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Or, alternatively, it assumes that the cost of moving policy more vigorously to create greater headroom above the zero lower bound is justified in risk management terms – that the cost of a tighter policy setting than required is justified by benefits of avoiding the risk of having to use exceptional policy tools at the lower bound. I have however seen little evidence in the UK that monetary has a consistently asymmetric impact in normal 20 times. As to the risk management argument, I do think the experience of the last 10 years shows that there are policy tools which, while not the primary instrument, remain available close to or at the zero bound. It was partly for this reason that the MPC’s recent statement on the unwinding of QE made clear that QE remained a weapon in the Committee’s armoury. 21 20 Such evidence that exists for other economies suggest the opposite is true – that monetary policy has greater impact when it is raised than when it is lowered. Tenreyro and Thwaites (2016) 21 As it stated in the June 2018 MPC minutes: In the event that potential movements in Bank Rate are judged insufficient to achieve the inflation target, the reduction in the stock of assets could be amended or reversed. 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 A sharper tightening of policy has also been suggested to avoid financial stability risks.
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I have noted before the much greater degree of attention to the supply side given by the post-crisis MPC 4 relative to its pre-crisis predecessors. This is clearly accounted for by the much greater inability to forecast the evolution of supply and its impact on inflation (Charts 3 & 4). 2 Mark Carney’s recent speech illustrates that bank rate might have risen by 2-3 percentage points between August 2013 and the end of 2014 if the post crisis MPC’s had followed the reaction function of its pre-crisis predecessors. And the important role that forward guidance played in preventing financial markets and real economy agents acting in expectation of such tightening. 3 Miles (2015) 4 The rate of mentions of ‘supply’ and ‘productivity’ in the minutes of MPC meetings in the past decade has been about twice that in the decade prior to the crisis.
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Having given at our last policy meeting the assurance that we would continue this as long as is needed and at least until the beginning of next year, means that we have given the assurance to the banks that the easing policy will continue for quite a long period of time. Having said that, what we need to look at now is not the theory. We have to be pragmatic, and look at what works and what does not work. The objective of so-called additional measures would be to act where parts of the credit market are not working, the transmission mechanism is not working. A central bank may consider that at a certain point it is appropriate to intervene directly in these markets. At the moment, we have some signs that the transmission mechanism, in terms of interest rates in almost all segments of the credit market, works relatively well. All money market segments have seen interest rates go down very significantly. It is interesting to note that if 2 BIS Review 29/2009 you take the 3-month reference rates, there is only 30 basis points difference between the euribor and the dollar libor, and no difference vis-à-vis sterling, so that in practice the transmission is quite efficient in the euro segment. Finally, the possibility for corporates to issue securities – short term or long term – seems to have revived significantly since December.
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CN: What has been designed by various countries – bearing in mind the structure of their economies and the relative importance of the automatic stabilisers – is probably the right balance between what needs to be done to stimulate global demand and the necessity to retain the credibility of the fiscal policy and budgets over time. It is especially important in European countries where we have the feeling that the so-called Ricardian effects can play a role. So if we were to give the impression to citizens that public finances were to deteriorate by too much and for too long consumers might increase their savings ratio to prepare themselves for tax increases in the future that they might regard as inevitable, or the reduction of benefits and pensions. So you have to keep the right balance between long term credibility and immediate stimulation. As far as we can judge, that balance is probably appropriate. That will have to be reviewed according to future economic developments. A related issue is the fact we all agree that a condition for the revival of the global economy is that financial systems everywhere are stabilised and that stabilisation is convincing the markets. I have the impression that we are a little more advanced in that regard in Europe than in the US. It is clear that the US authorities are making every effort to reach that goal, but that is probably as important as the size of the stimulus itself if we want to stabilise the economy.
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Strengthening of the current account position is continuous, with gradual closing of the deficits. Some countries even exhibit surplus, such as the case of Slovenia, Czech Republic, Croatia, Bulgaria and Hungary. Chart 5 Current account Source: IMF, BOP database 6 The averaged numbers exclude data for Montenegro and Serbia due to the shorter time span of their BOP series. 8 Current account adjustment Source: IMF, BOP database Observing the adjustment, through structural lenses, one can notice that the adjustments in the current account, was predominantly driven by the balance of goods and services. The deficit in the balance of goods narrowed from an average of 15.6% of GDP in the 2000-2008 period to 10.6% of GDP, and in the following 2009-2013 sub-period to even lower share of GDP in the last four years of 8.2% of GDP. Additionally, the surpluses in the services shows steady increase, a dynamic that is more visible in economies with more developed tourism sector. While the initial adjustment in the acute phase of the crisis was through compression of imports, what followed afterwards was remarkable shift in export, which kept the trade deficit markedly bellow the pre – crisis level. Hence, in 2018 the average trade balance hovered around 8% of GDP, compared to 17% of GDP before the crisis. Imports is close to its pre-crisis level, while the level of exports surpasses it by close to 10 p.p. of GDP.
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Meanwhile, aggregate current account deficits of advanced economies rose slightly, underpinned by renewed fiscal easing in the United States. 3 Chart extracted from the IMF External Sector Report, 2019. 4 Chart 3 Current account and fiscal balances in Euro Area and USA USA Euro Area Current account and fiscal balance, as % of GDP Current account and fiscal balance, as % of GDP 4.0 0.0 2.0 -2.0 -4.0 0.0 -6.0 -2.0 -8.0 -10.0 -6.0 -12.0 -8.0 -14.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 -4.0 Fiscal balance Fiscal balance Current account balance Current account balance Source: IMF, WEO October 2019, database The dynamics of the balances is not always indicative on how appropriate the external position is. The deviation of the current account from its fundamentals and desirable policies provides for additional substantial information on the correction needed. According to the IMF (2019), 35–45 percent of overall current account surpluses and deficits were deemed excessive in 2018.
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This will make our intentions regarding future monetary policy as clear as they can be. In my opinion, this new way of working reduces the need for signalling prior to the monetary policy meetings. Objections of principle… It is also possible to raise issues of principle regarding when and how one should signal. The signalling has sometimes been a question of wanting to communicate that we have had a slightly different view of how the interest rate should be set at the next meeting than the market has expected. In these situations one can say that we have preferred to prepare the market by signalling a few weeks before a monetary policy meeting rather than to risk surprising them when the decision is announced. But it is not necessarily the case that much can be gained by “fine tuning” expectations over the course of a few weeks. Although this system has meant that we have sometimes been able to avoid strong reactions and indignant comments in connection with the actual interest rate decision, we have nevertheless had roughly the same reactions when we have signalled the probable interest rate decision a few weeks earlier. The question is then what value the signalling has had. …not least because we are several members who must agree Many questions regarding the signalling are connected to the fact that we are a group of persons making interest rate decisions. The Executive Board of the Riksbank is what is usually known as an individualistic committee 8 .
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This means, quite simply, that the members act as individuals. This applies both when we are out speaking and when the interest rate is set. The interest rate decisions are made through voting and the members can publicly state whether or not they share the majority view. In the case of so-called collegial committee, there is instead an agreement that the individual members’ views are subordinate to the group’s overall opinion. If there are internal differences of opinion, they 8 See, for example, Blinder, A.S., (2007), "Central Banking by Committee: Why and How?” European Journal of Political Economy 23, 106-123. BIS Review 40/2007 7 are often concealed from the outside world and once a decision has been taken, all of the members officially support it. The combination of making interest rate decisions in a group and signalling between the monetary policy meetings is not entirely problem-free. If we assume, for instance, that an individual member is to hold a speech a few weeks prior to a monetary policy meeting where he or she gives signals that the interest rate should be changed. Regardless of whether or not the Executive Board is an individualistic committee, I believe that sometimes there may be uncertainty as to who is actually sending the signal. Is it merely the individual member who is describing his or her view, or is he or she expressing the majority's opinion?
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In other words, the business ‘creation effect’ stimulated by WTO accession will far outweigh the ‘diversion effect’, under which the pessimists had been predicting that Hong Kong’s trade would gradually dry out and shrivel up. To put a figure on it, our estimates within the HKMA suggest that Hong Kong’s annual GDP growth rate will be boosted by somewhere between half to one per cent through the increase in re-export trade resulting from China’s membership of the WTO. 6. But that is not the end of it. For our less visible trade, in financial, technical and professional services, the outlook is even more promising. These lucrative service industries, which are increasingly taking pride of place in Hong Kong’s economy, will be greatly boosted by business from Chinese enterprises seeking to expand their capabilities and improve their governance to handle increased trade and meet foreign competition. They will also be stimulated by overseas investors who need advice on how to make the best of the opportunities on the Mainland and who find Hong Kong the best place at which to obtain that advice. These trends have been in play for a long time – indeed they reflect Hong Kong’s historic role as a hub of commercial, technological and cultural exchange between China and the rest of the world. But there are clear signs that these mediatory and advisory services are now receiving a boost in anticipation of WTO entry, as companies in the Mainland, in Hong Kong and overseas position themselves for new kinds of commercial relationships.
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7. How do banking and finance fit into all of this? We expect to see two main developments over the next few years. The first is the greater demand for banking services resulting from the growing volume of business that will follow WTO accession. The second is the financial deepening, stimulated by more rapid financial liberalisation, greater banking competition, and product innovation induced by the terms of WTO accession. These developments will accelerate the reforms already in train within China’s domestic banking sector – reforms that cover the whole spectrum of banking management and services from corporate governance to the professional training of staff. The developments will also progressively open China’s business environment to competition from banks from outside the Mainland. In two years’ time, foreign banks will be able to conduct RMB business with Chinese enterprises in Shanghai, Shenzhen, Tianjin and Dalian. Within five years, they will be able to deal with all Chinese enterprises without any geographical restriction. The advantages for banks with a base in Hong Kong are obvious. Many of them have a head start on the Mainland, with networks of branches and more than a generation of practical experience. They also have all the advantages of geographical proximity, a common language and culture, yet separate financial and legal jurisdictions that Hong Kong’s unique position in China brings. Forty per cent of the Mainland’s trade is routed through Hong Kong. Hong Kong is the Mainland’s largest source of foreign direct investment and China’s main financial conduit and funding centre.
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They appear instead to have “skilled-down”, typically by taking a job for which they are over-qualified. They have become not unemployed but “under-employed”. Rates of under-employment have risen and are at significant levels (Table 2). Across the EU, rates of under-employment average around 15%. As in the early 19th century, by adding to the unskilled pool of labour, this will have dampened unskilled wage growth. BIS central bankers’ speeches 7 These switching patterns of employment demand and supply would be expected to show up in wages. UK evidence shows no clear pattern (Salvatori (2015)). But US evidence is more conclusive. It suggests that wages at the top end of the skill spectrum have risen, in some cases significantly. But there is little evidence of that having happened at the lower-skill end (Autor (2015)). In other words, only the higher-skilled appear to have gained in both employment and wage terms. A rising skill premium is consistent with the well-documented widening gap between the top 1% and 0.1% of income earners and the rest over recent years (Piketty (2014), Atkinson (2015)) (Chart 16). In the words of Tyler Cowen Average is Over, with a widening bifurcation between a high-skilled elite and everyone else (Cowen (2013)). By itself, a widening distribution of incomes need not imply any change in labour’s share of national income: in the past, technology’s impact on the labour share appears to have been broadly neutral. But this time could be different.
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If you look more closely at the dollar bill, you will find a further inscription which states “This note is legal tender for all debt, public and private”. This imposes an obligation to accept the note in the settlement of contracts and highlights the fact that money derives its value - whether imposed by a legal tender requirement or not - from the willingness of other economic agents to accept it to settle transactions. Each agent will only accept money, if he can be confident that it will in turn be accepted BIS Review 96/2000 2 by other agents in future transactions. Thus money is a social achievement as has long been recognised by economists for example by Menger. Money is a question of trust, its use requires trust and it reflects trust. This is especially true in the case of fiat money, i.e. the use of printed paper - which has no intrinsic worth - as a medium of exchange and as a store of value. Yet even commodity money requires trust and a well-founded expectation that it will be accepted for a wide range of transactions. Milton Friedman, in his book Money Mischief (1992), reports the well-known story of the monetary system of a small island in Micronesia which at the end of the 19th century used stone wheels as a medium of exchange and as a store of wealth.
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There is thus hardly any support for low interest rates in themselves causing problems for financial stability or for high interest rates in themselves improving financial stability. 9 The current situation in Sweden is rather that higher policy rates may have a negative effect on financial stability. Swedish banks are now choosing to fund themselves by short-term borrowing in foreign currencies, which is cheaper than borrowing in Sweden as interest rates are higher here than abroad. But this entails some risks as foreign investors are an unstable source of funding (Sveriges Riksbank 2012a). When the policy rate in Sweden is raised in relation to interest rates abroad, it becomes even more attractive for the banks to borrow in 9 Is the United States an exception? Hardly. A very fragile financial sector arose there without resilience, as a result of a lack of regulation, exaggerated confidence in risk management, very excessive leverage, gigantic hidden off-balance sheet liabilities and large information problems with a large spread of uncertain assets. A modest shock in the form of loan losses due to untenable sub-prime mortgages with low-quality credit assessments then led to a major financial crisis. It was not low interest rates that led to this lack of resilience and to these untenable sub-prime loans, and it is difficult to see that higher interest rates would have prevented the crisis. 8 BIS central bankers’ speeches foreign currency.
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In my view, it should only be possible to neglect price stability and highest sustainable employment for a limited period if there are clear signs of problems with financial stability, if there are no means of addressing these problems without setting aside price stability and highest sustainable employment and if it can be credibly demonstrated that another, for example a higher, repo-rate path would lead to better target fulfilment for inflation and unemployment in the longer run. This last condition is important. The government bill that contained the proposal for the Sveriges Riksbank Act states namely that the policy rate may only be used to prevent a financial crisis if such a crisis threatens the price stability objective. In my opinion, there are no clear signs of problems with financial stability at present, there is no lack of means to maintain financial stability and if necessary to limit growth in mortgage 1 Sveriges Riksbank Act 1983:1385 and Government Bill 1997/98:40. BIS central bankers’ speeches 1 lending, and nor is there any theoretical or empirical support for the view that a low policy rate would lead to imbalances in Sweden. If anything, a lower policy rate might instead mean that the banks have less incentive to seek short-term funding in foreign currency and thus the risks linked to this funding will decline. If the Riksbank succeeds in stabilising inflation around the target and unemployment around a sustainable rate, average inflation should be in line with the target over a longer period of time.
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It is no easy task to build this type of mechanism into our models, or even the part of the analysis based on assessments. Allow me to alter the time perspective somewhat and assume that a loan-driven bubble in the property market has burst and had serious consequences for the rest of the economy. There are some questions that I would like to be able to give the “right” answer to if I were standing in this situation looking back over the developments leading up to it, perhaps looking back a year. Would we then be able to claim with certainty that our interest rate policy did not contribute to developments becoming unbalanced and getting out of control? Would we be able to say with certainty that we did not suspect that these developments were untenable and that there would soon be a collapse? And would we be able to say with certainty that conducting a slightly stricter monetary policy than was justified by the forecasts had not helped? I consider it essential for the credibility of every central bank to be able to provide good answers to these questions. And for me it is natural to also take into account the type of factor I have now spoken about – that is so difficult to quantify – when I assess what is the best-balanced monetary policy. Other weapons than the interest rate are probably more effective with regard to preventing loan-financed house price bubbles from building up.
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In my opinion, a good checklist for a policy-maker on monetary policy issues is what Donald L. Kohn at the Federal Reserve has put forward on several occasions. He considers that three conditions I mentioned earlier must be met before central banks “lean against the wind”. And these are the three arguments I mentioned earlier. The first condition is that it must be possible to identify a bubble sufficiently early and with sufficient certainty. Secondly, the assessment must be that there is a good chance that a slightly higher interest rate will really slow down the untenable developments. Finally, one must count on being able to gain “enough” by preventing a bubble in relation to what a tighter monetary policy might cost in the short term. I believe that most people will agree that these are sound conditions to use as a foundation. However, the views regarding when the conditions are actually met can vary. Professor Kohn’s first condition probably entails the greatest difficulty. Although we are constantly developing our forecasting methods and models and they are becoming increasingly sophisticated, I do not expect that we will be able to reach a stage in the foreseeable future where we can be entirely sure that something we assess as an incipient bubble actually is a bubble. This is largely due to the nature of things, or rather the nature of the bubble.
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9 The level of this imputed interest rate is not set by the regulator and 9 Banks generally stipulate that the cost of a residential property, based on an imputed interest rate of 5% plus amortisation and maintenance costs, must not exceed one-third of the borrower’s gross income. When assessing affordability risk for mortgage lending, the SNB likewise bases its calculations on an interest rate of 5%. Page 9/10 varies between banks. However, if this interest rate were to be lowered in the current environment, borrowers, banks and the economy as a whole would face significant risks. It is especially important when assessing affordability and the relevant interest rate to remember that real estate is normally purchased over a long time horizon of several decades. Interest payments for a mortgage will thus be incurred for the duration of this period, in the course of which rates may well be significantly higher than they are today. While a sharp interest rate rise is unlikely in the short term, there is considerable room for a substantial upward correction in the medium term. It is worth bearing in mind that long-term interest rates are currently about 300 basis points below what was considered normal during the pre2008 era. It is thus vital that borrowers and banks do not exclude the possibility of a sharp interest rate rise in the medium term and, that they ensure their ability to cope should such a scenario come to pass.
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Thus instead of re-slicing the pie more focus is needed on ensuring that the pie gets bigger and more inclusive, which will lead to less unhappiness in all the dimensions that it might appear. I truly hope that in a not so distant future, we will be witnessing moderation in the income gaps, more prosperous and less unequal societies. This requires commitment, willingness and vision by all policymakers. Somehow, it seems appropriate to end as I began, with Tolstoy quotation: “Тhere is only one time that is important— Now! It is the most important time because it is the 2/3 BIS central bankers' speeches only time when we have any power”. And we, as policymakers, exactly Now have not only power, but also a duty to act for a better wellbeing in our societies. Thank you. 3/3 BIS central bankers' speeches
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BIS central bankers’ speeches 5 Concluding observations In conclusion I would note that the financial crisis highlighted that financial institutions did not have the quality or quantity of capital they needed. In particular, the broader measures of capital were largely ignored during the crisis by many investors as they worried about the “core” capital immediately available to absorb losses. Thus the emphasis in Basel III on improving the quality and quantity of capital is an important regulatory response to the financial crisis. Clearly we need to focus on the narrow definitions of capital – that which can readily absorb losses. The United States has also improved its supervision framework based on lessons learned during the crisis. One of the major additions to the supervisory “toolkit” was the use of stress tests – in the SCAP and then as an important component of the broader CCAR exercise. The supervisory and regulatory responses have provided strong encouragement for U.S. financial institutions to improve their capital ratios, particularly those ratios most appropriate for absorbing losses during stressful economic periods. Through retention of earnings, asset sales, and new equity issuances, U.S. banks have substantially improved their capital ratios since the crisis period. The severe disruptions and economic dislocations that occurred during the financial crisis – affecting not just institutions, but individuals throughout the national and global economy – highlight the critical need to maintain a well-capitalized and resilient financial sector.
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With a low interest rate, households may save less and the turnaround may occur more rapidly than we assume. This indicates in isolation that changes in the interest rate should be gradual or that further interest rate cuts should be put on hold. Overall, the outlook and balance of risks suggest that the key policy rate should be gradually reduced further to a level of around 1 per cent in the second half of 2009. This is about one percentage point lower than in Norges Bank’s forecast from 17 December last year. With the low interest rate added to the government fiscal measures, our analysis indicates that growth in the economy will be positive from the second half of this year. Growth will be driven by a rise in private consumption as a result of a low key policy rate, growth in real wages and higher government transfers. Activity in the economy will be underpinned by strong growth in government spending. The projections are based on the assumption that Norges Bank’s interest rate changes will translate into lower lending rates for households and businesses. At the same time, tighter credit standards in banks are making monetary policy somewhat less effective than normal. BIS Review 37/2009 11 Inflation is projected to fall below 2 per cent in 2010, before gradually moving up towards the target towards the end of the projection period as the output gap gradually closes.
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It is necessary for the communication policy of the Central Bank that the open letters and Inflation Report would be perceived as complementary factors. Role of public sector in inflation targeting strategy It should be reemphasized that the monetary policy should be supported by fiscal policy in order to be able to turn the downward trend in inflation into a long-term and lasting achievement. The fiscal policy can affect inflation through various channels. A particular channel, through which fiscal policy has direct effects on inflation, is the price and tax adjustments in the goods and services produced by the public sector. Making these adjustments in line with a pre-announced schedule or a pre-described rule would diminish BIS Review 4/2008 3 uncertainties regarding inflation forecasts and thereby contribute to the reputation of inflation targeting regime. The Central Bank sets inflation targets on the basis of the budget projections of public sector. Therefore, while updating the monetary policy stance, the trend of public sector expenditures, which is a very important component of total demand, is closely monitored. Moreover, keeping public sector wage adjustments consistent with the inflation target is very important as the private sector take these adjustments as a benchmark for their own wage adjustments. Due to all these reasons mentioned above, the Central Bank closely monitors the income and fiscal policy implementations, and frequently emphasizes the importance of structural reforms that would enhance the quality of fiscal discipline and predictability of fiscal policies.
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In view of the Treasury’s financing program for 2008 and the Central Bank foreign exchange buying auction program for 2008, the excess liquidity in the market is expected to continue generally at reasonable levels in 2008. However, as was the case in previous years, the level of liquidity in the market may change significantly depending on the changes in Treasury’s financing program as well as in foreign exchange buying amounts of the Central Bank and changes in Treasury cash accounts within the Central Bank. As long as the excess liquidity in the market remains at reasonable levels, the Central Bank will continue to withdraw the excess liquidity in the market on an overnight basis, via New Turkish lira deposit transactions in the Interbank Money Market within the CBRT and repo transactions in the Repo and Reverse Repo Market of Istanbul Stock Exchange. Hence, overnight interest rates will continue to be at the level of the borrowing rate of the Central Bank. Thus, the overnight borrowing rate of the Central Bank will continue to be the benchmark interest rate with respect to the monetary policy. In case of a permanent liquidity shortage in the market, the benchmark short-term interest rates will not be the borrowing rate of the Central Bank but the average interest rate of the repo auctions, which is the basic funding instrument. Therefore, in case of tightening in liquidity, the interest rate taken as a benchmark by the market would have increased merely due to the decline in liquidity.
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As a financial centre, Singapore provides a suitable platform for public-private-partnership financing frameworks to help channel private capital into infrastructure development in Asia. BIS central bankers’ speeches 3 Build expertise for investing capital 24. While pricing capital correctly and improving the channels to distribute it more efficiently are necessary, they will be insufficient if the human expertise to manage and allocate the capital is not well developed. Building a successful team of financial intermediaries hinges on identifying the right talent and building the right competencies. 25. In Singapore, MAS and the industry have worked together to develop the Financial Industry Competency Standards (or “FICS”), aimed at enhancing the professionalism of the financial sector workforce. The accredited programmes of FICS are readily accessible, with funding support of up to 90 per cent of the programme fees. MAS supports relevant training programmes under the Financial Training Scheme, which co-funds training costs for training courses. 26. Substantial investment has also been made in the area of financial research. The work of researchers here helps to increase the body of knowledge and understanding of risks unique to Asian markets. Many research institutes have been set up in Singapore to support these efforts. 26. Singapore has put much effort into attracting asset managers to bolster the buy-side of the investment equation. As at end-2010, assets managed out of Singapore stood at $ trillion, with a rolling 5-year average growth rate of 16 per cent per annum.
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The region’s 45 countries in the MSCI AC World Index account for less than 10 per cent of the Index although their share of world GDP is 19 per cent. 21. We need to make emerging Asia’s capital markets deep enough to effectively intermediate its considerable savings pool and broad enough to provide a range of suitable instruments for risk mitigation. 22. The crying investment need in Asia is for infrastructure. A report released by the Asian Development Bank Institute estimates that the total investment needs for national infrastructure development in Asia will average close to $ billion per year from 2010 to 2020. But private participation in infrastructure investments in Asia amounted to just $ billion in 2009, less than half the $ billion that went into real estate investment. It will be a shame if Asia’s considerable savings pool, not to mention the inflows of capital from abroad, goes into speculative real estate instead of productive infrastructure investments that enhance long-term economic growth. Having well-developed capital markets is a good way of ensuring that capital is allocated to productive uses. 23. A promising experiment in developing better mechanisms for allocating capital is the World Bank-Singapore Urban Hub. Established in 2009, it brings together Singapore’s public agencies, research institutes, and private sector players to share their experiences with developing countries, in areas ranging from water and waste management, land use planning, and urban development.
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To date we have published a report on EMU’s conceivable importance for the Swedish krona; the conclusion was: not much, provided - and it is a major proviso - Sweden provides equal conditions in other respects for wealth formation and business enterprise. The krona’s part in the assessment of inflation has varied One of the topics in the discussion during the past six months has been how the Riksbank reacts to the exchange rate in the formation of monetary policy. We have been accused of being indistinct or dithery during the summer and autumn. First let me say that there is a pattern to this that I find familiar. Conducting and interpreting monetary policy is more difficult when the situation is appreciably affected by other factors than resource utilisation, for instance the exchange rate or inflation expectations. The assessments are then more complex and the Riksbank faces greater educational challenges. The decisions also tend to be more controversial because there is a clearer conflict between different goals, so that more criticism is only to be expected. Our forecasts are always based on a variety of factors. A traditional model for determining inflation in the context of a Phillips curve, for example, points to resource utilisation, inflation expectations and the exchange rate as central components. However, these variable’s relative importance for inflation changes over time.
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So personally I do not think it has always been hard to understand the direction, upwards or downwards, of exchange rate movements in recent years. It is the tendency for the krona’s average value to be unduly low that has been more difficult to interpret. To some extent, this has presumably been a consequence of the American dollar being generally over-valued against European currencies. I also believe that some part may have been played by various structural factors, for example the construction of the tax system, the internationalisation of the corporate sector with the attendant relocation of certain functions, the status of the Swedish krona as the importance of the euro grows in Europe and so on. Some of these notions are supported both by arguments from principle and by somewhat anecdotal information. There is reason to believe, for instance, that the taxation of both capital gains and wealth has had effects. Moreover, at least a part of the residual item in the statistics could have to do with a tendency for firms not to repatriate export receipts to the same extent as before, which in turn may be a consequence of a larger proportion of their central functions now being located abroad. But we do not know how quantitatively important these factors are and I believe that perhaps one should be wary of exaggerating them. Still, these are questions that deserve further scrutiny and we intend to pursue them.
