Power Grid”, The European Physics Journal, B 46 (2005) 101. Kubelec, C and Sa, F (2009), “The Geographical Composition of National External Balance Sheets: 1980-2005”, Bank of England Working Paper (forthcoming). Lee, S.H, Kim, P-J and Jeong, H (2006), “Statistical properties of sampled networks”, Physical Review, Vol.73. Levin, S and Lubchenco, J (2008), “Resilience, Robustness, and Marine Ecosystem-based Management”, Bioscience Vol. 58: 27-32. Lloyd-Smith J.O, Schreiber S.J, Kopp, P.E and Getz, W.M (2005), “Superspreading and the impact of individual variation on disease emergence”. Nature 438, 355-9. May, R.M (1974), “Stability and Complexity in Model Ecosystems”, Princeton University Press. May, R.M (2006), “Network structure and the biology of populations”, Trends in Ecology and Evolution Vol. 27, No. 7. May, R.B and Anderson, R.M (1991), “Infectious Diseases of Humans”, Oxford University Press. | For instance, the mission observed that in Mpongwe, in the 2011 farming season, the Food Reserve Agency (FRA) paid out a total of K52 billion (Kr 52 million) to small-scale maize farmers while an additional K7 billion (Kr 7 million) was paid to commercial farmers. Coupled with this, total sales from maize alone exceeded about K80 billion (K80 million) if total sales to agents other than the FRA was included. It was further observed that the district produces more maize than the other nine districts on the Copperbelt put together. In addition, it was noted that the payments made to the farmers were growing steadily as evidenced by the increase from K19 billion (Kr19 million) in 2010 to K58 billion (Kr 58 million) in 2011 while members of the Farmers Union had accessed about K2.4 billion (Kr2.4 million) in loans from banks outside the district for the 2010/2011 farming season alone. Furthermore, the Mission reported that 2,700 residents of Mpongwe, comprising Government/Civil Service employees and registered farmers use the financial services located either in Kitwe, Ndola or Luanshya. It must be noted that this number did not include other persons in the productive sector such as private businesses. Distinguished Guests, Ladies and Gentlemen, the report further observed that a total monthly wage bill of about K2.8 billion (Kr2.8 million) was paid out to the residents of Mpongwe in 2011. These funds did not include grants and other sources of funding utilized by various Government organs and private individual and businesses. | 0 |
Firms’ management and boards should ensure that in credit assessments equal focus is placed on the liquidity profile of their clients as on their capital strength. Right-way risk is only right-way if a client is still standing when the hedge matures. Investment banks must bear in mind that their positions can play an important role in the functioning of the economy. Whilst it might be good risk management to reduce a client’s exposures when it suffers cash flow stresses from margin calls, was it good risk management for the bank to sleepwalk into that position in the first place? Working with the client to understand and anticipate all possible future outcomes, and access to facilities in order to meet liquidity demands in a stress, should surely be at the cornerstone of a client-centric business. It is important here for banks to think a few steps ahead and have in mind the potential indirect second-round effect of their counterparty management practices – some of which can otherwise Page 5 come back to hit them. One other common feature of periods of stress has sometimes been the inadequacy of initial margins required by investment banks over the counter. The spike in nickel markets in March 2022 reminded everyone that progress needs to be made here. And while CCPs have lessons to learn, so do banks. When they undercook initial margins in benign times, banks give their clients the illusion that some products – for example hedges – are cheaper than they really should be economically. | [2] Whilst waters were calmer at that time, we could see waves on the horizon. We warned that future cyclical and structural changes could materially threaten profitability and sustainability of certain business models. In the months since we sent that letter, events have unfolded – and indeed a war broke out – that now make this is all feel more present and real. Geopolitical and macroeconomic uncertainty is translating into market volatility. Meanwhile, digitalisation continues at pace, as new technologies, products and partners enter the financial services ecosystem. And the risks from climate change loom and threaten to change the very nature of the environment banks operate in. These are all key features of a new world facing investment banks. Like anyone preparing for an open water swim, if investment banks are to perform in these uncharted waters, they will need to challenge themselves on their true capabilities, be forward- Page 3 looking, anticipate changing conditions, and prepare to encounter unexpected currents along the way. This will be a real test of their true mettle. So what does this mean in practice? Financial Resilience Investment banks’ business models have changed significantly since the Global Financial Crisis. Legacy balance sheets have mostly been cleaned up. Firms no longer look to boost returns from proprietary trading. Client-driven strategies have become the norm. | 1 |
