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However, new regulation may affect the magnitude of these affects, and the size of the market-based financial sector may end up being smaller after the crisis. In Europe, the commercial banks dominate the financial sector. 18 Kohn (2006, 2008) specifies three conditions that should be fulfilled for central banks to take “extra action” to deal with a possible asset-price bubble: “First, policymakers must be able to identify bubbles in a timely fashion with reasonable confidence. Second, a somewhat tighter monetary policy must have a high probability that it will help to check at least some of the speculative activity. And third, the expected improvement in future economic performance that would result from the curtailment of the bubble must be sufficiently great.” He concludes, also in 2008 and after thorough considerations, that those conditions would rarely be met. See also Kohn (2009). BIS Review 16/2010 9 In particular, if there is evidence of rapidly-rising house prices and mortgage loans, and these developments are deemed to be unsustainable and a possible bubble, there are much more effective instruments than policy rates. Restrictions on loan-to-value ratios and minimum mortgages and requirements of realistic cash-flow calculations for house buyers with realistic interest rates are much more effective in putting a break on possible unsustainable developments than a rise in the policy rates. In particular, more transparency about future policy rates, in the form a policy-rate path published by the central bank, may help in providing realistic information about future interest rates. | 14 Nyberg (2010) provides more discussion of macroprudential regulation and regulation reform. BIS Review 16/2010 7 significant social costs. I find it helpful to conceptually distinguish financial-stability policy from monetary policy. Different economic policies and policy areas, such as fiscal policy, labor market policy, structural policies to improve competition, etc., can be distinguished according to their objectives, the policy instruments that are suitable for achieving the objectives, and the authority or authorities controlling the instruments and responsible for achieving the objectives. Monetary policy in the form of flexible inflation targeting has the objective of stabilizing both inflation around the inflation target and resource utilization around a normal level. The suitable instruments are under normal circumstances the policy rate and communication, including possibly a published policy-rate path and a forecast of inflation and the real economy. In times of crisis, as we have seen during the current crisis, other more unconventional instruments can be used, such as fixed-rate lending at longer maturities, asset purchases and foreign-exchange intervention to prevent currency appreciation. The authority responsible for monetary policy is typically the central bank. Financial-stability policy has the objective of maintaining or promoting financial stability. The available instruments are under normal circumstances supervision, regulation and financialstability reports with analyses and leading indicators that may provide early warnings of stability threats. In times of crisis, there are instruments such as lending of last resort, variable-rate lending at longer maturities, special resolution regimes for financial firms in trouble, government capital injections and so forth. | 1 |
4 BIS Review 27/2004 ESAF/SADC Bank Supervision Application project • The implementation of the BSA project has reached an advanced stage. It is expected that the implementation will be completed by end of April. The consultants are finalising the returns that will be used for submission of data. The finalised returns, in the form of a workbook will be circulated to all the banks. In the meantime, the BoZ would like to thank the five banks (Barclays Bank, Stanbic Bank, Cavmont Capital Bank, Investrust Bank and African Banking Corporation) that submitted test data for finalising the returns. The BoZ will be calling on the banks to take part in the testing of the electronic submission of data. Non-bank financial institutions sector • The performance of the non-bank financial institutions sector was generally satisfactory although some institutions were still faced with financial distress. The Bank of Zambia is addressing the problems of distressed financial institutions within the framework of the Financial Sector Development Plan. 3. Announcements and areas of concern Update on the Financial Sector Development Plan (FSDP) • The BoZ is seeking comments from the public and other stakeholders on the FSDP which was placed on the BoZ website on 6 February 2004. The last day for submission of comments is 31 March 2004. A National Forum to discuss the FSDP is scheduled for April 2004. Further details on the Forum will be advised in due course. | The annual overall inflation at 16.8% was also 6.1 percentage points below the end-February 2003 inflation outturn of 22.9%. Broad money • Preliminary data indicate that broad money (M3)1 growth slowed down to 1.4% (8.4% in December 2003) to K4,530.7 billion in January 2004 from K4,467.9 billion in December 2003. This growth was 1.0 percentage points lower than the 2.4% recorded during the corresponding period in 2003, but was 0.4 percentage points above the programmed money supply growth of 1.0% for the month. • The growth in broad money during the period under review was largely on account of the increase in net foreign assets of the banking system, which increased by 2.9% to K2,364.9 billion. • Year-on-year broad money growth on the other hand declined by 1.2 percentage points to 22.2% in January 2004 from 23.4% in December 2003. Domestic credit • 1 Preliminary data show that growth in domestic credit slowed down to 2.3% (3.1% in December 2003) to K4,310.9 billion in January 2004 from K4,215.1 billion in December Broad money is here defined to include currency outside banks, demand deposits at Bank of Zambia and commercial banks, local currency savings and time deposits, and foreign currency deposits. BIS Review 27/2004 1 2003. This was mainly attributed to the decline in borrowing by the public sector to negative 4.0% from 22.5%. | 1 |
This brings me to some broader issues and the progress made in restoring the euro area's robustness and integrity. Nine months ago we had reached a degree of market fragmentation that was threatening the integrity of the euro area. Spreads on peripheral sovereigns were at an all-time high; private capital flows from core to periphery countries had all dried up, financial conditions were increasingly diverging. The same borrower was faced with very different conditions across countries. As everybody knows, the introduction of the OMT, following President Draghi's remarks in July 2012, marked a major change. The measures taken have restored confidence, BIS central bankers’ speeches 1 eliminated the tail risks of convertibility and reversed the dynamics of market fragmentation. The process of repair of financial intermediation is making significant progress. In recent weeks, non-euro area investors have returned to debt and equity markets in stressed countries. Deposits flows have also reversed from core to periphery where repatriation by domestic households has been significant. Target 2 balances, which measure the degree to which financial intermediation compensates for insufficient private capital flows, have receded by 20% since last summer. The second transformational change has been the Banking Union. Never in its history, has the EU been able to agree upon and implement a major reform so quickly. A year ago, the issue was not even on the table. Then, last June, leaders made a decisive step. Through days and night of hard work and negotiations, a detailed agreement was finally reached in December. | Therefore, their actions are focused, in all advanced economies, on making sure that the impact of their decisions is felt in all parts of the 2 BIS central bankers’ speeches economy. In other words, they aim to ensure that the monetary policy transmission mechanism is working. Let us now turn to fiscal policy. In all advanced countries, and primarily in the US, the fiscal stance is being hotly debated. As we all know since Musgrave has introduced his famous distinction, fiscal policy has three dimensions: stabilization, allocation and distribution. In a post crisis environment, governments are struggling to find the right mix. Today, what constitutes a “growth-friendly” fiscal policy? Discussion has sometimes focused on the stabilization aspect, and more specifically, on one important, but limited feature: the so-called “fiscal multipliers” which are set out to measure the impact of a change in the fiscal balance on GDP. This narrow standpoint focuses on the negative impacts of fiscal consolidation, especially when the output gap is significantly negative, as is now the case. However, we need to take a broader perspective and take into account the effects of fiscal policy on consumer and investment confidence as well as on the efficient allocation of resources. Where could the gains come from? To answer this question, it is important to consider the interactions between the fiscal stance and debt markets. | 1 |
For the United States, we assume a target inflation rate of 2.5 per cent, which is consistent with the Federal Reserve’s mandate to maintain price stability and is close to the average inflation rate within the sample. What is striking about these series is that, for the most part, they look more like trendstationary series than difference-stationary ones, with swings around a flattish line. The three exceptions are: Japan, which is not altogether surprising given that is was mired in deflation for much of the period; New Zealand, where inflation has systematically averaged above the mid-point of the target range; and Sweden, where the opposite is true. But for both New Zealand and Sweden, the behaviour is still more characteristic of trend stationarity than difference stationarity. Table 2 reports some formal (Augmented Dickey-Fuller) statistical tests of difference stationarity for these eight jurisdictions over the period 1993 Q4 to 2010 Q1 (excluding the euro area, where the tests run from the inception of the euro). The dependent variable is the change in the deviation of (the logarithm of) the target measure of prices from a path along which the price level grows at a rate corresponding to the central bank’s inflation objective. The regressors include a constant, a trend, 10 two lagged values of the dependant variable and the lagged level of the variable of interest, which should attract a zero coefficient if and only if the series is stationary in differences. | 30 BIS Review 111/2010 Chart 2 Macroeconomic Volatility Measures United States 7 6 5 4 3 2 1 0 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 United Kingdom 7 6 5 4 3 2 1 0 1966 1970 BIS Review 111/2010 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 31 32 Chart 3a Impulse Responses for United States United States Volatility shock Supply shock Demand shock Credit demand shock Credit supply shock BIS Review 111/2010 Monetary policy shock House price shock Macrovolatility Inflation GDP growth Change in bond spread Real credit growth Policy rate House price inflation Chart 3b BIS Review 111/2010 Impulse Responses for United Kingdom United Kingdom Volatility shock Supply shock Demand shock Credit demand shock Credit supply shock Monetary policy shock House price shock Macrovolatility Inflation GDP growth Change in bond spread Real credit growth Policy rate House price inflation 33 Chart 4a Historical Decompositions: United States Real credit growth (ann %) Real house price inflation (ann %) 15 15 10 10 5 5 0 0 ‐5 ‐5 ‐10 ‐10 ‐15 ‐15 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 1970 1974 1978 Federal Funds rate (%) 1982 1986 1990 1994 1998 2002 2006 2010 GDP growth (ann %) 20 10 8 15 6 10 4 2 5 0 0 ‐2 ‐4 ‐5 ‐6 ‐10 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 ‐8 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Legend:1 Trend Aggregate demand and supply shocks Credit market shocks Macro volatility shock Monetary policy shock House price shock 1 Aggregate demand and supply shocks” is the net impact of the aggregate demand shock and the aggregate supply shock. | 1 |
Part of solution to this is to create a more diversified and contestable financing mix, such that if banks finance becomes too expensive or scarce, non-bank finance can efficiently substitute for it. This is what the ongoing agenda to deepen and integrate capital markets in Europe aims to achieve – the so-called Capital Markets Union. Non-banks such a private equity investors or institutional investors can also play an important role in filling financing gaps, especially for the latter in long-dated lending such as infrastructure that matches their liability profile. But we also know that for certain types of lending that are the preserve of banks, in particular SME financing, asymmetric information problems and high costs of monitoring means banks cannot easily be replaced by non-banks. And perhaps even more importantly, such lending cannot quickly be replaced by other banks, as exit from the market tends to destroy the relationship networks – or “soft information” – that is crucial for small business lending. 3 In this way, exit can in fact create a form of hysteresis in the banking sector. What this shows is that, as policymakers, we cannot be agnostic as to how banks adapt to the current environment. We need to stay alert to the fact that actions by banks that are rational at the microeconomic level can create negative externalities at the macroeconomic level – analogous to the “fire sales” problem during financial crises. 4 And where those externalities risk becoming sufficiently large, there is a justification for policy actions. | This is consistent with the Terrorism Financing Regional Risk Assessment findings at the 2nd CTF Summit in 2016 in Bali, where one of the priority actions identified was for FIUs to improve the visibility and insights into the nature of terrorism financing in the region. The idea is intended to help FIUs gain better insights into the role of financial and transit hubs in regional and international terrorism financing networks. Closer international cooperation Another area to ensure an effective mitigating strategy requires closer regional and global cooperation, particularly in the sharing of intelligence and technical know-how. Terrorism and terrorism financing are global issues that demand global solutions. Sharing of intelligence and expertise across borders will go a long way towards enhancing the effectiveness of our risk management framework. In this regard, the various working groups under the CTF Summits, the Financial Intelligence Consultative Group and International Community of Experts have done commendable efforts and initiatives in building capacity and sharing operational experiences in the region. This must continue to be strengthened given the challenges that we will face. Conclusion The fight against terrorism financing is an on-going battle that will continue to evolve in line with the ever-changing landscape of the financial industry. In the era of rapid technological advancements, it is essential that the financial sector’s risk management strategy remains agile in order to mitigate emerging risks. | 0 |
Nonetheless, identifying the role of pull versus push factors poses problems akin to those of separating supply and demand. There is still room for research that finds clever identification strategies to settle this question. Under most conditions, a situation of abundant capital inflows and low global interest rates is good for developing countries. Theory tells us that, in the absence of frictions, international capital flows not only contribute to expand a country’s productive capacity, but also allow their citizens to share risk with the rest of the world. However, the presence of pecuniary externalities, of inefficient fluctuations in credit standards, or of other types of financial frictions may lead to perverse situations where these inflows result in excessive credit growth, risk taking, or misallocation of capital. An important amount of recent research has been devoted to understanding how an economy may borrow in excess and miss‐allocate credit.3 Of course, if we believe that these frictions are present and strong, first‐best policy actions should aim to undo them. But this may not be feasible, either because we are unsure about the presence, type, or magnitude of the frictions involved, or because first best policies cannot be implemented in the timeframe required. In such a situation, policymakers may have to resort to second best policies. We will address some of the roles of financial frictions in the transmission of foreign shocks in the presentation by Javier García‐Cicco this afternoon. | This should also help to reduce pressure on the rental market, where there is evidence that from being at the lower end of cross-country rent-to-wage ratios, we have moved relatively quickly to being close to ratios found in the most expensive European cities. Besides the impact that this rise could have on our capacity to attract foreign workers, we need to consider its impact on Maltese tenants, which in turn will impact on the broader costs of doing business and, consequently, competitiveness. We believe that, going forward, if we continue to grow at the rates observed in recent years, we will need to have a much more dynamic housing market. But before discussing private provision, let us discuss social housing. Recent developments have reinforced the case for replenishing our social housing stock. However, this expansion needs to be accompanied by a change in approach. In recent years, most of Malta’s benefit system has been changed so as to create clear incentives to shift from benefit dependence to participation in the formal labour market. The only area where this is not happening yet is social housing, where the tendency remains that, once allocated, social housing tends to become a lifetime entitlement. We need to change this so that social housing schemes act to activate individuals and empower them rather than encourage passivity. Such a transition could itself be helpful in financing the expansion of social housing. | 0 |
Mark Carney: Putting the right ideas into practice Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the Institute and Faculty of Actuaries General Insurance Conference, Wales, 25 September 2014. * * * Introduction It is an honour to be invited to address you today. Insurance is at the core of the new Bank of England. As regulator, we are tasked with ensuring the safety and soundness of the UK’s insurance companies and the protection of their policyholders. To discharge these responsibilities, we draw on the entire resources of the Bank. Fully one third of our regulatory staff – over 200 supervisors and 50 actuaries – are engaged in supervising insurance companies. But that is just the start. Our supervisors are supported by hundreds of credit risk analysts, scores of monetary policy experts and macro-financial analysts. As a central bank with responsibilities for both monetary and financial stability, we have a view of both the asset and liability sides of your balance sheets. And as a highly active participant in global financial reform, we influence the measures that are reshaping the global system. In all of our actions, we recognise the importance of insurance to the economy. The UK insurance industry makes a major, direct contribution: £ to annual GDP and 300,000 high-paying jobs including many of the 14,000 members of the Institute & Faculty of Actuaries. It is a major exporter with about 30% of premiums earned overseas. | That sorry experience highlights the need to understand all the activities in which insurers are engaged, including on occasion substantial business beyond the boundaries of traditional insurance. Regulators have grouped those activities as “non-traditional” and “non-insurance” – including business involving extensive use of market instruments, like derivatives, and instruments that engage in substantial maturity transformation. Where this type of business is carried out in scale or across borders, risks to the system can be substantial. The crisis also showed how particular insurance markets can affect systemic stability. BIS central bankers’ speeches 5 The Monolines demonstrated how sub-sectors that are excessively concentrated or undercapitalised can amplify shocks. The failure of multiple insurance companies in response to economic stress can disrupt the provision of critical economic functions. It can also suddenly transfer risks to other parts of the financial system that may be ill-equipped to manage them; or shift assets around in a way that can amplify and spread distress. As I said previously, the insurance sector is systemic in a positive way. Insurance companies have different risk bearing capacities than many other financial institutions. They play a stabilising role by deploying funds over a longer time horizons, in a manner less vulnerable to sudden outflows. The resilience of large insurers is therefore important to safeguard that positive contribution to the global economy. The starting point for the application of global standards has been the identification of systemically-important insurers. | 1 |
It is therefore more 2 Source: Record of the November 2016 Financial Policy Committee Meetings published 6 December 2016 http://www.bankofengland.co.uk/publications/Documents/records/fpc/pdf/2016/record1612.pdf 3 http://www.bankofengland.co.uk/pra/Pages/publications/ss/2016/ss1816.aspx 4 All speeches are available online at www.bankofengland.co.uk/speeches 4 difficult for insurers to assess credit and other risks. Investing in and managing these assets also requires different skills. For example, when bonds are downgraded, an insurer may expect to be able to sell them. But when a direct investment begins to go wrong, the insurer will probably only be able to sell at a fire-sale price. It needs the capability to renegotiate and restructure the debt. One particular area of growth has been equity release mortgage lending. Life insurers take on almost all of the flow of new equity release mortgages in the UK. This now stands at around £ billion or 1.4% of non-linked assets. We published a discussion paper on Equity Release Mortgages last year. A typical such mortgage is a loan to an older borrower that does not require regular interest payments. Instead interest accrues over time and is repaid, together with the principal, from the proceeds of the sale of the house when the loan becomes due. That is usually when the borrower either dies or goes into long-term care. Borrowers have a ‘no negative equity guarantee’. It protects them from being required to pay back any more than the value of their property. In economic terms, the insurer has sold the borrower a put option on the house. | The overall banking system represented more than 700% of GDP. In terms of employment, every third job was related to the financial and professional service sector. An active use of the relevant policy tools could – and indeed should – have curbed these unsustainable developments. But prudential supervision was too weak and did not prevent the build-up of large financial sector imbalances. Asset growth outpaced deposit inflows. Banks became increasingly exposed to funding vulnerabilities. They tried to attract deposits by offering very high deposit rates – on average, nearly 2 percentage points higher than in the rest of the euro area 1. Domestic credit expansion and imprudent lending practices fuelled a domestic property boom. As the bubble burst, non-performing loans increased dramatically. Moreover, Cypriot banks underwent sizeable losses following the Greek debt restructuring. This further deteriorated the soundness of their balance sheets. The lop-sided nature of the economic model was not confined to the banking sector alone. At the same time, significant external and internal imbalances had built up – notably persistent current account deficits, significant losses in competitiveness, rising fiscal deficits and public debt. All this left Cyprus in a weak position to tackle the problems of its banking sector. And these problems appeared to be daunting – especially compared to the small size of the 1 The rate for term deposits from households and non-financial corporations as of March 2013 was 4.4% in Cyprus and 2,5% in the euro area. BIS central bankers’ speeches 1 economy. | 0 |
Chart 12: Dispersion of inflation and GDP growth outturns since 2007Q3 across the quintiles of the one year ahead Inflation Report fan chart distributions Percentages of outturns GDP growth 70 Inflation 60 50 40 30 20 10 Lower Higher Lower Higher 0 Source: Bank calculations. Notes: For further details on the methodology please see Hackworth et al (2013). 22 BIS central bankers’ speeches Chart 13: Estimate of the proportion of MPC minutes covering the topic of “banking” Source: Bank calculations. Notes: This chart shows the estimated allocation of each month’s MPC minutes to a topic which we label “banking”. The words used most frequently in the topic are bank(s)/banking/banker(s), credit(s), financial/finance, market(s), asset(s), condition(s), money and lend(s)/lending/lender. The estimation of the topics, and the allocation of each set of minutes across all topics is completed using latent Dirichlet allocation as applied to FOMC transcripts in Hansen et al (2014). The lines correspond to: September 2007 when Northern Rock received a liquidity support facility from the Bank of England; September 2008 when Lehman Brothers filed for bankruptcy; June 2011 when speculation and uncertainty about the euro area sovereign debt crisis started escalating; June 2011 when ECB President Mario Draghi delivered his “whatever it takes” speech. Chart 14: Estimate of the proportion of MPC minutes covering the topic of “banking” and major UK banks CDS premia Source: Bank calculations and Bloomberg. Notes: The blue and vertical lines are the same as Chart 13. | 4 BIS central bankers’ speeches BIS central bankers’ speeches 5 6 BIS central bankers’ speeches BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches BIS central bankers’ speeches 13 14 BIS central bankers’ speeches BIS central bankers’ speeches 15 16 BIS central bankers’ speeches BIS central bankers’ speeches 17 18 BIS central bankers’ speeches BIS central bankers’ speeches 19 20 BIS central bankers’ speeches BIS central bankers’ speeches 21 | 0 |
BIS central bankers’ speeches 1 The emerging global regulatory paradigm Following wide-ranging discussions and consultation, the global regulatory community has made progress to strengthen the resilience of the financial system. The Basel Committee on Banking Supervision has strengthened global minimum capital standards as part of its Basel III Framework. The Financial Stability Board (“FSB”) has released guidelines to reduce the risks posed by systemically-important financial institutions, or “SIFIs”. MAS welcomes the Basel III reforms. They will strengthen the resilience of individual banks during periods of stress, and in doing so, contribute to banking sector stability. Basel III is a major step forward in several areas: (i) First, it strengthens capital requirements for trading activities, off-balance sheet vehicles, securitisation, and counterparty credit derivatives. (ii) Second, it improves the quality of capital, with a greater focus on common equity to absorb losses. (iii) Third, it raises the level of capital that banks will have to hold to absorb losses in both going-concern and unwinding scenarios. (iv) Fourth, it introduces international liquidity standards for the first time, to make banks more resilient to short-term funding disruptions and longer-term liquidity mismatches. The FSB is finalising its recommendations for global systemically important financial institutions, or G-SIFIs. This will comprise a package of measures, the most important of which are quite clear: First, G-SIFIs will have to meet higher capital requirements, above the Basel III minimums. This is to reflect the greater risk that their failure would pose to the financial system. | The changes in our assumptions have led us to revise our inflation forecasts for end-2011 upwards by around 35 basis points. Since the launch of inflation targeting in 2006, the CBRT has been announcing its mediumterm inflation forecasts and providing a qualitative perspective regarding the outlook for policy rates. As I have mentioned earlier in my speech, the current economic climate prompted the CBRT to consider financial stability along with price stability, which in turn required the diversification of policy tools. Accordingly, we adopted a policy mix made up of required reserve ratios and liquidity management facilities, besides policy rates. Given the significant level of uncertainties concerning the global economic outlook in the upcoming 12 BIS central bankers’ speeches period, we believe that there should be flexibility regarding the direction and course of each instrument within the policy mix. Therefore, this Report will provide forecasts for the net effect of the policy combination, and will not outline any specific path regarding its sub-items. Now, I would like to present our inflation and output gap forecasts produced within the framework outlined so far. Assuming that the policy mix is suited to deliver an additional limited monetary tightening during the rest of 2011, inflation is expected to be, with 70 percent probability, between 4.5 and 7.3 percent with a mid-point of 5.9 percent at end-2011, and between 3.3 and 6.9 percent with a mid-point of 5.1 percent by the end of 2012. | 0 |
What remains is for financial institutions to internalise the impact of the transition for businesses, customers, and stakeholders, and drive transformation in pragmatic and meaningful ways. With that, I wish all of you an insightful and productive programme. Thank you. 3/3 BIS - Central bankers' speeches | Joseph Yam: Fourth Hong Kong Monetary Authority Distinguished Lecture: opening remarks Opening remarks by Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the Fourth Hong Kong Monetary Authority Distinguished Lecture on the theme of Monetary Policy and Financial Stability, Hong Kong, 13 February 2001. * * * It is an honour for me to welcome Mr Andrew Crockett to deliver this Fourth Hong Kong Monetary Authority Distinguished Lecture. I am also delighted to welcome Dato’ Dr Zeti Akhtar Aziz as the Discussant. Both are good friends of the HKMA, and it is a special pleasure to see them here today before this large and diverse audience. I extend to all of you, on behalf of the HKMA, a very warm welcome. The subject matter of this Lecture – monetary policy and financial stability – is at the heart of central banking. Much attention has been given to resolving the apparent conflicts between the two desirable objectives of monetary stability and financial stability, at the policy as well as the operation levels. The recent experience of a number of jurisdictions has indicated problems in achieving both simultaneously. Some have gone as far as to introduce institutional changes to alleviate the tension, or the embarrassment, or the risk of policy credibility being undermined as a result of such conflicts. | 0 |
Timothy F Geithner: Restoring market liquidity in a financial crisis Welcoming remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Second New York Fed-Princeton University Liquidity Conference, New York, 13 December 2007. * * * Welcome to the New York Fed and to this conference on liquidity. You are addressing some of the most important issues affecting financial markets today. Your timing is good, perhaps too good. We are all going to need some time and perspective before we will know enough to draw conclusions and recommendations from the events of the past six months. The conditions that led to this crisis took a long time to develop and they will take some time to resolve. I think it is appropriate, though, that as central banks act to address the challenges in markets today, we also begin to define the agenda for future research and policy. On December 12, the Federal Reserve and several other major central banks, announced a series of actions in response to the elevated pressures in funding markets. Together, these actions provide a more flexible and potentially more effective set of instruments, alongside our conventional monetary policy instruments, to help mitigate the risks that liquidity pressures in markets going forward could pose to the broader economy. With this framework of tools, we have the capacity to calibrate our response as market conditions change. | The symptoms of this are apparent in the high risk premia across a range of assets, as well as in the dramatic contraction in the volume of transactions for certain assets and the securities that reference those assets. Elevated term premia in the interbank market has the effect of tightening overall financial conditions, offsetting some of the impact of reductions in the target federal funds rate. The danger this poses is the risk of an adverse, self-reinforcing dynamic in which concerns about overall liquidity magnify concerns about credit problems. As financial institutions prepare for a more challenging funding environment, in part by conserving capital, and as they anticipate the higher potential losses that would normally accompany an economic slowdown, their response, in aggregate, makes markets and the economy potentially more vulnerable to that adverse outcome. The risk is a greater contraction in the availability of credit beyond what might have otherwise occurred, with attendant risks to growth. BIS Review 149/2007 1 Monetary policy has an important role to play in addressing these dynamics in markets. By adjusting policy proactively as the risk to the outlook changes, central banks can help reduce the probability of the extreme adverse outcome. And this can positively affect the incentives that might otherwise lead market participants to protect themselves against the extreme outcome. Central banks have been employing a range of different tools to help reduce the incentive for an excessive level of liquidity hoarding by banks that might impede an efficient flow of liquidity among banks. | 1 |