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The Financial Stability Forum and other groups and agencies have made many proposals to this end. These proposals should help to reduce the risk and severity of future crises, though they will not eliminate them. 2 Joint statement by IMF and World Bank on “An Enhanced Partnership for Sustainable Growth and Poverty Reduction”, 5 September 2000. 3 BIS Review 76/2000 Managing the change While the fundamentals for sound financial systems are universal, specific policies to attain them must recognise the unique socio-political context of each country. To succeed, countries must change, or at least modify, deeply embedded social structures and cultural practices. As the experience of the former Soviet republics and the former East European economies shows, such a far-reaching change can only be an evolutionary process; it cannot happen overnight. The politics in each country will dictate the pace and texture of financial and economic reform. In Malaysia, Prime Minister Dr Mahathir Mohamed has made clear that in reforming and restructuring the corporate and financial sectors, his government’s social and political objectives come first. In Indonesia, monetary and banking reforms, important as they are, are subordinate to more fundamental issues of political transition, security, and national cohesion. The legal framework will constrain what is possible. In many Asian countries, laws are incomplete, and enforcement is weak. For example, not all Asian countries have adequate insolvency laws. Without these, borrowers have an incentive to become “strategic” debtors, deliberately defaulting on interest and loan payments.
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François Villeroy de Galhau: Digital innovation - what role can we play as central banks? Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Singapore Fintech Festival, 8 November 2021. * * * Ladies and Gentlemen, It is always a great pleasure for me to have the opportunity to speak at the Singapore Fintech Festival, and I wish to thank Ravi Menon and the Monetary Authority of Singapore for organizing it. Although I am joining from Paris today, I look forward to coming back to Singapore soon to continue exchanging. Innovation may not be the first thing that comes to mind about central banks. After all, our institutions have been around for quite some time: MAS just turned 50 – and I take this opportunity to congratulate this golden Jubilee –, and Banque de France is more than 2 centuries old. We are more associated with stability than disruption… Yet the blossoming of digital innovation has the potential to transform the financial system in its entirety. We have to embrace these changes, but there are also things that we need to preserve in this process: the stability of the financial system. Innovation and stability can appear as contradictory in the short run; but they are complementary through a common value; a keystone: trust. Trust of the public in money. To be implemented effectively, these dual principles of innovation and stability require a cooperative setting.
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I had then also warned that the “three bears”—inflation, protectionism, and financial instability—could make an appearance any time to spoil the party.1 Six months later, we can say that at least two of the three bears have been sighted—inflation and protectionism. First, the risk of more rapid inflation has heightened. Inflation is on an upward path globally, and in the US has reached the Fed’s 2% target amidst a tightening labour market. Accordingly, last month, the Fed indicated a faster pace of monetary policy normalisation. The expectation now is for two more rate hikes this year. But if inflation surprises on the upside, the Fed could be compelled to hike more. This would tighten global financial conditions by more than currently anticipated. Tighter global financial conditions could trigger market volatility and dampen corporate spending. As interest rates rise, some firms could face debt-servicing problems, especially in emerging market economies with relatively high levels of leverage. And besides the risk of faster rate hikes, two things are happening that threaten to tighten global financial conditions even more: first, the unwinding of the Fed’s balance sheet which withdraws $ liquidity from global markets; and second, the increased issuance of US Treasury bills to fund fiscal expansion, which accentuates tightness in $ funding. We are already seeing some capital outflows from emerging market economies, alongside some tightness in $ liquidity and funding markets. This is to be expected. But if the withdrawal of $ liquidity becomes more acute, some emerging market economies could face serious bouts of financial volatility.
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PCPs are also in the works for two more areas in banking – wealth management (which is rapidly growing) and operations and support (which is undergoing disruptive change). IBF will launch a dedicated career centre next month, to offer integrated support across career planning, skills development, and job placement. 8 / 11 BIS central bankers' speeches While the financial industry continues to create jobs on a net basis, there is a lot of churn and movement in the industry. Skills development, career pathways, and job placements need to be looked at holistically. IBF will leverage on its strong network with financial institutions to help professionals navigate and make their career transitions. IBF will also work closely with partner agencies – e2i, NTUC and WSG – to support financial sector professionals looking to move into other sectors. INNOVATION AND TECHNOLOGY The third pillar of the ITM is innovation and technology. Singapore has global mindshare today as one of the leading Fintech hubs in the world. Our FinTech agenda is well known and there will be other occasions to talk about the various initiatives. Today, I want to emphasise the central role played by regulation in promoting innovation and technology. To get innovation right, we must get regulation right. This is a creative tension – managing risk while facilitating innovation. It calls for a pragmatic and flexible approach; there is no one-size-fits-all approach. Sometimes, it means not rushing to regulate so that we do not front-run innovation e.g.
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At the same time, all desirable spending programmes must be prioritised within an overall budget framework. Fund structures or other forms of financing outside the ordinary budget are only a way of avoiding budget constraints. This would weaken the credibility of the fiscal rule, which in turn would affect interest rate setting. Again – policy rules and words must be followed up by action. In the words of former Norges Bank Governor Hermod Skånland: Once the authorities have charted a course, they should not embark a different path. 5 National Budget for 2003. BIS central bankers’ speeches 7 Lessons from the financial crisis – financial stability and supervision Chart 14: Household debt. As a percentage of GDP. 2000, 2005 and 2010 I have described how Norway differs from other European countries after the financial crisis. While many EU countries are in the economic doldrums and are facing high government debt, Norway has made use of its fiscal leeway and has fared well. However, there is one area in which Norway differs from other countries in a manner we perhaps do not like: Norwegian households are among the most heavily indebted in Europe. Rising debt and property prices are mutually reinforcing. Higher asset prices lead to higher collateral values for loans. Easier access to credit also leads to increased purchasing power when property is offered for sale. This increases risk in the financial system.
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Someone has to pay the bill. The rapid growth in government debt in Europe and the US is consistent with a well known historical pattern. Fiscal policy was used actively in most countries to curb rising unemployment. The mistakes of the 1930s were not to be repeated. The intention was good and the policy was most likely appropriate, but weak public balances became even weaker. On top of this, some countries provided substantial government funding to banks. The situation came to a head in several euro area countries, initially in Greece, which had allowed deficits to creep up during the growth period. In the next round, Ireland, Portugal and Spain came under pressure and had to payer higher interest rates on new loans. The UK also ran a government budget deficit in the favourable pre-crisis years and when tax revenues rapidly declined and social security spending rose, the deficit increased to more than 10 per cent of GDP and government debt doubled. The authorities in many countries must now tread a difficult balance. Controlling debt requires an economy with a back strong enough to carry it. It is not certain that low interest rates are sufficient to sustain the nascent recovery if fiscal policy is tightened. Credible 2 BIS central bankers’ speeches reforms that limit public spending in the long run, combined with moderate tightening in the short run, could be an appropriate strategy. Governments that saved during the expansion may have the scope for pursuing that approach. Greece did not save.
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Working level committees have also been formed to undertake the task of considering new proposals and monitoring the implementation of the MIFC recommendations. To take into consideration global trends and to provide insights on the strategic direction, an International Advisory Panel (IAP) comprising industry leaders and experts from the global community is also being established. Conducive environment for business In continuously creating an enabling environment for the efficient functioning of the MIFC, the Government has identified several key strategic objectives. T he Government has also granted an attractive tax package to promote Malaysia as a competitive international Islamic financial centre. The objective is to build the base - that is, to create the necessary critical mass of participating financial players and to increase the scale of activity. Malaysia aims to attract global players as well as to enhance the capacity and capabilities of the existing financial institutions.
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Malaysia has developed the comparative advantage in the area of Islamic finance. The comprehensiveness of the Islamic financial system in Malaysia has been mutually reinforcing with the key components of the financial system comprising the Islamic banking, takaful, Islamic money and capital markets now being at an advanced stage of development. In addition, the established legal, regulatory and Shariah frameworks in the Islamic financial infrastructure is also a key competitive advantage for Malaysia , placing it ahead of other financial centres offering Islamic financial services. In terms of Shariah governance, it has enabled the development of Islamic finance to be orderly and compliant with the Islamic injunctions, thereby ensuring that customer confidence be maintained. The conducive Shariah environment has also ensured that Malaysia is sustained as a centre of product innovation, producing cutting-edge products for the increasingly sophisticated customers. In respect of Shariah interpretation and practices, the MIFC will adopt a stance of mutual recognition and accommodate the various juristic reasoning that has been approved by recognised Shariah advisers . Next week, Bank Negara Malaysia will again host the 2nd International Shariah Scholars Dialogue, gathering the Shariah scholars from different regions in our endeavour to continuously bridge and BIS Review 104/2006 1 foster greater interaction and promote understanding on the issues and challenges faced by the Islamic community on the aspect of Shariah. Malaysia also has a strong and advanced regulatory regime and legal structure in the Islamic financial system.
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In 1835 Alexis de Tocqueville wrote that, “the authority which public men possess in America is so brief and they are so soon commingled with the ever changing population of the country that the acts of the community frequently leave fewer traces than events in a private family. .... The instability of administration has penetrated into the habits of the people”. The stability of institutions is, therefore, one of their greatest assets. Barro and Gordon (1983b) assumed the existence of an ongoing government or central bank which had an interest in preserving a reputation for “good” behaviour. A substantial literature, reviewed by Nancy Stokey (2002), analyses the circumstances in which it is attractive for a “good” government to distinguish itself from a “bad” government. Stokey shows that if it is not easy to do so, then it may be optimal to impose a monetary policy rule on all governments in order to reduce the damage done by the prospect of a bad government in the future. But how can society convince itself that it can eliminate bad government by adopting a policy rule? A really bad government will simply restore discretion to itself. Good and bad governments are not independent actors. They reflect the degree of consensus on how to construct institutions that will pursue consistent objectives. The experience of high and variable inflation itself can be an important force shaping public attitudes towards the design of institutions to control it.
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On average, it was 1.1% in this period, dropping 1.8 percentage points from the previous quarter. The rapid decline of annual inflation rates, which has started in the third quarter of the past year, is driven mainly by the slowdown of price rise in food items during this period, as well as the stability of prices of other consumer goods. Inflation performance has reflected the simultaneous action of supply and demand factors. On the supply side, slowdown of commodity prices in international markets and of inflation in our trade partners, combined with the stable exchange rate, have transmitted lower imported inflation rates to our economy. Likewise, contribution of administered prices has been lower. Inflation expectations have been anchored and production cost pressures contained. On the demand side, pressures remain low, conditioned by the continuation of the negative output gap. Reduction of factual inflation rates, shifting of the inflationary pressures balance to the down side and the increase of aggregate demand below its potential, under the conditions of a controlled fiscal policy, have created the space for further increase of the monetary stimulus to the economy during the first quarter of the year. The Bank of Albania has lowered the key interest rate twice, bringing it down to the historic low of 4.25%. Such a decision, besides being in line with maintaining price stability over the medium term, provides the appropriate conditions for boosting private demand at home.
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But let me stress one thing very clearly: it is BIS Review 134/2008 3 important that we get neither too zealous nor to indulgent about regulation. In times such as these, it is easy for opportunism to gain the upper hand, resulting in regulations that do more harm than good. For example, I am a little bit worried about where the discussion on procyclicality is heading. Suggestions have been made that both Basel-rules and fair value accounting standards should be relaxed to cut the banks some slack under stressed circumstances. In my opinion, this seems like a very hazardous way forward. I am also worried about what I in some instances have seen being proposed with regard to the regulation of credit rating agencies. In can agree that in certain aspects regulation in this area could be considered, for instance in relation to the use of credit ratings for regulatory purposes and also concerning some governance issues. But for me, it is quite hard to see how a more general regulatory intervention in this particular area could be justified. There seems to be neither any proof of an existing market failure, nor any convincing assessments on the benefits of imposing rules. On the contrary, as the credit rating business strongly builds on the confidence of those using the ratings, market mechanisms should be quite enough to provide an efficient output. If agencies cannot deliver qualitative and reliable credit assessments they will soon go out of business.
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The banks' increased dependency on financial markets to fund their operations also creates a need to keep an even closer eye on certain markets, and in particular the credit markets, which banks not only use for their funding needs but also to manage risks. The greater market dependency also entails the need to apply a greater international outlook in our analysis. Even if a country’s financial system is dominated by a few domestic institutions with limited operations abroad, they can evidently still suffer from the breakdown of institutions and markets elsewhere. However, a wider geographical focus is not only justified by the growing importance of markets. Over the last decade, institutions have also become more international. In Europe, for example, we now have a few truly pan-European banks and even more that operate across borders on a regional basis. Furthermore, in the last year we have seen that not only deposit-taking commercial banks can pose threats to financial system stability. Events in the US tell us that a broad array of other financial institutions, such as investment banks, monolines and the banks’ various kinds of special purpose vehicles have contributed to the build up of imbalances. Therefore, analytical focus is needed not only on commercial banks but also on their different counterparties. Another lesson for central banks I would say is to use their expertise to work more proactively on financial stability policy issues. The current crisis – as well as most historic ones – can partly be explained by regulatory failures.
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May I quote from my statement again; the interest rate decision “has been taken in a forward-looking perspective focusing on the medium-term trends in inflation and the compatibility of these trends with the Eurosystem’s definition of price stability.” That is something totally different from a “konjunkturgetriebene Politik”. Question (translation): Mr. Duisenberg, this interest rate move has turned out to be unexpectedly large. Do you believe that you are now at the limit which you can justify in terms of stability policy and how long will this interest rate remain in place if economic activity in the euro zone does indeed pick up in the second half of the year? Duisenberg: This is something we have, of course, considered in depth. We wanted the move to be as convincing as possible and we were afraid that a smaller move would only have led to further expectations for the future, that this would only be a first step in a series. We have by all means possible tried to avoid that impression. In very parochial words, I am inclined to say - and I cannot say “do not quote me” here, I realise that - but I am inclined to say that we moved from 3% to 2.5% which is maybe a slightly, unexpectedly large fall, but I would like to add, and now you be sure: this is it.
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We see a slowdown in economic development., We do not see, or do not yet see, a recession to be on our hands. So I will not speculate about what we would do if there really were a recession. We will cross that bridge when we come to it or, as my mother used to say: if the skies fall down, all the birds are dead. Interest rates in the United States are higher, but you have to realise that the United States is in a totally different phase of the cycle than we are and whether that will in any way induce capital flows to move differently from what they are moving today remains to be seen. And the third part of your question was, have we in any way made the conclusion that the banks, when the rate was 3 %, were not giving in enough to the demand for credit. No, on the contrary, as you know, the development of credit to the private sector has been quite buoyant over the past few months, although its bias of increase has come down somewhat. The last time I was here, I reported that credit to the private sector was growing at an annual rate of nearly 10%; the latest figure we have now is that it has come down to a rate of slightly over 9%.
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It includes a number of important recommendations to ensure that we are best equipped to take forward the next stage of the work, including how the Bank as resolution authority can gain the greatest leverage possible by using the supervisory machinery of the PRA to ensure firms prepare for resolution while respecting statutory obligations requiring structural separation of supervision and resolution functions. 11 Conclusion This transparency and public assurance should help in one other key respect. Effective resolution of a globally systemic bank will require cooperation and coordination between a range of authorities in a number of jurisdictions. These need to have confidence that an effective resolution - and one that treats all jurisdictions fairly - can be carried out by the home resolution authority. Absent that, they may need to take action that would frustrate a successful resolution for the bank as a whole. 10 Two further major pieces of the framework will be published shorty – our statement of policy setting out the requirements for internal MREL, and our final policy on valuations. 11 BRRD (DIRECTIVE 2014/59/EU) – Article 3 – states that there should be “Adequate structural arrangements … in place to ensure operational independence and avoid conflicts of interest” between the supervisors of firms and the resolution authority of firms when the two functions are carried out by same public authority.
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It ensures the robust collateralisation of the remaining net exposures through the margin taken from participants. And in the event of a default, any losses that exceed the defaulter’s collateral margin held by the CCP are mutualised between the members. As the Lehman experience illustrated, the centralised, rules-based management of a clearing member’s default by a CCP, combined with the incentives created by mutualisation enhance the system’s resilience and continuity during a stress and brings greater certainty to the default management process for market participants. Central clearing also brings greater transparency – in the run up to the crisis and during the crisis itself, authorities had very poor visibility over the network of derivatives transactions. That made it much harder to identify risks and the connections between institutions. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 2 Not all derivative contracts are suitable for central clearing. Where clearing is not possible, the post crisis reforms include similar requirements to margin and report bilateral derivative contracts. But the additional mutualisation and central default management benefits of central clearing, justify in my view, the authorities efforts since the crisis to move derivatives that are suitable for clearing onto CCPs. These efforts have been successful. Reforms since the crisis have led to a very substantial increase in the use of clearing services for both exchange traded and over the counter derivatives.
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Needless to say, had the debtor’s solvency and ability to pay been strictly used as the main consideration when granting credit, as proposed in the new law, this would have helped curb the runaway growth of credit before the crisis. At this point, it is worth asking where we currently stand in terms of ability to pay. We can see in the left-hand chart that, having peaked in 2007, the ratio between the price of housing and the median household income declined until 2012 and subsequently rose again after 2014. However, if we consider the red line, which represents the affordability of housing, we see that the instalments payable in the first year are currently slightly above 30% of monthly household income, in contrast to the level of over 50% reached in 2008. Admittedly, we need to treat these affordability data with caution. Since interest rates remain at historic lows, monetary policy normalisation in the medium term will inevitably have an effect on mortgage payments. 9/15 We should not forget that, although the proportion of fixed rate mortgages has recently reached 40% of all new transactions, 87% of the existing stock of mortgage loans remain linked to a variable rate, so that our mortgage market continues to be particularly sensitive to rising interest rates. Consequently, we take a positive view of the facilities to encourage conversion of variable to fixed rate loans introduced by the new law.
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Stock Markets enable firms to acquire the much needed capital at relatively lower cost, hence facilitating capital allocation, investment and growth. The stock market also plays a resource mobilisation role by encouraging savings through the purchase of equities that meet investors risk preferences and liquidity needs. The provision of information on the stock market and its activity such as contained in the CASE handbook is therefore one way of promoting investor awareness and participation on our local market. This will no doubt enhance the development of the stock exchange and its contribution to our economy. Chairperson, as you may be aware, the Government of the Republic of Zambia has been implementing a comprehensive Financial Sector Development Plan (FSDP) since 2004, whose main objective is to broaden and deepen the financial sector in Zambia. Under the FSDP, the need for a well-developed capital market as an engine for economic development is emphasised as it among other things would enable investors have access to a wide range of investment options. It is for this reason that the Bank of Zambia together with stakeholders introduced a number of initiatives aimed at further developing the capital market. This includes the introduction of long term Government bonds, which among other purposes, was aimed at providing an appropriate platform for pricing corporate bonds. Furthermore, the Bank of Zambia in collaboration with LuSE and Bankers Association of Zambia is in the process of extending the services of RTGS to settle stock exchange transaction.
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So, in other words, not only will banks get lower capital requirements in respect of lower risk credits; but they’ll also get lower capital requirements if they can demonstrate that they manage risk well. It is for this reason that Basel II might perhaps be better thought of not as the second “Capital Accord” but rather the first “Risk Management Accord”. Because it focuses attention not only on the more accurate measurement of risk, but on the management of risk. Banks looking to reduce their capital charge will have two choices: either reduce the risk, for example by substituting better risk credits for lower risk credits, or by reducing positions; or simply manage the risk better. And this will apply not only to credit risk. Again, to take the example of operational risk, banks will have the option of investing in more advanced approaches which will translate into lower capital charges. You may have noticed that I just mentioned banks having options, having choices. This is another key feature of Basel II. No longer will there be a “one size fits all” approach whereby banks of varying shapes and sizes are shoehorned into one inflexible system of capital charges. Instead, banks will be able to choose what approach they take; for example, whether they adopt the standardised approach or IRB approach for credit risk, and which of the various approaches to operational risk they adopt.
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Having said that, the HKMA will of course have its own views on what levels of sophistication of risk management we would expect to see in different types of banks. While we won’t mandate particular approaches, we will expect to see levels of risk management that are commensurate with the types and levels of risk being run. So, for example, we won’t necessarily expect even a large bank with significant credit risk to implement advanced IRB. But we would expect a bank of such a type to have a fairly advanced internal credit rating system. As another example, we would generally expect banks with a significant level of market risk to implement a models based approach to measuring the risk. BIS Review 31/2003 1 This flexible approach - in contrast to the approach being adopted by some other supervisors, who are mandating that particular approaches be adopted by particular types of banks - is, we feel, the most appropriate approach for Hong Kong. In Hong Kong we have a wide variety of banks, RLBs and DTCs. We have different nationalities. We have different sizes. We have banks that focus on the retail market, and ones that focus on the wholesale market. We have banks that specialise in mortgage lending, ones that specialise in SME lending, and ones that are jacks of all trades. It’s perfectly appropriate, therefore, that with such a wide variety of banks there should be a wide variety of credit risk management and other risk management practices.
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2 ...and have led to major differences between the banks, so now the framework will be changed... Around three years ago, the Basel Committee published several reports where they analysed several globally-active banks’ capital requirements calculated using internal models.3 One conclusion from the work was that there are major differences in the banks' risk weights that cannot be explained by differences in underlying risk. As a result of this, among other things, the Basel Committee has discussed reducing the degree of freedom given to the banks with regard to some of the models. This concerns, for instance, the banks’ exposures to large corporates and other banks. In addition, they have discussed further measures in the framework for the banks’ internal models to reduce the differences in risk weights and capital requirements 2 See Finansinspektionen’s report ”Stability in the Financial System, December 2014”, http://www.fi.se/upload/43_Utredningar/20_Rapporter/2014/stab2_2014ny.pdf 3 See for instance the BIS publication “Analysis of risk-weighted assets for credit risk in the banking book”, http://www.bis.org/publ/bcbs256.pdf 6 [12] between different banks. Let me make myself clear here. There is no doubt that the banks’ internal models will continue to be an important component when determining the banks’ capital requirements. The constraints I have mentioned here will, if they are introduced, limit the banks’ freedom with regard to using internal models. At the same time, they will increase confidence in the banks’ capital levels and make it easier to compare the banks.
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This regulatory framework was incorporated into Swedish law and in many other countries at the beginning of 2007. One of the main differences with regard to Basel I, was that Basel II made it possible to apply different methods to calculate risk-weighted assets and capital requirements. As you probably know, some banks were able, after approval by the financial supervisory authority, to use so-called internal models to calculate their risk-weighted assets. This reform was intended to increase the link between the banks’ capital requirement and their actual risks, which was also largely the case and thus generally improved the banks’ risk management. 4 [12] However, the use of internal models also entailed a risk that the banks’ calculation of the capital requirements would not reflect the actual conditions. The risk that the banking system would not have sufficient capital to manage the risks arising from the banking operations thus increased. As the banks themselves were given the opportunity to influence their capital requirements, their incentives to underestimate the risks and thus reduce the capital requirements, increased. It is also difficult to determine how much capital a bank actually needs to manage a crisis situation. Soon after the Basel II Accord had been reached, the major international financial crisis broke out with the bankruptcy of the US bank Lehman Brothers. It then became clear that many banks lacked sufficient resilience to the sudden changes in the financial markets.
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But ultimately, it is the repo rate’s effect on overall economic development and the prospects for inflation that are the decisive factor for monetary policy. I would also like to point out that household indebtedness in a broader perspective constitutes a vulnerability for the Swedish economy, as households with large debts are not just sensitive to higher rates but also to other types of changed economic circumstances, such as falling housing prices and weaker economic activity with higher unemployment. 15 A study by the IMF from 2017 with data up to 2012 indicates that saving among Swedish households is very unevenly distributed; for example, the 50 per cent of households with the lowest income do not save at all. See IMF (2017), “Sweden: Selected Issues”. 11 [13] Several factors can affect our forecasts – no “auto-pilot” towards higher interest rates So far, I have talked about the Riksbank’s monetary policy in terms of our best assessment or main scenario. But, as the world-famous physicist and Nobel Laureate Niels Bohr is reported to have said: “Prediction is very difficult, especially if it’s about the future”. We have most certainly not switched on an “auto-pilot” towards higher interest rates. As always, we are prepared to reassess monetary policy if developments were to justify it. So, what factors could affect our forecasts and future monetary policy? We can divide them into four different categories: economic developments abroad, the domestic economy, the development of inflation and structural changes.
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But obviously, it is also important for us to continuously assess how the Riksbank’s earnings will be affected during the course of the journey. This is something we have discussed in different contexts. 4 Our latest estimate indicates that the effect on earnings from the bond holdings could be quite close to zero seen over the entire holding period. But how earnings will be ultimately affected depends on how the interest rate develops in the future. Can households cope with higher interest rates? Swedish households current have record-high debts in combination with a large proportion of variable-rate mortgages (see Figure 7). As you are no doubt aware, the Riksbank has been concerned for many years about the high level of household indebtedness and the potential negative effects on the Swedish economy of rising interest rates or falling house prices. 5 From our horizon, it is therefore important to carefully analyse the interest-rate sensitivity of households. We have also returned to this issue on a number of occasions, most recently in the Monetary Policy Report in December. 6 4 See, for instance, “The Riksbank’s bond purchases affect government finances”, speech by Martin Flodén on 9 November 2016. 5 For example, we published an extensive inquiry into the risks on the Swedish housing market as early as in the spring of 2011. See Sveriges Riksbank (2011), “The Riksbank’s inquiry into the risks on the Swedish housing market”. 6 See “How are household cashflows and consumption affected by rising interest rates?” article in Monetary Policy Report, December 2018.
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By handling more financial flows, a centre will be able to further improve and innovate on its risk management capability. The process is interactive and there would be a clustering effect once a centre has established the leading position in risk management and client servicing. 5. Here I should mention several important developments in the last decade that are highly relevant and instrumental to Hong Kong’s rise to become the risk management hub in Asia. Internationalisation of Renminbi (RMB) 6. From 2009 onwards, Hong Kong has rapidly developed into the biggest offshore hub for RMB businesses in the world. Hong Kong is the source of around 50% of the global offshore 1/4 BIS central bankers' speeches RMB liquidity. On average, Hong Kong’s RMB Real Time Gross Settlement system clears and settles over RMB1 trillion a day. Moreover, over 70% of the global RMB SWIFT settlement goes through Hong Kong. All these figures suggest that Hong Kong is already the largest centre for RMB loans, Dim Sum bond issuance and RMB-related products and financial derivatives. The availability of a wide range of banking products, investment and hedging instruments in Hong Kong has made us the undoubted leader in risk management in the offshore RMB market. Stock Connect 7. The launch of the Hong Kong-Shanghai Stock Connect in 2014, followed by the Hong KongShenzhen Stock Connect in 2016, has opened up the most important part of the Mainland capital market to the world’s investors through Hong Kong.