So we are seeing many different effects emerge at the same time across the whole world. The likelihood of a recession has thus risen considerably. What is your expectation for economic growth? Our latest projections put euro area growth at 0.8% for this year. But that is now out of date. We will certainly have to adjust our projection significantly downwards. Below 0%? We don’t know yet. The greatest uncertainty is how long the crisis will last. Originally, many economists thought that there would be a short, sharp crisis and that things would subsequently pick up again quickly. It very much depends on how quickly the spread of the virus can be contained, but also on the economic policy reaction. You have done intensive research on financial crises of the past. Is there any crisis that was similar? The current situation cannot be compared with the 2008 financial crisis. That crisis originated in the financial system. Today we are looking at a shock to the real economy that is affecting many countries at the same time and for that reason is so devastating for the global economy. If we want to draw a comparison, we should look at other pandemics. The Spanish flu? Yes, for example – that pandemic was indeed devastating. The precise figures are not known, but between 20 and 100 million people died back then. Now we are in a much better situation. First, medicine is much more advanced. | We monitor all financial market data: equity prices, interest rates, capital flows. Corporate and sovereign debt markets are also important. What is going on there? We have seen a sharp increase in the risk premia that firms have to pay when raising debt on the markets. For high-risk firms in particular, these risk premia have shot up. Yields for countries such as Italy have also increased signficantly. We see a broad increase in risk premia. Another question that arises is whether the markets are still functioning. Is supply still matching demand? The central bank should intervene if liquidity dries up, that is if the markets suddenly seize up because of a lack of available liquid funds, or if the transmission of monetary policy is endangered, that is if our measures are not reaching the real economy. And that is exactly what we have been doing in greater measure since last Thursday. Our bond purchases have a stabilising effect on the market. US Treasuries have seen some severe temporary disruptions. There was a series of short intervals in which the trade in US Treasuries was disrupted. That’s a sign of considerable nervousness in the markets. Besides the markets, we are closely monitoring the situation of banks in Europe. We have taken measures to prevent banks from having to overly restrict their lending during the crisis. But the pressure on banks will intensify if economic conditions deteriorate. We are also closely watching investment funds. What is happening there? | 1 |
Corporate bonds and securitised loans account for only 7%. Chart 5 shows that in each of the US, UK and Europe, the period since the crisis has seen the stock of outstanding bonds move towards the stock of outstanding bank loans. 9 See FSB (2014e). 10 Chart 6 shows the post-crisis collapse in European securitisation issuance, which has been particularly concentrated in residential mortgage-backed securities. 11 Bank of England and ECB (2014) is a consultation paper on the development of such a model of securitisation. The EBA is also consulting on the same issue, see EBA (2014). 12 Menon 2013. 13 Shanmugaratnam (2013). 6 BIS central bankers’ speeches times. There is a disconnect between developments in real economies and the degree of financial risk taking. It is particularly notable how the search for yield has compressed liquidity premia across markets. This is unlikely to be sustainable over the medium term because it exists against a backdrop of much-reduced market-making activity.14 Fundamentally, liquidity has become more scarce in secondary fixed income markets. It just appears that it hasn’t. The reasons for the changes are clear however. New prudential requirements have reduced incentives for banks to warehouse risk positions. Dealer inventories in fixed income have declined by 70% since the pre-crisis period, while the stock of fixed income assets outstanding has doubled. And the Value-at-Risk in banks’ trading books has retreated to 2002 levels. | For the G20 as a whole that is $ By eroding these costs, financial reform alone can therefore more than deliver the G20 commitment to raise GDP by more than 2%. The Basel Committee found these costs to be minimised only if risk-weighted bank capital ratios were raised above 15%.28 The Basel III requirements did not go this far, in part because they anticipated the additional requirements for loss absorbing capacity that G20 Leaders have just endorsed. Once implemented, the combined effects of the reforms will take the system much closer to the degree of safety needed to minimise the costs of financial crises. That authorities have reached this point in a measured way – allowing both equity and forms of debt to qualify as loss absorbing capacity – shows our sensitivity to the potential costs of greater safety. What are those costs? Three points are worth emphasising. First, the Basel Committee study judged that each 1% increase in capital ratios could reduce output by just 0.1% as higher bank funding costs were passed through to borrowers. However, even that small number seems an upper bound. It fails to take account of the fact that monetary policy can offset the impact of higher lending spreads on effective borrowing rates.29 In fact, the need to offset the impact of higher lending spreads is one reason why some advanced economy central banks, such as the Bank of England, are so clear now that interest rate increases, when they come, will be gradual and limited. | 1 |