The medium term agenda We all have lessons to learn from the turmoil of the last fifteen months. I would like to pick out three in particular, two of which are international and one UK specific: • the need to develop new “macro prudential” policies to bridge the gap between monetary policy and the regulation of particular institutions and markets; • the need to establish a more effective regime in the UK for handling failing banks; and • the need to improve the handling of cross border crises and bank failures. Central Banks have always paid close attention to asset prices and credit growth in deciding monetary policy but they are setting interest rates for the whole economy and there is no guarantee that the rate or the rapid changes in rates that could be needed to dampen asset price growth will be appropriate more widely. On the other side, regulation and supervision are focused on the resilience and conduct of individual institutions: their management, risks controls, capital and liquidity and so on. What we have found in the last few years is that the sum of what makes sense at the level of individual institutions does not necessarily add up to what is needed for the system as a whole. We need to develop what are called “macro prudential” policies to bridge that gap. | The focus of their concerns shifted from future profitability to future survival. CDS premia rose to unprecedented levels (Chart 6), bank equity prices fell sharply and the money markets seized up. Interbank lending spreads widened dramatically (Chart 7) and lending became almost entirely concentrated in the overnight market. The shortening of interbank maturities generated a dangerous “snowball” effect as maturing term funding had to be rolled overnight. It was to tackle that wider loss of confidence that the UK authorities announced on 8th of October its comprehensive package of support for recapitalisation, guaranteed funding and enhanced liquidity. It was designed to remove solvency fears by ensuring that banks had more than sufficient capital to survive a severe economic downturn and thus to enable them to continue to lend on normal criteria to good credits. The new capital and the government guaranteed borrowing and liquidity support was designed to ensure and be seen to ensure that banks would be able to sustain their businesses through a downturn. With the banking system fully solvent, guarantees could be extended without exposing taxpayer to unacceptable risks. In a remarkable show of international consensus, a similar approach was quickly adopted by many other countries both in the US and EU and more widely. Looking ahead The early signs suggest that the package is underpinning the banking system both directly and as a demonstration of the authorities’ determination to do whatever is needed to reestablish confidence. In particular CDS premia for banks have fallen markedly (Chart 6) since the package was announced. | 1 |
4 BIS central bankers’ speeches We expect banking organizations of all types and sizes to have the capacity to analyze the potential impact of adverse outcomes on their financial condition. Stress testing can be a means to carry out such analysis. Certain portions of existing supervisory guidance – which cover capital planning and management of funding and liquidity risks – discuss using stress testing or addressing potential adverse outcomes in order to enhance risk management practices. This guidance is applied commensurate with an organization’s size, complexity and risk profile. For example: • Community banks – those with below $ billion in assets – are not expected to conduct the type of stress testing required or expected of larger banking organizations, as indicated in recent rulemakings, proposals and guidance. A community bank may still employ certain other types of simpler stress testing to augment their risk management – as many community banks have been doing for some time. • In contrast, regional banks – which are typically those with assets between $ and $ billion – are indeed required to conduct a company-run stress test on an annual basis. Still, regional banks are not subject to many other stress testing requirements imposed on larger firms, such as going through a supervisory stress test or conducting an additional stress test each year. Moreover, our reviews of those company-run stress tests are focused primarily on the quality of the processes those firms employ and not necessarily the results. | Firms have begun to take a hard look at their legal entity structures, including having identified and mapped material legal entities. This was a necessary first step for a lot of firms, which have begun the difficult task of making sense of their legal entity structures. This will be a focus of our future supervisory work on firms’ preparedness for recovery and resolution planning. Another positive step was recently made in the area of financial contracts – wherein 18 global firms recently agreed to sign a new ISDA Resolution Stay Protocol. The Protocol will provide for a stay of certain early termination rights triggered by resolution proceedings. The stay is intended to give jurisdictions time to orchestrate an orderly resolution of a troubled institution. It will be important that firms adhere to the protocol and amend ISDA Master Agreements consistent with the terms of the protocol. Firms should carry out a similar effort with respect to other types of financial contracts not covered through the protocol. | 1 |
The Basel Committee on Payment and Settlement Systems has published revised draft Principles for market infrastructures, including (Principle 24) that “A Trade Repository should provide timely and accurate data to relevant authorities and the public in line with their respective needs”. 19 See recommendations on bank provisioning in Chapter IV of FSB (2009), “Report of the FSB on Addressing Procyclicality in the Financial System”. Available at http://www.financialstabilityboard.org/publications/r_0904a.pdf 20 See Tucker P M W (2010), “Shadow Banking, Financing Markets and Financial Stability”, January 2010. BIS central bankers’ speeches 9 In a world in which regulatory arbitrage is endemic, it is a fact of life that the re-regulation of banks will set up incentives to build banking-like functions in other forms. The import of this for my remarks today is that securities market regulators (and insurance regulators) need either to be relaxed about the supervision of shadow banks being transferred to banking supervisors or, alternatively, vigilant about maintaining regimes that do not permit systemic risk to accumulate beyond the perimeter of the banking system. In the UK’s planned new regulatory framework, the Financial Policy Committee will be responsible for recommending to the Treasury when prudential supervision of a type of firm should shift from the securities regulator to the prudential regulator (and vice versa); and it will be able to advise the FCA on when it needs to revise its rulebook in the interests of stability. | Underlying inflation, which measures the rise in prices, excluding products with highly-variable prices (notably energy and fresh produce) and also public utility charges, after stripping out the impact of tax measures, rose at a slower twelve-month rate of 0.7%. France was thus the best performer of the euro area in this field, along with Germany, with twelve-month HICP growth of 1.7% in December 1999. Since the start of 1999, the Eurosystem - comprising the European Central Bank (ECB) and the eleven national central banks of the countries having adopted the euro as their currency - has been responsible for defining and implementing monetary policy. In accordance with the Maastricht Treaty, the primary objective of the single monetary policy is price stability. This is defined as a year-on-year increase in the HICP for the euro area of below 2%. The definition of this medium-term objective is the same as that adopted by the Monetary Policy Council for French monetary policy when the Banque de France was granted independent status a little more than six years ago. 1 BIS Review 55/2000 In order to achieve its main goal of price stability, the Governing Council of the ECB decided, as you know, to refer to two groups of indicators, or “pillars”, for European monetary policy: – the first pillar is a prominent role for money, reflected by the choice of a quantitative reference value for growth in M3, the broad monetary aggregate for the euro area. This reference value has been set at 4.5%. | 0 |
4 BIS Review 68/2002 Table 3 Real GDP growth in the UK Mean St. dev 1956-1959 2.42 1.22 1960-1969 3.15 0.92 1970-1979 2.12 1.42 1980-1992 1.86 0.84 1993-2002 2.76 0.36 1956-2002 2.42 0.98 Note: Mean GDP growth is the total increase in real quarterly GDP over the period indicated, expressed as a four-quarter growth rate. Standard deviation is calculated on quarterly growth rates (not annualised) over the period indicated. Data up to 2002 Q2. Source: Bank of England calculations based on ONS data. It is, of course, difficult to identify the effect of changes in the monetary policy regime on the path of total output. One approach is to consider long runs of data which make it easier to identify structural breaks in the behaviour of output. Luca Benati of the Bank of England has been investigating the statistical properties of inflation over long periods for a number of countries. He finds that changes in the behaviour of inflation appear broadly to coincide with changes in the monetary policy regime. Some tentative evidence that this general conclusion applies to the UK can be found in the behaviour of ten-year forward interest rates on UK government bonds. At this horizon, high and variable interest rates are signs of high expected inflation and a large inflation risk premium. | Decisions on interest rates were taken out of the political arena in May 1997 and delegated by the Chancellor to the new Monetary Policy Committee. It is too soon to compare the nine-member Monetary Policy Committee with the Council of Nine that ruled Siena during the fourteenth century. Exactly 660 years before the Chancellor created the MPC, the Council of Nine commissioned Lorenzetti to paint the marvellous frescoes in the Palazzo Pubblico showing the virtues of Good Government and the vices of Bad Government. There are few more convincing representations of the case for stability than those frescoes. Since the MPC has not, at least yet, discovered a modern Lorenzetti, I shall present the case for price stability in a more orthodox, if less compelling, visual form. Chart 1 shows consumer price inflation in this country over the past fifty years. The decade of inflation targeting stands out as a period of low and stable inflation. Table 1 shows that not only has inflation been lower since inflation targeting was introduced, but that, as measured by its standard deviation, it BIS Review 68/2002 1 has also been more stable than in recent decades. Moreover, inflation has been less persistent - in the sense that shocks to inflation die away more quickly - under inflation targeting than for most of the past 1 century. Now this fall in inflation has led to sharp reductions in nominal interest rates, at both short and long time horizons, as shown in Table 2. | 1 |
While the years before the crisis were characterised by stability in the evolution of the market for goods and services, asset markets were anything but stable. In particular, there was a massive expansion in 4 BIS central bankers’ speeches credit, particularly within the financial system in many of the advanced economies, accompanied by upward pressure on a range of asset prices, including real estate. There was a boom in asset markets, even if there was no corresponding boom in the real economy. To some people, the relatively low level of interest rates necessary to maintain price stability was instrumental in generating this boom in credit and asset prices by encouraging an aggressive search for yield. While there is some truth in this charge, I think it would be a mistake to conclude that monetary policy was the sole, or even the prime, cause of the crisis. Several factors coincided to form a potent cocktail. There were other factors that depressed the yield on safe assets, including high savings rates in China and a more general demand for US Treasuries as emerging economies accumulated larger stocks of foreign reserves in the wake of the Asia Crisis. Equally important, in my view, was the impact of the Great Moderation itself on risk-taking behaviour, as low volatility encouraged an underestimation of the likelihood and severity of adverse tail risks crystallising. Seen in this light, the Great Moderation sowed the seeds of its own destruction. | A collateral framework must never act in a pro-cyclical manner: Restricting banks’ access to liquidity in a crisis – for instance, by introducing more restrictive criteria for collateral – might pose a risk not to only to the most vulnerable banks, but to the whole financial system. Ultimately, this would increase the risk for the central bank’s balance sheet rather than protecting it. Hence, in order to enable that a wide range of the counterparties could continue participating in the refinancing operations, the Eurosystem temporarily relaxed some of the eligibility criteria for underlying assets. This was done on several occasions. For instance, from 2008 to 2011 and again as of 2012, we accepted foreign denominated marketable assets. In 2012 we created the Additional Credit Claims framework. Credit standards have been changed by accepting lower rated assets compared to those accepted at the beginning, notably for ABS that fulfill certain criteria. However, these accommodative measures were coupled with a stronger-scrutinised counterparty framework and with more stringent risk control measures. As a result, the total amount of eligible collateral increased. Thus, an enhanced participation of counterparties in the refinancing operations was enabled, while at the same time the risks for the Eurosystem expanded only moderately. BIS central bankers’ speeches 3 The Eurosystem collateral framework has been quite complex from the very beginning, not the least because of the variety of national frameworks preceding it. | 0 |
Thomas Jordan: Challenging economic and financial conditions for the Swiss banking sector Introductory remarks by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the media news conference of the Swiss National Bank, Berne, 20 June 2013. * * * The Swiss National Bank (SNB) is maintaining its minimum exchange rate of CHF 1.20 per euro. The Swiss franc is still high. An appreciation of the Swiss franc would compromise price stability and would have serious consequences for the Swiss economy. In the current environment, the minimum exchange rate remains important in order to avoid an undesirable tightening of monetary conditions for Switzerland in the event of sudden upward pressure on the Swiss franc. We stand ready to enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities, and to take further measures, as required. The target range for the three-month Libor will be left unchanged at 0.0–0.25%. Since March, the SNB’s conditional inflation forecast has remained almost unchanged, apart from inflation for the current year, which is slightly lower due to a reduction in the oil price. The forecast is again based on an unchanged three-month Libor of 0.0% over the next three years. For 2013, we now anticipate slightly lower inflation of –0.3%. For 2014, the inflation forecast is unchanged at 0.2% and for 2015 at 0.7%. Consequently, inflation in Switzerland will remain very low in the foreseeable future. | It also provides us with additional information on areas not covered by official statistical sources, and we learn which issues are of particular interest to enterprises. Information received from the regional network supported the picture presented in the June Inflation Report: enterprises are reducing costs while households’ financial position is strong. We are waiting to see if the results of the current round of talks will point to increased optimism in the business sector and in public entities or if the prospects for the future continue to be regarded as somewhat negative. Inflation is low in Norway. The rise in consumer prices adjusted for taxes and excluding energy products (CPI-ATE) has slowed primarily due to developments in prices for imported consumer goods. Low inflation is due to the appreciation of the krone throughout last year and low inflation abroad. The rise in prices for domestically produced goods and services has also slowed. This is particularly the case for domestically produced goods influenced by world market prices. Domestic price inflation has nevertheless remained close to 3 per cent, due to high wage growth over several years. In July, the year-on-year rise in the CPI-ATE was 0.7 per cent, which is lower than projected in the June Inflation Report and substantially lower than the inflation target. There are also prospects that inflation will be low for some time ahead. | 0 |
Many emerging economies have successfully applied the lessons learned in past financial crises, capitalizing them as increased financial resilience and a reduced impact on growth than developed countries. One feature of world financial markets’ behavior of the past few months has been the increase in long-term interest rates on public instruments. These movements can be linked to an environment of reduced risks and expected increases in fiscal debt certificates, and to the fact that, for the first time in several months, there is incipient debate about the convenience of a not-so-expansionary monetary policy, given the medium-term inflationary risks. In the local financial markets, the interest rates on long-term Central Bank notes have also risen— albeit with swings—above the levels that prevailed at the time of our May Report. The steepening of the yield curve coincides with what has occurred in international markets, and may be signaling an increase in the markets’ appetite for risk. It may also be that they respond to more idiosyncratic factors, especially because of the big momentum showed by the local bonds market this year to date. The pass-through of MPR cuts to lending rates in recent months has been evident. While the latest data suggest that it may have moderated, transmission should continue, particularly as macroeconomic uncertainties phase out. The annual growth rate of credit volume has slowed, in a context where lending standards are still tight and there is less demand for credit due to a more cautious attitude among economic agents. | The much more flexible monetary and fiscal policies of today have also avoided the intrusion of protectionist distorting measures that so prolonged the crisis of the 1930s, amplifying its costs and deeply hurting the later economic development in several regions of the world, including our country. Still, it is likely that returning to domestic demand levels like the ones we had before the crisis takes a while, especially in the United States. Active fiscal policy actions have taken up the room left by the shrinkage of private spending. However, it cannot be sustained for long. The natural, sustainable solution will come via net exports from the US and, to a lesser extent, from Europe. How it will happen is an open question, because it is also yet to be seen which economies will, as counterparts, have to reduce their own net exports to create the 2 BIS Review 93/2009 necessary space for such an adjustment. Furthermore, this may call for major parity adjustments in the main economic areas. Beyond this last point, currently floating foreign exchange regimes have played a stabilizing role, providing every degree of freedom needed by monetary policy and by liquidity provision measures to tackle the cycle and the financial stability objective. This element was nowhere to be seen in the 1930s, when the main central banks struggled hard, but ineffectively, to defend the gold standard, severely magnifying tensions in the banking systems. | 1 |
Reflecting the achievements of this university, our models have a well-defined steady state equilibrium for the real economy; well-defined steady state nominal properties, typically an inflation rate; and forward-looking rational expectations, that is to say modelconsistent expectations. The second of these characteristics means that a nominal target is always achieved in the medium-to-long run. And the third means that the model’s agents know that; ie they know now and behave – set wages and prices – accordingly, so that in these mainstream models the target is achieved over cyclical frequencies too. Typically, nominal things enter via inflation expectations, and they are pinned down in the stylised, model economy by a policy rule of the kind I sketched earlier, expressed in terms of an official interest rate (the price of base money). But just in case it were thought that the “problem” of models promising the policymaker success stems from the crime of ignoring money quantities, I should make it clear that that is not so. It would not make a fundamental difference in policymakers’ modern-macro models if nominal stuff entered via a money quantity, with the policy rule being specified as a money-supply growth rate. So-called velocity shocks to the demand for money would cause deviations from an inflation target in the short run, but everything would ultimately settle down nicely – because that assumption would be built in to the model’s long-run properties (in this instance via a demand-formoney equation that was imposed as stable over the long run). I’m exaggerating a bit. | The present report therefore does not discuss those options in as much detail. In Chapter 3, however, is an in-depth discussion of Icelanders’ experience with independent monetary policy and a floating exchange rate. The strategy formulated in coming months must take into account this material if all options are to be considered. It is also necessary to examine which prudential rules would be applied in order to reduce the risks related to domestic financial institutions’ foreign assets and liabilities and the risks related to unrestricted capital flows. These rules are discussed in a newly published Central Bank report entitled Prudential rules following capital controls. That report discusses the limitations on liquidity and foreign exchange risk and the restrictions on domestic financial firms’ international operations that must be in place if movement of capital BIS central bankers’ speeches 1 is unrestricted in other respects, particularly if Iceland retains its own currency. The discussion below also takes account of these two publications. 1 1.2 Iceland’s experience with its own currency Iceland has had its own currency since 1885, maintaining parity with the Danish krone until June 1922, when it was devalued by 23%, followed by a temporary float (see Chapter 12). It can be said that the króna came into existence as an independent currency at that time. The experience with it has been mixed, and efforts to preserve the value of the currency have been largely unsuccessful. | 0 |
Gross portfolio equity inflows to emerging markets surged as investors substituted out of low growth developed markets (Chart 1). Gross equity inflows to certain emerging markets were large relative to domestic market capitalisation (Chart 2). The resulting indigestion problem caused bubbly behaviour in emerging asset markets. In response, a number of countries have thrown grit in the wheels of finance through macro-prudential measures or capital flow restrictions. These surges in foreign capital flows, and associated asset market spillovers, are far from new. Through this century, a new wave of inflows to emerging markets has been building. Although halted temporarily by the financial crisis, its effect has been to buoy emerging asset prices (Chart 3). Earlier centuries have seen many similar episodes of capital flow surges into emerging markets, from the South Sea bubble in 1720 to the East Asian crisis of the 1990s (Reinhart and Rogoff (2008)). Historically, as these waves have broken they have often caused quite a splash, with sharp capital and asset price reversals (IMF (2011)). Some commentators have called those capital reversals “sudden stops” (Dornbusch, Goldfajn and Valdés (1995)). But the underlying problem may be as much the start as the stop. The seeds of emerging market crises are sown in the build-up phase, as inflows dwarf the absorptive capacity of recipient countries’ capital markets. Capturing that dynamic requires a different metaphor – the “Big Fish Small Pond” (BFSP) problem. The Big Fish here are the large capital-exporting, advanced countries. | Lending to microfinance sector now counts for more than 10 per cent of the whole lending portfolio of the banking system. The quality of the microfinance loans has been satisfactory. On average, the portfolio at risk is between 1.5-2 percent, according to their reports. This is not only because of their small size (usually under 1.5 thousand euros each), but also because of the diversity of the projects, ensuring diversification of the loan portfolio. One should also say that the experience gained by the microfinance institutions in this area, have also played an important role for this good quality. The legal framework on microfinance was completed in 1996, with the approval of a special law that defined the principles upon which such institutions could be found and operate. Such principles for the specialized institutions included free will, reciprocal cooperation, capitalization of the profit and reinvestment in the community etc. Later developments made it necessary for the Law to change. Hence, a new Law “On Savings and Loans Associations and their Unions” was approved in Parliament on May of 2001. Several changes supported this new law. Besides the principles that were restated, the Law has defined the legal personality of the microfinance institutions, their permitted activities, the rights and the obligations of the members of the association, the managing structures of the associations and their functions, other important supervisory financial requirements and ratios, the role of the Unions and that of the Bank of Albania as the regulatory and the supervisory authority. | 0 |
In the context of the ECB’s strategy, macroeconomic forecasts and projections therefore play an important - albeit limited - role. Two important points follow from the role of projections in the ECB’s strategy and the procedures used to produce projections within the Eurosystem. First, the projections are produced by staff experts and do not embody the policy judgement of the Governing Council. They therefore represent one input into the policy-making process and not the outcome of the Governing Council’s deliberations. The Governing Council must exercise a policy judgement in evaluating the projections it receives, alongside all other analyses, when drawing implications for policy decisions. Second, since policy decisions are based on a broad range of analyses conducted under the two pillars of the ECB’s monetary policy strategy - of which the Eurosystem’s projections constitute only a part one should not expect policy decisions to respond mechanically to developments in the published macroeconomic projections. In this respect, the projections published by the ECB and their role differ considerably from the forecasts published by some other central banks. One question which has been raised since the announcement is why the Governing Council does not assume full responsibility for the projections to be published by the ECB, whilst of course accepting full responsibility for the staff that produces them. Let me answer this question by recalling the Governing Council’s ultimate responsibility, namely to maintain price stability in the euro area. | Instead, it is important to analyze the loan growth in broader economic policy context where due consideration should be paid to the credibility of macroeconomic policies and the impact other policies may have on the incentive structure in the financial markets. As I stated earlier, the presence of Nordic banks in the Baltic market is, of course, a hugely important positive factor. Parent banks are sometimes considered to have an implicit responsibility for the stability of the banking systems in the Baltic countries. It is said that the Baltic banks are too small to fail. International experience lends support to this view, although the evidence is not always in one way. Hence, there are also potential risks. If parent banks are active in many countries of the region, a shock affecting exposure in one country may lead to a reduction in their exposure across the region. Build-up of exposures to common risk factors in a region may also increase the potential for contagion - a reduction in lending to countries not affected by a crisis. The potential for contagion is naturally higher in highly integrated economies. Another potential risk factor is the smallness of the banks in the Baltics combined with their high profitability. While the Nordic banks have high profitability in all of their markets, profitability in the Baltic market is especially high. As a result, the share of banking groups' assets in the Baltics is significantly lower than the share of profits banks make in this region. | 0 |
Indeed, what have happened in advanced economies today are stark reminders of those lessons learnt in Asia. Just like Asia, investors took excessively high risks creating asset price bubbles in advanced economies. Lax prudential policy, along with fragility of the financial system, quickly brought on a crisis of confidence, starting with debt defaults. Credit underwriting behaviors of financial institutions and credit rating agencies are being questioned along with imprudent lending practices and the bloating real estate sector. Thus far, the effects on emerging market economies in Asia have been minimal. Nevertheless, we are still awaiting final moments of truth as there will be a number of aftershocks following the financial tsunami. Clearly, having a resilient economy and financial sector that is stable, which I have discussed previously, is only a necessary condition for avoiding crisis. But, it is not sufficient to ensure non-occurrence of crisis. This is because the key pressure points that can lead to difficulties for us can be externally-induced, especially through capital account developments. We all know that sudden changes in global financial conditions and risk-appetite of investors can create difficulties through spillovers. Mindful of this, ASEAN needs to come up with 2 BIS Review 134/2008 cooperation strategy that best fit ASEAN objectives. Here, I wish to raise two key areas on regional cooperation strategy for your further exploration. First, the new global crisis should hasten ASEAN to think more deeply about the effectiveness of regional surveillance that can detect weakness early on. | Coordination and cooperation among ASEAN countries must be further enhanced to ensure that prompt remedial actions can be put in place should a crisis occur. Ladies and Gentlemen, In closing, I would like to reiterate that it is important for ASEAN’s economic and financial stability that ASEAN central banks continue, individually and collectively, to increase the effectiveness of their policy instruments through domestic reforms of markets and financial systems as well as communication efforts with markets and one another. In this spirit, I am reminded of how ASEAN has risen over the years to common challenges. History has recorded ASEAN as an exciting region second to none. While rich in diversity, ASEAN has always been united in bringing about successful solution to tackle our common challenges. ASEAN, itself, was formed forty years ago against the backdrop of political and security threats to the region. In addition, ASEAN Free Trade Area, or better known as AFTA, was created sixteen years ago to ensure that ASEAN together reap benefits from greater trade liberalization under the WTO. Going forward, with sustainable growth and development of ASEAN at stake, I have no doubt that we will be able to jointly find ways to overcome the present difficult global environment and together continue to prosper. Thank you. BIS Review 134/2008 3 | 1 |
Chart 18: Percentage of workforce by job type Agricultural Labourers Telephonists and Telegraph Operators Percentage of workforce 8 Percentage of workforce 0.6 7 0.5 6 0.4 5 4 0.3 3 0.2 2 0.1 1 - Accountants Percentage of workforce - Hairdressers 0.8 Percentage of workforce 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 - - Source: Deloitte (2015) 22 0.8 BIS central bankers’ speeches Chart 19: Share of unskilled workers in the UK, 1550–1849 Percent Chart 20: Employment shares in US manufacturing, 1850–1910 45 Percentage point change in relative to 1850 White collar Skilled blue collar 40 15.0 Operative/unskilled 35 10.0 30 5.0 25 0.0 20 -5.0 15 -10.0 10 -15.0 5 155-Q99 1600-49 1650-99 1700-49 1750-99 1800-49 0 Source: de Pleijt and Weisdorf (2014) 1850 1860 1870 1880 1900 -20.0 1910 Source: Katz and Margo (2013) Chart 21: Average real wages of unskilled building workers and GDP per capita, since 1270 Log scale, mean of 1270-1870=100 Allen Real Wages (Allen) Clark Real Wages (Clark) 320 GDP/cap GDP/cap 160 80 40 1270 1320 1370 1420 1470 1520 1570 1620 1670 1720 1770 1820 20 1870 Source: Broadberry, Campbell, Klein and van Leeuwen (2015); Clark (2005); Allen (2001) BIS central bankers’ speeches 23 Chart 22: Change in employment shares, 2004 – 2014 Percent change in employment 5 4 3 2 1 0 -1 Managers, Professional Associate Skilled Process, Directors and Occupations Professional Trades Plant and Senior and Technical Occupations Machine Officials Occupations Operatives Administrative Caring, Elementary Sales and and Leisure and Occupations Customer Secretarial Other Service Service Occupations Occupations Occupations -2 Decreasing median pay Source: ONS Notes: This chart shows the percentage point change in employment as a share of total employment. | Of course, there are alternative measures of inflation, such as the widely reported Consumer Price Index (CPI). The FOMC has set its inflation target in terms of the PCE Price index because relative to the CPI it covers a wider range of items that households consume and because it better adjusts for changes in the spending patterns of households. CPI inflation is currently around 2 percent. But CPI inflation generally runs three to five tenths of a percentage point higher than PCE inflation, and so the CPI’s performance should be measured against a higher inflation objective, such as 2-1/2 percent. So, an inflation gap remains for the CPI as well. Looking ahead, I am concerned about the possibility that inflation will not return to our 2 percent target within a reasonable period of time. First, recent monthly inflation numbers have been low, so there is not much upward momentum. Second, as I mentioned earlier, wage growth has been relatively low for some time. While wages don’t predict future inflation, the two often move together. So the subpar growth in wages we see today is consistent with continued subdued inflation. And, third, it does not appear as if inflationary expectations are exerting much of an upward pull on actual inflation at the moment. That said, I expect inflation to rise slowly over the next three years toward the FOMC’s 2 percent target. | 0 |