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The northbound Stock Connect has presented a huge opportunity for Hong Kong to develop risk management capability for understanding of the risks and the pricing of such risks for offshore investors interested in the A share markets. Apart from helping to channel foreign investments into the Mainland market, the Stock Connect has also contributed to the inclusion of bigger weights of A shares in the global stock market indices such as the MSCI. Asian Equity Derivatives Hub 8. Another recent trend that is relevant is that several international financial firms have decided or are planning to relocate their Asian equities derivatives booking hubs from Europe to Asia. This is very logical as the underlying securities and clients are based in Asia. The HKMA welcomes these moves and stands ready to facilitate such moves, on the condition that the booking business must be accompanied by the necessary risk management functions. Again, this will enhance Hong Kong’s position as the risk management hub for Asian equities and derivatives, particularly Mainland related stocks. Bond Connect 9. By the same token, the launch of the northbound Bond Connect in 2017 has opened another window of opportunity for Hong Kong to enhance its risk management functions for offshore investors wishing to invest in the Mainland bond market. It is still early days yet, but I am confident that Bond Connect offers attraction to those investors who prefer using a nominee holding structure through the Central Moneymarkets Unit of the HKMA.
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I would like to offer some observations, from my perspective at the Federal Reserve Bank of New York, on some of the broad considerations that should guide this process. Changes to the structure of the U.S. financial system It is useful to start with a brief review of the changes in the structure of the financial system that should motivate reform. Our system was once organized around banks—defined narrowly as institutions that take deposits and make loans. Over time there has been a gradual but pronounced decline in the BIS Review 95/2008 1 share of financial assets originated and held by banks, and a corresponding increase in the share of financial assets held across a variety of non-bank financial institutions, funds and complex financial structures. The lines between banks, investment banks and other institutions have eroded over time, as have the lines between institutions and markets. Loans made by both banks and non-banks were increasingly sold by the originating institution and packaged into securities. And these securities were repackaged into even more complex instruments and products, many of which resided off the balance sheets of the major financial institutions. Innovations in credit derivatives over this period made it easier to trade and hedge credit risk. Access to credit was extended on a dramatic scale to less creditworthy borrowers, without a commensurate increase in the risk premiums on the securities that embedded this more risky credit.
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A second basic conclusion is that, if the economy is close to the effective lower bound, it is vitally important to adopt especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched. In turn, this may also imply a transitory period in which inflation is moderately above target. In particular, the review identified forward guidance, asset purchases and longer-term refinancing operations as instruments in the monetary policy toolbox that can help to address the constraint of the effective lower bound on policy rates. At its 21 July monetary policy meeting, the Governing Council revised its forward guidance on policy rates in line with this new strategic orientation. In particular, the new forward guidance specified three conditions that need to be met before we would start raising our policy rates. The first condition is that the Governing Council “sees inflation reaching two per cent well ahead of the end of its projection horizon.” The second condition is that the two per cent target is reached 1/2 BIS central bankers' speeches “durably for the rest of the projection horizon.” The third condition is that the Governing Council “judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term.” Let me highlight today two key features of this rate forward guidance.
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This came as a specific response to the perceived high private costs of restrictions relative to the perceived social benefits – again, in a reversal of the Weitzman calculus from the early 1930s. As with size, the effects of liberalisation on banking concentration were immediate and dramatic. The share of the top three largest US banks in total assets rose fourfold, from 10% to 40% between 1990 and 2007 (Chart 2). A similar trend is discernible internationally: the share of the top five largest global banks in the assets of the largest 1000 banks has risen from around 8% in 1998 to double that in 2009. This degree of concentration, combined with the large size of the banking industry relative to GDP, has produced a pattern which is not mirrored in other industries. The largest banking firms are far larger, and have grown far faster, than the largest firms in other industries (Chart 3). With the repeal of the McFadden and Glass-Steagall Acts, the too-big-to-fail problem has not just returned but flourished. In the light of the Great Recession, and the large apparent costs of too-big-to-fail, does Weitzman’s cost-benefit calculus suggest there is a case for winding back the clock to the reforms of the Great Depression? Determining that requires an assessment of the benefits and costs of restrictions. The benefits of prohibition The potential benefits of restricting activity in any complex adaptive system, whether financial or non-financial, can roughly be grouped under three headings: modularity, robustness and incentives.
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For example, the National Payments Systems Act was enacted in June 2007, while Access Bank, the fourth largest bank in Nigeria is expected to open a branch in the country by July 2008, raising the number of commercial banks to 14. 2.6 Capital market developments The Lusaka stock exchange performed remarkably well, market capitalisation increased by 45.0% to K18,872.9 billion compared to the increase of 13.9% in 2006. The Lusaka All Shares index almost doubled, rising by 92.9% to close the year at 3,533.52 points compared to an increase of 47.7% in the previous year. This robust performance was a reflection of strong macroeconomic fundamentals in the economy and positive investor expectations in the growth and earnings prospects for both listed and quoted companies. Government introduced 7, 10 and 15-year bonds to help deepen the financial markets in 2007. Foreign investments in Government securities rose to K830.5 billion as at December 2007 from K539.8 billion recorded end-December 2005, an indication of the rising confidence in the economy. 2.7 Fiscal developments On the fiscal front the Government is expected to limit domestic borrowing to 1.2 percent of GDP in 2008. By reducing levels of government borrowing and enforcing prudent budget execution, this should result in greater mobilisation of domestic resources and effective coordination with the monetary authorities. Zambia has articulated its long-term development objectives in the National Long Term Vision 2030, which is aimed at raising Zambia to a middle income status by 2030.
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François Villeroy de Galhau: Parisian momentum Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Bloomberg "Future of Finance" Paris forum, Paris, 9 May 2023. *** Ladies and Gentlemen, It is a great pleasure for me to give this keynote address at the first Future of Finance – Paris forum organised by Michael Bloomberg and his team. After the first panel, which gave precious insights on how Paris can lead the way in the reshaping of financial markets, it will cover the whole range of most topical issues. This first Bloomberg forum in Paris is more broadly a very timely and welcome initiative, which echoes financial players' growing interest for the French capital. Paris has indeed kept asserting itself as a major financial centre over the last few years, and stands out as unique in the network of European financial centres. I can only invite you to read the excellent Bloomberg article published on 18 April, which perfectly captures this multifaceted trend.1 Its title, Banks betting on Paris say there is life after London, should bring definitive reassurance to other banks, and encourage them to make the same winning bet.
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What is more, in general French and European banks benefit from rising interest rates thanks to their diversified model, their broad deposit base and their large loan portfolio. We have in the euro area no "Sorgenkind" or "problem child", such as Crédit Suisse. As President of the French prudential authority (the ACPR), I can in particular attest to how solid French banks are nowadays. Whatever your field of activity, you will therefore find in Paris a convenient and safe harbour, with all facilities and fast connections to other major cities, in Europe and beyond. It has also attracted regulatory bodies, which can only be viewed as comforting neighbours after recent turmoil elsewhere. The EBA (European Banking Authority) moved to Paris in the wake of Brexit, thereby joining ESMA (European Securities and Markets Authority). Having a "regulatory hub" will facilitate cooperation between European agencies, in a world that requires such enhanced cooperation between authorities. Allow me to conclude with two topics you'll touch in your discussions this afternoon. As regards technology / innovation in the financial industry, you are all aware that French national regulators are recognised for their credible action and for being at the cutting edge of technological developments. I would also like to highlight one course of action at the Banque de France.
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The Riksdag has decided that an inquiry shall be made, and hopefully this work will begin soon. Natural explanations for Sweden’s current account surplus With regard to the third of the challenges – the changeover from exports to domestic demand or vice versa – one can note that Sweden is one of the countries with large current account surpluses. This has in principle been the case since the previous crisis at the beginning of the 1990s. However, the surplus is hardly the result of a deliberate policy to build up a strong external position. The fact that we are saving as much as we are is partly due to our public finances being in good order and partly due to commercial decisions in the private sector. Nor have we tried to benefit exports by holding our currency artificially low. We conduct inflation targeting, and the exchange rate is simply left to its own devices. There are thus natural explanations for our current account surplus and there have not been any strong requests from abroad for us to reduce it. So really, one can say that the third challenge does not have any direct implications for Sweden, either. The forecast and the interest rate decision It has thus become increasingly clear that the Swedish economy is growing strongly. Many indicators of developments in the real economy are now at very high levels and GDP outcomes have been surprisingly strong. How do we see developments in the coming period? And what monetary policy is needed now?
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Ingimundur Friðriksson: The Central Bank of Iceland and monetary policy Speech by Mr Ingimundur Friðriksson, Governor of the Central Bank of Iceland, at a civic club meeting in Reykjavík, 12 February 2003. * * * In recent years substantial changes have been taking place in central banking in many parts of the world. The main reason is the gradual acceptance of the view that it is natural to anchor central bank monetary policy to a single main objective. Simplified objectives were therefore set for central banks and they were granted greater independence to apply their monetary policy instruments, while more stringent demands were made regarding transparency of monetary policy and central banking activities, and accountability to the government and general public. As a rule, simplification of central bank objectives involved defining a single main objective, i.e. to promote price stability. Central banks were often also assigned a second objective, namely to promote the security of financial systems, or financial stability. Price stability was made the main objective of monetary policy because inflation is above all a monetary phenomenon. There is little point in setting an objective for monetary policy which it cannot attain. Applying monetary policy in order to achieve price stability also contributes to economic stability. This, in turn, provides a basis for the economy to be able to achieve lasting growth and make the most efficient use of its scarce resources. The year 2001 was an eventful one in the history of the Central Bank of Iceland.
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Key rates have been raised in a number of countries, and market participants expect further interest rate increases. Key rates remain low among many of our trading partners. Market participants expect a gradual increase in key rates in the period ahead, both in Sweden and the euro area. In the US, the key rate is expected to increase by a further 50 basis points before peaking. In the UK, the key rate is expected to remain virtually unchanged in the period ahead. Long-term interest rates are also low in most other countries. Oil prices have risen markedly over the last couple of years. Growth in global oil demand is expected to approach 2 per cent in 2006. This is in line with expected growth in supply from non-OPEC countries. On the whole, this supports the view that the price of oil will remain high. Futures prices indicate that the price of oil may remain above USD 60 per barrel for the next few years. High growth in the global economy also contributed to a further rise in prices for other commodities. This increase has continued in 2006. In spite of a slight decline recently, metal prices have increased substantially in recent months. There has also been a pronounced increase in futures prices, indicating expectations of a sustained upward movement in metal prices similar to that of oil prices. High commodity prices have contributed to somewhat higher head-line inflation, but so far underlying inflation has not risen.
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As the Eurosystem, we stand ready to take part in initiatives on issues falling within our fields of competence. I should like to end my remarks here. However, before I do, let me once again express my gratitude for being invited to give this lecture today. It has indeed been a great honour, in particular in view of Governor Zolotas’ long and distinguished career at the Bank of Greece. BIS Review 113/1999 6
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The main contribution of the public sector to growth no longer comes through its expenditures, but through the role it undertakes as a strong supervisory and regulatory agent in the framework of good governance principles and also from its policies focusing on the goal of increasing competitiveness. The public sector’s need for borrowing from financial markets declined due to tight fiscal policies, which provided the private sector the opportunity to find lower-cost and longer term resources. Another change observed in growth dynamics in line with the structural transformation in the economy is that productivity increases have become the most significant factor in growth. The cumulative productivity increase in the private manufacturing industry for the period between 2001 and the first quarter of 2006 reached 35 percent. While the said productivity increases support the growth process on the one hand, they improve the quality and contribute to the sustainability of growth on the other. BIS Review 89/2006 7 The last issue I will touch on about growth factors has to do with the increased level of integration of the Turkish economy with the world. In this framework, exports, which rose by 151.5 percent cumulatively from 2001 to July 2006, made a critical contribution to the rapid growth observed for the last four years. Domestic and foreign competition, which increased due to the increased number of firms that took up export activities and entered international markets as a result of integration with the world, led to a decrease in profit margins in these sectors.
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In the framework of the exchange rate policy that I have mentioned earlier in detail, developments in the foreign exchange market are monitored carefully by the Central Bank as they have a direct impact BIS Review 89/2006 5 on inflation and constitute an important part of financial stability. In this scope, I would like to briefly analyze the fluctuations in financial markets. In the period between the beginning of May - when fluctuations started - and the end of June, the Turkish lira depreciated by approximately 29 percent. What triggered the rapid depreciation of the Turkish lira was the change in international liquidity conditions against developing countries. Global risk perceptions changed along with expectations that the central banks of developed countries would tend to increase interest rates, and global liquidity abandoned developing countries and shifted to developed countries. Along with all developing countries, Turkey was significantly affected by the changes in international liquidity conditions, as well. The impact observed in Turkey was stronger compared to other countries because the domestic risk perceptions about inflation, current account deficit and political issues increased in this period. As a result of these impacts, capital outflow took place over a two-month period. At this point, it should be underlined that a major part of the said outflow was met by the foreign exchange sales of residents. The process of structural change in the Turkish economy, in other words, the background of the steps taken to strengthen macroeconomic fundamentals and to normalize the economy took only five years.
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Noyer: There was probably during the period of time that preceded the crisis an excessive belief that the combination of the growing importance of emerging economies, which brought a disinflationary force in the manufacturing sector, and the credibility attained by central banks globally had created a world where inflation could be kept at bay quite easily. There was insufficient focus on some of the effects of low interest rates for a long period, like the fact that it facilitated asset bubbles and asset bubbles may lead to burst bubbles and economic and financial crisis or the transmission into pressure on inflation. We’ll probably be more attentive in the future. WSJ: The ECB has upped its vigilance on inflation in the euro zone, but if interest rates were to b e raised earlier than expected, it could be a problem for countries in the periphery that depend on the ECB’s support through its bond-buying program. Would it be possible for the ECB to raise rates to address rising inflation in core countries while keeping nonstandard measures in place to prop up peripheral states? Noyer: Generally speaking, it is technically feasible. I am not signaling that we are going to raise interest rates. As a matter of fact we have done a lot to start unwinding nonstandard measures. Excess liquidity in the euro-system has decreased dramatically and the situation has normalized. Now the market is working much better.
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It’s useful that governments look into that and look at the various tools that could be effective and which could correspond to the various goals that they want to pursue, including making sure that the policies followed by member states receiving EFSF support are aimed at restoring a sound fiscal and the appropriate competitiveness. 2 BIS central bankers’ speeches
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This brings me to the final topic of my talk, that of regional economic and financial integration in Asia. Under ASEAN economic community (AEC), the region’s prospects will be much enhanced by further integration efforts to foster freer international trade and more mobile movements of factors of production. Four broad facets of regional connectivity are expected to contribute to ASEAN economic growth and stability. First, with barriers to trade in goods and services brought down, there will likely be a substantial expansion in intra-regional demand. This increasing role of intra-regional trade in final consumption goods should provide the region with a potential source of resiliency against global demand shocks. Second, higher mobility of factors of production and crossborder infrastructure development can help unlock the tremendous potential of the region by removing supply-side constraints and bottlenecks to growth faced by individual countries, while also making best use of resources and comparative advantages through regional and global supply-chain networks. Third, through closer ties of financial and capital markets, ASEAN countries stand to benefit from tapping the vast pool of Asian savings, to finance intra-regional investment activities. This will prove particularly valuable given that many ASEAN countries are currently in much need of investment to lift their potential rates of growth after a prolonged period without largescale upgrading.
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The good news however is that despite this and other serious challenges, the country was able to maintain macroeconomic stability at a reasonable level. The balance of payments recorded a surplus; the exchange rate, which in the years 2001 to 2004 had depreciated by approximately 5.9 per cent per annum, depreciated by only 5.2 per cent during 2006; a comfortable level of reserves was maintained; Government revenue and fiscal deficit targets were achieved as planned; the outstanding Government debt to GDP ratio declined; investor confidence remained high; a remarkable increase was seen in foreign direct investments (FDI) and for the first time, the yearly FDI exceeded US dollars 500 million; foreign portfolio inflows into the Stock Market increased substantially; the share indices recorded its highest ever levels; the government was able to mobilise around US dollars 1.2 billion in loans and grants from bilateral and multilateral donors and commercial sources. But we have to admit that not everything was rosy. There were a few down-sides and draw-backs too. Inflation began to rise since April due to higher than expected monetary expansion, some revisions to administered prices and escalating vegetable prices. In response, a tight monetary policy stance was adopted to curtail high growth in monetary and credit aggregates and it is likely that such measures would lead to the moderation of the rising inflationary pressures, and reflect a downward trend from April 2007 onwards.
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While the financial aspects are important, we should inspire our young recruits on the underlying values of the industry and capitalise on the noble objective of providing protection and managing risk for our people. Takaful for example, is built upon the spirit of brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants. Drawing talent that shares the same values will ensure commitment and support talent retention in the industry. When the general public interact with the industry, with highly motivated staff, it will sow confidence and consequently trust. Refrain from making false promises, make clear the terms and conditions up front In building trust, a huge responsibility lies now on intermediaries playing their role, as intermediaries’ behaviour mirrors the image of the insurance and takaful industry. Many consumers are not well versed with insurance and takaful terminology and will rely on the advice rendered and the full disclosure of the policy terms and conditions. This low degree of familiarity with insurance and takaful terms makes it even more crucial for the full disclosure of the terms and conditions governing a policy. An important consideration is the role of intermediaries being the ‘first point of contact’ with the public. Intermediaries create an impression, powerful enough to influence a customer’s decision whether or not to engage in an insurance contract.
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Back office operations, important as they are, can prove distracting in managing a financial institution, where the focus should firmly be on the heart of the institution's business. Outsourcing arrangements can lighten the load of such a burden and these operations can often be performed more effectively and efficiently by skilled outsourcing providers than if performed in-house. Ladies and gentlemen, The essence of a successful outsourcing arrangement rests on the institution's overall strategy. In executing a successful outsourcing strategy, the various risks involved have to be recognised and mitigated. Controls and effective oversight on the external parties have to be put in place to ensure that there is no over-reliance or loss of an institution's control. Clarity on roles and responsibilities is paramount. Outsourcing strategies which maximise rewards and minimise risks can prove invaluable to an institution in enhancing its competitiveness. Therefore, a key to this is to conceptualise the outsourcing approach and early identification of the gains and pains that may arise. Bank Negara Malaysia , in our efforts towards facilitating the development of stronger and more focussed institutions in the financial sector, will endeavour to reconsider any regulatory barriers deemed to be impeding the outsourcing arrangements of banking institutions and insurance companies in the future. Our only wish is that the outsourcing arrangements should not in any way affect stability in the financial system. On that note, I wish you a productive and successful forum. Thank you. 2 BIS Review 133/2007
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In other words, people might implicitly be assuming that less debt would necessarily mean greater net wealth. If that’s really what’s being asked – would we be better off if we were all better off? – then the answer’s obvious. But most debt, including the significant majority of household debt, is used to buy or finance assets. It’s true that, in principle, easier credit conditions could result in higher consumer spending, a lower rate of saving and therefore a slower rate of accumulation of net wealth. “Debt-fuelled consumption” is certainly possible. It’s just that, taken in isolation, the numbers on household debt don’t really tell you that much about that process. At least excluding car and student loans, unsecured household debt is no higher than it was 25 years ago, relative to income. Mortgage debt is still well above those levels. This is the inevitable result of the boom in house prices in the early years in the last decade, itself caused by the preceding decline in the neutral rate of interest. The counterpart to the faster mortgage growth wasn’t higher consumption but a transfer of financial wealth to those trading down the housing market (largely from younger to older people). And, to complete the circle, the decline in the neutral rate of interest, from extremely high levels in the early 1990s, makes a given quantity of debt more affordable. I’m not claiming that higher debt involves no extra risk at all.
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Nevertheless, this does look to be a case where rapid growth has gone hand-in-hand with loosening supply and rising risk. In the concluding section I’ll make some brief points about policy. The superior predictive power of debt growth What we saw in Charts 3 and 4 was that, at least in that 17-country sample, prior growth rates of debt were better predictors than levels of a country’s economic performance after the last financial crisis. Even if they went into the crisis with relatively high levels of gearing, countries with below average growth rates of debt had a less severe experience after the event. A much more complete study by economists at the Bank, based on the experience of 26 advanced economies over many economic cycles, dating back 50 years, found very similar results.3 Charts 7 and 8 are one way of expressing those. They show what you might expect of a country’s relative economic performance during a recession if, based on these results, you knew only that aggregate debt: income ratios beforehand were 10% points higher than the average and then if the growth in that ratio was 10% points higher. The second has proved much more informative than the first. 3 Bridges et al. (2017).
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Panicos Demetriades: The pros and cons of having a separate and independently managed asset management and development bank Welcome remarks by Mr Panicos Demetriades, Governor of the Central Bank of Cyprus, at the Institute of Directors (IoD) Open Panel Discussion, Nicosia, 27 August 2013. * * * Good evening ladies and gentlemen. I think tonight’s panel discussion is very important. The Bank of Cyprus is our largest bank and it will shortly hold its Annual General Meeting. At the AGM shareholders will choose the Board that will run the bank. The strategy that the new Board approves will need to be aggressively pursued. The Bank of Cyprus in the future will have a greater focus on its core Cypriot business, serving personal, SME and corporate customers. It will also have to deal with the legacy of historic expansion and growth in non-performing loans. The Central Bank of Cyprus does not have a fixed view as to whether the Bank of Cyprus should be split into two or not. This is a decision for shareholders and the Board. The question is whether separating certain assets is the right answer today. Opinion is divided – some say that this would be damaging to borrowers, others that it is the only way to manage the assets and restore the bank to health. I believe that we need to confront this issue and the bank should investigate all options. Any decision should be based on the facts and merits.
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Leong Sing Chiong: Remarks - Official Opening Ceremony of the FM Global Centre Remarks by Mr Leong Sing Chiong, Deputy Managing Director (Markets & Development) of the Monetary Authority of Singapore, at the Official Opening Ceremony of the FM Global Centre, Singapore, 8 November 2022. *** Thank you, Mr Malcolm Roberts, Distinguished Guests, Ladies and Gentlemen, Good morning. It is a pleasure to join you at the official opening of the FM Global Centre. 2 The launch of the FM Global Centre is yet another significant milestone in FM Global's long and rich journey with Singapore. Since 37 years ago, the Singapore office has grown significantly, and became the Asia Pacific Headquarters for FM Global in 2019. Today, it provides commercial property, risk advisory and engineering solutions to over 400 clients, across 36 markets in Singapore and the region. The Global Centre is the second biggest centre, outside of the US. 3 The choice of Singapore to house the FM Global Centre is very timely, and is reflective of two key factors. First, strong growth prospects. Asia's property insurance industry is projected to grow from $ billion in premiums in 2020, to almost $ billion in 2025.1 This is due to continued commercial expansion and infrastructure development as part of the region's growth. Second, it also reflects Asia's growing need for natural catastrophe and climate risk financing solutions, given the region's significant exposure to climate risk.
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The financial sector will have to push ahead with regulatory adjustments and manage the transition to new business models, while in manufacturing, digitalisation is going to be a particular focus of attention. Our country’s future welfare depends critically on how well we master these challenges. Page 3/5 Berne, 15 December 2016 Thomas Jordan News conference Exchange rates, interest rates and inflation expectations I will now review changes to monetary conditions since the middle of the year. The last half year has been shaped by the surprising outcomes of a number of political events. The Brexit decision led to a significant devaluation of the pound sterling and generated upward pressure on safe-haven currencies. Thanks to our willingness to intervene in the foreign exchange market, we were able to cushion the effect of the additional pressure on the Swiss franc, which can often build up in such phases of increased market volatility. Equally, neither the US elections nor the Italian constitutional referendum caused any significant changes in the value of the franc overall. On a trade-weighted basis, the real external value of the franc hardly changed over the course of the year. An analysis of nominal exchange rates since our last assessment in June shows that the franc has appreciated slightly against the euro. Against the dollar, meanwhile, it has depreciated somewhat.
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One reason for the appreciation of the US dollar against the Swiss franc and most other currencies is the substantial increase in long-term interest rates in the US, particularly following the presidential election. Long-term yields on Swiss Confederation bonds have also risen, but yield increases have been less pronounced here than in the US. The interest rate differential with the US has thus widened. Short-term rates in Switzerland are virtually unchanged, with the yield curve steepening as a result. Inflation expectations in Switzerland remain stable. Most households, companies and financial analysts anticipate that inflation will be slightly positive in the short to medium term. This view is substantiated in the surveys conducted by the SNB’s delegates for regional economic relations. Despite weak inflation in recent years, long-term inflation expectations have changed very little and remain firmly anchored in the range which we equate with price stability. Monetary policy outlook Ladies and gentlemen, let me summarise my key points. Even in times of turbulence such as those witnessed in the last six months, our monetary policy has proved its worth. The negative interest rate has partially restored the traditional interest rate differential with other currencies and has thus made Swiss franc investments less attractive. During periods of high volatility, our willingness to intervene in the foreign exchange market has a stabilising effect on the exchange rate.
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Lastly, private bankers must also bear in mind that there is a very wide range of sophistication and investment experience among private banking clients from Mainland China. So private banks must ensure that their account managers take extra care in offering investment advice and marketing investment products to the less sophisticated clients. Ladies and gentlemen, private banking is just a special type of banking: it is all about trust and service. It takes a private bank many, many decades to build up trust, but such trust can be destroyed overnight. My vision, which I am sure is shared by many of you, is that Hong Kong will become the most competitive and dynamic private banking hub in the region in the years to come. This is a highly achievable aspiration if both the industry and the regulators work closely together to develop, nurture and protect the reputation of the private banking industry as well as the professionalism and ethical standards of its practitioners. Thank you very much. BIS central bankers’ speeches 5
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The first implication should not be of excessive concern as long as the unemployment rate remains low, which is the case for Thailand. This is because the market mechanism will allow efficient adjustment as uncompetitive firms have to either upgrade themselves, or close down and free up labor resources to more competitive firms. This reallocation process implies that the country makes a better use of labor resources and should therefore yield higher productivity. At present, Thailand’s unemployment rate hovers steadily around 1 percent despite strong baht appreciation in recent years. In the meantime, export growth has remained robust with a swift recovery from the global crisis. These developments possibly indicate that our export sectors have adjusted themselves well and labor resources are being allocated more efficiently. In line with this view, the baht appreciation has somewhat catalyzed the adjustment of Thai economy to a more efficient use of labor resources. In fact, Thailand has continued to face a shortage of labor supply and has to employ immigrant workers from neighboring countries. This tight labor market phenomenon creates incentive for firms to shift factor of production from labor to capital. This shortage of labor will then accentuate my second implication of a strong baht, since the shortage of labor, in addition to cheaper capital goods in baht term, gives incentive for investors to make imported-capital investments. This is the part where the private sector role is essential, especially as Thailand has benefited from immense foreign direct investment in which Japan played the top role.
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On the demand side, the relative importance of China and the US in powering the world economy may help to explain why world oil demand grew quite so strongly relative to world GDP last year. This year, however, the sharp rise in prices owes at least as much to supply factors. Allowing for these caveats, this is still a much stronger world economic background than, say, 2001. But there are several important risks to this outlook. The first concerns oil prices. So far the world economy has apparently taken a tripling in oil prices in its stride, thanks to the much lower oil intensity of output, and the greater flexibility in labour markets, in most advanced economies compared with a generation ago. It is also true that the short term capacity of oil producing countries to spend their increased revenues is now much greater than it was in the 70s. This helps to explain why consensus forecasts for world GDP growth next year have remained remarkably steady. But there is a very high level of uncertainty about future oil prices. Judging by the oil futures curve, the central view is that prices are likely to remain high, at around $ per barrel for the next few years at least. This is in contrast to 2000, when the oil futures curve was downward sloping. But the range of current Consensus forecasts is very wide – from around $ and $ per barrel.