By many measures, nations and people are closer than ever in terms of trade, investment, information exchange and physical mobility. Despite the weakness in growth and trade activities, global flows of goods, services and finance is still more than one-third of global GDP, 150% the level in 1990. Yet, social disparities, most noticeably inequality in the distribution of income, have worsened considerably. Income inequality has risen in many OECD countries since the 1980s1; we in Asia have not fared well either, with an average Gini coefficient that is higher than the rest of the world 2. The distance between the reality that we live in and our idea of an ideal construct of society is thus at once both closer and further than it was in our parents’ generation. The issues underlying this paradox are complex and different for every nation. In many ways, it is 3/8 BIS Central Banker's Speeches driven by the very forces of globalisation that have brought our economies closer together, but at the same time undermined the welfare of the middle-class in advanced economies and driven the ‘haves and have-nots’ further apart in the emerging economies. The problems confronting us today are different from the past. The implications for policymakers and social thinkers are therefore, immense. These new challenges require more nuanced understanding and approaches, and because of this, our frameworks need to adjust accordingly. For a start, it is important to recognise that new challenges can arise as a by-product of a genuinely positive development. | The engineering industry began to doubt the quality of their order books. Prices for oil, gas, aluminium and ferro-alloys fell, as did freight rates. The fragility of the Norwegian krone was illustrated when investors fled the currencies of small countries, and the krone weakened considerably. When speculators withdrew, daily fluctuations increased and hedging against exchange rate volatility became more expensive. On Christmas Eve, the krone fell to its lowest level in ten years. We are now in the deepest downturn in OECD countries in the postwar period. The US economy may already have shrunk by around 2½ per cent since the crisis erupted in September. Output has fallen at the same rate in many European countries, and perhaps by twice that rate in Japan and Korea. For a long period there were hopes that growth in China and other emerging market economies would hold up. But they are also now severely affected by the crisis. Output is also contracting in Norway, but so far probably somewhat less so than abroad. What is happening now is more than a normal fluctuation in the business cycle. The world is facing a crisis of confidence, with faltering faith in the future and a loss of confidence in banks, counterparties and contractual partners. The authorities have taken extraordinary action, as in a state of emergency, deploying a wide range of established and new policy instruments. | 0 |
Whilst we would not expect all assets to achieve the same MA, these disparities do give rise to questions as to the extent to which MA benefit is excessively influencing investment choices: and whether those behaviours are prudent and delivering the best outcome for the UK economy. Furthermore – Chart 5 shows a relatively small proportion of firms’ asset holdings are driving the majority of their MA benefit[4]. Whilst firms are expected have a diverse range of assets matching their liabilities, this raises the question of whether the current MA framework adequately captures the risks and uncertainties associated with the unique and innovative assets that tend to be the most MA-efficient. Naturally, investment in new asset types with some bespoke and novel features raises new and important questions for the prudential regulator: Do firms have the right risk management capabilities and the governance to apply them rigorously and robustly? Is the regulatory solvency regime suitable for them or is a square peg being forced to fit a round hole? The PRA has always focused on ensuring that investments in these new asset types do not break the link between risk exposures and their valuation and capital requirements. The most notable example of this is the extensive work we have undertaken on Equity Release Mortgages. The assessment of valuation and risk in assets with more bespoke features inherently requires more judgement, and relies much more on firms’ own internal assumptions and much less on public information. Firms argue that they are good at making these assessments. | Chart 2 shows that the BPA