Petroleum activities have contributed to technological developments in the shipbuilding industry and the offshore sector. The current cost level in the Norwegian business sector is adapted to an expansion of the petroleum sector and a steady phasing-in of petroleum revenues into the mainland economy. In the long term, the exchange rate tends to adjust so that both the domestic economy and the current account are in balance. After a period, we will be able to cover a smaller share of our imports using current petroleum revenues and by drawing on the Petroleum Fund. Competitiveness will then have to be improved. It may have to be brought back to around the level prevailing at the end of the 1960s prior to Norway’s emergence as an oil nation. Rough estimates3 suggest that the real exchange rate that ensures balance in the external account when petroleum wealth no longer has the same significant role in the economy is more in line with the real exchange rate that we started with. This is shown in the chart, where the real exchange rate in the very long term will revert to the level prevailing before petroleum extraction began. In conclusion, the Petroleum Fund and the fiscal rule shield the economy from fluctuations in oil prices and extraction rates. With an inflation target, inflationary pressures are steered using the interest rate, while the value of the krone fluctuates. | As elsewhere, a regulatory regime of constrained discretion has given way to one with too much unconstrained indiscretion. This calls for regulatory repair. Without change, the current regulatory system risks suffering, like the Chicago teachers and the LIBOR fixers, reputational damage. Fortunately, there are early signs that regulatory change is afoot to place tighter constraints on this (in)discretion. The emergence of self-regulation To understand how we ended up here, it is useful to explore the historical contours of the regulatory debate. This is a history in roughly four chapters. Chapter 1 covers the period prior to the agreement of the first Basel Accord in 1988. Until then, a patchwork of national regulatory frameworks for capital adequacy operated. Some countries set capital adequacy standards based on simple measures of bank equity to assets – a leverage ratio. Others, including in the US, used risk-based standards with risk weights set by regulators for a small set of asset categories. Chapter 2 begins with the introduction of the Basel Accord. This was a landmark agreement: the first-ever genuinely international banking accord, based around an 8% bank capital ratio, with internationally-set risk-weights applied to a small set of banks’ assets. The Accord was explicitly designed to lean against an international “race to the bottom” in capital adequacy standards (Goodhart (2011)). It also helped ensure a level international playing field. Chapter 3 commences with the Market Risk Amendment to Basel I in 1996 and continues through to the Basel II agreement of 2004. | 0 |
Such lending can tide a bank over while it is taking steps to remove the cause of the concerns that generated a run or lack of confidence. But it can also serve to conceal the severity of the underlying problems, and put off the inevitable day of reckoning. I hope it is now understood that the provision of central bank liquidity, while essential to buy time, is not, and never could be, the solution to the banking crisis, nor to the problems of individual banks. Central bank liquidity is sticking plaster, useful and important, but not a substitute for proper treatment. Just as a fever is itself only a symptom of an underlying condition, so the freezing of interbank and money markets was the symptom of deeper structural problems in the banking sector. So let me explain why a major recapitalisation of the banking system was necessary, was the centrepiece of the UK plan (alongside a temporary guarantee of some wholesale funding instruments and provision of central bank liquidity), and was in turn followed by other European countries and the United States. Securitised mortgages – that is collections of mortgages bundled together and sold as securities, including the now infamous US sub-prime mortgages – had been marketed during a period of rising house prices and low interest rates which had masked the riskiness of the underlying loans. By securitising mortgages on such a scale, banks transformed the liquidity of their lending book. They also financed it by short-term wholesale borrowing. | In itself that 2 BIS Review 128/2008 does not affect the ability of banks to fund lending, but confidence has been badly shaken after the traumatic events of the past few weeks. New sources of funding will develop only slowly, although the temporary government guarantees of new lending to banks will help. So it will take time before the recapitalisation leads to a resumption of normal levels of lending by the banking system to the real economy. And we cannot assume that there will not be problems in other parts of the financial system and in some emerging market economies to be overcome before the crisis can truly be described as over. With the plan for recapitalisation in place, the focus of attention has moved to the outlook for the UK and world economies. Over the past month, the economic news has probably been the worst in such a short period for a very considerable time. The most recent activity indicators for the second of half of the year have fallen sharply. In the UK, unemployment continues to rise and, over the past three months, has risen at the fastest rate for seventeen years, albeit from a relatively low level. House prices declined by about 5% in the third quarter and are 13% lower than a year ago. The recent weakness of the housing market is likely to continue. And if the news on the domestic front were not sufficiently discouraging, the rest of the world economy also appears to be slowing rapidly. | 1 |
Ardian Fullani: Current development stage of the Albanian economy Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the regional meeting of the Bank of Albania, Fier District, 31 January 2012. * * * Dear guests, It is an honour and great privilege to be here with you today to share some reflections and ideas on the current development stage of the Albanian economy in general, and your region in particular. Regional meetings have now become a consolidated tradition in our public communication philosophy. We believe that meetings of this kind serve to accomplish the Bank of Albania’s objectives by ensuring a better explanation of the monetary policy-making. In addition to enhancing the transparency of our decision-making, this direct communication also embodies another function, that of public education. We ultimately believe that this communication contributes to a greater efficiency in transmitting the monetary policy decisions to the economy. I cannot, however, refrain myself from sharing some personal impressions I have made over the years on Fier and its people. Your city is an important crossroad connecting the lower part of Albania to the south, including the Ionian Riviera. I think this makes a strong point in favour of Fier, a comparative advantage relative to many other cities in Albania. And not just that. Fier opens wide into the Adriatic Sea, beginning from the embouchure of Seman River in the north to that of Vjosa River in the south. | In my speech today I would like to touch upon main elements of the forecast which are of key importance from the point of view of the decision we took today and for understanding the logic behind our future actions. I will start from the assumptions. We assume the Urals crude price this year at around 50-55 US dollars per barrel. We have reasons to expect oil prices to rise to 70–75 US dollars per barrel by 2017, but nonetheless remain significantly below the levels observed during several past years. We also assume that access of the Russian companies to the global capital markets will be restricted throughout whole forecast period. A long period of relatively low oil prices will force Russian economy to adapt to the new conditions. As a result, GDP is expected to decrease by 3.5%-4% in 2015 and 1%-1.6% in 2016. Moreover, as I have already mentioned, the structural constraints of the economy will be supplemented by factors of cyclical nature. Despite the drop in oil and other commodity prices, the net export will make a positive contribution to GDP dynamics due to the effects of the ruble depreciation on imports and Russian exporters’ competitiveness. However, net export dynamics will not be able to fully offset the reduction in consumer and investment activity during two coming years. As in 2009, contraction in the domestic demand will primarily influence durable goods, including imports, and also some services sectors. | 0 |
All these considerations allow us to underline the notion that the achievement of financial stability must be based on a broad range of tools which we should all seek to strengthen. Achieving a coherent approach to financial stability may be challenging, if only because it requires a consistent combination of macro and micro elements and because of the large number of interested and participating parties. Also, it should foster financial innovation, and ensure a level playing field. I believe that prudential supervisors should analyse the extent to which conditions are in place so that the banking system can remain resilient in the face of internal and external shocks. This should contribute to the proper functioning of the economy under a wide range of circumstances. Basel II and financial stability That leads me to my third topic, which is a discussion of the impact the new capital framework will have on financial stability. You are probably not surprised to hear that I believe the framework will enhance stability. But let me elaborate on several areas where I believe Basel II will foster stability. Incentives for better risk management First, I believe that Basel II is a major step forward in strengthening the incentives for the ongoing improvement of banks’ risk measurement and management systems. The new capital framework is an incentives-based system and it is a risk-based framework. | Basel II, in my view, is fundamentally about better risk management and corporate governance on the part of banks, as well as improved banking supervision and greater transparency. It is also about increasing the stability of the global financial system, to the benefit not only of banks, but also consumers and businesses. The new capital framework attempts to achieve these objectives with three mutually reinforcing pillars. The first pillar aligns minimum capital requirements more closely with banks’ actual underlying risks. Qualifying banks may also rely partly on their own measures of those risks, which will help to create economic incentives to improve those measures. In concept the first pillar is similar to the existing capital framework in that it provides a measure of capital relative to risk. What is new are the second and third pillars. The second pillar – supervisory review – allows supervisors to evaluate a bank’s assessment of its own risks and determine whether that assessment seems reasonable. It is not enough for a bank or its supervisors to rely on the calculation of minimum capital under the first pillar. Supervisors should provide an extra set of eyes to verify that the bank understands its risk profile and is sufficiently capitalised against its risks. The third pillar – market discipline – ensures that the market provides yet another set of eyes. The third pillar is intended to strengthen incentives for prudent risk management. Greater transparency in banks’ financial reporting should allow marketplace participants to better reward well-managed banks and penalise poorly-managed ones. | 1 |
However, the main drivers of this third-quarter fall in inflation were energy and core goods. Annual inflation continued to decline across the core goods category thanks to decreased negative effects of exchange rate developments. Regarding underlying inflation trends, there has been a significant improvement in the core goods category. Meanwhile, the services category produced a relatively negative outlook. In the third quar ter, the core inflat ion tren d reco rded a decli ne BIS central bankers’ speeches 5 following the favorable impact of the macroprudential measures and our tight monetary stance (Chart 11). Accordingly, the marked first-half inflation increase in core indicators was reversed in the third quarter. Yet, I would like to note that underlying trend indicators are still above the target-consistent levels. In this period, international commodity prices, especially oil, fell in line with the weak global growth outlook and USD-denominated import prices dropped. In addition to this favorable outlook of import costs, aggregate demand conditions and the relatively slow pace of growth in consumer loans alleviate the pressures on inflation. In fact, excluding food products and associated services subcategories, we see that annual consumer inflation declined considerably in the third quarter (Chart 12). In sum, the negative effects of cumulative exchange rate developments continued to wane in the third quarter, yet food prices remained on a relatively unfavorable track. The prolonged high level of consumer inflation and the ongoing deterioration in inflation expectations adversely affect pricing behaviors in certain categories, particularly services. | Despite waning external demand, exports continue to support the balanced growth. The macroprudential measures and our tight monetary stance have had positive implications for the core inflation trend. A sizable amount of the significant first-half increase in core inflation indicators was reversed in the third quarter. Annual core goods inflation continues to slow down as the negative effects from exchange rate changes diminish. Moreover, falling oil prices restrict the inflationary pressures on energy items. However, elevated food prices cause inflation to hover significantly above the target. We expect significant disinflation for 2 BIS central bankers’ speeches the upcoming year. The continued decline in cumulative exchange rate effects, the return of food inflation to the average level of previous years and the fall in commodity prices, especially oil, will be the main factors contributing to disinflation. Moreover, we believe that the tight fiscal stance set out in the Medium Term Program (MTP) will support the decline in inflation. 1. Monetary policy and monetary conditions Distinguished Guests, The Central Bank implemented a front-loaded and strong monetary tightening in the first quarter of 2014 and then lowered policy rates gradually amid reduced domestic and external uncertainty in the second quarter. During the third quarter, we firstly cut the one-week repo auction rate from 8.75 to 8.25 percent, and the overnight borrowing rate from 8 to 7.5 percent in July. | 1 |
In fact, two areas that we recently reviewed that require attention include basic IT asset management and strengthening patch and vulnerability management practices. These are necessary hygiene steps and should be a fundamental for a sound cyber security defense program. As part of good risk management, firms also need to start considering how to assess the costs of cyber and connect the pricing of cyber risk to the businesses. You must ask yourself “what is my cyber exposure?” And, you need to think about how you should price it, because until cyber is priced, it may not get the attention it needs. 3. It’s not just the banks Cyber isn’t just about the banks – it’s about the entire financial sector, as well as the connections between the financial sector and other sectors like the utilities, retail, and others. We know that every area of the industry is interconnected; and it’s not just financial firms. As the old saying goes, we are only as strong as the weakest link. In the financial system, that weak link could be a weak firm, a weak vendor, a weak point of vulnerability in a payments or clearing system, etc. A weakness in any of these areas exposes the entire system, because the interconnections mean that you are all linked to each other, to non-financial firms, and to every system that supports the operations and structure of the industry. | Conversely, at the height of the crisis, financial conditions tightened sharply even as the Federal Reserve aggressively pushed its federal funds rate target down toward zero. As a result, monetary policymakers need to take the evolution of financial conditions into consideration. For example, when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation. While I agree with Hélène in most respects, there are a few points where I am less convinced. While the global financial cycle complicates policymakers’ ability to guide financial conditions in their own economies, I’m not persuaded that the trilemma has been replaced by a dilemma—that is, essentially an “either/or” choice between an independent monetary policy versus an open capital account. While there is no panacea to insulate countries from financial spillovers—particularly when policy in some areas is constrained by the effective lower bound on interest rates—I think a combination of exchange rate flexibility, a credible monetary policy framework, sufficient foreign exchange reserves, and a strong financial system can help mitigate the effects of such spillovers. Moreover, it strikes me that market participants have become more discriminating over time about the circumstances of different countries, rather than painting all EMEs with a similar broad brush. | 0 |
The dappled world Speech given by Andrew G Haldane, Chief Economist, Bank of England GLS Shackle Biennial Memorial Lecture 10 November 2016 The views are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Arthur Turrell for his help in preparing the text and Rafa Baptista, Karen Braun-Munzinger, Angelina Carvalho, Doyne Farmer, Jeremy Franklin, Marc Hinterschweiger, Andreas Joseph, Katie Low, Zijun Liu, Matthew Manning, Rajan Patel, Paul Robinson, Daniel Tang, Ryland Thomas and Arzu Uluc for their comments and contributions. 1 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx Introduction I am delighted to be giving this year’s Shackle Biennial Memorial Lecture. The past few years have witnessed a jarring financial crisis as great as any have experienced since the world wars, a crisis whose aftershocks are still being felt today. Against that dramatic backdrop, I thought I would use this occasion to reflect on the state of economics, not least in helping us make sense of such catastrophic phenomena. This topic has risen in both prominence and urgency since the financial crisis (Coyle and Haldane (2015), Battiston et al (2016)). Indeed, it would probably not be an exaggeration to say the economic and financial crisis has spawned a crisis in the economics and finance profession - and not for the first time. Much the same occurred after the Great Depression of the 1930s when economics was rethought under Keynes’ intellectual leadership (Keynes (1936)). | 1 Mainstream finance and macroeconomics has, then, followed firmly in the footsteps of giants, part Popperian, part Newtonian. It has been heavily indebted, intellectually, to Classical physics. That has led some to dub the dominant economic paradigm “econo-physics” (Mirowski (1989)). Less kindly, some have described economics as suffering from physics-envy. Assessing the Pros and Cons Despite recent criticism, which has come thick and fast, it is important not to overlook the benefits from having followed this path. One benefit, shared with theoretical physics, is that economic theory has well-defined foundations. There are fewer “free”, or undefined, parameters floating around the model. Nobel 2 Laureate Robert Lucas said “beware of economists bearing free parameters”. He was right. A theory of everything is a theory of nothing. The advantages do not stop there. On the assumption agents’ behaviour is representative – it broadly mirrors the average person’s – these models of micro-level behaviour can be simply-summed to replicate macro-economic behaviour. The individual is, in effect, a shrunken replica of the economy as a whole. These macro-economic models are, in the jargon, micro-founded – that is, constructed bottom-up from optimising, micro-economic foundations. These advantages carry across into the policy sphere. If the assumptions underlying these models are valid, then the behavioural rules from which they are derived will be unaffected by changes in the prevailing policy regime. These models are then a robust test-bed for policy analysis. They are, in economists’ jargon, immune to the Lucas critique (Lucas (1976)). | 1 |
BIS central bankers’ speeches 7 fixed-rate, full allotment regime in its refinancing operations, offering unlimited liquidity to banks at a predictable cost against an expanded set of eligible collateral. The widening of collateral might be seen as a way to mitigate the adverse and destabilizing effects of shortterm funding “runs” relating to a deterioration of asset liquidity, but it can also be seen as a way to prevent large recourse to central bank liquidity by banks, who would otherwise be subject to funding outflows at a later stage of the crisis. Such a widening has to be accompanied by proper risk management measures, such as haircuts, to mitigate the increase of the risk profile of the central bank. The challenge for the central bank is to “buildin” the possibility to expand the set of eligible collateral while mitigating the incentives for banks to abuse it.20 Similarly, the LOLR’s function of providing emergency liquidity assistance has been criticised for provoking moral hazard by banks. Indeed, support that is considered as appropriate during the crisis might have perverse effects on the incentives of banks at a later stage. Banks may ex ante decide to take an excessive exposure to risk, knowing that the central bank will intervene if that risk materialises. Moreover, there is a fine line between liquidity and solvency needs, which in a crisis is often blurred. Central banks should therefore be particularly wary not to substitute for capital support that should be provided by shareholders, investors, or in last resort by governments. | From a practical perspective, for the BNB this means reorganising the management, administrative, IT, and budget processes in these two areas, as well as an increase in the number of employees involved in these activities. So far the banking supervision and bank resolution activities have been funded by the BNB’s monetary income. From 2021 the BNB will move on to the principle of the ECB and SRB to fund the relevant activities by collecting fees from credit institutions. 4/4 BIS central bankers' speeches | 0 |
Therefore, the Central Bank targeting a variable such as FX rate, growth or current account deficit is out of the question. The Central Bank shares with the public the general framework of the current exchange rate policy and FX buying auctions in the press releases it has issued each year since the start of 2002. As also stated in these press releases; (i) In the current floating exchange rate regime, exchange rates are determined by supply and demand conditions in the market and the Central Bank does not have any exchange rate target. (ii) Since there is no exchange rate level to maintain in countries with floating exchange rate regimes, the level of foreign currency reserves is much less significant compared to countries with fixed or flexible exchange rate regimes. However, especially in emerging economies such as Turkey, a strong FX reserves position is significant in removing the unfavorable effects of potential internal and external shocks and boosting confidence in the country’s economy. In addition, taking into account the foreign debt payments of the Treasury and the need to gradually reduce the number of high-cost remittance accounts in the long-term, which are peculiar to Turkey and make up a significant part of the liabilities side of the Central Bank’s balance sheet, the Central Bank holds foreign exchange buying auctions to build up reserves at times where foreign exchange supply constantly increases compared to foreign exchange demand. | In the case of the Bronx, we found evidence both for and against the proposition. In either case, we take seriously the feedback from local businesses that they perceive access to credit to be a problem. The question then becomes what can be done to improve the situation going forward. Not surprisingly, most loans to small businesses tend to be small. Microloans – defined $ or smaller – make up 90 percent of all loans to small businesses. These loans tend to be labor intensive and costly to underwrite relative to the returns they generate. This combined with the higher risk associated with these loans present challenges to banks. Community development financial institutions (CDFIs) can help fill this space. CDFIs are specialized financial institutions that target their efforts to areas underserved by traditional financial institutions. They provide a range of financial products including capital for investments to start-up or expanding businesses in low-income areas. Most CDFIs tend to be nonprofit organizations, but some are regulated institutions such as community development banks and credit unions. Examples of CDFIs operating in the Bronx include the Bronx Overall Economic Development Corporation, the Bethex Federal Credit Union and Spring 4 BIS central bankers’ speeches Bank. However, CDFIs tend to make loans smaller than $ A challenge, then, is bridging the gap between the maximum loan amount typically provided by a CDFI and the minimum loan amounts typically provided by a bank. | 0 |
There were risks of the crisis’ effects being greater than assumed in the main scenario in June, so that weak demand and low inflation in the rest of the world would lead to an even lower price rise in the Swedish economy. All in all, these considerations meant that in the June report the Riksbank’s overall assessment of inflation in the coming years was adjusted downwards. As the rate of inflation twelve to twenty-four months ahead was judged to be below the target, the Riksbank considered that, at least for a time, there was room for a somewhat more expansionary monetary stance. The repo rate was therefore lowered 25 basis points. 4. What has happened since the June report? Let us now look at what has actually happened since the beginning of the summer. Low pressure from international prices During the summer the Asian crisis has got worse and the uncertainty about its future course seems to have grown. More countries in the region are now expected to show a fall in output during the year. One of the main factors behind the deterioration is the weak Japanese economy. The knock-on effects of the Japanese crisis in other parts of the world are highly uncertain, as is the outlook in such countries as Russia and China. An impact from the Asian crisis is now discernible in economic growth in the United States and the United Kingdom. | BIS Review 66/1998 -3Notwithstanding the prospect of further good economic growth in the coming years, the Riksbank judged that the rate of inflation would remain low and even be less than we had expected earlier. The strong demand was certainly assumed to give some increase in inflationary pressure in the forecast period but not so much as to be a cause for concern. One reason lay in the good productivity growth that was also foreseen, indicating that full capacity utilisation in the economy would not be reached in the coming twenty-four months. Although capacity utilisation was high in certain sectors, the Riksbank envisaged that in the economy as a whole there would be a capacity surplus. External inflationary pressure was expected to be low in view of subdued international inflation, low raw materials prices and a somewhat stronger exchange rate. Expectations of future inflation among households, financial agents and manufacturing indicated a belief that future inflation would be low. Thus, confidence in economic policy’s focus on price stability seemed to have been firmly established. The Riksbank noted that the uncertainty in the assessment of future inflation was mainly whether it would be even lower than we foresaw in the main scenario. One of the main factors here was the crisis in Asia and its conceivable effects on international economic developments and prices. | 1 |
Chart: Oil investment and spending of petroleum revenues Most of us might say that the economic winter has been fairly mild so far. This is partly because the economy has been provided with ample fuel. When oil prices started to fall, the economy had for several years enjoyed both strong growth in oil investment and fiscal spending of petroleum revenues. Oil investment has since declined, while government spending has continued to rise. Spending of oil revenues has increased by about as much as oil investment has fallen since 1/9 BIS central bankers' speeches 2013. Chart: Key policy rates Monetary policy has also made a substantial contribution. An already low policy rate was cut further. The key policy rate has now been kept at a record-low 0.5 percent for close to a year. In our neighbouring countries, interest rates have come down to even lower levels, but in real terms the interest rate level has been lowest in Norway. The krone exchange rate fell in tandem with the oil price and led to higher prices for imported goods, resulting in a temporary increase in inflation. Since there is confidence that inflation will remain low and stable, we have been able to disregard that increase when setting monetary policy. The social partners have shown wage restraint. The krone depreciation has thus translated into a marked decline in relative labour costs, which has helped strengthen the position of Norwegian firms exposed to international competition. | Inadequate pricing of emissions is one of the culprits. An international emissions trading system covering all countries could, in principle, provide for equal pricing of emissions. In practice, this has proved difficult to establish. Getting developing countries to sign on to such an agreement is understandably difficult. It is hard to demand that the polluter pays in countries where much of the population is still below the poverty line. The transition to low-carbon technologies in emerging markets is, however, essential for reaching global emissions targets. The pricing of emissions also encounters opposition in rich nations. Some would argue that higher emissions taxes will simply cause emitters to move elsewhere. This argument may be relevant for some sectors. But there is also opposition from groups who consider themselves better served by financial support to make changes rather than having to bear the costs themselves. For the political authorities, subsidies may therefore appear a more attractive option. The result is a more costly and less effective climate policy. Chart: Price of emissions Norway was among the first countries to introduce a carbon tax. In addition, several industries are covered by the EU emissions trading system. But a glance at the cost of carbon emissions in Norway shows that even here we have a long way to go before the principle of equal pricing of emissions is realised. Some sources of pollution are completely exempt. | 1 |
Under the so-called Solidarity Alternative, or wage moderation policy, the social partners were to ensure moderate wage growth and competitiveness. The authorities promised to deliver a stable krone. Structural reforms were implemented to increase growth capacity. Confidence in monetary policy gained a firm footing and inflation and the real interest rate declined. But the regulatory pendulum that swings back and forth was still in motion. In the period up to the turn of the millennium, petroleum revenues were on the rise and fiscal policy came under pressure. The fixed exchange rate regime amplified fluctuations in the economy and the social partners were no longer able to rein in cost growth. The Solidarity Alternative had played its role. Unexpected growth in petroleum revenues also highlighted the importance of designing a long-term government savings plan. We needed a new anchor for both fiscal policy and monetary policy. Chart 5: Inflation. Moving 10-year average and variation in CPI. Per cent. 1980 – 2010 Report No. 29 from 2001 sets out long-term guidelines for economic policy. The division of responsibility was further clarified. Norges Bank was given a clear responsibility for keeping inflation low and stable. The government and the Storting can build on Norges Bank’s response pattern when drawing up annual budgets. They can also take into account that increasing spending via government budgets may trigger an appreciation of the krone. | 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. | 1 |
There are promising signs, among business and regulatory sectors, that there is a growing space for captives to play a role. It is important that we move forward to harness this potential, responsibly and thoughtfully. 4/4 BIS central bankers' speeches | In 2022, inflation rose initially on the back of the rapid surge in prices of import items, in addition to an ever increasingly strong aggregate demand and an overall upswing in costs of production. However, inflation trend recorded a turning point in October 2022, declining progressively onwards at 4.7% in May 2023. This performance reflected the dynamics of prices in global markets, the first effects of our monetary policy's reaction, - which I will elaborate on in more detail below, - and the appreciation of the exchange rate. Also, the relatively low inflation rate in Albania was also backed by the contained electricity prices for households and some businesses, thus transferring the increased cost in energy imports to the public sector's balance sheets. Year 2022 marked progress in terms of improving the external position of Albania as well. More specifically, the Albanian exports grew by 42% over the past year, driven by the rapid growth in tourism income. This growth led to the reduction in both the trade deficit and the current account deficit. In parallel, external debt of Albania declined while its sustainability indicators improved. The improvement in the balance of external trade, the high levels of foreign direct investments coupled with the stability of the domestic financial markets, drove to the strengthening of the lek exchange rate during the past year. These trends seem to have continued in 2023 as well. | 0 |
Now the point of all that was not just to help me decide how I should vote in the MPC next month! It was to distinguish two distinct issues relating to monetary policy that I want to discuss over the next few minutes. The first is the objective of monetary policy - what it is that we, in the MPC should actually be trying to do. And that objective couldn’t be clearer. It is to achieve - on average and over time - a target rate of retail price inflation, of 2½% on the RPIX measure (i.e. excluding MIPS), as set by the Chancellor of the Exchequer. 1 BIS Review 18/2000 I suppose it might just be coincidence, but since we adopted inflation targetting as the objective of monetary policy, towards the end of 1992, our economy has performed remarkably well. In fact over the past 7 years we have enjoyed the longest period of sustained low inflation we’ve known for a generation. Retail price inflation - on the Government’s target measure - has averaged 2.7% over that time. That’s just about 2% on the European standardised HICP measure of inflation and on that measure our inflation rate is currently the lowest in Europe at 0.8%. Alongside low inflation we’ve also had the lowest nominal interest rates that most of us can remember. Short-term rates have averaged some 6¼%, (fluctuating between 5 and 7½% over the period) compared with some 11¼%, (fluctuating between 7 and 15%) over the previous decade. | However, there is a risk that African countries could become the biggest casualties of a crisis they did not create. The impact is already severe and has dealt a huge shock to our continent while posing a great threat of reversal to the hard earned social and economic gains that most of our economies had achieved in the recent past. Ladies and Gentlemen, for more than a decade, most African countries had continued to register unprecedented economic growth rates averaging 5% and above. We saw a rise in income levels and a reduction in poverty among our peoples with improved education, BIS Review 44/2009 1 health, water and infrastructure development. The continent also experienced a surge in investment flows in many sectors including mining, manufacturing, tourism, transport and construction. Progress in governance and accountability had also been noted in most African countries. Mr Chairman, allow me without pre-empting the deliberations to mention some problems the global financial crisis has created for most African economies. Commodity exporting countries have experienced a decline in their export receipts. This has been due to the decline in commodity prices reflecting the weak demand of such commodities arising from the scaled down output in industrialised and emerging market countries. The declining export earnings as well as changing investor sentiment toward investing in emerging markets, which has been reflected in the reversal of investment flows, have been exerting pressure on the exchange rates. | 0 |