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Oil supply is traditionally slow to respond to changing prices – lead times for developing new fields are often around 3-7 years; and there are constraints on refinery capacity which may influence petrol prices. This is bound to have implications for the UK and for our European markets. Over the past decade, we have benefited from the downward pressure on imported goods prices exerted directly and indirectly by low cost production in Asia. Even if these trends continue, as in principle they could for some time, it is becoming increasingly clear that consumers may also need to contend with upward price pressures as world energy markets adapt to meet the needs of emerging Asia. The second key area of risk is global imbalances. These pose risks to foreign exchange markets and to world activity. Higher oil prices have intensified the scale of the problem. Yet we seem no closer to a denouement – indeed, as the US current deficit topped 6% of GDP, the dollar has tended to strengthen. What does this mean for the UK? I find it extremely hard to predict how sterling’s effective rate would be affected, were there to be a major re rating of the dollar. But a resolution of global imbalances which was accompanied by global recession would represent a major challenge for us – one to which, I suspect, we are now less well placed to respond than we were in 2001.
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And the culprits would be the handful of hedge funds having little or no interest in Hong Kong, not to mention in our well being, other than it being a free market which they can manipulate and from which they can take money, somewhat like an ATM machine, as others have put it. The HKSAR administration is run by people who have put Hong Kong on the map as the freest economy in the world. It is clear to us that there are, again quoting my great teacher Sir Philip, “imperfections in the operation of the market mechanism”, possibly leading to “economic inefficiency” and “social distress”. So the administration decided to intervene to deter currency manipulation, to get rid of the unnecessary and unfair pain that has been inflicted on the community as reflected in the currency manipulation interest rate premium, and to avoid market adjustments overshooting in panic into an uncontrollable tailspin. Consistent with Sir Philip’s view that interventionism should be “relevant to the maintenance of economic stability in Hong Kong”, and with Exchange Fund Advisory Committee backing, Financial Secretary Donald Tsang Yam-kuen made the order to intervene in the free play of market forces. There has been no departure from the long established policy of positive non-interventionism that has served Hong Kong so well in the past. Those who think that we have so departed should try and refresh themselves of what this policy really means. And no one needs to take my word for it.
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And the reforms do pay off: the remarkable labour productivity growth performance in some network industries in Europe over the last ten years provides a perfect example of the positive impact on labour productivity growth of easing regulations and fostering competition. For example, in the telecommunication sector which was largely liberated in the course of the 1990s, hourly labour productivity grew on average by 8.5% in the euro area over the period 1996-2003 compared to 6.9% in the US. The euro area HICP index for telecommunications fell by 35% relative to the overall euro area HICP index in the period 1998-2005. The third prerequisite for higher growth in the euro area is the unlocking of business potential by creating an entrepreneurial-friendly economic environment. This includes lowering costs imposed by public sector administrations for existing firms and business start-ups. Let me illustrate this with some figures. According to the World Bank, in 2004, the average cost of starting a business with up to 50 employees in the euro area (excluding Luxembourg) is estimated to have been around ten times larger than in the US 12 . The policy implication of lowering business regulation is that EU countries can help to raise economic growth by avoiding an excessively restrictive regulatory environment for firms. The immense importance of this issue is increasingly appreciated by European governments and several initiatives at national or EU level have started to implement actions for a “better regulation”.
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I believe that we can enhance our levels of productivity by maximizing knowledge, especially in the subject of finance. Over these three days, a total of 100 booths will be featured during this carnival, each offering a variety of finance-related activities and opportunities. This includes facilities to open a bank account, assistance in loan applications, CCRIS checks, debt management advice (by AKPK and the Small Debt Resolution Scheme), platforms that allow consumers to seek redress solutions, opportunities for innovative SMEs to submit business proposals as well as group lecture sessions. On behalf of the Bank and other related stakeholders, I sincerely hope that you may fully utilise the wealth of opportunities available in this Finance Carnival by visiting the exhibition booths and participating in dedicated activities designed for fellow visitors. Our aspiration is for this event to be a powerful enabler to increase knowledge and awareness on the importance of financial management, which, if done wisely, possesses the distinct potential of uplifting lives. Finally, allow me to take this opportunity to express my gratitude and appreciation to the committee, the ministry of finance, relevant government agencies and financial institutions, whose efforts have all contributed towards realising the success of this Carnival. 4/4 BIS central bankers' speeches
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Even if Finansinspektionen’s justification for the mortgage ceiling was to protect consumers, the measure can also be used for macroprudential supervision. From a stability perspective, the credit risks in the banks’ credit portfolios could be reduced if the rule contributes towards reducing the economic vulnerability of households. The loan ceiling may also contribute towards more stable price formation on the housing market, as the rules influence how much money households are willing to put into purchasing housing. If this counteracts excessive price variations on the housing market and the unsustainable accumulation of debt among households, it will also likewise contribute towards reducing the risk of loan losses in the banking system. 12 See, for example Lim, C., et al., (2011), “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences”, IMF Working Paper, 11/238. 6 BIS central bankers’ speeches A loan ceiling based on income would have largely the same characteristics as one based on the value of housing, but may have certain advantages. If debts are not linked to price movements on the housing markets, this avoids the problem of price increases and indebtedness reciprocally being pushed upwards in a rising spiral. Effectively combating future financial crises will require flexibility An efficient financial system is a prerequisite for a modern economy. A shock leading to the breakdown of any of the financial system’s functions can have major economic costs in the form of sharp falls in GDP and high unemployment.
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Setting the table Classic and modern crises In the financial crisis that initiated the Great Depression, we saw a classic banking panic. At the peak of an economic expansion, a stock market crash signaled a revision to growth expectations, or possibly a change in the willingness of people to assume risk. Around the country many banks (whose deposits were not insured) experienced difficulty in meeting depositors’ withdrawal demands, and bank runs began to occur, at first sporadically. In these runs, depositors formed lines stretching from teller windows to outside the bank, clearly indicating to the public that the bank was in distress. Bank runs waxed and waned for a few years prior to the generalized runs that preceded F.D.R.’s declaration of a bank holiday. F.D.R. explained well the consequences of a bank run: the banks that were run could only close their doors, or sell their assets at panic prices. Either of those actions conferred negative externalities on the economy more broadly. With the closure of a bank, the community lost access to credit and to a safe place into which it could deposit its paychecks and savings. The knowledge about borrowers and their creditworthiness was lost, and even if other banks would expand their business, that loss of information was costly to the efficiency of the economy, and in notable research Ben Bernanke (1983) measured the very negative effect that bank closures had on economic performance.
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The complication is that while most financial crises have been preceded by a credit boom, not all credit booms have been followed by a financial crisis. In fact, a credit boom has been followed by a financial crisis in only about 30 percent of the cases.6 Consequently, there are good booms, which don’t end in a crisis, and bad booms, or “booms gone wrong” that do end in a crisis. Given that credit booms often accommodate the real and pressing needs of a growing economy, simply preventing credit booms, if that were even possible, could have the effect of choking off desirable growth and thus be more costly for society over the longer run. Nevertheless, it is difficult a priori to distinguish good and bad booms, and, furthermore, to determine the mechanisms that generate crises when the economy has become vulnerable to one, that is, when the economy has high debt, a weakening macroeconomy, and other such elements. Even so, as previous studies have indicated, debt growth shifts the conditional distribution of economic outcomes to put more weight on events in which debtors must 5 See Borio, Drehmann, and Tstsaronis (2011), Schularick and Taylor (2012), and Reinhart and Rogoff (2011). 6 See Dell’Ariccia, Igan, Laeven, and Tong (2015), and Gorton and Ordonez (2015). BIS central bankers’ speeches 3 unexpectedly cut back their spending plans to repay debt, a vulnerability that is not present in the absence of debt.
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Exports are growing, and stock markets are up. As a regional grouping, we have continued to integrate our economies while individually pursuing restructuring. ASEAN is now back on its feet, up and running again. The necessity of deeper integration The need to broaden and deepen economic co-operation is a necessity recognised by ASEAN more than ten years ago. In 1992, ASEAN started the ASEAN Free Trade Area (AFTA) to boost intra-ASEAN trade and establish the region as a common area for manufacturing operations. At that time, the catalyst for greater integration was globalisation. Competition was getting tougher. Europe was consolidating and integrating itself to form the Single European Market. In North America, the US, Canada and Mexico were preparing to form the North America Free Trade Area (NAFTA). NAFTA provided US manufacturers an attractive, low cost manufacturing base in Mexico. Mexico too expected to benefit from new investments from the US, which would create jobs and bring growth and prosperity to the country. Both the Single European Market and NAFTA strengthened the competitiveness of the continents, and threatened to divert investments away from Asia. Determined not to lose out, ASEAN responded with AFTA. In retrospect, AFTA is perhaps the most important decision on economic cooperation that ASEAN members have taken together. Today, the world is even more globalised than compared to 1992. Competition is once again at our door step. This time however, the competition comes not from Europe or Mexico, but from much closer to home. China and India are growing very rapidly.
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Lee Hsien Loong: ASEAN - the way ahead Speech by Mr Lee Hsien Loong, Deputy Prime Minister of Singapore and Chairman of the Monetary Authority of Singapore, at the opening ceremony of the ASEAN Finance Ministers meeting (AFMM), Singapore, 7 April 2004. * * * Finance Ministers of ASEAN member states The ASEAN Secretary-General Ladies and Gentlemen Let me first welcome all of you to Singapore for the 8th ASEAN Finance Ministers Meeting. Introduction In 1997, ASEAN was hit by its worst-ever economic crisis. The Asian Financial Crisis dealt a severe blow to all of us. One after another, our countries succumbed to the flight of capital and investors. Several economies were on the verge of collapse. Before we could fully recover from the Crisis, we were confronted again with yet another shock, this time a global economic downturn. The September 11 attacks in America followed shortly. More recently, ASEAN was hit by SARS and the avian flu. ASEAN has taken quite a few hard punches in the last few years. Although we might have been bruised, we are far from being knocked out. ASEAN countries strived to repair the damage, to recapitalise banking systems, to restructure companies in difficulties, and most importantly to restore confidence. Despite the setbacks, ASEAN countries continued to embrace globalization. We continued to look outwards, do our best to attract FDI, liberalise trade, and broaden our linkages with the outside world. Now most ASEAN economies are on the mend. Economic growth has been strong in many countries.
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This is in fact going to be a growing challenge in much of Asia too. Finally, creating good jobs. In Singapore, the financial industry employs close to 200,000 people, most of them in relatively well-paying jobs. Technology will replace many tasks and even whole jobs in finance. But with proactive upgrading of skills to keep pace with new technologies, and with the continuing growth of our financial centre, we must and will provide good jobs in finance for many years into the future. How finance is being transformed 14. The digitalisation of finance is picking up pace, and will transform banking. 15. There are essentially three key forces driving this transformation: pervasive mobile internet access, the rise of big data, and the growth of platform ecosystems as a major new business 2/6 BIS central bankers' speeches model in finance. The three forces are also reinforcing each other, and together transforming banking in more fundamental ways than we have seen before. 16. Smartphones and tablets are ubiquitous. Pervasive broadband access has coupled mobility with connectivity – so interaction is real-time and unconstrained by where you are. The smartphone is now our grocery store, our restaurant, our bank, and much more. 17. Second, big data. We have unprecedented computing power, coupled with cloud technologies that allows us to store and retrieve large volumes of information at low cost and ondemand. Firms are also gathering a lot more data from a wide variety of sources, including social media and e-commerce platforms.
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There is therefore little time to spare, in the run up to a revival of the sukuk market and the lead time it takes to promulgate tax exemption rules for Islamic finance transactions; financial market players in Hong Kong must gear themselves up to embrace the change coming your way. Secondly, there is in general a greater awareness of Islamic finance within the local financial community, particularly among banks. Banks in Hong Kong are in the position of being both investors in, and suppliers of Islamic finance products. Instruments, ranging from retail BIS Review 19/2009 3 Islamic investment funds and Islamic treasury placements at the interbank and corporate level, to Islamic loan syndication, have started to emerge in Hong Kong within the past year. Financial market participants have also set up Islamic banking windows here to signal their readiness to cater for these types of activities. But even with all the significant developments achieved here in such a short period of time, more still needs to be done. While the recognition of Islamic finance as a viable fund-raising and investment alternative is gradually making its way to the corporate sector in Hong Kong, the pace of development is still rather slow. Furthermore, this market awareness should also be promoted beyond banks and other types of financial institutions to all related service industries, such as investment managers, asset managers, securities and brokerage houses, exchanges and commodity firms, pension funds, insurance agencies, solicitors, accountants, and trustees.
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Rising concerns regarding the debt sustainability of several Southern European countries have caused risk appetites to follow a volatile and downward trajectory, which in turn, have triggered capital outflows from emerging markets and increased risk premiums. While risk premium indicators particularly in some European countries have increased, during this period, increases in emerging market risk premiums – especially in Turkey – have been limited (Figure 3). BIS Review 133/2010 1 Sovereign debt-related problems in Europe have once again confirmed that downside risks regarding the global economy activity remain. This development led many central banks to adopt a monetary policy stance with an increased emphasis on downside risks, especially in advanced countries. Accordingly, central banks of advanced economies have underscored that the current monetary policy stance would be kept accommodative for a long period, while emerging economies have also adopted similar changes in their rhetoric through policy statements. These developments have postponed the expectations regarding the timing of policy normalization (Figure 4). 2 BIS Review 133/2010 According to this outlook, year-on-year inflation in consumer prices was flat in both advanced and emerging economies during the second quarter of 2010 (Figure 5). In the meantime, core inflation continued to diverge between both groups of economies (Figure 6). 1. Inflation developments After summarizing current global conditions, I would now like to make an evaluation of the inflation developments in Turkey that took place in the last quarter.
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6 BIS Review 133/2010 During the second quarter, the fall in inflation and increased downside risks regarding the global economy have vindicated the monetary policy stance of the Committee – that it may be necessary to maintain policy rates at current levels for some time, and to keep them at low levels for a long period. Accordingly, we see that market expectations regarding future policy rates were revised downwards (Figure18). Market rates also reflect growing expectations of delay and moderation in the rate-hike cycle. Accordingly, benchmark bond yields fell during the second quarter and continued to hover around historic lows despite the increased risk aversion (Figure 19). The downturn in market BIS Review 133/2010 7 rates was also driven by the improved inflation outlook. The flattening of the yield curve in July compared to April indicates that policy rate-expectations of market players have been revised downwards (Figure 20). The downslide was more significant in market rates than in inflation expectations during the second quarter, pushing medium-term real rates down to historic lows (Figure 21). Yet I would like to underline that real market rates in Turkey did not decouple substantially from other emerging economies (Figure 21). 8 BIS Review 133/2010 The ongoing downward trend both in market rates and the tightness in credit conditions contributed to the maintenance of low levels in loan rates. No remarkable change is observed in loan rates in the second quarter despite the continuing improvement in credit markets (Figure 22). 3.
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Chart 9: Profits in tradable sector boosted by depreciation in early 90s, hit by later appreciation Chart 10: Unlike early 1990s, there is now limited spare capacity, including in tradable sector Source: ONS and Bank of England calculations Source: BCC and Bank of England calculations 10 All speeches are available online at www.bankofengland.co.uk/speeches 10 Chart 11: Investment in tradable sector also sensitive to exchange rate Chart 12: Business investment growth weak in 2016 Source: ONS and Bank of England calculations Source: ONS, CBI, BCC and CIPS These trends then went into reverse after sterling’s re-appreciation later than decade. If subdued domestic consumption had allowed the economy to “rebalance” through the 1992-97 period, the opposite occurred over the following few years. Stronger domestic demand growth “crowded out” the tradable sector by helping to push up sterling’s exchange rate. This led to falls in prices, profits and investment in the tradable sector. What about today? Sadly we don’t have such detailed information on anything like a real-time basis. Indeed we have very little data of any kind, even at an aggregate level, to tell us how profits and investment have behaved since last summer. But here’s my take on what we do know: First, it’s likely that profitability has improved significantly in the tradable sector of the economy. We know that non-financial corporate profits in aggregate rose 10% in the year to Q3.
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Indeed, an important development emerging in the recent period has been the more explicit consideration of implications for recovery plans in key strategic decisions, such as decisions to hub operations at a particular location or service provider. As much as organisational resources are put into enhancements of business continuity management, it is important for businesses to always keep in mind the inherent limitations of BIS central bankers’ speeches 3 business continuity plans and not be lulled into a false sense of confidence that these plans may provide. Scenarios featured in these plans are often based on assumptions, which are a simplification of reality at best. Such scenarios should always be rigorously challenged to account for changing conditions. Business recovery or resumption actions should also contemplate a range of conditions to build agility within the organisation to execute required, but potentially untested, responses. Firms should expect that they will rarely get to a point of precision in their scenario planning and BCM responses. This does not mean that BCM is necessarily reduced to an exercise in futility. A commitment to continuous improvements in BCM is almost certainly likely to prepare firms better for disasters and tail risk events even if those specific events were not exactly contemplated. This is because the organisation will be naturally better at coming together in a crisis, and would be able to leverage on some of the core elements of response plans that have already been developed and tested.
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Enhanced tax transparency lifts the veil on structures created for illicit purposes, and will help to deter tax criminals from abusing trust structures. This bodes well for the longer term sustained growth of the trust industry. The critical role of industry 24. An AML/CFT regime, no matter how robust, cannot in itself fight against ML/TF activities. We need the commitment and active participation of the industry. Promoting a strong AML/CFT culture within the industry, and deepening manpower capabilities are important elements to maintain a robust regime, and allow us to reap the benefits of business growth while managing risks effectively. 25. Industry has primary responsibility to build a good AML/CFT culture and ensure compliance. I am encouraged that the industry has taken active steps to promote robust controls to strengthen its resilience and prepare for increased transparency on beneficial ownership information and enhanced tax transparency. The private banking industry in Singapore introduced a set of industry sound practices last year to provide guidance to private banks on the development and implementation of robust controls to detect and deter the proceeds of tax crimes. As most of you would know, the Singapore Trustees Association has also issued similar guidelines for trust companies. We commend such industry initiatives and look forward to continue working in meaningful partnership with the industry. 26. Competency building is also imperative in raising AML/CFT standards amongst industry professionals. An effective AML/CFT system cannot be solely the responsibility of compliance professionals or experts, but must be an integral part of the firm’s culture.
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In asset management, an industry report 7 estimates the number of high net worth individuals and their financial wealth in Asia combined to be about the same as those of Europe and America, but growing faster. The number of Asian middle class has also surged with economic growth. While growth momentum may moderate in the next few years as the global economy recovers, the underlying trend remains. The growing interest in Islamic funds will provide opportunities for asset managers who can provide the right products. In short, my second reflection is that nature of financial services in the coming years will change, with a focus on deepening the symbiotic relationship between financial services and economic growth. This will be favourable for various segments of Islamic finance. Nature of financial regulation Let me move on to my third reflection, on the nature of financial regulation. This crisis shows that proper regulation of financial activities is difficult – it’s unpopular to take away the punch bowl when the party is going. But it is necessary. Equally important is the need to focus on the economic substance and underlying risks of the activities, regardless of its form. Prof. Rifaat provided a very timely reminder when he said recently, “Every financial institution requires close supervision, regardless of whether it is conventional or Islamic.” While Islamic Finance has features that make it robust, there are also risks such as liquidity and concentration risks that demand special attention.
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The impact is also more obvious on mortgage than on corporate lending. Three quarters of total lending is to households rather than to firms, and it is easier for banks to launch new offers in that sector. In the corporate sector, we have seen banks take different approaches to SME lending: one bank offers a cash back scheme; another has scrapped arrangement fees; a third is offering guaranteed discounted borrowing costs. The true impact for corporate customers is not easily measured in “standard” interest rate data, but the potential economic benefit is there. Overall, we think there is more action to come in lower lending rates. The final stage is the impact of lower lending rates on the quantity of credit. That will take some time to work through from applications to approvals to actual lending and is the most uncertain leg. The FLS has clearly shifted the supply of credit: loans are generally available at lower cost than previously. That in itself is a monetary boost as new borrowers will be better off than they were before because they are paying lower interest rates. But whether there is more borrowing in total will depend on the demand for credit and the creditworthiness of borrowers. If firms or households, for whatever reason, are reluctant to borrow, a change in the marginal interest rate may not make much difference.
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When profit expectations ultimately fall back to more realistic levels, share prices drop. Corporate investment slackens as the economy’s aggregate capital stock is adjusted to match a more reasonable long-term return. This is accompanied by decreased household consumption, not least of capital goods, to match a more realistic assessment of the long-term development of income. The Austrian School also provides us with a fundamental insight into economic policy’s limitations. If a technological breakthrough leads to a period when the growth of investment and consumption exceeds what is sustainable in the longer run, there is bound to be a fall-off. After a supply shock of this type, measures of economic policy are simply not capable of preventing an adjustment to a more realistic appraisal of the future. The necessity of the adjustment means that the measures only postpone it and presumably tend to make it all the more painful when it does occur. History teaches us that after a period of what I would call “growing pains”, the optimism about what the new technology can achieve will be restored, albeit in a more orderly, realistic guise. In my opinion, neither the rapid fall-off in global activity nor the terrorist attacks on 11 September have upset the grounds for being optimistic about the new technology’s potential. Problems for many companies After the investment boom and the marked slowdown we are now experiencing, there is a risk of a good many companies having balance-sheet problems.
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There are numerous security features but fortunately, we need to know only a few major ones to enable us to tell the difference between genuine and counterfeit notes. It would be in our interest to download and use this application so that we are able to differentiate a genuine and a counterfeit note. In the process, we will get to know and appreciate better our unique characteristics of the design and security features of our currencies. The My Ringgit application also contains useful information on the locations of the coin deposit machines of participating institutions throughout Malaysia. Users of this app will also receive a “Push Notification” message from time to time on news relevant to our currency like issuance of a new commemorative coin. Protecting our currency against being forged is critical but protecting it against being stolen is also as important. In the last few years, our ATMs have been the frequent target of criminals that has impacted the general public perception on the security of the banking industry’s ATMs. Many defective and preventive measures have been taken by financial institutions to protect the safety of ATMs such as relocating the ATMs to a safer location, strengthening the ATM security panel, installing bollards or even replacing obsolete ATMs. We are appreciative of the police who have played a significant role in improving the ATMs’ security. Bank Negara and financial institutions will always stand ready to assist the police in ensuring the security of our ATMs.
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SPEECH DATE: 16 November 2016 SPEAKER: Cecilia Skingsley VENUE: FinTech Stockholm 2016, Berns SVERIGES RIKSBANK SE-103 37 Stockholm (Brunkebergst org 11) Tel. +46 8 787 00 00 Fax +46 8 21 05 31 registratorn @ riks ban k.se www.riksb ank.s e Should the Riksbank issue e-krona?1 Should the Riksbank issue electronic means of payment in the same way as we now issue cash? This is a natural question for a central bank, as technological advances create new opportunities, as the printing press once upon a time made it possible to print banknotes. Banknotes were a complement to the minted coins, and are so today too. Similarly, an electronic means of payment, say an e-krona, could be a complement to physical cash. This is the question I intend to discuss today. The question is particularly relevant for us in Sweden, as cash is being used to a declining extent and is sometimes difficult to get hold of. The fact that cash is no longer as easily accessible as before means that the general public finds it more difficult to get hold of money issued by the Riksbank and instead often has to use money in bank accounts with the commercial banks. This is a development steered by market forces and not by the authorities. Market forces has worked well for a long time, but developments move fast for some consumers and companies.
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Arnór Sighvatsson: Iceland’s future monetary and exchange rate regime Speech by Mr Arnór Sighvatsson, Deputy Governor of the Central Bank of Iceland, at a meeting of the Icelandic Federation of Labour, Reykjavík, 10 January 2012. * * * Ladies and gentlemen: In the wake of severe financial and monetary instability, it is appropriate for the Icelandic authorities to conduct a comprehensive review of Iceland’s exchange rate and monetary policy regime. The re-assessment must be based on an accurate diagnosis. The authorities should not only review the experience of recent years, but also grapple with the fundamental questions of why Iceland’s monetary policy track record has been so dismal, over nearly a century, that the Icelandic króna has depreciated by 99.95% against the Danish krone since the two currencies were uncoupled in 1920. Monetary policy generally faces two conflicting roles of the currency exchange rate: to be an anchor of monetary policy, on the one hand, and a tool for adjustment, on the other. During the Icelandic króna’s lifetime as an independent currency, exchange rate policy has moved along the axis between fixing and floating, but without managing to stop the virtually uninterrupted erosion of the króna’s purchasing power except for short periods of time. There could be four potential types of explanations for Iceland’s poor performance in the field of monetary policy, and corresponding types of measures for improving the performance: 1. First of all, the source of the problem might be the implementation of monetary policy or its framework.
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Such comforts were viewed by many as a shield against underlying risks, and in some cases they prompted banks to lower their guard against the problems that were gathering. Given the new playing field in place as from 2007, the responsibility of savings banks is clear: to act resolutely to change those structures that can be improved, in full awareness that other parts of the new situation are exogenous and therefore elude their management capabilities. Hence the importance of taking decisions aimed at improving efficiency, through merger – or concentration – processes that position savings banks at a new set of size and rationality-based coordinates. BIS Review 173/2010 1 Faced with this need, the structuring of the new IPS instrument (new, at least, in terms of its current contours) responds to the need to pave the way so that concentration agreements may be reached between a type of institution –savings banks – which, given its business form and complex governance arrangements, does not have the same flexibility as banks to conclude merger agreements. To smooth these concentration processes, the Fund for the Orderly Restructuring of the Banking Sector was also created, a Fund to which the initiators of the various projects can resort to strengthen their capital. This assistance adds further discipline in respect of compliance with the plans, since the condition imposed by the use of public funds is that the capacity of the banking system should be reduced and its efficiency increased.
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If it is structured correctly, each form of intermediation will not be subject to the same risks. Diversity also allows risks to be more closely aligned with risk-bearing capacity in the system. With scope for creditor preferences to be more closely matched with those of borrowers, the full potential of finance to intermediate can be exploited and the cost of finance for the real economy minimised. If we can succeed in safely and sustainably combining bank and market-based finance, the effectiveness of the system can be dramatically increased. Households and businesses can benefit from access to markets while the advantage of banks in originating loans can continue to be exploited. A trusted financial system can be much more effective. Through cultural change, reforms to compensation and building markets that are transparently fair, finance can earn the legitimacy needed to operate and innovate to serve customers and clients in the real economy. The literature on the benefits of an open global financial system is admittedly mixed. The contradiction between this conclusion and the clear and overwhelming benefits of trade integration is reconciled by the previous unsafe and potentially unstable nature of the global 14 BIS central bankers’ speeches system. As my colleague Andy Haldane observed recently, connectivity can serve as a shock-transmitter.30 A risky system cannot be an open system. The renewal of globalised finance must therefore go hand in hand with making the global system safer, including through mutual trust and cooperation between supervisors and regulators.