market is projected to have opportunity to grow at significant pace over the next ten years. The decline of Defined Benefit (DB) pensions and the desire to secure future scheme member benefits continues to create demand from DB pension scheme sponsors and trustees for de-risking or exit solutions. These should provide their members with a wellmanaged and cost-effective delivery of their outstanding pension benefits as they fall due over the coming decades – some extending more than 50 years into the future. Life insurers also have the capability to use the relatively stable and long-term annuitant liabilities entrusted to them, to invest in productive assets for the benefit of future generations, including in the transition to net-zero carbon. While I talk about growth, overall this is really a transfer of promises - specifically promises made by a large number of employers converted to promises made by a smaller set of insurers. It is important to remember that this is not all new investment or credit creation. But in making this transfer there is a change in investment strategy that backs those promises. And, given there is still a much larger pool of DB pension liabilities potentially available, as prudential regulator we need to know that the right package of incentives – and constraints – are in place for this transfer to be soundly managed in both the short and longer term. | 1 |
And the reason for this optimism is the euro. The single currency has the potential to bring enormous benefits to European nations, which they can use to achieve a high degree of stability and prosperity, in the interest of all countries in the world. 4 BIS Review 43/2007 | 19(2), pages 04-77 -Woodford (2018), Monetary Policy Analysis when Planning Horizons are Finite, NBER Working Paper No. 24692 i I would particularly like to thank Matthieu Bussière, Stéphane Dupraz, Mark Deen, and Olivier Garnier for their help in preparing this speech. ii On the measurement of the natural rate of interest and the uncertainty surrounding its long-term component, see e.g. Holsten, Laubach and Williams (2017), Hamilton et al. (2019), and Brand, Bielecki and Penalver (2018). iii On the opportunity of relying on fiscal policy in a low-rate environment, see e.g. Blanchard (2019). iv On the issues surrounding the measurement of potential output and natural unemployment, see e.g. Orphanides and van Norden (2002), Coibion, Gorodnichenko and Ulate (2019) and Aiyar and Voigts (2019). v For early research on firms’ expectations, see e.g. Coibion, Gorodnichenko and Kumar (2018) and Coibion, Gorodnichenko and Ropele (2018). vi On the forward-guidance puzzle and possible solutions to it, see e.g. Del Negro, Giannoni and Patterson (2012), Nakamura, Steinsson and McKay (2016), Gabaix (2019), and Woodford (2018). vii See e.g. Bernanke, Kiley and Roberts (2019). viii Monnet (2014) and Monnet and Vari (2019), among others of his work. ix Stein (2013). x Protocol on the Statute of the Eurosystem and the ECB, Article 3.3. xi For recent historical accounts of the ECB’s monetary policy in general, and monetary pillar in particular, see Hartmann and Smets (2018) and Rostagno et al. (2019). Page 12 sur 11 xii See Svensson (2017) and Ajello et al. | 0 |
In this regard it is worth mentioning the activities of the Instituto de Crédito Oficial (ICO) in Spain as a key provider of venture capital, either directly or indirectly, through FOND-ICO Global, a “fund of funds” whose goal is to promote the creation of private venture capital funds that invest in Spanish companies. At the European level, the European Investment 6 For recent evidence in the euro aera, see ECB (2018): “Investment in intangible assets in the euro area”. ECB Economic Bulletin, Issue 7/2018 7 C. Corrado, J. Haskel, C., Jona-Lasino and M. Iomni (2018), “Intangible investment in the EU and US before and since the Great Recession and its contribution to productivity growth”, Journal of Infrastructure, Policy and Development, Volume 2 Issue 1. 8 Cotec Foundation for Innovation-Ivie (Instituto Valenciano de Investigaciones Económicas). Intangible assets: database for Spain and its autonomous communities (1995-2014). April 2017. Database available at: http://informecotec.es/activos-intangibles/. 9 Brown, J. R., Fazzari, S. M. and B. C. Petersen (2009): “Financing Innovation and Growth: Cash Flow, External Equity, and the 1990x R&D Boom”, The Journal of Finance, Vol. LXIV, No. 1 4/6 Bank Group also supports innovation through different instruments such as guarantees, SME loan securitisation and venture capital. The public sector can also play a relevant role in supporting innovation through the education system since a key element of innovation is the supply of high-skilled workers. An improvement of the quality and functioning of the education system can therefore have a positive contribution to innovation. | Evidence from Eleven Countries over Twenty-Five Years”, Review of Economics and Statistics, 96(1), pp. 60-77 2 2/6 costs for certain groups of workers. Third, cybersecurity threats pose another challenge, given the vast amount of valuable information created and stored in the digital economy. Digitalisation may potentially lead to significant changes in the structure of most sectors of the