Secondly, it requires unwavering determination and capacity to act: let me reiterate firmly here today, not just our forecast but also our commitment, alongside Christine Lagarde, to bring inflation back towards 2% in the euro area and France by end-2024/2025. Credibility ultimately means renewing our communication: since last year, like all other major central banks, we have stopped giving the markets “forward guidance” in the form of a commitment to a path of key rates that is unconditional and/or extended over time, as this no longer appears suited to today’s highly uncertain environment. However, market expectations of the future path of key interest rates are an essential determinant of medium and long-term interest rates, those that matter the most for investment and spending decisions. We therefore need to aim, with humility, for a “new predictability” in our communication.6 To do this we need to overcome at least one challenge, which relates to the overly strict interpretation of what “deciding meeting-by-meeting” means. As witnessed with our meetings at the end of last October and in December, this would lead to surprises and excessive volatility. Monetary policy deserves better than a “live” prediction contest, or an overinterpretation of statements by different individuals. On 2 February, on the contrary, we made it clear that we intended to raise our key rates by another 50 basis points on 16 March, and that we would then evaluate the subsequent path of our monetary policy. Refusing to give long-term and unconditional “guidance” does not preclude providing some short-term visibility, today or tomorrow. | However, I should also underline the progress in institutional and legal framework, such as the introduction of the Public Fiscal Management and Control Law, the Public Procurement Law and the multi-year budgeting framework. Three year inflation targets that are compatible with the three-year budgeting practice are also one of the good examples of coordination between fiscal and monetary policies. Another pillar of better economic governance is financial stability. A stable and healthy financial system is the key to sustainable growth through allocating savings to the real sector BIS Review 38/2008 3 in a country. Law defines financial stability as the auxiliary objective of the Central Bank of Turkey. Establishment of the Banking Regulation and Supervision Agency, successful implementation of The Banking Sector Restructuring Program and the New Banking Law that brought the legal framework with best international practices were the milestones of legal and institutional reform in the financial sector. No need to say that the improved macroeconomic framework through successful monetary and fiscal policy implementations also contributed much to financial stability. Last but not least, I should say that there is also an effective cooperation among the Central Bank of Turkey, the Banking Regulation and Supervision Agency, the Undersecretariat of Treasury, the Capital Markets Board and other public authorities and also with private sector representatives. The fourth and the final set of actions that has been undertaken towards better economic governance is structural reforms. | 0 |
I am not going to go into details tonight about the precise economic mechanisms which make overnight market rates converge on Bank Rate, but there is plenty of technical material available on that if you wish to know precisely how that works.7 In my first week as Markets Director of the Bank of England, in March 2009, we set Bank Rate at 0.5% where it has remained ever since; a record low for the policy rate in the Bank’s history of over 300 years. Since that left little scope to adjust the price of money downwards directly, we switched at that point to directly affecting the supply of narrow money. The Asset Purchase Programme – more popularly called “Quantitative Easing” or just “QE” – has since reached of total of £ the vast majority of which has been by purchasing gilts, financed by increasing the supply of reserve balances (net of other flows across the Bank’s balance sheet – see Charts 1 and 2). The economics of QE is actually more simple than is often portrayed: by buying a large amount of assets from the market, in exchange for cash, we can greatly increase the amount of sterling in the economy. We inject the most liquid asset of all – short-term sterling reserve balances – and take out of circulation a long-maturity, less liquid asset, gilts. That switch in maturity and liquidity leads to a range of effects, as the economy has to rebalance its holdings of financial assets. | Caleb M Fundanga: The effects of the crisis on Africa Remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the African Economic Research Consortium Senior Policy Seminar (SPS XI), Lusaka, 6 April 2009. * * * The Executive Director, African Economic Research Consortium; Government and Central Bank Officials present; Distinguished Participants; Members of the Africa Economic Research Consortium; Ladies and Gentlemen. It is with great joy and gratitude that I welcome you all to Zambia and to this seminar. I wish to extend a warm welcome to all the international participants. I hope you will have a good stay in our beautiful and friendly city of Lusaka. I feel particularly honoured and grateful to officiate at this important seminar organized by the Institution I am proud to be associated with, the Africa Economic Research Consortium (AERC). Chairperson, let me begin by thanking you and AERC for choosing Zambia to host this important seminar. I am aware that since its establishment in 1988, the AERC has played a pivotal role in developing and harnessing resources in Africa both informational and human capital. Research, workshops and seminars such as this one have helped to strengthen the capacity of undertaking policy–relevant research into the problems facing the management of economies in sub-Saharan Africa. It has, through these interventions, undoubtedly contributed to the positive strides African economies have scored in the last decade with regard to economic governance and development. | 0 |
For example, in avalanche areas the snow may be “seeded” so that, by inducing small avalanches, the chance of a large avalanche is mitigated. And in fire-risk areas, controlled burns or fire breaks are sometimes used to limit the risk of a large fire. In the context of the financial system, policymakers could impose a “Glass-Steagall” style separation between the payments system network and risky activities. Actions can also be taken to mitigate the impact of a bad outcome. For example, this might mean building an avalanche net or fence; funding a fire-fighting service; or launching a lifeboat. In the context of financial regulation, this might entail reducing the costs associated with resolving financial institutions, for example by requiring banks to develop resolution and recovery plans, or requiring forced subsidiarisation of foreign bank branches. As always, however, there is the risk that such interventions can have unintended consequences: shortly after the Titanic sank, a steamer, the S.S. Eastland, capsized on Lake Michigan, with the loss of around 850 lives, because it had been destabilised by the extra lifeboats required by post-Titanic regulations! 4. Decision making under uncertainty and the role of beliefs The analogies between economics and science can be taken only so far. A key difference between economics and the physical sciences is the role played by active decision-makers – such as households and businesses – whose presence complicates substantially the dynamics of the system. | Therefore, with inflation running at 16-20 percent in the Baltic States, interest rates became strongly negative in real terms and the monetary policy procyclical, boosting consumption, while the fixed exchange rate has discouraged production. Basically, the main weakness of the currency board, namely the inability to respond to exogenous adverse factors, pushed the economies of those countries towards a hard landing. Let's look now at the picture in Romania. Our exchange rate regime, featuring a flexible exchange rate in a managed floating system, allowed the market to correct the overappreciation the leu had registered at a certain point via its own mechanisms, and the BNR was able to raise interest rates – which it did seven times already over the past 10 months – in order to permanently keep them in real-positive territory and curb inflation which had been triggered by the same external factors that affected the countries you have mentioned before. The BNR has even moved forward in order to slow down consumption and maintain a healthy portfolio for commercial banks via the recent prudential measures BIS Review 113/2008 1 regarding loans to households. All these have significantly contained the risk of a hard landing for the Romanian economy, even if such a risk still lingers as long as the gap between the current account deficit and its financing via FDI remains significant. Nevertheless, the foreign analysts that included Romania in the group of the five countries exposed to a hard landing had substantiated their opinion. Are they completely wrong? | 0 |
Going negative has sharply lowered and flattened the yield curve in the euro zone, which is especially relevant given the importance of long-term financing. And so far the substitution for cash has also remained negligible. Yet, there are limits on how far one can go. Thus lower key interest rates should be combined with other non-conventional measures. In short, CBs have innovated a lot, both in terms of rates and quantities. We knew CBs could do a lot and they have actually done a lot, even if they cannot do everything. In the main advanced economies, the precise macroeconomic effect of large-scale asset purchases is still under discussion. But I can summarize the Eurosystem’s shared analysis and Mario’s recent statement: our purchases will add around half a point to inflation in 2016 and almost the same to growth. In the US case, the QE2 launched in late 2010 is the most similar to our QE. Controlling for its size, roughly half of ours, it has had a broadly comparable impact, even if published estimates differ somewhat. Fourth challenge: how to deal with the risk of a mismanaged exit from the ZLB and financial instability? Staying too low for too long would be counterproductive: ultra-low margins may discourage financial intermediation and lending to the real economy, while addiction to forward guidance may silence contrarians and hamper market information on fundamentals. Yet the exit may be bumpy and, hence, postponed or even aborted. | Some economists have called for adjusting the inflation target, although in opposite directions: a few have argued for a higher target to avoid testing the Zero Lower Bound often (ZLB); others have called for a lower target, assuming lowflation is the New Normal. In both 2 BIS central bankers’ speeches cases, hasty changes may only affect the CBs’ credibility and the expectation channel of monetary policy. We have more flexibility on the target horizon. This is the medium term and should not be confused with the 3-year horizon of the forecasts published by the ECB for instance, which may fall short of the target level; what matters is being on a path that is consistent with this medium-term mandate. Forward guidance and the announcement that rates will be “lower for longer” should provide reassurance over the CB’s determination to do “whatever it takes” to fulfill its mandate within this mandate. True, uncertainty about the causes of lowflation and low rates leads to uncertainty over the neutral rate and the need for accommodation; but the more uncertain our environment, the more important and useful it is that we be clear and predictable in order to reduce this uncertainty. According to simulations carried out within the Eurosystem and the BDF, clarifying that the future stance will remain accommodative for many years enhances the efficacy of Quantitative Easing (QE). Third challenge: how effective can non-conventional monetary measures be? The ZLB has proved not to be the effective lower bound. | 1 |
Naturally, a booming economy, with a widening current account deficit, persistent appreciation and low inflation may need some stabilization if the expansion is deemed to be unsustainable. Fiscal policy could help, but unfortunately it is not always available, especially in countries with a weak fiscal history. Another tool, with weak evidence supporting its 2 For further discussion on the use of monetary policy to affect asset prices, in particular in the context of inflation targeting in open economies, see De Gregorio (2010b). 3 In economies following inflation targets is important that the intervention be coherent with the inflation outlook to avoid undermining credibility. Intervention can also be part of unconventional policies to reach the inflation target when interest rates are close to the zero lower bound. BIS Review 124/2010 3 effectiveness, is capital controls. 4 Regardless of whether they are effective or not, they may hide policy distortions. For example, policymakers thinking that capital controls are effective at insulating the economy from capital inflows, may tighten monetary policy to slowdown the expansion, but instead induce further inflows that look for loopholes to avoid the controls. For this reason I think that a more promising avenue is to look at the impact of capital inflows on financial stability. Indeed, many of the booms in asset prices and activity that come with capital inflows are caused and amplified in the financial system. Capital inflows and financial stability From the macro point of view, I have emphasized currency risks associated to capital inflows. | 141–156. IMF (2010), Global Stability Report, April, International Monetary Fund, Washington DC. Ostry, J., A. Ghosh, K. Habermeier, M. Chamon, M. Qureshi and D. Reinhardt, “Capital Inflows: The Role of Controls”, IMF Staff Position Note, SPN/10/04. 10 BIS Review 124/2010 | 1 |
History is important In a study1 published by the LSE’s Financial Markets Group last year, Rosa Maria Lastra concludes that central banks are not “natural products” but products of history. She emphasises the special relationships whereby central banks have been consciously awarded privileges by governments, and have been expected to provide certain services and functions in return. This may seem a dubious process, like selling monopolies. But central banking, she kindly says, is not an “evil”: that comes as a relief to some of us. Though a product of history, and a creature favoured by the state, a central bank may serve useful economic goals in the pursuit of stable money and sound banking. While most of their functions could be fulfilled by a different public or private institution, central banks are today typically seen as convenient instruments for the conduct of both monetary policy and banking supervision. I agree with Dr Lastra’s conclusions. Moreover, central banks’ differing historical origins influence not only the tasks they carry out today, but also the way in which they think and operate. The Bank of England was established to lend money to the government; and though the Maastricht Treaty now prohibits any buying of British government debt by the Bank of England in the primary market, the Bank still manages government funding operations in an essentially agency capacity (and the present Governor first came to public prominence in this area!). | But these banks have been hit by a series of powerful shocks. (i) Monetary policy The first is the shift from centralised control of the economy to a market-based system. Instead of directing money to meet enterprises’ deficits - a job which required a large branch network and hordes of bureaucrats - the aim is to influence the behaviour of the economy by using indirect instruments of monetary policy to guide interest rates and the exchange rate, and to conduct the prudential supervision of the new commercial banks. But many of the bureaucrats find it difficult to work out which bits of information they need and how often, and prefer instead to demand a substantial volume of data without prioritisation. Some of the staff of eastern European central banks, used to passing on raw data which can be checked against enterprises’ targets, find it difficult to analyse information with the aim of learning something about the behaviour of markets, consumers or firms. The simple questions, “Why are we doing this?”, “What does this mean?” can be too hard to ask. New goals, however well-enshrined in the constitution and law, do not change culture overnight. BIS Review 33/1997 -5- The second culture shock has been the move from a monobank to a two-tier banking system. The old system had two separate monetary circuits - one for cash (used mainly by individuals) and the other in transfers between bank accounts (used by enterprises). | 1 |
It is therefore not surprising that over there, as well as over here, there is criticism of the existing structure, and pressure for change. Our own system, with its monopolistic approach to the origination of legislation, does not generate competing draft bills. But the marketplace for ideas on regulatory reform is, I can assure you, just as well contested. Critics of the existing British system object on three counts: 1 that the failures of the last decade demonstrate its inability to cope with strains and crises; 2 that it is unnecessarily complex, with overlapping and sometimes even conflicting responsibilities; and 3 that it has failed to keep pace with changes in institutional and market structures; the distinctions on which it was based no longer effectively apply. It is not my aim today to give a comprehensive assessment of the validity of all these arguments. And, in any event, just as in the US, there is a heavy political dimension to this debate. But I would make a few observations on the arguments advanced for change. The UK system is complex, although it is no more complicated than the equivalent arrangements in some other countries with similarly sophisticated financial markets. (Indeed, were I not a guest here, I might say that the US system was rather more labyrinthine than ours.) Those who argue for simplification point to duplication of function and cost, especially between the SIB and the front-line financial services regulators. | This approach, sometimes called ‘market neutrality’, has obvious attractions for central banks charged with setting monetary policy for the economy as a whole. But it has quite a striking implication for the carbon footprint of the CBPS portfolio. Chart 5 compares the proportion of the CBPS held in each sector with the contribution of that sectoral holding to the total carbon footprint of the portfolio. And you can immediately see that some sectors – notably the utilities: electricity, water and gas – contribute more to the CBPS’ carbon footprint than their portfolio share might suggest. Others by contrast contribute substantially less – eg the consumer, communications, property and finance sectors. 12 A full set of eligibility criteria can be found here: https://www.bankofengland.co.uk/markets/market-notices/2016/asset-purchasefacility-corporate-bond-purchase-scheme-market-notice-september-2016. Financial risks on the CBPS, like the Asset Purchase Facility as a whole, are indemnified by HM Treasury. 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 Chart 5: CBPS sectoral composition and carbon footprint13 There are at least two reasons for this apparent bias. The first is that – for reasons unrelated to emissions – investment grade corporate bond issuance tends to be better suited to companies with big fixed long-term capital investment needs (and on average larger carbon footprints). By contrast, smaller companies (with on average lower carbon footprints) are more likely to rely on funding from banks or other sources. Debt issuance therefore tends to be skewed towards sectors with higher carbon footprints, relative to their shares of GDP. | 0 |
In order to ensure that the national strategy is rapidly implemented, we rely on the Operational Committee, which I chair, and which is responsible for management and coordination. Our roadmap for 2017 is clear: during the first half of the year, operational objectives will be defined and available resources will be identified; and during the second half, a robust and effective assessment methodology will be developed. We are already actively working on introducing specific mechanisms for people in financial difficulty and students. To help those experiencing financial difficulties, we are working closely with social service providers to produce practical educational materials covering seven concrete subjects: budgeting, relationships with banks, credit, bank payment incidents, banking inclusion, overindebtedness and complaints. From June 2017, these materials will be made available to social workers and associations so that they can be used with people in financial difficulty. By the end of the year, the Banque de France's teams have planned to hold nearly 900 meetings to present in detail these educational materials, as well as the "mes questions d'argent" portal, to 14,000 social service providers. For students, in December 2016 the Ministry of Education set up a group of experts in which the Banque de France and the French Institute for Public Financial Education actively participate. | The Labuan IBFC's competitiveness will be further enhanced through a revision of the pricing structure pertaining to incorporation and maintenance fee charges. There will be an annual reviews and prices will be revised in response to competitive market developments. The Labuan IBFC will also leverage on the national strategy of the Malaysian Islamic Financial Centre by promoting Syariah-compliant trusts and foundation. These products will complement Islamic financial products and services already available in Kuala Lumpur. Efforts will also be taken to further develop Labuan's captive insurance business which has enjoyed commendable growth over the years. Conclusion Ladies and Gentlemen, The establishment of Labuan as an international offshore financial centre in 1990 was indeed a bold step in its time. We are now seeing the payoffs from this initiative. With the transformation of Labuan as an International Business and Financial Centre, our ambition will be taken further. The new name signals that Labuan is ready to take on the much broader and larger role. The new name also represents a commitment. A commitment for the future. To demonstrate this commitment, the Government and the regulators have put in place the supportive and enabling environment to promote a more connected and more cost effective environment. Continued initiatives will also be taken to remove any impediments and obstacles to a more efficient delivery system and to advance forward the Labuan IBFC. 2 BIS Review 10/2008 The responsibility for ensuring the ambitions of the Labuan IBFC to be realised, is however, a shared responsibility. | 0 |
The most uncertain risks for general insurers tend to be in the policies they have written and therefore on the liability side of the balance sheet, not the asset side. On the other hand, life insurers tend to be more exposed to market (including credit spread) risk on their assets. And although they are less likely than a bank to have a liquidity mismatch, the risk management challenge for an insurer is to try to match the maturity between assets and liabilities (and hence manage their rate of return). That is particularly necessary for life insurers whose liabilities tend to extend well into the future i.e. tens of years for many products. From 1 January 2016 a new European-wide capital standard will come into force under the Solvency II directive. Solvency II is largely maximum harmonising and should establish a more level playing field between European insurers. In part it embodies some of the basic principles of the UK’s ICAS regime, being based on holding sufficient capital to meet an event of such severity that might happen only once in every 200 years. In other aspects it is different, most noticeably in that the UK has a “gone concern” regime – i.e. under ICAS firms hold sufficient capital to run off their liabilities. Solvency II is to be a “going concern” regime – firms have to hold an additional risk margin to allow their business to be transferred to a surviving entity. | The main point I want to make here is that, even though there are international agreements arising out of the alphabet soup of committees, most of these initiatives require detailed interpretation, rule-making and implementation by the PRA, even after transposition into EU or UK law. Since the PRA was created in April 2013 (to 30 September 2015), I count that the PRA has issued 70 consultation papers, 82 supervisory statements or updates thereof and 44 policy statements setting out final rules. The UK financial regulatory system is not solely about the PRA of course. Those firms that are authorised and supervised by the PRA are the banks, building societies, credit unions and major investment firms. Those firms are also regulated by the FCA for conduct matters. The remaining firms and persons within the regulatory perimeter of the financial system are then solo regulated by the FCA for prudential matters as well as conduct. The PRA and FCA arrangement is an example of the modern “twin peaks” model for financial regulation, pioneered in Australia in 1998, which separates out the prudential regulator – which covers the larger, more systemic firms – from the conduct regulator. That gives the latter a very long tail of small firms and financial advisors within its net. For comparison, the PRA authorises 2 BIS central bankers’ speeches some 1,700 firms and groups and has a budget for some 1,200 staff, plus support services from the wider Bank of England. The FCA regulates over 73,000 firms and employs over 3,000 staff. | 1 |
Much has been done; however, looking at the bull’s-eye scorecard, I would argue, if anything, the FOMC has been less aggressive than the policy loss function calls for. And to me, in the current circumstances, accountability and optimal policy mean we should be maintaining a large degree of accommodation for some time. Policies that would instead place us on a slow glide path toward our targets undermine the credibility of our claim that we will do our job and meet mandated policy goals in a timely fashion. Timid policies would also increase the risk of progress being stymied along the way by adverse shocks that might hit before policy gaps are closed. The surest and quickest way to reach our objectives is to be aggressive. This means, too, that we must be willing to overshoot our targets in a manageable fashion. Such risks are optimal if the outcome of our policy actions implies smaller average deviations from our targets over the medium term. We should be willing to undertake such policies and clearly communicate our willingness to do so. References Board of Governors of the Federal Reserve System, 2013, “What are the Federal Reserve’s large-scale asset purchases?,”(external) Current FAQs, December 19. Federal Open Market Committee, 2014a, press release(external), March 19. Federal Open Market Committee, 2014b, Transcript(external-pdf) of Janet Yellen press conference, March 19. Federal Open Market Committee, 2014c, “Statement on longer-run goals and monetary policy strategy,”(external-pdf) as amended January 28. | Today, low-inflation policies seem to enjoy high credibility in most countries, which is indicated in part by the fact that the rise in the oil price at least so far has had small effects on inflation expectations. The risk of an oil price rise spreading to wages and other prices in the economy is therefore also likely to be low. Furthermore, in the case of Sweden it should be added that inflation is rising from a low level and that agreements in the labour market have been settled for 2005 and 2006, further reducing the risk of contagion effects via the jobs market. To sum up: the fact that the increase in the oil price is partly a demand-driven phenomenon, that the dependency on oil has decreased and that inflation-targeting regimes enjoy high credibility suggests that the higher oil price should mainly be reflected in a temporary, limited rise in inflation and that the effects on the real economy should be fairly small. If this is correct, the general economic and inflationary developments are more significant for monetary policy than developments in the oil price. This brings me to a discussion of the broad outlook for the Swedish economy in the years ahead. Economic activity in Sweden Despite the Riksbank’s relatively optimistic outlook for the Swedish economy compared with other forecasters, we have gradually revised up our forecasts in the past year. | 0 |
The introduction of macroprudential instruments to complement the stabilising capacity of monetary and fiscal policies is probably one of the most significant advances in the wake of the international financial crisis. For the countries belonging to a monetary union, the introduction of these tools is particularly important. This is because it is one of the few instruments available nationally to ensure the stability of the domestic financial system. In my opinion, macroprudential policy has a dual role to play in the current setting. First, continuing low or even negative interest rates over an extended period may have adverse effects on financial stability. Macroprudential policy should be primarily entrusted with reacting if some of these risks emerge, actively combating potential excessive debt growth and protecting financial institutions against the hypothetical materialisation of these 12 See Chapter 4, “Fiscal policy in the euro area”, in the Annual Report 2016, Banco de España. 13 See Arce et al. (2016), “Policy spillovers and synergies in a monetary union”, International Journal of Central Banking, 12(3), September, pp. 219-277. 14 See Chapter 4, “Fiscal policy in the euro area”, in the Annual Report 2016, Banco de España. 12/16 risks. This policy action should affect both the banking sector and the non-bank financial sector, depending on where the signs of exuberance are perceived. Second, some macroprudential instruments, such as the countercyclical capital buffer (CCyB), can be used to build up capital buffers at financial institutions in times of plenty that can be deployed when conditions worsen. | The recently created instrument for convergence and competitiveness, while a step in the right direction, lacks stabilisation capacity. It does not incorporate some of the potentially most effective elements, such as European unemployment insurance and the use of European funds to mitigate the impact of specific shocks on certain economies. The lack of effective macroeconomic policy coordination mechanisms in the euro area is exacerbated when monetary policy comes up against its effective interest rate limits. As I said earlier, this circumstance might become more frequent in the future if we move into a more persistent setting of low rates. Moreover, it is in this setting that the effectiveness of fiscal policy may prove greater.13 There is thus a pressing need to create some type of common cyclical insurance mechanism in the euro area. This instrument would help automatically absorb adverse shocks at the aggregate level (symmetric) or idiosyncratic shocks in certain countries (asymmetric). Its dual aim would be to smooth effects in individual countries and safeguard the stability of the euro area as a whole. Some recent analyses suggest that it would be possible to design a mechanism which, without committing major funds (fewer than the current European budget) and without it entailing permanent cross-State transfers, would provide for a similar stabilisation capacity to that achieved with the US transfer system.14 The role of macroprudential policy We should not forget the role that so-called “macroprudential policy” can and should play. | 1 |
A regulatory framework that remains to be finalised With regard to banking regulation, the Commission presented its proposal at the end of October 2021 for the transposition into EU law of the international agreement of December 2017, which is a decisive step towards the finalisation of Basel III. The ACPR supports this proposal which takes full account of Europe’s specificities and allows sufficient time – until 2032 – to adapt to the new features of supervision. But I want to be very clear on this: the exemptions regarding housing loans or unrated businesses must absolutely remain temporary. Any temptation to make them more permanent would call into question our commitment, the international credibility of France and Europe. In response to certain surprising but recurrent claims from the banking industry, let Page 5 of 8 me just re-state the obvious: in the past ten years, the regulatory framework has done nothing to hinder the sound, and even very broad, financing of the French economy; on the contrary, it has strengthened the resilience of the financial system, as became abundantly clear during the Covid crisis. We must not deviate or drag our feet: France and Europe have everything to gain from a stable and balanced Basel III; we shall strive to maintain this level international regulatory playing field, including in investment banking which is important for European sovereignty. | Presentation of the 2021 Annual Report of the Autorité de contrôle prudentiel et de résolution (ACPR) Press conference, 31 May 2022 Speech by François Villeroy de Galhau, Governor of the Banque de France Chairman of the ACPR Press contact: Mark Deen ([email protected]). Page 1 of 8 Ladies and Gentlemen, I am very pleased to welcome you to our presentation of the Annual Report of the Autorité de contrôle prudentiel et de résolution (ACPR – Prudential Supervision and Resolution Authority), in the company of Jean-Paul Faugère, Vice-Chairman of the ACPR, Dominique Laboureix, Secretary General of the ACPR, and Alain Ménéménis, President of the Sanctions Committee. Last year was marked by a vigorous recovery of our economy, during which our financial sector proved particularly robust (I). 2022 should now see substantial advances on the regulatory front (II). However, the war in Ukraine is posing new risks to the financial sector, calling for heightened vigilance (III). In all these situations, the women and men of the ACPR have worked tirelessly to ensure that the French financial system remains resilient under all circumstances, providing adequate financing to the economy. I would like to extend my warm thanks to them. ** I. The strength of the French financial sector is more than ever an asset for our economy I shall start with just a short word on the situation for insurers, which Jean-Paul Faugère will go into in greater depth. | 1 |