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But what should not be in doubt is that the MPC will take whatever steps are necessary in order to keep inflation on track to meet the 2.5% target. The challenge for monetary and fiscal policy is to restore domestic demand growth to sustainable levels. This would permit the stabilisation and eventual reduction of the trade deficit, while maintaining 2 BIS Review 26/2002 low and stable inflation, and high and stable employment, at the same time as resources move from private consumption to the provision of better public services. It is possible, perhaps likely, that the transition to lower growth rates of consumption will occur smoothly. And lower inflation now than in the past may ease the adjustment - the future is not what it was. For the Monetary Policy Committee the challenge is to keep inflation close to the target during a period in which a significant re-balancing of the British economy will take place. That will be a challenge, not just for the MPC, but for all of us. BIS Review 26/2002 3
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Considering from the viewpoint of fiscal policies, we should note that one of the factors ensuring the maintenance of the downward trend of inflation in the medium-term is the sustainability of fiscal discipline and the revenues policy consistent with the targets without hesitations. Within this context, we closely monitor the effects of the adjustments in the revenues policy and the primary public expenditures on inflation and inflation expectations. The achievements in structural reforms support the increase in efficiency via the improvements in competition and investment environments, contributing to the downward trend of inflation. The structural reform process has a determining effect also on the expectations. Unceasing maintenance of the steps in this area are important for the permanency of the downward trend in inflation. Even if a considerable improvement is observed today in comparison with the first half of the year, medium-term inflation expectations that are higher than targets are the other risk factors regarding the inflation outlook. This is due to the possibility of these expectations to bring about deteriorations in the pricing behaviors. Dear Guests, Although some political developments regarding the negotiations with the European Union may come to the forefront, and some interruptions and delays may occur, this process itself does mean BIS Review 28/2007 3 convergence to the developed economies in economic terms. Together with the IMF, it also functions as an important anchor for the domestic and foreign economic units. This perspective, which is very influential on expectations, should be preserved.
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Therefore, we have a small increase in bad loans, which reached about 12 percent. I think this process will slowly wind down. Then, together with the reduction of the risks that banks see in the real sector, and which will come to the surface now after the positive signals from the European economy, lending to companies will become a little more intensive. In one of its reports NBRM has pointed out that one of the limiting factors for higher credit growth are some conservative strategies in the local banking groups. What specifically did you mean? Yes, we pointed out the conservative strategies. And it is no secret that here we primarily think of the problems that some of the banks present in Macedonia have in their home countries. Banks in Slovenia and Greece are in serious problems, even though their banks in Macedonia are among the best, by both the quality of corporate governance and the credit risk management, and also the level of capital and liquidity they have is the highest in our BIS central bankers’ speeches 1 banking system. So, their banks in Macedonia have no impediment to normally work and grant loans. But don’t they grant loans normally? Well, some of them are quite restrained. We constantly talk to them and they promise to be more active in the market. Which of them are restrained? Stopanska Banka has been quite restrained in recent years, but it always had positive rates of credit growth. It has never cut lending.
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4 Patrick Bolton, Morgan Despress, Luiz Awazu Pereira da Silva, Frederic Samama, and Romain Svartzman, “The Green Swan – Central Banking and Financial Stability in the Age of Climate Change,” Bank for International Settlements, 2020. 5 TCFD site and review of annual reports, integrated reports, non-financial reports, sustainability reports and standalone climate-related disclosure reports of individual GSIBs. 6 In the international context, see Enhancing Banks’ and Insurers’ Approaches to Managing the Financial Risks from Climate Change, Bank of England Supervisory Statement 3/19, April 15, 2019; ECB Banking Supervision: Risk Assessment for 2020, European Central Bank; and Bolton et al. (2020). 7 Kevin J. Stiroh, New York Fed, Emerging Issues for Risk Managers, Nov, 2019. 8 Governor Lael Brainard, Federal Reserve Board of Governors, Why Climate Change Matters for Monetary Policy and Financial Stability, Nov. 2019. 9 “Demystifying Climate Scenario Analysis for Financial Stakeholders,” Four Twenty Seven, 2019. “Climate risk and response,” McKinsey Global Institute, 2020. “Fifth Assessment Report (AR5), the Synthesis Report (SYR),” Intergovernmental Panel on Climate Change (2015). 10 Fink, Larry, A Fundamental Reshaping of Finance, Letter to CEOs, 2020. 11 See The 2021 Biennial Exploratory Scenario on the Financial Risks from Climate Change, Bank of England Discussion Paper, December 2019 for a discussion of relevant issues. 12 Carney (2015). 4/4 BIS central bankers' speeches
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The markets made a highly positive assessment of this transparency exercise and the banks, which are responsible for providing information to investors, should be the parties most interested in persevering with these market communication efforts. From the approval of the measures to the current situation The functioning of financial markets in the first half of 2010 was complicated considerably by the lack of confidence in the sustainability of public finances. At the height of the tension, the funding markets shut down and, consequently, many European institutions, including Spanish ones, resorted increasingly to funding from the Eurosystem since borrowers and lenders were no longer directly in contact. As a result of the economic measures approved by the Government, the reforms of the banking sector and the publication of the stress tests, this tension eased from July. Not only did the interbank market begin to function again, but many institutions were able to place € billion of bonds and notes on primary markets. This was reflected in the sharp reduction in funds requested by Spanish banks from the Eurosystem. At end-November 2010, funding from the ECB, which in July 2010 stood at € billion, fell back to € billion. This means that the Spanish banking system absorbs 12% of the loan from the European Central Bank, a proportion fully commensurate with its size and importance in the euro area and which represents 2.5% of its balance sheet.
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Swedish Ministry of Finance (2013), Ett förstärkt ramverk för finansiell stabilitet. (A stronger framework for financial stability),only in Swedish. Memorandum, 26 August. Heikensten, Lars (2008), More To It than Just “Leaning Against the Wind”. Article in the Financial Times, 5 June 2008. Ingves, Stefan (2007), Housing and Monetary Policy: A View from an Inflation-Targeting Central Bank. In Housing, Housing Finance and Monetary Policy, Jackson Hole Symposium Conference Proceedings, 433–443, Federal Reserve Bank of Kansas City. Ingves, Stefan (2010), Monetary policy and financial stability – some future challenges. Speech at the Swedish Economics Association, Stockholm, 17 May. Sveriges Riksbank. Jahnson, Daniel and Lundberg, Jacob (2013), Fördelningseffekter av utbudsrestriktioner på bostadsmarknaden. (Distribution effects of supply restrictions in the housing market.) The Reform Institute, September 2013. BIS central bankers’ speeches 9 Jansson, Per (2013), Perspectives on the Riksbank’s monetary policy. Speech at the Centre for Business and Policy Studies, 7 June. Sveriges Riksbank. Jauch, Sebastian and Watzka, Sebastian (2013), The Effect of Household Debt Deleveraging on Unemployment Evidence from Spanish Provinces. Conference paper, Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung. Krugman, Paul (2013), What Janet Yellen – And Everyone Else – Got Wrong. Blog in The New York Times, 8 August. Lindbeck, Assar (2013), Hyreskontrollen måste bort för att få fart på byggandet. (Rent controls must be abolished to boost construction.) Debate page, Dagens Nyheter newspaper, 24 November. Maddaloni, Angela and Peydró, José-Luis (2013), Monetary Policy, Macroprudential Policy, and Banking Stability: Evidence from the Euro Area.
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Anita Angelovska Bezhoska: Strengthening of the institutional capacity of the NBRNM in the process of its accession to the ESCB Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the opening conference of the Twinning Project "Strengthening of the institutional capacity of the NBRNM in the process of its accession to the ESCB", Skopje, 30 October 2019. * * * Your Excellency Gerberich, dear Mr. Janmaat, Secretary Vučić, representatives of the central banks of Germany and Croatia, ladies and gentlemen, It is my great pleasure to address you at today’s event to mark the launch of a particularly important project that we expect to contribute to our further profiling as a modern central bank, with strong capacity and readiness to join the European family of central banks. The European Union has been important institutional, economic and political benchmark for us from the outset of the transition process. The EU pre-accession process itself provides key tools that support and reinforce the reform process in a country aspiring to full membership, thereby strengthening its institutional capacity and economic foundations. Faster institutional and economic convergence, including faster convergence to the European central bank values, will also mean faster integration into the European family. That is why we, at the National Bank, have been strengthening our capacity through various modalities, often with direct EU support using the available tools.
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The unemployment rate has decreased close to its record lows, while the number of vacant jobs has approached its record high. To fill the new jobs, we need either an inflow of labour migrants, or a redistribution of the current labour force among regions, industries, and enterprises. This process is objectively slower than the return of the available labour force to work during the period of the recovery growth. A higher competition for specialists between employers is promoting the conditions for an increase in wages. It is essential that a rise in wages is consistent with the growth of labour productivity in the relevant sectors. Otherwise, it will entail higher costs which enterprises will pass on to consumers, and the rise in nominal wages will be ultimately absorbed by inflation. We keep our GDP forecast unchanged for the next year and further on. An additional tightening of monetary policy aimed at returning inflation to the target is coherent with the positive contribution of external demand and investments from the National Wealth Fund made to aggregate demand. GDP will increase by 4–4.5% this year and by 2–3% further on, which is in line with the sustainable growth path. Monetary conditions have changed only slightly after the September meeting. An increase in market rates following the rise in the key rate currently has only a limited effect on them. This is largely associated with the impact of higher inflation expectations.
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However, the experience of the subsequent waves of the pandemic has proven that restrictions are impacting demand increasingly less, whereas supply contracts when enterprises are forced to suspend operations. We consider that restrictions rather have a proinflationary influence now. The industries that directly depend on restrictions, primarily services, will be affected most considerably. The Government has introduced support measures to aid the most vulnerable industries, first of all small and medium-sized enterprises and their employees. The Bank of Russia, on its part, has allocated a limit of 60 billion rubles within a special 4% refinancing programme for the banks that would issue loans on preferential terms to small and mediumsized enterprises affected by restrictions. We have also recommended that banks and microfinance organisations should approve 3/4 BIS central bankers' speeches restructuring applications for those individuals and entrepreneurs who need this. I will now speak about our future decisions. It has become more probable that the level of the key rate will be higher, and the period during which the key rate might stay at this elevated level will be longer than we assumed in our previous forecast. According to our baseline forecast, the key rate will average 7.3–8.3% per annum next year, and 5.5–6.5% per annum in 2023. In other words, the key rate will return to its long-term neutral range no earlier than in the middle of 2023. Thank you for attention. 4/4 BIS central bankers' speeches
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Figure 1: A stylised depiction of the monetary policy trade-off The blue line in the figure is the Phillips curve, which summarises the structure of the economy and, in particular, how changes in demand, via the output 9 gap, affect inflation. The economy’s equilibrium is at the intersection of these two lines. In the case of an inflationary shock that induces a trade-off, the Phillips curve shifts up, as shown in the figure. Monetary policy needs to tighten to lower pressure on resources and reduce inflationary pressures, such that the economy ends up on the 9 Originally formulated by Phillips (1958), albeit as a relationship between wage growth and unemployment. See: Phillips, A. W. (1958). "The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861-1957". Economica, 25 (100): 283–299. 5 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches 5 red line, consistent with the policymaker’s preferences (as shown by the dotted arrows in the figure). The slope of the Phillips curve is crucial in determining in the size of the fall in output needed to reduce inflation to an acceptable level – the sacrifice ratio. Figure 2: Stylised policy responses Frequently, the economy experiences shocks that drive inflation and output in the same direction. These shocks to aggregate demand can include variations in government consumption, households’ desire to consume, or business’ desire to invest. Increases in demand put pressure on the use of resources, causing prices to rise.
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The time-variation of lambda is illustrated in part by the fact that the regression estimating the MPC’s lambda leaves around two-thirds of the variation of inflation over the output gap unexplained, even in expectation and over the post-crisis period. So why isn’t the estimated lambda fixed, and what considerations inform its value in practice? 19 Yellen, J (2012), “Revolution and Evolution in Central Bank Communications”, November. Converting this to an equivalent value for the weight on the output gap depends on the Okun’s law coefficient one assumes, estimates for which vary. 20 Ilbas (2012) estimates the Smets-Wouters model under optimal commitment policy for the Volcker/Greenspan era and find a value of lambda on output growth of around ½. Dennis (2006) uses a semi-structural model and finds a weight of around 3 on the output gap, whereas Givens (2012) estimates a value of around 0.1 over a similar sample. Givens and Salami (2015) estimate a small New Keynesian model on post-Volker data and find a lambda on the output gap of around ¼. Sack (2000) finds a weight of around 0.8 on the unemployment gap over the period 1984-1998 using a VAR to describe the economy’s dynamics. Lakdawala (2016) allows for time variation in central bank preferences and finds that the weight on inflation relative to the output gap to have fluctuated over time, falling to low levels in the 1990s and early 2000s (implying a high relative weight on the output gap), before rising in the period leading up to the financial crisis.
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When you know it’s there, it’s obvious. But when, as instructed , people are engrossed in the highs and lows of the basketball game, many fail to notice the bear. The risk of adjustment in the stretched prices (and compressed yields) in corporate debt markets are my moonwalking bear, hidden in plain sight. The icebergs can lurk beneath the surface of the system. They make navigation of markets uncertain and hazardous. Assessment of them requires diving into the cold, murky depths of the financial system. Excessive leverage and liquidity mismatches were the bergs of the financial crisis. They forced investors into firesales of assets, magnifying market adjustments, and sometimes even disrupting market functioning. In other words, they compromised market resilience. Those risks have been addressed. But we must stay alert to any possible new bergs of the future. To spot them emerging we need to dive into the detail of the system, to look at the incentives and constraints facing the participants. 2 All speeches are available online at www.bankofengland.co.uk/speeches 2 We’ll don our diving equipment later. Before we do, it’s worth asking who should care about hidden risk? Any manager focussed on risk and return will be interested in these bears and bergs. Failure to acknowledge them can damage performance. But while the risks mean some investors can have a bad day and others a good one, the ups and downs of asset markets don’t necessarily concern policymakers.
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In these circumstances, had we allowed the exchange rate to adjust to market pressures within the 15 per cent band, the currency would have appreciated. 5. You seem to be playing down the efficacy of the fiscal deficit and of exchange rate adjustment as a means of jump starting the economy. What would you suggest instead? As I have already pointed out, the domestic factors which are contributing to the economy’s anaemic growth record are largely microeconomic in nature. I have also explained why deficit financing and changes in the nominal exchange rate cannot correct these weaknesses, still less produce sustainable growth. Policy orientation must eschew short-term palliatives. Like our competitors we must learn to come to terms with globalization. Reflecting on one simple fact should help in understanding what this means: the hourly cost of labour of an electronics operative in Malta is around $ compared with $ in Singapore and $ in China. Neither more government spending nor a devaluation can narrow that gap. Against this background, maintaining external competitiveness in the long run depends on continued moderation in wage growth, faster increases in labour productivity and sustainable budget positions. I make no claim to originality in proposing this prescription; it is shared by the EU Commission, the ECB and the IMF. I shall first address the last objective. Given that taxation levels are already high, fiscal consolidation should be achieved by cutting recurrent spending.
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Infrastructure Asia harnesses the networks and collective capabilities of public sector agencies and private sector firms across the region to meet Asia’s infrastructure needs by (i) connecting partners in the 2/5 BIS central bankers' speeches ecosystem; (ii) building capacity in demand markets; and (iii) providing top-level project advisory to improve bankability. Infrastructure Asia provides an open platform for Chinese (including Shanghai-based) infrastructure developers and financial institutions to partner players in Singapore in regional infrastructure projects. b. Furthermore, as infrastructure demand and foreign investments along the Belt and Road region increase, we expect a boost in demand for commodities and growth in commodity trade. Singapore’s strategic location in the crossroads of key trade flows has enabled commodity traders in Singapore to capture such opportunities. Shanghai Pudong Development Bank (“SPDB”) opened its first overseas commodity centre in Singapore in October this year, providing global commodity businesses with commodity-related financial services and solutions. c. Singapore banks are also embarking on BRI collaborations with Shanghai banks. UOB signed a MOU with SPDB in September this year to serve companies hoping to tap on BRI opportunities, providing financial solutions covering investment advisory, cross-border RMB transactions, syndicated loans, project and trade finance, and cash settlement. OCBC Bank signed its second MOU with Bank of Shanghai in April this year, leveraging each other’s strengths, networks and platforms to support customers in their BRI expansion plans, including access to OCBC’s funding and risk management solutions for Bank of Shanghai’s corporate clients.
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Our Governing Council will do whatever it takes to fulfil our primary price stability mandate; have no doubt about that. It is therefore particularly important for the fiscal authorities to ensure debt sustainability in a context of rising interest rates. It is an understatement to say that this issue was far from dominating the French election campaign, so I will first develop the reasons why debt must remain a key issue (I), before discussing possible fiscal rules - including European ones (II). ** I. Why debt must remain at the forefront of economic concerns 1. Ensuring fiscal sustainability Faced with the Covid storm, the public authorities rightly activated both the fiscal and monetary levers. Public debts rose significantly in 2020 and 2021 to absorb Page 2 of 9 the economic fallout of the crisis: an increase of 16% of GDP in France and 12% of GDP in the euro area. The “whatever it takes” was justified in 2020; however, the downside was that the massive increase in debt started to be considered trivial. Many of our fellow citizens, in good faith, do not understand why the French Treasury would refuse one-billion-euro spendings, when hundreds of billions were suddenly easy to find. Debt became unlimited and cost-free. This twofold illusion, which is so appealing, is our greatest danger today. What was an exceptional response to exceptional circumstances must not become a “new normal”.
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At the moment, a German low-price retail chain is planning to establish itself on the Swedish market, which could have a dampening effect on prices. A high concentration of companies also increases the risk of forming cartels. Recently, several cartels, or suspected cartels, have been revealed in the building, aviation and petrol trades. According to a recently published SIFO survey, 80 per cent of small companies in Sweden and 50 per cent of large companies state that they believe cartels arise very often or quite often in Swedish trade and industry. In other words, consumers may be losing considerable sums of money. With regard to the "petrol cartel", amounts in the order of half a billion kronor were discussed. By eliminating market mechanisms, companies also avoid the competitive pressure that could otherwise ensure they make their operations more efficient and develop new products. In the long term, it also leads to a loss of competitiveness from an international perspective, lower growth and fewer jobs. The government has proposed measures against unlawful co-operation in the bill on combating cartels 10 that was put forward recently. The bill aims to make the war against cartels more efficient by allowing a company that exposes a cartel in future to avoid paying the fine for damage to competition or to have its fine reduced. The government also proposes a stronger confidentiality protection for those who report or provide information on cartels.
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The FLS does not seek to allocate credit to particular parts of the economy directly – the Bank is not taking a view on this matter. But SMEs and first time home buyers in particular are thought to be credit hungry. Banks will collectively need to meet that demand if they are individually to make the most of the FLS. 10 BIS central bankers’ speeches Not necessarily every bank will support every sector. But if the big firms don’t then the smaller banks will. We are relying on the pressures of demand and supply, and competition, to ensure that credit flows to where there is demand. The normal business model of a bank is that their lending rates are related to their funding rates. The process for doing so is not immediate and funding from different sources – both retail and wholesale, secured and unsecured, might be used to support lending activities. There is no reason to think that the provision of cheaper funding via the FLS will cause a bank to change its business model in this regard. Indeed the incentives in the scheme are for banks and building societies to cut lending rates and hence lend more to get the cheapest funding. Since the scheme was announced we have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions.
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The region as a whole is an active hive of experimentation in digital financial services, supported by favourable consumer demographics, particularly the digitally savvy youth. In Southeast Asia, digital financial services is estimated to contribute about 5% of the total revenue for the financial sector this year. This share is expected to more than double to 11% within the next five years, driven among others by digital lending, investment, remittance and insurance products. Here in Malaysia, the most recent demand side survey on financial capability and inclusion indicated that four in ten Malaysians utilise internet banking services, up from just one in ten as recently as three years before. This trend is expected to intensify, with the expansion in digital product offerings and growing acceptance of online financial services. 1/3 BIS central bankers' speeches Building trust and confidence Digitalisation can also be a powerful force for sustainable financial inclusion. By lowering costs and increasing scale and reach, it has become a means for providing access to essential financial services such as e-payments, micro-insurance and online remittance to previously underserved segments. Other innovations such as banking and insurance aggregators are also helping consumers make better financial decisions, in turn, increasing their confidence in using financial services.
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Safeguarding the interests of consumers without stifling innovation remains one of the most difficult balances to achieve for regulators. Regulators are constantly trading off considerations of privacy against efficiency; fragmentation against competition; access against risks of abuse. In the digital age, these trade-offs become impossible without equipping consumers with the information, knowledge and tools that they need to protect themselves and make decisions that are in their own best interests. It is only through a complementary mix of appropriate but not excessive regulation, and enlightened and confident consumers, that we will find the right balance of guiding the development of digital financial services so that it is neither hurried nor hampered, and remains sustainable and well-functioning to promote financial stability and inclusive growth. For Bank Negara Malaysia, our regulatory agenda is supported by a long-standing focus on financial education. This year, I am pleased to share that this has been elevated to a nationallevel priority with the launch of Malaysia’s first five-year National Strategy for Financial Literacy. A key focus of the strategy is helping consumers protect themselves against fraud and exploitation, and embrace innovation more confidently in the digital era. This needs to start with the young, but without neglecting those for whom the digital world is both unfamiliar and daunting. Specific challenges in a digital era Let me just mention a few of the specific challenges that financial services authorities will have to contend with in the digital era.
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1980 1985 1990 1995 2000 2005(a) 1,065 1,315 1,984 3,807 5,522 6,347 Textile and Garments 110 293 628 1,853 2,982 2,895 Tea 373 442 495 481 701 810 All Other Exports 582 581 862 1,474 1,839 2,642 Export Earnings (Services) 279 329 531 821 953 1,540 Worker Remittances 152 292 401 790 1,160 1968 Foreign Direct Investment 43 24 34 28 175 272 Foreign Loans and Grants 307 517 526 847 422 972 Inflows 9 14 13 21 15 19 Trade balance 15 40 57 53 65 76 Loans and grants 50 56 76 93 275 197 Total imports 7 14 15 15 16 22 GDP 4 5 5 6 7 8 Export Earnings (Goods) Worker Remittances, as a % of Total current account (a) Provisional As shown in the table above, in 2005, remittances increased to $ 1,968 mn, indicating a 22.6% growth compared to 2004.
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Principle III: Remittance services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework The implementation of this principle requires special laws and regulations for remittances, while the existing or new laws should be sound, predictable, non-discriminatory and proportionate. Specially, for remittance corridors, (e.g. US-Mexico, US-Brazil, the Middle East-Philippines) both sending and receiving countries should cooperate with each other to sort out legal obstacles in transferring remittances. It is also noteworthy to consider avoiding dangers of over-regulation in remittance transfers. The Money Laundering and Terrorist Financing Acts can also deter some of the cross-border money transfers. The authorities responsible for implementation of these legislation should be mindful of the need to use judgment in dealing with genuine remittances. Principle IV: Competitive market conditions, including appropriate access to domestic payment infrastructures, should be fostered in the remittance industry. This requires the avoidance of exclusivity conditions as imposed on an agent choosing to offer only one remittance service and to promote several direct /indirect access to domestic payment systems in the country. Here too, the central banks have a role to play. The central banks and supervisors should BIS Review 3/2007 5 work with competitive authorities to ensure consistent approaches and discourage exclusivity conditions. It is also important for supervisors to ensure that money transfer systems are not unnecessarily anti-competitive. Principle V: Remittance services should be supported by appropriate governance and risk management practices Good governance and risk management practices by all stakeholders make remittance service safer and help protect consumers.
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On the counterpart side, there has been a further slight strengthening in the growth of loans to non-financial corporations, which rose to 1.0% in April, after 0.8% in March. The growth of loans to households was 3.4% in April, unchanged from the previous month. The latest data confirm a continued gradual strengthening in the annual growth of lending to the nonfinancial private sector. The overall size of bank balance sheets has remained broadly unchanged over the past few months, notwithstanding some volatility. It is important that banks continue to expand the provision of credit to the private sector in an environment of increasing demand. To address this challenge, where necessary, it is essential for banks to retain earnings, to turn to the market to strengthen further their capital bases or to take full advantage of government support measures for recapitalisation. In particular, banks that currently have limited access to market financing urgently need to increase their capital and their efficiency. To sum up, based on its regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged. The information that has become available since our meeting on 5 May 2011 confirms continued upward pressure on overall inflation, mainly owing to energy and commodity prices. A cross-check of the outcome of the economic analysis with that of the monetary analysis indicates that the underlying pace of monetary expansion is gradually recovering. Monetary liquidity remains ample, with the potential to accommodate price pressures in the euro area.
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A number of data sets have already been, or are about to be, made available by the ESAs: banking sector data, collected by the European Banking Authority (EBA) on a quarterly basis, relate to: supervisory data on solvency, credit risk and asset quality, earnings risk and balance sheet structure ( key risk indicators), as well as to data on large exposures, broken down by instrument and by sectoral and geographic counterpart, for samples of EU large banking groups; insurance sector data collected by the European Insurance and Occupational Pension Funds Authority (EIOPA) on an annual basis and, possibly, at a higher frequency relate to aggregate solvency and profit-and-loss data for large EU insurance groups; quarterly data provided by the European Securities Markets Authority (ESMA) refer to the number of shares admitted to trading in the European Economic Area (EEA), by country and by market, as well as to the list of EEA markets. 1 Council Regulation (EU) No 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board (Official Journal of the European Union, L 331, 15.12.2010, pp. 162 ff.). 2 BIS central bankers’ speeches The ECB, in turn, is in the process of making datasets available to the ESRB and the ESAs that meet their requirements.
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And it used its balance sheet to keep money market rates, which served as an anchor for rates in the wider economy, close to its policy rate. 6 The rest is monetary history. Ten years on, central banks now use a much wider range of tools than just the policy rate in setting monetary policy. Once Bank Rate hit 0.5% in March 2009, which at the time was seen as its effective lower bound, the MPC turned to what were then thought of as unconventional monetary policy tools to stimulate demand and help bring inflation back to target. These tools used our balance sheet in new and different ways. And together they account for a large part of the increase in the size of the Bank’s balance sheet. 5 As part of the MPC’s continuing efforts to make our thinking more transparent, we published our estimate of excess supply (or slack) in the economy for the first time in the May 2018 Inflation Report. 6 The last Bank Rate change to follow this practice was arguably the 50bp cut on October 8th 2008. I say arguably because this cut was itself unconventional: it was coordinated across the major central banks and, due to differing international schedules, actually took place early on a Wednesday afternoon rather than the usual Thursday at noon.