economy. Among them, the possible impact on the financial sector is especially relevant for the Banco de España given our role as banking prudential and conduct supervisor and central bank. In particular, new technologies may imply efficiency gains and may also facilitate the entry of new companies offering financial services. For customers this may entail benefits in terms of cost savings and financial inclusion. For the incumbent banks technological change involves both challenges and opportunities. On the one hand, the entry of new competitors such as Fintech or Bigtech companies may threaten the market shares of incumbents. But on the other hand, innovation may lead in the long run to efficiency gains in the provision of financial services for incumbent banks, although in the short term it probably implies an increase in costs necessary to adapt to the new technologies. Given our limited understanding of the impact of digitalisation on the economy, the use of surveys to firms can be a useful tool to enhance our knowledge of specific aspects of digitalisation such as adoption rates, barriers and impact on firm performance. | 1 |
William C Dudley: Transcript of the Cornell College of Business Annual New York City Predictions Event Transcript of a discussion between Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, and Ms Maureen O'Hara, Robert W Purcell Professorship of Management, at the Cornell College of Business Annual New York City Predictions Event, New York City, 15 February 2017. * * * Maureen O’Hara: Bill, let me start off with kind of the low-hanging fruit. The post-Trump economy has been confusing, with low Q4 growth, yet record-setting stock market levels. So let me just throw you an easy one here. What does the Fed see as the outlook for the next year? President Dudley: For the near-term I think more of the same. I mean, we think the economy is going to continue to grow, a little bit above-trend. That’s going to generate job gains that put, you know, more pressure on the labor market, and as a consequence of that, we think inflation’s going to move back towards our 2% objective. So, you know, we could be completely wrong, but that – the data that’s come out over the last couple of months, is very consistent with that pattern. A lot of uncertainty in the outlook. I mean we don’t know what’s going to happen with the whole host of policy choices: healthcare reform, immigration policy, trade policy, tax policy, fiscal policy. | You could probably do the Volcker Rule in a more efficient way to achieve the same objectives without the burden of regulation that you have right now. You know, right now, if you’re an equity trading desk and the equity market falls very violently, you really aren’t supposed to go in and buy equities unless you actually have customer orders. So, you actually have this crazy situation where the equity desk can’t actually buy equities to support the market. So, I’d like to see the Volcker Rule looked at to see if there’s a way of doing it in a way that – if you’re a client-facing business, and you’re trading your own asset class, you have a little bit more freedom to buy and sell when markets are volatile and maybe provide actually a little liquidity support in the market. But also make it a lot easier, I think, to enforce the Volcker Rule. The other thing I would say is relief for smaller banking institutions. The financial crisis was not about small banking institutions. It was about large banking institutions and particularly it was about large broker-dealers. And so I think the Dodd-Frank Act imposed a lot of compliance and regulatory costs on smaller banking institutions. And I think – we have about 6,500 smaller banks in the United States plus a lot of credit unions and other financial intermediaries. | 1 |
Giannone, D., M. Lenza and L. Reichlin (2007), “The Equilibrium Level of the World Real Interest Rate”, paper presented at the First Annual Risk Management Institute Research 12 BIS Review 9/2008 Conference “Capital Flows and Asset Price: The International Dimension of Risk”, Singapore 6-7 July. Hartmann, P., F. Heider, E. Papaioannou and M. Lo Duca (2007), “The role of financial markets and innovation in productivity and growth in Europe”, ECB Occasional Paper No. 72, September Ihrig, J., S.B. Kamin, D. Lindner and J. Marques (2007), “Some Simple Tests of the Globalization and Inflation Hypothesis”, International Finance Discussion Papers, Board of Governors of the Federal Reserve System, No. 891. Kose, M.A., E. S. Prasad, K. Rogoff and S.