To the extent size is a proxy for productivity, this is also as we would expect.18 During expansions, more productive firms hire more, and lose fewer, of their workers than less productive firms (Charts 14a and 14b). Other patterns in the data less obviously fit the facts, however. Despite jobs flows picking up, pay growth has until reasonably recently remained slow and low. Meanwhile, productivity growth has remained 18 For example, Bernard et al (2014) and Wales et al (2018). 13 All speeches are available online at www.bankofengland.co.uk/speeches 13 stubbornly subdued despite a seven-year jobs recovery. So has the jobs ladder broken? Have its rungs been removed? To understand these developments, it is useful to break the decade down into phases. Charts 14a and 14b: Hire and quit rates by firm size Hire rate Quit rate 7% 2.5% 1.0% Small firms (< 50 workers) Medium firms (50-499 workers) Large firms (500+ workers) 0.9% 6% 2.0% 0.8% 5% 0.7% 4% 0.6% 1.5% 0.5% 3% 2% 1% 0.4% Small firms (< 50 workers) - LHS 0.3% Medium firms (50-499 workers) - RHS 0.2% Large firms (500+ workers) - RHS 0.1% 0% 1.0% 0.5% 0.0% 0.0% Sources: ONS LFS and Bank of England calculations. Notes: Charts show four-quarter moving average of hire and quit rates. | In case of remote payments, such as Internet payments, an additional requirement has been introduced for the so-called dynamic linking. It requires linking each transaction to a specific amount and a particular payee by sending one-time code messages by the payment service providers. The forthcoming review of the PSD 2 will provide a comprehensive assessment of the strong customer authentication impact on the level of payment fraud. New requirements are considered in order to reduce ‘social engineering’ and ‘phishing’ types of fraud, including a requirement to 1/2 BIS central bankers' speeches match the payee’s name in the payment order with that of the account holder. Special emphasis will be placed on the prevention of instant payment fraud. Electronic identification and certificatebased solutions are explored as means of strong customer authentication. Recently, a special focus has been placed on re-defining and strengthening the oversight of the wider payment ecosystem. Specific steps in this aspect have been taken by the ECB with the draft of a single Eurosystem oversight framework for electronic payment instruments, schemes and arrangements (PISA framework), published last year. PISA framework aims to cover not only the traditional payment schemes and instruments (e.g. payment cards), but also innovative instruments, such as digital payment tokens backed by assets (e.g. stablecoins). Last September the European Commission published a Proposal for a Regulation on Markets in Crypto-assets (MiCA), which is currently under discussion. | 0 |
The financial sector is, correspondingly, structurally short options, which it can – and does – slice and dice in various ways in an attempt to distribute the option exposure to those who want it. But to a greater or lesser extent, a residue is left, some of it with institutions which de facto seem to have short holding periods. They dynamically hedge, either continuously or within thresholds. A rather graphic – if, ultimately, not stability-threatening – example of what I’m describing occurred a few weeks ago in the structured credit markets. I’ll spend a few moments on this as the distribution of optionality was quite complex. For some while, a wide range of regional banks, insurers and pension funds in Europe and Asia have been selling protection on intermediate tranches of credit portfolios, say on losses between 3% and 7%. Although they are effectively short an option on portfolio credit risk, they are widely regarded as passive investors who do not dynamically hedge. Their counterparts, the dealers, are initially long an option on portfolio credit risk; as spreads generally widen, the value of the bought-protection position increases non-linearly. Over time it became popular amongst short-term leveraged traders to exploit the strong supply of intermediate (or mezzanine) protection by holding a bought-protection position on mezzanine tranches as a hedge against selling protection on equity tranches. This was a so-called long credit correlation position, as its value would tend to increase with rises in the implied correlation of default risk among the companies represented in the underlying portfolios. | 3 The effective federal funds rate is calculated as a volume-weighted median of overnight federal funds transactions reported by banks on the FR 2420 Report of Selected Money Market Rates. The New York Fed publishes the EFFR for the prior business day, along with volumes and rate percentiles, on its website daily at approximately 9:00 a.m. Eastern Time. The EFFR is used as a measure of the typical fed funds transaction and is the way the New York Fed’s Open Market Trading Desk (the Desk) measures its success in meeting the directive on interest rate control from the FOMC. 1 confidence in its ability to appropriately control overnight interest rates over the period of normalization. I will then conclude with some comments on recent developments in broader money market rates, in particular U.S.-dollar LIBOR. U.S. term money market rates are of global significance, owing to the heavy use of the dollar outside the United States and the large stock of dollar-LIBOR-linked debt issued abroad. 4 The spread of LIBOR to overnight indexed swaps has fluctuated in recent years, along with similar term unsecured dollar borrowing rates, driven in part by the same factors influencing overnight rates but also by specific past regulatory and legislative changes that have impacted flows in term markets. Evidence, such as from the FX swaps market, suggests that dollar borrowing markets continue to function well. Policy Normalization Continues As Expected I’d like to start by taking stock of where we are with the normalization of monetary policy in the United States. | 0 |
Intesa SanPaolo Bank acquired and merged with Veneto Bank, and the American Bank of Investments acquired and merged with NBG Bank Albania. I would like to underline that these changes were dictated by developments in 5/8 BIS central bankers' speeches the banks’ home country or their international strategies rather than by domestic issues in the Albanian market. Moreover, at the beginning of 2019, changes in ownership were rendered possible in the case of International Commercial Bank and Societe Generale Albania. Changes in ownership took place also in two other banks, with one of them reflected in a higher share for domestic capital in the market. The Bank of Albania deems that the consolidation of the banking system is a welcomed development, which will revitalise the banking activity, will enhance the efficiency of the banking industry and will bolster development and innovative policies with regard to credit and payments. In the capacity of the Resolution Authority, in 2018, the regulatory and procedural framework for resolution planning was prepared for harmonisation with international standards. In addition, the initial phase for the preparation of individual resolution plans has started. Also, during 2018 was established the Resolution Fund and the procedures for monitoring its management by deepening the cooperation agreements with the Deposit Insurance Agency. Lastly, I would like to reiterate that safeguarding financial stability is a responsibility not only of the Bank of Albania but also of other regulatory agencies and the Government of Albania. | In parallel, the reduction by 5.6 percentage points of the interest rate on lek credit compared to 2011 – when the monetary policy easing started – helps Albanian firms and households to save around ALL 15 billion per year. Third, the accommodative monetary policy has supported Albania’s financial stability. Growth of demand for goods and services and reduction of debt costs led to the improvement of the solvency of firms and households, and has encouraged loan restructuring. Also, the orientation of lending toward lek credit has reduced the exposure of the economy and of the financial system against exchange rate volatilities. Monetary policy-related measures undertaken by the Bank of Albania have contributed to the expansion of aggregate demand and boosting economic growth. Our assessments suggest that the accommodative monetary policy stance has contributed positively, on average by 0.5 percentage point, to economic growth in the last two years. Also the accommodative monetary policy stance has contributed to the stability of the domestic currency. Both transmission channels have contributed and will continue to contribute to price stability in Albania. The current trends in the development of the economy and our projections suggest that inflation will converge toward the target within a two-year horizon. Banking supervision and financial stability The main aspects of our work for safeguarding financial stability were strengthening the stability of the banking system, enhancing its resilience to shocks, adopting international standards on supervision and regulation, and administration of consolidation processes in the banking sector. | 1 |
Nobody could tell, at the outset, to what extent the introduction of the single currency would affect the functioning of the single market of goods and services, or the very nature of financial markets or price and wage-setting behaviour across the euro area. Indeed, times of institutional change are arguably times in which private expectations may fail to converge on a focal point. The widely-held assumption has been that the statistical patterns emerging from an aggregation of pre-EMU data may not reveal much about the structure of the new economic entity, and any inference drawn on its basis may - in extreme cases - even be misleading. This is all the more likely when we consider the fact that, as far as monetary and financial convergence in the future euro area was concerned, it was based upon a concept of “benchmarking”, namely convergence towards the best performers, which suggests that aggregation of the EMS data might be even less predictive. Such a situation has called for a cautious interpretation of model results and, even more importantly, for a broad information basis in order to cross-check the interpretation of various pieces of information. This implies a need for detailed and high-quality statistics for the euro area. The construction of a comprehensive statistical support has confronted the ECB with a number of practical issues, to which I now turn. Statistics for the euro area: achievements and outlook Over the past ten years, major progress has been achieved in developing statistics for the euro area. | Having such a system in place may lead over time to major progress in both the structural analysis of the euro area and the assessment of the current economic situation. Fully integrated sectoral accounts provide the ideal framework for analysing the structure of the economy and its changes over time as well as the propagation of shocks through the system. This helps to gain further insights into the monetary policy transmission mechanism and the relative importance of the various transmission channels. At the same time, monitoring a wide range of key indicators in a single macroeconomic accounting framework provides a coherent picture of the current economic situation. This is particularly important in the context of the ECB’s monetary policy strategy, which takes into account a broad range of indicators. Integrated financial and non-financial sector accounts provide a framework for analysing the link between the financial and the real economy - an issue notoriously difficult to analyse on the basis of the currently available analytical framework. An integrated system of quarterly sector accounts would also provide a powerful information basis for forecasting, allowing what is nearly impossible today, namely the integration of monetary and financial variables in macro-econometric models. Of course, many of these uses will only be possible once an integrated system of sectoral accounts has been available for quite a number of years and with an appropriate timeliness. But being forward-looking and developing visions is of great importance in the field of statistics. | 1 |
But in another sense one can say that this is not the case, if the Riksbank – as an independent central bank – says that the purchases are made for monetary policy purposes. Monetary financing does not entail the purchases themselves. Under certain circumstances, purchases of government bonds can be monetary financing, but under other circumstances they are not. This is what makes it difficult to define the concept. It is important to understand that the Riksbank's government bond purchases do not mean that the state's costs of issuing bonds disappear. If the Riksbank purchases some of the government bond stock, then part of the state’s debt will be financed by private agents and another part by the Riksbank with central bank reserves. The state costs of the private part of the debt is the yield on the government bonds. The cost for the part the Riksbank has purchased is different however, and not as obvious. The state’s interest payments on the government bonds purchases by the Riksbank fall to the Riksbank. But the Riksbank is a public authority whose income and expenditure is a part of the state's total budget constraint. The interest the state pays to the Riksbank in other words falls to the state itself, the net cost to the state is therefore zero. However, the Riksbank pays interest – that is, the policy rate – on the central bank reserves that have financed the government bond purchases. | The state’s cost for the part of the debt the Riksbank has purchased is thus the policy rate. Economists usually say that the Riksbank’s purchases of government bonds are actually a maturity transformation of the state’s debts from 51 Central bank reserves are electronic central bank money that the banks hold in their accounts with the Riksbank. Central bank reserves are the money the banks have in accounts with the Riksbank overnight, but also the money the banks have invested in Riksbank Certificates with a particular maturity. The total of these investments comprises the banking system’s so-called liquidity surplus towards the Riksbank, which can also be called the banking system’s reserves with the Riksbank or just central bank reserves. 52 See also Vlieghe (2020). 21 [35] long-term to very short term, as central bank reserves are a state debt with a very short maturity. In other words, the state pays a very short-term interest on the government bonds the Riksbank purchases, and a more long-term interest on the government bonds that private agents hold. In the cases where people are concerned about monetary financing, it is almost always a fear that government bond purchases will lead to rapidly rising inflation, or so called hyperinflation, as was the case in Zimbabwe and Venezuela not so long ago. But the Riksbank's and many other central banks’ government bond purchases have not led to this type of situation. Why is this? One explanation could be that the size of the purchases is important. | 1 |
In this context, the cooperation between the institutions of public administration and the academia, the cooperation between different countries and the establishment of research nets on various areas are of prime importance. They would not only enhance the efficiency in carrying out the research, but also stimulate the professional critique and opposition and reach higher standards. The research mission described above, clear and well-defined within the framework of a central bank should not be understood as an isolate mission. The studies can not take place in a closed environment. They need debate and exchange of ideas with the academy, business and other interested stakeholders. In this regard, it is my pleasure to state that the Bank of Albania has made its research subject to reviews in activities organized particularly for this purpose (inflation targeting, round tables, Friday workshops, etc). I invite you to do the same thing even during this activity. In view of debate and discussion, we have made constant efforts to attract academy and intellectuals in the discussion of our works. The Bank of Albania has introduced the “series of Friday seminars”, as an infrastructure to promote this debate. Twice a month this forum invites the interested persons within and outside the Bank of Albania to discuss their research on topics of economic nature. The activity is as much open for home and foreign researchers from the academy and business as it is open for the Bank of Albania employees. | Payments after the COVID crisis – emerging issues and challenges Speech given by Christina Segal-Knowles Executive Director Financial Market Infrastructure Directorate Webinar: London School of Economics and Centre for Economic Policy Research 11 June 2020 I would like to thank Natalia Dobrovolschi, Rachel James, Cordelia Kafetz, Hardeep Rai, Josh Sadler, Jonathan Wakefield, and Ellen Caswell for their assistance with preparing this speech and Laura Wallis and Stephanie Haffner for their comments and input. 1 All speeches are available online at www.bankofengland.co.uk/news/speeches Thanks Erik and thanks very much for inviting me to this webinar. I’ll talk through very briefly how payments were changing well before COVID-19 and the impact we’ve seen during the global health crisis. And then I’ll begin to cover what central banks can and are doing in response. Even before the current crisis, people were changing the way they pay. For many if not all of you– the fact that the way we pay has been changing significantly won’t be a surprise. You’ve experienced this. In London, where I live and work, contactless payments have become ubiquitous – from small coffee shops, to farmer’s markets, to stalls at sporting and music events, the need to rush to the cash machine is gone - you can tap your card, phone or watch. We’ve become accustomed to online baskets and clicks; to summoning and paying for services on our phone. People’s behaviour has changed. | 0 |
This has enabled the banks to signal to the markets that they will pay off their debts on a certain date even if formally there is no specific date on which the securities fall due. Basel III thus entails a considerable tightening up of the minimum capital requirements. I think this is excellent. I have long advocated clearer and stricter regulations. As equity is expensive in relation to other sources of funding, tighter capital requirements will reduce the banks’ appetite for risk and at the same time increase their ability to manage losses. More and better capital will thus not only soften the effects of future crises but also reduce the likelihood of them occurring at all. A clear and uniform level for Core Tier 1 capital will also reduce the scope for arbitrary interpretations. This in turn will reduce the scope for creating a non-level playing field, which should benefit global competition. BIS central bankers’ speeches 5 Counter-cyclical capital buffer In addition to the new minimum requirements, Basel III comprises a counter-cyclical capital buffer of a maximum of 2.5 percentage points of Core Tier 1 capital. 6 The buffer acts as a dynamic capital requirement, which means that it varies over the economic cycle. The idea is that the banks should build up capital in good times that they can use to deal with losses in bad times. | This was not actually a BIS central bankers’ speeches 9 great problem in Sweden, but rather in the United States and some other parts of Europe. We have also underestimated the strength of the contagion risks that arose as a consequence of the connections between different agents in the financial system. If the banks are to be equipped to deal with their losses themselves we should endeavour to draw up capital requirements that reflect the banks’ real risks. Reactions and effects As always, when stricter regulations are introduced, a certain amount of resistance can be expected. The most usual criticism of the new banking regulations is that they will come at a high cost, both in terms of actual expenses and in terms of efficiency. I am very aware that stricter regulations entail certain costs. But these costs are worth incurring if they mean we will get a new regulatory framework that does what it is designed to do. What we want is a safer financial system. Having seen the results of many financial crises internationally and two in Sweden, I can also note that the costs of a deep and wide-ranging banking crisis can be exceptionally high. Looking back, we can see that financial crises are usually drawn-out processes that are followed by long periods of high unemployment and low GDP growth. Situations like this should be avoided, although of course not at any price. | 1 |
If European policy-makers decided to follow their American counterparts, neglecting the different structure and shocks, this would result in destabilising economic policies, which would bring us to the high inflation and profligate fiscal policies of the 1970s. This judgement is backed by a lot of analysis, which – perhaps unconsciously – has been understood by European citizens and their governments. Those who lived the times of economic instability should have understood that offloading the weight of the macroeconomic adjustment onto future generations is elusive and counterproductive. With a longer life expectancy, the mistakes of a given generation are paid in large part by the same generation. It is best therefore not to commit those mistakes altogether, and let economic policies follow tested rules of good behaviour. Thank you for your attention. Figure 1. Official interest rates in the euro area and in the United States (percentage points) Sources: ECB and Federal Reserve Council. NB: most recent observation dated 30 October 2008. Euro area interest reference rate is rate on main refinancing operations to June 2000, and minimum bid rate thereafter. Official US interest rate is federal fund rate. 12 BIS Review 135/2008 Table 1. Measuring long-term inflation expectations in the euro area and in the United States Figure 2. Government budget balance in the euro area and in the United States NB: Total budget balance shows degree of budget policy’s expansion or contraction. | Remarks on The Post-pandemic Landscape for Central Bank Statistics 11th IFC Biennial Conference Pablo García Silva, Deputy Governor, Central Bank of Chile August 25th 2022 I want to thank the organizers for the opportunity to participate in this distinguished panel, providing some remarks on the challenges we face as Central Banks and as providers of statistics, particularly in the environment we live today, as the pandemic recedes. Central Banks are keenly aware of the need to provide timely, accurate, and in-depth understandings of the changing economy. This not only to inform correctly policy making, but also to satisfy the shifting demands of society regarding the environment we live in. This inevitably implies trade-offs. Operative and budgetary constraints mean that a careful balance of timeliness, accuracy, and depth needs to be achieved. The ever-expanding complexity of economic relationships, and the speed at which policies have had to adapt to very large shocks, imply in my view that compared to a not so distant past timeliness is today at a premium. The times of change we live in require us to react promptly. This, however, carries the cost that both the accuracy and the depth of data will be inversely related to its timeliness. This brings about the implication that both policy making needs to consider the implicit uncertainty of the environment, and also that statistics providers need to be candid about those uncertainties when communicating with the public. | 0 |
It should finally be noted that contrarian views are probably easier to arouse in a decisionmaking process that does not rest on a single unified analytical framework, such as one that would be used, for instance, to produce the central bank’s inflation projections. In this respect, the ECB’s monetary policy strategy, which aims to pass some robustness checks by making use of various theoretical and empirical approaches, may already provide the Governing Council with a relatively broad spectrum of views about risks to price stability. III. Conclusion Let me now conclude. The financial crisis has exposed several shortcomings in the monetary policy frameworks of the pre-crisis era, and more generally in their intellectual foundations. Not only does maintenance of output and inflation stability not automatically deliver financial stability, but on the contrary, the very same monetary policy which successfully keeps output and inflation stable in the short run may well lead to the build-up of financial imbalances and asset price bubbles which threaten macroeconomic stability at longer horizons. Further, commitment to “mopping up” such bubbles by means of aggressive interest rate cuts implemented after their bursting has proved to be most unwise. Moreover, the recent experience demonstrated that such a strategy may well be unable to shield the economy from the costs deriving from the bursting of the bubble, costs which in many cases may simply be staggering. Also, the sheer size of the macroeconomic shock associated with the bursting of the bubble may be sufficient to plunge the economy to the zero lower bound. | In doing so, it will also contribute towards enriching further the diversity of players and strengthening the institutional infrastructure of the Malaysian Islamic banking system. The continued growth of Islamic finance in Malaysia The international economic and financial environment is expected to remain very challenging with several major economies now in recession and continued uncertainties prevailing in the international financial system. In spite of this, the Asian economies are still growing, albeit at a more modest pace. The dominance of domestic demand and increasing regional economic integration have enhanced the prospects for Asia to sustain a modest pace of growth. In this challenging international financial environment, it is encouraging that Islamic finance has continued to demonstrate its evolution and strong growth. Islamic finance has now become a new vehicle contributing to increasing the financial linkages not only within Asia but also with the rest of the world thereby facilitating cross-border allocation of capital globally. Indeed, a number of international financial centres have recognised Islamic finance as an integral part of their financial system in order to complete the suite of financial products and services being offered, and therefore are actively developing this segment. The Islamic finance industry has not only continued to grow but it has also been able to present a higher level of dynamism. The key indicators of the Islamic banking sector continue to record a progressive pace of development. The Islamic banking assets have expanded by 23% to RM234.9 billion compared with a year ago. | 0 |
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. | This would contribute to both better understanding and greater legitimacy for the policy conducted by the central bank. It should be added here that the Riksbank’ monetary policy is evaluated every year, that is, how the Riksbank has performed its remit. The Riksdag Committee on Finance performs an annual review based on background material such as the “Account of monetary policy”, a report compiled and published by the Riksbank. 15 In addition, the Committee on Finance occasionally hires external experts to review Swedish monetary policy. So far three such reviews have been conducted: By Francesco Giavazzi and Frederic Mishkin for the period 1995-2005, by Charles 14 Advocates of a higher inflation target include Blanchard et al. (2013), Ball (2014), Krugman (2014), Rosengren (2015) and Yates (2019). 15 See Sveriges Riksdag (2018) and Sveriges Riksbank (2018a) for the latest versions of these publications. 9 [21] Goodhart and Jean-Charles Rochet for the period 2005-2010 and by Marvin Goodfriend and Mervyn King for the period 2010-2015. 16 Although these external reviews have sometimes touched upon issues related to the policy objective, their main purpose has been to evaluate the monetary policy conducted, based on the existing policy objective. These reviews are undoubtedly valuable and fulfil their purpose effectively, but it is something else I have in mind here. Canada has chosen a system with reviews of the central bank’s remit every fifth year. 17 The latest review from 2016 analysed, among other things, whether the level of the inflation target was the most appropriate. | 1 |
36. The “travel rule”, already used in traditional finance, will in the future cover transfers of crypto-assets. Information on the source of the asset and its beneficiary will have to “travel” with the transaction and be stored on both sides of the transfer. The law also covers transactions above € from ”self-hosted wallets” (a crypto-asset wallet address of a private user) when they interact with hosted wallets managed by crypto-asset service providers. See Regulation (EU) 2023/1113 of the European Parliament and of the Council of 31 May 2023 on information accompanying transfers of funds and certain crypto-assets and amending Directive (EU) 2015/849 (Text with EEA relevance), Official Journal L 150, 9 June 2023, p. 1– 39. 37. Crypto lending is a centralised or decentralised finance service that allows investors to lend out their crypto holdings to borrowers. Decentralised crypto lending platforms use smart contracts to automate loan payouts and yields, and users can deposit collateral to receive a loan if they meet the appropriate requirements automatically (see Duggan, W. (2023), “Crypto Lending: Earn Money From Your Crypto Holdings”, Forbes, 30 January). A non-custodial wallet, or self-custody wallet, entails the crypto owner being fully responsible for managing their own cryptos. The users have full control of their crypto holdings, manage their own private key and handle transactions themselves (see “Custodial vs Non-Custodial Wallets”, crypto.com, 17 February 2023). 38. | This is a sort of prospectus for crypto-assets that informs potential holders about the characteristics of the issued crypto-asset before they offer a token to the public or list it on a trading platform. 39. See Financial Stability Board (2023), “Crypto-assets and Global “Stablecoins”. 40. See European Central Bank (2023), “Crypto-assets: a new standard for banks”, Supervision Newsletter, 15 February. 41. Panetta, F. (2022), “Demystifying wholesale central bank digital currency”, speech at the Deutsche Bundesbank’s Symposium on “Payments and Securities Settlement in Europe – today and tomorrow”, Frankfurt am Main, 26 September. 42. European Central Bank (2023), “Eurosystem to explore new technologies for wholesale central bank money settlement”, Frankfurt am Main, 28 April. | 1 |
Explanation (3): Uncertain business case – “The Code is a useful guide to market conventions, but that doesn’t mean we need to sign up. The Code is really about the sell-side putting its house in order – the buy-side has nothing to apologise for. At best, the Code just reiterates what we already do; at worst, it’s more regulation in disguise.” This is for me the most important observation to address, and vital for securing the buy-in of CEOs and Boards. In putting together that case, I think there are five points worth stressing: 7 https://www.nex.com/insights/20180904-fx-code-changing-behaviour. 8 https://www.globalfxc.org/press/p181129a.htm 7 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 7 First, the Code provides a simple and powerful ‘off the shelf’ way to educate and promulgate globally-recognised best practice amongst your FX trading and operations staff internally, complementing other tools and regulations; Second, it sends a clear signal to your sell-side counterparties of the standards you expect them to uphold in their dealings with you, and your intention to hold them to account for those standards – strengthening market discipline and sending a clear collective message that the buy-side expects the highest standards of service for their customers; Third, in demonstrating a commitment to best practice both by your own traders and from those you trade with externally, it gives your firm a competitive advantage in the market for investors and other customers. | With economic indicators below expectations since April, long-term yields fell back to their mid-2001 level. The expectations reflected in the futures markets concerning the development of money market rates – and therefore also monetary policy – have undergone a marked downward adjustment, notably for the US dollar, but also for the euro and the Swiss franc. Hopes of a vigorous and rapid economic recovery have given way to a more realistic assessment. The SNB as asset manager In the context of its statutory mandate, the National Bank manages sizeable assets (table 1). In May 2002, their market value exceeded Sfr 100 billion. The free assets (Sfr 21 billion) are to be withdrawn from the National Bank and allocated to other purposes. Mr Blattner will provide details on the management of the free assets. The monetary assets (Sfr 86 billion) serve monetary purposes. Claims from repo business (Sfr 16 billion) reflect our money market activities on the assets side of the balance sheet, while Swiss franc securities (Sfr 5 billion) are available for absorption repos if necessary. Foreign exchange reserves (Sfr 41 billion) are at the centre of our activity as asset managers. At the end of 1997, the leeway BIS Review 39/2002 1 previously granted solely for money market investments was legally extended. This provided a possibility to spread fixed-interest investments more evenly across various maturities and currencies and to widen the range of instruments. | 0 |
Greater focus on incentives is needed But, I also think we must take a broader view of what characterizes a resilient and robust financial system. To that end, we need to carefully monitor the incentives that influence the behavior of financial firms and their employees. Indeed, the record from the crisis and more recent years shows just how powerful incentives can be in driving firms and individuals to do things that are imprudent and/or unethical. Bad incentives can lead to conduct that not only generates large risk exposures and market excess, but also erodes trust and confidence in the financial system. | This process must be grounded on prudent macroeconomic projections, involve all tiers of general government and translate into a medium-term plan detailing the government receipt and expenditure measures aimed at ensuring a gradual reduction in the imbalances. This would shore up the sustainability of public finances and bolster the credibility of, and confidence in, economic policies. The fiscal consolidation should also go hand-in-hand with an improvement in the quality of public finances, boosting their contribution to the economy’s potential growth. And it must take into account the impact of structural aspects such as population ageing, which will exert upward pressure on public spending on pensions and other expenditure items. At the same time, addressing social imbalances is also essential as increasing inequality could undermine social cohesion and foment social conflict, with adverse repercussions for the security of investments, the incentive to work and opportunities for future generations.25 25 Grossman (1991), Dijkstra, Poelman and Rodríguez-Pose (2020), Persson and Tabellini (1994), Alesina and Rodrik (1994) and Corak (2013). 8 In recent years, the Banco de España has actively contributed to identifying sources of inequality. One factor that crucially affects productivity is educational inequality. | 0 |