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Your Excellency, from this, it is clear that the current strengthening of the Kwacha has been caused mostly by changes in economic fundamentals. I recognise the concerns by some of our exporters of non-traditional commodities that they are losing external competitiveness. I wish to point out that not all has been lost as a result of the appreciation of the Kwacha. Some non-traditional exporters have benefited through, among other things, the reduction in the cost of capital goods and imported raw materials. In addition, may I mention the fact that the exchange rate alone does not determine external competitiveness of exports. Exporters should look at those areas in their production processes where they can attain efficiency gains and improve productivity. These efforts need to be complemented by Government through directing investment in infrastructure and structural reforms, including labour BIS Review 72/2006 3 laws, so as to reduce the cost of doing business in Zambia. On its part, the Bank of Zambia will carry out its function of smoothing the movements in the exchange rate in a way that would not compromise the low inflation objective. At this point, Your Excellency, Distinguished Ladies and Gentlemen, allow me to humbly say once again that I am deeply honoured to be invited to address you on this occasion. I thank you for your attention. 4 BIS Review 72/2006
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Firstly, due to the phenomenal rise in reserve holdings of central banks, in our region, and secondly, due to the intensive public scrutiny that reserve management has attracted as a result of the significant increase of foreign reserves in the national wealth of countries in our region. The drivers of this sharp rise in reserves are many. High commodity prices, increase of exports of natural resources, and increased remittances, have been among the main contributors to this situation. Consequently, many countries have been able to systematically accumulate large foreign exchange reserves over the past few years, and, in a way, reserve accumulation is now possible, not only for the wealthy industrialized countries, but for the so-called developing countries as well. 4. However, these reserve accumulation has not been without pain. In fact, developing countries, being those still requiring improvements in their domestic infrastructure and other systems, have found that the increasing of their foreign exchange reserves has resulted in a huge opportunity cost. This is particularly so because the funds collected in the form of foreign exchange have been generally applied to acquire low risk, low-return investments, mostly in fixed income securities in industrialized countries. This situation has indirectly led to such funds being used to fund the huge fiscal deficits of several Western countries, or the expansion plans of their large corporations, instead of being utilized for domestic infrastructure, which, on most occasions have been funded with high cost loans from those very same countries.
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Ajith Nivard Cabraal: Foreign exchange reserve management Inaugural address by Mr Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka, at the SAARCFINANCE seminar on Foreign Exchange Reserve Management, organised by the Centre for Banking Studies of the Central Bank of Sri Lanka, Colombo, 15 August 2008. * * * Deputy Governors, Director of the CBS, My dear friends, 1. I am pleased to participate at the opening ceremony of this SAARCFINANCE seminar on foreign exchange reserve management. I also welcome all participants to this course and extend to the participants from the central banks of our neighboring countries, our resource persons from BIS, Deutsche Bank group, Citigroup and Reserve Bank of India, a very warm welcome to our country as well. 2. At the 17th SAARCFINANCE Governors’ meeting held in Washington in April 2008, it was decided to organize a seminar in foreign exchange reserve management. It was also decided that the Centre for Banking Studies (CBS) in Sri Lanka, with its over 26 years of experience in training and developing financial sector professionals, together with the International Operations Department of the CBSL, should host this seminar, so as to provide a forum within the region to discuss the latest challenges facing the managers of sovereign reserves at present. 3. My dear friends, foreign exchange reserve management has gained increased importance in Central bank activities in the recent past, due to two factors.
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As virtual banks are not allowed to operate physical branches, they will have to come up with innovative ways to offer attractive and competitive banking services. This is likely to force existing banks to consider how to further upgrade their services, and better make use of technology in their offerings. The result, I hope, will be a more innovative and globally competitive banking sector in Hong Kong, offering customers more diversified and efficient services. Technology use is a means to an end 20. Last but not least, we should bear in mind that the use of technology is a means to an 2/5 BIS central bankers' speeches end, and not an end by itself. Most people appreciate new technology for what it can do to improve their lives. They don’t really care whether the algorithms or the chips are amazingly innovative. To achieve wide adoption, any innovation has to offer users a “unique value proposition”. In plain language, the consumer wants to know “what can it do for me?” 21. Take mobile payment as an example. This has rapidly taken off for retail payment in Mainland China and some other places. In Hong Kong and other markets, people already use credit cards and e-payment systems like Octopus, so mobile payments will grow more slowly. The point is that mobile payment technology is only the means to an end. The Hong Kong consumer will ask: “what can it do for me?”.
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The interlinkages between financial institutions amplify risk in the financial system. In our assessments, it is important to be aware of any build-up of systemic risk. Residential mortgages provide a good illustration of the difference between the individual risk for a bank and systemic risk. Even during the 1990s banking crisis, Norwegian banks’ losses on residential mortgages were low. Today’s low risk weights for residential mortgages provide strong incentives for banks to extend these mortgage loans. However, housing market fluctuations, which go hand in hand with shifts in saving behaviour, are nonetheless a source of business cycle fluctuations and substantial losses when banks have to write off loans to firms selling goods and services to households. 8 BIS Review 131/2009 The Norwegian housing market is vulnerable. Both a high level of tax incentives for house ownership and a large volume of adjustable-rate mortgages contribute to wide fluctuations in activity and prices. 8 The rise in house prices in the past two decades has also been very strong compared with countries where housing bubbles have burst. To finance strong growth in residential mortgages, banks have to rely to a great extent on borrowing, thereby increasing their vulnerability to a liquidity squeeze. Thus, low risk weights for residential mortgages also lead to higher liquidity risk in the banking system as a whole. It is important to be aware of the similarities between developments in the Norwegian housing market and bank lending and developments in the countries most severely affected by the crisis.
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It provides lessons on channels of transmission, basic tradeoffs across objectives, and the effectiveness of policy responses.3 The channels of macroeconomic and financial transmission among open and interdependent economies occur through the current account of the balance of payments, the capital account, or both. From the vantage point of the domestic economy, there are three main channels of transmission: the exchange rate; the external demand; and the interest rate or risk-premia channel. The last can be more broadly defined as the financial conditions channel. The intensity of transmission of spillovers will depend on the monetary policy, currency policy and the real and financial openness of the economy being affected by external developments. Other relevant characteristics include the flexibility of labor and product markets; the depth, safety and soundness of the financial system; and the economy’s position as an international creditor or debtor. The Mundell-Fleming framework suggests that a country with a high degree of capital mobility and a flexible currency will be in a favorable position to use monetary policy to attain its internal growth and inflation objectives. When foreign interest rates increase and financial conditions tighten, changes in relative prices brought about by currency fluctuations can help to absorb the external shocks. The positive expenditure switching effect from currency depreciation improves the trade balance and supports demand.
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As national authorities we are all convinced that our national discretions are worth fighting for and we take pride when they are included in the final drafts. Perhaps we should ask ourselves more often whether our discretions are motivated by a fundamental need or just deep-rooted tradition or, even worse, our unconscious caving in to special interest groups. I realise this might be naïve but why not take this opportunity of change and think new instead of designing EU regulation on the basis of existing, often imperfect, national regulation. The need for a common rule book for big cross-border banking groups is often raised by the industry. In principle, we are sympathetic to this wish. If a common rule book means “just” common rules we are certainly moving in that direction. One of the main objectives of the Committee of European Banking Supervisors (CEBS) is to promote convergence of supervisory rules and practices. However, in the sense of common or centralised decision making by authorities, I think it is still far away from coming true. As long as the implementation and interpretation of directives and rules is done on a national level it will take time before we have a common rule book. Still, the aim should be to eliminate or reduce as much as possible these differences. Remaining differences in supervisory practices between countries should be clearly disclosed in order to improve the predictability of the EU regulatory system – which is another area where the CEBS is doing important work.
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So, we target some key initiatives specifically to low- and moderate-income groups. Here on Long Island there are pockets that suffered greatly in the recession. In Nassau County, communities in Hempstead, Baldwin, Roosevelt and New Hyde Park have a foreclosure rate over four times the national average. The same holds true for parts of Brentwood, Central Islip and Patchogue, in Suffolk County. We have worked hard to help neighborhoods that face high foreclosure rates. Over the past three years, my staff has come to Long Island to meet with housing counselors and legal services practitioners. We have provided housing advocates with the latest information on mortgage conditions, via mortgage briefs, roundtables, presentations and newsletters. We have now developed an online resource that shows delinquency and foreclosure conditions in neighborhoods each month. We believe that this site will be a useful complement, aiding the work of housing counselors and other parties seeking to help these communities. To share what we learn about our diverse District, we have a website, with detailed information about the region. I invite you to visit newyorkfed.org to explore our highly localized maps and information on small business, credit and housing conditions and even the latest job openings at the New York Fed. Finally, and crucially, in the aftermath of the financial crisis, we are working with our colleagues in Washington, D.C., and at other agencies to help put the nation’s financial system on a firmer footing.
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While the underlying core inflation rate, that strips out volatile food and energy prices, has been somewhat higher than expected a few months back, it appears that the annual rate of core inflation2 has peaked and we expect it to begin to decline later this year.3 Finally, inflation expectations, which play an important role in the inflation process, remain well anchored. By this I mean that people expect that the rate of inflation will continue to be relatively low for some time to come. Regional economic conditions So how is the recovery proceeding in the state and the region? As I mentioned, the New York Fed produces indexes that help us track economic activity in the region. Based on these measures, the economic recovery got underway in both New York State and New York City in late 2009, and economic activity has continued to expand through early 2012. The New York Fed also conducts the monthly Empire State Manufacturing Survey to monitor conditions for regional manufacturers. The most recent survey, for which a number of Long Island firms participated, points to continued expansion in manufacturing activity throughout the first quarter of 2012 and heightened optimism about the general business outlook. Recently released employment revisions indicate that the economic recovery has taken hold on Long Island. But there still is a long way to go. Employment on the island declined by a little over 4 percent in the downturn – a steep drop, to be sure, but only about two-thirds of the decline that occurred nationally.
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However, there are lessons and experiences on many different levels and my intention is instead to apply the more unpretentious strategy of “starting in my own backyard”. More specifically, what I intend to do is to review three aspects concerning developments in Sweden since the financial crisis, give my personal reflections on them and indicate what lessons I think there are to learn. Such a review need not be as self-indulgent and provincial as one might fear, but should be of rather general interest. There are clear links between developments in Sweden and the current international debate on monetary policy. Furthermore, Sweden has for some reason often been one of the first countries to face various new situations that have had to be dealt with. And even though other countries have yet to encounter the challenges already faced by the Swedish economy, they may have to do so sooner or later. 3 The three aspects I would like to discuss are the following: • The Riksbank is one of relatively few central banks that have explicitly used the policy rate to try to counteract the build-up of financial imbalances – a policy that is usually called “leaning against the wind”. It is probably the only central bank that has had to abandon this policy, temporarily at least, in order to focus fully on the inflation target.
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Once a monetary policy framework has been in force for long enough, the benefits of it tend no longer to be so obvious. In addition, if developments have been favourable, as has been the case since inflation targeting was introduced, it is easy for demands and expectations to rise. It is also easy to place greater focus on the drawbacks, which exist in all frameworks. For example, it is not so difficult to communicate that high and variable inflation is bad, as was the case when inflation targeting was introduced in the early 1990s. But when memories of those problems have faded, it is not as easy to convey that an inflation target is also supposed to prevent inflation being too low, that is, the importance of there not only being common expectations in society as to how much prices and wages will rise, but also that these expectations are anchored far enough above zero. Although this argument – that the inflation target should be sufficiently high – is crucial, it is after all also relatively abstract. There are above all two relationships that I think make it important to maintain confidence in the inflation target of 2 per cent – which is what our policy in recent years has aimed to do – and which indicate that the target should not be lower. One is that the conditions for wage formation to effectively allocate resources in the economy can deteriorate when average inflation is too low.
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The proportion of BAME employees is around 17%, greater than the proportion for the UK as a whole. Representation at senior management remains much lower at 5%, but is increasing. 56 Walton and Spencer (2009). 57 Page (2010). 58 Davies (2015) 59 Resolution Foundation (2015) 60 Although around half of that reflects the fact that there is a greater proportion of women working part time than men. 61 European Women on Boards (2016) 10 BIS central bankers’ speeches Like many other organisations, the Bank has sought to support diversity through a range of diversity networks covering, among other things, gender, ethnicity, LGBT, mental health, disability, caring and some of the main religions. One of my responsibilities is as Executive Sponsor of the Bank’s Ethnic Minority Network. This Network has put in place some valuable new initiatives to support greater ethnic diversity across the Bank over recent years, including reciprocal mentoring schemes and an Afro-Caribbean Scholarship Programme which funds students through university. The Bank has also recently signed up to UPstanding – an initiative to showcase BAME professionals working in the US, UK and Ireland. Plainly, there is further to go along these identity-based dimensions of diversity, in the Bank and more broadly. But there is wind in society’s sails, as well as in the Bank’s, on these dimensions of diversity, which gives good grounds for optimism about the future.
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The expertise has proven rather useful for many of our staff and, at times, was provided as on- BIS central bankers’ speeches 1 the-job training, for example, FSVC experts joined the Bank of Albania’s Supervision Department inspectors in their on-site examinations. I am confident that these qualities of FSVC’s assistance will be maintained in the future. A result of this fruitful cooperation is our shared commitment to extend it to the medium run. The parties have been in constant contact to identify the fields for future cooperation and I reckon that this process is being finalized in terms of project design and relevant details on development methodology and expected results. A preliminary assessment reveals that the scope of our future cooperation has expanded. Projects will continue to serve the objective for ongoing supervision capacity building in the fields of improvement of contingency plans, implementation of latest amendments to international banking supervision standards, risk assessment and improvement of regulatory requirements for responsible management by banking and financial institutions. The assistance may be expanded to include underlying standards for payment systems and use of e-money, thus laying the grounds for the adoption of relevant requirements arising from EU directives. The cooperation of the FSVC with ADIA will focus on the implementation of the Strategic Development Plan 2012–14 and will address, more concretely, the modernization of the IT infrastructure and reporting system as well as other ancillary processes.
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In spite of the brisk primary and secondary market activities in a few stock exchanges in the region, capital markets, in particular the bond market, remain rather underdeveloped. There is much more to be done, therefore, to further develop the financial markets by the regional jurisdictions. The second part of the conference title - 'The New Frontier' - also contains an important message. Globalisation and the revolution in information technology have fundamentally altered the dynamics of international finance. Such changing dynamics raise concerns among many of us about the manner in which a sizable portion of gross savings in Asia finds its ways into financial obligations of the developed markets before they are recycled back to Asia. As the capital inflows into the region tend to be more volatile, the recycling process may have implications on monetary and financial stability in the region. Another aspect of the dynamics of international finance is contagion. World interest rates have until recently stayed at record lows. In search of higher yields, hedge funds and other institutional investors have scoured the world for assets generating higher returns, driving up asset prices and driving down credit spreads. As the interest rate outlook has become uncertain, fund managers may be reassessing the risks of emerging market assets, as reflected in the recent correction in world equity and commodity prices. A sudden exit of capital could leave those economies with weaker financial systems even weaker, with spillover effects on other parts of the region.
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This is not only the case for economies like ours here in Hong Kong where financial services constitute a substantial proportion of GDP, but equally for economies that rely on other sectors, be they manufacturing, mining, or agriculture, for the bulk of economic activity. There are many reasons for this. First, a well-functioning financial system helps allocate capital to the most productive individuals, firms, and sectors through the process of intermediation between households that engage in savings and entrepreneurs who require funds to carry out investment projects. Second, broad financial markets permit risk sharing and diversification, thereby reducing the exposure of investors to idiosyncratic risks. Third, structured financial products allow the transfer of risk to entities that are most capable of bearing it. This makes it possible for economic agents to offload risks that they are not well equipped to deal with and specialize in activities which constitute their comparative advantage. Last but not least, a financial system makes it possible to shift purchasing power across time as individuals build up financial assets while they are working to sustain a comfortable living standard in retirement. Considerable progress has been made by many regional economies in revamping and strengthening the financial markets since the Asian financial crisis. However, there is still a general lack of diversity in the channels of financial intermediation, with a significant over-reliance on the banking system.
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Our vision is to create a bill payment experience where consumers and businesses can: • electronically apply for GIRO bill payments; • seamlessly pay bills via a “request for payment” function that leverages off FAST fund transfers without needing to bank with the same bank as the biller; and • manage their standing payment instructions online or on their mobile phones. MAS is working with the banks and the payments industry to create seamless bill payments and collections. Mobile payments for public transport – account-based ticketing The way we pay for public transport is also due for a refresh. The Land Transport Authority has recently announced that by the end of this year, it will be conducting a pilot for its Account-Based Ticketing System. • This system will allow commuters to use their existing contactless credit and debit cards to pay for train and bus rides. • No longer will users have to queue to top-up their stored value transit cards. • Users will even be able to use their mobile wallets to pay for public transport. An Account-Based Ticketing System will bring Singapore in line with other cities with worldclass public transport payment infrastructure such as London. Pervasive digitisation – maximising productivity gains from e-payments The fourth strategy is to help businesses to digitise their processes and integrate them with electronic payments solutions, so as to maximise productivity and efficiency gains.
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A society: • that spurs continuous innovation in payments technology; • that gives consumers maximum convenience and confidence in making payments; • that enables firms to increase productivity through payments integrated with business processes; and • where swift, simple, and secure payments is a reality for everyone. MAS has been working closely with the financial industry and other government agencies to drive electronic payments. We have also engaged KPMG Advisory to study Singapore’s payments landscape; KPMG’s report will be released later today. Let me elaborate on the four key strategies to create an e-payments society: • streamlined regulation; • inclusive governance; • interoperable infrastructure; and • pervasive digitisation. Streamlined regulation – targeted, activity based, risk appropriate First, we will streamline our regulatory framework for payments; strengthen consumer protection; and make regulation more targeted based on the specific payment activities that businesses undertake. The existing regulatory framework for payments cuts across the Money-Changing and Remittance Businesses Act (“MCRBA”) and the Payment Systems (Oversight) Act (“PS(O)A”). The MCRBA was introduced in 1979, an era when bricks-and-mortar money changers and remittance agents were the norm. • For more than three decades, it has served us well. • We have a thriving remittance industry that provides an essential service to residents, including the many foreign workers in Singapore. The PS(O)A was enacted in 2006, with the objective of keeping our key payment systems safe and efficient.
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This fable, known as “blessing or curse”, is essentially about how the true significance of developments is often not immediately apparent – and how the wise observer therefore pays due attention to unintended consequences, both positive and negative. In my view this describes rather well the situation in the euro area financial sector today. The euro area banking sector has suffered a substantial shock that has triggered widespread deleveraging, and on the face of it this is a negative development: it harms economic growth and constrains access to finance. Yet, it is also clear that before the crisis the European banking system had become unhealthily large. It was too leveraged, too big relative to the size of national economies, and perhaps too dominant relative to capital markets. Thus, the effect of a downsizing banking sector might in fact be a blessing in disguise – that is, a shift towards safer banks and a more balanced financing mix. BIS central bankers’ speeches 1 Yet, we have to be careful that this too does not turn out to create problems. For example, the transition to a new financing mix may favour some jurisdictions over others, thus reinforcing imbalances. A shift from bank to non-bank financing may create new sources of systemic risk in less transparent sectors. In other words, the challenge for policy-makers in Europe today is to capitalise on the potential positives from the situation that has befallen us, while making sure that we do not simply end up creating new problems for the future.
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For example, the average cost of borrowing for non-financial firms in Portugal is more than 5% per year, whereas the equivalent for French firms is around 2% per year. One would imagine in this situation that a Portuguese firm would seek out a French bank, but the euro area banking market does not facilitate such arbitrage. Direct cross-border loans to firms account for just 7.5% of total loans to firms. And local affiliates of foreign banks represent on average only around 20% of national markets, and much less in larger countries. Thus, firms depend heavily on the health of their domestic banks. Moreover, while corporate bond issuance has partially substituted for bank lending, it is strongly concentrated in non-distressed countries where there has been no decrease in the net flow of bank loans. The net issuance of debt securities, quoted shares and bank loans in non-distressed countries was plus € billion in 2013, whereas it was minus € billion in distressed countries. Of course, in principle firms from distressed countries can issue securities in non-distressed countries. In practice, however, it is legally complicated due to issues of different governing law, especially when securities are traded along a chain of financial intermediaries. This analysis points to two missing pieces in the euro area financial market: lack of retail banking integration and lack of capital market integration. The low level of retail banking integration reflects several factors, but diverging approaches to supervision and resolution are certainly among them.
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And likewise, we are working across the institution to maximise our very considerable international engagement; BIS central bankers’ speeches 3 • fifth, while it is a real strength of the new system that conduct and prudential supervision have their own institutions that can provide the focus that is essential, where we should work together we do, as the example of mortgage underwriting standards illustrates; • sixth, our approach is to use judgment to set the right incentives for the firms that we regulate to take the actions themselves rather than default to the regulators to do the work. I welcome the action taken by firms on mortgage underwriting standards as an example of that process, and more broadly I welcome the recommendations of the Parliamentary Commission on Banking Standards not least because they put the whole issue of incentivisation of the right behaviour at the front of their recommendations; • and last, returning to my earlier theme, we want to create and preserve financial stability as a platform to enable choices to be made in other areas of public policy free of concerns that our objective might be put in jeopardy by doing so. A prime example of this is to enable conditions to exist which can enable people to buy homes. I hope this gives a good sense of what we are about. Thank you. 4 BIS central bankers’ speeches
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How can research help address these issues and, more generally, improve the overall supervisory stress testing regime? I want to suggest two general areas of research – one tactical and the other much bigger picture and strategic. The tactical area is research that helps improve supervisory models. First, developing additional ways of projecting revenues and non-credit expenses in stressed environments is a particularly ripe area for additional work, in my view. As I noted, an important innovation in the SCAP was the recognition that a comprehensive stress test focused on net income needed to incorporate projections of interest and non-interest income and non-interest expense. While a number of models already existed for making such projections – for instance, those used by banks in their budgeting and planning processes – these were nearly all calibrated to produce projections assuming business as usual conditions, rather than the stressed environment assumed in the SCAP. The SCAP PPNR projections were thus based on stylized supervisory models that used available historical data on bank performance during recessions. Since then, the supervisory PPNR models have become considerably more sophisticated, but at their heart, they continue to rely on historical outcomes for revenues and expenses, rather than fully incorporating the fundamental drivers of those outcomes at the business line level. Additional research and data 5/8 BIS central bankers' speeches collection on these fundamental drivers and their performance under stress could make the PPNR projections more robust to changing business strategies and focus. A second tactical research area concerns measuring model risk.
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Elvira Nabiullina: Speech - Federation Council’s Financial Market Development Board meeting Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at the Federation Council’s Financial Market Development Board meeting, Moscow, 8 December 2020. * * * Good afternoon, dear Speaker and fellow colleagues, There is no denying the fact that the financial sector plays a critical part in the context of our efforts to deliver on the national development agenda. Financial intermediaries and the stock market work to ensure that savings transform into investment, businesses obtain the resources they need for development, and consumers gain the tools to grow their wealth. It is within our regulator’s mandate to oil the gears of all these mechanisms and make sure the financial sector provides excellent performance. This means that the costs of businesses and consumers related to their financial objectives should go down. And this means, as the Speaker has mentioned, that we should secure the emergence of long-term money. My deputy, Sergey Shvetsov, is here today to tell you more on our financial market agenda. In my opening remarks, I would like to expand on a number of key points in our operations as a regulator, which have, in my view, major implications. It would be fair to say that this year has spurred transformation in the financial sector. Among key developments are accelerated digitalisation, the Bank of Russia’s switch to soft monetary policy, falling interest rates in the economy, pandemic-induced borrowers’ problems and a large volume of restructured loans.
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Philipp Hildebrand: The new investment policy of the Swiss National Bank Introductory remarks by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Geneva, 17 June 2004. * 1. * * The evolution of the new investment policy The new National Bank Act has been in force since 1 May 2004. The management of monetary reserves is explicitly mentioned in the NBA as part of the Swiss National Bank’s mandate for the first time. The management of these reserves is subject to the primacy of monetary policy and implemented according to the criteria of liquidity, security and return. In so doing, the National Bank must guarantee professional, modern asset management and risk management. Until the mid-1990s, the National Bank only had limited possibilities for managing its assets. Monetary reserves were mainly held in the form of gold and foreign-currency government bonds with a maturity of less than one year. Accounting for approximately 80%, the US dollar was the main reserve currency. An easing of investment regulations came about in 1997 when the legally prescribed maximum term for bonds was repealed and repo and gold lending business was introduced. At the same time, the National Bank began to diversify currency risks on its investments to a greater degree and gradually reduced the US dollar portion. The new Act takes this a step further and leaves the permissible investment universe completely open. 2.
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We are, though, conscious that we still have much to learn in operating this new framework, including from the experience of others. I do not know what Sir Leslie would have made of the Global Financial Crisis and the Great Recession. But I think we can take it for granted that he would have risen to the challenge of preventing a repetition. That is a challenge future central bankers must also aspire to meet. Apparently there is an old Chinese curse that wishes “interesting times” on the recipient. The past four years have, I am afraid, been rather more “interesting” than I would have liked. Times will no doubt continue to be interesting, but let us hope in the English, rather than the Chinese sense. Thank you! 7 This is analogous to the relationship between monetary and fiscal policy, where the fiscal authority is in effect a Stackelberg leader. BIS central bankers’ speeches 9 References Adrian, Tobias, and Hyun S. Shin (2009). “Money, Liquidity and Monetary Policy”, American Economic Review, Papers and Proceedings, 99, 600–605. Bean, Charles R. (2003). “Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?” in Anthony Richards and Timothy Robinson (eds.) Asset Prices and Monetary Policy, 48–76. Reserve Bank of Australia: Sydney. Bean, Charles R., Matthias Paustian, Adrian Penalver and Timothy Taylor (2010). “Monetary Policy after the Fall” in Macroeconomic Challenges: The Decade Ahead, Federal Reserve Bank of Kansas: Kansas City. Bernanke, Ben S. (1983).
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For instance, the Bank of England has introduced regular auctions of liquidity in which loans can be secured against either the safest collateral or, at a cost, a wider collateral set, including high-quality private securities. An increase in bids offering the wider collateral as security then provides an early warning of financial stress. And here, the Reserve Bank of Australia has also permanently widened the range of collateral it accepts. More recently, the movements in the size and composition of our respective balance sheets reflect transactions carried out for monetary policy purposes, especially our large-scale purchases of government debt (and, in the US case, also government-backed GSE debt and mortgage-backed securities) financed by the issuance of reserves. Commonly called “quantitative easing”, I shall say more about the efficacy of these operations later. Before the crisis, central banks saw these two objectives of monetary and financial stability as largely complementary in nature. According to the conventional wisdom, the maintenance of price stability would help foster stable macroeconomic conditions more generally by anchoring expectations. And the consequent reduction in macroeconomic volatility should help reduce the likelihood of episodes of financial instability. All that was necessary, then, was to ensure that banking regulators and supervisors ensured individual financial institutions followed appropriately responsible policies with regard to their lending decisions and were sufficiently well capitalised and all would be well. We know now that this confidence was misplaced.