-J. Wei (2006), “Financial Globalisation: A Reappraisal”, NBER Working Paper 12484 Kose, M. A., E. S. Prasad and M. E. Terrones (2005), “Growth and Volatility in an Era of Globalisations”, IMF Staff Papers, vol. 52, pp. 31-63 Kose, M. A., E. S. Prasad, and M. E. Terrones (2006), “How Do Trade and Financial Integration Affect The Relationship Between Growth and Volatility?”, Journal of International Economics, vol. 69, pp. 176-202. Kroszner, R. S. (2007), “Globalization and Capital Markets: Implications for Inflation and the Yield Curve”, Remarks at the Center for Financial Stability (CEF), Buenos Aires, Argentina,16 May. | This should be done not by measures that stifle financial innovation and market efficiency, but by actions and an institutional framework that encourage prudent behaviour and adequate risk assessment and management. More specifically, the securitisation of bank loans and other assets and the “originate and distribute” model should not be abandoned. Securitisation and the new bank model do entail economic and social benefits as they contribute to a better allocation of financial resources and a wider diversification of risks across markets and frontiers. At the same time, it is evident that this bank model and the securitisation process should be strengthened by improving incentive structures, risk assessment and management practices, and by increasing transparency. Similarly, the structured finance market, in order to be revitalised, will require actions that address the valuation problems and increase transparency and disclosure, so as to enhance the understanding and assessment of the embedded risks and to improve the practices of agencies and financial entities involved in their creation, rating and distribution of such products. Standardisation of some of the structured finance products could facilitate the market’s functioning. More generally, the risk management systems and practices of banks and other financial institutions should be further improved. This will require better and more extensive stress-testing in order to enable them to better assess the potential impact of tail risks and correlated risks. | 1 |
I see a risk in allowing monetary policy to continue to lean against the wind until one sees tendencies for 15 I n a long-run perspective, inflation below the target could lead to unnecessarily high unemployment if inflation expectations are firmly anchored around the target (see Svensson, 2013). In the same way that unexpectedly high inflation benefits those who borrow and is a disadvantage to those who lend as the real value of the debt becomes lower than anticipated, unexpectedly low inflation can benefit those who lend at the cost of the borrowers. BIS central bankers’ speeches 7 inflation expectations in the long run to begin to adjust downwards. That is a situation that might be hard to turn around. Target attainment is important for credibility One argument that is sometimes put forward is that the differences between what the majority of Executive Board members and the minority advocate are so small and that in practice it is not very important whether or not one cuts the repo rate a little more. And in a strictly “mechanical” sense, it is perhaps true that a policy rate that was 0.25 percentage points lower for a period of time would have a limited effect on the economy. But for the sake of credibility and target attainment in the long run, it is also important how households and companies perceive monetary policy. How seriously does the central bank view the inflation target? | Contrary to the approach taken by many during the recent crisis, Malaysia had further liberalised the foreign exchange administration (FEA) rules in our efforts to promote efficiency, reduce costs and create a more conducive environment for trade, business and investment activities. The accomplishments in financial sector reforms and the many policy changes made have augured well for the country, as evident by our ascent into the top-20 bracket in the World Economic Forum’s financial development index this year. As with other countries within the region, we have also been a recipient of capital flows. As a result of continuous effort to strengthen the financial sector, our ability to manage the volatility and other impacts of capital flows has been enhanced. The financial markets and banking sector have proven their ability to absorb and intermediate these inflows while the Central Bank is always monitoring the market on a daily basis and is also well positioned to manage the situation. The domestic economy stands resilient and inflation remains under control. Furthermore, the pace of ringgit appreciation also reflected the positive underlying fundamentals of the economy. Trends of investing by central banks and institutional investors i) The concept of diversification Let me now share some thoughts on portfolio diversification. Nearly 60 years since the proposition of Modern Portfolio Theory by Harry Markowitz, many investors are still grappling with the challenges of portfolio diversification. Among the sands in the wheel of a welldiversified portfolio are transaction costs and information asymmetry. | 0 |
7 P. Aghion, P. Askenazy, N. Berman, G. Cette and L. Eymard, 2012. “Credit Constraints And The Cyclicality Of R&D Investment: Evidence From France,” Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1001–1024, October. 8 P. Aghion, D. Hémous and E. Kharroubi, 2014. “Cyclical fiscal policy, credit constraints, and industry growth,” Journal of Monetary Economics, Elsevier, vol. 62(C), pages 41–58. 9 A. Bergeaud and G. Cette and R. Lecat, 2016. “The role of production factor quality and technology diffusion in 20th century productivity growth,” Working papers 588, Banque de France. 10 C. Reinhart and K.S. Rogoff. 