Loan conditions are more favourable and the terms on sight deposits are better than they would be under a sovereign money system. Since banks have to compete with each other, they are left with only enough of the profits from money creation to enable them to remain in business. In a sovereign money system, money creation would be centralised at the SNB, from where the corresponding profits would be distributed. But total profits would be no higher than under the current system. For the general population then, the whole thing would be, at best, a zero-sum game. Damaging effects of sovereign money The fact that the Swiss sovereign money initiative promises too much is only one issue. Even more serious is that adoption of the initiative would have profound implications for Switzerland on three levels, namely the real economy, monetary policy and economic order. Real economy The initiative would negatively impact the real economy through lending because banks would no longer be able to draw on sight deposits. Instead, they would have to attract liquidity from other sources. A key such source would be savings deposits. However, since Page 5/8 savings – like any funds which investors forego for an extended period – are more expensive than sight deposits that can be withdrawn at any time, borrowing becomes more costly in a sovereign money system. The Swiss sovereign money initiative affects us all directly, as borrowers and savers. Of the loans granted in Switzerland, 94% go to households and SMEs; 86% are mortgages. | A country with such challenges should not and actually – given our euro area membership and the background of market globalisation – cannot pursue any economic policy avenue other than one which, firstly, provides for and boosts higher employment growth or, on the other side of the same coin, brings about swifter and more sustainable gains in our productivity and competitiveness; and, secondly, helps curb the growth of our public and private debt with a view to subsequently reducing it. In economic policy, hits and misses only become clearly manifest after some time. Just like big vessels which, owing to their great inertia, can only change course or speed slowly, an economy such as ours also moves with considerable inertia: correcting mistakes takes time and, almost always, entails losses in income and well-being, and social instability. Our experience – both in the pre-crisis expansionary phase while the imbalances were accumulating and during their correction and the recovery of growth – should help us avoid errors, persevere with reforms to safeguard and enhance our competitiveness, and fulfil our public finance commitments in the European Union. Thank you. BIS central bankers’ speeches 5 | 0 |
There are countries where a large proportion of borrowing is arranged at a variable interest rate; the national tax systems differ, for example as regards tax relief for interest expenditure; and the time required for bank interest rate adjustments varies. All this means that the impact of a change in the monetary union’s interest rate will differ from country to country. In Italy, for instance, lending to households is arranged at variable interest rates to a greater extent than in Germany and the Netherlands. EMU will probably speed up the ongoing integration in these respects, too, so the ECB’s problems may be greatest initially. Many matters to do with the ECB’s working procedures have already been decided. The broad structure is in place. But in many respects, the way in which the ECB and the ESCB will operate and develop in practice is still an open question. Some observers are concerned that national interests will be excessively influential at the expense of a union-wide perspective. They point out, for example, that the NCB Governors make up a larger proportion of the Governing Council than is the case with the regional FED Governors in the United States. Another argument is that the ECB has a limited staff at its disposal. Personally, I do not find this particularly convincing. | 9 For sterling markets, see https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/ 10 4 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 4 3. Reducing the legacy of post-2021 LIBOR-linked contracts Sadly it’s not only in derivatives where pre-existing fallback arrangements have been absent. Until recently, few contracts in other markets envisaged the potential for a world without LIBOR either, leaving borrowers and lenders alike exposed to serious uncertainty and the risk of a disorderly outcome. Where those contracts are expected to remain outstanding, the best chance of avoiding those risks lies in active conversion to another rate before the end of 2021. For sterling, the industry-led Working Group has strongly encouraged all market participants to complete, by the end of next March, a full assessment of their LIBOR contracts extending beyond the end of 2021. The aim is to identify those that can be actively converted, and to put plans in place to complete those conversions wherever viable by the end of next September. This advice is echoed more broadly by the FSB in its global transition roadmap. 11 If you haven’t done so already, you should be making a start on that assessment. To stand a chance of controlling your destiny, you need to know what your exposures are, and how you’re going to deal with them over the course of next year. Make and resource those plans now – we don’t want anyone to be caught out. And the regulators will be watching closely. | 0 |
If wage growth in the general government sector is 1 percentage point higher than assumed, labour costs will increase by a little more than NOK 2 billion. This is the equivalent of the entire increase in the use of petroleum revenues over the central government budget for 2003. The bulk of the high growth in central government allocations translates into strong growth in household consumption, while growth in public services production is moderate. This is only to be expected when there is a steep increase in public sector allocations in an economy where there are no available resources. The high level of wage growth is thus having a negative impact on both the internationally exposed sector and the more sheltered sectors of the economy. Public sector budgets are being consumed by wage growth, and growth in service production is being stifled. Teachers are being made redundant. The internationally exposed sector is feeling the double impact of high wage growth and a strong krone. Norges Bank has one instrument, the key rate, which has effects on the wider economy. This means that monetary policy cannot be oriented towards stabilising developments only in the internationally exposed sector. This would cause considerable imbalances in the Norwegian economy. It is important to be aware that low wage growth will be of double benefit to the exposed business sector. | Demand for labour, measured in terms of advertised vacancies, is also low in other industries, indicating that unemployment may also increase further in the sheltered sector in the period ahead. Registered unemployment is projected to increase from 3¼ per cent in 2002 to 4 per cent in 2003 and up to 4¼ per cent in 2004. Unemployment is projected to stabilise at this level in 2005. There are wide regional variations in unemployment. At the end of February, the number of registered unemployed in Troms County came to 3.6 per cent of the labour force, which is lower than the national average of 3.9 per cent. Agriculture and fisheries combined account for a larger share of employment in Troms County than in other counties. The internationally exposed sector is relatively small in the county. The food industry accounts for about half of manufacturing employment. As in the rest of the country, the public sector and some private service segments are important for employment in Troms. Business and financial services account for a smaller share than the national average. The work on the Inflation Report drew on information from the regional network that was established last year. We will have six rounds of talks each year with business and community representatives concerning financial developments in their enterprises and industries. There will be a total of about 200 visits in each round. We have divided the country into 7 regions and established links with regional research institutions in six of them. | 0 |
Before dealing with the evidence of possible links between global liquidity, international portfolio flows and euro area monetary growth, it is worthwhile recalling the theoretical work by James Tobin and Harry Markowitz on macroeconomics and asset pricing. The bulk of Tobin’s work in the 1950s and 1960s was on the monetary side of macroeconomics. One of his main objectives was to establish a firm foundation for the sensitivity of money demand, or money velocity, to interest rates. He argued that people may prefer liquidity, and prefer it more the lower the interest rate on non-cash assets, because individuals are risk adverse. Over the same period, Harry Markowitz worked on portfolio choice problems, balancing risks against expected returns. Markowitz showed that under certain given conditions, an investor’s portfolio choice can be reduced to balancing two dimensions, i.e. the expected return on the portfolio and its variance. When the Nobel Prize was announced in 1981, Tobin was asked about his work at the press conference. He tried to explain for a lay audience the idea of why it is that people hold different proportions of different assets in their portfolios. 2 BIS Review 149/2007 He said, “Well, you know, diversification – don’t put all your eggs in one basket”. This explanation led to headlines around the world: “Yale Economist Receives Nobel Prize for ‘Don’t Put All Your Eggs in One Basket’”. A similar argument was made when the Nobel Prize was awarded to Markowitz in 1990. | The growing size of international capital flows associated with globalisation of financial markets has made the analysis of monetary aggregates, for the purpose of extracting information for assessing price stability, increasingly more complex. BIS Review 149/2007 3 This brings me to discuss the third point: the implications of globalisation and of international capital flows for monetary policy. If globalisation and, specifically, cross-border capital flows can affect the dynamics of monetary aggregates, how can we conduct monetary policy? An improved shared understanding of the influence of global liquidity and cross-border capital flows on the monetary policy transmission mechanism is necessary to enhance the analysis underlying our decisions. Our role and responsibilities as central bankers remain intact in the globalised economy, but the performance of our task may be becoming more challenging. Certainly, there is a need for timely and open exchange of information among central banks and for further collaborative research efforts. Still, let me stress that the globalisation of financial markets does not affect the central role and overriding responsibility of central banks, which is to preserve price stability within their respective jurisdictions. Central banks throughout the world have been assigned responsibility for keeping domestic inflation at low and stable rates. Cross-border capital flows may affect the velocity of money, but the basic principle for anchoring monetary policy – that is the Friedman’s view that “…in the long run, inflation is always and everywhere a monetary phenomenon” – remains valid. | 1 |
For anyone familiar with Carmen’s work, this does not come as a surprise. Besides being an outstanding economist, Carmen is also an excellent writer. She writes on apparently dry economic topics in a captivating and entertaining way. It is fair to say that this is not the norm in our profession. Carmen’s research in economic history involves spending countless hours in libraries, consulting obscure sources – some of them centuries old – in the search for economic data. Carmen has compared her endeavours in finding and analysing data both to archaeological expeditions as well as to the detective work of Sherlock Holmes. While this sounds rather exciting, the process can be painstaking. Carmen once described an episode where she found herself, at 3 o’clock in the morning, counting the number of zeros in records from countries that had experienced hyperinflation. Of course, with such a tiring task a little help can come in handy. If the legend is true, Carmen’s husband and frequent co-author, our friend Vincent Reinhart, once put together almost all the economic data published by the League of Nations and gave it to Carmen on Valentine’s Day. Maybe Carmen can tell us a little bit more about this most unusual gift. Now back to Carmen’s economic research. Carmen’s specialty is to draw lessons for the present by studying the past. Taking a long-term view helps to put things into perspective, and reveals that there are often historical analogies to contemporary situations that may at first seem unprecedented. | In fact, it has to be recognised that around the world domestic authorities have been putting in place defensive measures, mostly below the radar of commentators, over the past few years. This comes back to the use of public money. A world in which public money is used to bail out banks or dealers, is a world in which balkanisation is likely because the authorities that deploy public money are accountable to domestic tax payers – people with votes in their jurisdiction – and to nobody else. But by delivering the FSB’s global agenda – not only on resolution, but more widely – we will significantly reduce, if not remove, the need for some of those balkanising tendencies. By making finance safe and orderly failure possible, I think we can take off the stage the most basic force towards balkanisation. The stakes are high. BIS central bankers’ speeches 5 | 0 |
As for the short-termism of the shareholders and the financial reporting cycle, banks are at the receiving end and there is not much they can do. 12. While I agree that it is probably unrealistic to go back to the “good old days” of banking, I am not fully convinced that there is little banks can do to restore a stronger alignment of interest with their customers. But that doesn’t really matter because, without these changes, the slow track solution to get rid of supervisors also does not seem to work! So I am bringing you the bad news! The bad news is that the public will need an agency entrusted with the mandate and powers to protect the safety of their deposits, to guard against banks taking excessive risk in pursuit of profits, to ensure that customers are treated fairly, to deal with 3/5 BIS central bankers' speeches bank failure, as and when it happens, in an orderly manner to avoid disrupting the financial system and reduce the risk of having to use public funds again to bail out failing banks. What happened during the GFC is a very powerful reminder that excessive risk taking in pursuit of short term profits in modern day banking and finance can and did pose a serious threat to the economic well-being and stability of society as a whole, even in the most advanced economies. | Both the US and the UK Acts were prompted by preceding banking crises. In Hong Kong, the Office of the Commissioner of Banking was only established around 50 years ago in the 1960s, after a couple of rather unpleasant bank failures. Before then, banking was basically a free for all, although it did not mean that it was a wild jungle ruled by Tarzan or the Lion King. Back in those “good old days” during which banking supervision was not a prominent feature of our financial system, bank customers and depositors had to take care of their own interests by choosing very carefully who they could trust and bank with. It should also be borne in mind that internationally, the first Basel Capital Accord was only approved by the G10 Governors in 1988, meaning that we are only just approaching the 30th anniversary of this important milestone. 6. I know that you are going to say: you cannot find such a clock or time machine. In that case, the fast track solution is not quite available. So you will have to consider the slow track solution in trying to get rid of the bank supervisors. As I said earlier, a world in which there were no banking supervisors was not a wild jungle. For a long long time and well 1/5 BIS central bankers' speeches before we had bank supervisors, bankers needed to earn the trust of depositors and customers in order to survive and thrive. | 1 |
In practice, as the MPC has emphasised, the actual path of interest rates in the event of either Brexit outcome would never be automatic; it will depend on the response of demand, supply and the exchange rate to these outcomes. This is impossible to predict in advance. If a “no deal” were to lead to a sharp fall in sterling and a sharp rise in inflation expectations, it is not clear the MPC could cut interest rates, as the market expects, if it was to meet its inflation mandate. The risks to rates in a “no deal” scenario are in that sense two-sided, if not necessarily symmetric. This bi-polarity in possible economic outcomes poses a dilemma for UK monetary policy. Monetary policymakers are often cast as one-club golfers. In the current conjuncture, the problem is more that the MPC does not know which of two quite different fairways it should be aiming at. Brexit uncertainty is not, by itself, a reason for leaving interest rates on hold, as the two tightenings in monetary policy by the MPC since the Brexit referendum demonstrate. Nonetheless, with the economic road ahead potentially forking, the case for holding rates until the road becomes clearer is strong. With Brexit uncertainty high, the global economy softening and other major central banks expected to loosen monetary policy, it is not difficult to see why short-term interest rates have fallen and are now pricing a nearterm loosening of UK monetary policy. UK growth is expected to stall in the second quarter. | Averagesize farms continue to be relatively small, thus restricting the development and growth of average productivity, or differently known as “the economies of scale”. There are many reasons behind this. We can mention the inheritance of the communist system and the separation of land after its collapse. As it was stated above, the lack of a normal land market also due to ownership problems, naturally plays an important role in establishing larger farms and, consequently, more competitive ones. These problems also affect the agricultural sector-bank relationship and the lending activity at home. The recent data show that lending to the agricultural sector accounts for 1.25% of total lending to businesses, on average. It is a considerably low figure, which should raise our concern, considering that this sector contributes by one/fifth to the gross domestic product. I believe that there are two reasons driving the banking system to be reluctant to finance different projects in this sector. First, risk classification and categorisation for credit to agricultural sector is a commitment different from the other activities. The lack of formalisation, even for matters such as regular maintenance of information and statistics BIS central bankers’ speeches 3 about ownership, and financial statistics, damage the farmers’ credibility from the early steps of lending. I find that there is room for prudential intervention by public institutions, not to condemn farmers, but to better prepare them and assist them in formalising their business. | 0 |
Market prices suggest the implied subsidy has been substantially reduced as the expectation of public bail-outs dies away.7 However, we have more to do in order to make cross-border resolution the only expected outcome in the event an institution fails. The TLAC standards must be finalised next year and then implemented fully. Resolution plans for individual firms must be finalised and legal and operational impediments removed. Arrangements for the funding of firms in resolution must be put in place. Legislation must be enacted to allow regulators to give effect to the resolution actions of authorities in other jurisdictions. And the solution of the too big to fail problem in banks must be broadened to include all systemic institutions, including insurers and critical financial market infrastructures, through designation, more intensive supervision and standards for loss absorbing capacity. We recognise that our success can never be absolute. Specifically, we can’t expect to insulate fully all institutions from all external shocks, however large. But we can change the system so that systemically important institutions, their shareholders and their creditors bear the cost of their own actions and the risks they take. The future of reform With a safer, simpler and fairer system in place, the FSB can begin to look ahead to how, collectively, we will engage in the next phase of reform and regulate and supervise the global system. 6 Clear principles and a detailed indicative term sheet covering the necessary amount, type and location of loss absorbing capacity are now being consulted on. See FSB (2014a). | This is probably due to the modernisation of the functioning of the economy through the 1980s and 1990s, which resulted in more efficient markets. In addition, growth in labour productivity reflected a marked fall in sickness absence in 2004. The outlook for the Norwegian economy Monetary policy influences the economy with a lag. Norges Bank therefore has to be forward-looking in its interest rate setting. Developments in prices and capacity utilisation in Norway are influenced by both domestic conditions and economic developments in other countries. Since the end of June, global money and credit markets have been characterised by sharp fluctuations, liquidity shortages and reduced risk willingness. The turbulence stems from problems in the US mortgage market. Defaults on subprime mortgages in the US began in the second half of 2006. Securities portfolios had been developed around these mortgages. Uncertainty arose among banks and investors that were directly or indirectly exposed to losses on subprime mortgages. Expected losses on mortgage-backed securities rose. Investors became gradually less willing to take risk. The premium on corporate securities increased markedly. The credit premium has been highest on the lowest rated securities, i.e. securities backed by subprime loans. Another effect of the turbulence is credit migration, i.e. that the rating of securities has changed as the consequences of the unrest have become apparent. For example, a security that had an AAA rating, may now be rated AA or lower. The turmoil spread rapidly to other parts of the financial markets. | 0 |
The chart also shows the price of imports and an indicator of underlying domestic inflation, UNDINHX. As you will see, we believed inflation would move up gradually in the wake of rising activity. This would be countered by low, even falling, import prices in connection with a stronger exchange rate, lower oil prices and generally strong global competition. Even our inflation forecast was evidently on the high side, at least to date. It is perhaps even more noteworthy that underlying domestic inflation has turned out to be appreciably lower. This is something that observers of the Swedish economy cannot ignore, particularly as the past decade has provided so many surprises of this sort, though not as dramatic. The main point to consider is, of course, how permanent the changes are likely to be. To what extent should we abandon earlier relationships and commit ourselves to a continuation of the relationships that have applied in recent years? 1 BIS Review 107/2000 Why has inflation been low? The first thing to note is that this development has not been confined to Sweden. Inflation in many other countries has also been unexpectedly low. There, too, the reasons for this are not entirely clear. Some pieces of the puzzle have been identified but not enough to make up a clear picture. As decision-makers, however, we cannot simply shrug our shoulders and say we don’t know. | Christine M Cumming: Enhancing payment system speed, efficiency and security Keynote remarks by Ms Christine M Cumming, First Vice President of the Federal Reserve Bank of New York, at the TCH Annual Payments Symposium and Business Meeting, New York City, 5 July 2013. * * * It is a great pleasure to be here today to speak to you about the evolution of the U.S. payments system and the Federal Reserve Banks’ role in that evolution. The views I express will be mine and not those of the Federal Reserve System or the Federal Reserve Bank of New York, although I will draw on the considerable work being done in the Federal Reserve on the future payments direction. Without question, we are living in an once-in-a-lifetime period of change in the U.S. payments system. Payments providers are seeking ways to bring mobile technology to payments, an integration widely seen as a game-changer by payments industry participants. Person-to-person payments mechanisms have grown rapidly, and the potential for those funds to be immediately credited to the receiver could be another game-changer. Commerce increasingly integrates with a payments mechanism, especially as information about spending patterns are a source of value to firms and loyalty discounts and points become an important part of the business value proposition to customers. Indeed, rather than talk about a payments industry, we find ourselves talking about a payments ecosystem, a web of banks, service companies, alternative payments providers and commercial firms. Some have called these developments a second internet revolution. | 0 |
Our trade negotiators are well aware of these principles and mechanisms and I am sure they will negotiate effectively. Now in addition to all the deals which that have been negotiated with India, China and Singapore, we have the bilateral FTA in goods with Pakistan which is being invigorated, and on top of that, of course we have EU GSP plus. If you take all this together, if we are able to conclude these Trade Negotiations successfully, Sri Lanka could have access, preferential access, to a market of 3 billion people, which is a massive USP. Now I think Singapore has preferential access to both China and India. But they don’t have preferential access to EU. So there is no other country in the world that I know of, which has preferential access to China, India and Page 14 of 17 Europe. I know that GSP plus is only for four years. But four years is enough time for us to take advantage of it. So that is a massive opportunity. Now, of course this market of three billion people is going to provide opportunities for our own exporters. But on top of that the trick is to use this preferential access to this 3 billion person market to leverage the trade/investment nexus. We can tell people you can come and locate here and sell on a preferential basis to China, India and Europe. | Sustained export growth is crucial for the development of Sri Lanka, particularly given the relatively small size of its domestic economy. Relying on the domestic economy is not sufficient to enhance growth. Sri Lanka was ahead of its regional peers in liberalizing its Page 4 of 17 economy in 1977. The adoption of liberal economic policies, such as private sector development, export networks and encouragement of FDI led to immediate improvements in the foreign trade openness of the country. Trade Openness which was 36.4% in 1977, nearly doubled to 72.2% by 1979 while exports which were 18.7% of GDP in 1977, increased significantly to 29.2% by 1979, just two years after opening of the economy. Despite the turn-around in the immediate aftermath of the adoption of liberal policies, Sri Lanka’s international trade performance has been lackluster since then, regressing to levels that were seen during the pre-liberalization era. In 2015, Sri Lanka’s Trade Openness was 36.5% - it was 36.4% in 1977. While exports, relative to GDP, declined to 12.7% in 2015, having increased to 29.2% in 1979, and it rose as high as 32% in 2000. So we’ve gone backwards. And we have gone back to almost where we were in 1977, in terms of trade performance. Although the common notion is that there is a by-directional relationship between export and economic growth, this relationship has not been seen in relation to Sri Lanka. | 1 |
A year ago there were grounds for hoping that the external storms were beginning to abate, but those hopes were deferred - by the after-effects of corporate governance and accounting failures in the US and by uncertainty associated with the war in Iraq. There nevertheless remain reasonable grounds for BIS Review 29/2003 1 thinking that the external environment will now gradually improve as we move through the second half of this year into next, and that this will help to offset the gradual moderation we are beginning to see in the growth of consumer spending. That would open the way to continued relatively steady and better balanced growth - at or above trend, with inflation remaining close to target. But there are certainly short-term risks on either side, and given those risks - including the risk of slow growth in the Eurozone, particularly in Germany - I agree with your assessment that the economic case for euro-entry has not yet been made. More generally on that subject, I very much welcome the Treasury’s exhausting - I mean exhaustive - broader assessment of the longer-term pros and cons which I hope, when people have had time to digest it properly, will result in a better balanced - less polarised - debate on the economics of the euro question. I confess that I had hoped that we would by now be further along the narrow channel I have described on past occasions between the Charybdis of external weakness and Scylla of unsustainable consumer demand. | And I’m sorry in this respect to be jumping ship at this particular point. But I’m convinced that calmer waters lie not too far ahead. And I’ve every confidence that Mervyn King - who has in effect been our Chief Navigating Officer for much of the past decade, and who will take over as skipper at the end of the month, with an outstanding MPC and Bank crew to support him - will find the way through. I certainly wish them safe passage! My Lord Mayor, if the harsh international climate made life difficult for us on the macro-economic front, the associated, sustained, fall, in global equity markets in particular, made it an unusually tough time for many financial institutions here in the City. Happily, here too, there are more recent signs of improvement. Perhaps the truly remarkable thing about that is that the financial system as a whole withstood the pressures as well as it did. But over a longer time horizon the City’s financial institutions have responded remarkably well to sustained market pressure for change, and we have been outstandingly successful in fulfilling the City’s vital economic, and social, function of promoting growth and employment both in this country and across the globe. One can think of lots of reasons for that success - I pick out two in particular. First, we have managed over time to maintain a reasonable balance between creative market dynamics on the one hand and official intervention and regulation on the other. | 1 |
All told, we spoke to firms accounting for about three-quarters of current reserves balances. What did we find? Unsurprisingly, different firms thought about their reserves holdings in quite different ways – and no-one used the term ‘demand curve’! Nevertheless, we can build up a picture of demand for reserves by understanding three core drivers of demand, common to all firms. First, at the most basic level, firms hold reserves to meet both expected and unexpected sterling payments during each day. The shape of this demand depends on firms’ business models. Calendar effects are important for retail banks, for example; whereas wholesale banks and gilt-edged market makers are more affected by the ebb and flow of capital markets activity. And access to (and efficiency of) payment and settlement systems can have important implications for the reserves that firms need to hold. So innovations such as the Bank’s RTGS renewal programme14 have the potential to transform demand levels. Second, reserves are an important form of insurance against liquidity outflows over short, but multi-day, horizons. Regulatory rules require firms to hold liquid assets to cover projected outflows over a 14 https://www.bankofengland.co.uk/payment-and-settlement/rtgs-renewal-programme 9 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 9 thirty day period. This doesn’t have to mean reserves – firms could instead hold liquid government bonds, mortgage backed securities or even equities. But, unlike reserves, such assets have to be liquidated in the market before they can be used to meet outflows. | Sabine Lautenschläger: Caution should be the life of banking Introductory statement by Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism, at the Association for Financial Markets in Europe (AFME) Board Meeting, Frankfurt am Main, 22 March 2017. * * * Ladies and gentlemen, Taking risks is at the heart of any healthy business, including banks. After all, it is the job of banks to take and allocate risks. But as Walter Bagehot said: “Adventure is the life of commerce, but caution is the life of banking”. I agree with him. Banks are far too important for the economy to indulge in adventures. They enable business by providing loans to companies or by helping them to tap the capital markets. And they also facilitate business by providing services in fields such as payments, mergers and acquisitions, and global trade. Banks help the economy to grow and prosper. But they can also badly hurt it; we saw that in the financial crisis. That’s why banks need to be cautious. In practical terms that requires, among other things, sound risk management. And this sets the scene for my short statement today. The topic is risk management. I will begin with some smaller, or rather bank-specific, risk management topics and end with a few big issues. Sound risk management depends on good data. It also depends on firm-wide risk aggregation and reporting. Those who take decisions must be in the picture. | 0 |