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This story was much more unique, as involved the first banking crisis in Europe since the EU single market was formed in the early 1990s. Today I am not going to talk about the build-up to these events, and I will have little to say about the second story. I have expanded on both in various publications and speeches that I can refer you to. Instead, I am going to talk about what happened to the Icelandic economy afterward – its deep recession and its recovery – and then reflect on some of the policy challenges that still face us. But let us first reflect on the distance that has been travelled since that fateful autumn of 2008. Iceland’s financial sector was crumbling, and the authorities had to take extraordinary measures to keep basic domestic banking services up and running, including letting the international part of the banking system go into resolution, wiping out all equity in the banks, and removing their managers. Many expected the sovereign to default on its obligations, which would have left Iceland shut out of international capital markets for years. A key aspect of crisis management was therefore to ring-fence the sovereign from the failing banks and minimise the socialisation of private sector losses. And Iceland was well on its way into its deepest post-war recession, where GDP contracted by 12.5% from its peak in the fourth quarter of 2007 to its trough nine quarters later, in the first quarter of 2010.
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It fell from an unsustainable peak, of course, but the drop was spectacular nonetheless. BIS central bankers’ speeches 1 Where are we now, almost five years later? First, there is hardly any talk of a potential sovereign default any more: the public sector has a primary surplus, the overall deficit is estimated to have been around 2% of GDP last year, government debt as a share of GDP is on a downward trajectory, and Iceland has investment-grade ratings from all three major rating agencies. Second, we are far advanced in rebuilding a domestically oriented financial sector. The new domestic banks, which were built on the ashes of the three failing cross-border banks, are profitable, well capitalised, liquid, and with nonperforming loan ratios that, although still high due the crisis, are falling to normal levels as private sector debt restructuring progresses and the economy recovers. Third, the economy has indeed recovered, as can been seen on Figure 1a. The economy has been growing since the second quarter of 2010, and unemployment has fallen from a peak of over 9% to around 5½%. And as Figure 1b shows, this year Iceland is projected to be among the world’s five fastest-growing advanced economies, with growth estimated at 2.1%, although that is due in part to the recent slowdown in many other advanced countries.
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Other initiatives such as the harmonization of the regulatory framework in the region will also help foster an investment-friendly environment that encourage issuers to tap funds across the region using procedures, prospectus, and disclosure requirements they are familiar at home. Savers will also have a greater choice of diversification of their savings. As finance people, we are always conscious that finance always follows trade and production. Today, our region trades more with one another and invest more in each other’s market, which is confirmed by the ranking of Asian trading partners as top export destination 1 From 950 USD billion as of December 2001 to 5,700 USD billion at end 2011. 2 From 2,800 USD billion at end 2001 to 14,000 USD billion at end 2011. BIS central bankers’ speeches 1 for most of our countries. It is therefore only natural that our financial markets become more integrated to enable our firms and enterprises to allocate resources where they most benefit themselves and the region. Notwithstanding these progress and ongoing works, there are challenges that come with a maturing and more integrated market. Some Asian bond markets experience, from time to time, market turbulence as foreign investors leave the market during the recent crisis period. These point to the limited ability of the market to manage large amount of foreign capital flows.
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But harmonization takes time as the devil is in the details. And harmonization may go beyond regulations on the trade or issuance of bonds. As cross border initiatives, they inevitably involve regulations over international capital flows which we need to also respect both host country and home country authorities. For instance, the home country may allow their savers to invest abroad, but the recipient countries still maintain controls on inflows. Other regulators may permit non residents to make use of tools such as repo, as liquidity enhancing mechanism, but others may look at this measure as way to engage currency speculation. These are all delicate balancing acts which we would need to tackle as we strive to integrate our financial markets further. And while we pursue development and liberalization objectives we also need to strengthen our regional safety net. Today our regional cooperation has multilayer safety net consisting of Cross Border Collateral Arrangement (CBCA) for our banks to avail themselves of liquidity from the host central bank using collaterals at their home or head office, bilateral foreign exchange swap line, and the Chiang Mai Initiative Multilateralisation (CMIM) serves as second line of defense and should continue to be enhanced to counter possible market turbulence. As you have heard from the Minister of Strategy and Finance of Korea, Mr. Bahk Jaewan, the ASEAN+3 Finance Ministers and Central Bank Governors have made progress on important features of the CMIM. We have announced the doubling of the total size of the CMIM from $ billion to $ billion.
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BIS central bankers’ speeches 5 information on household inflation expectations at the time; tested alternative wording of potential inflation expectations questions; studied the feasibility of eliciting individual uncertainty about future outcomes for inflation, house prices, and earnings growth; and introduced a panel dimension to the experimental data collection effort in order to study the persistence of inflation expectations and their responsiveness to inflation surprises. The HIEP considered different potential time horizons for its inflation expectations questions. For the short-term expectations, we settled on the one-year-ahead horizon – similar to the Michigan survey. We also examined the feasibility of asking for inflation expectations over a longer time horizon. The Michigan survey asks respondents by what percent per year they “expect prices to go up or down on the average, during the next 5 to 10 years”.17 We replicated this question in our experimental surveys, and found that the Michigan question elicits a mixture of interpretations, with some respondents using a 10-year horizon and others thinking about a 5-year horizon.18 From the results of our cognitive interviews and experimental surveys, we decided in the SCE to elicit medium-term inflation expectations at the one-year two-year-forward horizon.
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The May results of the SCE showed an increase of 29 basis points from April in the median of the individual means (see Slide 6) and this can also be examined by holding the sample constant using the panel structure. In this case we find an increase of 27 basis points from April and the distribution shifting to the right, although the statistical significance of the change is more marginal than the decline over the longer period.38 As can be seen in Slide 9 there is a wide dispersion in views about future inflation held by consumers.39 This sort of analysis highlights the value of the panel nature of the SCE in yielding more robust measures of expectations. Let me turn next to the surveys of market professionals conducted by the New York Fed. Probabilistic questions on the surveys of primary dealers and market participants Ahead of each meeting of the FOMC, the Trading Desk of the New York Fed asks a group of financial market participants, including both primary dealers and buy-side investors, to provide their views on a range of economic and financial indicators. The Desk has surveyed the primary dealers for over a decade, and since 2011 it has made the questions and results of the Survey of Primary Dealers (SPD) publicly available.40 Beginning in 2014, the Desk also launched the Survey of Market Participants (SMP), which solicits views from active investment decision makers, such as mutual, pension, and hedge fund managers as well as corporate treasurers.
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Clearly, then, there has been a rapidly rising tide of banking information. Or has there? The Godfather of information theory, Claude Shannon, defined information in terms of its ability to reduce our uncertainty. 60 But page length and certainty are not synonyms. As even professional investors find banks’ annual reports somewhere between undigestible and unfathomable, it seems possible more banking information, in the conventional sense, may have made for less banking information, in the Shannon sense. One interesting diagnostic comes from looking at the nature of the information provided by banks’ annual reports, rather than its quantum. Linguistic analysis provides a range of metrics for determining the complexity of a language, including word and sentence length. 61 By taking a range of measures of linguistic complexity, and applying them to banks’ annual reports, we can get a window on Shannon’s measure of information-content. Chart 3 plots six metrics of linguistic complexity, as applied to the annual reports of the four largest UK banks. 62 It compares them with a series of alternative publications, specifically a UK broadsheet newspaper, a UK tabloid newspaper, a set of recent Bank of England reports, a selection of my own speeches, and a selection of speeches by the leaders of the UK’s main political parties. These comparators have no significance beyond the fact that they are examples of material written for a general audience. What this demonstrates is that banks’ annual reports rank highly on the linguistic complexity scale, well above even a broadsheet newspaper.
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Decisions were now taken by the Bank’s MPC and were accompanied both by published minutes of MPC meetings and a quarterly Inflation Report. This pushed the wordcount per decision up to around 20,000. Fast forward to today. Monetary policy decisions are still made by the MPC and communicated through Minutes and the Inflation Report. But there have been additions. A Monetary Policy Statement now accompanies every policy decision. And, after a lag of eight years, transcripts of the policy meetings themselves will in future also be published. By my rough estimates, that will push the word-count per monetary policy decision up to around 30,000 to 35,000. These are big steps forward from an openness perspective. The key question, from a Shannon perspective, is how far they have helped understanding of monetary policy by the general public. The evidence here is mixed. On the upside, around 60% of the general public believe the Bank has a good understanding of the economy. On the downside, despite the raft of transparency initiatives, only around a third believe the Bank operates with openness. And, perhaps most tellingly of all, only around a quarter believe the Bank explains its actions and decisions in terms they can understand. 63 What explains this mixed message? Perhaps, as with banks, some of the explanation lies in the nature of communications, rather than their quantity. Chart 4 puts Bank of England reports and speeches on the linguistic complexity map.
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We are taking a four-pronged approach to building the digital asset ecosystem. first, explore the potential of distributed ledger technology in promising use cases; second, support the tokenisation of financial and real economy assets; third, enable digital currency connectivity; and fourth, anchor players with strong value propositions and risk management. EXPLORE POTENTIAL OF DISTRIBUTED LEDGER TECHNOLOGY IN PROMISING USE CASES The most promising use cases of digital assets in financial services are in crossborder payment and settlement, trade finance, and pre- and post-trade capital market activities. There are several promising developments, including in Singapore. In cross-border payments and settlements, wholesale settlement networks using distributed ledger technologies such as Partior – a joint venture among DBS, JP Morgan and Temasek – are achieving reductions in settlement time from days to mere minutes. In trade finance, networks like Contour – formed by a group of trade banks – are establishing common ledgers with traceability to automate document verification, enabling faster financing decisions and lower processing cost. In capital markets, Marketnode – a joint venture between SGX and Temasek – is leveraging distributed ledger technology to tokenise assets, which reduces the time needed to clear and settle securities transactions, from days to just minutes. SUPPORT TOKENISATION OF FINANCIAL AND REAL ECONOMY ASSETS The concept of asset tokenisation has transformative potential, not unlike securitisation 50 years ago. Tokenisation enables the monetisation of any tangible or intangible asset. It makes it easier to fractionalise an asset or split up its ownership.
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Yet others see MAS as having struck the right balance, that “the crypto winter is proving MAS’ policies to be right”. What does MAS really want? Well, we know what we want but I think we need to do a better job of explaining it. Before I get to that, it is important to be clear what we are talking about. Public and media attention has tended to focus on cryptocurrencies. But cryptocurrencies are just one part of the entire digital asset ecosystem. To understand the issues more sharply and what the benefits and risks are, we need to be clear what the different components of this ecosystem are. I can understand why there is confusion about cryptocurrencies, blockchains, and digital assets. The inherent complexity of this ecosystem has made it difficult even for MAS to get its messages across. So, today, we will try to do a better job of explaining the ecosystem and its different components – and what MAS is actively promoting; what MAS is discouraging; and what are the risks MAS is seeking to manage. My apologies if the next couple of minutes sound like a tutorial but it is important that we are clear about the concepts we are dealing with. A good place to start is with digital assets. A digital asset is anything of value whose ownership is represented in a digital or computerised form.
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In Chart 7, the greater the number of years spent in school, the darker the green in which the country is colored. In Asia, there are a number of dark green areas, such as Japan, Korea, Malaysia and Sri Lanka. As you would expect, Hong Kong and Singapore also belong to this group, although it is not shown clearly on this map. One may get the impression that Asia as a whole is not as green as North America or Europe, and is more or less similar to South America. This would seem to indicate that there remains significant potential for further accumulation of human capital in the region. At the same time, there are some interesting figures relating to U.S. universities, which are generally acknowledged as providing the highest standard of education, attracting talented people from all over the world. If you look at the data for U.S. university students by their country of origin, you can see that students from Asian countries dominate, as shown in Chart 8. Those students returning to their home countries will no doubt have a profound impact on the human capital there. It is well known that Bangalore, the IT hub of India, benefited from returnees from Silicon Valley. Moretti’s study shows that innovative, highly skilled workers contribute not only directly to the higher quality of human capital, but they also have a positive effect on the skills of those around them – a sort of positive externality.
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2 Unemployment peaked at nearly 12% in the eighties and over 10% in the early nineties – after smaller falls in output. 2 Labour force data were published after the date of this talk: unemployment has dropped to 7.9% in the three months to April. 2 BIS Review 91/2010 Throughout the recession we have heard many reports from firms about how they and their workforces have responded to recessionary pressures. Those reports are from our Agents or MPC members talking directly to business contacts across the regions and in all sectors – a truly invaluable source of information for the Committee. It has been clear that there has been an unusual response from companies and their employees. Many firms have sought to retain staff wherever possible, rather than shed them as in previous downturns – hours have been shortened and wages frozen or even cut where possible, rather than making people redundant. Large firms with smaller suppliers have tried to work with suppliers to keep their supply chains intact, which has helped smaller firms to survive. Many employees – at least in the private sector – have been willing to forgo income in order to retain their jobs. Tax officials have worked very hard with firms to give them the time for tax bills to be paid.
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In the early years of the MPC there was an intense debate about these imbalances, and how they should affect monetary policy. 24 In a speech in April 2000, I argued that “it is important not to let domestic demand grow too rapidly for too long. The longer the correction is left, the sharper the required adjustment will be”. 25 The question was how much to stimulate domestic demand, at the cost of exacerbating the imbalances, in order to compensate for weak external demand, and the minutes of the MPC in 2001 and 2002 explicitly discussed the case for accepting inflation below target over the two-year horizon. 26 The Committee rejected the case, and during that period most of the dissenting votes on the MPC were for lower rates (see Table 3). The dilemma, and the MPC’s resolution of it, was summed up by my predecessor Eddie George in 2002 when he said “So in effect we have taken the view that unbalanced growth in our present situation is better than no growth – or as some commentators have put it, a two-speed economy is better than a no-speed economy.” 27 Was that the right choice? As in some other industrialised countries, asset prices, including house prices, had been pushed up by falls in long-term real interest rates (see Chart 7).
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In February 1929, Josiah Stamp went to Paris as a member of the Young Committee to assess whether the reparations debts run up by Germany could be repaid – the similarities with the present situation in Europe are too poignant to dwell on. In a letter to Keynes, Stamp compared these international meetings to a conjuror trying to pull a rabbit out of the hat: “It is still a madhouse, in a way – but all are mad in a very genteel way, the main occupation being elaborate proofs, from different angles, of sanity. One half sit round a hat saying with Coué reiteration: there is a rabbit – there is. The other half try to make a noise like a succulent lettuce. There is a general conviction that the more eminent the conjurors convened, the more certainty is there of the existence of the rabbit”. 33 The only escape from madness is the power of ideas. Today, we understand less than we would wish about how the economy works. The challenge of trying to understand more, and of developing those new ideas, belongs to you – the next generation of students and academics at the LSE and elsewhere. Go to it! 33 Stamp’s letter is reprinted in the collected works of J.M.Keynes volume XVIII, p.306-7, Macmillan 1978. Émile Coué was a French psychologist who developed a popular method of psychotherapy based on optimistic autosuggestion. He would have been right at home in modern economic policy debates.
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Complex control adds, not subtracts, from the Knightian uncertainty problem. The US constitution is four pages long. The recently-tabled Dodd Bill on US financial sector reform is 1,336 pages long. Which do you imagine will have the more lasting impact on behaviour. Second, faced with uncertainty, the best approach is often to choose a strategy which avoids the extreme tails of the distribution. Technically, economists call this a “minimax” strategy – minimising the likelihood of the worst outcome. Paranoia can sometimes be an optimal strategy. This is a principle which engineers took to heart a generation ago. It is especially evident in the aeronautical industry where air and space disasters acted as beacons for minimax redesign of aircraft and spaceships. Third, simple, loss-minimising strategies are often best achieved through what economists call “mechanism design” and what non-economists call “structural reform”. In essence, this means acting on the underlying organisational form of the system, rather than through the participants operating within it. In the words of economist John Kay, it is about regulating structure not behaviour. 23 Taken together, these three features define a “robust” regulatory regime – robust to uncertainties from within and outside the system. Using these robustness criteria, it is possible to assess whether restrictions might be preferable to taxation in tackling banking pollution. To illustrate this, contrast the regulatory experience of Glass-Steagall (a restrictions approach) and Basel II (a taxation approach). Glass-Steagall was simple in its objectives and execution. The Act itself was only 17 pages long.
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Haldane, A G (2009a), Banking on the State, available at http://www.bankofengland.co.uk/publications/speeches/2009/speech409.pdf 14 BIS Review 40/2010 Haldane, A G (2009b), Rethinking the Financial Network, available at http://www.bankofengland.co.uk/publications/speeches/2009/speech386.pdf IMF (2009), World Economic Outlook: Crisis and Recovery, available at http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf Kay, J (2009), Narrow Banking: The Reform of Banking Regulation, Centre for the Study of Financial Innovation. Kelling, M J, Woolhouse, M E J, May, R M and B T Grenfell (2003), “Modelling Vaccination Strategies Against Foot-and-mouth Disease”, Nature, vol. 421, p.136–142. Kennedy, S E (1973), The Banking Crisis of 1933, University Press of Kentucky. Korup, O and J J Clague (2009), “Natural Hazards, Extreme Events, and Mountain Topography”, Quaternary Science Reviews, vol. 28(11–12), p.977–990. Kotlikoff, L J (2010), Jimmy Stewart is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking, John Wiley and Sons. Laeven, L and R Levine (2007), “Is There are Diversification Discount in Financial Conglomerates?”, Journal of Financial Economics, vol. 85(2), p.331–367. Mehra, R and E C Prescott (1985), “The Equity Premium: A Puzzle”, Journal of Monetary Economics, vol. 15, p.145–161. Merton, R C (1973), “Theory of Rational Option Pricing”, Bell Journal of Economics and Management Science, vol. 4(1), p.141–183. Miles, D (2009), The Future Financial Landscape, available at http://www.bankofengland.co.uk/publications/speeches/2009/speech418.pdf Modigliani, F and M Miller (1958), “The Cost of Capital, Corporation Finance and the Theory of Investment”, American Economic Review, vol. 48(3). NYU Stern School of Business (2009), Restoring Financial Stability: How to Repair a Failed System, John Wiley & Sons.
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To set things in motion, we introduced the Interoperable Credit Transfer Framework (ICTF) last month. Along with the RPP, the ICTF is also expected to be a game changer for Malaysia’s payment landscape, particularly for mobile payments. For the first time in Malaysia and likely in the region, banks and non-banks will be connected on a single payment network. This is a good example of a strategy of collaborative competition, or ‘co-opetition. Payment providers collaborate at the infrastructure level via the shared payment infrastructure and compete on the service level. This expands network reach, lowers costs and avoids duplication of resources by the industry. It also focuses competition at the product level. Looking ahead, we envisage industry players to develop more innovative value-added features to provide better service levels to consumers and merchants. Another important area where innovation plays a prominent role, is to advance financial inclusion through digitalisation. Out of the Malaysian adult population of 24 million, we estimate that about 10 million do not use online banking, while 2 million remain unbanked. We look to the industry, both banks and non-banks, to come up with new and imaginative ways to accelerate the onboarding of these underbanked and unbanked segments of our society. In supporting this, the transaction fee for instant transfer transactions up to RM5,000 will be waived effective 1 July 2018 for individuals and SMEs. Strategies beyond monetary incentives also need to be employed. For example, mobile payment applications should be convenient, fast, secure, simple and intuitive.
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According to their mission statement, it aims to improve the quality of economic policy with open and fact-based research, analysis and debate, targeted at improving the quality of economic policy. At the same time, we are proud that the National Bank of Romania has been a member of Bruegel think tank since 2016. Returning to our guest speaker: André Sapir is a Professor at the Université Libre de Bruxelles (ULB), he also teaches “International Economics and European Integration” at the Solvay Brussels School of Economics and Management. Prof. Sapir has a PhD from Johns Hopkins University in Baltimore, where he studied with the famous trade economist Bela Balassa. He was elected Member of the Academia Europaea and of the Royal Academy of Belgium for Science and the Arts. He was a Visiting Fellow at the International Monetary Fund, the World Bank and the World Trade Organization. Prof. André Sapir has written extensively on international economics including European integration, monetary union, international trade, international policy coordination and globalization. He worked for the European Commission as Economic Advisor to the Director-General for Economic and Financial Affairs (1990–2001), then he was Economic Advisor to President Romano Prodi and also headed his Economic Advisory Group (2001–2004). From 2005 to 2009 he was External Advisor to President José Manuel Barroso. From 2011 to 2015 he was successively Vice-Chair and Chair of the Advisory Scientific Committee and Member of the 1/2 BIS central bankers' speeches General Board of the European Systemic Risk Board (ESRB), Europe’s financial stability oversight body.
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None of this means financial institutions are excused from the need to manage their balance sheets prudently. But as Bill Winters observed, more exacting liquidity requirements mean the conditions for using central bank facilities can be less stringent (and more effective). This is one example of the synergies that arise from the return of banking supervision to the central bank. With our announcements today, we are building a liquidity framework for the markets of tomorrow. In the markets of today, initial usage of these facilities is likely to be limited. The MPC’s stock of asset purchases and the Funding for Lending Scheme currently provide all the liquidity and collateral that the sterling system needs. But as these operations are wound small relative to the global supply of assets capable of meeting this demand. As the CGFS has recently shown, the stock of non-cash collateral eligible for derivatives transactions is some $ trillion, and the supply of AAA– and AA– rated government bonds alone has risen by nearly $ trillion since 2007. See the CGFS report, “Asset encumbrance, financial reform and the demand for collateral assets” available at http://www.bis.org/publ/cgfs49.pdf. 10 Bagehot, W. (1873) “Lombard Street”, particularly pages 205–207. 11 See “Liquidity insurance at the Bank of England: developments in the Sterling Monetary Framework”, available at www.bankofengland.co.uk/markets/Documents/money/publications/liquidityinsurance.pdf. The Winters Review is available on the Bank’s website at http://www.bankofengland.co.uk/publications/Documents/news/2012/cr2winters.pdf. 12 BIS central bankers’ speeches 5 down over time, we expect to see banks making increasing use of our new permanent facilities.
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Mark Carney: The UK at the heart of a renewed globalisation Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at an event to celebrate the 125th anniversary of the Financial Times, London, 24 October 2013. * 1. * * Introduction When the Financial Times opened for business in 1888 London was the world’s preeminent financial centre. It had the most international banks, the largest capital markets, and the deepest money and gold markets. It backed projects all over the world, and most of world trade was financed by bills drawn on London. Supporting the critical mass of banks, insurers and investors was an army of solicitors, accountants and clerks.1 What London had lacked, at least until the FT’s great rival Financial News was founded in 1884, was a ready provider of financial news. The FT famously set out to report “Without Fear and Without Favour”, and declared itself to be the friend of the honest financier, the respectable broker and the legitimate speculator; and the enemy of the closed stock exchange, the unprincipled promoter and the gambling operator. Perhaps as a consequence, its initial circulation was modest. The preoccupations of 1888 were not very different than today. Editions of the FT 125 years ago contained stories on economic development in China, the health of Spanish government finances, and the state of Irish banks.
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Many of Norges Bank’s activities within this area are linked to our role as issuer of banknotes and coins; these activities are a public service, and costs are covered by the central bank. However, Norges Bank is also often in competition with others when it performs a number of other payment system services for banks and the postal system, which incur either no charges or no cost-covering charges for these services. This practice is currently under internal evaluation at the Bank. Consequently, we must anticipate that pricing for processing cash will approach full cost over time. It will be interesting to see if this has any affect on the public’s use of cash. 3.2. Interbank systems (clearing and settlement systems) I would now like to look more closely at risk and efficiency in interbank systems and, particularly, at our standing internationally. 3.2.1. We have made a fair amount of progress The establishment of NICS and NBO8 provided us with a modern clearing and settlement system in Norway, which we managed to implement at approximately the same time as the G10 countries and the EU. Our systems have certain positive properties, such as the possibility of releasing a gridlock situation in gross settlement (in NBO) and centralised information on banks’ liquidity (in NICS). Our central bank lending arrangements are generally similar to those found in other countries, where it is commonplace for collateral to be furnished for all loans in the central bank.
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A transition to a so-called “Y-copying” - also in the Norwegian SWIFT system - should be a long-term objective.10 Foreign exchange settlement We must assume that the Norwegian payment system is also vulnerable to a fairly substantial amount of foreign exchange settlement risk. This risk arises because the parties to a trade must usually send the currency sold long before they know whether the currency they have purchased has been received. We know that the krone portion of foreign exchange turnover makes up a very large part of the turnover in the gross settlement system, and that such trades can amount to NOK 90bn kroner daily. The transition to gross settlement has thus reduced settlement risk in the Norwegian system, but at the same time this transition may not have addressed what may represent the largest risk. Norges Bank intends to identify foreign exchange settlement risk among Norwegian banks in the same way as has been done for G10 countries. Norges Bank also supports the inclusion of Norwegian kroner in the 10 Y-copying: the payer bank sends a payment order to the data centre, which first sends a settlement order to the settlement bank and then, when the settlement bank has confirmed that settlement has occurred, sends the payment order on to the payee bank. 9 BIS Review 7/2000 foreign exchange settlement system CLS.11 Ties to the CLS will be in line with international recommendations and will greatly reduce the foreign exchange settlement risk of trading in NOK. 3.2.3.
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So far this year, it has bought currency for 30 b.kr., as opposed to 21 b.kr. over the same period in 2014. If it maintains that pace, it will buy more currency in 2015 than in 2014. As a result, the reserves exceed the outstanding foreign-denominated loans taken to finance them – by 65 b.kr. as of the end of February. But we mustn’t rest on our laurels; we need sizeable reserves as we prepare to lift the capital controls. I mentioned uncertainty surrounding the estimation of potential FX outflows once the controls are lifted. But one thing is certain: if the failed banks’ estates were given a green light tomorrow and could convert all of their krónur to foreign currency, and the same happened with the offshore overhang, there is no way we could safeguard stability, let alone bolster confidence, except perhaps after a long time has elapsed. The Central Bank of Iceland has designed a model intended to assess the impact of various developments in the balance of payments over a long horizon, including capital account liberalisation measures. When applied to this instance, the model reveals that our entire foreign exchange reserves would be wiped out – and more besides – if they were used to shore up the exchange rate. This would never be done, of course, and therefore the currency would depreciate sharply.
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The initial foreign currency mismatches in their balance sheets have been reduced are now within the limits provided for in Central Bank rules, and their domestic and foreign liquidity positions have improved. But the banks are operating in the shelter of the capital controls, and looking ahead, questions concerning their size and efficiency remain to some extent unanswered. Many factors have been favourable for us in spite of global headwinds, which were initially reflected in a marked deterioration in terms of trade and are still reflected in a weak economic recovery among our trading partners. Looking back at the three challenges I mentioned a moment ago, we can say in broad terms that the macroeconomic goals have been met thus far. The financial system now stands on much more solid ground. It is primarily in connection with the third challenge, of reintegrating Iceland into international capital markets, that more work needs to be done. But even in this area we have made significant progress. GDP growth, a balanced economy, a Treasury surplus, and the Central Bank’s foreign currency purchases have created good conditions for the liberalisation of the capital controls. The credit ratings of the sovereign and the commercial banks have improved. The sovereign regained access to foreign credit markets some time ago, and the banks have opened a crack in the door. But even though we have made significant progress, the game is not yet won. Debt levels are high, rendering borrowers vulnerable to shocks, and the capital controls are still in place.