2010. “Growth in a Time of Debt.” American Economic Review, 100(2): 573–78; Lane, Philip R. 2012. “The European Sovereign Debt Crisis.” Journal of Economic Perspectives, 26(3): 49–68. BIS central bankers’ speeches 3 impediments to the flow of resources, in particular in the labour market and in the way credit was allocated between sectors, hence revealing that a malfunctioning of the financial sector can reinforce structural weaknesses. 11 In some cases both were present at the same time. Of the uttermost importance were the structural changes targeting an improvement in the monitoring and the resilience of our financial system. Arguably the financial crisis partly resulted from excess risk taking and overinvestment in low productivity sectors. 12 The Basel 3 framework worldwide and the Single Supervisory Mechanism in the euro-zone provide new supervisory and prudential tools to mitigate these risks in the future. | Similar decrease in reallocation was found in the United Kingdom by the Bank of England 6. Financing constraints also hit more particularly R&D financing: according to a Banque de France study 7, R&D investment share becomes procyclical when credit constraints bites and does not increase proportionally in upturns. As the Great Recession was global, years of R&D efforts lost cannot be recovered by the purchase of technology from abroad, as all countries have been hit. In the medium term, this will weigh on productivity growth, which is partly fed by technical innovation. Financing constraints may contribute to a depressed investment, especially in industries with heavier reliance on external finance or lower asset tangibility 8, which can slowdown capital stock and hence potential growth, but also lead to its aging and weigh on its productivity through the use of older equipment vintages. As we can see on this graph from a Banque de France study 9, both the great Depression and the great Recession led to a significant ageing of the equipment stock. The Governing Council of the ECB has been particularly conscious of the acute strains in the financial system over recent years and the impairment of the credit channel. In particular, it has been concerned that bank deleveraging could reduce the supply of credit and undermine the supportive effects of lower interest rates on firms’ balance sheets. This could have been a significant “headwind” for monetary policy and has reinforced the case for decisive action. | 1 |
The agreement being drafted by global regulators is now under fire from banks who say it is convoluted, expensive, heavy-handed and poorly tested, and who now seek to stall or derail it. Not devoid of a dry sense of humour and with a shy smile, Caruana is known as a diligent and rigorous technocrat, a fan of teamwork who avoids showiness. “The core of the issue is whether Caruana will be able to demonstrate his leadership in the next couple of months,” said one committee member who works directly with Caruana, who spoke under the condition of anonymity. “It's not easy to guide such a group of self-confident people,” the committee member said. “He's just trying to fight his way.” Part of the problem is that Caruana's predecessor, New York Federal Reserve Chairman William McDonough, left large shoes to fill. McDonough's unexpected retirement in June left critics wondering whether his successor would be able to hold together a global project. “There were definitely advantages in having a superpower in charge of this committee,” said the Basel Committee member. Karel Lannoo, head of the Brussels-based think tank Center for European Policy Studies, said Caruana is a strong player with anti-establishment nuances who should be able to push through the 4 BIS Review 39/2003 accord and even impart some Spanish character to it. “Caruana is, in the Spanish context, very well regarded,” said Lannoo, a frequent adviser to the European Commission and a member of the academic European Shadow Regulatory Commission. “He was a broker. | He knows market risk. He worked on the trading floor,” Lannoo said. Lannoo and the shadow committee are critics of the accord, saying its overly complex nature may in fact heighten systemic threats by “capturing” regulators who would be required to take a more active role in banks' daily operations. Revolution in the making The new accord, now over five years in the making, represents a revolution for the banks who will adopt it. It leaves the first accord's simple dictates behind and offers a menu ranging from basic to complex. A second Basel Committee member, who also requested anonymity, said he had few doubts that the technocrat Caruana was the right choice for the job due to his expertise in such a complex field. “This is not new territory for Jaime,” he said. Indeed, some critics of the accord say a technocrat like Caruana is just who is needed to make sure that the byzantine draft is moulded into shape before being finalised by the end of this year. Caruana, a 51-year-old Valencian, studied telecommunications engineering and then qualified as a government economist. Those who have worked with him say he is a real technology fan, which given his studies is no surprise. The current controversy over the Basel reform is probably a source of discomfort for Caruana, who keeps himself to himself. “He is very simple and discreet, and shys away from limelight,” says a former colleague. | 1 |
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