There were too few left in the business sector to bear the welfare state. The resource curse also increases rent-seeking at the expense of value creation, as the economist Trygve Haavelmo noted. Many countries that have experienced a windfall of wealth have been victims of this curse. The state of Alaska has chosen its own institutional solution to avoid rent-seeking among special-interest groups. Once the real value of Alaska’s oil fund, the Alaska Permanent Fund, is secured, dividends are distributed to the owners. Each resident receives an annual cheque that can be spent as desired 13, providing a strong incentive to protect the capital in the fund. 14 The choice of building up a sovereign wealth fund must also be seen in connection with the state’s substantial pension obligations under Norway’s National Insurance Scheme. For the Norwegian state it would not have made sense to choose a solution like the Alaska fund without also addressing the issue of pension obligations. 11 See for example the obituary “Gunter Sachs”, in The Telegraph, 9 May 2011: http://www.telegraph.co.uk/ news/obituaries/8503379/Gunter-Sachs.html 12 Jeffrey Sachs and Andrew Warner (1995): “Natural Resource Abundance and Economic Growth”, NBER Working Paper 5398. 13 See for example the Alaska Permanent Fund website: http://www.apfc.org/home/Content/dividend/dividend.cfm 14 This would be comparable to using the return on the fund as tax relief. | Nevertheless, there is also scope for financial institutions to develop innovative financing schemes – such as equity finance – to make home ownership more affordable. These include shared ownership schemes where buyers can acquire partial interest in a home, instead of being burdened by an outright purchase. Similarly, we have also observed lease-to-own schemes under Islamic finance arrangements, where tenants have the option to increase their stakes in a home after leasing for a period of time. Bank Negara Malaysia continues to work with the industry to uncover new opportunities, including through financial education, to support firsttime home buyers within their means. Financing therefore is not the issue. More to the point, financing measures have had an important role in tempering house price increases and encouraging an increase in the supply of affordable homes. This alone, however, is insufficient. Public policy can play a bigger role in advancing the affordable housing agenda. Given the structural factors that are shaping the housing market, solutions have to go beyond advocating for the construction of more houses. It is also imperative that we improve the existing ecosystem for affordable housing delivery to respond to both current and new challenges ahead. Let me briefly touch on several key components of such an ecosystem. First is having good data. An integrated database on housing supply and demand is critical – this should provide insights on the needs and preferences of households, their linkages with demographic shifts, as well as housing gaps across different parts of the country. | 0 |
We have a demographic development towards an increasingly ageing population and a rising dependency ratio. This means that we can have a situation with many old age pensions who push up public expenditure at the same time as fewer individuals of working age contribute to tax revenue, which deteriorates public finances. Increased immigration can in this context be positive for the age composition, as those born abroad have a favourable age structure. Just over 70 per cent of those born abroad are of working age, which can be compared with around 55 per cent of those born in Sweden. A continued inflow of people born 15 [24] abroad could therefore keep down the dependency ratio going forward, see Figure 11. 19 Figure 11. Total dependency ratio and dependency ratio for Swedish born 1.1 1.1 Dependency ratio, total Dependency ratio, only Swedish born 1 1 0.9 0.9 0.8 0.8 0.7 0.7 0.6 1980 1990 2000 2010 2020 2030 2040 0.6 Note. The dependency ratio refers to the number of children and elderly people in relation to the working age population. Children refers to people in the age range 0-19 and elderly people to those aged 65 or older. Sources: Statistics Sweden and the Riksbank A rapid population growth generally promotes economic growth. A large population gives increased scope for economies of scale and thereby better capacity to introduce new technology that can make production more efficient. | Uncertainty over long-term trends – more cautious monetary policy A large part of today’s speech has concerned long-term levels and trends on the labour market and the financial markets. When such trends change, it often takes some time before one notes the change and this can also be difficult to assess. One example of this is our forecasts of labour force participation. Figure 13a shows the forecasts for labour force participation at different points in time, together with actual outcomes. The forecasts do not appear to have succeeded in capturing what appears to be an increasing trend in labour force participation. This is partly because we have underestimated the population increase, which is based on Statistics Sweden's forecasts, and partly because labour force participation has risen as a share of the population. The latter could be due to reforms that have stimulated the labour supply and an increase in labour supply that is not registered in the population database. However, the forecast errors can be smaller 19 [24] when it is not a question of changes in trends, which can be illustrated by the forecasts of GDP growth, see Figure 13b. One uncertainty factor in the monetary policy decisions is thus the difficulty in detecting changes in trends, but there are also other uncertainty factors to take into account. Alan Greenspan put it like this: “Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape”. | 1 |
These two objectives contain the same “subject to that” language used in 1997 in the Monetary Policy Committee’s objectives. It means that there is a hierarchy of objectives which the FPC must observe. But, two further points are relevant here. First, resilience and economic growth interact, so they are not fully independent. An economy that displays stable growth is more likely to have a stable financial system, and vice versa. Second, policy is necessarily forward-looking, in that we are concerned with stability and growth in the future, since today’s outcomes are so to speak, “baked in”. This means that, in thinking about the hierarchy of objectives, in my view we have to take a forward-looking assessment of the probability of success, rather than saying we should complete one and then do the other. Financial stability is more complicated than monetary policy in at least one respect, namely that it does not reduce to a single target expressed as a number. Rather, it comes in the form of recommendations, in the plural, expressed as words. You would think that as central bankers and public officials we should love that, spending our time crafting language in a form that only we really understand. Let’s not get carried away here – there is a danger that BIS central bankers’ speeches 1 by doing so we create uncertainty about our intentions. This danger of creating uncertainty exists because we are finding our way in a new and difficult area of policy. | I want to try to cast more light on the issues here. But, I would note that, in the history of monetary policy, regime changes have had to deal with the challenge of crafting communication that avoids creating more uncertainty. We have two, hierarchical, objectives: simply put, the resilience of the financial system, and the objective of encouraging growth (the counter-cyclical objective). These two can point in opposite directions, for instance in terms of banks’ ratios of capital to assets. The FPC has recommended that banks should strengthen their buffers of capital. What is meant by this? Let me tell you what we have concluded, and what we have not yet concluded. We are in a quite extended transitional phase, whereby the capital buffers of the banks are being increased to the Basel III levels. This process has around six years to run on the transition timetable. The FPC has recently said that it thinks banks should take steps to build up those buffers more rapidly than most firms have done recently under the Basel transition policy. (I say “most” because some firms have already made the transition.) But, we are not defining this objective as requiring banks to reach a level such as a 10% Core Tier One ratio in the next year or so on the new Basel III measure. Why not? | 1 |
So even a relatively small effect of this sort can have a material impact on the credibility, and therefore the power, of the guidance (the dotted line in Chart 5). The solid blue line presumes that there’s some mechanism – some Odyssean mast to which you could tie yourself – ensuring that the cost of breaking the promise is always greater than the temptation to do so. Chart 5. Commitment policy loses much of its power if it isn’t fully credible Results from a simulation of a small macroeconomic model under alternative assumptions about monetary policy and the average distance to the lower bound. Macroeconomic volatility is measured using a simple “loss function” that weights the variance of inflation and the output gap. The y-axis shows the square root of the loss function, scaled to 1 for the case of commitment policy with an average distance to the lower bound of 5pp. Sources: See Appendix for further details. In practice, it’s hard to see that there is one. The importance of maintaining reputation obviously helps. There’s a cost to breaking one’s word. But that mightn’t be enough, especially if your promise seeks to constrain not just your future self but your successor as well. That obstacle is all the greater if, as in the UK, policy decisions are made not by collective consensus but by democratic vote. Each member of the MPC member is individually accountable for his or her vote. It’s part of the UK’s constitution that “no parliament can bind its successor”[16]. | One is the distance between the “neutral” nominal rate of interest and the lower bound. This is plotted on the x-axis. The larger this gap (i.e. the further you are to the right) the less the lower bound is likely to matter. There may occasionally be shocks that are bad enough to take you there but they obviously become rarer the more distant the average policy rate from its floor. Maybe you can think of this a reasonable description of the 1990s (when the neutral interest rate was comfortably above zero and “forward guidance” was no more than a twinkle in Michael Woodford’s eye). The second is the scope for this committed (“Odyssean”) form of guidance. QE isn’t available to either of the policymakers in Chart 4. But one, at least, has the capacity to commit credibly to particular policies beyond the current date. The average loss in this case is plotted in blue. The red policymaker can’t do this. He takes the lower bound into account when setting current policy, but, unfettered by any sort of prior commitment, he’s free to reset policy each period as he sees fit. This may sound like a good thing (isn’t it better always to have full discretion?) and there are certainly many instances in which the blue policymaker would prefer to be released from his earlier promise. | 1 |
From a financial management point of view, large investors may give priority to companies with a low risk profile, in order to bring back their own asset portfolios to levels of volatility matching their requirements. Therefore listed companies will have an incentive to adjust their risk profile and avoid more hazardous –which may also be more innovative– investment projects. Therefore, “entrepeneurship” may be curbed and the growth potential may be influenced adversely. Another impact of volatility on financial management is related to recourse to hedging, namely derivative products. As I mentioned earlier, derivatives are a driving force behind mature financial markets, and their strong development in the last two decades is merely consequence of the benefits they have generated. More precisely, derivatives and related financial innovations have enabled companies to transfer the impact of interest rate and currency fluctuations to financial institutions or investors that were ready to manage it, whereby facilitating international trade or project financing. Meanwhile, the pricing of derivatives is closely linked to volatility. As volatility is indeed difficult to predict, market practitioners have developed models, which are constantly being refined. Over time, market participants, –especially banks,– have become more competent in managing risk, while being left that residual risks which are more complex and harder to control. These consequences would not be a major concern, if the episodes of excessive volatility were only accidental. Peaks of volatility clearly reflect macroeconomic imbalances, as soon as market participants take into account the relevant information. | • Fifthly, central bank independence is of the essence. It is an integral part of the acquis communautaire, which is laid down not only in national legislation but above all in the 8 BIS Review 71/2002 Maastricht Treaty. The effective implementation of the acquis communautaire is not only a legal prerequisite for accession to the EU. It also implies the effective transformation of accession countries’ economic framework, which should facilitate their integration into the EU and, later, the euro area. In this context, it should be ensured that there is no discrepancy between the central banks’ formal status in the legislation and the implementation of that legislation. It is of utmost importance that all present and future Member States respect this economic and institutional ground rule of the European framework. • Sixthly, let us not forget the present and future contribution of Central and Eastern European countries to the economic prosperity of Europe at large. It seems that this contribution might be sometimes underestimated, while the relative influence of the US economy, for instance, might be sometimes overestimated. In fact, transition economies, as a whole, are as important as the US in terms of external demand addressed to the euro area: they both enjoy the same share, i.e. 13% of our exports. And, during the last two years, transition economies contributed for two-thirds to the overall growth of our total external demand, while the US contributed for less than 0.1%. | 1 |
In order to meet these challenges, it is imperative that this ecosystem transforms to accommodate changes in demand for financial products and services, the increased competition that is driving down profitability and the fast-growing need for operational resilience. In this context, a thriving, creative and efficient FinTech ecosystem may be a key element in the transformation of the financial system towards greater efficiency and resilience to shocks. This is why, as central banker and supervisor in charge of ensuring monetary and financial stability, I feel it is important to support this FinTech ecosystem and facilitate its smooth integration into the broader financial ecosystem. Naturally, I would like to make it clear that this integration does not,in my opinion, mean a convergence of players, a “harmonious” cooperation or a coordinated approach: the various players have different, sometimes even opposing goals, and that is how competition works. However, we should not systematically pit FinTechs against established players: there is a great variety of relationships between these two worlds, as we see every day. The potential for enriching the financial ecosystem and making it more efficient and resilient lies in strengthening the relationships between players and their diversity. What do we want to do and what are we doing at the Banque de France and the ACPR to support this development of the FinTech ecosystem? | I now give the floor to Director Jannecke Ebbesen, who will chair the morning session. Thank you. 2 BIS Review 27/2008 | 0 |
The growth rate after having recovered the initial output level was also different. Considering the first six quarters after having reached this point, in the beginning of 2000, the economy grew at an average annual rate of 4.4%, whereas between the first quarter of 2010 and mid-2011 the economy grew an average annual rate of 6.3%. The behavior of the unemployment rate was totally different as well. After having risen from around 7.5% in mid-2008 to levels close to 11% in mid-2009, it began a period of fast decrease, returning to levels around 7% to 7.5% at the beginning of this year. The policy regime was crucial in this result. Fiscal policy implemented a sizeable economic stimulus package. Monetary policy also added a significant impulse to the economy, as the Bank took the monetary policy interest rate to its minimum and implemented additional measures to ensure the effectiveness of its actions. The effects of the 2008–2009 crisis were very significant, but the resilience of the Chilean economy and the effectiveness of its macroeconomic policies were even stronger. Over time, inflation targeting regimes have evolved to what is now known as flexible inflation target (FIT). In this scheme, the central bank sets an inflation target, which is intended to be achieved in a given time horizon. As shown by Svensson (1997), inflation targeting implies inflation forecast targeting. | The result is a recession or a period of sluggish growth, which, in turn, reduces the wealth of savers and their demand for safe assets.7 Do we have alternative ways of escaping this trap? We require, following my earlier metaphor, an update to our electricity grid. On first thoughts, two ways to expand the set of safe euro-denominated assets spring to mind. On the one hand, euro area countries with a sovereign bond that is not considered sufficiently safe should focus on reducing their idiosyncratic sovereign risk, in particular by implementing credible medium-term fiscal 7 Caballero, Farhi and Gourinchas (2017), “The safe asset shortage conundrum”, Journal of Economic Perspectives, 31(3). 6/8 plans, in order to jump on the safety bandwagon. On the other hand, increases in the amount of current safe instruments could mitigate the safety trap. However, this strategy may not be enough to ensure a sufficiently stable and ample supply of safe assets. First, its success depends on the capacity of the less safe countries to become safe. The sovereign debt crisis has shown that it is not sufficient to start from a low level of debt and a budget surplus, as was the case of Spain in 2007. Second, countries with fiscal space might face restrictions on the amount of debt they can issue. As a consequence, one cannot guarantee that, faced with another negative shock, risk perceptions will not differ nor fragmentation increase. | 0 |
Looking at your coverage of our policy one might be inclined to think so. Between 2001 and 2005, for example, the Swiss National Bank was mentioned three times less in the Financial Times than in the period 1996 to 2000. However, let me emphasise that more transparency does not mean that monetary policy will always be simple to predict. Remember that the inflation forecasts published by central banks are always based on expectations of future economic developments. Hopefully, these expectations will be accurate most of the time. However, during certain periods of the economic cycle, particularly at turning points, our expectations will be prone to correction. I am therefore confident that, despite transparency, there will remain some news to report about monetary policy. I do believe, however, that central bank transparency may change the nature of media reports on monetary policy. In the old days of secrecy and unexpected monetary interventions, journalists obviously debated the objectives of central bankers and what this meant for the future. With increased transparency, such discussions have become obsolete, as objectives seem to be clear and future policy is easier to predict. In return, central bank transparency now gives journalists the opportunity to question the consistency of our monetary policy decisions with our stated objectives. This leads me to believe that, in future, media coverage of monetary policy may concentrate on scrutinising the congruency of our actions with our goals, rather than debating about what central banks are trying to achieve. | Market predictions of monetary policy measures have been accurate, leading to lower volatility in financial markets and improving the effectiveness of our policy measures A prime example of this is the most recent increase in our operational target in March 2006. An analysis of interest rate movements shows that the increase of our operational target by 25 basis points was almost fully anticipated by financial markets prior to the announcement. Contrary to what many believe, a central bank does not lose any prestige in seeing its policy correctly anticipated by the markets. It is just proof of a well-understood monetary strategy. 3. Credibility - words are not enough In Switzerland, the systematic communication of monetary policy has had the desired effect of getting market participants to adapt their expectations well before actual policy interventions are made. Does this mean that the Swiss National Bank now only has to indicate its intentions in order to influence interest rates? Or as some academics and practitioners have posed the question: can central bankers now replace open market operations with "open mouth" interventions? Considering the recent tightening of monetary policy in Switzerland, one might be tempted to agree that open mouth operations are sufficient to move interest rates. After all, short-term interest rates rose long before an increase in the operational target was announced or before we raised the actual interest rates on repo transactions. However, this interpretation of the data ignores one crucial issue. | 1 |
In future, banks should be required to prepare sufficient assets in such a way that they can be delivered to their respective central banks as collateral for existing liquidity facilities. Page 5/8 Zurich, 22 June 2023 Thomas Jordan, Martin Schlegel and Andréa M. Maechler News conference Taken together, these observations raise an important question concerning the ‘too big to fail’ (TBTF) regulations: Are these regulations adequately geared towards the timely adoption of corrective measures so that banks can recover by their own means in the event of a crisis? Focusing solely on regulatory metrics may delay such corrective action. These metrics are important for assessing the need for corrective measures and for justifying their implementation. At the same time, however, they do not reflect a broad, forward-looking perspective, as the example of Credit Suisse shows. The crisis at Credit Suisse will be analysed, and the lessons drawn will be factored into the review of the TBTF regulations, among other things. The SNB will contribute to this work. I now hand over to Andréa Maechler. Implementation of monetary policy I would now like to look at developments on the money and foreign exchange markets since the last monetary policy assessment. Secured short-term Swiss franc money market rates remained close to the SNB policy rate despite the tense situation on the financial markets, as can be seen in chart 2. We ensured this by deploying our monetary policy instruments. | This is something on which individual banks will have to take a view, but I would like to offer some general advice. First, banks should accept that profits for 2003 may not reach budgetted targets as a result of the outbreak; and they should not strain too much to make up the difference. When profitability comes under pressure, it is important to avoid the mistakes that might arise from over-aggressive business tactics. Keep the bank healthy from a capital and liquidity point of view in order to benefit from the business recovery when it comes, as it surely will. Banks should also monitor closely the financial position of their customers and adopt a supportive attitude to those experiencing financial difficulties as a result of the SARS outbreak. This means being prepared to offer temporary relief arrangements to borrowers who find that they cannot service their debts in the current environment. This should not be seen as soft option for customers since the banks will certainly not benefit if those customers go bankrupt. Nor do I suggest that relief should be offered indiscriminately. The long-term viability of the customer or his business, his track record and his willingness to cooperate with the bank are all factors to be taken into account in deciding whether to restructure debts. Each case thus needs to be looked at on its merits. | 0 |
FATF will consider these issues as part of its planned review of Recommendation 16 on wire transfers, to improve consistency and usability of message data, and enable more effective AML/CFT checks. It will also continue efforts to promote consistent implementation of the Travel Rule for virtual assets. The new FSB industry taskforce on Legal, Regulatory, and Supervisory matters, chaired by Carolyn Rogers from Bank of Canada, will help move the conversation forward in these areas. We hope to harness expert input from industry and provide guidance, working with national authorities and the international standard-setting bodies. Continued collaboration Improving the payments infrastructure will only be possible through successful collaboration. As policymakers and operators, we can improve the policies and core infrastructure to provide solid foundations for private innovation. The private sector needs to build on this to help deliver cheaper, faster, more transparent, and more accessible services to their customers. The new industry taskforces will play an important role. But this needs to be complemented by strong dialogue and actions in individual jurisdictions: exploring improvements to the domestic payment infrastructure, using the globally agreed frameworks. Page 8 Firms will likely need to continue to invest in their payments technology to be ready for upgrades to payment systems: such as the move to ISO 20022. The industry taskforce on Payment System Interoperability and Extension are developing a handy checklist to support firms on this journey. And importantly, firms should consider how to make the most of these changes. | ISO 20022 will make a big difference to cross-border payments: but it also offers a wealth of other opportunities, which the individual firms can benefit from. While the roadmap is a G20-led initiative, the targets are international, and our goal is to improve payments across all countries and payment corridors. Making progress therefore depends on sharing best practice widely and achieving change worldwide. To that end, the World Bank and IMF, along with the G20 Central Banks, are developing a technical assistance programme available to countries wishing to enhance their national payments infrastructure or policies. We have achieved a lot already but there is still more to do, and much more to gain. We have built the foundations and a framework to support a holistic set of changes. Now we need to act and there is a role for everyone. I look forward to helping to smooth the path ahead in my role as a policymaker and a payment system operator. I hope that many of you will join and play your part in this exciting and transformational journey towards the shared vision that benefits companies, individuals and whole economies through enhanced cross-border payments. I would like to thank Andrei Pustelnikov, Paul Bedford, Anna Koch and Mark Streather for their help in preparing these remarks. 1. See Building blocks for a roadmap to enhance cross-border payments: letter to the G20 2. See Enhancing Cross-border Payments: Stage 3 roadmap 3. See Targets for addressing the four challenges of cross-border payments: Final report 4. | 1 |
In this latter context banks have traditionally played a key role in financing the corporate and household sectors, earning their return by gathering information about, and assessing and monitoring, the creditworthiness of private sector borrowers, especially those who do not or cannot cost-effectively provide the comprehensive, public, information that would allow them to access the capital markets. Much of the banks’ lending, while nominally at short-term, for example in the form of callable overdrafts, is in practice illiquid and non-marketable. So a further BIS Review 13/1997 -2- distinctive characteristic of banks is that they typically function with a mismatch between their highly liquid liabilities and their less liquid, non-marketable, assets. There is no need, I think, to labour the importance to the economy as a whole of these distinctive banking functions, or the damage that would be caused if the banks’ role - as the repository of liquidity, as the core payments mechanism, and as the principal source of finance to at least a large part of the economy - were seriously interrupted. That in itself helps to explain the public interest in the effective functioning of the banking system, or why banks collectively have been regarded as special. But beyond that, the distinctive banking characteristics that I have described, of liquid liabilities and less liquid assets, give rise to special needs. Given the banks’ role in the payments system they may need late access to liquidity to square their positions vis-à-vis each other after executing payments instructions on behalf of their customers. | Their loan ratio to total assets is down to around 12% from around 50% in 1985 and 30% only 5 years ago. That is still much higher than the illiquid asset ratio for the large US securities firms which has fairly consistently been around 2%. The conclusion that I draw from all of this is that while there certainly have been important changes affecting the banks, and the environment in which they operate, they have not, yet at least, been such as to affect fundamentally their relevant key functions or the importance of those functions to the economy; nor have they altered fundamentally the distinctive characteristics of either the banks’ liabilities or their assets. To what extent have other financial institutions become more like banks? So, then, to what extent have other financial institutions developed similar characteristics to the distinctive characteristics of the banks as I have described them? The question, let me be quite clear, is not whether other financial institutions perform economically or socially important functions - clearly they do - and those functions may equally be special in their own distinctive ways. It is also obviously true that, with the upsurge in financial innovation and globalisation that we have seen in the past 10-20 years, there has been substantial blurring of the boundaries between different types of financial institution and the increasing emergence of multifunctional, multinational, financial groups, so that non-bank institutions have taken over banks or offered banking services just as banks have entered substantially into non-banking financial activities. | 1 |
We also allow for the wage Philips Curve to be non-stationary: it moves over time, and it is absolutely normal to do so. Reference wage values, social preferences, jobs’ characteristics, skill endowments and even Central Banks’ targets, they all change over time – hence, the impact of wage gaps on inflation cannot be the same in different time periods. The preliminary finding of our model is that inflation does not increase close to or above its target level until the wage gap is closed. For Philips Curve to work, the loss of welfare from a negative wage gap has to be fully compensated first – as a stock measure, not as a flow. The policy recommendation from here is that countries which closed their wage gap should be much more prudent in further wage increases – because they will be seen in inflation much faster and larger than in the recent past. And for countries which have not closed their wage gap the implication is 3/5 BIS central bankers' speeches that inflation will remain subdued until this happens. I fully agree with the IMF’s recommendation that central banks in NMS with their own currencies should be alert to the inflation risks of higher wage growth, while bearing in mind that raising policy rates could trigger capital inflows and exchange rate appreciation – which could further deepen current account imbalances. While the real monetary policy stance may differ between euroarea and emerging Europe, there is broad heterogeneity even among emerging Europe. | In fact, the downsizing of current accounts can be attributed to both public and private sectors. This means that aggregate demand was affected for a longer period, and measures to stimulate it, when the economies experienced negative output gaps, were needed. Despite very low interest rates, credit was not a main driver of the recovery; and public investments, as the report outlines, are on average 2 percentage points of GDP lower than their pre-crisis levels. Although it is nowadays a demand-led recovery, we do not have sufficient demand-push inflation, with the notable exception of countries that have closed the output gap – and these are the New Member States. This justifies the report recommendation of further accommodative policies from the ECB. However, as Mr. Thomsen highlighted in his presentation, policymakers need to seize the good times to advance further with fiscal consolidation and structural reforms. But the low rate environment and the strong sovereign-bank nexus are feeding the beasts and provide the wrong incentives for reforms. This is where policy trade-offs step in. Monetary policy has been overburdened in times of crisis, trying to address the market failures and the pro-cyclical fiscal policy. Yet, monetary policy is not a universal medicine, and it cannot work in isolation. Jens Weidmann, the President of Bundesbank, once made an analogy between monetary policy and Coca-Cola’s all-round curative properties: monetary policy is also currently being branded as a cure for assorted ills. | 1 |
Thus, we have ended up in a somewhat strange situation where countries that not long ago were complaining about receiving too much capital inflows are now complaining about a potential shortage of funding. Countries in this situation should consider the temporary postponement of tapering as a welcome opportunity to reduce their vulnerability by strengthening their fiscal position and addressing potential risks in their financial systems. There is still time, but the clock is ticking. Let me be clear: tapering will take place, global monetary conditions will and should eventually normalize, and the times of extremely cheap and abundant international financing will end. In Chile, we are currently in a situation where we do not consider tapering as bad news. After declining for some quarters, our trade balance has gradually improved. Gross inflows are still concentrated in FDI, and an important part of foreign expenditure goes to investment goods. Furthermore, Chilean residents, mainly through pension funds, have large gross foreign asset positions, which have lately acted as a buffer against fluctuations in gross inflows by non‐ residents, as mentioned in the latest World Economic Outlook. Our fiscal position is solid. The on‐shore peso rates have not moved in tandem with the latest global increase in long term rates, but instead they have actually fallen. And we have maintained a regime of fully flexible exchange rate that has helped us deal with external shocks in an economy with small degrees of dollarization. | Nonetheless, identifying the role of pull versus push factors poses problems akin to those of separating supply and demand. There is still room for research that finds clever identification strategies to settle this question. Under most conditions, a situation of abundant capital inflows and low global interest rates is good for developing countries. Theory tells us that, in the absence of frictions, international capital flows not only contribute to expand a country’s productive capacity, but also allow their citizens to share risk with the rest of the world. However, the presence of pecuniary externalities, of inefficient fluctuations in credit standards, or of other types of financial frictions may lead to perverse situations where these inflows result in excessive credit growth, risk taking, or misallocation of capital. An important amount of recent research has been devoted to understanding how an economy may borrow in excess and miss‐allocate credit.3 Of course, if we believe that these frictions are present and strong, first‐best policy actions should aim to undo them. But this may not be feasible, either because we are unsure about the presence, type, or magnitude of the frictions involved, or because first best policies cannot be implemented in the timeframe required. In such a situation, policymakers may have to resort to second best policies. We will address some of the roles of financial frictions in the transmission of foreign shocks in the presentation by Javier García‐Cicco this afternoon. | 1 |