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Norman T L Chan: Responding to the financial crisis – financial reform impacts and regulatory regime changes Opening remarks by Mr Norman T L Chan, Chief Executive of Hong Kong Monetary Authority, at the Asian Financial Forum 2010, Policy dialogue: “Responding to the financial crisis – financial reform impacts and regulatory regime changes”, Hong Kong, 20 January 2010. * * * 1. “It has often been said that history, especially financial crisis, tends to repeat itself. Notwithstanding the disturbingly frequent occurrence of seemingly similar financial crises, I am inclined to believe that history does not repeat itself because, upon close scrutiny, no two crises are exactly the same. It may be more correct to say that mistakes will be punished by the market. If people do not learn from their mistakes, then the market will continue to repeat its punishment. The only difference between the major financial crises is that the punishment is getting more and more severe, if not violent.” 2. “Going forward, I can see two possible ways to learn more about the financial markets. One is to learn from past mistakes and do something now. The second is to wait until the next disaster strikes and try to do something there and then.
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In any case, there are several key questions that need answers to properly identify NPOs and their activities in a country. These questions include: i) What is an NPOs sector ? ii) How many NPOs are in operation? iii) What types are they (religious, cultural, educational, sports). iv) What activities do they perform? v) Are there registration requirements and record keeping requirements for NPOs? vi) Are there reporting requirements? vii) Are there mechanisms to verify funds are spent as advertised and planned? So it is fair to say that there are major challenges and practical issues that need careful consideration when the issue of money laundering and terrorist financing is discussed from the perspective of NPOs. The global concern Let me now briefly highlight some of the concerns that have emerged globally in the area of money laundering and terrorist financing. The goal of a large number of criminal acts is to generate a profit for the individual or group that carry out these acts. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source. Illegal arms sales, smuggling and the activities of organized crime, including, for example, drug trafficking, human trafficking and prostitution rings, can generate huge amounts of cash. Embezzlement, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimize” the ill-gotten gains through money laundering.
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19 Changes to the world of work, technology and a greater sense of insecurity, therefore may well have changed workers perception of their bargaining power, their appetite for risk and weakened their response, in terms of seeking higher pay, to signals of a tightening labour market. This would have flattened the Phillips curve as well as lowered it. To the extent that greater risk aversion has played a role, one might expect the impact to be asymmetric so that the effect on pay from falling unemployment is less than the effect of rising unemployment. 20 Globalisation and technology have almost certainly contributed to a greater sense of job insecurity. But they may also have a more direct effect on the Phillips curve relationship between unemployment and pay by enabling global supply and production chains that have resulted in a more global labour market. To put this in its starkest terms, the global Phillips curve matters much more now. Claudio Borio and Andrew Filardo at the BIS argue that traditional models are too ‘country-centric’ and that a more ‘globe-centric’ view of the inflation process is now not only warranted but has been growing in importance over time. 21 18 My colleagues on the MPC, Michael Saunders and Andy Haldane have explored these issues in great detail. See Saunders (2017) and Haldane (2017) for a discussion of how labour market flexibility may have affected pay determination.
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There were also inadequacies with regard to credit granting. Large loans were made to new customers, new sectors and new geographical areas. This type of lending strategy is not wrong in itself, but it requires that the credit-granter has done his homework and is aware of the possible risks. In some parts of the banking world, they talk about credit-granting according to the church tower principle, i.e. that loans should be primarily made to customers living and active close by. How this principle was applied in connection with investments in Atlanta or Brussels is not easy to see. In addition, the banks contributed to their customers building up a comprehensive credit exposure in foreign currencies, regardless of whether or not they had matching income in their loan currency. As the krona exchange rate was high, some borrowers chose to take out loans in foreign currencies that had a lower nominal interest rate. The risks with this strategy became evident after the krona’s rapid fall of almost 25 per cent in six months, calculated from when the krona was allowed to float in November 1992. When the banks’ borrowers found that their debt amounts had increased by up to 25 per cent, calculated in kronor, many of them were unable to meet their obligations and the banks’ loan losses increased further. These actions by the banks are actually quite remarkable.
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From my vantage point as a banking supervisor, the most prominent impact of the pandemic has been a substantial increase in the popularity of digital banking among consumers. Customers were kind of “crash-coursed” into accepting the provision of banking services through digital means. As an example, we have seen that the total applications for personal banking credit products via digital channels recorded a significant growth of more than 40% in the second half of 2020 compared to the first half year, and among that, those made via mobile apps already surged to account for 40% of the total digital applications. So the digital transformation has basically become a new normal. 3. Against such a rapidly surging acceptance of online services, it is indeed extremely important for banks to substantially enhance their operational resilience on top of all the challenges that they face due to changes in the pandemic situation. The industry has been doing a fantastic job in that, but also we should not lose sight of the impact that this is having on some areas which may not surface immediately. From our supervisory dialogue with banks, two notable impacts on bank culture caused by the pandemic situation are particularly worth our attention. 4. First, the pandemic disruptions may be taking away the momentum of culture effort which banks have been investing a lot in the past 4-5 years.
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Thus, it can be said that slow export growth is as much the cause of the current account deficit as the expansion of domestic demand. Business Profitability and the Labour Market The external conditions of the economy in 1997 were largely unchanged from 1996, and were on the whole favourable. Business profitability seems to have been fairly good, although not as favourable as in 1996, because of the wage increases at the beginning of the year BIS Review 42/1998 -2- and large depreciation and interest charges related to the high levels of investment in recent years, especially in the fisheries. The labour market situation improved further and unemployment declined to 3.9 percent on average, having come down from a peak of 5 percent in 1995. Real wages grew by 5.7 percent in the course of 1997, and were at year-end at their highest level since 1989. Prices Inflation remained subdued in 1997, or 2.2 percent in the course of the year, and 1.8 percent on average between 1996 and 1997. The Central Bank had, in the wake of the wage settlements, forecast somewhat higher inflation but wage increases did not translate into price increases to the extent shown by past experience. Productivity growth was higher than expected and the rise in import prices lower. In addition, the Central Bank’s measures restrained price increases, as I will discuss in greater detail shortly.
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The fiscal authorities have no choice but to come to terms with the need to bring about a better balance between taxes and spending and to not only bend the curve, but reverse the inexorable growth in federal debt accumulation. This is the stuff of the great negotiations taking place among the executive branch and the two houses of Congress. This is no small chore. The parties involved must stop the hemorrhaging without inducing cardiac arrest; they must solve the long-run debt and deficit problem without, in the short run, pushing the economy back into recession, creating still more unemployment. And they must not only confront their addiction to debt and spending beyond their means, but they must reorganize the tax system, redirect the money they collect and rewrite the regulations they create so as to be competitive in a world that wants to beat us at our own game. This is an essential point. It will not be enough to reach a deal on the debt ceiling or on partially reining in deficits. In the post-Cold War, post-Bamboo Curtain world, there are many governments and great swathes of people outside the United States that want to attract investment and improve their lot. We are being challenged as the place to invest job-creating capital. Our fiscal and regulatory authorities do not operate in a vacuum; we live in a globalized, interconnected world where money is free to go to wherever it earns the best return.
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News conference Zurich, 17 December 2020 Andréa M. Maechler Introductory remarks by Andréa M. Maechler I will touch on two areas in my remarks today: First, I will review developments on the financial markets over the last half-year; here I will comment briefly on our foreign exchange market interventions in 2020. Then I will speak about the imminent changeover from Swiss franc Libor to SARON. Situation on the financial markets Investor risk sentiment has been extremely volatile since our last news conference in June, mainly due to developments surrounding the coronavirus pandemic. Over the summer months, economic activity and investor sentiment recovered following the relaxation of the containment measures introduced during the first wave of infections. In the autumn, the second wave of infections dampened investor confidence again, especially in Europe. Then, in November, news that coronavirus vaccines might soon become available caused market sentiment to return to a positive footing. In addition, various political risks, such as the Brexit negotiations and the US presidential elections, influenced risk sentiment. Monetary and fiscal policy on both sides of the Atlantic also played an important role in market developments. Having taken extensive measures to stabilise the markets in the wake of the turbulence in March, the US Federal Reserve (Fed) and the European Central Bank (ECB) have since confirmed the expansionary stance of their respective monetary policies. The ECB recently eased its monetary policy further by, among other things, increasing the size of its bond-buying programme.
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In any case, the RER is within the range considered to be consistent with its long-term fundamentals. The materialization of any of these risk scenarios will have direct effects on domestic growth and inflation scenarios foreseen by the Board. After consideration of the aforesaid elements, the Board believes that the balance of risks for inflation and growth is unbiased. As pointed in the Financial Stability Report, these risks are also relevant for the Chilean economy’s financial stability. Therefore, banks and other financial intermediaries should consider these threats in their management and planning for 2010, assessing the adequacy of their capital base, prudently managing their liquidity in pesos and other currencies, and actively diversifying by counterparties and credit sources. The Board will continue evaluating the probabilities of these risks and their consequences on domestic inflationary and financial stability prospects. Conclusions I wish to wrap this presentation with some brief concluding remarks. As I said at the beginning, the last eighteen months have brought events that will be forever recorded in world history. Chile suffered the consequences of the financial earthquake of developed markets on confidence around the world. Economic activity dropped not only sharply but also with unprecedented speed. The same happened with inflation, which was in its long-time peak in October 2008 and is now in its lowest for decades. Activity already began to pick up in the third quarter. Although the y-o-y variation of the Imacec remains in negative territory, in four of the last five months it posted a monthly increase.
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Domestically, monetary policy will remain expansionary, which, together with less tight financial conditions, also backs this projection. It is worth saying that these projections use as a working assumption that the policy rate will be kept at its low of 0.50% until at least the second quarter of 2010 and that its normalization will occur at a similar pace to that in December’s Economic Expectations Survey (EES), which is more gradual than the one implied by financial asset prices in the two weeks before the statistical closing of this Monetary Policy Report (figure 15). The scenario outlined here is, as usual, subject to several risks. On one hand, doubts about how robust will the global economic recovery ultimately be still persist. The latest data have been better than predicted in several economies, but financial markets continue to react with volatility in the face of unexpected events while credit losses are still being absorbed by financial intermediaries. The labor market situation is still complex in several economies, which, combined with the de-leveraging process under way, adds doubts about the capacity of consumption and investment around the world to regain strength. Another substantial risk has to do with the way in which central banks and governments will withdraw their unconventional monetary policy measures and fiscal and financial packages, and how this could affect the functioning of financial markets.
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Two factors played leading roles in that development. The first is the relatively large share of foreign-denominated loans – an average of 20% for households and 70% for businesses. The latter factor is an unusually strong exchange rate pass-through effect, which stems from the magnitude of the exchange rate drop and the lack of confidence that the króna would recover in the near future. As a result, the principal of indexed loans – which constitute about 70% of household debt and 10% of business debt – was written up. As is often the case in severe financial crises that are at the same time country crises, there was a genuine risk of a multi-faceted spiral of currency collapse, inflation, debt crisis, and economic contraction. It was critical to stave off such a vicious cycle, and therefore of vital importance to stabilise the exchange rate. BIS Review 146/2009 1 But this was problematic because of the large amount of capital that had accumulated in Iceland through carry trading during the economic upswing. Current estimates indicate that some 500 b.kr. remain in the Icelandic economy. There was the risk that this money would try to escape through a collapsed foreign exchange market, with unimaginable consequences for the exchange rate. Thus it was quite possible that astronomical interest rates would have been required if exchange rate stability were to be achieved through interest rate policy alone.
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However, when the adjustment is over, we should not be faced with persistent inflation, and it is the chief role of monetary policy to try to ensure that inflation does not become entrenched. The Central Bank published a new macroeconomic forecast yesterday, as well as announcing the Monetary Policy Committee’s interest rate decision. The highlights are as follows: • GDP will contract by about 8½% in 2009 and by almost 2½% in 2010. • The contraction for 2009 is rather smaller than previously forecast. • Private consumption has declined less sharply so far in 2009, probably because disposable income rose more in 2008 than previously forecast, and because of pension fund payouts amounting to some 1½%of GDP in 2009. • In addition, unemployment has risen less than previously projected. • Recovery will begin in early 2010, in the sense that quarter-on-quarter GDP will begin to grow. 4 BIS Review 146/2009 • At that point, however, Icelanders will still consider the situation unfavourable, and it will keep deteriorating for a while, as unemployment and the output slack will continue growing well into the year, as will the contraction in private consumption. • As the second half of the year progresses, these factors, too, will begin to improve. • As always, these projections are uncertain, and the economic recovery could prove stronger or weaker.
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Recognising shifts in the operating landscape, the Financial Sector Blueprint 2022-2026 focuses on fostering market dynamism to enable financial sector to be highly adaptive to wide ranging scenarios. Regulatory efforts will be directed toward targeted interventions to remove undue barriers to innovation as well as address market failures. The Bank is also reviewing how we regulate innovation to facilitate a more conducive environment for solutioning. This includes reviewing existing policies and enhancing the Regulatory Sandbox to better support innovation in value-based finance, including the novel application of Shariah contracts. We also strongly encourage innovation in impactdriven instruments such as Islamic social finance, blended finance, and green solutions. Potential recalibration of existing regulatory requirements will be explored to support the broader and more diversified application of Shariah contracts in advocating inclusivity and sustainability. Secondly, financial institutions must demonstrate immediacy, and act together to solve 'real world' issues. The need for a collective and coordinated response to deliver meaningful impact to stakeholders is urgent and paramount. The flood last year provided a harrowing glimpse of the consequences of fragmented actions. Delayed evacuation responses and inefficient donation allocation to relief centres resulted in lost lives and wastages. Applying lessons learnt to achieve desired outcomes for the financial sector – which is finance for all, finance for transformation and finance for sustainability – requires leaders to have foresight in identifying collaborative 1/3 BIS - Central bankers' speeches opportunities across industries and work together to develop impactful and scalable solutions.
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Suhaimi Ali: Leading change through Value-based Impact Opening remarks by Mr Suhaimi Ali, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Sustainability Leadership Programme for Financial Institutions, Kuala Lumpur, 24 May 2022. *** While domestic economy is expected to improve further this year, risks to Malaysia's growth momentum remain. Beyond economic factors, adverse developments surrounding COVID-19 as well as environmental and social risks continue to heighten volatility. The December 2021 flood event for example, hailed as the worst since 1971, demonstrated specific vulnerabilities and intricacies in how risks are to be managed: 1. Structural reforms are needed to improve Malaysia's flood risk mitigation infrastructures; 2. Large-scale relief efforts need strong coordination to be effective; and 3. Finance solutions must be expedient and impactful to help those affected. This recent flood episode goes to show that sustainability-related risks are inherently volatile, uncertain and complex, and would require a change in how finance is structured and consumed. Allow me to offer some perspectives on leadership imperatives for financial institutions to catalyse and support a more orderly transition to a sustainable economy. Firstly, the financial sector must actively respond to critical needs through innovation-led growth. Demographic shifts, rapid technological change and climate change will continue to place new and evolving demands on the financial industry. In navigating the challenges ahead, agility in finance response is key.
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The deterioration in Norway's competitiveness relative to other countries stems from high wage growth over several years since 1998. The nominal krone exchange rate measured by the trade-weighted BIS Review 66/2004 3 index (TWI) is now approximately at the level prevailing in the mid-1990s, while labour costs in manufacturing have risen considerably more than among our trading partners in the same period. The business sector is still burdened with the loss in competitiveness that can be attributed to high wage increases in the period 1998-2002. The exposed sector has been scaled back. Companies that are still in operation may be in a better position to cope with the high wage level. A more efficient service sector may also have strengthened the export industry. Nevertheless, costs may have negative impact on activity and employment. The cost level with the current krone exchange rate is close to 15 per cent higher than in the mid-1990s and about 6 per cent higher than the average for the past 30-35 years. Norwegian businesses are losing market shares in domestic and foreign markets partly because of the strong real krone exchange rate. In the face of major restructuring as a result of shifts in the international division of labour, it is a disadvantage for Norwegian business and industry that costs are high. Reports from Norges Bank’s regional network confirm the picture of an expanding economy. In the August/September round of interviews, our contacts throughout the country reported continued growth in all the main industries.
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7 Consequently, our proposition could now include this consideration: Different economic agents will be more or less willing to invest in negative rate investments to the extent that their costs of handling currency are lower or higher than others’, and to the extent they have available to them zero interest rate economic arrangements. In addition, having talented individuals looking for these opportunities is a dead-weight loss to society. We would rather have them use their talents for more socially productive purposes. In addition to the convention that all prepayments of debt carry a zero interest rate, creditors often have the option of deciding when to settle a debt, for example by choosing when to deposit a check once it is received. In an environment in which negative nominal rates prevail, one would want to collect debts slowly (at least from creditworthy counterparties). 8 For example, if one were to receive a check from the U.S. government for a tax refund, one could simply put it in a safe place and earn zero interest on it during the time the check remained undeposited. (These practices could trigger further innovations, such as a check with a “deposit-by” date embedded in it.) How strong these incentives are depends on the level of the negative rates. The lower the negative rate and the more persistent it is expected to be, the more attractive these practices would be. Consequently, these zero rate economic arrangements form another constraint that would prevent rates from going too far into negative territory.
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We believe that, in order to prevent problems at an early stage, the Bank of Russia should be granted the right for professional judgment, because the current strictly formalised approach to banking supervision often does not allow us to intervene when banks still have some assets, i.e. the owners have not yet withdrawn all of them. It is important mainly to protect creditors’ rights. The changed attitude to resolution also needs further discussion. Resolution has become a more frequent measure. We tightened requirements for turnaround managers over the year and will continue to do so. Now about the Bank of Russia’s activity as a megaregulator. We seek to enhance cross-sectoral approach in supervision and regulation, and in 2015, we worked out the first key document covering all sectors of the financial industry, ‘Guidelines for the Development of the Russian Financial Market in 2016–2018’. This document is envisaged by the law. We held detailed discussions of this project with business associations, including in parliamentary hearings, presented it in Russian regions for businesses to understand and contribute to our measures to develop the financial market. Some words about our achievements in the sector of non-bank financial institutions. Today, OSAGO is likely to be the most socially significant type of insurance. Let me remind you that in 2015 the tariffs were adjusted for the first time since the introduction of the compulsory motor insurance. By that time the situation in the OSAGO market was a challenging one.
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In some regions it was almost impossible to buy the policy without additional foisted services, there were difficulties with reimbursement of damages. The overall situation has improved, but some regions still experience difficulties with OSAGO. We have introduced an electronic OSAGO policy. For now, only 200,000 electronic policies have been issued, that is not many. Therefore, we welcome the law that would bind insurers to issue an electronic policy upon the customer’s request from January 2017. Last year, we improved the European accident statement rules – documenting road traffic accidents without involvement of the road police has become easier and more convenient. Microfinance organisations. Microfinancing is discussed with fervour. I would like to stress, that we believe it to be short-sighted to ban microfinancing. Short-term loans are in demand and if there is no regulated business, consumers will turn to illegal lenders. We took measures to ensure better protection of citizens’ rights, primarily, by limiting the maximum effective interest rate and fines and interests on overdue loans. And I believe we should move from the fourfold maximum to the twofold on the legislative level. As for illegal lenders, this problem needs a legislative solution, among other things. The accountability of illegal lenders is currently not very serious, so to say. Moreover, ironically enough, the illegal lender can recover the debt in court. We believe it to be important to deprive agreements with illegal lenders of relief at law. Non-governmental pension funds. We have established a system of pension savings guarantees.
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Diversity in financing instruments has also widened beyond green bonds, with around half of the funds raised so far in 2021 expected to come from the issuance of sustainability, sustainability-linked bonds as well as transition bonds. Fourth, an equity capital market with significant potential for growth. Singapore’s public equity market has seen increased trading interest amid the COVID-19 pandemic. However, other exchanges in the region have grown even faster. SGX has traditionally had more active volumes in less volatile, income-generating investments, such as REITs, compared to other growth-focused exchanges. This is a gap we are committed to bridging. An extensive consultation with market participants last year highlighted two key challenges: a perceived lack of institutional investor interest, and a dearth of high-growth companies listing in Singapore. These are chicken-and-egg challenges. The public and private sectors have together come up with a slate of measures to enhance the ability of our equity market to better meet the needs of issuers and investors: strong co-investment support; reduced listing costs and improved research coverage; a new listing pathway; and a platform for sustainable investments. We have launched two new funds for co-investment. The government has come together with Temasek Holdings to establish a new $ billion fund, called Anchor Fund @ 65, which will act as a cornerstone investor for promising companies looking to list on SGX.
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Confronted with such dramatic developments, the Swiss National Bank (SNB) introduced a minimum exchange rate of CHF 1.20 per euro on 6 September 2011. Against the backdrop of a rapidly deteriorating global economic outlook and policy rates that were already at the zero lower bound, this measure helped to avoid an extreme tightening of monetary policy conditions. By setting a cap on exchange rate appreciation, the SNB provided some relief to businesses and bought them time to adopt measures that would reduce costs and improve productivity. Nonetheless, the Swiss franc remained highly valued. However, the minimum exchange rate of CHF 1.20 per euro was only ever meant to be an exceptional and temporary measure. A few weeks ago, on 15 January, the SNB announced its discontinuation. Publishing such a decision as a surprise announcement for the markets and the public was unavoidable. No pre-emptive guidance is possible for this kind of decision. Any guidance would have invited speculative attacks. Markets reacted accordingly, and the Swiss franc appreciated massively within minutes after the announcement. Although some of the overshooting has since been corrected, our currency is still trading at a significantly overvalued level as we speak. Once again, the reasons for the SNB decision are to be found in international developments. In particular, over the course of 2014 it became increasingly evident that the European Central Bank (ECB) and Fed policies would diverge. In the US, the ongoing recovery rendered the prospect of an exit from the unconventional policies more likely.
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A recent paper examines how economists and commentators, when confronted with a flattening curve in the past, often argued that “this time is different”. [31] That is, they claimed that special factors were contributing to the flatter curve and that these compromised the standard interpretation of the curve as a harbinger of recession. As I mentioned at the beginning, the current euro area yield curve is indeed quite flat from a historical perspective, with the spread between ten-year and one-year yields amounting to about 30 basis points, which is around 1 percentage point lower than on average. [32] I will certainly not make a binary statement on whether this time is different. In particular, a sound assessment of the future growth outlook should be based on a wide range of indicators and models, rather than the yield curve alone. Moreover, there are two further issues to consider. First, the current flattening of the curve has mainly been induced by the long end of the curve coming down, rather than by the short end coming up. This constellation is different from previous episodes of yield curve inversion, as is shown in Chart 11. Hence, the inversion of the yield curve observed this time is not occurring in a context of monetary policy contraction raising the short end of the curve. Chart 11 Decomposition of change in the slope of the yield curve (percentage points) Sources: Bundesbank, OECD, Thomson Reuters and ECB calculations. Notes: Update of the corresponding chart in De Backer et al. (2019).
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[23] This result is qualitatively in line with Joyce, M., Tong, M. and Woods, R. (2011), “The United Kingdom’s quantitative easing policy: design, operation and impact”, Bank of England Quarterly Bulletin 2011Q3 who find that “the fall in gilt yields cannot primarily be attributed to signalling effects […] Instead, it is consistent with the main effect coming through portfolio rebalancing”. Bauer and Rudebusch (2014), op. cit., by contrast, find up to one half of the US LSAP effects on yields coming through signalling, challenging earlier literature giving less weight to this channel. In addition, Broadbent (2018) op. cit. argues that the effects of asset purchases and the relative importance of the channels through which they work can vary over time. [24] Duration extraction was highlighted also as a prominent channel for the Federal Reserve’s LSAP, see the seminal paper by Gagnon, J., Raskin, M., Remache, J. and Sack, B. (2011), “The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases”, International Journal of Central Banking, 7(1), pp. 3-43, which stresses exactly the type of mechanism that ECB staff tried to quantify for the euro area: “The LSAPs have removed a considerable amount of assets with high duration from the markets. With less duration risk to hold in the aggregate, the market should require a lower premium to hold that risk. This effect may arise because those investors most willing to bear the risk are the ones left holding it.
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The second area of prospective demand for humans skills is bespoke design and manufacture (“hands”). Routine technical tasks are relatively simple to automate and are already well on their way to disappearing. 57 Gratton and Scott (2016). AlphaGoZero is one such attempt. It is an updated version of AlphaGo, a computer programme that plays the game ‘Go’, which itself was the first software to beat a human professional player in full match. 58 15 All speeches are available online at www.bankofengland.co.uk/speeches 15 But the same is not true of non-routine technical tasks – for example, the creation of goods and services that are distinctive in their design, manufacture or delivery. A rise in global wealth and income is likely to create an increasing demand for luxury goods and services of this type, whose characteristics are unique and supply constrained. Indeed, this can be seen already in the rising demand and price of rare art and artefacts and independently-produced foodstuffs and beverages. To meet this demand, Mark Carney has spoken about the re-emergence of a new artisan class. If so, this would mark something of a return to our pre-industrial revolution future. 59 The third, and perhaps the biggest potential growth area of all, is social skills (“hearts”). That is, tasks requiring emotional intelligence (such as sympathy and empathy, relationship-building and negotiation skills, resilience and character) rather than cognitive intelligence alone. These are skills a robot is likely to find it hard to replicate.
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A: Avenue for meetings – To promote discussion and policy analysis among central banks, the Asian office has hosted and supported numerous meetings and events in the region, collaborating with other organisations such as the Financial Stability Institute, EMEAP and SEANZA. R: Reserves management – The Asian office plays a vital role in the management and administration of Asian Bond Funds 1 and 2 that aim to broaden and deepen regional and domestic bond markets. The dealing room of the Asian office also provides Asian central banks with ready access to BIS banking services, helping facilitate their liquidity and portfolio management of foreign reserves. Over these 10 years, I have seen the Asian office play a significant role in helping to strengthen financial sectors, develop financial infrastructure, and promote stability and BIS Review 88/2008 1 financial integration in this region. And since its establishment, the HKMA has stepped up its participation in the BIS' wide range of activities, sometimes co-hosting seminars and meetings, fostering an even closer relationship between us. Let me take this opportunity to acknowledge with thanks the great work of the BIS management and its staff, who have made the Asian office a success. In particular, I would like to thank Bob McCauley who has contributed significantly to the achievements of the Asian Office in the past decade. The accomplishments of the BIS in Asia over the past 10 years call for celebration. With this in mind, let's celebrate these achievements and anticipate even greater endeavours to come.
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