BIS central bankers’ speeches 3 But opening up the capital account amidst a slowing economy, a still developing domestic financial system, and a debt overhang, is no easy task. China has also made progress in reforming its exchange rate framework. • Decoupling the RMB from the US Dollar last year – while it caused considerable anxiety in the markets – was an important and necessary step towards a more market-based exchange rate. • The shift to a trade-weighted index for evaluating the exchange rate of the RMB will, however, take some time to gain credibility among market participants. The most decisive yet most difficult piece in the overall reform programme is the reform of state-owned enterprises, or SOEs. The SOEs have been generating lower rates of returns on investment compared to the non-state sector, and are a drag on China’s overall measured productivity performance. • An SOE restructuring blueprint was announced last year, with the aim of improving competitiveness and efficiency but without outright privatisation, for example by consolidating similar SOEs or promoting “mixed ownership”. • This is a strong step in the right direction, but the Third Plenum’s vision of a marketbased economy can only be realised if SOEs are subject to competitive forces in all aspects of their operations. China in transition: near-term effects on Asia So, what does this all mean for the global economy, and Asia in particular? | But if successfully executed, these objectives are mutually reinforcing and will lay the foundation for a more sustainable and vibrant First World economy. Moderation in growth Why is China growing more slowly? As China reaches a more mature stage of development, it is simply unrealistic to expect it to grow at the same rate as before. China is confronted with the reality of supply-side constraints that every economy eventually runs into. • According to UN projections, China’s working-age population (aged 15–59), is projected to shrink by 0.6% each year over the next 15 years. Slower growth does not mean anaemic growth. China may no longer grow at 8–10%, but it is well positioned to grow by 6 to 6.5% for the next five years. With the right mix of structural reforms, there is substantial scope for China to achieve faster catch-up in productivity and income levels. • China’s per capita GDP is modest by international standards and its labour productivity remains well below the frontier. • The less developed regions in China still have scope to grow at rates that are higher than the national average, and this process of internal convergence is itself an important source of future productivity growth. The large size of the Chinese economy means that, at even more moderate rates of growth, the incremental demand from China will be quite substantial in absolute terms – and this is what matters for the global economy. | 1 |
In this context it is not the present exchange rate that is decisive, but how we see it developing in a slightly longer-term perspective. There is no reason to depart from the basic assessment we made earlier; there are still strong reasons in favour of a stronger krona. It is not merely that Swedish macro data in general has developed well over a number of years compared with, for instance, the euro area; most forecasts indicate that this development will continue. Sweden is also one of the countries that has had the highest trade surplus as a percentage of GDP over a number of years, which is one indication among many that the value of the krona has been relatively low. However, even if we should not – as I see it – change our basic assessment that the krona will strengthen, its value at present is rather different. There is therefore reason to take into consideration a risk scenario for inflation linked to a weaker exchange rate. Just as the Riksbank emphasised during 2003 and 2004 that the strong krona was one reason behind the low inflation rate, there is reason to point out that the weakening of the krona this year, particularly if it persists, could result in higher inflation,” said Mr Heikensten. ”All in all, I do not at present see any reason to change my view of inflation now to any great extent, compared with the October assessment. | • There will be a greater rebalancing between the role of the public and private sectors in the economy, with the public sector activity focussed on providing the enabling environment to strengthen the role of the private sector in the economy. • While large domestic corporations and multinational corporations will continue to be important in the economy, the role of the small and medium-scale enterprises will gain significance. • Greater focus will be given to secure competitiveness on a more comprehensive basis in terms of other dimensions such as productivity and efficiency, labour quality, logistics, research and development, the delivery system and the supply chain. BIS Review 44/2004 1 Malaysia will also continue to leverage on our low country risks in terms of the political stability, industrial maturity and the supply of a skilled workforce. To promote endogenous sources of growth, greater focus has been directed at promoting greater private investment, including by the small and medium enterprises (SMEs). The financial infrastructure and incentive structure will continue to be enhanced to promote investment in new sub-sectors in particular, the services, agriculture and manufacturing sectors. On the external front, while there has been a synchronisation of growth among the major economies, there has also been some rebalancing of the relative strength of the growth among the economies. The increase in the expansion of world trade and the strengthening of labour market conditions in most of these economies suggest continued and self-sustaining growth. | 0 |
This raises the question of whether this expansion has already entered its twilight years, with the risk of recession edging higher with each passing month. As I have said before, expansions do not simply die of old age. 1 Rather, expansions end either because a significant inflation risk emerges that requires a sharp tightening of monetary policy, or the economy is adversely impacted by a large shock that cannot be offset by monetary policy in a timely manner. While the sample of post-war U.S. expansions is still too small for reliable statistical analysis, the evidence suggests that after an expansion’s first few years its likelihood of ending is mostly independent of age, and depends mainly instead on the level of inflation. Since the possibility is low that a significant inflation risk would emerge over the near term, this means that the main danger facing the current expansion is the risk of large, adverse shocks. Given that the labor market still appears to have some excess slack and inflation is below the Federal Reserve’s objective, monetary policy is appropriately still quite accommodative despite the advancing age of the expansion. While this limits to an extent the degree to which monetary policy can aggressively respond to any adverse events, the good news is that the economy is more resilient to any shocks. Key sectors of the U.S. economy, such as the household sector, seem to be in good shape. | The key policy has been the implementation of financial sector reform which has resulted in a much improved financial system, especially the banking sector. Policies have also been directed at developing the region’s capital markets, especially the bond market. And as I noted, policy cooperation has also been strengthened to support regional financial integration. But while policies have been important, financial integration in East Asia has essentially been left to the market, in the sense that the process is basically a market-driven one. My view is that, going forward, the process of integration should continue to be market-driven and not policy-driven. But policy can do more by focusing on developing robust, efficient, and resilient local markets. This is because well-developed local markets will make the process of regional financial integration much easier. As for policy cooperation, there are definitely areas that government policies can do more collectively, especially on issues that involve efforts on a region-wide basis. In this context, future efforts at policy cooperation should focus on few but concrete and specific issues to be addressed or projects to be executed. A case in point is the development of a shared regional financial infrastructure such as linking the clearing and settlement systems, harmonizing regulations on cross-border investment flows, and developing a shared facility to promote greater flows of investment information. This type of specific efforts and projects would be easier to win region-wide commitment and support. | 0 |
But as an academician I was in contact with the central bank already at the beginning of 1990s. At that time, the staff was struggling with very basic issues: a new statistics and data on the newly born market economy, ways how the economy should be analysed and what kind of theory or model should be applied etc. The Czech National Bank was receiving a lot of help from the foreign central banks and international institutions. Today, we are at the level of state-of-art and we do not receive but provide foreign technical assistance. We assist directly to a number of countries as well as our experts are invited to IMF missions around the world. And yet our staff is based primarily on people educated in the Czech Republic. I consider it as a good signal that we have reached significant achievements in economic education and that the problem of missing generation will soon cease to exist. I can only hope that we will continue with this process of catching up and that CMC will keep contributing to it. What can I wish to you personally? Let me recall my recent visit to the Bank of Israel on the occasion of its 50th anniversary. We were having lunch with the Finance Minister Benjamin Netanyahu and we discussed necessary fiscal reforms. Mr. Netanyahu said that for pushing reforms through, one needs three things: the vision, the will and the political power. | Zdeněk Tůma: Education in the Czech Republic - the case of the missing generation Speech by Mr Zdeněk Tůma, Governor of the Czech National Bank, on the occasion of graduation from the EMBA programme at CMC Graduation School of Business, Prague, 4 December 2004. * * * In recent years I have heard many strong statements about knowledge based economy. Today’s graduation is obviously an excellent opportunity for yet another speech on this issue but I fear it would be too general and therefore “empty”. Instead, I would like to contribute with my personal experience and observations. We have almost forgotten that 15 years ago there were not any Czechs nor Slovaks educated in modern economics or business. Economic programs were focused on central planning and marxist theory of socialism before 1990. Nobody - with one exception - was allowed to study abroad since the 1960s. When my friend Martin Kupka returned from Geneva in 1989 from his studies, he brought the textbook on macroeconomics by Dornbusch and Fischer. He told me: “We should translate it into Czech”. At the same time, another group was working on the translation of “Economics” by Paul Samuelson. Later on, we translated the textbook on corporate finance by Brealey and Myers. In other words, we started from scratch. It had two - though interrelated - aspects. First, we had only limited knowledge about what economics and business programs should look like. | 1 |
Inevitably, correcting major imbalances comes at a very high cost in terms of employment and welfare, and that is the lesson that we can draw from the Great Expansion that ended in 2008 with the bursting of the real-estate bubble. Imbalances have to be corrected, although obviously not anyhow or at any speed. It has been argued, with a striking image, that if you are on the twenty-fifth floor of a building and wish to descend to street level, it is better to use the lift or the stairs than to jump out of the window, even though that would definitely be the fastest way down. The reforms that have been approved in Spain – in particular the adjustment of public spending and revenues, bank restructuring and labour market reform – have been rigorous, but also prudent, and this has also contributed to the recovery. That is certainly the opinion of our European partners and of the markets. The European Monetary Union originated more than twenty years ago in the Maastricht Treaty, and became a reality in the markets more than fifteen years back. In those days, the idea of a Monetary union was capable of mobilising extensive political support, but with time, and the crisis, this has been somewhat eroded. The Monetary Union alters economic policy priorities and their relative importance and changes the way in which economic pressures are relieved. It is an economic construct, but also a political one, and cannot survive without political support. | through the adjustment of domestic prices and costs relative to external ones, and by curbing government spending and revenue shortfalls, in real terms. This is what the Spanish economy has, with great effort, been achieving since 2012. In the truly difficult circumstances of 2012, Spain avoided a bail-out that would have been very painful in many ways, and certainly from an economic and social standpoint. Spain never lost its access to the capital markets. Admittedly at very high interest rates, and with very large risk premiums, our Treasury was always able to fund itself on the markets, because the markets, while mindful of the risks involved, very quickly appreciated (I am referring to the summer of 2012) the seriousness and decisiveness of the corrective action being taken. Spain reacted as a responsible and loyal European Union and Monetary Union member. It did not attempt to shift the blame onto anyone else, even though the euro crisis, which affected us very directly, obviously did not arise exclusively, or originally, in the Spanish economy. BIS central bankers’ speeches 3 To call the correction of unsustainable imbalances (like the balance of payments deficits of 2007 and 2008, of around 10% of GDP, and the budget deficits, which ranged from 9% to 11% between 2009 and 2012) austerity, is not really a very good description of reality. Changing direction when on a path towards impossible and unsustainable situations is not “austerity” but common sense and, in a very real sense, patriotism. | 1 |
Christian Noyer: A new regulatory framework for a new financial system Speech by Mr Christian Noyer, Governor of the Bank of France, at a round table discussion at the University of Paris-Dauphine, Paris, 11 December 2008. * * * Ladies and Gentlemen, It is a great pleasure for me to take part in this round table discussion. Today, the prevailing view is – and justly so – that it is necessary to rethink financial regulation. There are two reasons for this: a) Financial markets and banks are, more or less strongly, confronted with problems of asymmetric information; b) Operational inefficiencies may arise, leading, in some extreme cases, to the seizing up of certain market segments. Needless to say that these imperfections are interconnected. In many respects, the financial crisis is the expression of these imperfections. Three examples can be used as an illustration. The underestimation of risk and the mispricing of assets during the upswing of the financial cycle show that markets may generate excess investment in certain sectors of the economy (e.g. the US real estate sector). Furthermore, it appears that financial innovation and the change in banks’ economic models have resulted in a significant increase in information asymmetries and, more importantly, in lower incentives for economic agents to pay attention to these asymmetries. Lastly, the fact that some market segments seized up during the crisis suggests that some infrastructures necessary for their functioning are lacking. | It would definitely be an important reference for the SMEs. 2 BIS central bankers’ speeches | 0 |
In performing their intermediation function of channelling funds between the savers and investors, depositors need to be assured of the safety of their deposits and the efficiency in the manner in which the funds are mobilised and channelled to productive investment. Through their extensive branch network, and now through internet banking, banking institutions are able to efficiently reach an extensive customer base nationwide. As a custodian of public funds, maintaining integrity and confidence in the banking sector is vital towards ensuring the stability and soundness of our financial system. The trust of the public in banking institutions is inspired by the confidence in the safety and security of deposits, and that these funds will be professionally managed. Banking business involves risks and these risks need to be rigorously managed if public confidence in the banking system is to be secured. These risks involves credit risks, market risks, sovereign risks and foreign exchange risks, to name a few. There is therefore no room for negligence. This emphasize that the business of banking is too important to be left to self regulation. The regulatory framework put in place by Central Banks are aimed to ensure the soundness and efficiency of the system and the protection of the interest of depositors and investors. Before proceeding further, I would like to touch some aspects of the regulatory framework instituted for the Islamic banking industry in Malaysia. In Malaysia, we have embarked on the concept of dual banking where the Islamic banking system operates in parallel with the conventional banking system. | One example was when the authority of a European country suggested letting a bank go bankrupt for having made management mistakes. Wisely, it quickly changed its mind, showing that wisdom does not mean never committing errors but rather recognising such errors in time. The consequences of the other example of the mishandling of moral hazard were worse. I refer here to the initial reaction to the euro area sovereign debt crisis. As we have often repeated at the European Central Bank, the negative consequences of openly admitting the possibility of sovereign debt default by one of the euro area countries, and even of demanding default as a centrepiece of any bail-out programme, were perhaps not taken sufficiently into account. And these factors have no doubt contributed significantly to the crisis attaining its current scale. But let us be clear: avoiding the costs associated with the potential bankruptcy of or default by banks and countries is perfectly compatible with laying down rigorous conditionality criteria when extending aid to resolve crises. Averting bankruptcies in specific cases does not mean going “soft” on banks or countries which took on too many risks or incurred excessive debt. Countries or credit institutions should be helped only in exchange for strict conditions. And not only for moral reasons (never helping those who do not help themselves), but essentially because to be able to stand on one’s own two feet it is necessary to enact far-reaching restructuring and reforms. | 0 |
We have strong economic activity at the same time as monetary policy continues to be expansionary. Inflation has been below target for a longer period, but is now rising and approaching 2 per cent. The expansionary monetary policy is necessary for inflation to stabilise at 2 per cent. Despite the difficulties encountered in recent years in bringing inflation up, I think that flexible inflation targeting, on the whole, works well. But monetary policy cannot, by itself, solve all the economic problems Sweden and the rest of the world are struggling with. Real interest rates have fallen for a long time in the rest of the world and in Sweden. It is also likely that interest rates will remain low in the period ahead. This may make it more difficult to stimulate the economy with interest rate cuts when economic activity becomes weaker and inflation is below target. In such a case, it could be necessary, both for the Riksbank and other policy areas, to implement other measures. When the interest rate has been low for a longer period, it also entails increased risks for the financial system and financial stability. Stability is a condition for both monetary policy and fiscal policy to succeed. The free movement of capital and 20 [23] the rapid financial development have led to increased capital flows that affect asset prices, indebtedness and exchange rates. And this limits monetary policy’s degree of freedom, above all in smaller economies such as ours. | It is not difficult to find reasons why this could be the case, particularly not in the period after the financial crisis. The supply of acceptable collateral on the financial markets decreased when a significant share of the assets were lost during the financial crisis. The sovereign debt problems in the euro area may also have reduced the supply of safe assets. The demand for safe assets may have increased due to new financial regulations, such as Basel III. Finally, central bank purchases of government bonds reduce supply on the financial markets. To summarise – making predictions about future economic development is, as everyone knows, very difficult. The economic system is complex and new innovations and changes that are difficult to predict happen all the time. The theory of secular stagnation was presented for the first time as early as the 1930s by the American economist Alvin Hansen. 8 It proved to be incorrect at that time and I have suggested that there may be reason to still be sceptical about it now. 9 The current low interest rate environment may very well have been caused by factors other than secular stagnation and need not therefore be long-lasting. A look-back in history shows that real interest rates often vary in longer cycles. They have been on the same low levels as today only to then return to more normal levels.10 The difficulty we now face is assessing how long this cycle of low real interest rates will last. | 1 |
Given this, it does not appear entirely unnatural for fiscal policy to support monetary policy in exceptional circumstances with regard to maintaining confidence in the inflation target – and thereby ensuring that the central bank's policy rate can continue to be an effective tool in the future. Conditioning of monetary policy a possible route? An area that we as central bank have control over, and where we could possibly become more effective, is our communication of future monetary policy. Although we have been publishing a forecast for the repo rate for many years now, 10 For a more detailed discussion of the Riksbank’s monetary policy toolbox, see Ingves (2020). 11 Moreover, ideas have recently been put forward with regard to fiscal policy being a more effective stabilisation policy tool than monetary policy in some situations, in that fiscal policy measures can more directly target individual sectors of the economy where the problems are greatest, see Woodford (2020). 12 See, for example, Sims (2016). This idea has also been put forward earlier in the Swedish debate, see Borg (2003). 7 [15] we have to acknowledge that our forecasts during the past decade have systematically overestimated how quickly the interest rate can be raised. We have not been alone in this overestimation – the market forecasts have looked fairly similar (Figure 6). They were better than the Riksbank's during the period 2011-2013, but the pattern is essentially the same – substantial overestimates and inaccurate forecasts. | Here today I have focused on the interest rate, the actual and expected, and I do not intend to say very much about other tools.10 These have without doubt been important in the situation that has arisen, but my proposition is that the interest rate is preferable as the main monetary policy tool. More important role for fiscal policy However, one circumstance that has become obvious in recent years is that fiscal policy needs to play a greater role in stabilising the economy than has been the case in recent decades. There has long been a tendency to consider it the task of monetary policy and not fiscal policy to stabilise economic activity when the exchange rate is floating. But the central banks’ gradually declining room for manoeuvre has contributed to a reconsideration of the role of fiscal policy in stabilisation – monetary policy can no longer be “the only game in town”, as for instance former ECB Governor Mario Draghi has put it.11 One normally expresses it as fiscal policy shall help to parry economic downturns. An interesting thought that I feel deserves greater consideration is whether fiscal policy could play a more explicit role also with regard to attaining the inflation target.12 After all, the inflation target in most countries has the support of the political system. Thus, it is not merely the central bank's target, but society's target. Fiscal policy will also function better if the inflation target can continue to be the anchor in price-setting and wage formation. | 1 |
Holston, K., T. Laubach and J. Williams (2016), “Measuring the Natural Rate of Interest: International Trends and Determinants”, Federal Reserve Bank of San Francisco Working Paper No. 2016–11. Joyce, M., D. Miles, A. Scott, and D. Vayanos (2012), “Quantitative Easing and Unconventional Monetary Policy – an Introduction”, Economic Journal, 122(564), F271–82. Landau, B. and F. Skudelny (2009), “Pass-through of external shocks along the pricing chain: A panel estimation approach for the euro area”, ECB Working paper No 1104. Meltzer, A.H. (1999), “The Transmission Process”, Working Paper, Carnegie Mellon University. Modigliani, F. (1963), “The Monetary Mechanism and Its Phenomena”, Review of Economics and Statistics, 45(1), 79–107. Interaction with Real Modigliani, F. (1971), “Monetary Policy and Consumption”, in Consumer Spending and Monetary Policy: The Linkages. Boston: Federal Reserve Bank of Boston, 9-84. Osbat, C. and M. Wagner (2006), “Sectoral exchange rate pass-through in the euro area”, ECB. Praet, P. (2017), “Calibrating unconventional monetary policy”, speech at The ECB and Its Watchers XVIII Conference, 6 April. Smets, F. and R. Wouters (2007), “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach”, American Economic Review, Vol. 97, No 3, 586–606. Stracca, L. (2017), “The Euler equation around the world”, The B.E. Journal of Macroeconomics, Vol. 17, Issue 2. Svensson, L. (2000), “Open-Economy Inflation Targeting”, Journal of International Economics, 50, 155–183. Taylor, J.B. (2000), “Low inflation, pass-through, and the pricing power of firms”, European Economic Review, Vol. 44, Issue 7, 1389–1408. | We believe that our approach of setting the targets and forecasts rather than forecasts alone on a declining path involves a firmer commitment on behalf of the central bank; therefore it is more transparent and more effective in anchoring inflation expectations. 2 BIS central bankers’ speeches Dear guests, Being a central banker, I have mostly focused on inflation and monetary policy dimension of commodity price movements. Needless to say, the course of commodity prices has implications on many other key macro variables. For example, as a net energy-commodity importer, Turkey’s dependence on energy imports makes the current account balance more sensitive to volatility in commodity prices. Recent uncertainty surrounding the energy market is not comparable to any other period in the near history. Moreover, there is a significant risk that commodity prices stay volatile due to uncertainties regarding global economy and the exceptionally loose monetary policies across the globe. Therefore, medium-term outlook for commodity prices is unusually hard to predict. In the long term, supply conditions and structural policies should adjust to stabilize the energy and other commodity prices. The recent concrete steps as part of the medium term programs in Turkey, aiming at curtailing the dependence on energy imports by switching towards domestically produced and renewable energy sources, have important implications also for decreasing the sensitivity of current account balances to international price movements. | 0 |
In annual average terms, the discrepancies between the behaviour of domestic spending and of net external demand were further accentuated in 2005; however, throughout the year there were incipient signs of a change in the composition of growth, as national demand embarked on a slight slowdown and as a likewise modest correction was seen in the contractionary contribution of the external sector. Nonetheless, initial estimates for the opening months of 2006 would suggest that this rebalancing of the composition of expenditure has come to a halt, against a background in which activity has continued to grow sharply. In the absence of sufficiently appreciable changes in the drivers of the expansion and of significant corrections in the pattern of growth, the imbalances already building up in the Spanish economy have become bigger and certain factors of vulnerability to potential future shocks have been accentuated. The high growth rates of domestic demand have combined with the inertia persisting in cost and price determination and have continued fuelling the inflationary pressures that have been eroding the BIS Review 60/2006 5 economy's competitiveness. In turn, the fact that private-sector spending has outpaced incomegenerating capacity has made for fresh increases in corporate and, above all, household debt, and for a growing resort to external saving. Both factors resulted in an ongoing deterioration in the nation's borrowing requirements, despite the fact that the public sector has appreciably increased its saving capacity. | However, average labour costs have grown at relatively moderate rates as a result of the rise in employment in industries with comparatively lower wages, which are those where the influx of immigrants is proving greater. In this respect, the sizeable immigrant inflows are acting as a factor of wage flexibility in certain labour market segments. In any event, while this behaviour of wages may be considered moderate, compared with their historical, upward pattern, growth has remained higher than that of wages in other euro area countries. Moreover, these developments have taken place against a background of very low productivity gains, meaning that the cost growth differential with the euro area has remained wide. This differential is proving particularly harmful for manufacturing industry, which has continued under increasingly sharp pressure from foreign competition. It should be borne in mind that, in the euro area, the consequences of losses in competitiveness induced by continuing demand pressure may be difficult to reverse. This is because they require a direct adjustment of relative prices and costs based on the effective moderation and the sufficiently flexible behaviour of wages. In Spain's case, moreover, given the specialisation of the productive structure in industries where demand is more sensitive to relative prices and in which the pressure exerted by products from the emerging economies is very high, companies may find themselves having to make a sharper adjustment to make up for lost ground on international markets and on the domestic market. | 1 |
During the course of, say, four decades, we have gone from regarding strictly-regulated financial markets as the norm, to regarding the financial markets as needing to have free rein to be able to benefit society, to then swing back towards the idea of more regulation. Another example is that we, at least here in Sweden, have moved from only twenty or so years ago finding it difficult to imagine anything other than a fixed exchange-rate regime to now regarding this as completely out of date and off the agenda. A slightly less formal way of expressing this insight would perhaps be to say that one should never be too confident. What seems obvious now may not seem so tomorrow. Economics does not have any rigid conformity to particular principles; it involves trying to understand the effects of the actions and interactions of a large number of people in a constantly changing world. This presupposes a willingness to reconsider. There is otherwise a risk that the field of vision will narrow too much and that one will not observe phenomena that should lead to questions and analysis, as they are not considered to belong in the intellectual reasoning currently applied. Perhaps it was this type of “blinkers” that prevented us from noticing the build-up of risk prior to the crisis. In my speech today I intend to discuss this from a central bank perspective and to focus on two important areas that are central parts of central banks’ monetary policy frameworks, namely independence and inflation targeting. | Major differences from when I last worked at the Riksbank I have worked at the Riksbank twice, during two entirely different regimes – or paradigms, if you wish. The first time was during a period of around fifteen years from the early 1970s to the mid-1980s. At that time, the credit and foreign exchange markets were regulated. The Riksbank determined both the price and size of the credit on offer and had access to tools such as liquidity ratios and lending caps. The Riksbank also had regular meetings with the commercial banks, to closely monitor that they were observing the regulations. The banks were told in no uncertain terms if they had failed on some point. The Riksbank was able to conduct a policy that stabilised economic activity to some extent, but monetary policy – to the extent that one can call it such – was largely subordinate to other economic policy. One important task for the Riksbank during this period was to secure the funding needs of the government and the housing sector. This was of course only possible because the markets BIS central bankers’ speeches 1 were so strictly regulated and separate from the surrounding world. In other words, the situation was completely different then – although some of the regulation tools used then have begun to come back into fashion, albeit in another form and context. | 1 |
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